Congaree Bancshares Inc - FORM 10-Q

Attached files

file	filename
EX-31.1 - Congaree Bancshares Inc	e00411_ex31-1.htm
EX-31.2 - Congaree Bancshares Inc	e00411_ex31-2.htm
EX-32 - Congaree Bancshares Inc	e00411_ex32.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, 2015

OR

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

For the Transition Period from _________to_________

Commission File No. 000-52592

CONGAREE BANCSHARES, INC.

(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:

1,765,939 shares of common stock, par value $0.01 per share, were issued and outstanding as of November 6, 2015.

INDEX

PART I - FINANCIAL INFORMATION		Page No.

Item 1.	Financial Statements

	Consolidated Balance Sheets – September 30, 2015 (Unaudited) and December 31, 2014	2

	Consolidated Statements of Income - Nine months and three months ended September 30, 2015 and 2014 (Unaudited)	3

	Consolidated Statements of Comprehensive Income - Nine months and three months ended September 30, 2015 and 2014 (Unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity - Nine months ended September 30, 2015and 2014 (Unaudited)	5

	Consolidated Statements of Cash Flows - Nine months ended September 30, 2015 and 2014 (Unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	38

Item 6.	Exhibits	38

Part I - Financial Information

Item 1. Financial Statements

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

	September 30, 2015 (unaudited)			December 31, 2014
Assets:
Cash and due from banks	$	4,913,783		$	3,034,889
Federal funds sold		3,707,000			—
Securities available-for-sale		16,606,049			21,173,560
Securities held-to-maturity (estimated fair value of $3,400,400 and $3,472,710 at September 30, 2015 and December 31, 2014, respectively)		3,420,412			3,444,699
Non-marketable equity securities		500,900			720,800
Loans receivable		81,579,138			78,426,868
Less allowance for loan losses		1,113,279			1,006,794
Loans, net		80,465,859			77,420,074

Premises, furniture and equipment, net		2,831,287			2,959,222
Accrued interest receivable		355,051			363,444
Other real estate owned		1,710,235			1,441,095
Deferred tax asset		2,008,715			2,156,902
Other assets		169,854			207,401
Total assets	$	116,689,145		$	112,922,086
Liabilities:
Deposits:
Noninterest-bearing transaction accounts	$	16,253,890		$	14,555,810
Interest-bearing transaction accounts		14,292,805			8,005,384
Savings and money market		40,676,823			43,484,515
Time deposits $100,000 and over		15,801,651			12,199,291
Other time deposits		8,801,475			9,713,312
Total deposits		95,826,644			87,958,312

Federal Home Loan Bank advances		7,000,000			11,500,000
Accrued interest payable		16,078			13,766
Other liabilities		264,809			105,060
Total liabilities		103,107,531			99,577,138

Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized:
Series A cumulative perpetual preferred stock 1,400 shares issued and outstanding		1,400,000			1,400,000
Series B cumulative perpetual preferred stock 164 shares issued and outstanding		164,000			164,000
Common stock, $0.01 par value, 10,000,000 shares authorized; 1,765,939 and 1,764,439 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		17,659			17,644
Capital surplus		17,715,823			17,693,644
Accumulated deficit		(5,723,441	)		(5,850,277	)
Accumulated other comprehensive loss		7,573			(80,063	)
Total shareholders’ equity		13,581,614			13,344,948
Total liabilities and shareholders’ equity	$	116,689,145		$	112,922,086

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

	Nine months ended						Three months ended
	September 30,						September 30,
	2015			2014			2015			2014
Interest income:
Loans, including fees	$	3,016,506		$	2,907,466		$	1,043,497		$	960,189
Investment securities, taxable		382,498			494,097			122,631			163,644
Federal funds sold and other		24,904			19,18			7,405			6,978
Total interest income		3,423,908			3,421,381			1,173,533			1,130,811

Interest expense:
Time deposits $100,000 and over		82,440			95,549			31,500			30,417
Other deposits		138,173			171,118			47,909			55,043
Other borrowings		45,169			41,620			13,690			13,912
Total interest expense		265,782			308,287			93,100			99,372
Net interest income		3,158,126			3,113,094			1,080,434			1,031,439
Provision for loan losses		195,000			248,000			65,000			70,000
Net interest income after provision for loan losses		2,963,126			2,865,094			1,015,434			961,439

Noninterest income:
Service charges on deposit accounts		273,111			222,541			86,274			83,683
Residential mortgage origination fees		67,055			26,276			29,057			7,890
Gain on sale of securities available for sale		111,077			65,591			—			70,069
Other		33,013			16,165			9,527			3,208
Total noninterest income		484,257			330,573			124,858			164,850

Noninterest expenses:
Salaries and employee benefits		1,451,082			1,451,153			497,751			505,191
Net occupancy		237,572			232,748			84,942			79,646
Furniture and equipment		300,149			262,716			107,735			86,715
Professional fees		278,307			178,636			131,582			62,236
Regulatory fees and FDIC assessment		95,481			91,778			30,220			31,214
Data processing		273,327			248,961			90,724			88,473
Net cost of operation of other real estate owned		203,265			12,229			32,358			19,838
Other operating		259,966			343,124			68,152			88,159
Total noninterest expense		3,099,149			2,821,345			1,043,464			961,472
Income before income taxes		348,234			374,322			96,829			164,817
Income tax expense		(115,828	)		(13,290	)		(44,776	)		(11,924	)
Net income		232,406			361,032			52,053			152,893
Net accretion of preferred stock to redemption value		—			13,345			—			4,449
Preferred dividends		105,570			103,290			35,190			35,192
Net income available to common shareholders	$	126,836		$	244,397		$	16,863		$	113,252
Income per common share
Basic and diluted income per common share	$	0.07		$	0.14		$	0.01		$	0.06
Weighted average common shares outstanding		1,765,939			1,764,439			1,765,939			1,764,439

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(unaudited)

	Nine months ended September 30,
	2015			2014
Net Income	$	232,406			361,032
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale net of tax expense of $86,090 at September 30, 2015 and $158,976 at September 30, 2014		164,090			308,601
Reclassification adjustment for gains included in net income, net of tax expense of $34,623 at September 30, 2015 and $22,301 at September 30, 2014		(76,454	)		(43,290	)
Other comprehensive income		87,636			265,311
Comprehensive income	$	320,042		$	626,343

