Congaree Bancshares Inc - FORM 10-Q

Attached files

file	filename
EX-32 - Congaree Bancshares Inc	e00297_ex32.htm
EX-31.1 - Congaree Bancshares Inc	e00297_ex31-1.htm
EX-31.2 - Congaree Bancshares Inc	e00297_ex31-2.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 March 31, 2016

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	(I.R.S. Employer
of incorporation)	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:

1,766,439 shares of common stock, par value $0.01 per share, were issued and outstanding as of May 6, 2016.

INDEX


PART I - FINANCIAL INFORMATION		Page No.

Item 1.	Financial Statements

	Consolidated Balance Sheets - March 31, 2016 (Unaudited) and December 31, 2015	2

	Consolidated Statements of Income - Three months ended March 31, 2016 and 2015 (Unaudited)	3

	Consolidated Statements of Comprehensive Income – Three months ended March 31, 2016 and 2015 (Unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity Three months ended March 31, 2016 and 2015 (Unaudited)	5

	Consolidated Statements of Cash Flows - Three months ended March 31, 2016 and 2015 (Unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

Part I - Financial Information

Item 1. Financial Statements

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

	March 31, 2016			December 31, 2015
	(unaudited)
Assets:
Cash and due from banks	$	4,518,404		$	2,993,284
Federal Funds Sold		421,000			—
Securities available-for-sale		15,237,180			15,268,221
Securities held-to-maturity (fair value of $3,383,121 at December 31, 2015)		—			3,412,281
Non-marketable equity securities		348,800			500,900

Loans receivable		78,429,825			80,980,708
Less allowance for loan losses		1,111,061			1,079,782
Loans receivable, net		77,318,764			79,900,926

Premises, furniture and equipment, net		2,742,708			2,783,775
Accrued interest receivable		295,559			367,412
Other real estate owned		1,710,235			1,710,235
Deferred tax asset		1,921,076			1,985,168
Other assets		715,993			218,848
Total assets	$	105,229,719		$	109,141,050
Liabilities:
Deposits:
Noninterest-bearing transaction accounts	$	16,405,185		$	16,536,465
Interest-bearing transaction accounts		8,798,497			9,447,087
Savings and money market		41,581,008			41,986,056
Time deposits $100,000 and over		13,627,316			14,223,750
Other time deposits		8,450,541			8,348,008
Total deposits		88,862,547			90,541,366

Federal Home Loan Bank advances		2,500,000			5,000,000
Accrued interest payable		15,384			14,273
Other liabilities		121,997			25,805
Total liabilities		91,499,928			95,581,444
Shareholders’ equity:
Preferred stock, $.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, $.01 par value, 10,000,000 shares authorized; 1,766,439 and 1,765,939 shares issued and outstanding at March 31, 2016 and December 31, 2015		17,664			17,659
Capital surplus		17,728,067			17,721,059
Accumulated deficit		(5,673,641	)		(5,640,184	)
Accumulated other comprehensive income (loss)		93,701			(102,928	)
Total shareholders’ equity		13,729,791			13,559,606
Total liabilities and shareholders’ equity	$	105,229,719		$	109,141,050

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Income

(unaudited)

	Three months ended
	March 31,
	2016			2015
Interest income:
Loans, including fees	$	1,015,723		$	973,664
Investment securities, taxable		106,107			128,354
Federal funds sold and other		7,071			9,208
Total interest income		1,128,901			1,111,226

Interest expense:
Time deposits $100,000 and over		30,049			26,495
Other deposits		48,161			46,142
Other borrowings		7,868			15,302
Total interest expense		86,078			87,939
Net interest income		1,042,823			1,023,287

Provision for loan losses		33,000			75,000

Net interest income after provision for loan losses		1,009,823			948,287

Noninterest income:
Service charges on deposit accounts		91,750			89,927
Residential mortgage origination fees		10,115			15,008
Gain on sale of investment securities		81,049			111,077
Other		9,162			9,161

Total noninterest income		192,076			225,173

Noninterest expenses:
Salaries and employee benefits		427,569			479,005
Net occupancy		83,295			77,153
Furniture and equipment		110,978			95,071
Professional fees		345,836			66,604
Regulatory fees and FDIC assessment		34,324			33,731
Net cost of operation of other real estate owned		10,203			153,808
Other operating		184,415			167,217

Total noninterest expense		1,196,620			1,072,589

Income before income taxes		5,279			100,871
Income tax expense		(3,546	)		(5,088	)

Net income		1,733			95,783

Preferred dividends		35,190			35,190
Net (loss) income available to common shareholders	$	(33,457	)	$	60,593

(Loss) income per common share

Basic and diluted (loss) income per common share	$	(0.02	)	$	0.03

Weighted average common shares outstanding		1,765,939			1,764,439

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(unaudited)

	Three months ended
	March 31,
	2016			2015

Net income	$	1,733		$	95,783
Other comprehensive income:
Unrealized holding gains on securities available for sale, net of tax benefit of $145,726 at March 31, 2016 and $78,459 at March 31, 2015		247,690			133,594
Reclassification adjustment for gains included in net income, net of tax expense of $29,988 at March 31, 2016 and $41,099 at March 31, 2015		(51,061	)		(69,978	)
Other comprehensive income		196,629			63,616
Comprehensive Income	$	198,362		$	159,399

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Three months ended March 31, 2016 and 2015 (Unaudited)

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

Balance, December 31, 2014		1,564	$	1,564,000		1,764,439	$	17,644	$	17,693,644	$	(5,850,277	)		(80,063	)		13,344,948
Net income		—		—		—		—		—		95,783			—			95,783
Other comprehensive income		—		—		—		—		—		—			63,616			63,616
Stock option compensation expense		—		—		—		—		5,320		—			—			5,320
Dividends paid on preferred stock		—		—		—		—		—		(35,190	)		—			(35,190	)

Balance, March 31, 2015		1,564	$	1,564,000		1,764,439	$	17,644	$	17,698,964	$	(5,789,684	)	$	(16,447	)	$	13,474,477

Balance, December 31, 2015		1,564	$	1,564,000		1,765,939	$	17,659	$	17,721,059	$	(5,640,184	)	$	(102,928	)	$	13,559,606

