# Coastal Carolina Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2011

- Company: [Coastal Carolina Bancshares, Inc.](/companies/ccnb.md) (CIK 1437213)
- Form: 10-Q
- Filed: 2011-08-15
- Accepted by EDGAR: Aug 15, 2011, 10:35 ET
- Period: 2011-06-30
- Accession: 0001193125-11-222871
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1437213/000119312511222871/d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1437213/000119312511222871/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2011-04-01 to 2011-06-30 | $214.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2011-01-01 to 2011-06-30 | $426.7k | us-gaap:InterestExpense |
| Net income | 3 months, 2011-04-01 to 2011-06-30 | −$374.1k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2011-01-01 to 2011-06-30 | −$1.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-04-01 to 2011-06-30 | −$0.17 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2011-01-01 to 2011-06-30 | −$0.53 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2011-01-01 to 2011-06-30 | −$18.8k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2011-01-01 to 2011-06-30 | $28.5k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Total assets | at 2011-06-30 | $84.1m | us-gaap:Assets |
| Total liabilities | at 2011-06-30 | $70.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-06-30 | $14.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 45,827 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, 2010 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 or actual margins;
- changes in political conditions or the legislative or regulatory environment;
- 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;
- changes occurring in business conditions and inflation;
- changes in technology;
- the level of allowance for loan loss and the lack of seasoning of our loan portfolio;
- the rate of delinquencies and amounts of charge-offs;
- the rates 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 volatility and disruption experienced in national and international financial, capital, and credit markets during the last three years. We are unable to predict what effect these uncertain market conditions will continue to have on our Company. There can be no assurance that these unprecedented developments will not materially and adversely affect our business, financial condition and results of operations.

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. 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 and six months ended June 30, 2011 and 2010 and also analyzes our financial condition as of June 30, 2011 and December 31, 2010.

### 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, 2010, 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 possible that all or some portion of the potential deferred tax asset will not be realized. The Company believes its loss position may adversely impact its ability to recognize the full benefit of its deferred tax asset. Therefore, the Company currently has placed a valuation allowance for its full deferred tax asset. 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, a multitude of new regulatory and governmental actions have been announced beginning in 2008, including the Emergency Economic Stabilization Act (the EESA) approved by Congress and signed by President Bush on October 3, 2008, and the American Recovery and Reinvestment Act on February 17, 2009, among others.

Some of the more recent actions include:

- On February 10, 2009, the SEC issued its final rule requiring public companies to file their financial statements in interactive data format using the e**X**tensible **B**usiness **R**eporting **L**anguage (“XBRL”). The use of XBRL is intended to make financial information easier for investors to analyze and to assist in automating regulatory filings and business information processing. All filers not already subject to the XBRL reporting requirements will be required to comply with the XBRL reporting requirements for periods ending on or after June 15, 2011.
- 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 likely result in dramatic changes across the financial regulatory system, some of which became effective immediately and some of which will not become effective until various future dates. Implementation of the Dodd-Frank Act will require many new rules to be made by various federal regulatory agencies over the next several years. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act until final rulemaking is complete, which could have a material adverse impact either on the financial services industry as a whole or on our business, financial condition, results of operations, and cash flows. Provisions in the legislation that affect consumer financial protection regulations, deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd-Frank Act includes provisions that, among other things, will:

¡ Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws;

¡ Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity;

¡ Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions;

¡ Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will require an increase in the level of assessments for institutions with assets in excess of $10 billion;

¡ Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until December 31, 2012 for noninterest-bearing demand transaction accounts at all insured depository institutions;

¡ Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, which apply to all public companies, not just financial institutions;

¡ Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts;

¡ Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer;

¡ Eliminate the Office of Thrift Supervision (“OTS”) July 21, 2011. The Office of the Comptroller of the Currency (“OCC”), which is the primary federal regulator for national banks, now has become the primary federal regulator for federal thrifts. In addition, the Federal Reserve now supervises and regulates all savings and loan holding companies that were formerly regulated by the OTS.

- The Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd–Frank Act”) initiated a substantial platform for changes in rules and regulations for banks. The Act was passed over one year ago and new requirements continue to be issued. These new requirements are anticipated to continue over the next twelve months and the impact to our operations remain unclear. Summarized below are some highlights of recent developments related to the Dodd–Frank Act.