	Three months ended September 30,
	2015		2014
Net Income	$	52,053	$	152,893
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available for sale, net of tax expense (benefit) of $77,742 at September 30, 2015 and ($33,030) at September 30, 2014.		141,435		(64,117	)
Reclassification adjustment for gains included in net income, net of tax expense of $23,823 at September 30, 2014		0		(46,246	)
Other comprehensive income (loss)		141,435		(110,363	)
Comprehensive income	$	193,487	$	42,530

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Nine months ended September 30, 2015 and 2014 (Unaudited)

																Accumulated Other
	Preferred Stock						Common Stock				Capital		Retained			Comprehensive
	Shares			Amount			Shares		Amount		Surplus		Deficit			Loss			Total

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 loss																	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

Balance, December 31, 2014		1,564		$	1,564,000			1,764,439	$	17,644	$	17,693,644	$	(5,850,277	)	$	(80,063	)	$	13,344,948
Dividends on preferred stock														(105,570	)					(105,570	)
Stock based compensation expense												16,614								16,614
Issuance of common stock								1,500		15		5,565								5,580
Net income														232,406						232,406
Other comprehensive income																	87,636			87,636
Balance, September 30, 2015		1,564		$	1,564,000			1,765,939	$	17,659	$	17,715,823	$	(5,723,441	)	$	7,573		$	13,581,614

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended September 30,
	2015			2014
Cash flow from operating activities
Net income	$	232,406		$	361,032
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		195,000			248,000
Stock based compensation expense		16,614			—
Depreciation and amortization expense		143,764			126,746
Discount accretion and premium amortization		97,500			89,907
(Increase) decrease in accrued interest receivable		8,393			(4,593	)
Increase (decrease) in accrued interest payable		2,312			(39	)
Gain from sale of securities available-for-sale		(111,077	)		(65,591	)
Write downs on other real estate owned		111,000			—
(Gain) loss on sales of other real estate owned		12,413			(17,456	)
Decrease in other assets		134,265			46,051
Increase in other liabilities		159,749			114,366
Net cash provided by operating activities		1,002,339			898,423

Cash flow from investing activities
Purchase of securities available-for-sale		(2,651,606	)		(8,309,565	)
Purchase of non-marketable equity securities		—			(247,500	)
Proceeds from maturities, calls and paydowns of securities available-for-sale		2,266,048			705,981
Proceeds from sales of securities available-for-sale		5,130,038			9,214,860
Proceeds from sale and redemption of non-marketable equity securities		219,900			214,900
Net decrease (increase) in loans receivable		(3,699,785	)		(2,066,936	)
Purchase of premises, furniture and equipment		(15,829	)		(26,736	)
Proceeds from sale of other real estate owned		66,447			302,977
Net cash provided (used) by investing activities		1,315,213			(212,019	)

Cash flow from financing activities
Increase in noninterest-bearing deposits		1,698,080			1,296,479
(Decrease) increase in interest-bearing deposits		6,170,252			(1,716,955	)
(Decrease) increase in federal funds purchased		—			(369,000	)
(Decrease) increase in borrowings from FHLB		(4,500,000	)		1,500,000
Repurchase of preferred stock		—			(739,566	)
Proceeds from issuance of common stock		5,580			—
Dividends paid on preferred stock		(105,570	)		(103,290	)

Net cash provided (used) by financing activities		3,268,342			(132,332	)

Net increase in cash and cash equivalents		5,585,894			554,072

Cash and cash equivalents at beginning of the period		3,034,889			1,638,635

Cash and cash equivalents at end of the period	$	8,620,783		$	2,192,707

Supplemental cash flow information:
Interest paid on deposits and borrowed funds	$	263,470		$	308,326
Transfer of loans to other real estate	$	459,000		$	545,922
Cash paid for taxes	$	12,253		$	13,290

See notes to consolidated financial statements.

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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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, 2014 as filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2015.

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, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in our 2014 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.

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, 2015 and 2014:

	Nine months ended				Three months ended
	September 30,				September 30,
	2015		2014		2015		2014
Basic net income per common share computation:
Net income available to common shareholders	$	126,836	$	244,397	$	16,863	$	113,252
Average common shares outstanding — basic		1,765,939		1,764,439		1,765,939		1,764,439
Basic net income per common share	$	0.07	$	0.14	$	0.01	$	0.06

Diluted net income per common share computation:
Net income available to common shareholders	$	126,836	$	244,397	$	16,863	$	113,252
Average common shares outstanding — basic		1,765,939		1,764,439		1,765,939		1,764,439
Incremental shares from assumed conversions: Stock options		—		—		—		—
Average common shares outstanding — diluted		1,765,939		1,764,439		1,765,939		1,764,439
Diluted net income per common share	$	0.07	$	0.14	$	0.01	$	0.06

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, 2015, 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 Financial Accounting Standards Board (the “FASB”) amended Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (“OREO”). In addition, the amendments require a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments were effective for the Company for annual periods, and interim periods within those annual periods beginning after December 15, 2014, with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company applied the amendments prospectively. These amendments did not have a material effect on the Company’s 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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 3 - Recently Issued Accounting Pronouncements - continued

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

In January 2015, the FASB issued guidance to eliminate from U.S. Generally Accepted Accounting Principles (“GAAP”) the concept of an extraordinary item, which is an event or transaction that is both unusual in nature and infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (“ASC”), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2015, the FASB deferred the effective date of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

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

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

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.

