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EX-32 - EX-32 - Coastal Carolina Bancshares, Inc.a09-31186_1ex32.htm
EX-31.2 - EX-31.2 - Coastal Carolina Bancshares, Inc.a09-31186_1ex31d2.htm
EX-31.1 - EX-31.1 - Coastal Carolina Bancshares, Inc.a09-31186_1ex31d1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the Quarterly Period Ended September 30, 2009

 

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 number 333-152331

 

COASTAL CAROLINA BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

South Carolina

 

33-1206107

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

2305 Oak Street

Myrtle Beach , South Carolina 29577

(Address of principal executive offices, including zip code)

 

(843) 839-1953

(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 Securities 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.  x YES  o NO

 

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 o 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 the definitions 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 filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x  NO

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,180,000 shares of common stock, par value $0.01 per share, were outstanding as of November 16, 2009.

 

 

 



 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Balance Sheets

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

1,534,807

 

$

 

Federal funds sold

 

394,178

 

 

Interest-bearing bank deposits

 

30,085,008

 

 

Restricted cash - stock subscriptions held in escrow

 

 

2,371,528

 

Securities available for sale, at fair value

 

10,569,320

 

 

Federal Reserve Bank stock

 

525,250

 

 

Portfolio loans, net

 

4,555,236

 

 

Deferred stock issuance costs

 

 

337,476

 

Premises and equipment, net

 

460,520

 

448,458

 

Other assets

 

250,669

 

51,667

 

Total assets

 

$

48,374,988

 

$

3,209,129

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity (Deficit)

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing demand

 

$

801,430

 

$

 

Interest checking

 

1,451,467

 

 

Money market

 

14,010,439

 

 

Savings

 

45,776

 

 

Certificates of deposit

 

14,152,883

 

 

Total deposits

 

30,461,995

 

 

Stock subscriptions received

 

 

2,365,000

 

Line of credit

 

 

1,622,770

 

Advances from organizers and founders

 

 

620,000

 

Accrued expenses and other liabilities

 

291,406

 

152,448

 

Total liabilities

 

30,753,401

 

4,760,218

 

 

 

 

 

 

 

Shareholders’ Equity (Deficit)

 

 

 

 

 

Common stock, $.01 par value, 50,000,000 shares authorized, 2,180,000 issued and outstanding at September 30, 2009

 

21,800

 

 

Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding

 

 

 

Paid-in capital

 

21,520,893

 

 

Retained deficit

 

(3,945,984

)

(1,551,089

)

Accumulated other comprehensive income

 

24,878

 

 

Total shareholders’ equity (deficit)

 

17,621,587

 

(1,551,089

)

Total liabilities and shareholders’ equity

 

$

48,374,988

 

$

3,209,129

 

 

See notes to the consolidated financial statements.

 

2



 

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Operations

(Unaudited)

 

 

 

Three

 

Nine

 

June 20, 2007

 

 

 

Months

 

Months

 

(Inception)

 

 

 

Ended

 

Ended

 

through

 

 

 

September 30, 2009

 

Interest income

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Consumer

 

$

888

 

$

899

 

$

899

 

Commercial

 

27,577

 

27,870

 

27,870

 

Mortgage

 

2,149

 

2,149

 

2,149

 

Construction

 

16,116

 

16,116

 

16,116

 

Stock subscriptions held in escrow

 

 

78,246

 

85,412

 

Federal funds sold and interest-bearing bank deposits

 

73,763

 

86,791

 

86,791

 

Securities

 

34,958

 

34,958

 

34,958

 

Federal Reserve Bank stock dividend

 

8,730

 

10,923

 

10,923

 

Total interest income

 

164,181

 

257,952

 

265,118

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Interest checking

 

2,264

 

2,643

 

2,643

 

Money market

 

64,746

 

71,554

 

71,554

 

Savings

 

90

 

95

 

95

 

Certificates of deposits < $100,000

 

25,367

 

28,818

 

28,818

 

Certificates deposits ³ $100,000

 

55,035

 

62,871

 

62,871

 

Lines of credit

 

 

42,337

 

62,455

 

Total interest expense

 

147,502

 

208,318

 

228,436

 

Net interest income before provision for loan losses

 

16,679

 

49,634

 

36,682

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

60,511

 

62,276

 

62,276

 

Net interest expense after provision for loan losses

 

(43,832

)

(12,642

)

(25,594

)

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

Deposits service charges

 

429

 

429

 

429

 

Leasehold improvement allowance

 

 

12,500

 

25,000

 

Other

 

996

 

996

 

996

 

Total noninterest income

 

1,425

 

13,925

 

26,425

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

Salaries and employee benefits

 

490,535

 

1,295,133

 

2,039,472

 

Office occupancy and equipment

 

66,769

 

183,695

 

406,899

 

Depreciation and amortization

 

35,315

 

107,898

 

170,514

 

Data processing

 

55,627

 

87,800

 

89,794

 

Professional services

 

75,867

 

117,973

 

440,505

 

Marketing and business development

 

41,415

 

82,562

 

144,509

 

Corporate insurance

 

8,257

 

27,974

 

54,137

 

Other

 

37,719

 

109,694

 

217,536

 

Total noninterest expense

 

811,504

 

2,012,729

 

3,563,366

 

 

 

 

 

 

 

 

 

Net loss

 

$

(853,911

)

$

(2,011,446

)

$

(3,562,535

)

 

 

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

 

 

Basic loss per share

 

$

(0.39

)

$

(0.92

)

$

(1.63

)

 

See notes to the consolidated financial statements.

 

3



 

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Shareholders’ Equity and Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Shareholders’

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Income

 

Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 20, 2007

 

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-opening net loss for 2007

 

 

 

 

(171,881

)

 

(171,881

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-opening net loss for 2008

 

 

 

 

(1,379,208

)

 

(1,379,208

)

December 31, 2008

 

 

 

 

(1,551,089

)

 

(1,551,089

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-opening net loss for 2009

 

 

 

 

(770,450

)

 

(770,450

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-opening net loss

 

 

 

 

(1,240,997

)

 

(1,240,997

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains on securities available for sale

 

 

 

 

 

24,878

 

24,878

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(1,986,569

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

2,180,000

 

21,800

 

21,778,200

 

 

 

21,800,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct stock issuance costs

 

 

 

(836,488

)

 

 

(836,488

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Organizer/founder warrants

 

 

 

536,758

 

(383,448

)

 

153,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

42,423

 

 

 

42,423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

2,180,000

 

$

21,800

 

$

21,520,893

 

$

(3,945,984

)

$

24,878

 

$

17,621,587

 

 

See notes to the consolidated financial statements.

