# Coastal Carolina Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2010

- Company: [Coastal Carolina Bancshares, Inc.](/companies/ccnb.md) (CIK 1437213)
- Form: 10-Q
- Filed: 2010-11-12
- Accepted by EDGAR: Nov 12, 2010, 10:28 ET
- Period: 2010-09-30
- Accession: 0001104659-10-058092
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1437213/000110465910058092/a10-21059_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1437213/000110465910058092/

## Management's discussion and analysis

As filed, 40,808 characters.

*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 consolidated financial statements, and the related notes and the other statistical information included in this report.*

### DISCUSSION OF 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. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in our forward-looking statements include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 2009 under Item 1A - Risk Factors and the following:

- significant increases in competitive pressure in the banking and financial services industries;
- changes in the interest rate environment which could reduce anticipated margins;
- changes in political conditions or the legislative or regulatory environment, including the effect of recent financial reform legislation on the banking industry;
- general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality;
- the effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions;
- the amount of our loan portfolio collateralized by real estate, and the weakness in the real estate market;
- changes occurring in business conditions and inflation;
- changes in deposit flows;
- changes in technology;
- the adequacy of the level of our allowance for loan losses and the lack of seasoning of our loan portfolio;
- the rate of delinquencies and amount of loans charged-off;
- the rate of loan growth;
- 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;
- changes in the securities markets; and
- other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company. For over three years, the capital and credit markets experienced unprecedented levels of extended volatility and disruption. There can be no assurance that these unprecedented developments will not materially and adversely affect our business, financial condition and results of operations.

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

### Overview

Coastal Carolina Bancshares, Inc. is a bank holding company headquartered in Myrtle Beach, South Carolina. We were incorporated in February 2008 and our national bank subsidiary, Coastal Carolina National Bank, opened for business on June 8, 2009. The principal business activity of our bank is to provide retail and commercial banking services in Myrtle Beach and our surrounding market areas. Our deposits are insured by the Federal Deposit Insurance Corporation.

We completed our stock offering in June 2009, upon the issuance of 2,180,000 shares for gross proceeds of $21.8 million, pursuant to a closing in June 2009. Offering expenses of $836,488, including $515,676 of sales agent commissions and related expenses, were netted against the gross proceeds. We capitalized the bank with $19.9 million of the proceeds from the stock offering.

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

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our earnings. In the following section we have included a detailed discussion of this process.

The following discussion describes our results of operations for the three months ended September 30, 2010 and 2009, the nine months ended September 30, 2010 and also analyzes our financial condition as of September 30, 2010 and December 31, 2009.

### Critical Accounting Policies

We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America 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, 2009, as filed in our Annual Report on Form 10-K.

Certain accounting policies involve significant judgments and assumptions by us that may have a material impact on the carrying value of certain assets and liabilities. We consider such accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe are reasonable under the circumstances. Because of the nature of the judgments 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, assumptions about cash flow, determination of loss factors for estimating credit losses, and the impact of current events, conditions, and other factors impacting the level of probable inherent losses. Under different conditions, 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 consolidated financial statements and income tax returns, and income tax benefit or expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises judgment in evaluating the amount and timing of recognition of resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. Valuation allowances are established to reduce deferred tax assets if it is determined to be “more likely than not” that all or some portion of the potential deferred tax asset will not be realized. Currently we have fully reserved for our deferred tax asset related to continuing operations. 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.

### Legislative and Regulatory Initiatives to Address Financial and Economic Crises

Markets in the United States and elsewhere have experienced extreme volatility and disruption over the past three years. These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence. Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans. Dramatic slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures and unemployment, have created strains on financial institutions. Many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance. In response to the challenges facing the financial services sector, several regulatory and governmental actions have been announced including:

- The Emergency Economic Stabilization Act, approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase troubled assets from banks, authorized the Securities and Exchange Commission to suspend the application of marked-to-market accounting, and raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 through December 31, 2013;
- On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;
- On October 14, 2008, the U.S. Treasury announced the creation of a new program, the Capital Purchase Program, that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable;
- On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”), which seeks to strengthen confidence and encourage liquidity in the banking system. The TLGP has two primary components that are available on a voluntary basis to financial institutions:
- Guarantee of newly-issued senior unsecured debt; the guarantee would apply to new debt issued on or before October 31, 2009 and would provide protection until December 31, 2012; issuers electing to participate would pay a 75 basis point fee for the guarantee; and
- Unlimited deposit insurance through December 31, 2009 for non-interest bearing deposit transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts (the “Transaction Account Guarantee Program” or “TAGP”); financial institutions electing to participate will pay a 10 basis point premium (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place.
- On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan, which earmarked $350 billion of the TARP funds authorized under EESA. Among other things, the Financial Stability

Plan includes:

- A capital assistance program that will invest in mandatory convertible preferred stock of certain qualifying institutions determined on a basis and through a process similar to the Capital Purchase Program;
- A consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances;
- A new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy “toxic assets” from financial institutions; and
- Assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.
- On February 17, 2009, the American Recovery and Reinvestment Act (the “Recovery Act”) was signed into law in an effort to, among other things, create jobs and stimulate growth in the United States economy. The Recovery Act specifies appropriations of approximately $787 billion for a wide range of Federal programs and will increase or extend certain benefits payable under the Medicaid, unemployment compensation, and nutrition assistance programs. The Recovery Act also reduces individual and corporate income tax collections and makes a variety of other changes to tax laws. The Recovery Act also imposes certain limitations on compensation paid by participants in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”).
- On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced the Public-Private Partnership Investment Program for Legacy Assets which consists of two separate plans, addressing two distinct asset groups:
- The first plan is the Legacy Loan Program, which has a primary purpose to facilitate the sale of troubled mortgage loans by eligible institutions, including FDIC-insured federal or state banks and savings associations. Eligible assets are not strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the Treasury. The first sale under the Legacy Loan Program was made in the third quarter of 2009.
- The second plan is the Securities Program, which is administered by the Treasury and involves the creation of public-private investment funds (“PPIFs”) to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements. The U.S. Treasury received over 100 unique applications to participate in the Legacy Securities PPIF and in July 2009 selected nine PPIF managers. As of September 30, 2010, the PPIFs had completed their fundraising and have closed on approximately $7.4 billion of private sector equity capital, which was matched 100% by Treasury, representing $14.7 billion of total equity capital. The U.S. Treasury has also provided $14.7 billion of debt capital, representing $29.4 billion of total purchasing power. As of September 30, 2010, PPIFs have drawn-down approximately $18.6 billion of total capital which has been invested in eligible assets and cash equivalents pending investment.
- On November 12, 2009, the FDIC issued a final rule to require banks to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1, 2011.
- On April 13, 2010, the FDIC approved an interim rule that extends the unlimited deposit insurance for non-interest bearing deposit transaction accounts under the TLGP to December 31, 2011. Coverage under the program is in addition to and separate from the basic coverage available under the FDIC’s general deposit insurance rules. We are not participating in the unlimited deposit insurance component of the TLGP.
- On July 21, 2010, the U.S. President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), a comprehensive regulatory framework that will affect every financial institution in the U.S. The Dodd-Frank Act includes, among other measures, changes to the deposit insurance and financial regulatory systems, enhanced bank capital requirements, and provisions designed to protect consumers in financial transactions. The Dodd-Frank Act also alters certain corporate governance matters affecting public companies. Among other things, the bill includes provisions that exempt smaller public companies with a market cap of under $75 million from Sarbanes-Oxley Section 404(b) audits of management’s assessment of internal controls. Over the next 16 to 18 months, regulatory agencies will implement new regulations which will establish the parameters of the new regulatory framework and provide a clearer understanding of the legislation’s effect on banks.
- Internationally, both the Basel Committee on Banking Supervision (the “Basel Committee”) and the Financial Stability Board (established in April 2009 by the Group of Twenty (“G-20”) Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation, and transparency) have committed to raise capital standards and liquidity buffers within the banking system (“Basel III”). On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1 common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with implementation by January 2019. The U.S. federal banking agencies support this agreement. The Basel Committee is expected to finalize the new capital and liquidity standard later this year and to present them for approval of the G-20 Finance Minister and Central Bank Governors in November 2010.
- On September 27, 2010, the U.S. President signed into law the Small Business Jobs and Credit Act which, among other things, creates a $30 billion fund to provide capital for banks with assets under $10 billion to increase their small-business lending. The U.S. Treasury is currently working to finalize terms of participation for this fund.