Net income		—		—		—		—		—		1,733			—			1,733
Other comprehensive income		—		—		—		—		—		—			196,629			196,629
Stock option compensation expense		—		—		—		—		5,153		—			—			5,153
Issuance of common stock		—		—		500		5		1,855		—			—			1,860
Dividends paid on preferred stock		—		—		—		—		—		(35,190	)		—			(35,190	)

Balance, March 31, 2016		1,564	$	1,564,000		1,766,439	$	17,664	$	17,728,067	$	(5,673,641	)	$	93,701		$	13,729,791

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended
	March 31,
	2016			2015
Cash flow from operating activities
Net income	$	1,733		$	95,783
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan losses		33,000			75,000
Stock based compensation expense		5,153			5,320
Deferred income tax benefit		3,546			—
Depreciation and amortization expense		47,174			48,398
Discount accretion and premium amortization		34,573			31,538
Decrease (increase) in accrued interest receivable		71,853			(1,639	)
Increase in accrued interest payable		1,111			122
Gain from sale of securities		(81,049	)		(111,077	)
(Gain)/Loss on sale of other real estate owned		(657	)		9,911
Write downs on other real estate owned		—			111,000
(Increase) decrease in other assets		(497,146	)		10,540
Increase in other liabilities		40,999			53,678
Net cash (used) provided by operating activities		(339,710	)		328,574

Cash flow from investing activities
Proceeds from maturities, calls, and paydowns of securities available-for-sale		316,169			316,152
Proceeds from sales of securities available-for-sale		—			5,130,038
Proceeds from sales of securities held to maturity		3,485,997			—
Purchase of securities available-for-sale		—			(2,165,059	)
Proceeds from sales of nonmarketable equity securities		152,100			—
Purchase of nonmarketable equity securities		—			(100	)
Net decrease (increase) in loans receivable		2,442,689			(1,215,395	)
Purchase of premises, furniture and equipment		(6,107	)		(13,664	)
Proceeds from sales of other real estate owned		107,131			8,089
Net cash provided by investing activities		6,497,979			2,060,061

Cash flow from financing activities
(Decrease) increase in noninterest-bearing deposits		(131,280	)		2,293,729
Decrease in interest-bearing deposits		(1,547,539	)		(2,405,615	)
Decrease in borrowings from FHLB		(2,500,000	)		(1,000,000	)
Proceeds from issuance of common stock		1,860			—
Dividends paid on preferred stock		(35,190	)		(35,190	)

Net cash used by financing activities		(4,212,149	)		(1,147,076	)

Net increase in cash and cash equivalents		1,946,120			1,241,559

Cash and cash equivalents at beginning of the period		2,993,284			3,034,889

Cash and cash equivalents at end of the period	$	4,939,404		$	4,276,448
Supplemental cash flow information:
Interest paid on deposits and borrowed funds	$	84,967		$	87,817
Transfer of loans to other real estate	$	106,474		$	—
Cash paid for taxes	$	—		$	6,253

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(unaudited)

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.

Merger

On January 5, 2016, Carolina Financial Corporation (“Carolina Financial”) and the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Carolina Financial will acquire the Company in a cash and stock transaction with a total current value of approximately $16.278 million, which includes the assumption of approximately $1.6 million in preferred stock. Under the terms of the Merger Agreement, the Company will merge with CBAC, Inc. (the “Merger Sub”), a South Carolina corporation and wholly-owned subsidiary of Carolina Financial formed for the purpose of facilitating the merger, with the Company being the surviving corporation. As soon as reasonably practicable thereafter, the Company will merge up and into Carolina Financial, with Carolina Financial as the surviving entity. Simultaneously with the merger or immediately thereafter, the Bank will merge with and into CresCom Bank, the wholly-owned banking subsidiary of Carolina Financial, and CresCom Bank will be the surviving bank. Both Carolina Financial and CresCom Bank will continue their existence under Delaware and South Carolina law, respectively, while the Company and the Bank will cease to exist.

Subject to the terms and conditions of the Merger Agreement, each share of the Company’s common stock will be converted into the right to receive one of the following: (i) $8.10 in cash, (ii) 0.4806 shares of Carolina Financials’ common stock, or (iii) a combination of cash and Carolina Financial common stock, subject to the limitation that, excluding any dissenting shares, the total merger consideration shall be prorated to 40% cash consideration and 60% stock consideration. Cash will also be paid in lieu of fractional shares.

The boards of directors of Carolina Financial and the Company have approved the Merger Agreement. The transaction is anticipated to close in the second quarter of 2016, subject to customary closing conditions, including regulatory approvals, and the approval of the shareholders of the Company. On April 6, 2016, the South Carolina State Board of Financial Institutions approved the merger of the Bank into CresCom Bank.

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 three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015 as filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2016, as amended on April 20, 2016.

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, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in our 2015 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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 2 – Summary of Significant Accounting Policies - continued

Statements of Cash Flows

For purposes of reporting cash flows, the Company considered 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.

Basic and diluted net income per common share are computed below for the three months ended March 31, 2016 and 2015:

	Three months ended
	March 31,
	2016			2015
Basic net income per common share computation:
Net income available to common shareholders	$	(33,457	)	$	60,593
Average common shares outstanding — basic		1,765,939			1,764,439
Basic net income per common share	$	(0.02	)	$	0.03

Diluted net income per common share computation:
Net income available to common shareholders	$	(33,457	)	$	60,593
Average common shares outstanding — basic		1,765,939			1,764,439
Incremental shares from assumed conversions:
Stock options		—			—
Average common shares outstanding — diluted		1,765,939			1,764,439
Diluted net income per common share	$	(0.02	)	$	0.03

Stock options are not deemed dilutive as their exercise price exceeded the fair market value.

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 through the date of the filing this Form 10-Q to determine whether there have been any subsequent events since the balance sheet date, or March 31, 2016, and determined that no subsequent events occurred requiring accrual or disclosure.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 3 - Recently Issued Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

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, 2017. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

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

In 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. 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.

