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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended March 31, 2012

 

¨ 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 of   (I.R.S. Employer
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    ¨  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  x    NO  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,188,000 shares of common stock par value $0.01 per share, were outstanding as of May 4, 2012.

 

 

 


Table of Contents

INDEX

 

     Page No.  

PART I—FINANCIAL INFORMATION

  

Item 1.

  Financial Statements   
  Consolidated Balance Sheets—March 31, 2012 (unaudited) and December 31, 2011      3   
  Consolidated Statements of Operations and Comprehensive Loss (unaudited)—Three months ended March 31, 2012 and 2011      4   
  Consolidated Statements of Shareholders’ Equity (unaudited)—Three months ended March 31, 2012 and 2011      5   
  Consolidated Statements of Cash Flows (unaudited)—Three months ended March 31, 2012 and 2011      6   
  Notes to Consolidated Financial Statements      7   

Item 2.

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

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      29   

Item 4.

  Controls and Procedures      29   

PART II—OTHER INFORMATION

  

Item 1.

  Legal Proceedings      30   

Item 1A.

  Risk Factors      30   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      30   

Item 3.

  Defaults Upon Senior Securities      30   

Item 4.

  Mine Safety Disclosure      30   

Item 5.

  Other Information      30   

Item 6.

  Exhibits      30   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Balance Sheets

 

     March 31,     December 31,  
     2012     2011  
     (Unaudited)        

Assets

    

Cash and non-interest due from banks

   $ 1,064,478      $ 1,023,828   

Federal funds sold

     1,098,912        824,978   

Interest-bearing bank deposits

     13,936,020        9,471,498   
  

 

 

   

 

 

 

Total cash and cash equivalents

     16,099,410        11,320,304   

Securities available for sale

     26,834,856        29,507,235   

Federal Reserve Bank stock

     394,050        394,050   

Federal Home Loan Bank stock

     230,400        183,800   

Loans held for sale

     346,400        888,750   

Loans receivable

     55,637,419        52,639,397   

Deferred loan fees, net

     (135,544     (132,311

Allowance for loan losses

     (1,105,971     (1,091,877
  

 

 

   

 

 

 

Loans, net

     54,395,904        51,415,209   

Premises and equipment, net

     222,454        246,443   

Accrued income and other assets

     459,528        468,888   
  

 

 

   

 

 

 

Total assets

   $ 98,983,002      $ 94,424,679   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities

    

Deposits:

    

Non-interest bearing demand

   $ 5,173,853      $ 4,819,581   

Interest checking

     3,678,069        4,604,083   

Money market

     38,525,237        35,352,570   

Savings

     588,136        500,947   

Certificates of deposit

     36,448,781        34,500,228   
  

 

 

   

 

 

 

Total deposits

     84,414,076        79,777,409   

Accrued expenses and other liabilities

     540,342        561,446   
  

 

 

   

 

 

 

Total liabilities

     84,954,418        80,338,855   

Shareholders’ Equity

    

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

     —          —     

Common stock, $.01 par value, 50,000,000 shares authorized, 2,188,000 and 2,190,500 issued and outstanding at March 31, 2012 and December 31, 2011, respectively

     21,880        21,905   

Additional paid-in capital

     21,797,702        21,794,089   

Unearned compensation, nonvested restricted stock

     (25,417     (44,583

Retained deficit

     (7,968,953     (7,826,852

Accumulated other comprehensive income

     203,372        141,265   
  

 

 

   

 

 

 

Total shareholders’ equity

     14,028,584        14,085,824   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 98,983,002      $ 94,424,679   
  

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

3


Table of Contents

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2012     2011  

Interest income

    

Loans, including fees

   $ 770,452      $ 385,310   

Federal funds sold and interest-bearing bank deposits

     11,844        39,691   

Securities

     132,992        215,095   

Federal Reserve & Federal Home Loan stock dividend

     6,341        6,845   
  

 

 

   

 

 

 

Total interest income

     921,629        646,941   

Interest expense

    

Deposits:

    

Interest checking

     8,379        9,034   

Money market and savings

     71,623        97,865   

Certificates of deposit < $100,000

     35,483        35,153   

Certificates of deposit >$100,000

     75,127        70,699   
  

 

 

   

 

 

 

Total interest expense

     190,612        212,751   
  

 

 

   

 

 

 

Net interest income before provision for loan losses

     731,017        434,190   

Provision for loan losses

     14,094        318,431   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     716,923        115,759   

Noninterest income

    

Service charges on deposits

     19,272        5,120   

Gain on sale of loans

     19,850        6,605   

Gain on sale of investment securities

     7,930        —     

ATM, debit, and merchant fees

     4,817        3,590   

Other

     16,975        1,792   
  

 

 

   

 

 

 

Total noninterest income

     68,844        17,107   

Noninterest expense

    

Salaries and employee benefits

     538,292        555,505   

Data processing

     92,417        78,108   

Professional services

     84,437        55,293   

Occupancy and equipment

     81,869        94,403   

Marketing and business development

     41,242        50,822   

Shareholder communications

     11,687        9,422   

Postage and supplies

     8,306        10,025   

Corporate insurance

     6,871        5,104   

Telecommunications

     4,439        5,640   

FDIC insurance and regulatory assessments

     31,718        34,189   

Other

     26,590        25,725   
  

 

 

   

 

 

 

Total noninterest expense

     927,868        924,236   

Loss before income taxes

     (142,101     (791,370

Income taxes

     —          —     
  

 

 

   

 

 

 

Net loss

   $ (142,101   $ (791,370
  

 

 

   

 

 

 

Other comprehensive income:

    

Unrealized gains on securities available for sale

   $ 101,814      $ 80,106   

Reclassification of gains recognized in net loss

     (7,930     —     

Tax effect

     (31,777     (31,421
  

 

 

   

 

 

 

Total other comprehensive income

     62,107        48,685   
  

 

 

   

 

 

 

Comprehensive loss

   $ (79,994   $ (742,685
  

 

 

   

 

 

 

Loss per share

    

Basic and diluted loss per share

   $ (0.06   $ (0.36
  

 

 

   

 

 

 

Average shares outstanding

     2,189,456        2,189,111   
  

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

4


Table of Contents

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

                       Unearned           Accumulated        
                 Additional     Compensation           Other     Total  
     Common Stock     Paid-in     Nonvested     Retained     Comprehensive     Shareholders’  
     Shares     Amount     Capital     Restricted Stock     Deficit     Income (Loss)     Equity  

December 31, 2010

     2,185,000      $ 21,850      $ 21,667,958      $ (25,000   $ (6,548,688   $ (344,832   $ 14,771,288   

Net Loss

     —          —          —          —          (791,370     —          (791,370

Change in unrealized gains and losses on securities, net

     —          —          —          —          —          48,865        48,865   

Restricted Stock

     6,500        65        64,935        (65,000     —          —          —     

Organizer/founder warrants

     —          —          4,122        —          —          —          4,122   

Stock-based compensation

     —          —          11,432        6,875        —          —          18,307   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2011

     2,191,500      $ 21,915      $ 21,748,447      $ (83,125   $ (7,340,058   $ (295,967   $ 14,051,212   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

     2,190,500      $ 21,905      $ 21,794,089      $ (44,583   $ (7,826,852   $ 141,265      $ 14,085,824   