 

4



 

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Cash Flows

 

 

 

Three

 

Nine

 

 

 

Months Ended

 

 

 

September 30, 2009

 

Operating activities

 

 

 

 

 

Net loss

 

$

(853,911

)

$

(2,011,446

)

Adjustments to reconcile net loss to net cash used by operating activities:

 

 

 

 

 

Provision for loan losses

 

60,511

 

62,276

 

Premium amortization on securities

 

6,033

 

6,033

 

Depreciation and amortization expense

 

35,315

 

107,898

 

Stock-based compensation expense

 

36,981

 

195,733

 

Increase in accrued interest receivable

 

(91,517

)

(93,040

)

Increase in accrued interest payable

 

14,938

 

33,026

 

Decrease in deferred stock issuance costs

 

 

337,476

 

Increase in other assets

 

(61,063

)

(105,962

)

Increase in other liabilities

 

40,810

 

105,931

 

Net cash used in operating activities

 

(811,903

)

(1,362,075

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Net change in loans

 

(4,476,297

)

(4,617,512

)

Redemption (purchase) of Federal Reserve Bank stock

 

72,950

 

(525,250

)

Purchases of securities available for sale

 

(10,599,071

)

(10,599,071

)

Proceeds from paydowns of securities available for sale

 

48,596

 

48,596

 

Net purchases of premises and equipment

 

(73,180

)

(119,960

)

Net cash used in investing activities

 

(15,027,002

)

(15,813,197

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Net increase in demand deposits, interest-bearing transaction accounts and savings accounts

 

8,077,342

 

16,309,112

 

Net increase in certificates of deposit

 

5,361,992

 

14,152,883

 

Net decrease in stock subscriptions held in escrow

 

 

(2,365,000

)

Net decrease in organizer advances

 

 

(620,000

)

Net decrease in other borrowings

 

 

(1,622,770

)

Proceeds from issuance of common stock, net of offering costs

 

 

20,963,512

 

Net cash provided by financing activities

 

13,439,334

 

46,817,737

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(2,399,571

)

29,642,465

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

34,413,564

 

2,371,528

 

Cash and cash equivalents, end of period

 

$

32,013,993

 

$

32,013,993

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

132,564

 

$

175,292

 

Non-cash items:

 

 

 

 

 

Unrealized gains on securities available for sale

 

24,878

 

 

 

See notes to the consolidated financial statements.

 

5



 

COASTAL CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

 

Notes to Financial Statements

 

Note 1 — Organization and Summary of Significant Accounting Policies

 

Organization — Coastal Carolina Dream Team, LLC (the LLC) was formed on June 20, 2007, to explore the possibility of establishing a new bank in the Myrtle Beach, South Carolina area. On February 22, 2008, the LLC’s members (Organizers) filed applications with the Office of the Comptroller of the Currency (the OCC) to obtain a national bank charter for a proposed new bank (the Bank) and with the Federal Deposit Insurance Corporation (the FDIC) to obtain insurance for the Bank’s deposits. On February 28, 2008, Coastal Carolina Bancshares, Inc. (the Company) was incorporated to act as the holding company for the Bank and on April 10, 2008, the LLC merged with and into the Company (the Merger). As a result of the Merger, all the assets and liabilities of the LLC became assets and liabilities of the Company.

 

The Bank received preliminary conditional approval from the OCC on June 20, 2008 and received conditional approval from the FDIC on October 1, 2008. Having received those approvals from the OCC and the FDIC, the Company filed an application with the Board of Governors of the Federal Reserve System (the Federal Reserve) to become a bank holding company and acquire all of the stock of the Bank upon its formation, and the Company received that approval on November 21, 2008.

 

In order to capitalize the Bank, the Company conducted a stock offering and raised $21.8 million selling 2,180,000 shares of its common stock at $10 per share. Of the total shares sold, the organizers, directors and executive officers of the Company purchased 891,525 shares of common stock at $10 per share in the offering. Upon receipt of all final regulatory approvals, the Company capitalized the Bank through the purchase of 1,994,000 shares at $10.00 per share, or $19,940,000, on June 5, 2009, and the Bank began banking operations on June 8, 2009.

 

Until June 8, 2009, the Company had been a development stage enterprise, as it had devoted substantially all its efforts to establishing a new business. As of June 8, 2009, the planned principal operations commenced.

 

In recognition of financial risks undertaken by the Organizers and one non-organizer founder and, in the case of Organizers who serve as directors of the Company or the Bank or both, to encourage the continued involvement with the Company and the Bank by such persons, warrants to purchase additional shares of the Company’s common stock were issued to these individuals, effective June 8, 2009. The warrants have an exercise price equal to $10 per share and were issued as Type I (Director) or Type II (Organizer/Founder) warrants. Type I warrants were awarded only to individuals who serve as directors of the Company or the Bank and vest over three years. Type II warrants were awarded in recognition of the financial risks undertaken by Organizers and one non-organizer founder and by the Organizers guaranteeing certain liabilities of the Company and vested immediately.

 

Basis of Presentation — The accompanying financial statements have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

 

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.

 

6



 

Organizational and Pre-Opening Costs — Activities since inception have principally consisted of organizational activities necessary to obtain regulatory approvals and preparation activities necessary to commence business as a commercial bank. Organizational costs are primarily legal and consulting fees related to the incorporation and organization of the Company and the Bank. Pre-opening costs are primarily employees’ salaries and benefits, and other operational expenses related to preparation for the Bank’s opening. The organizational and pre-opening costs of $2,321,539 were expensed against the Company’s consolidated initial period operating results.

 

Offering Expenses — Offering expenses, consisting principally of direct incremental costs of the stock offering, were deducted from the proceeds of the offering. Such offering expenses were classified as deferred stock issuance costs until the close of the stock offering. The Company’s offering expenses were $836,488, and were deducted from the proceeds of the offering, including sales agent commissions and related out-of-pocket costs of $515,676.

 

Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation.  Depreciation and amortization of premises and equipment are computed using the straight-line method over the assets’ estimated useful lives.  Useful lives range from three to ten years for software, furniture and equipment, computer equipment, and automobile, and over the shorter of the estimated useful lives or the term of the lease for leasehold improvements.