¡ In November 2010, the FDIC approved two proposals that amend the deposit insurance assessment regulations. The first proposal implements a provision in the Dodd-Frank Act that changes the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets. The assessment base changes from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The second proposal changes the deposit insurance assessment system for large institutions in conjunction with the guidance given in the Dodd-Frank Act. In February 2011, the FDIC approved the final rules that change the assessment base from domestic deposits to average assets minus average tangible equity, adopt a new scorecard-based assessment system for financial institutions with more than $10 billion in assets, and finalize the designated reserve ratio to 2.0%. The reserve ratio target is higher than the 1.35% set by the Dodd-Frank Act in July 2010 and is an integral part of the FDIC’s comprehensive, long-range management plan for the DIF.

¡ We did not participate in the unlimited deposit insurance component of the Treasury’s Transaction Account Guarantee Program (“TAGP”). Although the TAGP expired on December 31, 2010, 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 took 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 and will be funded through general FDIC assessments, not special assessments.

¡ On December 29, 2010, the Dodd-Frank Act was amended to include full FDIC insurance on Interest on Lawyers Trust Accounts (“IOLTAs”). IOLTAs will receive unlimited insurance coverage as noninterest-bearing transaction accounts for two years ending December 31, 2012.

¡ On April 4, 2011, the FRB issued a Final Rule amending the Truth in Lending Act by increasing the threshold for exempt consumer credit transactions from $25,000 to $50,000, effective July 21, 2011.

¡ On April 19, 2011, the FRB issued a Notice of Proposed Rulemaking that would amend Regulation Z, *Truth in Lending*, to expand the scope of the ability-to-repay requirement to cover any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan). In addition, the proposal would establish standards for complying with the ability-to-repay requirement, including by making a “qualified mortgage.” The proposal also implements limits on prepayment penalties. Finally, the proposal would require creditors to retain evidence of compliance with this rule for three years after a loan is consummated.

¡ In June 2011, the Federal Reserve approved a final debit card interchange rule in accordance with the Dodd-Frank Act. The final rule caps an issuer’s base fee at $0.21 per transaction and allows an additional 5 basis point charge per transaction to help cover fraud losses. Though the rule technically does not apply to institutions with less than $10 billion in assets, such as the bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. The Federal Reserve also adopted requirements for issuers to include two unaffiliated networks for debt card transactions – one signature-based and one PIN-based. The effective date for the final rules on the pricing and routing restrictions is October 1, 2011. The results of these final rules may impact our interchange income from debit card transactions in the future.

¡ Under a provision of the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd–Frank Act”), insured depository institutions (“IDIs”) may pay interest on demand deposit accounts starting July 21, 2011. Under another section of the Dodd-Frank Act, the FDIC provides unlimited deposit insurance for noninterest-bearing transaction accounts through December 31, 2012. The Letter reminds IDIs that if on or after July 21, 2011, an IDI modifies the terms of a demand deposit account so that the account may pay interest, the IDI must notify affected customers that the account no longer will be eligible for unlimited deposit insurance coverage as a noninterest-bearing transaction account.

- 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 full implementation by January 2019. The U.S. federal banking agencies support this agreement. In December 2010, the Basel Committee issued the Basel III rules text, outlining the details and time-lines of global regulatory standards on bank capital adequacy and liquidity. According to the Basel Committee, the framework sets out higher and better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build-up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards.
- In November 2010, the Federal Reserve’s monetary policymaking committee, the Federal Open Market Committee (“FOMC”), decided that further support to the economy was needed. With short-term interest rates already nearing 0%, the FOMC agreed to deliver that support by committing to purchase additional longer-term securities, as it did in 2008 and 2009. The FOMC bought an additional $600 billion of longer-term U.S. Treasury securities through mid-2011 and may continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August 2010.
- The federal banking agencies (the “Agencies”) issued Interagency Appraisal and Evaluation Guidelines (the “Guidelines”) to provide further clarification of the Agencies’ appraisal regulations and supervisory guidance to institutions and examiners about prudent appraisal and evaluation programs. The Guidelines, including their appendices, update and replace existing supervisory guidance documents to reflect developments concerning appraisals and evaluations, as well as changes in appraisal standards and advancements in regulated institutions’ collateral valuation methods. In implementing the Dodd–Frank Act, the Agencies will determine whether future revisions to the Guidelines may be necessary. However, the Agencies are issuing the Guidelines to promote consistency in the application and enforcement of the Agencies’ current appraisal requirements and related supervisory guidance. The Agencies considered the Dodd–Frank Act and other federal statutory and regulatory changes affecting appraisals. The Guidelines are also responsive to the majority of public comments, which confirmed that additional clarification of existing regulatory and supervisory standards would strengthen the real estate collateral valuation and risk management practices across insured depository institutions.
- The Federal Housing Administration (“FHA”) has approved a waiver of the current audit requirements for FHA direct lenders under $500 million in assets. The audit requirement went into effect in January 2011 and began affecting lenders on March 31, 2011, following a 90-day grace period. The FHA will issue a mortgagee letter with the waiver’s details. It is

