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EXCEL - IDEA: XBRL DOCUMENT - Coastal Carolina Bancshares, Inc. | Financial_Report.xls |
EX-32 - EX-32 - Coastal Carolina Bancshares, Inc. | d234062dex32.htm |
EX-31.2 - EX-31.2 - Coastal Carolina Bancshares, Inc. | d234062dex312.htm |
EX-31.1 - EX-31.1 - Coastal Carolina Bancshares, Inc. | d234062dex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2011
¨ | 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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
2305 Oak Street
Myrtle Beach , South Carolina 29577
(Address of principal executive offices, including zip code)
(843) 839-1953
(Registrants 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 issuers classes of common stock, as of the latest practicable date: 2,191,500 shares of common stock, par value $0.01 per share, were outstanding as of November 4, 2011.
Page No. | ||||||
Item 1. |
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Consolidated Balance Sheets September 30, 2011 (unaudited) and December 31, 2010 |
3 | |||||
4 | ||||||
5 | ||||||
Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, 2011 and 2010 |
6 | |||||
7 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
21 | ||||
Item 3. |
27 | |||||
Item 4. |
27 | |||||
Item 1. |
28 | |||||
Item 1A. |
28 | |||||
Item 2. |
28 | |||||
Item 3. |
28 | |||||
Item 4. |
28 | |||||
Item 5. |
28 | |||||
Item 6. |
28 |
2
PART I FINANCIAL INFORMATION
COASTAL CAROLINA BANCSHARES, INC.
Consolidated Balance Sheets
September 30, 2011 (Unaudited) |
December 31, 2010 |
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Assets |
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Cash and non-interest due from banks |
$ | 877,120 | $ | 539,685 | ||||
Federal funds sold |
519,342 | 1,589,151 | ||||||
Interest-bearing bank deposits |
11,007,800 | 16,465,014 | ||||||
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Total cash and cash equivalents |
12,404,262 | 18,593,850 | ||||||
Securities available for sale |
31,977,688 | 28,705,311 | ||||||
Federal Reserve Bank stock |
417,250 | 456,300 | ||||||
Federal Home Loan Bank stock |
93,800 | | ||||||
Loans held for sale |
| 340,000 | ||||||
Loans receivable |
47,711,459 | 23,300,686 | ||||||
Deferred loan fees, net |
(136,794 | ) | (73,850 | ) | ||||
Allowance for loan losses |
(989,647 | ) | (432,750 | ) | ||||
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Loans, net |
46,585,018 | 22,794,086 | ||||||
Premises and equipment, net |
272,070 | 333,551 | ||||||
Accrued income and other assets |
431,252 | 663,435 | ||||||
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Total assets |
$ | 92,181,340 | $ | 71,886,533 | ||||
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Liabilities and Shareholders Equity |
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Liabilities |
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Deposits: |
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Non-interest bearing demand |
$ | 4,792,796 | $ | 2,319,623 | ||||
Interest checking |
3,905,379 | 2,432,715 | ||||||
Money market |
38,256,442 | 27,071,059 | ||||||
Savings |
308,351 | 104,515 | ||||||
Certificates of deposit |
29,825,941 | 24,759,204 | ||||||
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Total deposits |
77,088,909 | 56,687,116 | ||||||
Accrued expenses and other liabilities |
771,327 | 428,129 | ||||||
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Total liabilities |
77,860,236 | 57,115,245 | ||||||
Shareholders Equity |
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Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding |
| | ||||||
Common stock, $.01 par value, 50,000,000 shares authorized, 2,191,500 and 2,185,000 issued and outstanding at September 30, 2011 and December 31, 2010, respectively |
21,915 | 21,850 | ||||||
Additional paid-in capital |
21,782,284 | 21,667,958 | ||||||
Unearned compensation, nonvested restricted stock |
(58,542 | ) | (25,000 | ) | ||||
Retained deficit |
(7,755,345 | ) | (6,548,688 | ) | ||||
Accumulated other comprehensive income (loss) |
330,792 | (344,832 | ) | |||||
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Total shareholders equity |
14,321,104 | 14,771,288 | ||||||
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Total liabilities and shareholders equity |
$ | 92,181,340 | $ | 71,886,533 | ||||
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See notes to the consolidated financial statements.
3
COASTAL CAROLINA BANCSHARES, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, |
Nine Months
Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest income |
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Loans, including fees |
$ | 628,778 | $ | 276,015 | $ | 1,520,323 | $ | 649,331 | ||||||||
Federal funds sold and interest-bearing bank deposits |
16,715 | 82,769 | 75,773 | 310,780 | ||||||||||||
Securities |
224,712 | 197,544 | 668,517 | 594,597 | ||||||||||||
Federal Reserve & Federal Home Loan stock dividend |
6,671 | 7,384 | 19,827 | 22,631 | ||||||||||||
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Total interest income |
876,876 | 563,712 | 2,284,440 | 1,577,339 | ||||||||||||
Interest expense |
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Deposits: |
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Interest checking |
11,032 | 5,984 | 30,638 | 11,666 | ||||||||||||
Money market and savings |
87,534 | 86,417 | 292,749 | 265,422 | ||||||||||||
Certificates of deposit < $100,000 |
34,561 | 38,879 | 99,881 | 115,475 | ||||||||||||
Certificates of deposit > $100,000 |
72,770 | 87,509 | 209,376 | 256,433 | ||||||||||||
Lines of credit and other borrowings |
| | | 23 | ||||||||||||
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Total interest expense |
205,897 | 218,789 | 632,644 | 649,019 | ||||||||||||
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Net interest income before provision for loan losses |
670,979 | 344,923 | 1,651,796 | 928,320 | ||||||||||||
Provision for loan losses |
61,474 | 85,054 | 556,897 | 407,511 | ||||||||||||
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Net interest income after provision for loan losses |
609,505 | 259,869 | 1,094,899 | 520,809 | ||||||||||||
Noninterest income |
||||||||||||||||
Service charges on deposits |
13,194 | 1,891 | 26,676 | 7,408 | ||||||||||||
ATM, debit, and merchant fees |
5,196 | 2,267 | 13,306 | 5,418 | ||||||||||||
Gain on sale of loans |
| 15,059 | 8,629 | 22,327 | ||||||||||||
Gain on sale of investment securities |
168,089 | 249,795 | 297,585 | 364,278 | ||||||||||||
Other |
11,173 | 2,336 | 15,739 | 4,038 | ||||||||||||
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Total noninterest income |
197,652 | 271,348 | 361,935 | 403,469 | ||||||||||||
Noninterest expense |
||||||||||||||||
Salaries and employee benefits |
520,125 | 476,618 | 1,613,764 | 1,380,731 | ||||||||||||
Occupancy and equipment |
85,262 | 95,726 | 271,179 | 306,699 | ||||||||||||
Data processing |
86,652 | 72,946 | 246,520 | 210,318 | ||||||||||||
Professional services |
41,116 | 80,510 | 141,953 | 194,394 | ||||||||||||
Marketing and business development |
37,058 | 20,755 | 135,216 | 89,076 | ||||||||||||
Shareholder communications |
9,653 | 1,144 | 31,148 | 30,962 | ||||||||||||
Corporate insurance |
6,911 | 6,675 | 18,978 | 17,649 | ||||||||||||
Postage and supplies |
10,544 | 10,657 | 31,279 | 26,948 | ||||||||||||
Telecommunications |
5,189 | 5,029 | 16,061 | 15,609 | ||||||||||||
FDIC insurance and regulatory assessments |
26,406 | 30,577 | 88,982 | 84,631 | ||||||||||||
Other |
19,424 | 16,922 | 68,411 | 49,724 | ||||||||||||
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Total noninterest expense |
848,340 | 817,559 | 2,663,491 | 2,406,741 | ||||||||||||
Loss before income taxes |
(41,183 | ) | (286,342 | ) | (1,206,657 | ) | (1,482,463 | ) | ||||||||
Income taxes |
| | | 4,356 | ||||||||||||
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Net loss |
$ | (41,183 | ) | $ | (286,342 | ) | $ | (1,206,657 | ) | $ | (1,486,819 | ) | ||||
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Loss per share |
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Basic and diluted loss per share |
$ | (0.02 | ) | $ | (0.13 | ) | $ | (0.55 | ) | $ | (0.68 | ) | ||||
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Average shares outstanding |
2,191,500 | 2,185,674 | 2,190,238 | 2,185,890 | ||||||||||||
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See notes to the consolidated financial statements.