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. 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 February 2016, the FASB issued new guidance to change accounting for leases and that will generally require most leases to be recognized on the balance sheet. The new lease standard only contains targeted changes to accounting by lessors, however, lessees will be required to recognize most leases in their balance sheets as lease liabilities for lease payments and right-of-use assets representing the lessee’s rights to use the underlying assets for the lease terms for lease arrangements longer than 12 months. Under this approach, a lessee will account for most existing capital/finance leases as Type A leases and most existing operating leases as Type B leases. Type A and Type B leases have unique accounting and disclosure requirements. Existing sale-leaseback guidance, including guidance for real estate, will be replaced with a new model applicable to both lessees and lessors. The new guidance will be effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2018. Early adoption is permitted for all companies and organizations. Management is currently analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements, including assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting.

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. 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.

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

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

Loans Receivable – The fair value of loans is calculated using discounted cash flows by loan type resulting in a Level 3 classification. For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by

discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities

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

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

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

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

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

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)

March 31, 2016
Financial Instruments - Assets
Cash and due from banks	$	4,518,404	$	4,518,404	$	4,518,404	$	—	$	—
Federal funds sold		421,000		421,000		421,000
Securities available-for-sale		15,237,180		15,237,180		—		13,890,489		1,346,691
Nonmarketable equity securities		348,800		348,800		—		348,800		—
Loans receivable, net		77,318,763		76,805,000		—		—		76,805,000
Accrued interest receivable		295,559		295,559		295,559		—		—

Financial Instruments – Liabilities
Demand deposit, interest-bearing transaction, and savings accounts		66,784,690		66,784,690		66,784,690		—		—
Time Deposits		22,077,857		22,078,000		—		22,078,000		—
Federal Home Loan Bank advances		2,500,000		2,504,000		—		2,504,000		—
Accrued interest payable		15,384		15,384		15,384		—		—

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

					Quotes
					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, 2015
Financial Instruments – Assets:
Cash and due from banks	$	2,993,284	$	2,993,284	$	2,993,284	$	—	$	—
Securities available-for-sale		15,268,221		15,268,221		—		13,924,891		1,343,330
Securities held-to-maturity		3,412,281		3,383,121		—		3,383,121		—
Nonmarketable equity securities		500,900		500,900		—		500,900		—
Loans, net		79,900,926		79,385,000		—		—		79,385,000
Accrued interest receivable		367,412		367,412		367,412		—		—

Financial Instruments – Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		67,969,608		67,969,608		67,969,608		—		—
Time Deposits		22,571,758		22,532,000		—		22,532,000		—
Federal Home Loan Bank advances		5,000,000		5,002,000		—		5,002,000		—
Accrued interest payable		14,273		14,273		14,273		—		—

	March 31, 2016				December 31, 2015
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	15,925,000	$	—	$	15,181,233	$	—
Financial standby letters of credit		40,000		—		40,000		—

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.

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements – continued

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 both March 31, 2016 and December 31, 2015, 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.

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

	March 31, 2016
	Total		Level 1		Level 2		Level 3
Securities available-for-sale
Corporate bonds	$	507,620	$	—	$	—	$	507,620
Small Business Administration Securities		7,858,749		—		7,858,749		—
Mortgage-backed securities		3,295,753		—		2,456,682		839,071
State, county and municipals		3,575,058		—		3,575,058		—

Total assets	$	15,237,180	$	—	$	13,890,489	$	1,346,691

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

	December 31, 2015
	Total		Level 1		Level 2		Level 3
Securities available-for-sale
Corporate bonds	$	490,257	$	—	$	—	$	490,257
Small Business Administration Securities		7,969,694		—		7,969,694		—
Mortgage-backed securities		3,280,589		—		2,427,516		853,073
State, county and municipals		3,527,681		—		3,527,681		—

Total assets	$	15,268,221	$	—	$	13,924,891	$	1,343,330

There were no liabilities measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2016 and December 31, 2015, aggregated by level in the fair value hierarchy within which those measurements fall.

	March 31, 2016
	Total		Level 1		Level 2		Level 3
Impaired loans	$	1,012,728	$	—	$	—	$	1,012,728
Other real estate owned		1,710,235		—		—		1,710,235

Total assets	$	2,722,963	$	—	$	—	$	2,722,963

	December 31, 2015
	Total		Level 1		Level 2		Level 3
Impaired loans	$	1,457,696	$	—	$	—	$	1,457,696
Other real estate owned		1,710,235		—		—		1,710,235

Total assets	$	3,167,931	$	—	$	—	$	3,167,931

For Level 3 assets measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

		Fair Value as of			General
		March 31, 2016	Valuation Technique	Unobservable Input	Range
Nonrecurring Measurements:
Impaired loans	$	1,012,728	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		839,071	Fundamental Analysis	Pricing term	4.56 years estimated avg life
Corporate bonds		507,620	Estimation based on comparable non-listed securities	Comparable transactions	N/A

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 4 - Fair Value Measurements - continued

		Fair Value as of			General
		December 31, 2015	Valuation Technique	Unobservable Input	Range
Nonrecurring Measurements:
Impaired loans	$	1,457,696	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		853,073	Fundamental Analysis	Pricing term	4.69 years estimated avg life
Corporate bonds		490,257	Estimation based on comparable non-listed securities	Comparable transactions	N/A

There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2016 and December 31, 2015.

Note 5 - Investment Securities

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

	Amortized		Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
March 31, 2016
Corporate Bonds	$	500,000	$	7,620	$	—	$	507,620
Small Business Administration Securities		7,751,606		142,189		35,046		7,858,749
Mortgage-backed securities		3,320,691		1,731		26,669		3,295,753
State, county and municipal		3,516,152		58,906		—		3,575,058
	$	15,088,449	$	210,446	$	61,715	$	15,237,180

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

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

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

There were no securities held-to-maturity as of March 31, 2016.

Proceeds from sales of available-for-sale securities were $0 and $5,130,038 for the three month periods ended March 31, 2016 and 2015, respectively. Proceeds from the sale of held-to-maturity securities were $3,485,997 and $0 for the three months ended March 31, 2016 and 2015. Gross gains of $82,885 and gross losses of $1,836 were recognized on those sales for the three month period ended March 31, 2016 and gross gains of $111,077 were recognized on those sales for the three month period ended March 31, 2015. There were no losses recognized on those sales for the three month period ended March 31, 2015.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 5 - Investment Securities - continued

The amortized costs and fair values of investment securities at March 31, 2016, by expected 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 expected maturity date.