Net Loss

     —          —          —          —          (142,101     —          (142,101

Change in unrealized gains and losses on securities, net

     —          —          —          —          —          62,107        62,107   

Restricted Stock

     (2,500     (25     (8,586     10,555        —          —          1,944   

Organizer/founder warrants

     —          —          4,122        —          —          —          4,122   

Stock-based compensation

     —          —          8,077        8,611        —          —          16,688   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2012

     2,188,000      $ 21,880      $ 21,797,702      $ (25,417   $ (7,968,953   $ 203,372      $ 14,028,584   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to the consolidated financial statements

 

5


Table of Contents

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2012     2011  

Operating activities

    

Net loss

   $ (142,101   $ (791,370

Adjustments to reconcile net loss to net cash provided (used) by operating activities:

    

Provision for loan losses

     14,094        318,431   

Increase in deferred loan fees, net

     3,233        52,491   

Gains on sale of loans held for sale

     (19,850     (6,605

Origination of loans held for sale, net

     (973,925     (96,634

Proceeds from sale of loans held for sale

     1,536,125        343,239   

Premium amortization and discount accretion on securities, net

     137,588        80,954   

Securities gains, net

     (7,930     —     

Depreciation and amortization expense

     23,989        32,074   

Stock-based compensation expense

     22,754        22,429   

Decrease (increase) in accrued interest receivable

     2,763        (21,328

Increase (decrease) in accrued interest payable

     (3,173     488   

Decrease in other assets

     6,597        28,695   

Decrease in other liabilities

     (57,640     (47,214
  

 

 

   

 

 

 

Net cash provided (used) in operating activities

     542,524        (84,350

Investing activities

    

Net increase in loans

     (2,998,022     (9,074,512

Purchases of securities available for sale

     (2,868,871     (1,011,536

Proceeds from paydowns of securities available for sale

     1,236,918        911,624   

Proceeds from sales of securities available for sale

     4,276,490        —     

Purchase of Federal Home Loan Bank stock

     (46,600     (93,800

Purchases of premises and equipment

     —          (13,732
  

 

 

   

 

 

 

Net cash used in investing activities

     (400,085     (9,281,956

Financing activities

    

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

     2,688,114        7,731,332   

Net increase (decrease) in certificates of deposit

     1,948,553        (2,295,208
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,636,667        5,436,124   

Net increase (decrease) in cash and cash equivalents

     4,779,106        (3,930,182
  

 

 

   

 

 

 

Cash and cash equivalents, beginning of period

     11,320,304        18,593,851   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 16,099,410      $ 14,663,669   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for:

    

Interest on deposits

   $ 193,785      $ 212,263   
  

 

 

   

 

 

 

See notes to the consolidated financial statements

 

6


Table of Contents

COASTAL CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements

March 31, 2012

Note 1—Business and Basis of Presentation

Organization—On February 28, 2008, Coastal Carolina Bancshares, Inc. (the Company) was incorporated to act as the holding company for Coastal Carolina National Bank (the Bank). The Bank began banking operations on June 8, 2009. The principal business activity of the Bank is to provide banking services to domestic markets, principally in Myrtle Beach, South Carolina. The Bank is a nationally-chartered commercial bank and its deposits are insured by the Federal Deposit Insurance Corporation.

Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for 2011 as filed with the Securities and Exchange Commission (the “SEC”).

Note 2—Summary of Significant Accounting Policies

A summary of these policies is included in our Form 10-K filed with the SEC for the year ended December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for 2011 as filed with the SEC. It is uncertain whether Accounting standards that have been issued or proposed by the Financial Accounting Standards Board (the “FASB”) that do not require adoption until a future date will have a material impact on the Company’s consolidated financial statements upon adoption.

Statement of Cash Flow—For purposes of reporting cash flows, the Company considered certain highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks, federal funds sold, and interest-bearing bank deposits. Generally, federal funds are sold for one-day periods.

Loss Per Share—Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable upon exercise of outstanding stock warrants and stock options. There were no dilutive common share equivalents outstanding during the three months ended March 31, 2012 and 2011 due to the net loss; therefore, basic loss per share and diluted earnings per share were the same.

 

     Three Months Ended  
     March 31,  
     2012     2011  

Net loss to common shareholders

   $ (142,101   $ (791,370

Weighted-average number of common shares outstanding

     2,189,456        2,189,111   
  

 

 

   

 

 

 

Net loss per share

   $ (0.06   $ (0.36
  

 

 

   

 

 

 

Comprehensive Income—Accounting principles generally require that recognized income, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component and such items, along with net income, are components of comprehensive income.

 

7


Table of Contents

Note 3—Recently Issued or Proposed Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

 

   

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and had no effect on the financial statements.

 

   

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

 

   

On April 5, 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was signed into law. The JOBS Act is intended to make it easier for startups and small businesses to raise funds. The SEC will have 270 days to interpret the basic concepts in the JOBS Act and turn them into practical regulations. The JOBs Act is a significant change to securities regulations, including the raising the shareholders of record thresholds that require public registration and reporting. The JOBS Act eases certain aspects of the initial public offering process and relaxes certain reporting obligations for the post-IPC EGC. The law is not expected to have a material effect on the financial statements or results of operations.

 

   

In February 2012, SEC Chief Accountant told the IASB Advisory Council the adoption of IFRS continues to be delayed. The SEC staff is in the final stages of writing their next report on U.S. adoption of IFRS. However, it is anticipated a decision will not be made until late 2012. The adoption of IFRS is expected to have an impact on the financial statements but the effects are still unknown.

 

   

In December 2011, the Committee of Sponsoring Organizations (“COSO”) released a draft update of the 1992 Internal Control-Integrated Framework. The public comment period ended March 31, 2012 and the final updated Framework is slated to be released in early 2013. The changes are not expected to affect the financial statements or results of operations.

 

   

On January 31, 2012, federal financial institution regulatory agencies jointly issued supervisory guidance on loan loss allowance estimation practices for loans and lines of credit secured by junior liens on 1-4 family residential properties (junior liens). The guidance discusses the responsibilities of institution management to gather available and relevant information about the collectability of the portfolio, including information on the delinquency status of senior lien loans associated with the institution’s junior liens. Additionally, management should segment the junior lien portfolio to estimate allowance for high-risk segments, and support environment factor adjustments to historical loss rates by analyzing the trends in each risk segment of the junior lien portfolio. The guidance is not expected to have a material effect on the financial statements.

 

   

On December 5, 2010, the comment period closed on the FASB’s proposed ASU No. 1850-100, Leases. The draft requires lessees to recognize assets and liabilities arising from lease contracts on their balance sheet that historically would have been off-balance sheet under operating lease accounting guidance. The IASB and FASB have continued discussing the appropriate expense recognition methods and plan to meet again in April 2012. Before issuing the final document, the FASB intends to expose for public comment proposed amendments. The final ASU is expected to affect the financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

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Note 4—Cash and Cash Equivalents

As of March 31, 2012, cash and cash equivalents totaled $16.1 million and were represented by $1.1 million in cash on hand and noninterest-bearing deposits with other banks, $13.9 million in interest-bearing deposits with other banks, and $1.1 million in federal funds sold. Interest-bearing deposits with other banks included $3.7 million in CDs invested at other banks that carry a weighted average rate of .68% with maturities between 4 and 18 months, $6.9 million at the Federal Reserve, and $3.3 million in money market deposit accounts. These balances allow the Company to meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested.

