CCNB 10-Q Quarterly Report Sept. 30, 2010

COASTAL CAROLINA BANCSHARES, INC.

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10-Q 1 a10-21059_110q.htm 10-Q

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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, 2010

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

For the Transition Period from to

Commission file number 333-152331

COASTAL CAROLINA BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

South Carolina		33-1206107
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

2305 Oak Street

Myrtle Beach , South Carolina 29577

(Address of principal executive offices, including zip code)

(843) 839-1953

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x YES o NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,185,000 shares of common stock, par value $0.01 per share, were outstanding as of November 3, 2010.

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INDEX

		Page No.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets — September 30, 2010 (unaudited) and December 31, 2009		3

Consolidated Statements of Operations (unaudited) - Three months and nine months ended September 30, 2010 and 2009		4

Consolidated Statements of Shareholders’ Equity and Comprehensive Loss (unaudited) - Nine months ended September 30, 2010 and 2009		5

Consolidated Statements of Cash Flows (unaudited) — Nine months ended September 30, 2010 and 2009		6

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3. Quantitative and Qualitative Disclosures About Market Risk		24

Item 4. Controls and Procedures		24

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		24

Item 1A. Risk Factors		24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		24

Item 3. Defaults Upon Senior Securities		24

Item 4. (Removed and Reserved)		25

Item 5. Other Information		25

Item 6. Exhibits		25

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Balance Sheets

	September 30, 2010 (Unaudited)			December 31, 2009
Assets
Cash and due from banks	$	773,453		$	741,896
Federal funds sold	1,746,053			813,827
Interest-bearing bank deposits	20,744,024			30,701,988
Securities available for sale	22,626,665			17,029,866
Federal Reserve Bank stock	481,550			525,250
Loans Held for Sale	324,254			—
Loans, net of unearned income	19,660,358			10,581,837
Allowance for loan losses	(354,559		)	(144,845		)
Loans, net	19,305,799			10,436,992
Premises and equipment, net	363,239			464,174
Other assets	429,465			444,471
Total assets	$	66,794,502		$	61,158,464

Liabilities and Shareholders’ Equity
Liabilities
Deposits
Non-interest bearing demand	$	1,751,144		$	700,533
Interest checking	2,765,872			1,272,341
Money market	23,252,204			21,558,971
Savings	118,926			128,274
Certificates of deposit	22,802,390			20,323,745
Total deposits	50,690,536			43,983,864
Accrued expenses and other liabilities	434,252			233,446
Total liabilities	51,124,788			44,217,310

Shareholders’ Equity
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding	—			—
Common stock, $.01 par value, 50,000,000 shares authorized, 2,185,000 and 2,186,000 issued and outstanding at September 30, 2010 and December 31, 2009, respectively	21,850			21,860
Additional paid-in capital	21,664,322			21,604,774
Unearned compensation, nonvested restricted stock	(39,167		)	(51,111		)
Retained deficit	(6,020,362		)	(4,533,543		)
Accumulated other comprehensive income(loss)	43,071			(100,826		)
Total shareholders’ equity	15,669,714			16,941,154
Total liabilities and shareholders’ equity	$	66,794,502		$	61,158,464

See notes to the consolidated financial statements.