	Securities
	Available-for-Sale
	Amortized		Estimated
	Cost		Fair Value
Due within one year	$	405,045	$	405,644
Due after one through five years		4,144,817		4,165,431
Due after five through ten years		10,538,587		10,666,105
Due after ten years		—		—

Total securities	$	15,088,449	$	15,237,180

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 March 31, 2016.


	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Small Business Administration Securities	$	—	$	—	$	1,178,105	$	35,046	$	1,178,105	$	35,046
Mortgage-backed securities		1,977,567		16,794		839,071		9,875		2,816,638		26,669
	$	1,977,567	$	16,794	$	2,017,176	$	44,921	$	3,994,743	$	61,715

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Corporate Bonds	$	490,257		9,743	$	—	$	—	$	490,257	$	9,743
Mortgage-backed securities		2,425,228		75,480		853,073		14,193		3,278,301		89,673
Small Business Administration Securities		2,881,805		21,964		1,152,509		60,824		4,034,314		82,788
State, county and municipal		2,114,908		15,246		—		—		2,114,908		15,246
	$	7,912,198	$	122,433	$	2,005,582	$	75,017	$	9,917,780	$	197,450

The following table shows gross unrealized losses and fair value of securities held-to-maturity, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 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	$	2,283,612	$	44,615	$	—	$	—	$	2,283,612	$	44,615

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 5 - Investment Securities - continued

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

At March 31, 2016 and December 31, 2015, securities with estimated fair value of $6,188,462 and $11,882,419, respectively, were pledged to secure public deposits as required by law.

Note 6 – Loans Receivable

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

	March 31, 2016						December 31, 2015
	Amount			Percentage of Total			Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	32,453,731			41	%	$	32,539,464			40	%
Construction, Land Development, & Other Land		9,732,347			12	%		10,538,852			13	%
Residential Mortgages		10,414,829			14	%		11,491,959			14	%
Residential Home Equity Lines of Credit (HELOCs)		14,111,603			18	%		14,525,638			18	%
Total Real Estate		66,712,510			85	%		69,095,913			85	%

Commercial		10,382,763			13	%		10,503,730			13	%
Consumer		1,334,552			2	%		1,381,065			2	%
Gross loans		78,429,825			100	%		80,980,708			100	%
Less allowance for loan losses		(1,111,061	)					(1,079,782	)
Total loans, net	$	77,318,764					$	79,900,926

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 March 31, 2016 and December 31, 2015:

March 31, 2016	Commercial		Commercial Real Estate		Construction, Land Development, and Other Land		Consumer		Residential		Residential HELOCs		Total
Grade
Pass	$	10,269,802	$	31,955,831	$	9,732,347	$	1,021,506	$	9,048,213	$	12,792,820	$	74,820,519
Special Mention		49,829		268,634		—		34,846		540,225		1,035,046		1,928,580
Substandard or Worse		63,132		229,266		—		278,200		826,392		283,736		1,680,726
Total	$	10,382,763	$	32,453,731	$	9,732,347	$	1,334,552	$	10,414,830	$	14,111,602	$	78,429,825

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

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 6 – Loans Receivable – continued

The following is an aging analysis of our loan portfolio at March 31, 2016:

	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	$	—	$	—	$	—	$	—	$	10,382,763	$	10,382,763	$	—
Commercial Real Estate		—		—		—		—		32,453,731		32,453,731		—
Construction, Land Development, & Other Land		—		96,934		—		96,934		9,635,413		9,732,347		—
Consumer		—		—		—		—		1,334,552		1,334,552		—
Residential		—		—		—		—		10,414,829		10,414,829		—

Residential HELOC		39,492		—		283,736		323,228		13,788,375		14,111,603		—
Total	$	39,492	$	96,934	$	283,736	$	420,162	$	78,009,663	$	78,429,825	$	—

The following is an aging analysis of our loan portfolio at December 31, 2015:

	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	16,552	$	—	$	—	$	16,552	$	10,487,178	$	10,503,730	$	—
Commercial Real Estate		—		—		—		—		32,539,464		32,539,464		—
Construction, Land Development, & Other Land		51,518		99,389		102,967		253,874		10,284,978		10,538,852		—
Consumer		—		—		—		—		1,381,065		1,381,065		—
Residential		194,003		—		342,000		536,003		10,955,956		11,491,959		—
Residential HELOC		—		—		283,736		283,736		14,241,902		14,525,638		—
Total	$	262,073	$	99,389	$	728,703	$	1,090,165	$	79,890,543	$	80,980,708	$	—

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

	March 31, 2016		December 31, 2015
Commercial	$	66,872	$	35,221
Commercial Real Estate		—		—
Construction, Land Development, & Other Land		—		102,967
Consumer		—		—
Residential		—		342,000
Residential HELOCs		283,736		283,736
Total	$	350,608	$	763,924

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 three months ended March 31, 2016 and the year ended December 31, 2015, we received approximately $288 and $3,567 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 $3,751 and $65,308, 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 period ended March 31, 2016:

	Commercial			Commercial Real Estate			Construction, Land Development & Other Land			Consumer			Residential			Residential - HELOCs			Unallocated		Total
Allowance for Credit Losses
Beginning Balance	$	179,176		$	158,362		$	68,355		$	301,590		$	83,014		$	183,909		$	105,376	$	1,079,782
Charge Offs		—			—			—			—			(2,870	)		—			—		(2,870	)
Recoveries		750			—			—			—			—			399			—		1,149
Provision		(2,523	)		(75	)		(4,608	)		(501	)		(1,058	)		(6,287	)		48,052		33,000
Ending Balance	$	177,403		$	158,287		$	63,747		$	301,089		$	79,086		$	178,021		$	153,428	$	1,111,061
Ending Balances:
Individually evaluated for impairment	$	41,528		$	—		$	—		$	283,843		$	25,421		$	—		$	—	$	350,792
Collectively evaluated for impairment	$	135,875		$	158,287		$	63,747		$	17,246		$	53,665		$	178,021		$	153,428	$	760,269
Loans Receivable:
Ending Balance - Total	$	10,382,763		$	32,453,731		$	9,732,347		$	1,334,552		$	10,414,829		$	14,111,603		$	—	$	78,429,825
Ending Balances:
Individually evaluated for impairment	$	63,132		$	313,172		$	—		$	313,046		$	383,853		$	283,736		$	—	$	1,356,939
Collectively evaluated for impairment	$	10,319,631		$	32,140,559		$	9,732,347		$	1,021,506		$	10,030,976		$	13,827,867		$	—	$	77,072,886

