Congaree Bancshares Inc - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Congaree Bancshares Inc	Financial_Report.xls
EX-31.2 - Congaree Bancshares Inc	e00370_ex31-2.htm
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EX-31.1 - Congaree Bancshares Inc	e00370_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

	(MARK ONE)

	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 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 No. 000-52592

(Exact name of registrant as specified in its charter)

South Carolina	20-3863936
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

1201 Knox Abbott Drive

Cayce, South Carolina 29033

(Address of principal executive offices)

(803) 794-2265

(Registrant’s telephone number including area code)

________________________________________________

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

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

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

	Large accelerated filer o	Accelerated filer o
	Non-accelerated o (do not check if smaller reporting company)	Smaller reporting company 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

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

1,764,439 shares of common stock, par value $0.01 per share, were issued and outstanding as of November 10, 2014.

INDEX

PART I - FINANCIAL INFORMATION		Page No.

Item 1.	Financial Statements

	Consolidated Balance Sheets – September 30, 2014 (Unaudited) and December 31, 2013	2

	Consolidated Statements of Income - Nine months and three months ended September 30, 2014 and 2013 (Unaudited)	3

	Consolidated Statements of Comprehensive Income (Loss) - Nine months and three months ended September 30, 2014 and 2013 (Unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity - Nine months ended September 30, 2014 and 2013 (Unaudited)	5

	Consolidated Statements of Cash Flows - Nine months ended September 30, 2014 and 2013 (Unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosures	37

Item 5.	Other Information	37

Item 6.	Exhibits	37

Part I - Financial Information

Item 1. Financial Statements

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

	September 30, 2014 (unaudited)			December 31, 2013
Assets:
Cash and due from banks	$	2,192,707		$	1,638,635
Securities available-for-sale		22,435,070			23,645,240
Securities held-to-maturity (estimated fair value of $3,444,627 and $3,249,235 at September 30, 2014 and December 31, 2013, respectively)		3,452,541			3,475,977
Non-marketable equity securities		585,800			553,200

Loans receivable		79,063,857			77,962,461
Less allowance for loan losses		1,140,693			1,312,311
Loans, net		77,923,164			76,650,150

Premises, furniture and equipment, net		2,860,573			2,960,583
Accrued interest receivable		403,091			398,498
Other real estate owned		1,804,635			1,544,234
Other assets		1,489,550			1,672,276
Total assets	$	113,147,131		$	112,538,793
Liabilities:
Deposits:
Noninterest-bearing transaction accounts	$	14,221,893		$	12,925,414
Interest-bearing transaction accounts		7,681,346			5,667,203
Savings and money market		44,637,067			44,032,562
Time deposits $100,000 and over		13,118,184			15,368,122
Other time deposits		11,051,491			13,137,156
Total deposits		90,709,981			91,130,457
Federal Funds purchased		1,399,000			1,768,000
Federal Home Loan Bank advances		8,500,000			7,000,000
Accrued interest payable		14,088			14,127
Other liabilities		331,958			217,592
Total liabilities		100,955,027			100,130,176


Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized:
Series A cumulative perpetual preferred stock 1,400 and 2,129 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively		1,393,222			2,117,147
Series B cumulative perpetual preferred stock 164 shares issued and outstanding at September 30, 2014 and December 31, 2013		164,056			166,352
Common stock, $0.01 par value, 10,000,000 shares authorized; 1,764,439 shares issued and outstanding at September 30, 2014 and December 31, 2013		17,644			17,644
Capital surplus		17,688,324			17,688,324
Accumulated deficit		(6,805,073	)		(7,049,470	)
Accumulated other comprehensive loss		(266,069	)		(531,380	)

Total shareholders’ equity		12,192,104			12,408,617
Total liabilities and shareholders’ equity	$	113,147,131		$	112,538,793

See notes to consolidated financial statements.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

	Nine months ended						Three months ended
	September 30,						September 30,
	2014			2013			2014			2013
Interest income:
Loans, including fees	$	2,907,466		$	3,189,606		$	960,189		$	1,051,577
Investment securities, taxable		494,097			471,547			163,644			148,277
Investment securities, non-taxable		—			2,203			—			—
Federal funds sold and other		19,818			10,554			6,978			2,015
Total interest income		3,421,381			3,673,910			1,130,811			1,201,869
Interest expense:
Time deposits $100,000 and over		95,549			109,243			30,417			34,902
Other deposits		171,118			217,616			55,043			67,426
Other borrowings		41,620			26,824			13,912			5,430
Total interest expense		308,287			353,683			99,372			107,758
Net interest income		3,113,094			3,320,227			1,031,439			1,094,111
Provision for loan losses		248,000			320,000			70,000			135,000
Net interest income after provision for loan losses		2,865,094			3,000,227			961,439			959,111
Noninterest income:
Service charges on deposit accounts		222,541			191,159			83,683			65,475
Residential mortgage origination fees		26,276			47,741			7,890			8,597
Gain on sale of securities available for sale		65,591			185,238			70,069			—
Other		16,165			13,142			3,208			3,798
Total noninterest income		330,573			437,280			164,850			77,870
Noninterest expenses:
Salaries and employee benefits		1,451,153			1,357,978			505,191			449,078
Net occupancy		232,748			415,392			79,646			135,617
Furniture and equipment		262,716			232,076			86,715			77,592
Professional fees		178,636			129,828			62,236			25,410
Regulatory fees and FDIC assessment		91,778			97,398			31,214			24,498
Data processing		248,961			226,432			88,473			79,443
Net cost of operation of other real estate owned		12,229			178,546			19,838			8,729
Other operating		343,124			330,543			88,159			99,362
Total noninterest expense		2,821,345			2,968,193			961,472			899,729
Income before income taxes		374,322			469,314			164,817			137,252
Income tax expense		(13,290	)		(18,182	)		(11,924	)		(5,800	)
Net income		361,032			451,132			152,893			131,452
Net accretion of preferred stock to redemption value		13,345			13,349			4,449			4,450
Preferred dividends		103,290			90,909			35,192			30,303
Net income available to common shareholders	$	244,397		$	346,874		$	113,252		$	96,699
Income per common share
Basic and diluted income per common share	$	0.14		$	0.20		$	0.06		$	0.05
Weighted average common shares outstanding		1,764,439			1,764,439			1,764,439			1,764,439

See notes to consolidated financial statements.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

	Nine months ended September 30,
	2014			2013
Net Income	$	361,032		$	451,132
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available for sale net of tax expense (benefit) of $158,976 at September 30, 2014 and ($370,971) at September 30, 2013		308,601			(719,638	)
Reclassification adjustment for gains included in net income, net of tax expense of $22,301 at September 30, 2014 and $62,981 at September 30, 2013		(43,290	)		(122,257	)
Other comprehensive income (loss)		265,311			(841,895	)
Comprehensive income (loss)	$	626,343		$	(390,763	)

	Three months ended September 30,
	2014			2013
Net Income	$	152,893		$	131,452
Other comprehensive loss, net of tax:
Unrealized holding losses on securities available for sale, net of tax benefit of $33,030 at September 30, 2014 and $123,443 at September 30, 2013.		(64,117	)		(239,624	)
Reclassification adjustment for gains included in net income, net of tax expense of $23,823 at September 30, 2014		(46,246	)		—
Other comprehensive loss		(110,363	)		(239,624	)
Comprehensive income (loss)	$	42,530		$	(108,172	)

See notes to consolidated financial statements.