 

Stock-based Compensation — The Company accounts for stock-based compensation to employees as outlined in FASB Statement 123(R), Share-Based Payment (FASB ASC 718).  The cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award.  A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used to estimate the fair value of restricted stock.  Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and the restriction period for restricted stock awards.  For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

Provision for Loan Losses — The allowance for loan losses represents the Company’s recognition of the risks of extending credit and its evaluation of the loan portfolio. The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses based on management’s assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions, historical loss experience, evaluation of the quality of the underlying collateral, and holding and disposal costs. The allowance for loan losses is increased by provisions charged to expense and reduced by loans charged off, net of recoveries.  Loan losses are charged against the allowance for loan losses when management believes the loan balance is uncollectible.

 

Being the Bank began operations in June 2009 and has limited operating history and relatively few loans as of this reporting date, the Company has not yet formalized the process for determining an adequate allowance for loan losses.  Going forward, the Company expects the allowance for loan losses calculation process will have two components.  The first component represents the allowance for loan losses for impaired loans, computed in accordance with FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (SBASC 310-10-35) (SFAS 114 Component), as amended by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures, an amendment of FASB Statement No. 114 (FASB ASC 310-40-35).  To determine the SFAS 114 Component, collateral dependent impaired loans will be evaluated using internal analyses as well as third-party information, such as appraisals.  If an impaired loan is unsecured, it will be evaluated using a discounted cash flow of the payments expected over the life of the loan using the loan’s effective interest rate and giving consideration to currently existing factors that would impact the amount or timing of the cash flows.  The second component is the allowance for loan losses calculated under FASB Statement No. 5, Accounting for Contingencies (SBASC 450-20) (SFAS 5 Component), and will represent the estimated probable losses inherent within the portfolio due to uncertainties in economic conditions, delays in obtaining information about a borrower’s financial condition, delinquent loans that have not been determined to be impaired, trends in speculative construction real estate lending, results of internal and external loan reviews, and other factors.  This component of the allowance for loan losses will be calculated by assigning a certain risk weighting, within a predetermined range, to each identified risk factor.  The recorded allowance for loan losses will be the aggregate of the SFAS 114 Component and SFAS 5 Component.

 

Income Taxes — The Company is a corporation. Pre-opening expenses incurred will be capitalized and amortized in the income tax returns of the Company and the Bank following the commencement of operations. Deferred tax assets and liabilities will be recognized for the future tax consequences attributable to differences between the

 

7



 

financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities will be measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized in income in the period that includes the enactment date.

 

If the future tax consequences of differences between the financial reporting bases and the tax bases of the assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by any such asset is required. A valuation allowance is provided for the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management will consider the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

 

Note 2 — Cash and Cash Equivalents

 

As of September 30, 2009, cash and due from banks of $1,534,807 is represented by cash on hand and noninterest-bearing deposits with other banks.  Interest-bearing deposits in other banks were $30.1 million at September 30, 2009.  Additionally, as of September 30, 2009, the Bank had $394,178 in federal funds sold.  Interest-bearing bank deposits and federal funds sold allow the Bank to meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested.

 

As of December 31, 2008, the restricted cash balance was $2,371,528, represented by $2,365,000 of stock subscriptions received and $6,528 of interest earned.

 

Payments on subscriptions received during the offering period were held on deposit with an independent escrow agent.  The Company earned interest on these funds at a variable rate.  Subscriptions could not be revoked once they were received by the Company. The escrow agent held these funds, and no shares were issued, until:

 

·                  subscriptions and payment in full for a minimum of 2,100,000 shares at $10.00 per share were accepted;

·                  final approval was  received from the OCC to grant the proposed bank a national bank charter;

·                  final approval was received from the FDIC for deposit insurance; and

·                  final approval was received from the Federal Reserve to acquire the stock of Coastal Carolina National Bank.

 

If the Company had failed to meet the conditions by the close of the offering period, subscriptions would have been refunded in full, without interest, except as prescribed by law in North Carolina.

 

All funds were released June 5, 2009, upon the Company meeting its minimal capital raise requirements and receiving the appropriate regulatory approvals.

 

Note 3 - Securities

 

At September 30, 2009, the Bank’s securities consisted of U.S. government agency obligations and mortgage-backed securities, summarized as follows:

 

 

 

September 30, 2009

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government agency obligations

 

$

2,077,783

 

$

 

$

(12,783

)

$

2,065,000

 

Mortgage-backed securities

 

8,466,659

 

41,285

 

(3,624

)

8,504,320

 

Total securities

 

$

10,544,442

 

$

41,285

 

$

(16,407

)

$

10,569,320

 

 

The contractual maturity distribution and yields of the Bank’s securities portfolio at September 30, 2009 are summarized below. Actual maturities may differ from contractual maturities shown below since borrower may have the right to pre-pay these obligations without pre-payment penalties.

 

8



 

 

 

Due in 1 Year

 

Due after 1

 

Due after 5

 

 

 

 

 

 

 

or Less

 

through 5 Years

 

through 10 Years

 

Total

 

 

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Fair value of securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency obligations

 

$

 

 

$

1,025,625

 

2.05

%

$

1,039,375

 

2.16

%

$

2,065,000

 

2.11

%

Mortgage-backed securities

 

 

 

5,443,636

 

3.58

 

3,060,684

 

3.70

 

8,504,320

 

3.62

 

Total

 

$

 

 

 

$

6,469,261

 

3.34

%

$

4,100,059

 

3.31

%

$

10,569,320

 

3.32

%

Amortized cost of securities available for sale

 

$

 

 

 

$

6,452,482

 

 

 

$

4,091,960

 

 

 

$

10,544,442

 

 

 

 

At September 30, 2009 the Bank also owned Federal Reserve Bank stock with a cost of $525,250 and a weighted-average yield of 6%.

 

Note 4 - Loans

 

Loans consist of the following:

 

 

 

September 30,
2009

 

December 31,
2008

 

Construction and land development

 

$

2,313,786

 

$

 

Real estate - mortgage

 

331,401

 

 

Real estate – other

 

1,222,702

 

 

 

Commercial and industrial

 

690,240

 

 

Consumer and other

 

87,576

 

 

Gross loans

 

4,645,705

 

 

Allowance for loan losses

 

(62,276

)

 

Deferred loan fees, net

 

(28,193

)

 

Total loans, net

 

$

4,555,236

 

$

 

 

In the ordinary course of business, the Company had outstanding loans of $181,100 from directors, executive officers and principal shareholders (holders of more than five percent of the outstanding common shares) of the Company at September 30, 2009.