likely that banks with less than $500 million in assets will be able to submit Call Report data in lieu of an audit. The FHA is expected to require banks to comply with Department of Housing and Urban Development procedures, regardless of the audit waiver.

- On May 25, 2011, the SEC issued Release No. 34-64545, Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934. The Dodd–Frank Act established a whistleblower program that requires the SEC to pay an award, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action. The Dodd-Frank Act also prohibits retaliation by employers against individuals who provide the Commission with information about possible securities violations. The proposed rule specifically requires the SEC to pay awards, subject to certain limitations and conditions, to whistleblowers who voluntarily provide the SEC with original information about a violation of the securities laws that leads to the successful enforcement of an action brought by the SEC that results in monetary sanctions exceeding $1,000,000.

With respect to any other potential future government assistance programs, we will evaluate the merits of the programs, including the terms of the financing, our capital position, the cost to the Company of alternative capital, and our strategy for the use of additional capital, to determine whether it is prudent to participate. Regardless of our lack of participation, governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations.

### 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 June 30, 2011 and 2010

We incurred a net loss of $374,104, or .17 cents per share, for the three months ended June 30, 2011 compared to a net loss of $490,205, or .22 cents per share, for the three months ended June 30, 2010. Interest income was $760,623 and $531,542 for the three months ended June 30, 2011 and 2010, respectively. The increase in interest income is attributed to the larger loan portfolio maintained by the bank in 2011. Interest income for the three months ended June 30, 2011 was comprised of $506,235 earned on loans, $235,020 earned on investment securities, and $19,638 earned on fed funds sold and interest bearing bank deposits. Interest expense was $213,996 for the three months ended June 30, 2011, compared to $209,592 for the three months ended June 30, 2010. The small increase in interest expense is attributed to a larger deposit portfolio offset by a reduction in deposit rates. Our net interest spread and net interest margin were 2.48% and 2.79% respectively, for the three months ended June 30, 2011, compared to 1.58% and 2.07% respectively, for the three months ended June 30, 2010. The Company is achieving higher yields on earning assets due to loan growth, as lower yielding liquidity is redeployed into higher yielding loans. The Company is also achieving lower costs associated with deposit liabilities.

The loan loss provision, which is dependent on loan growth and non-performing loans, was $176,992 for the three months ended June 30, 2011, compared to $94,000 for the three months ended June 30, 2010. The increase in loan loss provision is attributed to higher loan growth experienced in 2011. Non-interest income was $147,176 for the three months ended June 30, 2011, of which $129,496 came from gains on the sale of investment securities. For the three months ended June 30, 2010, non-interest income was $125,681, of which $114,483 came from gains on the sale of investment securities. Non-interest expense was $890,915 and $843,836 for the three months ended June 30, 2011 and 2010, respectively. The increase in non-interest expense is primarily in salaries and benefits and data processing due to the growth of the Company, offset by decreases in professional services and occupancy and equipment expense.