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COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009(1)
Interest income
Loans, including fees	$	276,015		$	46,730		$	649,331		$	47,034
Federal funds sold and interest-bearing bank deposits	82,769			73,763			310,780			86,791
Securities	197,544			34,958			594,597			34,958
Federal Reserve stock dividend	7,384			8,730			22,631			10,923
Stock subscriptions held in escrow	—			—			—			78,246
Total interest income	563,712			164,181			1,577,339			257,952
Interest expense
Deposits:
Interest checking	5,984			2,264			11,666			2,643
Money market and savings	86,417			64,836			265,422			71,649
Certificates of deposit < $100,000	38,879			25,367			115,475			28,818
Certificates of deposit > $100,000	87,509			55,035			256,433			62,871
Lines of credit and other borrowings	—			—			23			42,337
Total interest expense	218,789			147,502			649,019			208,318
Net interest income before provision for loan losses	344,923			16,679			928,320			49,634
Provision for loan losses	85,054			60,511			407,511			62,276
Net interest income (loss) after provision for loan losses	259,869			(43,832		)	520,809			(12,642		)
Noninterest income
Service charges on deposits	1,891			429			7,408			429
ATM, debit, and merchant fees	2,310			—			5,469			—
Gain on sale of loans	15,059			—			22,327			—
Gain on sale of investment securities	249,795			—			364,278			—
Leasehold improvement allowance	—			—			—			12,500
Other	2,293			996			3,987			996
Total noninterest income	271,348			1,425			403,469			13,925
Noninterest expense
Salaries and employee benefits	476,618			490,414			1,380,731			1,299,279
Occupancy and equipment	95,726			100,966			306,699			291,354
Data processing	72,946			58,411			210,318			100,885
Professional services	80,510			75,867			194,394			117,973
Marketing and business development	20,755			38,960			89,076			80,107
Corporate insurance	6,675			6,039			17,649			13,127
Postage and supplies	10,657			13,464			26,948			30,392
Telecommunications	5,029			5,163			15,609			15,957
FDIC insurance and regulatory assessments	30,577			6,399			84,631			19,201
Other	18,066			15,822			79,116			44,429
Total noninterest expense	817,559			811,505			2,405,171			2,012,704
Loss before income taxes	(286,342		)	(853,912		)	(1,480,893		)	(2,011,421		)
Income taxes	—			—			5,926			25
Net loss	$	(286,342	)	$	(853,912	)	$	(1,486,819	)	$	(2,011,446	)
Loss per share
Basic and diluted loss per share	$	(0.13	)	$	(0.39	)	$	(0.68	)	$	(0.92	)

Average shares outstanding	2,186,000			2,180,000			2,186,000			2,180,000

(1) Bank opened June 8, 2009, thus numbers do not reflect a full nine months of activity

See notes to the consolidated financial statements.

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COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Shareholders’ Equity and Comprehensive Loss

(Unaudited)

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

December 31, 2008	—			$	—		$	—		$	—		$	(1,551,089	)	$	—		$	(1,551,089	)
Pre-opening net loss for 2009										—			(770,450		)	—			(770,450		)
Post-opening net loss										—			(1,240,997		)	—			(1,240,997		)
Change in unrealized gains and losses on securities	—			—			—			—			—			24,878			24,878
Total comprehensive loss	—			—			—			—			—			—			(1,986,569		)
Issuance of common stock	2,180,000			21,800			21,778,200			—			—			—			21,800,000
Direct stock issuance costs							(836,488		)	—			—			—			(836,488		)
Organizer/founder warrants							536,758			—			(383,448		)	—			153,310
Stock-based compensation	—			—			42,423			—			—			—			42,423
September 30, 2009	$	2,180,000		$	21,800		$	21,520,893		$	—		$	(3,945,984	)	$	24,878		$	17,621,587

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 (net of tax effect $87,519)	—			—			—			—			—			143,897			143,897
Total comprehensive loss	—			—			—			—			—			—			(1,342,922		)
Organizer/founder warrants	—			—			12,366			—			—			—			12,366
Stock-based compensation	(1,000		)	(10		)	47,182			—			—			—			47,172
Amortization of Restricted Stock	—			—			—			11,944			—			—			11,944
September 30, 2010	2,185,000			$	21,850		$	21,664,322		$	(39,167	)	$	(6,020,362	)	$	43,071		$	15,669,714

See notes to the consolidated financial statements.