Note 5—Securities

At March 31, 2012 and December 31, 2011, the Bank’s securities available for sale consisted of a U.S. Government Agency Bond issued by the Federal National Mortgage Association (FNMA), city and county issued municipal bonds, mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), collateralized mortgage obligations issued by the Government National Mortgage Association (GNMA), and a Small Business Administration (SBA) bond, summarized as follows:

 

     March 31, 2012  
     Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Government-Sponsored Enterprises

   $ 2,000,000       $ —         $ (50,464   $ 1,949,536   

Small Business Administration bonds

     1,523,799         10,794         —          1,534,593   

Municipal bonds

     3,165,045         116,273         —          3,281,318   

Collateralized mortgage obligations (CMOs)

     2,777,999         29,818         —          2,807,817   

Mortgage-backed securities (MBSs)

     17,034,616         230,907         (3,931     17,261,592   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 26,501,459       $ 387,792       $ (54,395   $ 26,834,856   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2011  
     Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Government-Sponsored Enterprises

   $ 2,000,000       $ 1,408       $ —        $ 2,001,408   

Municipal bonds

     3,168,963         86,479         —          3,255,442   

Collateralized mortgage obligations (CMOs)

     2,861,013         30,088         —          2,891,101   

Mortgage-backed securities (MBSs)

     21,245,677         145,690         (32,083     21,359,284   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 29,275,653       $ 263,665       $ (32,083   $ 29,507,235   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The following table summarizes the unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011.

 

     March 31, 2012  
     Less than 12 months     12 months or longer      Total  
     Fair      Unrealized     Fair      Unrealized      Fair      Unrealized  
     Value      Losses     Value      Losses      Value      Losses  

Government-Sponsored Enterprises

   $ 1,949,536       $ (50,464   $  —         $ —         $ 1,949,536       $ (50,464

Mortgage-backed securities (MBSs)

     1,339,521         (3,931     —           —           1,339,521         (3,931
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 3,289,057       $ (54,395   $ —         $ —         $ 3,289,057       $ (54,395
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Less than 12 months     12 months or longer      Total  
     Fair      Unrealized     Fair      Unrealized      Fair      Unrealized  
     Value      Losses     Value      Losses      Value      Losses  

Government-Sponsored Enterprises

   $ —         $ —        $ —         $  —         $ —         $ —     

Mortgage-backed securities (MBSs)

     10,734,122         (32,083     —           —           10,734,122         (32,083
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 10,734,122       $ (32,083   $  —         $ —         $ 10,734,122       $ (32,083
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The contractual maturity distribution and yields of the Bank's securities portfolio at March 31, 2012 are summarized below. Actual maturities may differ from contractual maturities shown below since borrowers may have the right to pre-pay these obligations without pre-payment penalties.

 

     Securities
Available For Sale
 
     Amortized
Cost
     Estimated
Fair Value
 

Due after one year but within five years

   $ —         $ —     

Due after five years but within ten years

     887,084         938,361   

Due after ten years

     25,614,375         25,896,495   
  

 

 

    

 

 

 

Total (1)

   $ 26,501,459       $ 26,834,856   
  

 

 

    

 

 

 

 

(1)

Maturities estimated based on average life of security.

The Bank also owned Federal Reserve Bank (“FRB”) stock with a cost of $394,050 at March 31, 2012 and at December 31, 2011. The yield at both periods was 6%. The amount of FRB stock held is based on our shareholders’ equity. As shareholders’ equity decreases due to losses, the amount of FRB stock may also decrease quarterly.

The Bank owned $230,400 in Federal Home Loan Bank (“FHLB”) stock at March 31, 2012 and $183,800 at December 31, 2011. The amount of FHLB stock held is based on our total assets and the amount of outstanding advances with the FHLB. Therefore, stock ownership levels with the FHLB are subject to change. The yield on FHLB stock is variable at the discretion of the FHLB. The dividend paid for March 31, 2012 was 1.87% and 1.23% for December 31, 2011.

Securities with an amortized cost of $9.1 million at March 31, 2012 and $6.3 million at December 31, 2011, were pledged to secure public deposits. During the three months ended March 31, 2012, the Bank sold three mortgage backed securities with amortized costs of $4.3 million and purchased 2 securities with an amortized cost of $2.9 million.

There were no write-downs for other-than-temporary declines in the fair value of debt securities for the three month period ended March 31, 2012. At March 31, 2012, there were no investment securities considered to be other than temporarily impaired. The Bank’s mortgage-backed securities are investment grade securities backed by a pool of mortgages. Principal and interest payments on the underlying mortgages are used to pay monthly interest and principal on the securities.

 

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Table of Contents

Note 6—Credit Quality

Provision and Allowance for Loan Losses

An allowance for loan losses has been established through a provision for loan losses charged to expense on the consolidated statement of operations. The allowance for loan losses represents an amount management has determined is adequate to absorb probable losses on existing loans that may become uncollectible. Growth in the loan portfolio is the primary reason for additions to the allowance for loan losses. Additionally, provisions may be made for non-performing loans.

The first step in the process is to assign a credit risk grade to each loan in the portfolio based on one common set of parameters that include items such as cash flow coverage ratios, debt-to-worth ratio, liquidity of the borrower, net worth, experience of the borrower, and other factors. The general pool of performing loans is then segmented into categories based on FFIEC call codes, which represent different loan types such as commercial loans, construction loans, consumer loans, and so on. The loss history of each loan type is measured and includes actual history experienced by the bank and the loss experiences of peer banks. The loss history results in a factor that is applied to each loan pool. Additionally, other factors are applied to represent known or expected changes to the loan portfolio resulting from economic and industry developments, the depth and knowledge of management, changes in policies and practices, and more. These environmental factors require judgment and estimates, and the eventual outcomes may differ from the estimates. The combined factors are applied to each loan category and result in the necessary allowance for the general performing loan pool.

The bank evaluates non-performing loans, loans with credit risk grades of Special Mention, Substandard, Doubtful, or worse, past due loans, loans on non-accrual, and any restructured loans separately to determine if the loan is impaired. Impaired loans and non-performing loans can require higher loan loss reserves. If a loan is individually evaluated and identified as impaired, it is measured by using either the fair value of the collateral less costs to sell, present value of expected future cash flows discounted at the loans effective interest rate, or observable market price of the loan. Management chooses a method on a loan-by-loan basis depending on which information is available. Measuring impaired loans requires judgment and estimates and the eventual outcomes may differ from the estimates.

The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge offs and recoveries at March 31, 2012 and December 31, 2011.

Loans are categorized differently in the allowance tables compared to the loan composition table below. The loan composition table reflects categories determined by the loan purpose, whereas the allowance table below reflects categories that are based on the collateral that secures the loan as defined by the FFIEC call codes. For example, a loan made for commercial purposes but secured by 1-4 family real estate will be reported as a Commercial Loan in the composition table, but is considered a Real Estate 1-4 Family loan in the allowance tables.