 

Note 5 — Premises and Equipment

 

Premises and equipment consist of the following:

 

 

 

September 30,
2009

 

December 31,
2008

 

Furniture, fixtures, and equipment

 

$

358,808

 

$

343,553

 

Computer software

 

163,487

 

65,326

 

Leasehold improvements

 

114,923

 

102,195

 

Total premises and equipment

 

637,218

 

511,074

 

Less accumulated depreciation and amortization

 

176,698

 

62,616

 

Premises and equipment, net

 

$

460,520

 

$

448,458

 

 

Depreciation and amortization expense for the three and nine months ended September 30, 2009 was $35,315 and $107,898, respectively.  Depreciation and amortization expense for the period June 20, 2007, through September 30, 2009 was $170,514.

 

9



 

On November 1, 2007, the Company entered into a lease for a banking facility in Myrtle Beach, South Carolina. The term of the lease is for three years with four one-year renewal options. Rent increases three percent each renewal period. Rental expense for the three and nine months ended September 30, 2009 was $40,163 and $120,488, respectively. Rental expense for the period June 20, 2007 (Inception) to September 30, 2009, was $267,753.

 

The lease was amended on February 12, 2008, making rent for the initial lease term $6,694 per month through April 30, 2008, and increasing to $13,388 per month beginning May 1, 2008. Total aggregate payments due under the lease during the initial term are $441,788. Future minimum lease payments under the lease are as follows: $40,163 in 2009 and $133,875 in 2010.

 

Note 6 - Deposits

 

Deposits are summarized as follows:

 

 

 

September 30,
2009

 

Percentage
of Total

 

December 31,
2008

 

Noninterest bearing demand

 

$

801,430

 

2

%

$

 

Interest-bearing demand

 

1,451,467

 

5

 

 

Money market accounts

 

14,010,439

 

46

 

 

Savings

 

45,776

 

 

 

Certificates of deposits < $100,000

 

4,513,170

 

15

 

 

Certificates deposits ³ $100,000

 

9,639,713

 

32

 

 

Total deposits

 

$

30,461,995

 

100

%

$

 

 

Note 7 — Advances from Organizers and Founders

 

There were 21 members of the LLC. The Organizers and founders advanced $620,000 to the LLC to fund pre-opening and organizational expenses. On April 10, 2008, the LLC merged into the Company. As a result of the Merger, the Organizers and founders were entitled to receive reimbursement of their advances upon the successful completion of the stock offering, unless they elected to apply their advances to purchase shares of the Company’s common stock.  These advances were non-interest bearing.  The majority of the Organizers elected to apply their advances to purchase shares of the Company’s common stock.  The remaining Organizer advances were repaid in June 2009, following the completion of the initial public offering and capitalization of the Bank.

 

Note 8 — Lines of Credit

 

On April 1, 2008, the Company established a $2 million line of credit with a bank to fund operating expenses during the development stage.  On January 29, 2009, the Company established an additional $1 million line of credit to fund continued operating expenses during the organization of the Company and its proposed banking subsidiary, the Bank. On April 1, 2009, the Company renewed the terms of its $2 million line of credit.  Both lines were uncollateralized and had a limited guaranty by the 21 Organizers. The lines bore a variable rate of interest at the three-month LIBOR rate plus a margin of 1.65 percent, with a floor of 5.50 percent, and each had a maturity date of July 29, 2009. Interest was due on a monthly basis and the unpaid principal balance was due at maturity.

 

As of December 31, 2008, the principal balance outstanding under the line of credit was $1.6 million.  Both lines of credit were repaid when subscription funds were released from escrow on June 5, 2009.

 

No interest expense on the lines of credit was incurred during the three months ended September 30, 2009. Interest expense on the lines of credit incurred for the nine months ended September 30, 2009, was $42,337.  For the period June 20, 2007, date of inception, to September 30, 2009, interest expense on both lines of credit totaled $62,455.

 

Note 9 - Common Stock Offering

 

The Company closed the initial offering for 2,180,000 shares of its common stock at an offering price of $10 per share, or $21.8 million, on June 2, 2009.  Direct offering costs of $836,488, including sales agent commission and expenses of $515,676, were incurred to raise the Company’s initial capital and have been offset against the initial

 

10



 

proceeds of the capital raise to yield a net opening capital of $21.0 million.

 

The offering was not underwritten.  Subject to compliance with applicable federal and state securities laws, the offering was made on a best efforts basis through the Company’s Organizers, executive officers and directors, who did not receive any commission or other compensation in connection with these activities.

 

Note 10 — Shareholders’ Equity

 

The Company has the authority to issue up to 50 million shares of common stock with a par value of $.01 per share.  As of September 30, 2009, 2,180,000 common shares were issued and outstanding.  In addition, the Company has the authority to issue up to 10 million shares of preferred stock with a par value $.01 per share.  As of September 30, 2009, no preferred shares were issued and outstanding.

 

Note 11 - Stock-based Compensation

 

The Company’s 2009 Stock Incentive Plan (the Plan) was approved by the Company’s Board of Directors (the Board) on June 3, 2009.  Under the terms of the Plan, officers and key employees may be granted both nonqualified and incentive stock options and restricted stock. The Board reserved 161,778 shares of common stock for issuance under the stock incentive plan.  The Plan provides for options to purchase shares of common stock at a price not less than 100% of the fair market value of the stock on the date of grant.  Stock options of 121,940 shares were granted on June 8, 2009, with an exercise price of $10.00 per share, the initial offering price, vest ratably at 20% per year, and expire on June 8, 2019. The Plan provides for accelerated vesting if there is a change of control, as defined in the Plan.  The Company recognized stock-based compensation cost related to stock options of $28,692 and $38,256 for the three and nine months ended September 30, 2009, respectively. No tax benefit related to stock-based compensation will be recognized until the Company is profitable.

 

The fair value of each option grant was estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following assumptions presented below:

 

Grant date

 

June 8, 2009

 

Total number of options granted

 

121,940

 

Expected volatility

 

7.40

%

Expected term

 

7 years

 

Expected dividend

 

0.00

%

Risk-free rate

 

3.60

%

Grant date fair value

 

$

2.29

 

 

Since the Bank has no historical stock activity, the expected volatility is based on the historical volatility of similar banks that have a longer trading history. The expected term represents the estimated average period of time that the options will remain outstanding. Since the Bank does not have sufficient historical data on the exercise of stock options, the expected term is based on the “simplified” method that measures the expected term as the average of the vesting period and the contractual term. The risk-free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds with the same expected term as the options.

 

No options were exercised, vested or forfeited during the three or nine months ended September 30, 2009.  As of September 30, 2009, there was $213,062 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted-average period of 1.45 years. There is no intrinsic value in these stock options as of September 30, 2009, as the exercise price equals the last traded price of the Company’s common stock.