-4-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Nine months ended September 30, 2014 and 2013 (Unaudited)

																Accumulated Other
	Preferred Stock						Common Stock				Capital		Retained			Comprehensive
	Shares			Amount			Shares		Amount		Surplus		Deficit			Loss			Total
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
Accretion of Series A discount on preferred stock					15,644									(15,644	)					—
Amortization of Series B premium on preferred stock					(2,295	)								2,295						—
Dividends on preferred stock														(90,909	)					(90,909	)
Net income														451,132						451,132
Other comprehensive loss																	(841,895	)		(841,895	)
Balance, September 30, 2013		2,293		$	2,279,050			1,764,439	$	17,644	$	17,688,324	$	(7,586,346	)	$	(431,249	)	$	11,967,423

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
Accretion of Series A discount on preferred stock					15,639									(15,639	)					—
Amortization of Series B premium on preferred stock					(2,294	)								2,294						—
Dividends on preferred stock														(103,290	)					(103,290	)
Repurchase of preferred stock		(729	)		(739,566	)														(739,566	)
Net income														361,032						361,032
Other comprehensive income																	265,311			265,311
Balance, September 30, 2014		1,564		$	1,557,278			1,764,439	$	17,644	$	17,688,324	$	(6,805,073	)	$	(266,069	)	$	12,192,104

See notes to consolidated financial statements.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended September 30,
	2014			2013
Cash flow from operating activities
Net income	$	361,032		$	451,132
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		248,000			320,000
Depreciation and amortization expense		126,746			110,210
Discount accretion and premium amortization		89,907			79,244
(Increase) Decrease in accrued interest receivable		(4,593	)		73,290
Decrease in accrued interest payable		(39	)		(9,312	)
Gain from sale of securities available-for-sale		(65,591	)		(185,238	)
Write downs on other real estate owned		—			140,000
(Gain) loss on sales of other real estate owned		(17,456	)		14,395
Decrease in other assets		46,051			38,844
Increase in other liabilities		114,366			69,753
Net cash provided by operating activities		898,423			1,102,318

Cash flow from investing activities
Purchase of securities available-for-sale		(8,309,565	)		(9,686,435	)
Purchase of non-marketable equity securities		(247,500	)		(135,000	)
Proceeds from maturities, calls and paydowns of securities available-for-sale		705,981			579,286
Proceeds from sales of securities available-for-sale		9,214,860			6,497,467
Proceeds from sale and redemption of non-marketable equity securities		214,900			136,800
Net decrease (increase) in loans receivable		(2,066,936	)		981,939
Purchase of premises, furniture and equipment		(26,736	)		(88,238	)
Proceeds from sale of other real estate owned		302,977			198,605
Net cash used by investing activities		(212,019	)		(1,515,576	)

Cash flow from financing activities
Increase (decrease) in noninterest-bearing deposits		1,296,479			(1,831,001	)
(Decrease) increase in interest-bearing deposits		(1,716,955	)		326,461
(Decrease) increase in federal funds purchased		(369,000	)		320,700
Increase in borrowings from FHLB		1,500,000			1,000,000
Repurchase of preferred stock		(739,566	)		—
Dividends paid on preferred stock		(103,290	)		(90,909	)

Net cash used by financing activities		(132,332	)		(274,749	)

Net increase (decrease) in cash and cash equivalents		554,072			(688,007	)

Cash and cash equivalents at beginning of the period		1,638,635			2,483,503

Cash and cash equivalents at end of the period	$	2,192,707		$	1,795,496

Supplemental cash flow information:
Interest paid on deposits and borrowed funds	$	308,326		$	362,995
Transfer of loans to other real estate	$	545,922		$	102,864
Cash paid for taxes	$	13,290		$	18,182

See notes to consolidated financial statements.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1 – Business and Basis of Presentation

Business Activity and Organization

Congaree Bancshares, Inc. (the “Company”) is a South Carolina corporation organized to operate as a bank holding company pursuant to the Federal Bank Holding Company Act of 1956 and the South Carolina Banking and Branching Efficiency Act and to own and control all of the capital stock of Congaree State Bank (the “Bank”). The Bank is a state chartered bank organized under the laws of South Carolina. The Bank primarily is engaged in the business of accepting deposits insured by the Federal Deposit Insurance Corporation (the “FDIC”) and providing commercial, consumer and mortgage loans to the general public.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine and three month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2014.

Note 2 – Summary of Significant Accounting Policies

A summary of these policies is included in our Annual Report on Form 10-K for the year ended December 31, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in our 2013 Annual Report on Form 10-K. Accounting standards that have been issued or proposed by the Financial Accounting Standards Board that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Statements of Cash Flows

For purposes of reporting cash flows, the Company considers certain highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks, federal funds sold and certificates of deposit with other banks. Generally, federal funds are sold for one-day periods.

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 Bank. 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. Options and warrants that are out-of-the-money are not considered in the calculation of dilutive earnings per share as the effect is not deemed to be dilutive.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 2 – Summary of Significant Accounting Policies - continued

Basic and diluted net income per common share are computed below for the nine and three months ended September 30, 2014 and 2013:

	Nine months ended				Three months ended
	September 30,				September 30,
	2014		2013		2014		2013
Basic net income per common share computation:
Net income available to common shareholders	$	244,397	$	346,874	$	113,252	$	96,699
Average common shares outstanding — basic		1,764,439		1,764,439		1,764,439		1,764,439
Basic net income per common share	$	0.14	$	0.20	$	0.06	$	0.05

Diluted net income per common share computation:
Net income available to common shareholders	$	244,397	$	346,874	$	113,252	$	96,699
Average common shares outstanding — basic		1,764,439		1,764,439		1,764,439		1,764,439
Incremental shares from assumed conversions:
Stock options		—		—		—		—
Average common shares outstanding — diluted		1,764,439		1,764,439		1,764,439		1,764,439
Diluted net income per common share	$	0.14	$	0.20	$	0.06	$	0.05

Comprehensive Income

GAAP requires that recognized income, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management performed an evaluation to determine whether there have been any subsequent events since the balance sheet date, or September 30, 2014, and determined that no subsequent events occurred requiring accrual or disclosure.

Note 3 - Recently Issued Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

In January 2014, the FASB amended the Receivables—Troubled Debt Restructurings by Creditors subtopic of the Codification to address the reclassification of consumer mortgage loans collateralized by residential real estate upon foreclosure. The amendments clarify the criteria for concluding that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments also outline interim and annual disclosure requirements. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014. Companies are allowed to use either a modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is permitted. 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.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 3 - Recently Issued 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 4 - Fair Value Measurements

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.

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

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

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

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

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

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

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

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

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

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

September 30, 2014
Financial Instruments - Assets
Cash and due from banks	$	2,192,707	$	2,192,707	$	2,192,707	$	—	$	—
Securities available-for-sale		22,435,070		22,435,070		—		21,434,510		1,000,560
Securities held-to-maturity		3,452,541		3,444,627		—		3,444,627		—
Nonmarketable equity securities		585,800		585,800		—		585,800		—
Loans, net		77,923,164		77,354,000		—		—		77,354,000
Accrued interest receivable		403,091		403,091		403,091		—		—

Financial Instruments – Liabilities
Demand deposit, interest-bearing transaction, and savings accounts		66,540,306		66,540,306		66,540,306		—		—
Time Deposits		24,169,675		24,201,000		—		24,201,000		—
Federal Home Loan Bank advances		8,500,000		8,517,000		—		8,517,000		—
Accrued interest payable		14,088		14,088		14,088		—		—
Federal funds purchased		1,399,000		1,399,000		1,399,000		—		—

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

December 31, 2013
Financial Instruments – Assets:
Cash and due from banks	$	1,638,635	$	1,638,635	$	1,638,635	$	—	$	—
Securities available-for-sale		23,645,240		23,645,240		—		22,650,865		994,375
Securities held-to-maturity		3,475,977		3,249,235		—		3,249,235		—
Nonmarketable equity securities		553,200		553,200		—		553,200		—
Loans, net		76,650,150		76,672,000		—		—		76,672,000
Accrued interest receivable		398,498		398,498		398,498		—		—

Financial Instruments – Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		62,625,179		62,625,179		62,625,179		—		—
Time Deposits		28,505,278		29,598,000		—		29,598,000		—
Federal Home Loan Bank advances		7,000,000		7,018,000		—		7,018,000		—
Accrued interest payable		14,127		14,127		14,127		—		—
Federal funds purchased		1,768,000		1,768,000		1,768,000		—		—

	September 30, 2014				December 31, 2013
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	12,654,000	$	—	$	10,711,000	$	—
Financial standby letters of credit		40,000		—		38,000		—

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

GAAP provides a framework for measuring and disclosing fair value which requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair Vale Hierarchy

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

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

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

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

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

Investment Securities Available for Sale

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

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At September 30, 2014 and December 31, 2013, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 3. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements – continued

Other Real Estate Owned

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

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy at September 30, 2014 and December 31, 2013.