 

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Table of Contents

Allowance for Loan Losses and Recorded Investment in Loans Receivable

For the Three Months Ended March 31, 2012

 
     Construction      Real     Real      Commercial                    
     and Land      Estate     Estate      and                    
     Development      1-4 Family     Other      Industrial     Consumer     Unallocated     Total  

Allowance for loan losses:

                

Beginning Balance

   $ 64,170       $ 213,709      $ 700,160       $ 77,123      $ 35,027      $ 1,688      $ 1,091,877   

Charge-offs

     —           —          —           —          —          —          —     

Recoveries

     —           —          —           —          —          —          —     

Provisions

     34,982         (9,337     830         (10,370     (323     (1,688     14,094   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 99,152       $ 204,372      $ 700,990       $ 66,753      $ 34,704      $ —        $ 1,105,971   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balances:

                

Individually evaluated for impairment

   $ 43,586       $ —        $ 110,020       $ —        $ 18,680      $ —        $ 172,286   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

   $ 55,566       $ 204,372      $ 590,970       $ 66,753      $ 16,024      $ —        $ 933,685   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

                

Ending balance—total

   $ 4,911,418       $ 20,980,171      $ 23,817,943       $ 3,899,100      $ 2,028,787        $ 55,637,419   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

     

 

 

 

Ending Balances:

                

Individually evaluated for impairment

   $ 118,786       $ —        $ 394,356       $ —        $ 18,680        $ 531,822   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

     

 

 

 

Collectively evaluated for impairment

   $ 4,792,632       $ 20,980,171      $ 23,423,587       $ 3,899,100      $ 2,010,107        $ 55,105,597   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

     

 

 

 

 

Allowance for Loan Losses and Recorded Investment in Loans Receivable

For the Year Ended December 31, 2011

 
     Construction     Real      Real      Commercial                      
     and Land     Estate      Estate      and                      
     Development     Mortgage      Other      Industrial      Consumer      Unallocated     Total  

Allowance for loan losses:

                  

Beginning Balance

   $ 92,265      $ 79,048       $ 185,062       $ 14,981       $ 2,112       $ 59,282      $ 432,750   

Charge-offs

     —          —           —           —           —           —          —     

Recoveries

     —          —           —           —           —           —          —     

Provisions

     (28,095     134,661         515,098         62,142         32,915         (57,594     659,127   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 64,170      $ 213,709       $ 700,160       $ 77,123       $ 35,027       $ 1,688      $ 1,091,877   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balances:

                  

Individually evaluated for impairment

   $ 6,784      $ 21,446       $ 137,282       $ —         $ 21,787       $ —        $ 187,299   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Collectively evaluated for impairment

   $ 57,386      $ 192,263       $ 562,878       $ 77,123       $ 13,240       $ 1,688      $ 904,578   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans receivable:

                  

Ending balance—total

   $ 4,875,191      $ 19,880,090       $ 21,783,860       $ 4,437,718       $ 1,662,538         $ 52,639,397   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Ending Balances:

                  

Individually evaluated for impairment

   $ 120,384      $ 166,117       $ 390,282       $ —         $ 21,787         $ 698,570   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Collectively evaluated for impairment

   $ 4,754,807      $ 19,713,973       $ 21,393,578       $ 4,437,718       $ 1,640,751         $ 51,940,827   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

The adequacy of the allowance for loan losses is reviewed on an ongoing basis. The amount of the allowance is adjusted to reflect changing circumstances. Recognized losses are charged to the allowance and recoveries are added back to the allowance. As of March 31, 2012, management considered the allowance for loan losses to be adequate to meet presently known and inherent losses in the loan portfolio. The underlying assumptions used in the analysis may be impacted in future periods by changes in economic conditions, the impact of changing regulations, and the discovery of new information with respect to borrowers not previously known to management. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required.

 

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Table of Contents

Credit Quality and Non-Performing Loans

Generally, the first indication of the non-performance of a loan is a missed payment. Thus, one of the adverse indicators used in monitoring the credit quality of a loan is the past due status of the loan payments. As of March 31, 2012, loans past due totaled $431,633, all of which was past due greater than 90 days. As of December 31, 2011, loans past due totaled $427,559, of which $37,277 was past due greater than 90 days.

Below are tables that present the past due status of loans receivable as of March 31, 2012 and December 31, 2011.

 

March 31, 2012

 
                                        Past Due >  
     30 - 59 Days
Past Due
     60 - 89 Days
Past Due
     Nonaccrual      Current      Total Loans      90 Days and
Accruing
 

Construction/Land development

   $ —         $ —         $ 118,786       $ 4,792,631       $ 4,911,417       $ —     

Real estate—mortgage

     —           —           —           14,174,353         14,174,353         —     

Real estate—other

     —           —           394,356         31,914,423         32,308,779         —     

Commercial and industrial

     —           —           —           3,899,100         3,899,100         —     

Consumer and other

     —           —           18,680         325,090         343,770         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 531,822       $ 55,105,597       $ 55,637,419       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

 
                                        Past Due >  
     30 - 59 Days
Past Due
     60 -89 Days
Past Due
     Nonaccrual      Current      Total Loans      90 Days and
Accruing
 

Construction/Land development

   $ —         $ —         $ 120,384       $ 4,754,807       $ 4,875,191       $ —     

Real estate—mortgage

     —           —           166,117         13,140,106         13,306,223         —     

Real estate—other

     —           —           390,282         29,295,492         29,685,774         —     

Commercial and industrial

     —           —           —           4,437,718         4,437,718         —     

Consumer and other

     —           —           21,787         312,704         334,491         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 698,570       $ 51,940,827       $ 52,639,397       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. When a loan is placed on non-accrual, all previously accrued interest that has not been received is reversed against current income. The recognition of interest on a non-accrual loan is placed on a cash basis and can be recognized when and if a payment is received. Generally, payments received on non-accrual loans are applied directly to principal.

At March 31, 2012, the Bank had four loans totaling $531,822 in non-accrual status. At December 31, 2011, the Bank had five loans in non-accrual status totaling $698,570. The Bank did not have any loans past due 90 days and still accruing as of March 31, 2012 or December 31, 2011.

Loans are assigned a credit risk grade upon their origination. Loans are monitored for non-performance and may be downgraded to reflect adverse conditions that might affect collectability. Heightened risk characteristics include a history of poor payment performance, poor financial performance, as well as the potential for adverse earnings impact from deteriorating collateral values. The Bank had $3,200,781 and $3,337,162 in loans classified as Substandard or worse as of March 31, 2012 and December 31, 2011, respectively.

 

13


Table of Contents

General definitions for each credit risk level are as follows:

 

   

Prime credits present little to no risk as they are secured by cash and/or the borrowers have unquestionable strength with access to liquidity.

 

   

Good credits have average risk. Borrowers have sound primary and secondary repayment sources, strong debt capacity and coverage, and substantial liquidity and net worth. Commercial borrowers in this category work within industries exhibiting strong trends and the company exhibits favorable profitability, liquidity, and leverage trends with good management in key positions.

 

   

Acceptable credits are those that perform relatively close to expectations with adequate evidence the borrower is generating adequate cash flows to service the debt. Borrowers have good debt coverage and capacity, average liquidity and net worth, and operate in industries the exhibit good trends.

 

   

Acceptable with care credits may be borrowers who exhibit a limited asset base and liquidity, have debt capacity that is limited, or may be a start up venture that is dependent on guarantor strength. These borrowers have elements of risk the Bank chooses to closely monitor.

 

   

Special mention credits have a potential weakness that deserves close attention. If left uncorrected, these potential weaknesses may result in deterioration. Credits in this category are formally monitored on a recurring basis.

 

   

Substandard credits are inadequately protected by the worth and paying capacity of the borrower or of the collateral pledged. These credits exhibit a well-defined weakness that may jeopardize the liquidation of the debt. There is a possibility these credits may result in losses if the observed weakness is not corrected.

 

   

Doubtful credits have all the weaknesses of a substandard credit with the added characteristic that the weakness makes collection or liquidation in full improbable.