The following table summarizes the allowance for loan losses and recorded investment in gross loans, by portfolio segment, at and for the period ended March 31, 2015:

	Commercial		Commercial Real Estate		Construction, Land Development & Other Land		Consumer			Residential		Residential - HELOCs		Unallocated			Total
Allowance for Credit Losses
Beginning Balance	$	174,737	$	62,460	$	13,157	$	42,299		$	64,651	$	476,045	$	173,445		$	1,006,794
Charge Offs		—		—		—		—			—		—		—			—
Recoveries		750		—		—		—			—		399		—			1,149
Provision		100,028		9,753		14,624		(6,075	)		11,138		9,730		(64,198	)		75,000
Ending Balance	$	275,515	$	72,213	$	27,781	$	36,224		$	75,789	$	486,174	$	109,247		$	1,082,943
Ending Balances:
Individually evaluated for impairment	$	150,383	$	—	$	—	$	8,616		$	1,445	$	189,301	$	—		$	349,745
Collectively evaluated for impairment	$	125,132	$	72,213	$	27,781	$	27,608		$	74,344	$	296,873	$	109,247		$	733,198

Loans Receivable:
Ending Balance - Total	$	10,386,888	$	30,995,940	$	8,819,161	$	1,194,158		$	11,687,916	$	16,559,349	$	—		$	79,643,412
Ending Balances:
Individually evaluated for impairment	$	181,903	$	782,521	$	—	$	37,474		$	674,099	$	657,981	$	—		$	2,333,978
Collectively evaluated for impairment	$	10,204,985	$	30,213,419	$	8,819,161	$	1,156,684		$	11,013,817	$	15,901,368	$	—		$	77,309,434

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, 2015:

	Commercial			Commercial Real Estate		Construction, Land Development & Other Land		Consumer			Residential			Residential - HELOCs			Unallocated			Total
Allowance for Credit Losses
Beginning Balance	$	174,737		$	62,460	$	13,157	$	42,299		$	64,651		$	476,045		$	173,445		$	1,006,794
Charge Offs		(108,893	)		—		—		(870	)		(24,292	)		(94,668	)		—			(228,723	)
Recoveries		10,115			70,000		—		—			—			1,596			—			81,711
Provision		103,217			25,902		55,198		260,161			42,655			(199,064	)		(68,069	)		220,000
Ending Balance	$	179,176		$	158,362	$	68,355	$	301,590		$	83,014		$	183,909		$	105,376		$	1,079,782
Ending Balances:
Individually evaluated for impairment	$	41,528		$	—	$	—	$	283,843		$	25,421		$	—		$	—		$	350,792
Collectively evaluated for impairment	$	137,648		$	158,362	$	68,355	$	17,747		$	57,593		$	183,909		$	105,376		$	728,990
Loans Receivable:
Ending Balance - Total	$	10,503,730		$	32,539,464	$	10,538,852	$	1,381,065		$	11,491,959		$	14,525,638		$	—		$	80,980,708
Ending Balances:
Individually evaluated for impairment	$	65,442		$	315,768	$	102,967	$	313,697		$	726,878		$	283,736		$	—		$	1,808,488
Collectively evaluated for impairment	$	10,438,288		$	32,223,696	$	10,435,885	$	1,067,368		$	10,765,081		$	14,241,902		$	—		$	79,172,220

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 $12,746 and $14,513 in interest income on loans that were impaired during the quarter ended March 31, 2016 and 2015, respectively.

At March 31, 2016, the Company had 10 impaired loans totaling $1,356,939 or 1.7% of gross loans. At December 31, 2015, the Company had 12 impaired loans totaling $1,808,488 or 2.2% of gross loans. There were no loans that were contractually past due 90 days or more and still accruing interest at March 31, 2016 or December 31, 2015. There were five loans restructured or otherwise impaired totaling $547,837 not already included in nonaccrual status at March 31, 2016. There were five loans restructured or otherwise impaired totaling $553,359 not already included in nonaccrual status at December 31, 2015. During the quarter ended March 31, 2016, we received approximately $288 in interest income in relation to loans on non-accrual status and forgone interest was approximately $3,751. During the quarter ended March 31, 2015, we received approximately $2,430 in interest income in relation to loans on non-accrual status and forgone interest was approximately $13,763.

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 quarter ended March 31, 2016:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		313,172		313,172		—		—		5,170
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		—		—		—		—		—
Residential		85,830		85,830		—		314,636		787
Residential HELOC		283,736		283,736		—		283,736		—
With an allowance recorded
Commercial	$	63,132	$	63,132	$	41,528	$	64,504	$	450
Commercial Real Estate		—		—		—		—		—
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		313,046		313,046		283,843		313,476		2,010
Residential		298,023		305,025		25,421		304,270		4,329
Residential HELOC		—		—		—		—		—
Total
Commercial	$	63,132	$	63,132	$	41,528	$	64,504	$	450
Commercial Real Estate		313,172		313,172		—		—		5,170
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		313,046		313,046		283,843		313,476		2,010
Residential		383,853		390,855		25,421		618,906		5,116
Residential HELOC		283,736		283,736		—		283,736		—
	$	1,356,939	$	1,363,941	$	350,792	$	1,280,622	$	12,746