 

11



 

Note 12 - Warrants

 

The Company funded organizational, pre-opening expenses and direct offering costs totaling $3.2 million from direct cash advances made by its Organizers of $620,000 and from draws of $2.6 million made under $3.0 million in lines of credit with a bank.  Each Organizer and one non-organizer/founder provided a limited guarantee on amounts drawn under the lines of credit.  Accordingly, in recognition of the substantial financial risks undertaken by the members of the organizing group, the Company granted an aggregate of 255,992 warrants to its Organizers and one non-organizer/founder. These warrants will be exercisable at a price of $10.00 per share, the initial offering price, and may be exercised any time prior to June 8, 2019.

 

 

 

Warrants Outstanding and Exercisable

 

Type

 

Exercise
Price

 

Number

 

Weighted
Average
Remaining
Contractual
Life (in years)

 

Weighted
Average
Exercise
Price

 

Organizer/founder warrants

 

$

10.00

 

231,992

 

9.7

 

$

10.00

 

Director warrants

 

$

10.00

 

24,000

 

9.7

 

$

10.00

 

 

The fair value of each warrant grant was estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following assumptions presented below:

 

 

 

Organizer/Founder and
Director Warrants

 

Grant date

 

June 8, 2009

 

Total number of warrants granted

 

255,992

 

Expected volatility

 

7.4

%

Expected term

 

10 years

 

Expected dividend

 

0.00

%

Risk-free rate

 

3.60

%

Grant date fair value

 

$

2.29

 

 

12



 

Since the Bank has no historical stock activity, the expected volatility is based on the historical volatility of similar banks that have a longer trading history. The expected term represents the estimated average period of time that the warrants will remain outstanding. The risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds with the same expected term as the warrants.

 

Organizer warrants totaling 231,992 were immediately vested upon issuance. Of the 231,992 organizer/founder warrants, 65,547 were treated as compensatory with the fair market value of $147,814 charged to earnings. The remaining 167,445 organizer/founder warrants were investment warrants with the fair market value of $383,448, and were treated as a component of shareholders’ equity. The 24,000 director warrants vest over three years. The Company recognized expense of $4,122 and $5,496 during the three and nine months ended September 30, 2009, respectively, related to these director warrants.

 

Note 13 — Employment Contracts

 

The Company has entered into employment contracts with its Executive Officers. The Chief Executive Officer has a contract for three years beginning in May 2008 and the Chief Financial Officer has a one-year contract, which is renewable annually. Both are entitled to certain additional benefits, including stock options, health insurance, and paid vacation.

 

Note 14 — Related Party Transactions

 

The Company has entered into a lease agreement, as described in Note 5, to lease a building from a company in which one of the Organizers serves on the board of directors.

 

The Company has engaged a law firm for legal services associated with assistance with the formation of the Company and the Bank. One of the Organizers is a shareholder with that firm. The Company incurred legal fees of $5,870 and $43,106 for services rendered by the firm for the three and nine months ended September 30, 2009. The Company incurred legal fees of $215,982 for the period June 20, 2007 (Inception) to September 30, 2009, of which $87,330 were direct offering costs, and thus, charged directly to capital. The Company anticipates paying additional fees to that firm during the remainder of 2009.

 

During the period June 20, 2007 (Inception) to December 31, 2008, the Company paid $24,000 in consulting fees to a company in which one of the Organizers is the president. Such company has not performed any services for the Company during 2009, and it is not anticipated that it will perform any such services in the future.

 

A public relations firm has been retained to provide marketing and public relations services for the Bank. A principal in the public relations firm is one of the Organizers. The Company incurred marketing and public relations fees of $30,223 and $72,167 for services rendered by the firm for the three and nine months ended September 30, 2009, respectively. Of the $165,064 in marketing and public relations fees paid to the firm since inception through September 30, 2009, $46,804 were direct offering costs, and thus, charged directly to capital. The Company anticipates paying additional sums to that firm during 2009.

 

The Company engaged a design firm to provide interior design services, including the costs of decorative furnishings, for the initial Bank office. The president of the design firm is the spouse of one of the Organizers. The Company had paid and capitalized, as premises and equipment and leasehold improvements, $148,548 through December 31, 2008. The Company does not currently anticipate paying any significant additional amounts to that firm during 2009.

 

Note 15 — Commitments and Contingencies

 

At September 30, 2009, we had issued commitments to extend credit of $1,079,446 through various types of lending arrangements.

 

Note 16 — Fair Value Measurements

 

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.  Fair value estimates are made

 

13



 

at a specific point in time based on relevant market information and information about the financial instruments.  Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

 

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

 

Cash and Due from Banks - The carrying amount is a reasonable estimate of fair value.

 

Interest-bearing Deposits with Other Banks — Due to the short-term and liquid nature of these deposits, the carrying amount is a reasonable estimate of fair value.

 

Restricted Cash — Stock Subscriptions Held in Escrow — The carrying amount is a reasonable estimate of fair value.

 

Federal Funds Sold — The carrying amount is a reasonable estimate of fair value.

 

Federal Reserve Bank Stock — The carrying value of nonmarketable equity securities approximates the fair value since no ready market exists for the stock.

 

Loans Receivable - 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.  Due to the short-term maturities of these certificates, the carrying amount of the certificates of deposit is considered a reasonable estimate of fair value at September 30, 2009.

 

Lines of Credit — Due to their short-term nature, the fair value of the line of credit at December 31, 2008, approximated its carrying amount.

 

Off-Balance-Sheet Financial Instruments - The carrying amount for loan commitments and standby letters of credit, which are off-balance-sheet financial instruments, approximates the fair value since the obligations are typically based on current market rates.

 

The Company has used management’s best estimate of fair value based on the above assumptions.  Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument.  In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented.

 

14



 

The estimated fair values of the Company’s financial instruments at September 30, 2009 and December 31, 2008, are as follows:

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

1,534,807

 

$

1,534,807

 

$

 —

 

$

 —

 

Federal funds sold

 

394,178

 

394,178

 

 

 

 

 

Interest-bearing deposits with other banks

 

30,085,008

 

30,085,008

 

 

 

Restricted cash – stock subscriptions

 

 

 

2,371,528

 

2,371,528

 

Federal Reserve Bank stock

 

525,250

 

525,250

 

 

 

Loans receivable

 

4,555,236

 

4,555,236

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Demand deposits, interest-bearing transaction and savings accounts

 

16,309,112

 

16,309,112

 

 

 

Certificates of deposits

 

14,152,883

 

14,152,883

 

 

 

Line of credit

 

 

 

1,622,770

 

1,622,770

 

 

 

 

Notional

 

Fair

 

Notional

 

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

Commitments to extend credit

 

$

1,079,446

 

$

 —

 

$

 —

 

$

 —

 

Standby letters of credit

 

 

 

 

 

 

Effective upon commencing operations of its banking subsidiary on June 8, 2009, the Company adopted SFAS 157, Fair Value Measurements (FASB ASC 820-10-50) (SFAS 157), which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, 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).