 

   

Loss assets are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. Losses should be taken in the period in which they surface as uncollectible.

Credit risk grades within the loan portfolio as of March 31, 2012 and December 31, 2011 are presented in the following three tables, separately for commercial loans, residential real estate loans, and consumer loans, with breakdowns provided for loan types within those categories.

 

14


Table of Contents

Credit Risk Profile of Commercial Loans

 
     March 31, 2012      December 31, 2011  
            Commercial                    Commercial         
            Real Estate      Commercial             Real Estate      Commercial  
     Commercial      Construction      Real Estate      Commercial      Construction      Real Estate  

Prime

   $ 413,356       $ —         $ —         $ 425,000       $ —         $ —     

Good

     2,000,000         —           —           2,000,000         —           —     

Acceptable

     173,468         1,879,066         11,235,768         245,490         1,978,000         11,296,180   

Acceptable with care

     1,101,715         967,984         16,822,313         1,567,228         1,231,118         14,120,577   

Special mention

     10,561         —           1,387,383         —           —           1,400,143   

Substandard assets

     200,000         118,786         2,863,315         200,000         120,384         2,868,874   

Doubtful assets

     —           —           —           —           —           —     

Loss assets

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,899,100       $ 2,965,836       $ 32,308,779       $ 4,437,718       $ 3,329,502       $ 29,685,774   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Credit Risk Profile of Residential Loans

 
     March 31, 2012      December 31, 2011  
     Residential - Prime      Residential - Subprime      Residential - Prime      Residential - Subprime  
     Residential      Residential      Residential      Residential      Residential      Residential      Residential      Residential  
     Mortgage      Construction      Mortgage      Construction      Mortgage      Construction      Mortgage      Construction  

Prime

   $ —         $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Good

     183,482         —           —           —           174,479         —           —           —     

Acceptable

     13,015,742         1,945,581         —           —           11,983,976         1,545,689         —           —     

Acceptable with care

     793,663         —           —           —           798,489         —           —           —     

Special mention

     181,466         —           —           —           183,162         —           —           —     

Substandard assets

     —           —           —           —           166,117         —           —           —     

Doubtful assets

     —           —           —           —           —           —           —           —     

Loss assets

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,174,353       $ 1,945,581       $ —         $ —         $ 13,306,223       $ 1,545,689       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Credit Risk Profile of Consumer Loans

 
     March 31, 2012      December 31, 2011  
     Consumer -
Auto
     Consumer -
Other
     Consumer -
Auto
     Consumer -
Other
 

Prime

   $ —         $ 220,564       $ —         $ 224,075   

Good

     17,704         —           20,795         —     

Acceptable

     25,283         47,192         27,013         19,456   

Acceptable with care

     —           —           —           6,791   

Special mention

     13,847         500         14,574         —     

Substandard assets

     —           18,680         —           21,787   

Doubtful assets

     —           —           —           —     

Loss assets

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 56,834       $ 286,936       $ 62,382       $ 272,109   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

Impaired loans totaled $531,822 and $245,200 as of March 31, 2012 and 2011, respectively, and were represented by loans on non-accrual. The following table sets forth certain information regarding the type of impaired loans, their related allowances, and any interest income recognized on impaired loans during the first quarter of 2012 and 2011, ended March 31st.

 

Impaired Loans

For the Quarter Ended March 31, 2012

 
     Outstanding
Principal
Balance
     Recorded
Investment
     Average
Recorded
Investment
     Related
Allowance
     Interest
Income
Recognized
 

With no related allowance recorded:

   $ —         $ —         $ —         $ —         $ —     

With an allowance recorded:

              

Construction and land development

     118,786         118,786         125,325         43,586         —     

Real estate—mortgage

     —           —           —           —           —     

Real estate—other

     394,356         394,356         390,371         110,020         —     

Commercial and industrial

     —           —           —           —           —     

Consumer loans to individuals

     18,680         18,680         22,932         18,680         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

   $ 531,822       $ 531,822       $ 538,628       $ 172,286       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Impaired Loans

For the Quarter Ended March 31, 2011

 
     Outstanding
Principal
Balance
     Recorded
Investment
     Average
Recorded
Investment
     Related
Allowance
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Construction and land development

   $ 245,200       $ 245,000       $ 250,291       $ —         $ —     

With an allowance recorded:

              

Construction and land development

     —           —           —           —           —     

Real estate—mortgage

     —           —           —           —           —     

Real estate—other

     —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —     

Consumer loans to individuals

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

   $ 245,200       $ 245,000       $ 250,291       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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If a loan is modified as a result of a customer’s inability to meet the original terms, and if the modification gives the customer more favorable terms that would not otherwise be granted, the loan is considered to be a troubled debt restructuring. As of March 31, 2012, the Bank has three loans that qualify as trouble debt restructuring. The following table presents information regarding the Bank’s loans that qualify as a troubled debt restructuring as of March 31, 2012 and 2011.

 

March 31, 2012

 
                          Number of      Balances of  
            Pre-modification      Post-modification      Loans that      Loans that  
     Number      Outstanding      Outstanding      Subsequently      Subsequently  
     of Loans      Balances      Balances      Defaulted      Defaulted  

Construction and land development

     2       $ 137,426       $ 118,786         1       $ 37,277   

Real estate—mortgage

     —           —           —           —           —     

Real estate—other

     —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —     

Consumer and other

     1         27,446         18,680         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 164,872       $ 137,466         1       $ 37,277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

March 31, 2011

 
                          Number of      Balances of  
            Pre-modification      Post-modification      Loans that      Loans that  
     Number      Outstanding      Outstanding      Subsequently      Subsequently  
     of Loans      Balances      Balances      Defaulted      Defaulted  

Construction and land development

     2       $ 131,047       $ 131,047         1       $ 37,277   

Real estate—mortgage

     —           —           —           —           —     

Real estate—other

     —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —     

Consumer and other

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 131,047       $ 131,047         1       $ 37,277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2012, management was not aware of any additional loans that were not already considered for impairment or categorized as impaired or on non-accrual.

Note 7—Fair Value Measurements

The current accounting literature requires the disclosure of fair value information for financial instruments, whether or not they are recognized in the consolidated balance sheets, when it is practical to estimate the fair value. The guidance defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations, which require the exchange of cash, or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment, accrued interest receivable and payable, and other assets and liabilities.

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 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 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, which 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 values presented.

 

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Assets and liabilities carried at fair value are classified in one of the following three categories based on a hierarchy for ranking the quality and reliability of the information used to determine 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.

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.

For financial instruments whose fair values are estimated for disclosure purposes only, the following methods were used:

Cash and Cash Equivalents, Federal Funds Sold and Interest—Bearing Bank Deposits—The carrying amount is a reasonable estimate of fair value due to the short term nature of such items. These amounts generally relate to currency or highly liquid assets, thus these are considered a Level 1 valuation.

Securities Available for Sale—Investment securities available-for-sale are recorded at fair value on a recurring basis. These securities trade in highly liquid markets with observable quoted prices for identical assets, thus these assets are considered a Level 1 valuation.

Federal Reserve Bank and Federal Home Loan Bank Stock—The carrying value of nonmarketable equity securities approximates the fair value since no ready market exists for the stock. These assets are considered a Level 3 valuation.

Loans Held for Sale—Loans held for sale are carried at the lower of cost or market value. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. Since the secondary market creates some liquidity and observable market inputs for similar assets, these assets are considered a Level 2.