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
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)

September 30, 2015
Financial Instruments - Assets
Cash and due from banks	$	4,913,783	$	4,913,783	$	4,913,783	$	—	$	—
Federal funds sold		3,707,000		3,707,000		3,707,000		—		—
Securities available-for-sale		16,606,049		16,606,049		—		15,244,932		1,361,117
Securities held-to-maturity		3,420,412		3,400,400		—		3,400,400		—
Nonmarketable equity securities		500,900		500,900		—		500,900		—
Loans, net		80,465,859		79,914,000		—		—		79,914,000
Accrued interest receivable		355,051		355,051		355,051		—		—

Financial Instruments – Liabilities
Demand deposit, interest-bearing transaction, and savings accounts		71,223,518		71,223,518		71,223,518		—		—
Time Deposits		24,603,126		24,636,000		—		24,636,000		—
Federal Home Loan Bank advances		7,000,000		7,000,000		—		7,000,000		—
Accrued interest payable		16,078		16,078		16,078		—		—

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

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

December 31, 2014
Financial Instruments – Assets:
Cash and due from banks	$	3,034,889	$	3,034,889	$	3,034,889	$	—	$	—
Securities available-for-sale		21,173,560		21,173,560		—		19,670,647		1,502,913
Securities held-to-maturity		3,444,699		3,472,710		—		3,472,710		—
Nonmarketable equity securities		720,800		720,800		—		720,800		—
Loans, net		77,420,074		77,254,000		—		—		77,254,000
Accrued interest receivable		363,444		363,444		363,444		—		—

Financial Instruments – Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		66,045,709		66,045,709		66,045,709		—		—
Time Deposits		21,912,603		21,963,707		—		21,963,707		—
Federal Home Loan Bank advances		11,500,000		11,513,800		—		11,513,800		—
Accrued interest payable		13,766		13,766		13,766		—		—

	September 30, 2015				December 31, 2014
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	15,242,000	$	—	$	13,267,090	$	—
Financial standby letters of credit		48,000		—		48,000		—

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

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, 2015 and December 31, 2014, 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.

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements – continued

The table below presents the balances of assets measured at fair value on a recurring basis by level within the hierarchy at September 30, 2015 and December 31, 2014.

	September 30, 2015
	Total		Level 1		Level 2		Level 3
Securities available-for-sale
Government sponsored enterprises	$	711,642	$	—	$	711,642	$	—
Corporate bonds		771,703		—		281,571		490,132
Small Business Administration Securities		8,132,174		—		8,132,174		—
Mortgage-backed securities		3,436,778		—		2,565,793		870,985
State, county and municipals		3,553,752		—		3,553,752		—
Total assets	$	16,606,049	$	—	$	15,244,932	$	1,361,117

	December 31, 2014
	Total		Level 1		Level 2		Level 3
Securities available-for-sale
Government sponsored enterprises	$	6,596,536	$	—	$	6,596,536	$	—
Corporate bonds		798,477		—		298,477		500,000
Small Business Administration Securities		8,700,577		—		8,700,577		—
Mortgage-backed securities		1,948,933		—		946,020		1,002,913
State, county and municipals		3,129,037		—		3,129,037		—
Total assets	$	21,173,560	$	—	$	19,670,647	$	1,502,913

There were no liabilities measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014.

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 assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2015 and December 31, 2014, aggregated by level in the fair value hierarchy within which those measurements fall.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

	September 30, 2015
	Total		Level 1		Level 2		Level 3
Impaired loans	$	1,509,462	$	—	$	—	$	1,509,462
Other real estate owned		1,710,235		—		—		1,710,235
Total assets	$	3,219,697	$	—	$	—	$	3,219,697

	December 31, 2014
	Total		Level 1		Level 2		Level 3
Impaired loans	$	2,426,332	$	—	$	—	$	2,426,332
Other real estate owned		1,441,095		—		—		1,441,095
Total assets	$	3,867,427	$	—	$	—	$	3,867,427

For Level 3 assets measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value as of			General
	September 30, 2015		Valuation Technique	Unobservable Input	Range
Nonrecurring Measurements:
Impaired loans	$	1,509,462	Discounted appraisals	Collateral discounts	0 – 10%
Other real estate owned		1,710,235	Discounted appraisals	Collateral discounts and
				Estimated costs to sell	0 – 10%
Recurring Measurements:				Pricing yield	5.03%
				Pricing spread	+200
Mortgage-backed securities		870,985	Fundamental Analysis	Pricing term	4.86 years estimated
					avg life
Corporate bonds		490,132	Estimation based on	Comparable transactions	N/A
			comparable non-listed
			securities

	Fair Value as of			General
	December 31, 2014		Valuation Technique	Unobservable Input	Range
Nonrecurring Measurements:
Impaired loans	$	2,426,332	Discounted appraisals	Collateral discounts	0 – 10%
Other real estate owned		1,441,095	Discounted appraisals	Collateral discounts and
				Estimated costs to sell	0 – 10%
Recurring Measurements:				Pricing yield	5.03%
				Pricing spread	+200
Mortgage-backed securities	$	1,002,913	Fundamental Analysis	Pricing term	4.69 years estimated
					avg life
Corporate bonds		500,000	Estimation based on	Comparable transactions	N/A
			comparable non-listed
			securities

There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2015 and December 31, 2014.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 5 - Investment Securities

The amortized cost and estimated fair values of securities available-for-sale at September 30, 2015 and December 31, 2014 were:

			Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
September 30, 2015
Government sponsored enterprises	$	713,705	$	—	$	2,063	$	711,642
Corporate bonds		781,578		—		9,875		771,703
Small Business Administration Securities		8,100,510		70,583		38,919		8,132,174
Mortgage-backed securities		3,452,794		50		16,066		3,436,778
State, county and municipal		3,545,698		23,523		15,469		3,553,752
	$	16,594,285	$	94,156	$	82,392	$	16,606,049

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

The amortized cost and estimated fair values of securities held-to-maturity at September 30, 2015 and December 31, 2014 were:

	Amortized		Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
September 30, 2015
State, county and municipal	$	3,420,412	$	8,630	$	28,642	$	3,400,400
December 31, 2014
State, county and municipal	$	3,444,699	$	31,830	$	3,819	$	3,472,710

Proceeds from sales of available-for-sale securities were $5,130,038 and $9,214,860 for the nine month periods ended September 30, 2015 and 2014, respectively. Gross gains of $111,077 were recognized on sales of available-for-sale securities for the nine month period ended September 30, 2015 and gross gains of $74,643 and gross losses of $9,052 were recognized on sales of available-for-sale securities for the nine month period September 30, 2014. There were no losses recognized on sales of available-for-sale securities for the nine month period ended September 30, 2015.