4
COASTAL CAROLINA BANCSHARES, INC.
Consolidated Statements of Shareholders Equity and Comprehensive Loss
(Unaudited)
Additional Paid-in Capital |
Unearned Compensation Nonvested Restricted Stock |
Retained Deficit |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders Equity |
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Common Stock | ||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
December 31, 2009 |
2,186,000 | $ | 21,860 | $ | 21,604,774 | $ | (51,111 | ) | $ | (4,533,543 | ) | $ | (100,826 | ) | $ | 16,941,154 | ||||||||||||
Net Loss |
| | | | (1,486,819 | ) | | (1,486,819 | ) | |||||||||||||||||||
Change in unrealized gains and losses on securities |
| | | | | 143,897 | 143,897 | |||||||||||||||||||||
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Total comprehensive loss |
| | | | | | (1,342,922 | ) | ||||||||||||||||||||
Restricted Stock |
| | | 11,944 | | | 11,944 | |||||||||||||||||||||
Organizer/founder warrants |
| | 12,366 | | | | 12,366 | |||||||||||||||||||||
Stock-based compensation |
(1,000 | ) | (10 | ) | 47,182 | | | | 47,172 | |||||||||||||||||||
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September 30, 2010 |
2,185,000 | $ | 21,850 | $ | 21,664,322 | $ | (39,167 | ) | $ | (6,020,362 | ) | $ | 43,071 | $ | 15,669,714 | |||||||||||||
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December 31, 2010 |
2,185,000 | $ | 21,850 | $ | 21,667,958 | $ | (25,000 | ) | $ | (6,548,688 | ) | $ | (344,832 | ) | $ | 14,771,288 | ||||||||||||
Net Loss |
| | | | (1,206,657 | ) | | (1,206,657 | ) | |||||||||||||||||||
Change in unrealized gains and losses on securities |
| | | | | 675,624 | 675,624 | |||||||||||||||||||||
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Total comprehensive loss |
| | | | | | (531,033 | ) | ||||||||||||||||||||
Restricted Stock |
6,500 | 65 | 64,935 | (65,000 | ) | | | | ||||||||||||||||||||
Organizer/founder warrants |
| | 12,366 | | | | 12,366 | |||||||||||||||||||||
Stock-based compensation |
| | 37,025 | 31,458 | | | 68,483 | |||||||||||||||||||||
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September 30, 2011 |
2,191,500 | $ | 21,915 | $ | 21,782,284 | $ | (58,542 | ) | $ | (7,755,345 | ) | $ | 330,792 | $ | 14,321,104 | |||||||||||||
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See notes to the consolidated financial statements.
5
COASTAL CAROLINA BANCSHARES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, |
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2011 | 2010 | |||||||
Operating activities |
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Net loss |
$ | (1,206,657 | ) | $ | (1,486,819 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: |
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Provision for loan losses |
556,897 | 407,511 | ||||||
Increase in deferred loan fees, net |
62,944 | 36,593 | ||||||
Gains on sale of loans held for sale |
(8,629 | ) | (22,327 | ) | ||||
Origination of loans held for sale, net |
(95,764 | ) | (1,622,244 | ) | ||||
Proceeds from sale of loans held for sale |
444,393 | 1,320,317 | ||||||
Premium amortization and discount accretion on securities, net |
206,547 | 93,223 | ||||||
Securities gains, net |
(297,585 | ) | (364,278 | ) | ||||
Depreciation and amortization expense |
91,912 | 133,414 | ||||||
Stock-based compensation expense |
80,850 | 71,482 | ||||||
Increase in accrued interest receivable |
(29,893 | ) | (67,563 | ) | ||||
Increase in accrued interest payable |
(7,647 | ) | (1,668 | ) | ||||
Decrease in other assets |
41,608 | 22,586 | ||||||
Increase in other liabilities |
139,356 | 174,938 | ||||||
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Net cash used in operating activities |
(21,668 | ) | (1,304,835 | ) | ||||
Investing activities |
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Net change in loans |
(24,410,773 | ) | (9,312,911 | ) | ||||
Purchases of securities available for sale |
(28,451,802 | ) | (34,851,300 | ) | ||||
Proceeds from paydowns of securities available for sale |
2,224,405 | 1,375,102 | ||||||
Proceeds from sales of securities available for sale |
24,153,638 | 28,381,870 | ||||||
Redemption of Federal Reserve Bank stock |
39,050 | 43,700 | ||||||
Purchase of Federal Home Loan Bank stock |
(93,800 | ) | | |||||
Net purchases of premises and equipment |
(30,431 | ) | (32,479 | ) | ||||
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Net cash used in investing activities |
(26,569,713 | ) | (14,396,018 | ) | ||||
Financing activities |
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Net increase in demand deposits, interest-bearing transaction accounts and savings accounts |
15,335,056 | 4,228,027 | ||||||
Net increase in certificates of deposit |
5,066,737 | 2,478,645 | ||||||
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Net cash provided by financing activities |
20,401,793 | 6,706,672 | ||||||
Net decrease in cash and cash equivalents |
(6,189,588 | ) | (8,994,181 | ) | ||||
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Cash and cash equivalents, beginning of period |
18,593,850 | 32,257,711 | ||||||
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Cash and cash equivalents, end of period |
$ | 12,404,262 | $ | 23,263,530 | ||||
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Supplemental disclosures of cash flow information |
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Cash paid for: |
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Interest on deposits and borrowings |
$ | 434,394 | $ | 650,688 | ||||
Non-cash items: |
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Unrealized gains (losses) on securities available for sale (net of tax expense of $431,956 and $87,519 for 2011 and 2010, respectively) |
675,624 | 143,897 | ||||||
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See notes to the consolidated financial statements.