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 values of loans, excluding leases, are estimated based on groupings of similar loans by type, interest rate, and borrower creditworthiness. Discounted future cash flow analyses are performed for the groupings, incorporating assumptions of current and projected prepayment speeds and expected loss. Discount rates are determined using the Company’s current origination rates on similar loans, adjusted for changes in current liquidity and credit spreads, if necessary. Because the current liquidity spreads are generally not observable in the market and the expected loss assumptions are based on the Company’s experience, these are Level 3 valuations. However, the fair value of impaired loans is estimated based on discounted cash flows or underlying collateral values, where applicable. Thus, impaired loans are reported at Level 2 and Level 3 depending on the specifics of each impaired loan.

 

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Table of Contents

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. These liabilities are reported as a Level 2.

Off-Balance-Sheet Financial Instruments—The carrying amount for loan commitments are reported with zero fair value, since these amounts have not been issued.

The carrying values and estimated fair values of the Company’s financial instruments as of March 31, 2012 and December 31, 2011 were as follows:

 

March 31, 2012

 
    Carrying     Fair Value Measurements  
    Amount     Total     Level 1     Level 2     Level 3  

Financial assets

         

Cash and due from banks

  $ 1,064,478      $ 1,064,478      $ 1,064,478      $ —        $ —     

Federal funds sold

    1,098,912        1,098,912        1,098,912        —          —     

Interest-bearing bank deposits

    13,936,020        13,936,020        13,936,020        —          —     

Securities available for sale

    26,834,856        26,834,856        —          26,834,856        —     

Federal Reserve Bank and Federal Home Loan Bank stock

    624,450        624,450        —          —          624,450   

Loans Held for Sale

    346,400        346,400        —          346,400        —     

Loans, net

    54,395,904        55,507,343        —          81,509        55,425,834   

Financial liabilities

         

Demand deposits, interest-bearing transaction and savings accounts

    47,965,295        47,965,295        —          47,965,295        —     

Certificates of deposits

    36,448,781        36,282,621        —          36,282,621        —     
    Notional     Estimated                    
    Amount     Fair Value                    
 

 

 

   

 

 

       

Commitments to extend credit

  $ 9,803,371      $ —           

December 31, 2011

 
    Carrying     Fair Value Measurements  
    Amount     Total     Level 1     Level 2     Level 3  

Financial assets

         

Cash and due from banks

  $ 1,023,828      $ 1,023,828      $ 1,023,828      $ —        $ —     

Federal funds sold

    824,978        824,978        824,978        —          —     

Interest-bearing bank deposits

    9,471,498        9,471,498        9,471,498        —          —     

Securities available for sale

    29,507,235        29,507,235        —          29,507,235        —     

Federal Reserve Bank and Federal Home Loan Bank stock

    577,850        577,850        —          —          577,850   

Loans Held for Sale

    888,750        888,750        —          888,750        —     

Loans, net

    51,415,209        52,312,902        —          83,107        52,229,795   

Financial liabilities

         

Demand deposits, interest-bearing transaction and savings accounts

    45,277,181        45,277,181        —          45,277,181        —     

Certificates of deposits

    34,500,228        34,338,522        —          34,338,522        —     
    Notional     Estimated                    
    Amount     Fair Value                    
 

 

 

   

 

 

       

Commitments to extend credit

  $ 10,063,247      $ —           

 

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Table of Contents

There were no transfers between valuation levels for any assets during the quarter ended March 31, 2012.

Assets Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis at March 31, 2012, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Available-for-sale Securities

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Securities traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds are considered highly liquid and are classified as Level 1. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

The following table presents the fair value of assets evaluated on a recurring basis as of March 31, 2012 and December 31, 2011 by level within the hierarchy.

 

     Quoted      Significant         
     Market Price      Other      Significant  
     in Active      Observable      Unobservable  
     Markets      Inputs      Inputs  
     (Level 1)      (Level 2)      (Level 3)  

March 31, 2012

        

Government Sponsored Enterprise Bonds

   $ —         $ 1,949,536       $ —     

Small Business Administration Bonds

     —           1,534,593         —     

Municipal Bonds

     —           3,281,318         —     

Collateralized Mortgage Obligations (CMOs)

     —           2,807,817         —     

Mortgage Backed Securities (MBS)

     —           17,261,592         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 26,834,856       $ —     
  

 

 

    

 

 

    

 

 

 

December 31, 2011

        

Government Sponsored Enterprise Bonds

   $ —         $ 2,001,408       $ —     

Municipal Bonds

     —           3,255,442         —     

Collateralized Mortgage Obligations (CMOs)

     —           2,891,101         —     

Mortgage Backed Securities (MBS)

     —           21,359,284         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 29,507,235       $ —     
  

 

 

    

 

 

    

 

 

 

There were no other assets and no liabilities measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011.

Assets Measured at Fair Value on a Non-Recurring Basis

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. The fair value of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans for sale is nonrecurring Level 2.

 

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Table of Contents

Impaired Loans

A loan is considered impaired when the full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows or the fair value of collateral. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available and there is no observable market price, the Company records the loan as nonrecurring Level 3. The following table presents the fair value of assets evaluated on a nonrecurring basis as of March 31, 2012 and December 31, 2011.

 

            Quoted      Significant         
            Market Price      Other      Significant  
            in Active      Observable      Unobservable  
     Carrying      Markets      Inputs      Inputs  
     Value as of      (Level 1)      (Level 2)      (Level 3)  

March 31, 2012

           

Loans held for sale

   $ 346,400       $ —         $ 346,400       $ —     

Impaired Loans:

           

Construction and land development

     118,786         —           81,509         37,277   

Real estate—mortgage

     —           —           —           —     

Real estate—other

     394,356         —           —           394,356   

Commercial and industrial

     —           —           —           —     

Consumer loans to individuals

     18,680         —           —           18,680   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 878,222       $ —         $ 427,909       $ 450,313   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Loans held for sale

   $ 888,750       $ —         $ 888,750       $ —     

Impaired Loans:

           

Construction and land development

     120,384         —           83,107         37,277   

Real estate—mortgage

     166,117         —           —           166,117   

Real estate—other

     390,282         —           —           390,282   

Commercial and industrial

     —           —           —           —     

Consumer loans to individuals

     21,787         —           —           21,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,587,320       $ —         $ 971,857       $ 615,463   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no other assets and no liabilities measured at fair value as of March 31, 2012 and December 31, 2011 on a nonrecurring basis. During the quarter ended March 31, 2012, one Level 3 impaired loan paid off. Loans held for sale at December 31, 2011 were sold during the quarter ending March 31, 2012, and the values reported for loans held for sale as of March 31, 2012 represent new assets in that category. There were no other transfers between valuation levels for assets measured for fair value on a non-recurring basis.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at March 31, 2012.

 

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Table of Contents
     March 31,      Valuation    Unobservable
     2012     

Techniques

   Inputs

Impaired loans

        

Real estate:

        

Construction and land development

   $ 37,277       Sales Comparison    Partial ownership of property

Real estate—other

     394,356       Sales Comparison    Residential deed restrictions for
commercial property

Consumer installment:

        

Consumer loans to individuals

     18,680       Discounted Cash Flows    Unsecured

The impaired loan representing construction and land development is collateralized with a 25% interest in real estate. The impaired loan was valued by applying a 50% discount to the appraised value of the full property, which used a sales comparison approach, followed by applying the pro-rata 25% ownership in the property. The resulting valuation resulted in a full impairment of the loan balance. There is no observable market for selling the 25% interest in the property, therefore this impaired loan is considered a Level 3 valuation.