There were no sales of available-for-sale securities for the three months ended September 30, 2015. Proceeds from sales of available-for-sale securities were $5,530,749 for the three months ended September 30, 2014. Gross gains of $70,069 were recognized on sales of available-for-sale securities for the three months ended September 30, 2014. There were no losses recognized on sales of available-for-sale securities for the three months ended September 30, 2014.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 5 - Investment Securities – continued

The amortized costs and fair values of investment securities at September 30, 2015, 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	$	3,855	$	3,905	$	—	$	—
Due after one through five years		5,310,753		5,306,291		—		—
Due after five through ten years		11,279,677		11,295,853		1,609,361		1,604,216
Due after ten years		—		—		1,811,051		1,796,184

Total securities	$	16,594,285	$	16,606,049	$	3,420,412	$	3,400,400

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, 2015.

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Government sponsored enterprises	$	711,642	$	2,063	$	—	$	—	$	711,642	$	2,063
Corporate Bonds		771,703		9,875		—		—		771,703		9,875
Mortgage-backed securities		2,561,888		13,505		870,985		2,562		3,432,873		16,067
Small Business Administration Securities		—		—		1,239,721		38,919		1,239,721		38,919
State, county and municipal		705,082		9,601		557,515		5,868		1,262,597		15,469
	$	4,750,315	$	35,044	$	2,668,221	$	47,349	$	7,418,536	$	82,393

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Government sponsored enterprises	$	5,016,725	$	2,403	$	978,439	$	20,441	$	5,995,164	$	22,844
Corporate Bonds		298,477		2,229		—		—		298,477		2,229
Mortgage-backed securities		—		—		934,730		6,557		934,730		6,557
Small Business Administration Securities		—		—		4,090,318		101,970		4,090,318		101,970
State, county and municipal		1,292,753		8,418		1,836,284		14,431		3,129,037		22,849
	$	6,607,955	$	13,050	$	7,839,771	$	143,399	$	14,447,726	$	156,449

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, 2015.

	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	$	1,128,350	$	28,641	$	—	$	—	$	1,128,350	$	28,642

	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	$	518,456	$	3,819	$	—	$	—	$	518,456	$	3,819

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, 2015 and December 31, 2014, securities with estimated fair value of $12,075,577 and $10,119,786, respectively, were pledged to secure public deposits as required by law.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable

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

	September 30, 2015						December 31, 2014
	Amount			Percentage of Total			Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	31,926,704			39	%	$	30,280,899			39	%
Construction, Land Development & Other Land		10,860,268			13	%		7,973,835			10	%
Residential Mortgages		11,864,248			15	%		11,560,614			15	%
Residential Home Equity Lines of Credit (HELOCs)		15,064,655			18	%		16,995,363			21	%
Total Real Estate		69,715,875			85	%		66,810,711			85	%

Commercial		10,702,812			13	%		10,308,132			13	%
Consumer		1,160,451			2	%		1,308,025			2	%
Gross loans		81,579,138			100	%		78,426,868			100	%
Less allowance for loan losses		(1,113,279	)					(1,006,794	)
Total loans, net	$	80,465,859					$	77,420,074

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 the dates indicated:

September 30, 2015	Commercial		Commercial Real Estate		Construction, Land Development, and Other Land		Consumer		Residential		Residential HELOCs		Total
Grade
Pass	$	10,583,438	$	31,418,740	$	10,758,320	$	1,124,294	$	10,123,760	$	13,431,628	$	77,440,180
Special Mention		51,643		275,645		—		36,157		554,408		596,530		1,514,383
Substandard or Worse		67,731		232,319		101,948		—		1,186,080		1, 036,497		2,624,575
Total	$	10,702,812	$	31,926,704	$	10,860,268	$	1,160,451	$	11,864,248	$	15,064,655	$	81,579,138

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

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable – continued

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

September 30, 2015	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	—	$	—	$	—	$	—	$	10,702,812	$	10,702,812	$	—
Commercial Real Estate		—		—		—		—		31,926,704		31,926,704		—
Construction, Land Development, & Other Land		—		—		101,948		101,948		10,758,320		10,860,268		—
Consumer		—		—		—		—		1,160,451		1,160,451		—
Residential		—		—		366,292		366,292		11,497,956		11,864,248		—
Residential HELOC		—		—		319,090		319,090		14,745,565		15,064,655		—
Total	$	—	$	—	$	787,330	$	787,330	$	80,791,808	$	81,579,138	$	—

December 31, 2014	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	644,594	$	113,434	$	—	$	758,028	$	9,550,104	$	10,308,132	$	—
Commercial Real Estate		481,604		—		459,000		940,604		29,340,295		30,280,899		—
Construction, Land Development, & Other Land		—		—		—		—		7,973,835		7,973,835		—
Consumer		2,385		—		—		2,385		1,305,640		1,308,025		—
Residential		225,847		—		—		225,847		11,334,767		11,560,614		—
Residential HELOC		—		157,747		162,236		319,983		16,675,380		16,995,363		—
Total	$	1,354,430	$	271,181	$	621,236	$	2,246,847	$	76,180,021	$	78,426,868	$	—

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

	September 30, 2015		December 31, 2014
Commercial	$	36,121	$	152,255
Commercial Real Estate		—		459,000
Construction, Land Development, & Other Land		101,948		—
Consumer		—		—
Residential		366,292		380,500
Residential HELOCs		319,090		162,236
Total	$	823,451	$	1,153,991

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is applied against the principal balance. During the nine months ended September 30, 2015 and 2014, we received approximately $3,567 and $26,848 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 $42,027 and $88,168, respectively.

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, 2015:

	Commercial			Commercial Real Estate		Construction, Land Development & Other Land		Consumer			Residential		Residential - HELOCs			Unallocated			Total
Allowance for Loan Losses
Beginning Balance	$	174,737		$	62,460	$	13,157	$	42,299		$	64,651	$	476,045		$	173,444		$	1,006,794
Charge Offs		(108,893	)		—		—		(870	)		—		(59,314	)		—			(169,077	)
Recoveries		9,365			70,000		—		—			—		1,197			—			80,562
Provision		126,671			27,598		26,649		(15,433	)		28,555		80,260			(79,299	)		195,000
Ending Balance	$	201,880		$	160,058	$	39,806	$	25,996		$	93,206	$	498,188		$	94,145		$	1,113,279

Ending Balances:
Individually evaluated for impairment	$	42,327		$	—	$	—	$	5,220		$	25,421	$	291,071		$	—		$	364,039
Collectively evaluated for impairment	$	159,553		$	160,058	$	39,806	$	20,776		$	67,785	$	207,117		$	94,145		$	749,240