The following is an analysis of our impaired loan portfolio detailing the related allowance recorded at and for the quarter ended March 31, 2015:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		782,521		901,408		—		782,979		5,265
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		—		—		—		—		—
Residential		460,655		460,655		—		464,282		803
Residential HELOC		320,000		320,000		—		319,983		2,430
With an allowance recorded
Commercial	$	181,903	$	181,903	$	150,383	$	183,448	$	566
Commercial Real Estate		—		—		—		—		—
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		34,474		37,474		8,616		37,682		279
Residential		213,444		220,088		1,445		219,519		3,133
Residential HELOC		337,981		467,293		189,301		338,344		2,037
Total
Commercial	$	181,903	$	181,903	$	150,383	$	183,448	$	566
Commercial Real Estate		782,521		901,408		—		782,979		5,265
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		37,474		37,474		8,616		37,682		279
Residential		674,099		680,743		1,445		683,801		3,936
Residential HELOC		657,981		787,293		189,301		658,327		4,467
	$	2,333,978	$	2,588,821	$	349,745	$	2,346,237	$	14,513

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 year ended December 31, 2015:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		315,768		315,768		—		—		21,134
Construction, Land Development, & Other Land		102,967		102,967		—		102,078		2,322
Consumer		—		—		—		—		—
Residential		428,375		452,954		—		320,679		3,218
Residential HELOC		283,736		283,736		—		312,472		1,245
With an allowance recorded
Commercial	$	65,442	$	65,442	$	41,528	$	68,886	$	2,132
Commercial Real Estate		—		—		—		—		—
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		313,697		313,697		283,843		315,089		7,369
Residential		298,503		305,475		25,421		304,688		17,388
Residential HELOC		—		—		—		—		—
Total
Commercial	$	65,442	$	65,442	$	41,528	$	68,886	$	2,132
Commercial Real Estate		315,768		315,768		—		—		21,134
Construction, Land Development, & Other Land		102,967		102,967		—		102,078		2,322
Consumer		313,697		313,697		283,843		315,089		7,369
Residential		726,878		758,429		25,421		625,367		20,606
Residential HELOC		283,736		283,736		—		312,472		1,245
	$	1,808,488	$	1,840,039	$	350,792	$	1,423,892	$	54,808

Troubled Debt Restructurings

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 March 31, 2016 and March 31, 2015, we had six loans totaling $582,159 and eight loans totaling $776,905, respectively, which we considered to be TDRs. During the three months ended March 31, 2016 and 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.

There were no loans restructured within the last twelve months that defaulted during the three months ended March 31, 2016. The Bank considers any loans that are 30 days or more past due to be in default.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Note 7 – Other Real Estate Owned

Transactions in other real estate owned for the periods ended March 31, 2016 and December 31, 2015 are summarized below:

	2016			2015
Balance, beginning of period	$	1,710,235		$	1,441,095
Additions		106,474			459,000
Sales		(106,474	)		(78,860	)
Write downs		—			(111,000	)
Balance, end of period	$	1,710,235		$	1,710,235

Note 8 – Preferred Stock

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 March 31, 2016, 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.

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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, 2015 filed with the SEC, and the following:

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

restrictions or conditions imposed by our regulators on our operations;

our efforts to maintain our regulatory capital ratios;

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

changes in deposit flows;

our ability to successfully consummate our previously announced merger with Carolina Financial, including the ability to obtain required governmental approvals of the merger on the proposed terms and schedule or that the terms of the proposed merger may need to be unfavorably modified to satisfy such approvals or other closing conditions;

the diversion of management time from core banking functions due to merger-related issues;

potential difficulty in maintaining relationships with clients, associates or business partners as a result of our previously announced merger with Carolina Financial;

increases in competitive pressure in the banking and financial services industries;

changes in the interest rate environment, which could reduce anticipated or actual margins;

our expectations regarding our operating revenues, expenses, effective tax rates and other results of operations;

changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;

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

changes occurring in business conditions and inflation;

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

cybersecurity breaches, including potential business disruptions or financial losses;

changes in technology;

our current and future products, services, applications and functionality and plans to promote them;

changes in monetary and tax policies;

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

examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;

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

the rates of loan growth;

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

our reliance on available secondary funding sources to meet our liquidity needs;

our ability to maintain effective internal control over financial reporting;

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

changes in monetary and tax policies;

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

our ability to attract and retain key personnel;

changes in the securities markets; and

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

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, 2015. 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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Overview

The Company recorded net income, after tax expense, of $1,733 and net loss available to common shareholders of $(33,547) for the quarter ended March 31, 2015 compared to net income, after tax expense, of $95,783 and net income available to common shareholders of $60,593 for the quarter ended March 31, 2015. Basic and diluted (loss) earnings per common share were $(0.02) for the first quarter of 2016 compared to basic and diluted earnings per common share of $0.03 in the first quarter of 2015. The decrease in net income as compared to the first quarter of 2015 is primarily attributable to the merger related expenses of $287,680 and a decrease in gain on sale of securities available for sale of $30,028. For the period ended March 31, 2016, our net interest margin was 4.24% compared to 4.03% at March 31, 2015.

At March 31, 2016, total assets were $105,229,719, compared to $109,141,050 at December 31, 2015, a decrease of $3,911,331, or 3.58%. The decrease in total assets is primarily attributable to a decrease in securities held-to-maturity of $3,412,281. Interest-earning assets comprised approximately 89.7% and 91.7% of total assets at March 31, 2016 and December 31, 2015, respectively. Gross loans totaled $78,429,825 and investment securities were $15,585,980 at March 31, 2016, compared to gross loans of $80,980,708 and investment securities of $19,181,402 at December 31, 2015.

Deposits totaled $88,862,547 at March 31, 2016 and $90,541,366 at December 31, 2015. FHLB advances were $2,500,000 and $5,000,000 at March 31, 2016 and December 31, 2015, respectively. Shareholders’ equity was $13,729,791 and $13,559,606 at March 31, 2016 and December 31, 2015, respectively.

As of March 31, 2016, 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.

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

Significant Recent Developments

As previously disclosed, on January 5, 2016, Carolina Financial, the Merger Sub and the Company entered into the Merger Agreement which provides that, subject to the terms and conditions set forth in the Merger Agreement, Carolina Financial will acquire the Company in a cash and stock transaction with a total current value of approximately $16.278 million.

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

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

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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

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, 2015, 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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Results of Operations

Three months ended March 31, 2016 and 2015

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 three months ended March 31, 2016 and 2015 were 4.24% and 4.03%, respectively.