#### Six months ended June 30, 2011 and 2010

We incurred a net loss of $1,165,473, or .53 cents per share, for the six months ended June 30, 2011 compared to a net loss of $1,200,477, or .55 cents per share, for the six months ended June 30, 2010. Interest income was $1,407,563 and $1,013,627 for the six months ended June 30, 2011 and 2010, respectively. The increase in interest income is attributed to the larger loan portfolio maintained by the bank in 2011. Interest income for the six months ended June 30, 2011 was comprised of $891,546 earned on loans, $456,929 earned on investment securities, and $59,058 earned on fed funds sold and interest bearing bank deposits. Interest expense was $426,747 for the six months ended June 30, 2011, compared to $430,230 for the six months ended June 30, 2010. The decrease in interest expense is attributed to a reduction in deposit rates. Our net interest spread and net interest margin were 2.28% and 2.61%, respectively, for the six months ended June 30, 2011, compared to 1.37% and 1.88% respectively, for the six months ended June 30, 2010. The Company is achieving higher yields on earning assets due to loan growth, as lower yielding liquidity is redeployed into higher yielding loans. The Company is also achieving lower costs associated with deposit liabilities.

The loan loss provision, which is dependent on loan growth and non-performing loans, was $495,423 for the six months ended June 30, 2011, compared to $322,457 for the six months ended June 30, 2010. The increase in loan loss provision is attributed to higher loan growth experienced in 2011. Non-interest income was $164,284 for the six months ended June 30, 2011, compared to $132,121 for the six months ended June 30, 2010. Non-interest expense was $1,815,150 and $1,589,182 for the six months ended June 30, 2011 and 2010, respectively. The increase in non-interest expense is in multiple categories, including salaries and benefits, data processing, marketing and business development, and FDIC insurance and regulatory assessments, and is due to the growth of the Company. The largest increases occurred in salaries and benefits and in marketing and business development and were the result of the addition of two lending positions and an underwriting position to support the strategic growth initiatives.

### Assets and Liabilities

#### General

Total assets as of June 30, 2011 were $84.1 million, representing an increase of $12.2 million, or 17%, compared to $71.9 million as of December 31, 2010. The increase in assets is due primarily to net loan growth of $17.6 million, which was funded primarily by deposit growth of $13.0 million. At June 30, 2011, total assets consisted principally of $13.9 million in cash and cash equivalents, including interest bearing deposits with other financial institutions, $28.6 million in available-for-sale investment securities and $40.4 million in net loans. Net loans at December 31, 2010 were $22.8 million. The primary source of funding is deposits that are acquired locally. Liabilities at June 30, 2011 totaled $70.2 million, represented almost entirely by retail customer deposits totaling $69.7 million. Liabilities as of December 31, 2010 totaled $57.1 million, including $56.7 million in deposits. At June 30, 2011, shareholders’ equity was $14.0 million, compared to $14.8 million as of December 31, 2010. The reason for the decrease in shareholders’ equity is net losses. Book value per share was $6.37 at June 30, 2011 compared to $6.76 as of December 31, 2010.

#### Loans

Loans typically provide higher interest yields than other types of interest-earning assets. Net loans have increased $17.6 million, or 77%, during the six months ended June 30, 2011, primarily in the category of Real Estate – Other. The following table summarizes the composition of our loan portfolio as of June 30, 2011 and December 31, 2010.

|  | June 30, 2011 | Percentage of Total | December 31 2010 | Percentage of Total |
| --- | ---: | ---: | ---: | ---: |
| Construction and land development | $7,479,687 | 18.06% | $5,528,181 | 23.72% |
| Real estate - residential mortgage | 8,585,179 | 20.73 | 5,631,112 | 24.17 |
| Real estate - other | 20,805,973 | 50.23 | 10,721,143 | 46.01 |
| Commercial and industrial | 4,207,559 | 10.16 | 1,090,301 | 4.68 |
| Consumer and other | 339,540 | 0.82 | 329,949 | 1.42 |
| Gross loans | 41,417,938 | 100.00% | 23,300,686 | 100.00% |
| Allowance for loan losses | (928,173) | — | (432,750) | — |
| Deferred loan fees, net | (136,801) | — | (73,850) | — |
| **Total loans, net** | **$40,352,964** | **—** | **$22,794,086** | **—** |

#### Classified Loans

Classified loans are performing loans with elevated levels of credit risk. These loans are assigned credit risk grades of substandard or worse. The Bank’s classified loans increased during the first six months of 2011 from $651,686 as of December 31, 2010 to $2,163,979 as of June 30, 2011, primarily due to the downgrade of one loan relationship.

#### Nonperforming Loans

At June 30, 2011, nonaccrual loans totaled $243,528, related to three lending relationships, compared to $137,277 nonaccrual loans as of December 31, 2010. There were no accruing loans which were contractually past due 90 days or more as to principal or interest payments at June 30, 2011 and December 31, 2010. 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.