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COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Operating activities
Net loss	$	(1,486,819	)	$	(2,011,446	)
Adjustments to reconcile net loss to net cash used by operating activities:
Provision for loan losses	407,511			62,276
Increase in deferred loan fees, net	36,593			28,193
Gains on sale of loans held for sale	(22,327		)	—
Origination of loans held for sale, net	(1,622,244		)	—
Proceeds from sale of loans held for sale	1,320,317			—
Premium amortization and discount accretion on securities, net	93,223			8,560
Securities gains, net	(364,278		)	—
Depreciation and amortization expense	133,414			114,174
Stock-based compensation expense	71,482			195,733
Increase in accrued interest receivable	(67,563		)	(93,040		)
Increase (decrease) in accrued interest payable	(1,668		)	28,009
Decrease (increase) in deferred stock issuance costs	—			337,476
Decrease (increase) in other assets	22,586			(105,962		)
Increase in other liabilities	174,938			110,948
Net cash used in operating activities	(1,304,835		)	(1,325,079		)

Investing activities
Net increase in loans	(9,312,911		)	(4,645,705		)
Purchases of securities available for sale	(34,851,300		)	(10,599,071		)
Proceeds from paydowns of securities available for sale	1,375,102			46,069
Proceeds from sales of securities available for sale	28,381,870			—
Purchase of Federal Reserve Bank stock	—			(598,200		)
Proceeds from sale of Federal Reserve Bank stock	43,700			72,950
Net purchases of premises and equipment	(32,479		)	(126,236		)
Net cash used in investing activities	(14,396,018		)	(15,850,193		)

Financing activities
Net increase in demand deposits, interest-bearing transaction accounts and savings accounts	4,228,027			16,309,111
Net increase in certificates of deposit	2,478,645			14,152,884
Net increase (decrease) in stock subscriptions held in escrow	—			(2,365,000		)
Net increase (decrease) in organizer advances	—			(620,000		)
Net increase (decrease in other borrowings	—			(1,622,770		)
Proceeds from issuance of common stock, net of offering costs	—			20,963,512
Net cash provided by financing activities	6,706,672			46,817,737

Net increase (decrease) in cash and cash equivalents	(8,994,181		)	29,642,465

Cash and cash equivalents, beginning of period	32,257,711			2,371,528
Cash and cash equivalents, end of period	$	23,263,530		$	32,013,993

Supplemental disclosures of cash flow information
Cash paid for:
Interest on deposits and borrowings	$	650,688		$	180,311
Non-cash items:
Unrealized gains on securities available for sale (net of tax expense of $27,537)	43,071			—

See notes to the consolidated financial statements.

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COASTAL CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements

September 30, 2010

Note 1 - Business and Basis of Presentation

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

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

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

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

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

Basis of Presentation - The accompanying 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 nine month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for 2009 as filed with the Securities and Exchange Commission.

Note 2 - Summary of Significant Accounting Policies

A summary of these policies is included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for 2009 as filed with the Securities and Exchange Commission (the “SEC”). 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 are not expected to have a material impact on the consolidated financial statements upon adoption.

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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, 2010 and 2009 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
	2010			2009			2010			2009

Net loss to common shareholders	$	(286,342	)	$	(853,912	)	$	(1,486,819	)	$	(2,011,446	)

Weighted-average number of common shares outstanding	2,186,000			2,180,000			2,186,000			2,180,000

Net loss per share	$	(0.13	)	$	(0.39	)	$	(0.68	)	$	(0.92	)

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, 2010 and 2009:

	Three Months Ended September 30					Nine Months Ended September 30
	2010			2009		2010			2009
Net Change in unrealized gains on securities available-for-sale	$	(217,225	)	$	24,878	$	231,416		$	24,878
Deferred tax asset	84,718			—		(87,519		)	—
Net-of-tax amount	$	(132,507	)	$	24,878	$	143,897		$	24,878

Note 3 - Recently Issued Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

On June 29, 2010, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) issued separate exposure drafts intended to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accounting principles generally accepted in the United States of America (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”). The exposure drafts are the result of the boards’ joint efforts to ensure that fair value will have the same meaning in U.S. GAAP and IFRS and that their respective fair value measurement and disclosure requirements will be the same except for minor differences in wording and style. The most significant amendments in FASB’s proposed Accounting Standard Update (“ASU”) focus on subsequent measurement and disclosures. The FASB’s proposed changes apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability or an instrument classified in shareholders’ equity in the financial statements. The comment period for the FASB’s ASU exposure draft closed on September 7, 2010.