Net interest income was $1,042,823 during the three months ended March 31, 2016, compared to $1,023,287 for the same period in 2015. Interest income of $1,128,901 for the three months ended March 31, 2016 included $1,015,723 on loans, $106,107 on investment securities and $7,071 on federal funds sold and other. Interest expense decreased from $87,939 for the three months ended March 31, 2015 to $86,078 for the three months ended March 31, 2016, largely due to higher interest bearing deposits being replaced by lower interest bearing deposits. Total interest expense of $86,078 during the three months ended March 31, 2016 included $78,210 related to deposit accounts and $7,868 on FHLB advances and other borrowings.

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 three months ended March 31, 2016 was $33,000, a decrease of $42,000 or 56%, from our provision for loan losses of $75,000 for the three months ended March 31, 2015. 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 three months ended March 31, 2016 was $192,076, compared to $225,173 for the same period in 2015. Noninterest income for the three months ended March 31, 2016 consisted primarily of service charges on deposit accounts of $91,750, residential mortgage origination fees of $10,115, gain on sale of securities of $81,049 and other noninterest income of $9,162. Noninterest income for the three months ended March 31, 2015 consisted primarily of service charges on deposit accounts of $89,927, residential mortgage origination fees of $15,008, gain on sale of securities of $111,077 and other noninterest income of $9,161. The decrease of $33,097 in noninterest income compared to the same period in 2015 is primarily the result of a decrease in gain on sale of securities.

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 5 basis point charge per transaction to help cover fraud losses. Though the rule technically does not apply to institutions with less than $10 billion in assets, such as the Bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. The Federal Reserve also adopted requirements for issuers to include two unaffiliated networks for debit card transactions – one signature-based and one PIN-based. Our ATM/debit card fee income is included in service charges on deposit accounts and was $30,906 and $33,340 for the three months ended March 31, 2016 and 2015, 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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Noninterest Expenses

The following table sets forth information related to our noninterest expenses for the three months ended March 31, 2016 and 2015.

	Three months ended
	March 31,
	2016		2015
Compensation and benefits	$	427,569	$	479,005
Occupancy and equipment		194,273		172,224
Data processing and related costs		91,659		83,311
Marketing, advertising and shareholder communications		6,838		12,908
Legal, audit and merger expenses		341,127		65,039
Other professional fees		4,709		1,565
Supplies and postage		10,276		15,068
Insurance		16,844		11,839
Credit related expenses		2,205		(2,422	)
Regulatory fees and FDIC insurance		34,324		33,731
Net cost of operation of other real estate owned		10,203		153,808
Other		56,593		46,513
Total noninterest expense	$	1,196,620	$	1,072,589

The most significant component of noninterest expense is compensation and benefits, which totaled $427,569 for the three months ended March 31, 2016, compared to $479,005 for the three months ended March 31, 2015. The decrease in compensation and benefits is primarily related to the elimination of a position. Legal, audit and merger expenses increased from $65,039 for the three months ended March 31, 2015 to $341,127 for three months ended March 31, 2016, primarily as a result of $287,680 fees related to the merger with Carolina Financial. Other real estate expenses decreased from $153,808 for the three months ended March 31, 2015 to $10,203 for the three months ended March 31, 2016, primarily as a result of reduction in other real estate write downs. Regulatory fees increased from $33,731 for the three months ended March 31, 2015 to $34,324 for the three months ended March 31, 2016 due to a change in the assessment base and average assets used to calculate the fees.

Income Tax Expenses

The Company reported taxable income for the three months ended March 31, 2016 and 2015. 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 $3,546 for the three months ended March 31, 2016 and $5,088 for the three months ended March 31, 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 March 31, 2016 were $78,429,825, or 83% of interest-earning assets and 74.5% of total assets, compared to $80,980,708, or 80.9% of interest-earning assets and 74.1% of total assets, at December 31, 2015.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Loans secured by real estate mortgages comprised approximately 85% of loans outstanding at March 31, 2016 and 85% at December 31, 2015. 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 both March 31, 2016 and December 31, 2015. Our construction, development, and land loans represented approximately 12% and 13% of our loan portfolio at March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015.

	March 31, 2016						December 31, 2015
	Amount			Percentage of Total			Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	32,453,731			41	%	$	32,539,464			40	%
Construction, Land Development, & Other Land		9,732,347			12	%		10,538,852			13	%
Residential Mortgages		10,414,829			14	%		11,491,959			14	%
Residential Home Equity Lines of Credit (HELOCs)		14,111,603			18	%		14,525,638			18	%
Total Real Estate		66,712,510			85	%		69,095,913			85	%

Commercial		10,382,763			13	%		10,503,730			13	%
Consumer		1,334,552			2	%		1,381,065			2	%
Gross loans		78,429,825			100	%		80,980,708			100	%
Less allowance for loan losses		(1,111,061	)					(1,079,782	)
Total loans, net	$	77,318,764					$	79,900,926

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 three months ended March 31, 2016 and 2015 is presented below:

	Three Months Ended
	March 31,
	2016			2015

Balance at beginning of the period	$	1,079,781		$	1,006,794
Provision for loan losses		33,000			75,000
Loans charged-off		(2,869	)		—
Recoveries of loans previously charged-off		1,149			1,149
Balance at end of the period	$	1,111,061		$	1,082,943

The allowance for loan losses was $1,111,061 and $1,079,782 as of March 31, 2016 and December 31, 2015, respectively, and represented 1.42% and 1.33% of outstanding loans at March 31, 2016 and December 31, 2015, 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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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.

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. During the first quarter of 2015, the Company increased the historical loss calculation from three years to five years of charge-off history.

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s potential problem loan list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected. Management has determined that the Company had $1,356,939 and $1,808,488 in impaired loans at March 31, 2016 and December 31, 2015, respectively. The valuation allowances related to impaired loans totaled $350,792 at March 31, 2016 and December 31, 2015, respectively.

At March 31, 2016 and December 31, 2015, nonaccrual loans totaled $350,608 and $763,924, 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.

Other Assets

At March 31, 2016 and December 31, 2015, other assets totaled $715,993 and $218,848, respectively. The increase in other assets is the result of merger related expenses that will be assumed by CresCom Bank upon completion of the merger.