 

SFAS 157 defines fair value 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. SFAS 157 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 standard describes three levels of inputs that may be used to measure fair value:

 

Level 1

 

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury Securities.

 

 

 

Level 2

 

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  This category generally includes certain derivative contracts and impaired loans.

 

15



 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2009 are as follows:

 

 

 

Quoted

 

Significant

 

 

 

 

 

Market Price

 

Other

 

Significant

 

 

 

in Active

 

Observable

 

Unobservable

 

 

 

Markets

 

Inputs

 

Inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

Securities available for sale

 

$

 

$

10,569,320

 

$

 

Total

 

$

 

$

10,569,320

 

$

 

 

The Company has no liabilities carried at fair value or measured at fair value on a recurring or nonrecurring basis.

 

The Company is predominantly a cash flow lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The Company had no impaired loans at September 30, 2009.

 

Note 16 – Subsequent Events

 

The Company evaluated all events or transactions that occurred after September 30, 2009, through November 16, 2009, the date the Company issued these financial statements, as filed with the Securities and Exchange Commission on Form 10-Q.  During this period, the Company did not have any material recognizable or nonrecognizable subsequent events that required recognition in the Company’s disclosures to the September 30, 2009 financial statements.

 

16



 

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

 

DISCUSSION OF FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of our management, as well as assumptions made by and information currently available to management. The words “expect,” “estimate,” “anticipate,” and “believe,” as well as similar expressions, are intended to identify 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 are discussed in detail in our filings with the Securities and Exchange Commission, including, without limitation:

 

·                  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 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 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.  During 2008 and continuing through the third quarter of 2009, the capital and credit markets experienced unprecedented levels of extended volatility and disruption. There can be no assurance that these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.

 

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.

 

17



 

Overview

 

The following discussion describes our results of operations for the three and nine months ended September 30, 2009 and also analyzes our financial condition as of September 30, 2009. Coastal Carolina National Bank, our banking subsidiary, opened for business on June 8, 2009, and the Company’s inception was February 28, 2008. Because our bank opened on June 8, 2009, a comparison for the quarter and nine month periods ended September 30, 2009, to the quarter and nine month periods ended September 30, 2008 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 (OCC) for our application to charter the bank, the pursuit of approvals from the Federal Reserve to become a bank holding company, and the pursuit of approvals from the Federal Deposit Insurance Corporation (FDIC) for our application for insurance of the deposits of the bank. We received conditional approval from the FDIC on October 1, 2008, approval from the Federal Reserve on November 21, 2008, and preliminary conditional approval from the Office of the Comptroller of the Currency on June 20, 2008 and commenced business on June 8, 2009. We completed our stock offering in June 2009, upon the issuance of 2,180,000 shares for gross proceeds of $21,800,000, 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 $19,940,000 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.

 

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.

 

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.

 

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.

 

Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crises

 

Markets in the United States and elsewhere have experienced extreme volatility and disruption for more than 12 months.  These circumstances have exerted significant downward pressure on prices of equity securities and

 

18



 

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 recently been announced including:

 

·                  The EESA, approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the Treasury Department to purchase troubled assets from banks, authorized the Securities and Exchange Commission to suspend the application of marked-to-market accounting, and temporarily 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 the CPP which encourages and allows financial institutions to build capital through the sale of senior preferred shares to the Treasury Department 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:

 

·                  The Transaction Account Guarantee Program (TAGP), which provides unlimited deposit insurance coverage for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts through June 30, 2010.  Institutions participating in the TLGP pay an assessment on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place;

 

·                  The Debt Guarantee Program (DGP), under which the FDIC guarantees certain senior unsecured debt of FDIC-insured institutions and their holding companies.  The unsecured debt must have been issued on or after October 14, 2008 and not later than June 30, 2009, and the guarantee is effective through the earlier of the maturity date or June 30, 2012.  The DGP was extended to allow participating entities to issue guaranteed debt through October 31, 2009 with a maturity date of December 31, 2012. The DGP coverage limit is generally 125% of the eligible entity’s eligible debt outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their liabilities as of September 30, 2008.  Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or June 30, 2012.  The TAGP and DGP are in effect for all eligible entities, unless the entity opted out on or before December 5, 2008.

 

·                  On February 17, 2009, the American Recovery and Reinvestment Act (ARRA) was signed into law in an effort to, among other things, create jobs and stimulate growth in the United States economy.  The ARRA 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 ARRA also imposes certain limitations on compensation paid by participants in the U.S. Treasury’s Troubled Asset Relief Program.

 

·                  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:

 

19



 

(a)          The Legacy Loan Program, which the primary purpose will be to facilitate the sale of troubled mortgage loans by eligible institutions, which include FDIC-insured federal or state banks and savings associations. Eligible assets may not be strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the U.S. Treasury. Additionally, the Loan Program’s requirements and structure will be subject to notice and comment rulemaking, which may take some time to complete.

 

(b)         The Securities Program, which will be administered by the U.S. Treasury, involves the creation of public-private investment funds 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.

 

Results of Operations

 

We incurred a net loss of $853,911 and $2,011,446 for the three and nine months ended September 30, 2009, respectively. Included in the net loss for the nine months ended September 30, 2009 was $770,450 of net expenses related to pre-opening and organizational activities incurred prior to the Bank’s June 8, 2009 opening. For the nine months ended September 30, 2009, we recognized $257,952 in interest income, of which $78,246 was from stock subscriptions held in escrow and $132,672 was from Federal funds sold, other short-term investments and Federal Reserve stock. For the quarter ended September 30, 2009, we realized $164,181 in interest income, of which $117,451 was from investment activities. The provision for loan loss was $60,511 for the quarter ended September 30, 2009. We anticipate the growth in loans in future quarters will drive the growth in assets and the growth in interest income. The primary source of funding for our loan portfolio is deposits that are acquired locally. The Bank incurred interest expense of $147,502 in the third quarter of 2009 related to deposit accounts. Interest expense of $23,307 was incurred on the organizing line of credit which was repaid with the proceeds from the stock offering.  Total interest expense for the nine months ended September 30, 2009 was $208,318, of which $165,981 was related to deposit accounts and $42,337 to the lines of credit.