	September 30, 2014
	Total		Level 1		Level 2		Level 3
Securities available-for-sale
Government sponsored enterprises	$	6,506,146	$	—	$	6,506,146	$	—
Corporate bonds		500,000		—		500,000		—
Mortgage-backed securities		1,962,648		—		962,088		1,000,560
Small Business Administration Securities		9,439,561		—		9,439,561		—
State, county and municipals		4,026,715		—		4,026,715		—

Total assets	$	22,435,070	$	—	$	21,434,510	$	1,000,560

	December 31, 2013
	Total		Level 1		Level 2		Level 3
Securities available-for-sale
Government sponsored enterprises	$	913,320	$	—	$	913,320	$	—
Corporate bonds		497,435		—		497,435
Mortgage-backed securities		8,633,646		—		7,639,271		994,375
Small Business Administration Securities		9,827,972		—		9,827,972		—
State, county and municipals		3,772,867		—		3,772,867		—

Total assets	$	23,645,240	$	—	$	22,650,865	$	994,375

There were no liabilities measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013, aggregated by level in the fair value hierarchy within which those measurements fall.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

	September 30, 2014
	Total		Level 1		Level 2		Level 3
Impaired loans	$	3,555,882	$	—	$	—	$	3,555,882
Other real estate owned		1,804,635		—		—		1,804,635
Total assets	$	5,360,517	$	—	$	—	$	5,360,517

	December 31, 2013
	Total		Level 1		Level 2		Level 3
Impaired loans	$	3,992,468	$	—	$	—	$	3,992,468
Other real estate owned		1,544,234		—		—		1,544,234
Total assets	$	5,536,702	$	—	$	—	$	5,536,702

For Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value as of		General
	September 30, 2014	Valuation Technique	Unobservable Input	Range

Nonrecurring Measurements:
Impaired loans	$ 3,555,882	Discounted appraisals	Collateral discounts	0 – 10%
Other real estate owned	1,804,635	Discounted appraisals	Collateral discounts and
			Estimated costs to sell	0 – 10%

Recurring Measurements:			Pricing yield	5.03%
			Pricing spread	+200
Mortgage-backed securities	1,000,560	Fundamental Analysis	Pricing term	9.8 years estimated
				avg life

	Fair Value as of		General
	December 31, 2013	Valuation Technique	Unobservable Input	Range
Nonrecurring Measurements:
Impaired loans	$ 3,992,468	Discounted appraisals	Collateral discounts	0 – 10%
Other real estate owned	1,544,234	Discounted appraisals	Collateral discounts and
			Estimated costs to sell	0 – 10%
Recurring Measurements:			Pricing yield	5.03%
			Pricing spread	+200
Mortgage-backed securities	994,375	Fundamental Analysis	Pricing term	9.8 years estimated
				avg life

There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2014 and December 31, 2013.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 5 - Investment Securities

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

			Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
September 30, 2014
Government sponsored enterprises	$	6,613,586	$	—	$	107,440	$	6,506,146
Corporate bonds		500,000		—		—		500,000
Mortgage-backed securities		1,959,161		5,967		2,480		1,962,648
Small Business Administration Securities		9,715,597		—		276,036		9,439,561
State, county and municipal		4,050,109		13,746		37,140		4,026,715
	$	22,838,453	$	19,713	$	423,096	$	22,435,070

December 31, 2013
Government sponsored enterprises	$	998,229	$	—	$	84,909	$	913,320
Corporate bonds		500,000		—		2,565		497,435
Mortgage-backed securities		8,668,091		6,495		40,940		8,633,646
Small Business Administration Securities		10,328,411		35		500,474		9,827,972
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
September 30, 2014
State, county and municipal	$	3,452,541	$	16,604	$	24,518	$	3,444,627
	$	3,452,541	$	16,604	$	24,518	$	3,444,627

December 31, 2013
State, county and municipal	$	3,475,977	$	—	$	226,742	$	3,249,235
	$	3,475,977	$	—	$	226,742	$	3,249,235

Proceeds from sales of available-for-sale securities were $9,214,860 and $6,497,467 for the nine month periods ended September 30, 2014 and 2013, respectively. Gross gains of $74,643 and gross losses of $9,052 were recognized on those sales for the nine month period ended September 30, 2014 and gross gains of $185,238 were recognized on those sales for the nine month period September 30, 2013. There were no losses recognized on those sales for the nine month period ended September 30, 2013.

Proceeds from sales of available-for-sale securities were $5,530,749 for the three months ended September 30, 2014. There were no sales of available for sale securities for the three months ended September 30, 2013. Gross gains of $70,069 were recognized on those sales for the three months ended September 30, 2014. There were no losses recognized on those sales for the three months ended September 30, 2014.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 5 - Investment Securities – continued

The amortized costs and fair values of investment securities at September 30, 2014, by contractual maturity, are shown in the following table. 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	$	14,144	$	14,968	$	—	$	—
Due after one through five years		3,088,889		3,052,049		—		—
Due after five through ten years		19,398,223		19,023,752		1,102,886		1,110,950
Due after ten years		337,197		344,301		2,349,655		2,333,677

Total securities	$	22,838,453	$	22,435,070	$	3,452,541	$	3,444,627

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 realized loss position at September 30, 2014.

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

Government sponsored enterprises	$	5,535,936	$	78,864	$	970,210	$	28,576	$	6,506,146	$	107,440
Small Business Administration Securities		1,543,449		7,708		7,896,112		268,328		9,439,561		276,036
Mortgage-backed securities		—		—		947,120		2,480		947,120		2,480
State, county and municipal		990,581		12,138		1,835,207		25,002		2,825,788		37,140
	$	8,069,966	$	98,710	$	11,648,649	$	324,386	$	19,718,615	$	423,096

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Government sponsored enterprises	$	913,320	$	84,909	$	—	$	—	$	913,320	$	84,909
Small Business Administration securities		8,492,186		363,685		1,323,559		136,789		9,815,745		500,474
Mortgage-backed securities		6,932,369		40,940		—		—		6,932,369		40,940
Corporate Bonds		497,435		2,565		—		—		497,435		2,565
State, county and municipal		3,359,791		176,626		413,076		6,385		3,772,867		183,011
	$	20,195,101	$	668,725	$	1,736,635	$	143,174	$	21,931,736	$	811,899

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 5 - Investment Securities – continued

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 September 30, 2014.

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
State, county and municipal	$	1,182,170	$	7,654	$	620,454	$	16,864	$	1,802,624	$	24,518

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

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.

At September 30, 2014 and December 31, 2013, securities with estimated fair value of $10,218,643 and $9,267,270 respectively, were pledged to secure public deposits as required by law.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable

Major classifications of loans receivable at the dates indicated are summarized as follows:

	September 30, 2014						December 31, 2013
	Amount			Percentage of Total			Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	30,748,983			39	%	$	28,760,723			37	%
Construction, Land Development & Other Land		8,862,872			11	%		8,198,696			11	%
Residential Mortgages		11,079,128			14	%		12,617,198			16	%
Residential Home Equity Lines of Credit (HELOCs)		17,155,276			22	%		17,388,327			22	%
Total Real Estate		67,846,259			86	%		66,964,944			86	%

Commercial		9,823,019			12	%		9,703,862			12	%
Consumer		1,394,579			2	%		1,293,655			2	%
Gross loans		79,063,857			100	%		77,962,461			100	%
Less allowance for loan losses		(1,140,693	)					(1,312,311	)
Total loans, net	$	77,923,164					$	76,650,150

The credit quality indicator utilized by the Company to internally analyze the loan portfolio is the internal risk rating. 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 September 30, 2014:

	Commercial		Commercial Real Estate		Construction, Land Development, and Other Land		Consumer		Residential		Residential HELOCs		Total
Grade
Pass	$	8,907,521	$	29,142,953	$	8,365,657	$	1,287,175	$	9,562,264	$	15,488,573	$	72,754,143
Special Mention		727,113		480,962		497,215		68,182		162,314		558,455		2,494,241
Substandard or Worse		188,385		1,125,068		—		39,222		1,354,550		1,108,248		3,815,473
Total	$	9,823,019	$	30,748,983	$	8,862,872	$	1,394,579	$	11,079,128	$	17,155,276	$	79,063,857