6
COASTAL CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
September 30, 2011
Note 1 - Business and Basis of Presentation
Organization Coastal Carolina National Bank (the Bank) received preliminary conditional approval from the OCC on June 20, 2008 and received conditional approval from the FDIC on October 1, 2008. Having received those approvals from the OCC and the FDIC, the Company filed an application with the Board of Governors of the Federal Reserve System (the Federal Reserve) to become a bank holding company and acquire all of the stock of the Bank upon its formation, and the Company received that approval on November 21, 2008.
In order to capitalize the Bank, the Company conducted a stock offering and raised $21.8 million selling 2,180,000 shares of its common stock at $10 per share. Of the total shares sold, the organizers, directors and executive officers of the Company purchased 891,525 shares of common stock at $10 per share in the offering. Upon receipt of all final regulatory approvals, the Company capitalized the Bank through the purchase of 1,994,000 shares at $10.00 per share, or $19,940,000, on June 5, 2009, and the Bank began banking operations on June 8, 2009.
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 and nine month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for 2010 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, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for 2010 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 Companys 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 nine months ended September 30, 2011 and 2010 due to the net loss; therefore, basic loss per share and diluted earnings per share were the same.
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss to common shareholders |
$ | (41,183 | ) | $ | (286,342 | ) | $ | (1,206,657 | ) | $ | (1,486,819 | ) | ||||
Weighted-average number of common shares outstanding |
2,191,500 | 2,185,674 | 2,190,238 | 2,185,890 | ||||||||||||
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Net loss per share |
$ | (0.02 | ) | $ | (0.13 | ) | $ | (0.55 | ) | $ | (0.68 | ) | ||||
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7
Comprehensive Income - Accounting principles generally require that recognized income, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
The change in the components of other comprehensive income and related tax effects are as follows for the three and nine months ended September 30, 2011 and 2010:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Change in unrealized gains on securities available-for-sale |
$ | 596,707 | $ | (217,225 | ) | $ | 1,107,580 | $ | 231,416 | |||||||
Net Change in Deferred tax on unrealized gains on securities available-for-sale |
(232,716 | ) | 84,718 | (431,956 | ) | (87,519 | ) | |||||||||
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Net-of-tax amount |
$ | 363,991 | $ | (132,507 | ) | $ | 675,624 | $ | 143,897 | |||||||
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Note 3 - Recently Issued or Proposed Accounting Pronouncements
The following is a summary of recent authoritative pronouncements:
| In July 2010, the Receivables topic of the Accounting Standards Codification (ASC) was amended by Accounting Standards Update (ASU) 2010-20 to require expanded disclosures related to a companys allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in their interim and annual financial statements. See Note 6. |
| Disclosures about Troubled Debt Restructurings (TDRs) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (FASB) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present. Disclosures related to TDRs under ASU 2010-20 have been presented in Note 6. |
| Also in December 2010, the Business Combinations topic of the ASC was amended to specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendment also requires that the supplemental pro forma disclosures include a description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This amendment is effective for the Company for business combinations for which the acquisition date is on or after January 1, 2011, although early adoption is permitted. The Company does not expect the amendment to have any impact on the financial statements. |
| In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments are effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements. |
| 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 will be effective for the Company beginning January 1, 2012 but are not expected to have a material 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. The amendment |
8
requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively. The Company does not expect the amendment to have any impact on the Companys financial condition, results of operations, or cash flows. |
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 Companys financial position, results of operations or cash flows.
Note 4 - Cash and Cash Equivalents
As of September 30, 2011, cash and cash equivalents totaled $12.4 million and were represented by $877,120 in cash on hand and noninterest-bearing deposits with other banks, $11 million in interest-bearing deposits with other banks, and $519,342 in federal funds sold. Interest-bearing deposits with other banks included $4.6 million in CDs invested at other banks that carry a weighted average rate of .82% with maturities less than 12 months, $2.7 million at the Federal Reserve, and $3.7 million in money market deposit accounts. These balances allow the Bank to meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested.