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In the second quarter of 2010, additional guidance was issued under the Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses. In July 2010, the Receivables topic of the Accounting Standards Codification was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. This standard requires additional disclosures related to the allowance for loan losses with the objective of providing financial statement users with greater transparency about an entity’s loan loss reserves and overall credit quality. Additional disclosures include showing on a disaggregated basis the aging of receivables, credit quality indicators, and troubled debt restructures with its effect on the allowance for loan losses. The Company is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010. The Company does not expect the adoption of this standard to have any impact on the Company’s financial position and results of operations. However, it will increase the amount of disclosures in the notes to the consolidated financial statements.

Income Tax guidance was amended in April 2010 to reflect an SEC Staff Announcement after the President signed the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, which amended the Patient Protection and Affordable Care Act signed on March 23, 2010. According to the announcement, although the bills were signed on separate dates, regulatory bodies would not object if the two Acts were considered together for accounting purposes. This view is based on the SEC Staff’s understanding that the two Acts together represent the current health care reforms as passed by Congress and signed by the President. The amendment had no impact on the financial statements.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments. Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.

In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112. The amendments related primarily to business combinations and removed references to “minority interest” and added references to “controlling” and “noncontrolling interest(s)”. The updates were effective upon issuance but had no impact on the Company’s financial statements.

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

Note 4 - Securities

At September 30, 2010, the Bank’s securities consisted of city and county issued municipal bonds and mortgage-backed securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association. As of December 31, 2009, the Bank’s securities consisted of

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mortgage backed securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association , summarized as follows:

	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Municipal bonds	$	1,071,093	$	—	$	(16,888	)	$	1,054,205
Mortgage-backed securities	21,484,963		87,497		—			21,572,460
Total securities	$	22,556,056	$	87,497	$	(16,888	)	$	22,626,665

	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Mortgage-backed securities	17,190,673		9,248		(170,055		)	17,029,866
Total securities	$	17,190,673	$	9,248	$	(170,055	)	$	17,029,866

The unrealized losses at September 30, 2010 and December 31, 2009 are shown in the following table:

	September 30, 2010
	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Municipal Bonds	$	1,054,205	$	16,888	$	—	$	—	$	1,054,205	$	16,888
Total temporarily impaired securities	$	1,054,205	$	16,888	$	—	$	—	$	1,054,205	$	16,888

	December 31, 2009
	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Mortgage-backed securities	$	15,008,386	$	170,055	$	—	$	—	$	15,008,386	$	170,055
Total temporarily impaired securities	$	15,008,386	$	170,055	$	—	$	—	$	15,008,386	$	170,055

The contractual maturity distribution and yields of the Bank’s securities portfolio at September 30, 2010 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.

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	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	—		—
Due after ten years	22,556,056		22,626,665
Total (1)	$	22,556,056	$	22,626,665

(1) Maturities estimated based on average life of security.

At September 30, 2010 and December 31, 2009 the Bank also owned Federal Reserve Bank stock with a cost of $481,550 and $525,250, respectively. 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 will also decrease quarterly. Securities with an aggregate carrying value of $5,416,937 at September 30, 2010 and $4,310,348 at December 31, 2009, were pledged to secure public deposits. During the nine months ended September 30, 2010, the Bank sold securities totaling $28.5 million and purchased securities totaling $34.8 million. All securities purchased and sold were U.S. Government agency obligations, mortgage backed securities, or municipal bonds. The objectives of the investment transactions were to increase the yields earned on excess cash at the bank level, while also recognizing gains on sale of those investments. The realized gains on the sale of securities totaled $367,571 and the realized losses totaled $3,293 for the period ended September 30, 2010. There were no sales during the period ended September 30, 2010.