The following is an analysis of our loan portfolio by credit quality indicators at December 31, 2013:

					Construction,
					Land,
					Development,
			Commercial		and Other				Residential
	Commercial		Real Estate		Land		Residential		HELOCs		Consumer		Total
Grade:
Pass	$	8,468,920	$	27,232,107	$	7,281,057	$	10,597,540	$	15,211,902	$	1,240,535	$	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		1,446,242		1,554,808		53,120		5,093,359
Total	$	9,703,862	$	28,760,723	$	8,198,696	$	12,617,198	$	17,388,327	$	1,293,655	$	77,962,461

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable – continued

The following is an aging analysis of our loan portfolio at September 30, 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	$	4,799	$	115,734	$	—	$	120,533	$	9,702,486	$	9,823,019	$	—
Commercial Real Estate		—		—		—		—		30,748,983		30,748,983		—
Construction, Land Development, & Other Land		—		—		—		—		8,862,872		8,862,872		—
Consumer		—		—		—		—		1,394,579		1,394,579		—
Residential		—		399,721		—		399,721		10,679,407		11,079,128		—
Residential HELOC		—		157,730		162,236		319,966		16,835,310		17,155,276		—
Total	$	4,799	$	673,185	$	162,236	$	840,220	$	78,223,637	$	79,063,857	$	—

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

													Recorded
					Greater								Investment
	30 - 59 Days		60 - 89 Days		Than		Total Past				Total Loans		>90 Days and
	Past Due		Past Due		90 Days		Due		Current		Receivable		Accruing
Commercial	$	155,128	$		$	49,066	$	204,194	$	9,499,668	$	9,703,862	$	—
Commercial real estate				4,820				4,820		28,755,903		28,760,723		—
Construction, land development and other land				—		—				8,198,696		8,198,696		—

Consumer		9,024		—				9,024		1,284,631		1,293,655		—
Residential		249,571		84,128		356,717		690,416		11,926,782		12,617,198		—
Residential HELOC		184,975		249,787		173,977		608,739		16,779,588		17,388,327
Total	$	598,698	$	338,735	$	579,760	$	1,517,193	$	76,445,268	$	77,962,461	$	—

The following is an analysis of loans receivables on nonaccrual status as of the dates indicated:

	September 30, 2014		December 31, 2013
Commercial	$	155,455	$	240,824
Commercial Real Estate		889,838		484,429
Construction, Land Development, & Other Land		—		—
Consumer		—		—
Residential		399,721		356,717
Residential HELOCs		162,236		173,977
Total	$	1,607,250	$	1,255,947

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 nine months ended September 30, 2014 and the year ended December 31, 2013, we received approximately $26,848 and $23,739 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 $88,168 and $66,814, respectively.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable – continued

The following table summarizes the allowance for loan losses and recorded investment in gross loans, by portfolio segment, at and for the nine months ended September 30, 2014:

	Commercial			Commercial Real Estate			Construction, Land Development & Other Land		Consumer			Residential			Residential - HELOCs			Unallocated		Total
Allowance for Loan Losses
Beginning Balance	$	234,069		$	104,705		$	80,213	$	39,792		$	228,771		$	624,739		$	22	$	1,312,311
Charge Offs		(46,916	)		(87,250	)		—		(7,572	)		(11,034	)		(290,697	)		—		(443,469	)
Recoveries		4,790			—			—		—			181			18,880			—		23,851
Provision		(8,591	)		64,598			8,045		571			(125,312	)		127,858			180,831		248,000
Ending Balance	$	183,352		$	82,053		$	88,258	$	32,791		$	92,606		$	480,780		$	180,853	$	1,140,693

Ending Balances:
Individually evaluated for impairment	$	44,288		$	—		$	—	$	12,988		$	24,084		$	165,568		$	—	$	246,928
Collectively evaluated for impairment	$	139,064		$	82,053		$	88,258	$	19,803		$	68,522		$	315,212		$	180,853	$	893,765

Loans Receivable:
Ending Balance - Total	$	9,823,019		$	30,748,983		$	8,862,872	$	1,394,579		$	11,079,128		$	17,155,276		$	—	$	79,063,857

Ending Balances:
Individually evaluated for impairment	$	188,385		$	1,217,493		$	497,215	$	99,597		$	1,359,634		$	440,486		$	—	$	3,802,810
Collectively evaluated for impairment	$	9,634,634		$	29,531,490		$	8,365,657	$	1,294,982		$	9,719,494		$	16,714,790		$	—	$	75,261,047

The following table summarizes the allowance for loan losses and recorded investment in gross loans, by portfolio segment, at and for the three months ended September 30, 2014:

	Commercial			Commercial Real Estate			Construction, Land Development & Other Land		Consumer			Residential			Residential - HELOCs			Unallocated		Total
Allowance for Credit Losses
Beginning Balance	$	189,167		$	82,160		$	83,085	$	36,803		$	173,300		$	492,741		$	159,811	$	1,217,067
Charge Offs		(43,095	)		(87,250	)		—		—			(6,825	)		(28,036	)		—		(165,206	)
Recoveries		750			—			—		—			—			18,082			—		18,832
Provision		36,530			87,143			5,173		(4,012	)		(73,869	)		(2,007	)		21,042		70,000
Ending Balance	$	183,352		$	82,053		$	88,258	$	32,791		$	92,606		$	480,780		$	180,853	$	1,140,693

Ending Balances:
Individually evaluated for impairment	$	44,288		$	—		$	—	$	12,988		$	24,084		$	165,568		$	—	$	246,928
Collectively evaluated for impairment	$	139,064		$	82,053		$	88,258	$	19,803		$	68,522		$	315,212		$	180,853	$	893,765

Loans Receivable:
Ending Balance - Total	$	9,823,019		$	30,748,983		$	8,862,872	$	1,394,579		$	11,079,128		$	17,155,276		$	—	$	79,063,857

Ending Balances:
Individually evaluated for impairment	$	188,385		$	1,217,493		$	497,215	$	99,597		$	1,359,634		$	440,486		$	—	$	3,802,810
Collectively evaluated for impairment	$	9,634,634		$	29,531,490		$	8,365,657	$	1,294,982		$	9,719,494		$	16,714,790		$	—	$	75,261,047

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable – continued

The following table summarizes the allowance for loan losses and recorded investment in gross loans, by portfolio segment, at and for the nine months ended September 30, 2013:

	Commercial			Commercial Real Estate			Construction, Land Development & Other Land		Consumer			Residential			Residential - HELOCs		Unallocated		Total
Allowance for Loan 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	)		—		(48,064	)		(37,191	)		—		—		(214,568	)
Recoveries		9,439			—			—		—			798			399		—		10,636
Provision		84,784			22,237			16,306		6,016			47,279			39,438		103,940		320,000
Ending Balance	$	182,856		$	98,761		$	107,460	$	39,791		$	302,219		$	484,806	$	195,228	$	1,411,121

Ending Balances:
Individually evaluated for impairment	$	28,479		$	2,533		$	—	$	2,405		$	242,456		$	180,704	$	—	$	456,577
Collectively evaluated for impairment	$	154,377		$	96,228		$	107,460	$	37,386		$	59,763		$	304,102	$	195,228	$	954,544

Loans Receivable:
Ending Balance - Total	$	8,369,842		$	30,979,517		$	8,213,894	$	1,390,986		$	12,213,358		$	18,244,911	$	—	$	79,412,508

Ending Balances:
Individually evaluated for impairment	$	217,241		$	1,350,688		$	496,827	$	41,163		$	1,588,854		$	527,050	$	—	$	4,221,823
Collectively evaluated for impairment	$	8,152,601		$	29,628,829		$	7,717,067	$	1,349,823		$	10,624,504		$	17,717,861	$	—	$	75,190,685

The following table summarizes the allowance for loan losses and recorded investment in gross loans, by portfolio segment, at and for the three months ended September 30, 2013:

	Commercial			Commercial Real Estate			Construction, Land Development & Other Land		Consumer			Residential		Residential - HELOCs			Unallocated		Total
Allowance for Loan Losses
Beginning Balance	$	159,766		$	94,378		$	106,231	$	56,071		$	262,982	$	539,302		$	136,839	$	1,355,569
Charge Offs		(70,801	)		(9,940	)		—		—			—		—					(80,741	)
Recoveries		894			—			—		—			—		399			—		1,293
Provision		92,997			14,323			1,229		(16,280	)		39,237		(54,895	)		58,389		135,000
Ending Balance	$	182,856		$	98,761		$	107,460	$	39,791		$	302,219	$	484,806		$	195,228	$	1,411,121

Ending Balances:
Individually evaluated for impairment	$	28,479		$	2,533		$	—	$	2,405		$	242,456	$	180,704		$	—	$	456,577
Collectively evaluated for impairment	$	154,377		$	96,228		$	107,460	$	37,386		$	59,763	$	304,102		$	195,228	$	954,544

Loans Receivable:
Ending Balance - Total	$	8,369,842		$	30,979,517		$	8,213,894	$	1,390,986		$	12,213,358	$	18,244,911		$	—	$	79,412,508

Ending Balances:
Individually evaluated for impairment	$	217,241		$	1,350,688		$	496,827	$	41,163		$	1,588,854	$	527,050		$	—	$	4,221,823
Collectively evaluated for impairment	$	8,152,601		$	29,628,829		$	7,717,067	$	1,349,823		$	10,624,504	$	17,717,861		$	—	$	75,190,685

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable – continued

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

							Construction,
							Land
							Development
				Commercial			and Other									Residential
	Commercial			Real Estate			Land			Consumer			Residential			HELOCs			Unallocated			Total
Allowance for loan 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
Provisions		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

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 GAAP 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 $43,420 and $88,081 in interest income on loans that were impaired during the quarter ended September 30, 2014 and 2013, respectively.

At September 30, 2014, the Company had 16 impaired loans totaling $3,802,810 or 4.8% of gross loans. At December 31, 2013, the Company had 25 impaired loans totaling $4,448,601 or 5.7% of gross loans. There were no loans that were contractually past due 90 days or more and still accruing interest at September 30, 2014 or December 31, 2013. There were ten loans restructured or otherwise impaired totaling $2,195,560 not already included in nonaccrual status at September 30, 2014. There were seven loans restructured or otherwise impaired totaling $1,765,817 not already included in nonaccrual status at December 31, 2013. During the quarter ended September 30, 2014, we received approximately $26,848 in interest income in relation to loans on non-accrual status and forgone interest was approximately $88,168. During the quarter ended September 30, 2013, we received approximately $919 in interest income in relation to loans on non-accrual status and forgone interest was approximately $67,440.

The Company’s analysis under GAAP 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.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable – continued

The following is an analysis of our impaired loan portfolio detailing the related allowance recorded at and for the nine months ended September 30, 2014.

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		1,217,493		1,324,923		—		1,714,325		30,626
Construction, Land Development, & Other Land		497,215		497,215		—		498,473		18,961
Consumer		—		—		—		—		—
Residential		745,552		745,552		—		972,961		37,538
Residential HELOC		162,236		162,236		—		249,365		564

With an allowance recorded
Commercial	$	188,385	$	188,385	$	44,288	$	170,387	$	1,782
Commercial Real Estate		—		—		—		—		—
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		99,597		228,909		12,988		106,198		2,433
Residential		614,082		620,550		24,084		625,396		21,568
Residential HELOC		278,250		278,250		165,568		278,264		4,682

Total
Commercial	$	188,385	$	188,385	$	44,288	$	170,387	$	1,782
Commercial Real Estate		1,217,493		1,324,923		—		1,714,325		30,626
Construction, Land Development, & Other Land		497,215		497,215		—		498,473		18,961
Consumer		99,597		228,909		12,988		106,198		2,433
Residential		1,359,634		1,366,101		24,084		1,598,357		59,106
Residential HELOC		440,486		440,486		165,568		527,629		5,246
	$	3,802,810	$	4,046,019	$	246,928	$	4,615,369	$	118,154

The following is an analysis of our impaired loan portfolio detailing the related allowance recorded at and for the year ended December 31, 2013:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	43,146	$	43,146	$	—	$	71,122	$	472
Commercial Real Estate		333,777		333,777		—		336,454		22,173
Construction, Land Development, & Other Land		504,415		504,415		—		498,473		25,270
Consumer		—		—		—		—		—
Residential		464,459		520,872		—		519,387		26,174
Residential HELOC		282,100		282,100		—		405,732		13,620

With an allowance recorded
Commercial	$	231,577	$	231,577	$	86,590	$	182,450	$	2,590
Commercial Real Estate		1,023,894		1,043,918		12,465		1,377,871		11,860
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		40,385		40,385		1,834		41,697		1,251
Residential		1,106,577		1,112,809		151,172		1,091,522		58,487
Residential HELOC		418,271		547,584		204,072		419,485		13,329

Total
Commercial	$	274,723	$	274,723	$	86,590	$	253,572	$	3,062
Commercial Real Estate		1,357,671		1,377,695		12,465		1,714,325		34,033
Construction, Land Development, & Other Land		504,415		504,415		—		498,473		25,270
Consumer		40,385		40,385		1,834		41,697		1,251
Residential		1,571,036		1,633,681		151,172		1,610,909		84,661
Residential HELOC		700,371		829,684		204,072		825,217		26,949
	$	4,448,601	$	4,660,583	$	456,133	$	4,944,193	$	175,226

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable – continued

The following is an analysis of our impaired loan portfolio detailing the related allowance recorded as of and for the nine months ended September 30, 2013:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	43,720	$	43,720	$	—	$	80,503	$	472
Commercial Real Estate		1,331,955		1,351,979		—		1,722,388		—
Construction, Land Development, & Other Land		496,827		496,827		—		499,522		18,940
Consumer		—		—		—		—		—
Residential		320,979		320,979		—		316,927		10,620
Residential HELOC		184,959		184,959		—		184,105		5,851

With an allowance recorded
Commercial	$	173,521	$	173,521	$	28,479	$	178,629	$	1,836
Commercial Real Estate		18,733		201,017		2,533		175,000		—
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		41,163		41,163		2,405		42,011		943
Residential		1,267,875		1,273,985		242,456		1,269,113		43,959
Residential HELOC		342,091		471,403		180,704		343,105		6,297

Total
Commercial	$	217,241	$	217,241	$	28,479	$	259,132	$	2,308
Commercial Real Estate		1,350,688		1,552,996		2,533		1,897,388		—
Construction, Land Development, & Other Land		496,827		496,827		—		499,522		18,940
Consumer		41,163		41,163		2,405		42,011		943
Residential		1,588,854		1,594,964		242,456		1,586,040		54,579
Residential HELOC		527,050		656,362		180,704		527,210		12,148
	$	4,221,823	$	4,559,553	$	456,577	$	4,811,303	$	88,918

Troubled Debt Restructuring

The Company considers a loan to be a troubled debt restructuring (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 September 30, 2014 and December 31, 2013, we had 11 loans totaling $2,129,906 and 14 loans totaling $2,620,800, respectively, which we considered to be TDRs. During the three and nine months ended September 30, 2014, we modified one loan for $84,985 that was considered to be a TDR. The payment was reduced using a 30 year amortization instead of 20 year. During the three and nine months ended September 30, 2013, we did not modify any loans that we considered to be a TDR.

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.

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.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable – continued

There were no loans restructured within the last twelve months that defaulted during the three months ended September 30, 2014. There was one loan restructured within the previous twelve months totaling $115,734 that defaulted during the nine months ended September 30, 2014. There were no loans restructured within the twelve months prior to September 30, 2013 that were in default during the three and nine months ended September 30, 2013. The Bank considers any loans that are 30 days or more past due to be in default.