Note 5 - Securities
At September 30, 2011 and December 31, 2010, the Bank's securities 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), and collateralized mortgage obligations issued by the Government National Mortgage Association (GNMA), summarized as follows:
September 30, 2011 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
U. S. Government Agency bonds |
$ | 2,000,000 | $ | 6,222 | $ | | $ | 2,006,222 | ||||||||
Municipal bonds |
3,172,845 | 83,020 | (6,890 | ) | 3,248,975 | |||||||||||
Collateralized mortgage obligations (CMOs) |
3,897,434 | 73,792 | (4,605 | ) | 3,966,621 | |||||||||||
Mortgage-backed securities (MBSs) |
22,365,128 | 397,722 | (6,980 | ) | 22,755,870 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities |
$ | 31,435,407 | $ | 560,756 | $ | (18,475 | ) | $ | 31,977,688 | |||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2010 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
Municipal bonds |
$ | 1,961,248 | $ | | $ | (131,775 | ) | $ | 1,829,473 | |||||||
Collateralized mortgage obligations (CMOs) |
3,024,821 | | (82,164 | ) | 2,942,657 | |||||||||||
Mortgage-backed securities (MBSs) |
24,284,541 | 9,615 | (360,975 | ) | 23,933,181 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities |
$ | 29,270,610 | $ | 9,615 | $ | (574,914 | ) | $ | 28,705,311 | |||||||
|
|
|
|
|
|
|
|
9
The unrealized losses at September 30, 2011 and December 31, 2010 are shown in the following table:
September 30, 2011 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
U. S. Government Agency bonds |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Municipal Bonds |
762,490 | (6,890 | ) | | | 762,490 | (6,890 | ) | ||||||||||||||||
Collateralized mortgage obligations (CMOs) |
1,952,118 | (4,605 | ) | | | 1,952,118 | (4,605 | ) | ||||||||||||||||
Mortgage-backed securities (MBSs) |
7,814,458 | (6,980 | ) | | | 7,814,458 | (6,980 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 10,529,066 | $ | (18,475 | ) | $ | | $ | | $ | 10,529,066 | $ | (18,475 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
Municipal Bonds |
$ | 1,829,473 | $ | (131,775 | ) | $ | | $ | | $ | 1,829,473 | $ | (131,775 | ) | ||||||||||
Collateralized mortgage obligations (CMOs) |
2,942,657 | (82,164 | ) | | | 2,942,657 | (82,164 | ) | ||||||||||||||||
Mortgage-backed securities (MBSs) |
20,467,363 | (360,975 | ) | | | 20,467,363 | (360,975 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 25,239,493 | $ | (574,914 | ) | $ | | $ | | $ | 25,239,493 | $ | (574,914 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturity distribution and yields of the Bank's securities portfolio at September 30, 2011 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 |
888,989 | 930,396 | ||||||
Due after ten years |
30,546,418 | 31,047,292 | ||||||
|
|
|
|
|||||
Total (1) |
$ | 31,435,407 | $ | 31,977,688 | ||||
|
|
|
|
(1) | Maturities estimated based on average life of security. |
The Bank also owned Federal Reserve Bank (FRB) stock with a cost of $417,250 at September 30, 2011 and $456,300 at December 31, 2010. 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. At September 30, 2011, the Bank owned $93,800 in Federal Home Loan Bank (FHLB) stock.
Securities with an amortized cost of $7,150,795 at September 30, 2011 and $5,021,219 at December 31, 2010, were pledged to secure public deposits. During the nine months ended September 30, 2011, the Bank sold 19 securities with amortized costs of $24.2 million and purchased 19 securities with an amortized cost of $28.4 million.
There were no write-downs for other-than-temporary declines in the fair value of debt securities for the nine month period ended September 30, 2011. At September 30, 2011, there were no investment securities considered to be other than temporarily impaired. The Banks 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.
10
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 September 30, 2011 and December 31, 2010. Deferred loans fees of $136,794 and $73,850 as of September 30, 2011 and December 31, 2010, respectively, are not included in the allowance for loan losses calculation.
11
Allowance for Loan Losses and Recorded Investment in Loans Receivable For the Nine Months Ended September 30, 2011 |
||||||||||||||||||||||||||||
Construction and Land Development |
Real Estate 1-4 Family |
Real Estate Other |
Commercial and 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 |
(11,530 | ) | 95,624 | 288,945 | 47,400 | 35,952 | 100,506 | 556,897 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending Balance |
$ | 80,735 | $ | 174,672 | $ | 474,007 | $ | 62,381 | $ | 38,064 | $ | 159,788 | $ | 989,647 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending Balances: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 13,764 | $ | | $ | | $ | | $ | 24,846 | $ | | $ | 38,610 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Collectively evaluated for impairment |
$ | 66,971 | $ | 174,672 | $ | 474,007 | $ | 62,381 | $ | 13,218 | $ | 159,788 | $ | 951,037 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans acquired with deteriorated credit quality |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans receivable: |
||||||||||||||||||||||||||||
Ending balance - total |
$ | 6,061,730 | $ | 17,538,397 | $ | 18,346,059 | $ | 4,088,871 | $ | 1,676,402 | $ | 47,711,459 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Ending Balances: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 253,664 | $ | | $ | | $ | | $ | 24,846 | $ | 278,510 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Collectively evaluated for impairment |
$ | 5,808,066 | $ | 17,538,397 | $ | 18,346,059 | $ | 4,088,871 | $ | 1,651,556 | $ | 47,432,949 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Loans acquired with deteriorated credit quality |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Allowance for Loan Losses and Recorded Investment in Loans Receivable For the Year Ended December 31, 2010 |
||||||||||||||||||||||||||||
Construction and Land Development |
Real Estate Mortgage |
Real Estate Other |
Commercial and Industrial |
Consumer | Unallocated | Total | ||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||
Beginning Balance |
$ | 42,442 | $ | 7,317 | $ | 80,054 | $ | 14,206 | $ | 826 | $ | | $ | 144,845 | ||||||||||||||
Charge-offs |
| | (197,797 | ) | | (30 | ) | | (197,827 | ) | ||||||||||||||||||
Recoveries |
| | | | 30 | | 30 | |||||||||||||||||||||
Provisions |
49,823 | 71,731 | 302,805 | 775 | 1,286 | 59,282 | 485,702 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending Balance |
$ | 92,265 | $ | 79,048 | $ | 185,062 | $ | 14,981 | $ | 2,112 | $ | 59,282 | $ | 432,750 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending Balances: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Collectively evaluated for impairment |
$ | 92,265 | $ | 79,048 | $ | 185,062 | $ | 14,981 | $ | 2,112 | $ | 59,282 | $ | 432,750 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans acquired with deteriorated credit quality |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans receivable: |
||||||||||||||||||||||||||||
Ending balance - total |
$ | 5,528,181 | $ | 5,631,112 | $ | 10,721,143 | $ | 1,090,301 | $ | 329,949 | $ | 23,300,686 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Ending Balances: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 137,277 | $ | | $ | | $ | | $ | | $ | 137,277 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Collectively evaluated for impairment |
$ | 5,390,904 | $ | 5,631,112 | $ | 10,721,143 | $ | 1,090,301 | $ | 329,949 | $ | 23,163,409 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Loans acquired with deteriorated credit quality |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
12
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 September 30, 2011, 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.
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 September 30, 2011, loans past due totaled $235,378, of which $168,714 was past due greater than 90 days. As of December 31, 2010, loans past due totaled $253,714, of which $137,277 was past due greater than 90 days.
Below are tables that present the past due status of loans receivable as of September 30, 2011 and December 31, 2010.