The impaired loan representing Real Estate-Other is collateralized with property that has a deed restriction for residential use only. However, the property has been converted to and used for commercial purposes for an extended period of time. The deed restriction for residential use and the commercial use of the property calls into question the marketability of the property and there are no observable market inputs for similar properties. Therefore, the fair valuation is considered to be Level 3. The valuation technique used was based on an appraisal of the property, based on sales comparisons for similar commercial properties, with a 10% discount applied. The valuation resulted in an impairment of $100,020, which is fully reserved.

The loan representing consumer loans is unsecured and, therefore, has no collateral for which to observe market inputs. Therefore, it is considered a Level 3 valuation. The valuation was performed using a discounted cash flows model and resulted in a full impairment of the loan balance.

Note 8—Subsequent Events

In preparing these consolidated financial statements, subsequent events were evaluated through the time the consolidated financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the consolidated financial statements or disclosed in the notes to the consolidated financial statements.

 

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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 statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in our forward-looking statements include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 2011 under Item 1A—Risk Factors and the following:

 

   

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

 

   

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

 

   

changes in political conditions or the legislative or regulatory environment;

 

   

general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality;

 

   

changes occurring in business conditions and inflation;

 

   

changes in technology;

 

   

the level of allowance for loan loss and the lack of seasoning of our loan portfolio;

 

   

the rate of delinquencies and amounts of charge-offs;

 

   

the rates of loan growth;

 

   

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

 

   

changes in monetary and tax policies;

 

   

loss of consumer confidence and economic disruptions resulting from terrorist activities;

 

   

changes in the securities markets; and

 

   

other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

These risks are exacerbated by the volatility and disruption experienced in national and international financial, capital, and credit markets during the last three years. Beginning in 2008 and continuing through 2011, the capital and credit markets experienced unprecedented levels of extended volatility and disruption. During the first quarter of 2012, economic conditions, while slow by historical standards, have shown signs of stabilization. However, as a result of U.S. government fiscal challenges, continued volatility in European sovereign and bank debt, slow improvement in domestic employment conditions, and the economic and monetary policy statements by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), it is difficult to predict if this stabilization is indicative of a lasting trend. Current economic reports are mixed and the outlook for the remainder of 2012 is unclear and does not yet indicate expectations of a sustained recovery. There can be no assurance that the current level of economic activity will not continue to materially and adversely impact the U.S. economy in general, the banking industry, and our business, financial condition and results of operations, as well as our ability to maintain sufficient capital or other funding for liquidity and business purposes.

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

 

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Overview

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

We completed our stock offering in June 2009, upon the issuance of 2,180,000 shares for gross proceeds of $21.8 million, pursuant to a closing in June 2009. We capitalized the bank with $19.9 million of the proceeds from the stock offering.

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

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

The following discussion describes our results of operations for the three months ended March 31, 2012 and 2011 and also analyzes our financial condition as of March 31, 2012 and December 31, 2011.

Critical Accounting Policies

We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2011, as filed in our Annual Report on Form 10-K.

Certain accounting policies involve significant judgments and assumptions by us that may have a material impact on the carrying value of certain assets and liabilities. We consider such accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe are reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Allowance for Loan Losses

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, assumptions about cash flow, determination of loss factors for estimating credit losses, and the impact of current events, conditions, and other factors impacting the level of probable inherent losses. Under different conditions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

Income Taxes

We use assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in our consolidated financial statements and income tax returns, and income tax benefit or expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises judgment in evaluating the amount and timing of recognition of resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. Valuation allowances are established to reduce deferred tax assets if it is determined to be possible that all or some portion of the potential deferred tax asset will not be realized. We believe our loss position may adversely impact our ability to recognize the full benefit of our deferred tax asset. Therefore, we currently have placed a valuation allowance for our full deferred tax asset. No assurance can be given that either

 

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the tax returns submitted by us or the income tax reported on the financial statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent non-deductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.

Results of Operations

Our primary source of revenue is net interest income. Net interest income is the difference between income earned on interest-bearing assets and interest paid on deposits and borrowings used to support such assets. The level of net interest income is determined by the balances of interest-earning assets and interest-bearing liabilities and corresponding interest rates earned and paid on those assets and liabilities, respectively. In addition to the volume of and corresponding interest rates associated with these interest-earning assets and interest-bearing liabilities, net interest income is affected by the timing of the repricing of these interest-earning assets and interest-bearing liabilities.

Three months ended March 31, 2012 and 2011

We incurred a net loss of $142,101, or .06 cents per share, for the three months ended March 31, 2012, compared to a net loss of $791,370, or .36 cents per share, for the three months ended March 31, 2011. Interest income was $921,629 and $646,941 for the three months ended March 31, 2012 and 2011, respectively. The increase in interest income is attributed to the larger loan portfolio maintained by the bank in 2012, offset by less interest income received on investments and interest bearing bank deposits. Interest income for the three months ended March 31, 2012 was comprised of $770,452 earned on loans, $139,333 earned on investment securities, and $11,844 earned on fed funds sold and interest bearing bank deposits.

Interest expense was $190,612 for the three months ended March 31, 2012, compared to $212,751 for the three months ended March 31, 2011. The decrease in interest expense is attributed to a reduction in deposit rates. Our net interest spread and net interest margin were 2.90% and 3.08%, respectively, for the three months ended March 31, 2012, compared to 2.23% and 2.53%, respectively, for the three months ended March 31, 2011. We are achieving higher yields on earning assets due to loan growth, as lower yielding liquidity has been redeployed into higher yielding loans. We are also achieving lower costs associated with deposit liabilities.

The loan loss provision, which is driven primarily by loan growth, non-performing loans, and a historical loss and environmental analysis, was $14,094 for the three months ended March 31, 2012, compared to $318,431 for the three months ended March 31, 2011. The decrease in loan loss provision is attributed primarily to higher specific reserves needed in 2011 for non-performing loans.

Non-interest income was $68,844 for the three months ended March 31, 2012, of which $19,272 came from service charges on deposits, $19,850 came from gains on the sale of mortgage loans, and $7,930 came from gains on sale of investments. For the three months ended March 31, 2011, non-interest income was $17,107, of which $5,120 came from service charges on deposits and $6,605 came from gains on the sale of mortgage loans. There were no gains on sale of investment securities during the first quarter 2011. Service charge fee income has increased due to consumer NSF activity. Additionally, the Bank received $15,891 on a fully depreciated bank vehicle that was disposed during the three months ended March 31, 2012. Non-interest expense was $927,868 and $924,236 for the three months ended March 31, 2012 and 2011, respectively. Employee benefit expenses, occupancy and equipment expense, and marketing expenses all decreased while data processing and consulting services, including an executive search firm, increased during the three months ended March 31, 2012 compared to the same time period in 2011.

Assets and Liabilities

General

Total assets as of March 31, 2012 were $99.0 million, representing an increase of $4.6 million, or 4.9%, compared to $94.4 million as of December 31, 2011. The increase in assets is due primarily to net loan growth of $3.0 million, which was funded primarily by deposit growth of $4.6 million. At March 31, 2012, total assets consisted principally of $16.1 million in cash and cash equivalents, $26.8 million in available-for-sale investment securities and $54.4 million in net loans. Net loans at December 31, 2011 were $51.4 million. The primary source of funding is deposits that are acquired locally. Liabilities at March 31, 2012 totaled $85.0 million, represented almost entirely by retail customer deposits totaling $84.4 million. Liabilities as of December 31, 2011 totaled $80.3 million, including $79.8 million in deposits. At March 31, 2012, shareholders’ equity was $14.0 million, compared to $14.1 million as of December 31, 2011. The reason for the decrease in shareholders’ equity is net losses. Book value per share was $6.41 at March 31, 2012, compared to $6.43 as of December 31, 2011.