Note 7 – Other Real Estate Owned

Transactions in other real estate owned for the periods ended September 30, 2014 and December 31, 2013 are summarized below:

	2014			2013
Balance, beginning of period	$	1,544,234		$	2,214,397
Additions		545,922			251,386
Sales		(285,521	)		(717,998	)
Write downs		—			(203,551	)
Balance, end of period	$	1,804,635		$	1,544,234

Note 8 - Dividends on Series A Preferred Stock Issued to the U.S. Treasury

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, having a liquidation preference of $1,000 per share (the “Series B Preferred Stock”), 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. Because we did not redeem the Series A, Preferred Stock prior to February 15, 2014, the cost of this capital increased on that date from 5.0% per annum (approximately $121,210 annually) to 9.0% per annum (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 in dividend expenses for 2013 and is estimated to save the Company approximately $104,000 in dividend expenses for the year ended December 31, 2014. 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 September 30, 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.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion reviews our results of operations and assesses our financial condition. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements. The commentary should be read in conjunction with the discussion of forward-looking statements, the financial statements, and the related notes and the other statistical information included in this report.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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. 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. Our actual results may differ materially from the results discussed in the forward-looking statements, and our operating performance each quarter is subject to various risks and uncertainties that include, without limitation, those described under the heading “Risk Factors” in our Annual Report for the year ended December 31, 2013 filed with the SEC, and the following:

credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;
restrictions or conditions imposed by our regulators on our operations;
our efforts to raise capital or otherwise increase our regulatory capital ratios;
our ability to retain our existing customers, including our deposit relationships;
changes in deposit flows;
increases in competitive pressure in the banking and financial services industries;
changes in the interest rate environment, which could reduce anticipated or actual margins;
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;
increased cybersecurity risk, 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;
the rate of delinquencies and amounts of loan charge-offs;
the rates of loan growth;
the amount of our loan portfolio collateralized by real estate, and the weakness in the real estate market;
our reliance on available secondary funding sources such as FHLB advances, Federal Reserve Discount Window borrowings, sales of securities and loans, and federal funds lines of credit from correspondent banks to meet our liquidity needs;
our ability to maintain effective internal control over financial reporting;
adverse changes in asset quality and resulting credit risk-related losses and expenses;
changes in monetary and tax policies;
loss of consumer confidence and economic disruptions resulting from terrorist activities or other military activity;
changes in the securities markets; and
other risks and uncertainties detailed in Part I, Item 1A of the Annual Report on Form 10-K and from time to time in our filings with the SEC.

If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document, and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Overview

The impact of the recession is continuing to be felt by the banking industry as a whole and by us as well as we move through 2014. Accordingly, our focus has been and continues to be centered on managing through the effects of these economic times to position the Bank to continue being profitable as the economy continues to recover. It is our expectation that our hard work, reduced operating expenses, and the eventual improvement in the economy and the real estate markets will help our borrowers and us weather this storm and continue our road to recovery. Our primary focus has been and will continue to be to increase our net interest margin. We are reducing our reliance on wholesale deposits and placing emphasis on acquiring core deposits, specifically small business operating accounts. Additionally, we are taking steps to increase noninterest income through allocating resources to mortgage loan production, insurance income and investment referrals. Reducing our level of nonperforming assets will also lower our operating costs, thus increasing the Bank’s profitability.

The Company recorded net income of $361,032 and net income available to common shareholders of $244,397 for the nine months ended September 30, 2014 compared to net income of $451,132 and net income available to common shareholders of $346,874 for the nine months ended September 30, 2013. Basic and diluted income per common share were $0.14 for the first nine months of 2014 compared to basic and diluted income per common share of $0.20 in the first nine months of 2013. The decrease in net income for the first nine months of 2014 as compared to the first nine months of 2013 is primarily attributable to the decrease in net interest income of $207,133. For the nine month period ended September 30, 2014, our net interest margin was 3.98% compared to 4.15% at September 30, 2013.

The Company recorded net income, after tax provision, of $152,893 and net income available to common shareholders of $113,252 for the three months ended September 30, 2014, compared to net income, after tax provision, of $131,452 and net income available to common shareholders of $96,699 for the three months ended September 30, 2013. Basic and diluted earnings per share were $0.06 and $0.05 for the third quarter of 2014 and 2013, respectively.

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. Our annualized net interest margins for the nine months ended September 30, 2014 and 2013 were 3.98% and 4.15%, respectively. Our annualized net interest margins for the three months ended September 30, 2014 and 2013 were 3.93% and 4.18%, respectively.

At September 30, 2014, total assets were $113,147,131, compared to $112,538,793 at December 31, 2013, an increase of $608,338 or 0.54%. Interest-earning assets comprised approximately 92.3% and 92.7% of total assets at September 30, 2014 and December 31, 2013, respectively. Gross loans totaled $79,063,857 at September 30, 2014, an increase of $1,101,396, or 1.4%, from $77,962,461 at December 31, 2013. Investment securities were $25,887,611 at September 30, 2014, a decrease of $1,233,606, or 4.5%, from $27,121,217 at December 31, 2013. There were no investments in overnight federal funds at September 30, 2014 and December 31, 2013.

Deposits totaled $90,709,981 at September 30, 2014 and $91,130,457 at December 31, 2013. FHLB advances were $8,500,000 at September 30, 2014 and $7,000,000 at December 31, 2013. Shareholders’ equity was $12,192,104 and $12,408,617 at September 30, 2014 and December 31, 2013, respectively.

As of September 30, 2014, the Bank’s ratios are sufficient to satisfy the standard regulatory criteria for being a “well capitalized” bank. Management has developed a plan to increase and preserve our capital with the goal of developing and maintaining a strong capital position. These initiatives include, among other things, restructuring the Bank’s balance sheet by controlling new loan activity and aggressively attempting to sell other real estate owned. Additionally, we are actively evaluating a number of capital sources and balance sheet management strategies to ensure that our projected level of regulatory capital can support our balance sheet and meet or exceed minimum requirements.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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 the footnotes to our audited consolidated financial statements as of December 31, 2013, as filed on our Annual Report on Form 10-K.

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 credit worthiness 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 benefit or 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. We have partially reversed the valuation allowance related to the company’s deferred tax asset. The valuation allowance was established in 2009 based on management’s analysis of the continued losses incurred by the Company and likelihood of recovery of those assets. As the Company has been demonstrating positive earnings, management has concluded that a portion of those assets are likely to be recovered and, as a result, a portion of the valuation allowance has been reversed, creating earnings in the prior quarters. If the Company continues to generate positive earnings, additional portions of the valuation allowance will be reversed which would positively impact income in future periods.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Results of Operations

Nine and three months ended September 30, 2014 and 2013

Net Interest Income

Net interest income was $3,113,094 during the nine months ended September 30, 2014, compared to $3,320,227 for the same period in 2013. The decrease in net interest income is primarily attributable to the decrease in interest income on loans. Interest income of $3,421,381 for the nine months ended September 30, 2014 included $2,907,466 on loans, $494,097 on investment securities and $19,818 on federal funds sold and other. This represented a decrease of $252,529 in interest income for the nine months ended September 30, 2014 compared to the same period last year which was primarily due to a 4.4% reduction in the average loan portfolio. Total interest expense of $308,287 during the nine months ended September 30, 2014 included $266,667 related to deposit accounts and $41,620 on FHLB advances and other borrowings. Interest expense decreased from $353,683 for the nine months ended September 30, 2013 to $308,287 for the nine months ended September 30, 2014, largely due to higher interest bearing deposits being replaced by lower interest bearing deposits and a 3.5% decrease in the average interest bearing deposits.

Net interest income was $1,031,439 for the quarter ended September 30, 2014, compared to $1,094,111 for the same period in 2013. Interest income of $1,130,811 for the quarter ended September 30, 2014 included $960,189 on loans, $163,644 on investment securities and $6,978 on federal funds sold and other. Total interest expense of $99,372 for the quarter ended September 30, 2014 included $85,460 related to deposit accounts and $13,912 on FHLB advances and other borrowings. The decrease in net interest income for this period is primarily attributable to the decrease in interest income on loans, which was primarily due to a 3% reduction in the average loan portfolio.

While nonperforming loans continue to be treated as interest-earning assets for purposes of calculating the net interest margin, the interest lost on these loans reduces net interest income, particularly in the quarter the loans first are considered nonperforming, as any interest income accrued on the loans is reversed at that point.