Loans Receivable:
Ending Balance - Total	$	10,702,812		$	31,926,704	$	10,860,268	$	1,160,451		$	11,864,248	$	15,064,655		$	—		$	81,579,138

Ending Balances:
Individually evaluated for impairment	$	67,731		$	318,349	$	101,948	$	36,157		$	752,009	$	597,307		$	—		$	1,873,501
Collectively evaluated for impairment	$	10,635,081		$	31,608,355	$	10,758,320	$	1,124,294		$	11,112,239	$	14,467,348		$	—		$	79,705,637

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, 2015:

	Commercial			Commercial Real Estate		Construction, Land Development & Other Land		Consumer			Residential		Residential - HELOCs			Unallocated			Total
Allowance for Credit Losses
Beginning Balance	$	278,180		$	59,390	$	31,143	$	41,472		$	59,690	$	612,778		$	133,014		$	1,215,667
Charge Offs		(108,893	)		—		—		(330	)		—		(59,314	)		—			(168,537	)
Recoveries		750			—		—		—			—		399			—			1,149
Provision		31,843			100,668		8,663		(15,146	)		33,516		(55,675	)		(38,869	)		65,000
Ending Balance	$	201,880		$	160,058	$	39,806	$	25,996		$	93,206	$	498,188		$	94,145		$	1,113,279

Ending Balances:
Individually evaluated for impairment	$	42,327		$	—	$	—	$	5,220		$	25,421	$	291,071		$	—		$	364,039
Collectively evaluated for impairment	$	159,553		$	160,058	$	39,806	$	20,776		$	67,785	$	207,117		$	94,145		$	749,240

Loans Receivable:
Ending Balance - Total	$	10,702,812		$	31,926,704	$	10,860,268	$	1,160,451		$	11,864,248	$	15,064,655		$	—		$	81,579,138

Ending Balances:
Individually evaluated for impairment	$	67,731		$	318,349	$	101,948	$	36,157		$	752,009	$	597,307		$	—		$	1,873,501
Collectively evaluated for impairment	$	10,635,081		$	31,608,355	$	10,758,320	$	1,124,294		$	11,112,239	$	14,467,348		$	—		$	79,705,637

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

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, 2014.

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

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

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

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

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 $42,027 and $118,154 in interest income on loans that were impaired during the nine months ended September 30, 2015 and 2014, respectively, and we recognized $14,219 and $40,422 in interest income on loans that were impaired during the quarter ended September 30, 2015 and 2014, respectively.

At September 30, 2015, the Company had 12 impaired loans totaling $1,873,501 or 2.3% of gross loans. At December 31, 2014, the Company had 13 impaired loans totaling $2,658,476 or 3.4% of gross loans. There were no loans that were contractually past due 90 days or more and still accruing interest at September 30, 2015 or December 31, 2014. There were five loans restructured or otherwise impaired totaling $558,828 not already included in nonaccrual status at September 30, 2015. There were six loans restructured or otherwise impaired totaling $1,176,190 not already included in nonaccrual status at December 31, 2014. During the nine months ended September 30, 2015 and 2014, we received approximately $8,799 and $26,848 in interest income in relation to loans on non-accrual status, respectively, and forgone interest was approximately $53,391 and $88,168, respectively. During the quarter ended September 30, 2015 and 2014, we received approximately $1 and $19,832 in interest income in relation to loans on non-accrual status, respectively, and forgone interest was approximately $12,006 and $75,766, respectively.

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.

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, 2015.

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		318,349		318,349		—		—		15,865
Construction, Land Development, & Other Land		101,948		101,948		—		101,958		2,322
Consumer		—		—		—		—		—
Residential		453,471		453,471		—		321,851		2,415
Residential HELOC		162,236		162,236		—		162,236		—

With an allowance recorded
Commercial	$	67,731	$	67,731	$	42,327	$	69,597	$	1,657
Commercial Real Estate		—		—		—		—		—
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		36,157		36,157		5,219		37,174		834
Residential		298,538		305,361		25,421		304,749		13,008
Residential HELOC		435,071		435,071		291,071		435,429		5,926

Total
Commercial	$	67,731	$	67,731	$	42,327	$	69,597	$	1,657
Commercial Real Estate		318,349		318,349		—		—		15,865
Construction, Land Development, & Other Land		101,948		101,948		—		101,958		2,322
Consumer		36,157		36,157		5,219		37,174		834
Residential		752,009		758,832		25,421		626,600		15,423
Residential HELOC		597,307		597,307		291,071		597,665		5,926
	$	1,873,501	$	1,880,324	$	364,039	$	1,432,995	$	42,027

The following is an analysis of our impaired loan portfolio detailing the related allowance recorded at and for the year ended December 31, 2014:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		784,527		902,746		—		1,222,163		36,050
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		—		—		—		—		—
Residential		936,667		936,667		—		1,028,010		39,938
Residential HELOC		162,236		162,236		—		204,071		564

With an allowance recorded
Commercial		184,903		184,903		40,706		192,328		9,500
Commercial Real Estate		—		—		—		—		—
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		98,258		227,570		24,234		100,914		3,231
Residential		213,668		220,256		1,669		220,987		12,792
Residential HELOC		278,217		278,217		165,535		278,255		6,260

Total
Commercial		184,903		184,903		40,706		192,328		9,500
Commercial Real Estate		784,527		902,746		—		1,222,163		36,050
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		98,258		227,570		24,234		100,914		3,231
Residential		1,150,335		1,156,923		1,669		1,248,997		52,730
Residential HELOC		440,453		440,453		165,535		482,326		6,824
	$	2,658,476	$	2,912,595	$	232,144	$	3,246,728	$	108,335

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, 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

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, 2015 and 2014, we had six loans totaling $594,950 and 11 loans totaling $2,129,906, respectively, which we considered to be TDRs. During the three and nine months ended September 30, 2015, we did not modify any loans that were considered to be TDRs.

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.