Although the TAGP expires on December 31, 2011, a provision of the Dodd-Frank Act requires the FDIC to provide unlimited deposit insurance for all deposits in non-interest-bearing transaction accounts. This deposit insurance mandate created by the Dodd-Frank Act will take effect on December 31, 2010, and will continue through December 31, 2012. The deposit insurance mandate created by the Dodd-Frank Act is not an extension of the TAGP. Although the TAGP and the Dodd-Frank Act establish unlimited deposit insurance for certain types of non-interest-bearing deposit accounts, unlike the TAGP, the coverage provided by the Dodd-Frank Act does not apply to NOW accounts or IOLTAs and will be funded through general FDIC assessments, not special assessments.

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

### Results of Operations

Our primary source of revenue is net interest income. Net interest income is the difference between income earned on interest-bearing 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.

#### Three months ended September 30, 2010 and 2009

We incurred a net loss of $286,342, or .13 per share, for the three months ended September 30, 2010 compared to a net loss of $853,912, or .39 per share, for the three months ended September 30, 2009. Interest income was $563,712 and $164,181 for the three months ended September 30, 2010 and 2009, respectively. The increase is attributed to the larger earning asset portfolio maintained by the bank in 2010. Interest expense was $218,789 for the three months ended September 30, 2010, compared to $147,502 for the three months ended September 30, 2009. The increase is attributed to the larger deposit portfolio maintained by the bank in 2010. The loan loss provision, which is largely dependent on loan growth, was $85,054 for the three months ended September 30, 2010, compared to $60,511 for the three months ended September 30, 2009. Non-interest income was $271,348 for the three months ended September 30, 2010, and included significant income from the sale of investments during the third quarter of 2010. Non-interest income for the three months ended September 30, 2009 was $1,425. Non-interest expense was $817,559 and $811,505 for the three months ended September 30, 2010 and 2009, respectively.

#### Nine months ended September 30, 2010

Because our banking subsidiary opened for business on June 8, 2009, a comparison between the nine months ended September 30, 2010 and September 30, 2009 would not be meaningful. Until June 8, 2009, our principal activities related to our organization, the conducting of our initial public offering and the pursuit of regulatory approvals from the Office of the Comptroller of the Currency for our application to charter the bank, the pursuit of approvals from the Board of Governors of the Federal Reserve System to become a bank holding company, and the pursuit of approvals from the Federal Deposit Insurance Corporation for our application for insurance of the deposits of the bank. We received final approvals from the FDIC, Federal Reserve and the Office of the Comptroller of the Currency in June 2009 and commenced business on June 8, 2009.

Net losses for the nine months ended September 30, 2010 were $1,486,819, or .68 per share. Interest income for the nine months ended September 30, 2010 was comprised of $617,228 earned on investment securities, $310,780 earned on fed funds sold and interest bearing bank deposits, and $649,331 earned on loans, and totaled $1,577,339. We incurred interest expense of $649,019 for the nine months ended September 30, 2010. The provision for loan loss totaled $407,511 for the nine months ended September 30, 2010. Our net interest spread and net interest margin were 1.55% and 2.00%, respectively, for the nine months ended September 30, 2010. Non-interest income for the nine months ended September 30, 2010 totaled $403,469 and consisted primarily of $364,278 in gains on sale of investments. Non-interest expense for the nine months ended September 30, 2010 was $2,405,171. The most significant components of non-interest expense include salaries and employee benefits, occupancy expense, and data processing expense.