September 30, 2011 | ||||||||||||||||||||||||
30 - 59 Days Past Due |
60 - 89 Days Past Due |
Greater Than 90 Days |
Current | Total Loans | Past Due > 90 Days and Accruing |
|||||||||||||||||||
Construction/Land development |
$ | | $ | | $ | 168,714 | $ | 5,893,016 | $ | 6,061,730 | $ | | ||||||||||||
Real estate - mortgage |
| | | 11,238,540 | 11,238,540 | | ||||||||||||||||||
Real estate - other |
66,664 | | | 25,919,974 | 25,986,638 | | ||||||||||||||||||
Commercial and industrial |
| | | 4,088,871 | 4,088,871 | | ||||||||||||||||||
Consumer and other |
| | | 335,680 | 335,680 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 66,664 | $ | | $ | 168,714 | $ | 47,476,081 | $ | 47,711,459 | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
30 - 59 Days Past Due |
60 - 89 Days Past Due |
Greater Than 90 Days |
Current | Total Loans | Past Due > 90 Days and Accruing |
|||||||||||||||||||
Construction/Land development |
$ | 116,437 | $ | | $ | 137,277 | $ | 5,274,467 | $ | 5,528,181 | $ | | ||||||||||||
Real estate - mortgage |
| | | 5,631,112 | 5,631,112 | | ||||||||||||||||||
Real estate - other |
| | | 10,721,143 | 10,721,143 | | ||||||||||||||||||
Commercial and industrial |
| | | 1,090,301 | 1,090,301 | | ||||||||||||||||||
Consumer and other |
| | | 329,949 | 329,949 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 116,437 | $ | | $ | 137,277 | $ | 23,046,972 | $ | 23,300,686 | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 borrowers 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.
13
Below is a table presenting information regarding nonaccrual loans at September 30, 2011 and December 31, 2010.
Non-Accrual Loans
September 30, 2011 |
December 31, 2010 |
|||||||
Construction and land development |
$ | 253,664 | $ | 137,277 | ||||
Real estate - mortgage |
| | ||||||
Real estate - other |
| | ||||||
Commercial and industrial |
| | ||||||
Consumer and other |
24,846 | | ||||||
|
|
|
|
|||||
Total |
$ | 278,510 | $ | 137,277 | ||||
|
|
|
|
At September 30, 2011, the bank had four loans totaling $278,510 in non-accrual status. At December 31, 2010, the Bank had two loans in non-accrual status totaling $137,277. The Bank did not have any loans past due 90 days and still accruing as of September 30, 2011 and December 31, 2010.
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 $2,135,778 and $651,686 in loans classified as Substandard or worse as of September 30, 2011 and December 31, 2010, respectively.
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. |
14
Credit risk grades within the loan portfolio as of September 30, 2011 and December 31, 2010 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.
Credit Risk Profile of Commercial Loans
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
Commercial | Commercial Real Estate Construction |
Commercial Real Estate |
Commercial | Commercial Real Estate Construction |
Commercial Real Estate |
|||||||||||||||||||
Prime |
$ | 280,000 | $ | | $ | | $ | 260,000 | $ | | $ | | ||||||||||||
Good |
| | | | | | ||||||||||||||||||
Acceptable |
2,054,926 | 2,120,893 | 10,397,527 | 90,870 | 2,450,014 | 3,424,704 | ||||||||||||||||||
Acceptable with care |
1,635,308 | 1,728,140 | 11,282,307 | 739,431 | 1,209,159 | 5,046,634 | ||||||||||||||||||
Special mention |
| | 2,568,172 | | | 1,851,832 | ||||||||||||||||||
Substandard assets |
118,637 | 122,227 | 1,738,631 | | 137,277 | 397,972 | ||||||||||||||||||
Doubtful assets |
| | | | | | ||||||||||||||||||
Loss assets |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 4,088,871 | $ | 3,971,260 | $ | 25,986,637 | $ | 1,090,301 | $ | 3,796,450 | $ | 10,721,142 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile of Residential Loans
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
Residential - Prime | Residential - Subprime | Residential - Prime | Residential - Subprime | |||||||||||||||||||||||||||||
Residential Mortgage |
Residential Construction |
Residential Mortgage |
Residential Construction |
Residential Mortgage |
Residential Construction |
Residential Mortgage |
Residential Construction |
|||||||||||||||||||||||||
Prime |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||
Good |
74,135 | | | | 45,808 | | | | ||||||||||||||||||||||||
Acceptable |
10,544,795 | 1,959,034 | | | 5,004,637 | 1,577,794 | | | ||||||||||||||||||||||||
Acceptable with care |
434,776 | | | | 580,667 | 37,500 | | | ||||||||||||||||||||||||
Special mention |
184,834 | | | | | | | | ||||||||||||||||||||||||
Substandard assets |
| 131,437 | | | | 116,437 | | | ||||||||||||||||||||||||
Doubtful assets |
| | | | | | | | ||||||||||||||||||||||||
Loss assets |
| | | | | | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 11,238,540 | $ | 2,090,471 | $ | | $ | | $ | 5,631,112 | $ | 1,731,731 | $ | | $ | | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile of Consumer Loans
September 30, 2011 | December 31, 2010 | |||||||||||||||
Consumer - Auto |
Consumer - Other |
Consumer - Auto |
Consumer - Other |
|||||||||||||
Prime |
$ | | $ | 28,097 | $ | | $ | 18,722 | ||||||||
Good |
19,667 | | | | ||||||||||||
Acceptable |
32,263 | 208,259 | 65,008 | 204,045 | ||||||||||||
Acceptable with care |
| 7,268 | | 11,228 | ||||||||||||
Special mention |
15,280 | | | 30,946 | ||||||||||||
Substandard assets |
| 24,846 | | | ||||||||||||
Doubtful assets |
| | | | ||||||||||||
Loss assets |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 67,210 | $ | 268,470 | $ | 65,008 | $ | 264,941 | ||||||||
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|
|
|
|
|
|
|
15
Impaired loans totaled $278,510 and $137,277 as of September 30, 2011 and December 31, 2010, 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 third quarter of 2011 ended September 30.
Impaired Loans
For the Quarter Ended September 30, 2011
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 |
253,664 | 253,664 | 246,755 | 13,764 | | |||||||||||||||
Consumer Loans to Individuals |
24,846 | 24,846 | 24,846 | 24,846 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total: |
$ | 278,510 | $ | 278,510 | $ | 271,601 | $ | 38,610 | $ | | ||||||||||
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|
|
|
|
|
|
|
|
|
If a loan is modified as a result of a customers 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 September 30, 2011, the Bank has three loans that qualify as trouble debt restructuring. The following table presents information regarding the Banks loans that qualify as a troubled debt restructuring as of September 30, 2011.