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 and nine months ended September 30, 2015. There was one loan restructured within the previous twelve months totaling $118,761 that defaulted during the nine months ended September 30, 2014. 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, 2015 and December 31, 2014 are summarized below:

	2015			2014
Balance, beginning of period	$	1,441,095		$	1,544,234
Additions		459,000			788,921
Sales		(78,860	)		(892,060	)
Write downs		(111,000	)		—
Balance, end of period	$	1,710,235		$	1,441,095

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 (the “Treasury”) under the Emergency Economic Stabilization Act of 2009, 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 (the “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, for an aggregate purchase price of $3,285,000 in cash. The Warrant was immediately exercised. On February 15, 2014, the dividend rate on the Series A Preferred Stock increased from 5% per year (approximately $121,210 annually) to 9% per year (approximately $206,370 annually). The Series B Preferred Stock has a dividend rate of 9% per year (approximately $14,760 annually).

On October 31, 2012, the Treasury sold its Series A and Series B preferred stock of the Company through a private offering structured as a modified Dutch auction. The Company bid on a portion of the preferred stock in the auction after receiving approval from its regulators to do so. The clearing price per share for the Series A Preferred Stock was $825.26 (compared to a stated value of $1,000 per share) and the clearing price per share for the Series B Preferred Stock was $801.00 (compared to a stated value of $1,000 per share). The Company was successful in repurchasing 1,156 shares of the 3,285 shares of Series A Preferred Stock outstanding through the auction process. This repurchase saved the Company approximately $58,000 and $104,000 in dividend expenses for the years ended 2014 and 2013, respectively. The remaining 2,129 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock held by Treasury were sold to unrelated third-parties through the auction process. The net balance sheet impact was a reduction to shareholders’ equity of $954,001 which is comprised of a decrease in preferred stock of $1,135,412 and a $181,411 increase to retained earnings related to the discount on the shares repurchased.

On April 14, 2014, the Company repurchased 729 shares of the 2,129 shares of Series A Preferred Stock outstanding at par. The repurchase will save the Company approximately $66,000 in dividend expenses annually. As of September 30, 2015, 1,400 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock were outstanding. The outstanding shares of preferred stock will receive preferential treatment in the event of liquidation, dissolution or winding up of the Company.

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, 2014 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 ability to maintain appropriate levels of capital including levels required under the capital rules under Basel III;
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;
examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;
changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;
general economic conditions resulting in, among other things, a deterioration in credit quality;
changes occurring in business conditions and inflation;
changes in access to funding or increased regulatory requirements with regard to funding;
cybersecurity 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;
disruptions due to flooding, severe weather or other natural disasters;
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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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, 2014. 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.

Overview

2014 was a very challenging year for the Bank, the banking industry, and the U.S. economy in general, and these challenges have continued in 2015. The impact of the recession is continuing to be felt by the banking industry as a whole and by us as well. 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 $232,408 and net income available to common shareholders of $126,838 for the nine months ended September 30, 2015 compared to net income of $361,032 and net income available to common shareholders of $244,397 for the nine months ended September 30, 2014. Basic and diluted income per common share were $0.07 for the first nine months of 2015 compared to basic and diluted income per common share of $0.14 in the first nine months of 2014. The decrease in net income for the first nine months of 2015 as compared to the first nine months of 2014 is primarily attributable to the increase in professional fees expense and cost of operation of other real estate owned of $290,707. As a result of the full reversal of the valuation allowance in 2014, income tax expense is now being booked against the valuation allowance with income tax expense for the first nine months of $115,828. For the nine month period ended September 30, 2015, our net interest margin was 4.09% compared to 3.98% at September 30, 2014.

The Company recorded net income, after tax provision, of $52,053 and net income available to common shareholders of $16,863 for the three months ended September 30, 2015, compared to 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. The decrease in net income for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 is primarily attributable to the income tax expense of $44,776 and increase in professional fees expense of $69,346 for 2015 as compared to three months ended September 30, 2014. Basic and diluted earnings per share were $0.01 and $0.06 for the third quarter of 2015 and 2014, respectively.

At September 30, 2015, total assets were $116,689,145, compared to $112,922,086 at December 31, 2014, an increase of $3,767,059 or 3.34%. Interest-earning assets comprised approximately 90.68% and 91% of total assets at September 30, 2015 and December 31, 2014, respectively. Gross loans totaled $81,579,138, federal funds sold were $3,707,000, and investment securities were $20,527,361 at September 30, 2015, compared to gross loans of $78,426,868 and investment securities of $25,339,059 at December 31, 2014.

Deposits totaled $95,826,644 at September 30, 2015 and $87,958,312 at December 31, 2014. FHLB advances were $7,000,000 at September 30, 2015 and $11,500,000 at December 31, 2014. Shareholders’ equity was $13,581,614 and $13,344,948 at September 30, 2015 and December 31, 2014, respectively.

As of September 30, 2015, 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.

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, 2014, 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 expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises judgment in evaluating the amount and timing of recognition of resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the financial statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent non deductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.

Results of Operations

Nine and three months ended September 30, 2015 and 2014

Net Interest Income

Our primary source of revenue is net interest income. Net interest income is the difference between income earned on interest-earning assets and interest paid on deposits and borrowings used to support such assets. The level of net interest income is determined by the balances of interest-earning assets and interest-bearing liabilities and corresponding interest rates earned and paid on those assets and liabilities, respectively. In addition to the volume of and corresponding interest rates associated with these interest-earning assets and interest-bearing liabilities, net interest income is affected by the timing of the repricing of these interest-earning assets and interest-bearing liabilities. Our annualized net interest margins for the nine months ended September 30, 2015 and 2014 were 4.09% and 3.98%, respectively. Our annualized net interest margins for the three months ended September 30, 2015 and 2014 were 4.15% and 3.93%, respectively.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Net interest income was $3,158,126 during the nine months ended September 30, 2015, compared to $3,113,094 for the same period in 2014. The slight increase in net interest income is primarily attributable to the increase in interest income on loans and a decrease in interest expense. Interest income of $3,423,908 for the nine months ended September 30, 2015 included $3,016,506 on loans, $382,498 on investment securities and $24,904 on federal funds sold and other. Total interest expense of $265,782 during the nine months ended September 30, 2015 included $220,613 related to deposit accounts and $45,169 on FHLB advances and other borrowings. Interest expense decreased from $308,287 for the nine months ended September 30, 2014 to $265,782 for the nine months ended September 30, 2015 largely due to higher interest bearing deposits being replaced by lower interest bearing deposits and a 4.5% decrease in the average interest bearing deposits.