As of June 30, 2011, 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

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. Additions to the allowance are often the result of growth in the loan portfolio. Additionally, our judgment as to the adequacy of the allowance for loan losses is based on an ongoing review of the quality, mix, and size of our overall loan portfolio. We make a number of assumptions regarding current portfolio and economic conditions. We consider our historical loan loss experience, the loan loss experience of our peers, and any specific problem loans and commitments that may affect the borrower’s ability to pay. We believe the assumptions we have made to be reasonable, but which may or may not prove to be accurate.

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.

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 $928,173 as of June 30, 2011, or 2.24% of gross loans outstanding, compared to $432,750 as of December 31, 2010, or 1.86% of gross loans outstanding. Total provision expense for the six months ended June 30, 2011 was $495,423, compared to $322,457 for the six months ended June 30, 2010. The increase in provision during 2011 was primarily due to growth in the loan portfolio and additional provision needed for classified and nonperforming loan relationships.

There were no charge offs or recoveries during the first six months of 2011.

Management considers the allowance for loan losses as of June 30, 2011 to be adequate and sufficient.

#### Deposits

Our primary source of funds for loans and investments is the funds obtained through our customer deposits. At June 30, 2011, we had $69.7 million in deposits, representing an increase of $13 million compared from December 31, 2010. The deposits as of June 30, 2011 consisted primarily of $7.3 million in demand deposit accounts, $25.3 million in certificates of deposit, and $37 million of savings and money market accounts. The primary source of funding for our loan portfolio is deposits that are acquired locally. As of June 30, 2011, 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 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 or borrow advances from the Federal Home Loan Bank Atlanta. As of June 30, 2011, our primary sources of liquidity included interest-bearing deposits and federal funds sold with financial institutions totaling $13.9 million. The fair value of our available for sale investment portfolio was $28.6 million as of June 30, 2011. Our lines of credit available with correspondent banks total $8.0 million with no outstanding principal or interest on these lines at June 30, 2011 and are unsecured. These lines may be withdrawn at the discretion of the correspondent financial institutions. Our credit availability at the Federal Home Loan Bank is $7.1 million and requires collateralization by eligible investment securities or loans. 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 June 30, 2011, we had issued commitments to extend credit of $7.7 million through various types of lending arrangements, compared to $4.3 million as of December 31, 2010. 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 $14.8 million at December 31, 2010 to $14 million at June 30, 2011. The decrease is primarily a result of net loss of $1.2 for the six months ended June 30, 2011 offset by after tax deferred gains in the investment portfolio that increased $311,633 during the six month period.

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%.

In approving the bank’s application for deposit insurance, the FDIC required that the bank maintain a leverage ratio of at least 8% during the bank’s “de novo” period. In addition, the business plan submitted as part of our application with the OCC to obtain a national bank charter calls for the Bank to maintain a Tier 1 risked-based capital ratio of at least 8% and a total risk-based capital ratio of 12% during the Bank’s “de novo” period.”

The bank exceeded its minimum regulatory capital ratios as of June 30, 2011 and December 31, 2010, as well as the ratios to be considered “well capitalized.”

The following table sets forth the bank’s various capital ratios at June 30, 2011 and December 31, 2010:

*(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% |
| Actual Ratios at June 30, 2011 |  |  |  |
| Coastal Carolina National Bank | 16.78% | 29.43% | 30.69% |
| Consolidated | 17.65% | 31.31% | 32.57% |
| Actual Ratios at December 31, 2010 |  |  |  |
| Coastal Carolina National Bank | 20.34% | 51.23% | 52.49% |
| Consolidated | 21.33% | 54.38% | 55.64% |

We believe our capital is sufficient to fund the activities of the bank for a modest period of time as the Company grows. As of June 30, 2011, there were no significant firm commitments outstanding for capital expenditures.

## Controls and procedures

As filed, 1,065 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 June 30, 2011. There have been no significant changes in our internal controls over financial reporting during the six months ended June 30, 2011 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 Aug 15, 2011.
Source: SEC EDGAR, the filing index for accession 0001193125-11-222871. Last ingested by Listed: Oct 24, 2026, 15:08 ET. No prices; not investment advice.