September 30, 2011 | ||||||||||||
Number of Loans |
Pre-modification Outstanding Balances |
Post-modification Outstanding Balances |
||||||||||
Construction and land development |
2 | $ | 137,277 | $ | 122,227 | |||||||
Real estate - mortgage |
| | | |||||||||
Real estate - other |
| | | |||||||||
Commercial and industrial |
| | | |||||||||
Consumer and other |
1 | 24,846 | 24,846 | |||||||||
|
|
|
|
|
|
|||||||
Total |
3 | $ | 162,123 | $ | 147,073 | |||||||
|
|
|
|
|
|
As of September 30, 2011, 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 Companys 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
16
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 managements 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.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Cash and Due from Banks The carrying amount is a reasonable estimate of fair value due to the short term nature of such items.
Federal Funds Sold The carrying amount is a reasonable estimate of fair value, as the term for Fed Funds sold is for one day.
Interest-bearing Bank Deposits Due to the short-term and liquid nature of these deposits, the carrying amount is a reasonable estimate of fair value.
Securities Available for Sale Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securitys credit rating, prepayment assumptions and other factors such as credit loss assumptions.
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.
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.
Loans Receivable For certain categories of loans, such as variable rate loans, which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans is estimated based on discounted cash flows or underlying collateral values, where applicable.
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.
Off-Balance-Sheet Financial Instruments The carrying amount for loan commitments, which are off-balance-sheet financial instruments, approximates the fair value since the obligations are typically made with variable rates or have short maturities.
17
The carrying values and estimated fair values of the Companys financial instruments were as follows:
September 30, 2011 |
December 31, 2010 |
|||||||||||||||
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
|||||||||||||
Financial assets |
||||||||||||||||
Cash and due from banks |
$ | 877,120 | $ | 877,120 | $ | 539,685 | $ | 539,685 | ||||||||
Federal funds sold |
519,342 | 519,342 | 1,589,151 | 1,589,151 | ||||||||||||
Interest-bearing bank deposits |
11,007,800 | 11,007,800 | 16,465,014 | 16,465,014 | ||||||||||||
Securities available for sale |
31,977,688 | 31,977,688 | 28,705,311 | 28,705,311 | ||||||||||||
Federal Reserve Bank and Federal Home Loan Bank stock |
511,050 | 511,050 | 456,300 | 456,300 | ||||||||||||
Loans and Loans Held for Sale, net |
46,585,018 | 47,577,440 | 23,134,086 | 23,520,480 | ||||||||||||
Financial liabilities |
||||||||||||||||
Demand deposits, interest-bearing transaction and savings accounts |
47,262,968 | 47,262,968 | 31,927,912 | 31,927,912 | ||||||||||||
Certificates of deposits |
29,825,941 | 29,986,750 | 24,759,204 | 24,901,427 | ||||||||||||
Notional Amount |
Estimated Fair Value |
Notional Amount |
Estimated Fair Value |
|||||||||||||
Commitments to extend credit |
$ | 8,621,563 | $ | | $ | 4,341,642 | $ | | ||||||||
|
|
|
|
|
|
|
|
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. |
18
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 September 30, 2011, 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 securitys 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 September 30, 2011 and December 31, 2010 by level within the hierarchy.
Quoted Market Price in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||
September 30, 2011 |
||||||||||||
U.S. Government Agency Bonds |
$ | | $ | 2,006,222 | $ | | ||||||
Municipal Bonds |
| 3,248,975 | | |||||||||
Collateralized Mortgage Obligations (CMOs) |
| 3,966,621 | | |||||||||
Mortgage Backed Securities (MBS) |
| 22,755,870 | | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | | $ | 31,977,688 | $ | | ||||||
|
|
|
|
|
|
|||||||
December 31, 2010 |
||||||||||||
Municipal Bonds |
$ | | $ | 1,829,473 | $ | | ||||||
Collateralized Mortgage Obligations (CMOs) |
| 2,942,657 | | |||||||||
Mortgage Backed Securities (MBS) |
| 23,933,181 | | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | | $ | 28,705,311 | $ | | ||||||
|
|
|
|
|
|
There were no other assets and no liabilities measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010.
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.
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
19
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 September 30, 2011 and December 31, 2010.
Carrying Value as of |
Quoted Market Price in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
September 30, 2011 |
||||||||||||||||
Loans held for sale |
$ | | $ | | $ | | $ | | ||||||||
Impaired Loans |
278,510 | | 241,233 | 37,277 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 278,510 | $ | | $ | 241,233 | $ | 37,277 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2010 |
||||||||||||||||
Loans held for sale |
$ | 340,000 | $ | | $ | 340,000 | $ | | ||||||||
Impaired Loans |
137,277 | | 100,000 | 37,277 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 477,277 | $ | | $ | 440,000 | $ | 37,277 | ||||||||
|
|
|
|
|
|
|
|
There were no other assets and no liabilities measured at fair value as of September 30, 2011 and December 31, 2010 on a non-recurring basis.
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.
20
Item 2. Managements 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, 2010 under Item 1A - Risk Factors and the following:
| significant increases in competitive pressure in the banking and financial services industries; |
| changes in the interest rate environment which could reduce anticipated or actual margins; |
| changes in political conditions or the legislative or regulatory environment; |
| general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality; |
| changes occurring in business conditions and inflation; |
| changes in technology; |
| the level of allowance for loan loss and the lack of seasoning of our loan portfolio; |
| the rate of delinquencies and amounts of charge-offs; |
| the rates of loan growth; |
| adverse changes in asset quality and resulting credit risk-related losses and expenses; |
| changes in monetary and tax policies; |
| loss of consumer confidence and economic disruptions resulting from terrorist activities; |
| changes in the securities markets; and |
| other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission. |
These risks are exacerbated by the volatility and disruption experienced in national and international financial, capital, and credit markets during the last three years. We are unable to predict what effect these uncertain market conditions will continue to have on our Company. There can be no assurance that these unprecedented developments will not materially and adversely affect our business, financial condition and results of operations.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Overview
Coastal Carolina Bancshares, Inc. is a bank holding company headquartered in Myrtle Beach, South Carolina. We were incorporated in February 2008 and our national bank subsidiary, Coastal Carolina National Bank, opened for business on June 8, 2009. The principal business activity of our bank is to provide retail and commercial banking services in Myrtle Beach and our surrounding market areas. Our deposits are insured by the Federal Deposit Insurance Corporation.
We completed our stock offering in June 2009, upon the issuance of 2,180,000 shares for gross proceeds of $21.8 million, pursuant to a closing in June 2009. We capitalized the bank with $19.9 million of the proceeds from the stock offering.
21
Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on the majority of which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.