Provision for Loan Losses

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

Our provision for loan losses for the nine months ended September 30, 2014 was $248,000, a decrease of $72,000, or 22.5%, from our provision for loan losses of $320,000 for the nine months ended September 30, 2013. Our provision for loan losses for the three months ended September 30, 2014 was $70,000, a decrease of $65,000, or 48.1%, from our provision for loan losses of $135,000 for the three months ended September 30, 2013. The provision continues to be maintained at a level based on management’s evaluation of the adequacy of the reserve for probable loan losses given the size, mix, and quality of the current loan portfolio. Management also relies on our history of past-dues and charge-offs to determine our loan loss allowance. See below under “Balance Sheet Review” for further information.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Noninterest Income

Noninterest income during the nine months ended September 30, 2014 was $330,573, compared to $437,280 for the same period in 2013. Noninterest income for the nine months ended September 30, 2014 consisted primarily of service charges on deposit accounts of $222,541, residential mortgage origination fees of $26,276, gain on sale of securities available for sale of $65,591 and other noninterest income of $16,165. Noninterest income for the nine months ended September 30, 2013 consisted primarily of service charges on deposit accounts of $191,159, residential mortgage origination fees of $47,741, gain on sale of securities available for sale of $185,238 and other noninterest income of $13,142. The decrease of $106,707 in noninterest income compared to the same period in 2013 is primarily the result of a reduction in the gain on sale of securities available for sale of $119,647.

Noninterest income for the three months ended September 30, 2014 was $164,850, compared to $77,870 for the three months ended September 30, 2013. Noninterest income for the quarter ended September 30, 2014 consisted primarily of service charges on deposit accounts, mortgage loan origination fees and gain on sale of securities available for sale. The increase of $86,980 in noninterest income compared to the same period in 2013 is primarily the result of the gain on sale of securities available for sale of $70,069.

In response to competition to retain deposits, institutions in the financial services industry have increasingly been providing services for free in an effort to lure deposits away from competitors and retain existing balances. Services that were initially developed as fee income opportunities, such as Internet banking and bill payment service, are now provided to customers free of charge. Consequently, opportunities to earn additional income from service charges for such services have been more limited. In addition, recent focus on the level of deposit service charges within the banking industry by the media and the U.S. Government may result in future legislation limiting the amount and type of services charges within the banking industry.

For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, calls for new limits on interchange transaction fees that banks receive from merchants via card networks like Visa, Inc. and MasterCard, Inc. when a customer uses a debit card. In June 2011, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) approved a final debit card interchange rule in accordance with the Dodd-Frank Act. The final rule caps an issuer’s base fee at $0.21 per transaction and allows an additional 5 basis point charge per transaction to help cover fraud losses. Though the rule technically does not apply to institutions with less than $10 billion in assets, such as the Bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. The Federal Reserve also adopted requirements for issuers to include two unaffiliated networks for debit card transactions – one signature-based and one PIN-based. The effective date for the final rules on the pricing and routing restrictions was October 1, 2011. Our ATM/debit card fee income is included in service charges on deposit accounts and was $102,184 and $98,269 for the nine months ended September 30, 2014 and 2013, respectively. Our ATM/debit card fee income for three months ended September 30, 2014 was $33,990, compared to $34,396 for three months ended September 30, 2013. We will continue to monitor the regulations as they are implemented and will review our policies, products and procedures to ensure full compliance but also attempt to minimize any negative impact on our operations.

Noninterest Expenses

The following table sets forth information related to our noninterest expenses for the nine and three months ended September 30, 2014 and 2013.

	Nine months ended					Three months ended
	September 30,					September 30,
	2014			2013		2014			2013
Compensation and benefits	$	1,451,153		$	1,357,978	$	505,191		$	449,078
Occupancy and equipment		495,464			647,468		166,361			213,209
Data processing and related costs		248,961			226,432		88,473			79,443
Marketing, advertising and shareholder communications		68,500			61,375		17,585			18,071
Legal and audit		173,310			125,422		60,174			24,161
Other professional fees		5,326			4,406		2,062			1,249
Supplies, postage and telephone		43,764			45,305		13,764			13,694
Insurance		35,435			32,706		11,812			10,902
Credit related expenses		(249	)		5,493		(4,071	)		2,527
Regulatory fees and FDIC insurance		91,778			97,398		31,214			24,498
Net cost of operation of real estate owned		12,229			178,546		19,838			8,729
Other		195,674			185,664		49,069			54,168
Total noninterest expense	$	2,821,345		$	2,968,193	$	961,472		$	899,729

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

The most significant component of noninterest expense is compensation and benefits, which totaled $1,451,153 for the nine months ended September 30, 2014, compared to $1,357,978 for the nine months ended September 30, 2013. The increase is primarily related to increase in salaries due to employee performance. Occupancy and equipment decreased from $647,468 for the nine months ended September 30, 2013 to $495,464 for the nine months ended September 30, 2014 due to the Company purchasing the Knox Abbott Drive property in October 2013. Prior to the purchase this property was leased monthly for $19,898. Data processing and related costs increased from $226,432 for the nine months ended September 30, 2013 to $248,961 for the nine months ended September 30, 2014. Marketing and advertising increased from $61,375 for the nine months ended September 30, 2013, to $68,500 for the nine months ended September 30, 2014. Regulatory fees decreased from $97,398 for the nine months ended September 30, 2013, to $91,778 for the nine months ended September 30, 2014. Other real estate expenses decreased from $178,546 for the nine months ended September 30, 2013, to $12,229 for the nine months ended September 30, 2014 as a result of gains on the sale of other real estate of $17,456 and a reduction in write downs in the portfolio of $140,000 during the nine months ended September 30, 2014.

Compensation and benefits increased from $449,078 for the three months ended September 30, 2013 to $505,191 for the three months ended September 30, 2014. Occupancy and equipment decreased from $213,209 for the three months ended September 30, 2013 to $166,361 for the three months ended September 30, 2014 due to the Company purchasing the Knox Abbott Drive property in October 2013. Prior to the purchase this property was leased monthly for $19,898. Other real estate expenses increased from $8,729 for the three months ended September 30, 2013, to $19,838 for the three months ended September 30, 2014 due primarily to a loss on the sale of other real estate of $6,075 during the three months ended September 30, 2014.

Income Tax Expenses

The Company reported taxable income for the nine months ended September 30, 2014 and September 30, 2013. The valuation allowance was established in 2009 based on management’s analysis of the continued losses incurred by the Company and likelihood of recovery of those assets. As the Company has been demonstrating positive earnings, management has concluded that a portion of those assets are likely to be recovered and, as a result, a portion of the valuation allowance has been reversed, creating earnings in previous quarters. If the Company continues to generate positive earnings, additional portions of the valuation allowance will be reversed which would positively impact income in future periods. The Company recorded income tax expense of $13,290 for the nine months ended September 30, 2014 and $11,924 for the three months ended related to estimated state income tax payments that are not allowed to be offset by the federal tax valuation allowance.

Balance Sheet Review

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 September 30, 2014 were $79,063,857, or 75.7% of interest-earning assets and 69.8% of total assets, compared to $77,962,461, or 74.9% of interest-earning assets and 69.3% of total assets, at December 31, 2013.

Loans secured by real estate mortgages comprised approximately 86% of loans outstanding at September 30, 2014 and December 31, 2013. 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 12% of our loan portfolio at September 30, 2014 and December 31, 2013. Our construction, development, and land loans represented approximately 11% of our loan portfolio at September 30, 2014 and December 31, 2013, respectively.

Due to the short time our portfolio has existed, the loan mix shown below may not be indicative of the ongoing portfolio mix. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration of certain types of collateral.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

The following table summarizes the composition of our loan portfolio as of September 30, 2014 and December 31, 2013.