Net interest income was $1,080,434 for the quarter ended September 30, 2015, compared to $1,031,439 for the same period in 2014. Interest income of $1,080,434 for the quarter ended September 30, 2015 included $1,043,497 on loans, $122,631 on investment securities and $7,405 on federal funds sold and other. Total interest expense of $93,100 for the quarter ended September 30, 2015 included $79,409 related to deposit accounts and $13,690 on FHLB advances and other borrowings. The slight increase in net interest income for this period is primarily attributable to the increase in interest income on loans, which was primarily due to a 4% increase 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, 2015 was $195,000, a decrease of $53,000, or 21.3%, from our provision for loan losses of $248,000 for the nine months ended September 30, 2014. Our provision for loan losses for the three months ended September 30, 2015 was $65,000, a decrease of $5,000, or 7.1%, from our provision for loan losses of $70,000 for the three months ended September 30, 2014. 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.

Noninterest Income

Noninterest income during the nine months ended September 30, 2015 was $484,257, compared to $330,573 for the same period in 2014. Noninterest income for the nine months ended September 30, 2015 consisted primarily of service charges on deposit accounts of $273,111, residential mortgage origination fees of $67,055, gain on sale of securities available-for-sale of $111,077 and other noninterest income of $33,013. 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. The increase of $153,684 in noninterest income compared to the same period in 2014 is primarily the result of an increase in service charge on deposit accounts of $50,570, residential mortgage origination fees of $40,779, gain on sale of securities available for sale of $45,486, and other noninterest income of $16,848.

Noninterest income for the three months ended September 30, 2015 was $124,858, compared to $164,850 for the three months ended September 30, 2014. Noninterest income for the quarter ended September 30, 2015 consisted primarily of service charges on deposit accounts, mortgage loan origination fees and gain on sale of securities available-for-sale. The decrease of $39,992 in noninterest income compared to the same period in 2014 is primarily the result of an increase in mortgage loan origination fees of $21,167 and reduction in the gain on sale of securities available for sale of $70,069.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), in June 2011, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) approved a final debit card interchange rule that caps an issuer’s base fee at $0.21 per transaction and allows an additional five 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. Our ATM/debit card fee income is included in service charges on deposit accounts and was $102,934 and $102,184 for the nine months ended September 30, 2015 and 2014, respectively. 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, 2015 and 2014.

	Nine months ended						Three months ended
	September 30,						September 30,
	2015			2014			2015			2014
Compensation and benefits	$	1,451,082		$	1,451,153		$	497,751		$	505,191
Occupancy and equipment		537,721			495,464			192,677			166,361
Data processing and related costs		273,327			248,961			90,724			88,473
Marketing, advertising and shareholder communications		39,052			68,500			4,982			17,585
Legal and audit		251,489			173,310			108,122			60,174
Other professional fees		26,818			5,326			23,460			2,062
Supplies, postage and telephone		44,450			43,764			13,430			13,764
Insurance		36,339			35,435			12,250			11,812
Credit related expenses		(2,387	)		(249	)		(6,501	)		(4,071	)
Regulatory fees and FDIC insurance		95,481			91,778			30,220			31,214
Net cost of operation of real estate owned		203,265			12,229			32,358			19,838
Other		142,512			195,674			43,991			49,069
Total noninterest expense	$	3,099,149		$	2,821,345		$	1,043,464		$	961,472

The most significant component of noninterest expense is compensation and benefits, which totaled $1,451,082 for the nine months ended September 30, 2015, compared to $1,451,153 for the nine months ended September 30, 2014. Occupancy and equipment increased from $495,464 for the nine months ended September 30, 2014 to $537,721 for the nine months ended September 30, 2015 due to increased lease expense and regular maintenance. Data processing and related costs increased from $248,961 for the nine months ended September 30, 2014 to $273,327 for the nine months ended September 30, 2015. Marketing and advertising decreased from $68,500 for the nine months ended September 30, 2014, to $39,052 for the nine months ended September 30, 2015. Legal fees increased from $173,310 for the nine months ended September 30, 2014, to $251,489 for the nine months ended September 30, 2015 as a result of one time fees involving other real estate and personnel expenses. Regulatory fees increased from $91,778 for the nine months ended September 30, 2014 to $95,481 for the nine months ended September 30, 2015. Other real estate expenses increased from $12,229 for the nine months ended September 30, 2014 to $203,265 for the nine months ended September 30, 2015 as a result of write downs on other real estate of $111,000 and increased other real estate expenses during the nine months ended September 30, 2015.

Compensation and benefits decreased from $505,191 for the three months ended September 30, 2014 to $497,751 for the three months ended September 30, 2015. Occupancy and equipment increased from $166,361 for the three months ended September 30, 2014 to $192,677 for the three months ended September 30, 2015. Legal expense increased from $60,174 for the three months ended September 30, 2014, to $108,122 for the three months ended September 30, 2015 as a result of one time fees involving other real estate and personnel expenses. Other real estate expenses increased from $19,838 for the three months ended September 30, 2014, to $32,358 for the three months ended September 30, 2015 due primarily to the operating of other real estate.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Income Tax Expenses

The Company reported taxable income for the nine months ended September 30, 2015 and September 30, 2014. 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, 2015 and $11,924 for the three months ended September 30, 2015 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, 2015 were $81,579,138, or 77.4% of interest-earning assets and 69.9% of total assets, compared to $78,426,868, or 75.5% of interest-earning assets and 69.4% of total assets, at December 31, 2014.

Loans secured by real estate mortgages comprised approximately 85% of loans outstanding at September 30, 2015 and at December 31, 2014. Most of our real estate loans are secured by residential and commercial properties. We do not generally originate traditional long-term residential mortgages, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. We obtain a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans we make to 85%. Commercial loans and lines of credit represented approximately 13% of our loan portfolio at September 30, 2015 and at December 31, 2014. Our construction, development, and land loans represented approximately 13% and 10% of our loan portfolio at September 30, 2015 and December 31, 2014, 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.

The following table summarizes the composition of our loan portfolio as of September 30, 2015 and December 31, 2014.