### Assets and Liabilities

#### General

Total assets as of September 30, 2010 were $66.8 million, compared to $61.2 million as of December 31, 2009. The increase in assets is due primarily to net loan growth of $8.9 million, which was funded by deposit growth of $6.7 million. At September 30, 2010, total assets consisted principally of $20.7 million in interest-bearing deposits with other financial institutions, $22.6 million in available-for-sale investment securities and $19.3 million in net loans. Net loans at December 31, 2009 were $10.4 million. Loans grew $4.9 million during the third quarter of 2010. The primary source of funding is deposits that are acquired locally. Liabilities at September 30, 2010 totaled $51.1million, represented almost entirely by retail customer deposits totaling $50.7 million. Liabilities as of December 31, 2009 totaled $44.2 million, including $44.0 million in deposits. Deposits grew $3.8 million in the third quarter of 2010. At September 30, 2010, shareholders’ equity was $15.7 million, compared to $16.9 million as of December 31, 2009. The reason for the decrease in shareholders’ equity is continued net losses. Book value per share was $7.17 at September 30, 2010 compared to $7.75 as of December 31, 2009.

#### Loans

Loans typically provide higher interest yields than other types of interest-earning assets. The following table summarizes the composition of our loan portfolio as of September 30, 2010 and December 31, 2009.

|  | September 30 2010 | Percentage of of Total | December 31 2009 | Percentage of Total |
| --- | ---: | ---: | ---: | ---: |
| Construction and land development | $4,817,919 | 24.4% | $3,395,362 | 32.0% |
| Real estate - residential mortgage | 3,081,070 | 15.6 | 585,338 | 5.5 |
| Real estate - other | 10,572,457 | 53.6 | 5,428,501 | 51.2 |
| Commercial and industrial | 930,324 | 4.7 | 1,136,486 | 10.7 |
| Consumer and other | 325,774 | 1.7 | 66,743 | 0.6 |
| Gross loans | 19,727,544 | 100.0% | 10,612,430 | 100.0% |
| Allowance for loan losses | (354,559) | — | (144,845) | — |
| Deferred loan fees, net | (67,186) | — | (30,593) | — |
| **Total loans, net** | **$19,305,799** | **—** | **$10,436,992** | **—** |

#### Nonperforming Assets

At September 30, 2010, nonaccrual loans totaled $37,547, related to one lending relationship, compared to no nonaccrual loans as of December 31, 2009. There were no accruing loans which were contractually past due 90 days or more as to principal or interest payments at September 30, 2010 and December 31, 2009. 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. The nonaccrual loan relationship is considered impaired. The bank recognized a partial charge off during the third quarter of 2010 totaling $110,000 on the loan relationship that is classified as nonaccrual. The remaining balance is adequately supported by the value of the collateral. There were no impaired loans as of December 31, 2009. As of September 30, 2010, we were not aware of any other loans that were not already considered for impairment or categorized as impaired or on nonaccrual.

#### Provision and Allowance for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged to expense on our consolidated statement of operations. The allowance for loan losses was $354,559 as of September 30, 2010, or 1.80% of total loans, compared to $144,845 as of December 31, 2009, or 1.37% of total loans . 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 collectibility of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons. Due to our limited operating history, to date the provision for loan losses has been made primarily as a result of our assessment of general loan loss risk compared to banks of similar size and maturity.

Due to our short operating history, the loans in our loan portfolio and our lending relationships are of very recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process known as seasoning. As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. Periodically, we will adjust the amount of the allowance based on changing circumstances. We will charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period especially considering the overall weakness in the commercial real estate market in our market areas.

Because of our short operating history and the lack of seasoning of our loan portfolio, we do not allocate the allowance for loan losses to specific categories of loans; therefore, the allowance is available to absorb losses in all categories. Instead, we evaluate the adequacy of the allowance for loan losses on an overall portfolio basis utilizing loss experience by loan type at banks of similar size and maturity, industry practices, and our credit grading system which we apply to each loan.

Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate, or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

#### Deposits

Our primary source of funds for loans and investments is the net proceeds received in the initial public offering of our common stock and the funds obtained through our customer deposits. At September 30, 2010, we had $50.7 million in deposits, representing an increase of $6.7 million compared to December 31, 2009. The deposits as of September 30, 2010 consisted primarily of $4.5 million in demand deposit accounts, $22.8 million in certificates of deposit, and $23.4 million of savings and money market accounts. The primary source of funding for our loan portfolio is deposits that are acquired locally. As of September 30, 2010, we have no brokered or wholesale deposits and no borrowings.

### Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. For an operating bank, liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to maintain sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. 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.

Our primary sources of liquidity are deposits, scheduled repayments on our loans, and interest/principal payments received on and maturities of our investments. We plan to meet our future cash needs through the liquidation of temporary investments and the generation of deposits. Occasionally, we might sell investment securities in connection with the management of our interest sensitivity gap or to manage cash availability. We may also utilize our cash and due from banks and federal funds sold to meet liquidity requirements as needed. In addition, we have the ability, on a short-term basis, to purchase federal funds from other financial institutions. As of September 30, 2010, our primary sources of liquidity included interest-bearing deposits and federal funds sold with financial institutions totaling $22.5 million. We also have lines of credit available with correspondent banks totaling $8.0 million with no outstanding principal or interest on these lines at September 30, 2010. These lines may be withdrawn at the discretion of the correspondent financial institutions. We believe our liquidity levels are adequate to meet our operating needs.

### Off-Balance Sheet Risk

Through the operations of our 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 customers at predetermined interest rates for a specified period of time. At September 30, 2010, we had issued commitments to extend credit of $2.8 million through various types of lending arrangements, compared to $660,743 as of December 31, 2009. We evaluate each customer’s credit worthiness 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, and commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

### Capital Resources

Total shareholders’ equity decreased from $16.9 million at December 31, 2009 to $15.7 million at September 30, 2010. The decrease is primarily a result of net loss for the nine months ended September 30, 2010 of $1,486,819 offset by deferred gains in the investment portfolio that increased $143,897 during the nine months.

Our bank and the company are subject to various regulatory capital requirements administered by the federal banking agencies. However, the Federal Reserve guidelines contain an exemption from the capital requirements for “small bank holding companies” which in 2006 were amended to cover most bank holding companies with less than $500 million in total assets that do not have a material amount of debt or equity securities outstanding registered with the SEC. Since our assets are less than $500 million and our stock is not registered under Section 12 of the Securities Exchange Act of 1934, we believe our company qualifies as a small bank holding company and is exempt from the capital requirements. Nevertheless, our bank remains subject to these capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the bank must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Regardless, our bank is “well capitalized” under these minimum capital requirements as set per bank regulatory agencies.

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

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

The bank exceeded its minimum regulatory capital ratios as of September 30, 2010 and December 31, 2009, as well as the ratios to be considered “well capitalized.”

The following table sets forth the bank’s various capital ratios at September 30, 2010 and December 31, 2009:

*(Unaudited)*

|  | Tier 1 Leverage | Tier 1 Risk-Based | Total Risk-Based |
| --- | ---: | ---: | ---: |
| Minimum Required | 4.00% | 4.00% | 8.00% |
| Minimum Required to be well capitalized | 5.00% | 6.00% | 10.00% |
| De novo requirement | 8.00% |  |  |
| Actual Ratios at September 30, 2010 |  |  |  |
| Coastal Carolina National Bank | 23.00% | 64.31% | 65.57% |
| Consolidated | 24.35% | 68.07% | 69.32% |
| Actual Ratios at December 31, 2009 |  |  |  |
| Coastal Carolina National Bank | 30.04% | 89.62% | 90.42% |
| Consolidated | 31.18% | 93.63% | 94.43% |

We believe our capital is sufficient to fund the activities of the bank in its initial stages of operation. As of September 30, 2010, there were no significant firm commitments outstanding for capital expenditures.

## Controls and procedures

As filed, 1,079 characters.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our current disclosure controls and procedures are effective as of September 30, 2010. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Filed Nov 12, 2010.
Source: SEC EDGAR, the filing index for accession 0001104659-10-058092. Last ingested by Listed: Oct 24, 2026, 15:08 ET. No prices; not investment advice.