	September 30, 2014						December 31, 2013
	Amount			Percentage of Total			Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	30,748,983			39	%	$	28,760,723			37	%
Construction, Land Development & Other Land		8,862,872			11	%		8,198,696			11	%
Residential Mortgages		11,079,128			14	%		12,617,198			16	%
Residential Home Equity Lines of Credit (HELOCs)		17,155,276			22	%		17,388,327			22	%
Total Real Estate		67,846,259			86	%		66,964,944			86	%

Commercial		9,823,019			12	%		9,703,862			12	%
Consumer		1,394,579			2	%		1,293,655			2	%
Gross loans		79,063,857			100	%		77,962,461			100	%
Less allowance for loan losses		(1,140,693	)					(1,312,311	)
Total loans, net	$	77,923,164					$	76,650,150

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 statements of operations. The allowance for loan losses for the nine months ended September 30, 2014 and 2013 is presented below:

	Nine Months Ended September 30,
	2014			2013
Balance at beginning of the period	$	1,312,311		$	1,295,053
Provision for loan losses		248,000			320,000
Loans charged-off		(443,469	)		(214,568	)
Recoveries of loans previously charged-off		23,851			10,636
Balance at end of the period	$	1,140,693		$	1,411,121

The allowance for loan losses was $1,140,693 and $1,312,311 as of September 30, 2014 and December 31, 2013, respectively, and represented 1.44% and 1.68% of outstanding loans at September 30, 2014 and December 31, 2013, respectively.

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

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

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Specific Reserve

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

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

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

Generally, for larger collateral dependent loans, current market appraisals are ordered to estimate the current fair value of the collateral. Third party appraisals are ordered through and independently reviewed by our appraisal management company. Those appraisals are generally ordered to provide the current “as is” market 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. An outside credit review firm 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 maintain a general reserve in accordance with December 2006 regulatory interagency guidance in our assessment of the loan loss allowance. This general reserve considers qualitative or environmental factors that are likely to cause estimated credit losses including, but not limited to, changes in delinquent loan trends, trends in risk grades and net charge offs, concentrations of credit, trends in the nature and volume of the loan portfolio, general and local economic trends, collateral valuations, the experience and depth of lending management and staff, lending policies and procedures, the quality of loan review systems, and other external factors.

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

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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 $3,802,810 and $4,448,601 in impaired loans at September 30, 2014 and December 31, 2013, respectively. The valuation allowances related to impaired loans totaled $246,928 and $456,133 at September 30, 2014 and December 31, 2013, respectively.

At September 30, 2014 and December 31, 2013, nonaccrual loans totaled $1,607,250 and $1,255,947, respectively. 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.

Deposits

Our primary source of funds for our loans and investments is our deposits. Total deposits as of September 30, 2014 and December 31, 2013 were $90,709,981 and $91,130,457, respectively. The following table shows the average balance outstanding and the average rates paid on deposits for the nine months ended September 30, 2014 (annualized) and the year ended December 31, 2013.

	September 30, 2014					December 31, 2013
	Average Amount		Rate			Average Amount		Rate
Non-interest bearing demand deposits	$	13,309,893		—	%	$	14,164,287		—	%
Interest-bearing checking		6,696,862		0.18			5,695,579		0.17
Money market		43,321,271		0.28			44,316,767		0.36
Savings		1,266,749		0.18			1,142,886		0.23
Time deposits less than $100,000		12,046,197		0.76			12,950,489		0.86
Time deposits $100,000 and over		14,620,451		0.88			16,103,530		0.89
Total	$	91,261,423		0.46	%	$	94,373,538		0.53	%

Core deposits, which exclude time deposits of $100,000 or more and brokered certificates of deposit, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were approximately $77,591,797 and $75,762,335 at September 30, 2014 and December 31, 2013, respectively. Our loan-to-deposit ratio was 87.16% and 85.55% at September 30, 2014 and December 31, 2013, respectively. Due to the competitive interest rate environment in our market, from time to time we will utilize internet certificates of deposit as a funding source when we are able to procure these certificates at interest rates less than those in the local market to balance our funding mix. All of our time deposits are certificates of deposits.

Liquidity

Liquidity is the ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of liabilities. We manage both assets and liabilities to achieve appropriate levels of liquidity. 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.

Cash and short-term investments are our primary sources of asset liquidity. These funds provide a cushion against short-term fluctuations in cash flow from both deposits and loans. The investment portfolio is our principal source of secondary asset liquidity. However, the availability of this source of funds is influenced by market conditions and pledging agreements. Individual and commercial deposits, wholesale deposits and borrowings are our primary source of funds for credit activities. 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 $12,550,000. Availability on these lines of credit was $11,151,000 at September 30, 2014.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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 September 30, 2014 and December 31, 2013, we had $8,500,000 and $7,000,000 outstanding, respectively. The Bank borrowed the funds to reduce the cost of funds on money used to fund loans. The Bank has remaining credit availability of $13,830,000 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 at September 30, 2014.

Amount		Grant Date			Maturity Date			Interest Rate

$	1,500,000		9	/25/2014		11	/25/2014		0.16	%
$	1,000,000		9	/12/2014		12	/12/2014		0.21	%
$	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.

At September 30, 2014, 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 $5,351,000 in unused federal funds on a one to 20 day basis for general corporate purposes. The interest rate on borrowings under these lines is the prevailing market rate for federal funds purchased. These accommodation lines of credit are renewable annually and may be terminated at any time at the correspondent banks’ sole discretion. At September 30, 2014, we had $1,399,000 in borrowings outstanding from a one to 20 day basis on the lines.

The Bank’s level of liquidity is measured by the cash, cash equivalents, and investment securities available for sale to total assets ratio, which was at 21.8% at September 30, 2014 compared to 22.5% as of December 31, 2013. At September 30, 2014, $10,218,643 of our investment securities were pledged to secure public entity deposits and as collateral for securities sold under agreement to repurchase. We continue to carefully focus on liquidity management during 2014.

Capital Resources

Total shareholders’ equity was $12,192,104 at September 30, 2014, a decrease of $216,513 from $12,408,617 at December 31, 2013. The decrease is due to the Company’s repurchase of Series A Preferred Stock of $729,000 and payment of cash dividends on preferred stock of $103,290 partially offset by net income for the period of $361,032 and a decrease in accumulated other comprehensive income loss of $265,311.

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

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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

At the bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. To be considered “adequately capitalized” under these capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%. To be considered “well-capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

The following table sets forth the Bank’s capital ratios at September 30, 2014 and December 31, 2013:

											To Be Well-
											Capitalized Under
						For Capital					Prompt Corrective
(Dollars in thousands)	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2014
Total capital (to risk-weighted assets)	$	12,634		15.65	%	$	6,459		8.00	%	$	8,069		10.00	%
Tier 1 capital (to risk-weighted assets)		11,623		14.40	%		3,228		4.00	%		4,843		6.00	%
Tier 1 capital (to average assets)		11,623		10.46	%		4,448		4.00	%		5,563		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	%

In July 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency each approved final rules to implement the Basel III regulatory capital reforms among other changes required by the Dodd-Frank Act. 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, which we collectively refer to herein as “covered banking organizations.” Bank holding companies with less than $500 million in total consolidated assets, such as the Company, are not subject to the final rules, nor are savings and loan holding companies substantially engaged in commercial activities or insurance underwriting. The framework requires covered 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 rules include 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 rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking institutions. In terms of quality of capital, the final rules emphasize common equity Tier 1 capital and implement strict eligibility criteria for regulatory capital instruments. The final rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity. The requirements in the rules begin to phase in on January 1, 2015 for covered banking organizations such as the Bank. The requirements in the rules will be fully phased in by January 1, 2019. The ultimate impact of the new capital standards on the Bank is currently being reviewed.

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.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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. At September 30, 2014 and December 31, 2013, we had issued commitments to extend credit of approximately $12,654,000 and $10,711,000, respectively, through various types of lending arrangements.

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 September 30, 2014 and December 31, 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. There were standby letters of credit included in the commitments for $40,000 and $38,000 at September 30, 2014 and December 31, 2013, respectively.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the nine months ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Part II - Other Information

Item 1. Legal Proceedings

We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, the Company believes would have a material adverse impact on the Company’s financial position, results of operations or cash flows.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 13, 2014	By:	/s/ Charles A. Kirby
		Charles A. Kirby
		President and Chief Executive Officer (Principal Executive Officer)


Date: November 13, 2014	By:	/s/ Charlie T. Lovering
		Charlie T. Lovering
		Chief Financial Officer and Executive Vice President (Principal Financial and Accounting Officer)

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

EXHIBIT INDEX

Exhibit
Number	Description

31.1	Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2	Rule 13a-14(a) Certification of the Principal Financial Officer.

32	Section 1350 Certifications.

101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

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Attached files

Congaree Bancshares Inc Reports

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