There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our earnings. In the following section we have included a detailed discussion of this process.
The following discussion describes our results of operations for the three and nine months ended September 30, 2011 and 2010 and also analyzes our financial condition as of September 30, 2011 and December 31, 2010.
Critical Accounting Policies
We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2010, as filed in our Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and assumptions by us that may have a material impact on the carrying value of certain assets and liabilities. We consider such accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe are reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Allowance for Loan Losses
We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, assumptions about cash flow, determination of loss factors for estimating credit losses, and the impact of current events, conditions, and other factors impacting the level of probable inherent losses. Under different conditions, the actual amount of credit losses incurred by us may be different from managements 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 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
22
assets and interest paid on deposits and borrowings used to support such assets. The level of net interest income is determined by the balances of interest-earning assets and interest-bearing liabilities and corresponding interest rates earned and paid on those assets and liabilities, respectively. In addition to the volume of and corresponding interest rates associated with these interest-earning assets and interest-bearing liabilities, net interest income is affected by the timing of the repricing of these interest-earning assets and interest-bearing liabilities.
Three months ended September 30, 2011 and 2010
We incurred a net loss of $41,183, or .02 cents per share, for the three months ended September 30, 2011, compared to a net loss of $286,342, or .13 cents per share, for the three months ended September 30, 2010. Interest income was $876,876 and $563,712 for the three months ended September 30, 2011 and 2010, respectively. The increase in interest income is attributed to the larger loan portfolio maintained by the bank in 2011. Interest income for the three months ended September 30, 2011 was comprised of $628,778 earned on loans, $231,383 earned on investment securities, and $16,715 earned on fed funds sold and interest bearing bank deposits. Interest expense was $205,897 for the three months ended September 30, 2011, compared to $218,789 for the three months ended September 30, 2010. The small decrease in interest expense is attributed to a larger deposit portfolio offset by a reduction in deposit rates. Our net interest spread and net interest margin were 2.78% and 3.03% , respectively, for the three months ended September 30, 2011, compared to 1.71% and 2.17%, respectively, for the three months ended September 30, 2010. We are achieving higher yields on earning assets due to loan growth, as lower yielding liquidity is 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 $61,474 for the three months ended September 30, 2011, compared to $85,054 for the three months ended September 30, 2010. The decrease in loan loss provision is attributed to a change in the historical losses used when calculating the loan loss reserve, which resulted in less provision needed. When calculating the loan loss provision needs, the historical losses are calculated using information from de novo banks that opened in the three years preceeding our commencement of operations. Loss information from the 2006 de novo peer group is no longer available and was replaced with loss information from the 2009 de novo peer group. Non-interest income was $197,652 for the three months ended September 30, 2011, of which $168,089 came from gains on the sale of investment securities. For the three months ended September 30, 2010, non-interest income was $271,348, of which $249,795 came from gains on the sale of investment securities. Non-interest expense was $848,340 and $817,559 for the three months ended September 30, 2011 and 2010, respectively. The increase in non-interest expense is primarily in salaries and benefits and data processing due to our growth, offset by decreases in professional services and occupancy and equipment expense.
Nine months ended September 30, 2011 and 2010
We incurred a net loss of $1,206,657, or .55 cents per share, for the nine months ended September 30, 2011, compared to a net loss of $1,486,819, or .68 cents per share, for the nine months ended September 30, 2010. Interest income was $2,284,440 and $1,577,339 for the nine months ended September 30, 2011 and 2010, respectively. The increase in interest income is attributed to the larger loan portfolio maintained by the bank in 2011. Interest income for the nine months ended September 30, 2011 was comprised of $1,520,323 earned on loans, $688,344 earned on investment securities, and $75,773 earned on fed funds sold and interest bearing bank deposits. Interest expense was $632,644 for the nine months ended September 30, 2011, compared to $649,019 for the nine months ended September 30, 2010. The decrease in interest expense is attributed to a reduction in deposit rates. Our net interest spread and net interest margin were 2.50% and 2.78%, respectively, for the nine months ended September 30, 2011, compared to 1.52% and 2.00%, respectively, for the nine months ended September 30, 2010. We are achieving higher yields on earning assets due to loan growth, as lower yielding liquidity is redeployed into higher yielding loans. We are also achieving lower costs associated with deposit liabilities.
The loan loss provision, which is dependent on loan growth and non-performing loans, was $556,897 for the nine months ended September 30, 2011, compared to $407,511 for the nine months ended September 30, 2010. The increase in loan loss provision is attributed primarily to higher loan growth experienced in 2011. Non-interest income was $361,935 for the nine months ended September 30, 2011, compared to $403,469 for the nine months ended September 30, 2010. Non-interest expense was $2,663,491 and $2,406,741 for the nine months ended September 30, 2011 and 2010, respectively. The increase in non-interest expense is in multiple categories, including salaries and benefits, data processing, marketing and business development, and FDIC insurance and regulatory assessments, and is due to our growth. The largest increases occurred in salaries and benefits and in marketing and business development and were the result of the addition of two lending positions and an underwriting position to support the strategic growth initiatives.
23
Assets and Liabilities
General
Total assets as of September 30, 2011 were $92.2 million, representing an increase of $20.3 million, or 28%, compared to $71.9 million as of December 31, 2010. The increase in assets is due primarily to net loan growth of $23.8 million, which was funded primarily by deposit growth of $20.4 million. At September 30, 2011, total assets consisted principally of $12.4 million in cash and cash equivalents, including interest bearing deposits with other financial institutions, $32.0 million in available-for-sale investment securities and $46.6 million in net loans. Net loans at December 31, 2010 were $22.8 million. The primary source of funding is deposits that are acquired locally. Liabilities at September 30, 2011 totaled $77.9 million, represented almost entirely by retail customer deposits totaling $77.1 million. Liabilities as of December 31, 2010 totaled $57.1 million, including $56.7 million in deposits. At September 30, 2011, shareholders equity was $14.3 million, compared to $14.8 million as of December 31, 2010. The reason for the decrease in shareholders equity is net losses. Book value per share was $6.53 at September 30, 2011, compared to $6.76 as of December 31, 2010.
Loans
Loans typically provide higher interest yields than other types of interest-earning assets. Net loans have increased $23.8 million, or 104%, during the nine months ended September 30, 2011, primarily in the category of Real Estate Other. The following table summarizes the composition of our loan portfolio as of September 30, 2011 and December 31, 2010.