 

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Loans

Loans typically provide higher interest yields than other types of interest-earning assets. Net loans have increased $3.0 million, or 5.8%, to $54.4 million, during the three months ended March 31, 2012, primarily in the category of Real Estate – Other, compared to $51.4 million as of December 31, 2011. The following table summarizes the composition of our loan portfolio as of March 31, 2012 and December 31, 2011.

 

     March 31,     Percentage of     December 31,     Percentage  
     2012     of Total     2011     of Total  

Construction and land development

   $ 4,911,417        8.83   $ 4,875,191        9.26

Real estate—residential mortgage

     14,174,353        25.47        13,306,223        25.28   

Real estate—other

     32,308,779        58.07        29,685,774        56.39   

Commercial and industrial

     3,899,100        7.01        4,437,718        8.43   

Consumer and other

     343,770        0.62        334,491        0.64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans

     55,637,419        100.00     52,639,397        100.00

Allowance for loan losses

     (1,105,971     —          (1,091,877     —     

Deferred loan fees, net

     (135,544     —          (132,311     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net

   $ 54,395,904        —        $ 51,415,209        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Classified Loans

Classified loans are performing loans with elevated levels of credit risk. These loans are assigned credit risk grades of substandard or worse. The Bank’s classified loans decreased during the first three months of 2012 from $3,337,162 as of December 31, 2011 to $3,200,781 as of March 31, 2012, primarily due to the payoff of one loan relationship.

Nonperforming Loans

At March 31, 2012, nonaccrual loans totaled $531,822, related to four lending relationships, compared to $698,570 in nonaccrual loans as of December 31, 2011. There were no accruing loans which were contractually past due 90 days or more as to principal or interest payments at March 31, 2012 and December 31, 2011. Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of the loan is doubtful. The nonaccrual loan relationship is considered impaired.

As of March 31, 2012, we were not aware of any other loans that were not already considered for impairment or categorized as impaired or on nonaccrual.

Provision and Allowance for Loan Losses

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

Periodically, we will adjust the amount of the allowance based on changing circumstances. We will charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

We have established an allowance for loan losses through a provision for loan losses charged to expense on our consolidated statement of operations. The allowance for loan losses was $1,105,971 as of March 31, 2012, or 1.99% of gross loans outstanding, compared to $1,091,877 as of December 31, 2011, or 2.07% of gross loans outstanding. Total provision expense for the three months ended March 31, 2012 was $14,094, compared to $318,431 for the three months ended March 31, 2011. The decrease in provision expense in 2012 compared to 2011 was primarily due to less growth in the loan portfolio and additional provision in 2011 needed for classified and nonperforming loan relationships.

 

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There were no charge offs or recoveries during the first three months of 2012 and 2011. As of March 31, 2012, management considered the allowance for loan losses to be adequate and sufficient to meet presently known and inherent losses in the loan portfolio.

Deposits

Our primary source of funds for loans and investments is the funds obtained through our customer deposits. At March 31, 2012, we had $84.4 million in deposits, representing an increase of $4.6 million from December 31, 2011. Our deposits as of March 31, 2012 consisted primarily of $8.9 million in demand deposit accounts, $36.4 million in certificates of deposit, and $39.1 million of savings and money market accounts. The primary source of funding for our loan portfolio is deposits that are acquired locally. As of March 31, 2012, we have no brokered or wholesale deposits and no borrowings.

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. For an operating bank, liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to maintain sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

Our primary sources of liquidity are deposits, scheduled repayments on our loans, and interest/principal payments received on and maturities of our investments. We plan to meet our future cash needs through the generation of deposits. Occasionally, we might sell investment securities in connection with the management of our interest sensitivity gap or to manage cash availability. We may also utilize our cash and due from banks and federal funds sold to meet liquidity requirements as needed. In addition, we have the ability, on a short-term basis, to purchase federal funds from other financial institutions or borrow advances from the Federal Home Loan Bank Atlanta. As of March 31, 2012, our primary sources of liquidity included cash, non-interest and interest-bearing deposits and federal funds sold with financial institutions totaling $16.1 million. In addition, the fair value of our available for sale investment portfolio was $26.8 million as of March 31, 2012. Our lines of credit available with correspondent banks total $8.0 million with no outstanding principal or interest on these lines at March 31, 2012 and are unsecured. These lines may be withdrawn at the discretion of the correspondent financial institutions. Our credit availability at the Federal Home Loan Bank is $9.35 million as of March 31, 2012 and requires collateralization by eligible investment securities or loans. We believe our liquidity levels are adequate to meet our operating needs.

Off-Balance Sheet Risk

Through the operations of our bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At March 31, 2012, we had issued commitments to extend credit of $9.8 million through various types of lending arrangements, compared to $10.1 million as of December 31, 2011. 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 was $14.0 million at March 31, 2012 compared to $14.1 million at December 31, 2011. The decrease is primarily a result of net losses of $142,101 for the three months ended March 31, 2012.

Our bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. However, the Federal Reserve guidelines contain an exemption from the capital requirements for “small bank holding companies”

 

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

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

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

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

The bank exceeded its minimum regulatory capital ratios as of March 31, 2012 and December 31, 2011, as well as the ratios to be considered “well capitalized.”

The following table sets forth the bank’s various capital ratios at March 31, 2012 and December 31, 2011:

 

     Tier 1     Tier 1     Total  
(Unaudited)    Leverage     Risk-Based     Risk-Based  

Minimum Required

     4.00     4.00     8.00

Minimum Required to be well capitalized

     5.00     6.00     10.00

Actual Ratios at March 31, 2012

      

Coastal Carolina National Bank

     13.62     24.34     25.60

Consolidated

     14.32     25.82     27.08

Actual Ratios at December 31, 2011

      

Coastal Carolina National Bank

     14.14     24.64     25.89

Consolidated

     14.87     26.16     27.42

We believe our capital is sufficient to fund the activities of the bank as we grow. As of March 31, 2012, there were no significant firm commitments outstanding for capital expenditures.

 

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

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 Principal Executive Officer and Principal 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 Principal Executive Officer and Principal Financial Officer have concluded that our current disclosure controls and procedures are effective as of March 31, 2012. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended March 31, 2012 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.

 

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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 1A. Risk Factors

Not applicable.

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

No applicable.

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

Not applicable.

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.
101    The following materials from the Quarterly Report on Form 10-Q of Carolina Coastal Bancshares, Inc. for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statement of Shareholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Coastal Carolina Bancshares, Inc.
Date: May 11, 2012     By:   /s/ Laurence S. Bolchoz, Jr.
    Laurence S. Bolchoz, Jr.
    President and Chief Executive Officer
    (Principal Executive Officer)
    By:   /s/ Dawn M. Kinard
    Dawn M. Kinard
    Senior Vice President and Chief Financial Officer
    (Principal Financial and 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.
101    The following materials from the Quarterly Report on Form 10-Q of Carolina Coastal Bancshares, Inc. for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statement of Shareholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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