 

We incurred noninterest expense of $2,012,729 during the nine months ended September 30, 2009. Included in this expense is $1,295,133 in salaries and employee benefits, $291,593 of office occupancy and equipment and depreciation and amortization, $117,973 of professional fees, $82,562 of marketing and business development, $87,800 of data processing, $27,974 of corporate insurance, and $109,694 in other expense.  Included in salaries and employee benefits expense for the nine months ended September 30, 2009 was $147,814 of expense related to the issuance of compensatory warrants to organizers and directors of the Company.  The charge directly to retained earnings for investment warrants was $383,448 for the nine months ended September 30, 2009.  The Company issued a total of 231,992 warrants to organizers, which vested immediately upon issue, and 24,000 warrants to certain directors of the Company, which vest over a three-year period. For the three months ended September 30, 2009, we incurred noninterest expense of $811,504.  Included in this expense is $490,535 in salaries and employee benefits, $102,084 of office occupancy and equipment and depreciation and amortization, $75,867 of professional fees, $41,415 of marketing and business development, $55,627 of data processing, $8,257 of corporate insurance, and $37,719 in other expense.

 

Assets and Liabilities

 

General

 

At September 30, 2009, we had total assets of $48.4 million, consisting principally of $30.1 million in interest-bearing deposits with other financial institutions, $10.6 million in available-for-sale securities, $4.6 million in net loans, $525,250 in Federal Reserve Bank stock, $460,520 in net premises and equipment, and $394,178 in Federal funds sold.  Liabilities at September 30, 2009 totaled $30.8 million, consisting principally of $30.5 million in deposits and $291,406 in other liabilities. At September 30, 2009, shareholders’ equity was $17.6 million.

 

20



 

Loans

 

Since loans typically provide higher interest yields than other types of interest earning assets, we intend to invest a substantial percentage of our earning assets in our loan portfolio. At September 30, 2009, our loan portfolio consisted of construction and land development loans of $2,313,786, real estate loans of $1,554,103, commercial and industrial loans of $690,240, and consumer loans of $85,576.

 

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 $62,276 as of September 30, 2009. 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 regarding current portfolio and economic conditions, which we believe to be reasonable, but which may or may not prove to be accurate. Over time, we will periodically determine the amount of the allowance based on our consideration of several factors, including an ongoing review of the quality, mix and size of our overall loan portfolio, our historical loan loss experience, evaluation of economic conditions and other qualitative factors, specific problem loans and commitments that may affect the borrower’s ability to pay.

 

Due to our limited 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.

 

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, 2009, we had $30.5 million in deposits, which consisted primarily of $2.3 million in demand deposit accounts, $14.1 million in certificates of deposit, and $14.1 million of savings and money market accounts.

 

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 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, security repurchase agreements, 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, 2009, our primary sources of liquidity included interest-bearing deposits with financial institutions of $30.1 million and

 

21



 

federal funds sold totaling $394,000. We also have lines of credit available with correspondent banks totaling $5.0 million. We believe our liquidity levels are adequate to meet our operating needs.

 

Off-Balance 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, 2009, we had issued commitments to extend credit of $1,079,446 through various types of lending arrangements.  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 increased from ($1.6) million at December 31, 2008 to $17.6 million at September 30, 2009. The increase is due to completion of our initial public offering, which raised $21.0 million, net of offering expenses of $836,488. This increase was offset by the net loss for the nine-month period of $2.0 million.

 

Our Bank and 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 stock is not registered under Section 12 of the Securities Exchange Act of 1934, we believe the 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. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

 

At the bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. To be considered “adequately capitalized” under these capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%.  To be considered “well-capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. 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, 2009, as well as the ratios to be considered “well capitalized.”

 

22



 

The following table sets forth the Bank’s various capital ratios at September 30, 2009.

 

Tier 1 leverage capital

 

40.3

%

Tier 1 risk-based capital

 

129.2

%

Total risk-based capital

 

129.7

%

 

We believe our capital is sufficient to fund the activities of the Bank in its initial stages of operation and the rate of asset growth will not negatively impact the capital base.  As of September 30, 2009, there were no significant firm commitments outstanding for capital expenditures.

 

Accounting, Reporting, and Regulatory Matters

 

Recently Issued Accounting Standards

 

The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by us:

 

On July 1, 2009, the Financial Accounting Standards Board (FASB) issued FASB Statement of Financial Accounting Standards (SFAS) No. 168, “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which is included in FASB Accounting Standards Codification (ASC) 105 “Generally Accepted Accounting Principles.” This new guidance approved the FASB ASC as the single source of authoritative nongovernmental GAAP. The FASB ASC is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all other accounting literature not included in the FASB ASC will be considered non-authoritative. The ASC is a restructuring of GAAP designed to simplify access to all authoritative literature by providing a topically organized structure. The adoption of FASB ASC did not impact the Corporation’s financial condition or results of operations. Technical references to GAAP included in these Notes to the Consolidated Financial Statements are provided under the new FASB ASC structure.

 

In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 —Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC.    ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position or results of operations but will change the referencing system for accounting standards.  Certain of the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs. For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section are provided where applicable in addition to the original standard type and number.  FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” (FASB ASC 325-40-65)

 

(“FSP EITF 99-20-1”) was issued in January 2009.  Prior to the FSP, other-than-temporary impairment was determined by using either Emerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (“SFAS 115”) depending on the type of security.  EITF 99-20 required the use of market participant assumptions regarding future cash flows regarding the probability of collecting all cash flows previously projected.  SFAS 115 determined impairment to be other than temporary if it was probable that the holder would be unable to collect all amounts due according to the contractual terms. To achieve a more consistent determination of other-than-temporary impairment, the FSP amends EITF 99-20 to determine any other-than-temporary impairment based on the guidance in SFAS 115, allowing management to use more judgment in determining any other-than-temporary impairment.  The FSP was effective for reporting periods ending after December 15, 2008.  Management has reviewed the Company’s security portfolio and evaluated the portfolio for any other-than-temporary impairments.

 

On April 9, 2009, the FASB issued three staff positions related to fair value which are discussed below.

 

FSP SFAS 115-2 and SFAS 124-2 (FASB ASC 320-10-65), “Recognition and Presentation of Other-Than-Temporary Impairments,” (“FSP SFAS 115-2 and SFAS 124-2”) categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be other-than-temporarily impaired into losses due to credit issues and losses related to all other factors.  Other-than-temporary impairment (OTTI) exists when it is more likely

 

23



 

than not that the security will mature or be sold before its amortized cost basis can be recovered.  An OTTI related to credit losses should be recognized through earnings.  An OTTI related to other factors should be recognized in other comprehensive income.  The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS 124-1 are also required for interim periods (including the aging of securities with unrealized losses).