Deposits

Our primary source of funds for our loans and investments is our deposits. Total deposits as of March 31, 2016 and December 31, 2015 were $88,862,547 and $90,541,366, respectively. The following table shows the average balance outstanding and the average rates paid on deposits for the quarter ended March 31, 2016 (annualized) and the year ended December 31, 2015.

	March 31, 2016					December 31, 2015
	Average Amount		Rate			Average Amount		Rate
Non-interest bearing demand deposits	$	16,823,189		—	%	$	15,887,626		—	%
Interest-bearing checking		9,511,938		0.13			9,089,437		0.19
Money market		39,666,540		0.30			39,776,584		0.27
Savings		2,089,179		0.17			2,044,757		0.17
Time deposits less than $100,000		8,398,142		0.71			8,670,132		0.76
Time deposits $100,000 and over		13,880,998		0.87			12,775,854		0.88
Total	$	90,369,986		0.43	%	$	88,244,390		0.42	%

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 $75,235,231 and $76,317,616 at March 31, 2016 and December 31, 2015, respectively. Our loan-to-deposit ratio was 88.2% and 89.2 % at March 31, 2016 and December 31, 2015, 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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Cash and short-term investments are our primary sources of asset liquidity. These funds provide a cushion against short-term fluctuations in cash flow from both deposits and loans. The investment portfolio is our principal source of secondary asset liquidity. However, the availability of this source of funds is influenced by market conditions and pledging agreements. Individual and commercial deposits, wholesale deposits and borrowings are our primary source of funds for credit activities. In addition, we will receive cash upon the maturities and sales of loans and maturities, calls and prepayments on investment securities. We maintain federal funds purchased lines of credit with correspondent banks totaling $12,550,000. Availability on these lines of credit was $12,550,000 at March 31, 2016.

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 March 31, 2016 and December 31, 2015, we had $2,500,000 and $5,000,000 outstanding, respectively. The Bank borrowed the funds to reduce the cost of funds on money used to fund loans. The Bank has remaining credit availability of $17,513,200 at the FHLB. We believe that our existing stable base of core deposits along with continued growth in this deposit base will enable us to successfully meet our long term liquidity needs. The following table shows the amount outstanding, grant date, maturity date, and interest rate at March 31, 2016.

Amount	Grant Date	Maturity Date	Interest Rate

$ 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 March 31, 2016, the Bank had short-term lines of credit with correspondent banks to purchase a maximum of $3,300,000 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 March 31, 2016, 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 15.2% at March 31, 2016 compared to 17.6% as of December 31, 2015. At March 31, 2016, $6,179,590 of our investment securities were pledged to secure public entity deposits and as collateral for securities sold under agreement to repurchase. We continue to carefully focus on liquidity management during 2015.

Capital Resources

Total shareholders’ equity was $13,729,791 at March 31, 2016, an increase of $170,185 from $13,559,606 at December 31, 2015. The increase is primarily due to other comprehensive income for the period of $93,701.

Our Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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

· a new common equity Tier 1 risk-based capital ratio of 4.5%,

· a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement),

· a total risk-based capital ratio of 8% (unchanged from the former requirement), and

· a leverage ratio of 4% (also unchanged from the former requirement).

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

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

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

The following table sets forth the Bank’s capital ratios at March 31, 2016 and December 31, 2015. It is management’s belief that, as of December 31, 2015, the Bank met all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were currently effective.

											To Be Well-
											Capitalized Under
						For Capital					Prompt Corrective
(Dollars in thousands)	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2016
Total capital (to risk-weighted assets)	$	13,128		15.81	%	$	6,643		8.00	%	$	8,304		10.00	%
Tier 1 capital (to risk-weighted assets)		12,080		14.55	%		4,982		6.00	%		6,643		8.00	%
Tier 1 capital (to average assets)		12,080		11.29	%		4,278		4.00	%		5,348		5.00	%
CET1 (to risk weighted assets)		12,080		14.55	%		3,737		4.50	%		5,398		6.50	%

December 31, 2015
Total capital (to risk-weighted assets)	$	13,162		15.75	%	$	6,686		8.00	%	$	8,357		10.00	%
Tier 1 capital (to risk-weighted assets)		12,108		14.49	%		5,014		6.00	%		6,686		8.00	%
Tier 1 capital (to average assets)		12,108		10.97	%		4,416		4.00	%		5,519		5.00	%
CET1 (to risk weighted assets)		12,108		14.49	%		3,761		4.50	%		5,432		6.50	%

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Off-Balance Sheet Risk

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 March 31, 2016 and December 31, 2015, we had issued commitments to extend credit of approximately $15,928,000 and $15,181,000, respectively, through various types of lending arrangements.

Standby letters of credit represent an obligation of the Company to a third party contingent upon the failure of the Company’s customer to perform under the terms of an underlying contract with the third party or obligates the Company to guarantee or stand as surety for the benefit of the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the shipment of goods, performance of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be drawn only when the underlying event fails to occur as intended. The Company can seek recovery of the amounts paid from the borrower. The majority of these standby letters of credit are unsecured. Commitments under standby letters of credit are usually for one year or less. At March 31, 2016 and December 31, 2015, the Company has recorded no liability for the current carrying amount of the obligation to perform as a guarantor; as such amounts are not considered material. There were standby letters of credit included in the commitments for $40,000 at March 31, 2016 and December 31, 2015.

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.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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 three months ended March 31, 2016 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 1. A Risk Factors

Not applicable.

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

Not applicable.

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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.

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: May 12, 2016	By:	/s/ Charles A. Kirby
		Charles A. Kirby
		President and Chief Executive Officer (Principal Executive Officer)

Date: May 12, 2016	By:	/s/ Charlie T. Lovering
		Charlie T. Lovering
		Chief Financial Officer (Principal Financial and Accounting Officer)

CONGAREE BANCSHARES, INC.

EXHIBIT INDEX

Exhibit Number	Description

2.1	Agreement and Plan of Merger between Carolina Financial Corporation, CBAC, Inc., and Congaree Bancshares, Inc. dated January 5, 2016 (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed on January 11, 2016).

31.1

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

31.2

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

Section 1350 Certifications.

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Income for the three months ended March 31, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2016 and 2015, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements.

Congaree Bancshares Inc - FORM 10-Q - May 12, 2016

Attached files

Congaree Bancshares Inc Reports