September 30, 2011 |
Percentage of Total |
December 31, 2010 |
Percentage of Total |
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Construction and land development |
$ | 6,061,730 | 12.70 | % | $ | 5,528,181 | 23.72 | % | ||||||||
Real estate - residential mortgage |
11,238,540 | 23.56 | 5,631,112 | 24.17 | ||||||||||||
Real estate - other |
25,986,638 | 54.47 | 10,721,143 | 46.01 | ||||||||||||
Commercial and industrial |
4,088,871 | 8.57 | 1,090,301 | 4.68 | ||||||||||||
Consumer and other |
335,680 | 0.70 | 329,949 | 1.42 | ||||||||||||
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Gross loans |
47,711,459 | 100.00 | % | 23,300,686 | 100.00 | % | ||||||||||
Allowance for loan losses |
(989,647 | ) | | (432,750 | ) | | ||||||||||
Deferred loan fees, net |
(136,794 | ) | | (73,850 | ) | | ||||||||||
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Total loans, net |
$ | 46,585,018 | | $ | 22,794,086 | | ||||||||||
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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 Banks classified loans increased during the first nine months of 2011 from $651,686 as of December 31, 2010 to $2,135,778 as of September 30, 2011, primarily due to the downgrade of one loan relationship.
Nonperforming Loans
At September 30, 2011, nonaccrual loans totaled $278,510, related to four lending relationships, compared to $137,277 nonaccrual loans as of December 31, 2010. There were no accruing loans which were contractually past due 90 days or more as to principal or interest payments at September 30, 2011 and December 31, 2010. Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrowers financial condition is such that collection of the loan is doubtful. The nonaccrual loan relationship is considered impaired.
As of September 30, 2011, we were not aware of any other loans that were not already considered for impairment or categorized as impaired or on nonaccrual.
Provision and Allowance for Loan Losses
The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that
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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 borrowers 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 $989,647 as of September 30, 2011, or 2.07% of gross loans outstanding, compared to $432,750 as of December 31, 2010, or 1.86% of gross loans outstanding. Total provision expense for the nine months ended September 30, 2011 was $556,897, compared to $407,511 for the nine months ended September 30, 2010. The increase in provision during 2011 was primarily due to growth in the loan portfolio and additional provision needed for classified and nonperforming loan relationships.
There were no charge offs or recoveries during the first nine months of 2011. As of September 30, 2011, 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 September 30, 2011, we had $77.1 million in deposits, representing an increase of $20.4 million compared from December 31, 2010. The deposits as of September 30, 2011 consisted primarily of $8.7 million in demand deposit accounts, $29.8 million in certificates of deposit, and $38.6 million of savings and money market accounts. The primary source of funding for our loan portfolio is deposits that are acquired locally. As of September 30, 2011, we have no brokered or wholesale deposits and no borrowings.
Liquidity
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. For an operating bank, liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to maintain sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.
Our primary sources of liquidity are deposits, scheduled repayments on our loans, and interest/principal payments received on and maturities of our investments. We plan to meet our future cash needs through the generation of deposits. Occasionally, we might sell investment securities in connection with the management of our interest sensitivity gap or to manage cash availability. We may also utilize our cash and due from banks and federal funds sold to meet liquidity requirements as needed. In addition, we have the ability, on a short-term basis, to purchase federal funds from other financial institutions or borrow advances from the Federal Home Loan Bank Atlanta. As of September 30, 2011, our primary sources of liquidity included cash, non-interest and interest-bearing deposits and federal funds sold with financial institutions totaling $12.4 million. The fair value of our available for sale investment portfolio was $32.0 million as of September 30, 2011. Our lines of credit available with correspondent banks total $8.0 million with no outstanding principal or interest on these lines at September 30, 2011 and are unsecured. These lines may be withdrawn at the discretion of the correspondent financial institutions. Our credit availability at the Federal Home Loan Bank is $8.3 million and requires collateralization by eligible investment securities or loans. We believe our liquidity levels are adequate to meet our operating needs.
Off-Balance Sheet Risk
Through the operations of our bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2011, we had issued commitments to extend credit of $8.6 million through various types of
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lending arrangements, compared to $4.3 million as of December 31, 2010. We evaluate each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.
Capital Resources
Total shareholders equity decreased from $14.8 million at December 31, 2010 to $14.3 million at September 30, 2011. The decrease is primarily a result of net loss of $1.2 million for the nine months ended September 30, 2011 offset by after tax deferred gains in the investment portfolio that increased $675,624 during the nine month period.
Our bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. However, the Federal Reserve guidelines contain an exemption from the capital requirements for small bank holding companies which in 2006 were amended to cover most bank holding companies with less than $500 million in total assets that do not have a material amount of debt or equity securities outstanding registered with the SEC. Since our assets are less than $500 million and our stock is not registered under Section 12 of the Securities Exchange Act of 1934, we believe our Company qualifies as a small bank holding company and is exempt from the capital requirements. Nevertheless, our bank remains subject to these capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the banks 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 banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banks 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 banks application for deposit insurance, the FDIC required that the bank maintain a leverage ratio of at least 8% during the banks 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 Banks de novo period.
The bank exceeded its minimum regulatory capital ratios as of September 30, 2011 and December 31, 2010, as well as the ratios to be considered well capitalized.
The following table sets forth the banks various capital ratios at September 30, 2011 and December 31, 2010:
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(Unaudited) | Tier 1 Leverage |
Tier 1 Risk-Based |
Total Risk-Based |
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Minimum Required |
4.00 | % | 4.00 | % | 8.00 | % | ||||||
Minimum Required to be well capitalized |
5.00 | % | 6.00 | % | 10.00 | % | ||||||
Actual Ratios at September 30, 2011 |
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Coastal Carolina National Bank |
14.78 | % | 26.58 | % | 27.84 | % | ||||||
Consolidated |
15.56 | % | 28.25 | % | 29.51 | % | ||||||
Actual Ratios at December 31, 2010 |
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Coastal Carolina National Bank |
20.34 | % | 51.23 | % | 52.49 | % | ||||||
Consolidated |
21.33 | % | 54.38 | % | 55.64 | % |
We believe our capital is sufficient to fund the activities of the bank we grow. As of September 30, 2011, there were no significant firm commitments outstanding for capital expenditures.
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 13a-15(e). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our current disclosure controls and procedures are effective as of September 30, 2011. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
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There are no material pending legal proceedings to which we are a party or of which any of our property is the subject.
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. [Removed and Reserved.]
Not applicable.
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 September 30, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements. |
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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: November 14, 2011 | By: | /s/ Jeff A. Benjamin | ||||
Jeff A. Benjamin | ||||||
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 September 30, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements. |
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