	September 30, 2015						December 31, 2014
	Amount			Percentage of Total			Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	31,926,704			39	%	$	30,280,899			39	%
Construction, Land Development & Other Land		10,860,268			13	%		7,973,835			10	%
Residential Mortgages		11,864,248			15	%		11,560,614			15	%
Residential Home Equity Lines of Credit (HELOCs)		15,064,655			18	%		16,995,363			21	%
Total Real Estate		69,715,875			85	%		66,810,711			85	%

Commercial		10,702,812			13	%		10,308,132			13	%
Consumer		1,160,451			2	%		1,308,025			2	%
Gross loans		81,579,138			100	%		78,426,868			100	%
Less allowance for loan losses		(1,113,279	)					(1,006,794	)
Total loans, net	$	80,465,859					$	77,420,074

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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, 2015 and 2014 is presented below:

	Nine Months Ended September 30,
	2015			2014
Balance at beginning of the period	$	1,006,794		$	1,312,311
Provision for loan losses		195,000			248,000
Loans charged-off		(169,077	)		(443,469	)
Recoveries of loans previously charged-off		80,562			23,851
Balance at end of the period	$	1,113,279		$	1,140,693

The allowance for loan losses was $1,113,279 and $1,006,794 as of September 30, 2015 and December 31, 2014, respectively, and represented 1.37% and 1.28% of outstanding loans at September 30, 2015 and December 31, 2014, 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.

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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.

The current economic conditions have improved but management believes real estate values have not yet rebounded to a level seen prior to the beginning of the recession in 2008. In some cases, the lack of a complete rebound in those values may result in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure. 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 the economy were to deteriorate in the future and suffer a subsequent decline in real estate values it may make it 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. Management believes the estimates of the required level of allowance for loan losses have been appropriate and the expectation is that the primary factors considered in the provision calculation will continue to be consistent with prior trends.

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s potential problem loan list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected. Management has determined that the Company had $1,873,501 and $2,658,476 in impaired loans at September 30, 2015 and December 31, 2014, respectively. The valuation allowances related to impaired loans totaled $364,039 and $232,144 at September 30, 2015 and December 31, 2014, respectively.

At September 30, 2015 and December 31, 2014, nonaccrual loans totaled $823,451 and $1,153,991, 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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Deposits

Our primary source of funds for our loans and investments is our deposits. Total deposits as of September 30, 2015 and December 31, 2014 were $95,826,644 and $87,958,312, respectively. The following table shows the average balance outstanding and the average rates paid on deposits for the nine months ended September 30, 2015 (annualized) and the year ended December 31, 2014.

	September 30, 2015					December 31, 2014
	Average Amount		Rate			Average Amount		Rate
Non-interest bearing demand deposits	$	15,635,483		—	%	$	13,832,579		—	%
Interest-bearing checking		8,923,407		0.19			6,786,089		0.18
Money market		39,717,655		0.26			42,915,814		0.27
Savings		2,035,653		0.17			1,329,634		0.18
Time deposits less than $100,000		8,729,866		0.73			11,617,528		0.76
Time deposits $100,000 and over		12,074,880		0.89			14,060,312		0.88
Total	$	87,116,944		0.41	%	$	90,541,956		0.45	%

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 $80,024,993 and $75,759,021 at September 30, 2015 and December 31, 2014, respectively. Our loan-to-deposit ratio was 85.1% and 89.2% at September 30, 2015 and December 31, 2014, 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 $15,050,000. Availability on these lines of credit was $15,050,000 at September 30, 2015.

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, 2015 and December 31, 2014, we had $7,000,000 and $11,500,000 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 $13,630,000 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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

The following table shows the amount outstanding, grant date, maturity date, and interest rate at September 30, 2015.

Amount		Grant Date	Maturity Date	Interest Rate

$	2,500,000	9/24/2015	2/24/2016		0.39	%
$	2,000,000	5/06/2015	11/06/2015		0.27	%
$	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, 2015, the Bank had short-term lines of credit with correspondent banks to purchase a maximum of $5,800,000 in unsecured federal funds on a one to 14 day basis, $6,750,000 in unused federal funds on a one to 20 day basis for general corporate purposes, and $2,500,000 in unused federal funds on a one to 30 day basis for general corporate purposes. The interest rate on borrowings under these lines is the prevailing market rate for federal funds purchased. These accommodation lines of credit are renewable annually and may be terminated at any time at the correspondent banks’ sole discretion. At September 30, 2015, we had no borrowings outstanding on these 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 21.6% at September 30, 2015 compared to 21.4% as of December 31, 2014. At September 30, 2015, $12,089,511 of our investment securities were pledged to secure public entity deposits and FHLB borrowings. We continue to carefully focus on liquidity management during 2015.

Capital Resources

Total shareholders’ equity was $13,581,614 at September 30, 2015, an increase of $236,666 from $13,344,948 at December 31, 2014.

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.

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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

The following table sets forth the Bank’s capital ratios at September 30, 2015 and December 31, 2014:

											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, 2015
Total capital (to risk-weighted assets)	$	13,013		15.09	%	$	6,898		8.00	%	$	8,623		10.00	%
Tier 1 capital (to risk-weighted assets)		11,925		13.83	%		5,174		6.00	%		6,898		8.00	%
Tier 1 capital (to average assets)		11,925		10.76	%		4,432		4.00	%		5,540		5.00	%
CET1 (to risk weighted assets)		11,925		13.83	%		3,880		4.50	%		5,605		6.50	%

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

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.

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, 2015 and December 31, 2014, we had issued commitments to extend credit of approximately $15,242,000 and $13,267,000, respectively, through various types of lending arrangements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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, 2015 and December 31, 2014, the Company has recorded no liability for the current carrying amount of the obligation to perform as a guarantor; as such amounts are not considered material. There were standby letters of credit included in the commitments for $48,000 at September 30, 2015 and December 31, 2014, 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, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

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 10, 2015	By:	/s/ Charles A. Kirby
		Charles A. Kirby
		President and Chief Executive Officer (Principal Executive Officer)


Date: November 10, 2015	By:	/s/ Charlie T. Lovering
		Charlie T. Lovering
		Chief Financial Officer and Executive Vice President (Principal Financial and Accounting Officer)

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, 2015, 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.

Congaree Bancshares Inc - FORM 10-Q - November 10, 2015

Attached files

Congaree Bancshares Inc Reports