 

FSP SFAS 157-4 (FASB ASC 820-10-65), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly” recognizes that quoted prices may not be determinative of fair value when the volume and level of trading activity has significantly decreased.  The evaluation of certain factors may necessitate that fair value be determined using a different valuation technique.  Fair value should be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, not a forced liquidation or distressed sale.  If a transaction is considered to not be orderly, little, if any, weight should be placed on the transaction price.  If there is not sufficient information to conclude as to whether or not the transaction is orderly, the transaction price should be considered when estimating fair value.  An entity’s intention to hold an asset or liability is not relevant in determining fair value.  Quoted prices provided by pricing services may still be used when estimating fair value in accordance with SFAS 157; however, the entity should evaluate whether the quoted prices are based on current information and orderly transactions.  Inputs and valuation techniques are required to be disclosed in addition to any changes in valuation techniques.

 

FSP SFAS 107-1 and APB 28-1 (FASB ASC 825-10-65), “Interim Disclosures about Fair Value of Financial Instruments” requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and also requires those disclosures in summarized financial information at interim reporting periods A publicly traded company includes any company whose securities trade in a public market on either a stock exchange or in the over-the-counter market, or any company that is a conduit bond obligor.  Additionally, when a company makes a filing with a regulatory agency in preparation for sale of its securities in a public market it is considered a publicly traded company for this purpose.

 

The three staff positions are effective for periods ending after June 15, 2009, with early adoption of all three permitted for periods ending after March 15, 2009.  The Company adopted the staff positions for its second quarter 10-Q.  The staff positions had no material impact on the financial statements.

 

The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M., “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” and to supplement FSP SFAS 115-2 and SFAS 124-2.  SAB 111 maintains the staff’s previous views related to equity securities; however debt securities are excluded from its scope.  The SAB provides that “other-than-temporary” impairment is not necessarily the same as “permanent” impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a write-down to fair value should be recorded and accounted for as a realized loss.  The SAB was effective upon issuance and had no impact on the Company’s financial position.

 

SFAS 165 (FASB ASC 855-10-05, 15, 25, 45, 50, 55), “Subsequent Events,” (“SFAS 165”) was issued in May 2009 and provides guidance on when a subsequent event should be recognized in the financial statements.  Subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date the financial statements were available to be issued.  For nonrecognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed.  The standard is effective for interim or annual periods ending after June 15, 2009.  The Company adopted the provisions of SFAS 165 during the period ended June 30, 2009, which did not impact is financial statements or disclosures.  The Company evaluated all events or transactions that occurred after September 30, 2009, through November 16, 2009, the date the Company issued these financial statements, as filed with the Securities and Exchange Commission on Form 10-Q.  During this period, the Company did not have any material recognizable subsequent events that required recognition in the Company’s disclosures to the September 30, 2009 financial statements.

 

24



 

The FASB issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140,” (“SFAS 166”) in June 2009.  SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement.  The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale.  The concept of a qualifying special-purpose entity is removed from SFAS 140 along with the exception from applying FIN 46(R).  The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  The Company does not expect the standard to have any impact on the Company’s financial statements.

 

SFAS 167 (not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) was also issued in June 2009.  The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest.  A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance.  Ongoing reassessments of whether a company is the primary beneficiary is also required by the standard.  SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE.  The standard also eliminates certain exceptions that were available under FIN 46(R).  SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  Comparative disclosures will be required for periods after the effective date.  The Company does not expect the standard to have any impact on the Company’s financial position.

 

The FASB issued ASU 2009—05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value” in August, 2009 to provide guidance when estimating the fair value of a liability.  When a quoted price in an active market for the identical liability is not available, fair value should be measured using (a) the quoted price of an identical liability when traded as an asset; (b) quoted prices for similar liabilities or similar liabilities when traded as assets; or (c) another valuation technique consistent with the principles of Topic 820 such as an income approach or a market approach.  If a restriction exists that prevents the transfer of the liability, a separate adjustment related to the restriction is not required when estimating fair value.  The ASU was effective October 1, 2009 for the Company and will have no impact on financial position or operations.

 

ASU 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” issued in September, 2009, allows a company to measure the fair value of an investment that has no readily determinable fair market value on the basis of the investee’s net asset value per share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of the reporting entity’s measurement date.   Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The update also provides guidance on how the investment should be classified within the fair value hierarchy based on the value for which the investment can be redeemed.  The amendment is effective for interim and annual periods ending after December 15, 2009 with early adoption permitted.  The Company does not have investments in such entities and, therefore, there will be no impact to our financial statements.

 

Issued October, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic 470 and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance.  At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital.  Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs.  The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement.  The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009.   The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial statements.

 

25



 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

 

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

 

Not required.

 

Item 4.  Controls and Procedures

 

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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 15d-15(e).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of September 30, 2009.  There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2009, 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.

 

Part II – Other Information

 

Item 1.  Legal Proceedings

 

There are no material pending legal proceedings to which we are a party or of which any of our property is the subject.

 

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

 

There were no sales of unregistered securities during the three or nine months ended September 30, 2009.

 

Item 3.  Default Upon Senior Securities

 

Not applicable.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

Item 5.  Other Information

 

On July 30, 2009, Joel P. Foster was terminated from his position as Chief Lending Officer of the registrant, and was reassigned to a new position, that of Commercial Relationship Manager, in the registrant’s wholly-owned banking subsidiary, Coastal Carolina National Bank.

 

 

26



 

Item 6.  Exhibits

 

31.1

Rule 15d-14(a) Certification of the Principal Executive Officer.

 

 

31.2

Rule 15d-14(a) Certification of the Principal Financial Officer.

 

 

32

Section 1350 Certifications.

 

27



 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Coastal Carolina Bancshares, Inc.

 

 

 

Date: November 16, 2009

By:

/s/ Michael D. Owens

 

 

Michael D. Owens

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date: November 16, 2009

By:

/s/ Holly L. Schreiber

 

 

Holly L. Schreiber

 

 

Chief Financial Officer

 

 

(Principal Financial Officer and Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Description

 

 

 

31.1

 

Rule 15d-14(a) Certification of the Principal Executive Officer.

 

 

 

31.2

 

Rule 15d-14(a) Certification of the Principal Financial Officer.

 

 

 

32

 

Section 1350 Certifications.

 

29