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, 2010. At September 30, 2010, there were no investment securities considered to be other than temporarily impaired. The municipal bonds have been evaluated and are considered to be in a temporary loss position. The Company’s mortgage-backed securities are investment grade securities backed by a pool of mortgages. Principal and interest payments on the underlying mortgages are used to pay monthly interest and principal on the securities.

Note 5 - Fair Value Measurements

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

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

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

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.

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

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 security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

With respect to securities available-for-sale, Level 1 includes those 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. 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.

Federal Reserve 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 — Due to the short-term nature of these loans, they are reported at their carrying value which is considered a reasonable estimate of fair value.

Loans Receivable - For certain categories of loans, such as variable rate loans, which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

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 based on current market rates.

The carrying values and estimated fair values of the Company’s financial instruments are as follows:

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	September 30, 2010				December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and due from banks	$	773,453	$	773,453	$	741,896	$	741,896
Federal funds sold	1,746,053		1,746,053		813,827		813,827
Interest-bearing bank deposits	20,744,024		20,744,024		30,701,988		30,701,988
Securities available for sale	22,626,665		22,626,665		17,029,866		17,029,866
Federal Reserve Bank stock	481,550		481,550		525,250		525,250
Loans Held For Sale	324,254		324,254		—		—
Loans receivable, net	19,305,799		20,773,744		10,436,992		10,405,000

Financial liabilities
Demand deposits, interest-bearing transaction and savings accounts	27,888,146		27,888,146		23,660,119		23,660,119
Certificates of deposits	22,802,390		22,907,172		20,323,745		20,363,806

	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Commitments to extend credit	$	2,771,844	$	—	$	660,743	$	—

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, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

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 for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments 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.

Assets measured at fair value on a recurring basis at September 30, 2010, and December 31, 2009, are as follows:

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	Quoted Market Price in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2010
Muncipal bonds	$	—	$	1,054,205
Mortgage-backed securities	$	—	$	21,572,460	$	—
Total	$	—	$	22,626,665	$	—

December 31, 2009
Mortgage-backed securities	$	—	$	17,029,866	$	—
Total	$	—	$	17,029,866	$	—

Assets measured at fair value on a nonrecurring basis at September 30, 2010, and December 31, 2009, are as follows:

	Quoted Market Price in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation Allowances as of September 30, 2010
September 30, 2010

Impaired loans	$	—	$	—	$	37,547	$	—
Total	$	—	$	—	$	37,547	$	—

December 31, 2009
Impaired loans	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—

There is one loan relationship that is classified and its underlying collateral has been monitored and reviewed throughout the year. The relationship has undergone partial charge-offs in the second and third quarters. An appraisal of the collateral supports the remaining balance of $37,547, thus there is no valuation allowance for this loan. However, this loan is considered impaired due to its history and remains on non-accrual.

As of September 30, 2010, and December 31, 2009, the Company had no liabilities carried at fair value or measured at fair value on a non-recurring basis.

The Company is predominantly a cash flow lender with real estate serving as collateral on a substantial majority of loans. Loans, which are deemed to be impaired, are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which are then discounted for other factors and which the Company considers to be level 3 inputs.

Note 6 — 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 Securities and Exchange Commission. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the consolidated financial statements or disclosed in the notes to the consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion reviews our results of operations and assesses our financial condition. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements. The commentary should be read in conjunction with the discussion of forward-looking statements, the consolidated financial statements, and the related notes and the other statistical information included in this report.

DISCUSSION OF FORWARD-LOOKING STATEMENTS

This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in our forward-looking statements include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 2009 under Item 1A - Risk Factors and the following:

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

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

· changes in political conditions or the legislative or regulatory environment, including the effect of recent financial reform legislation on the banking industry;

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

· the effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions;

· the amount of our loan portfolio collateralized by real estate, and the weakness in the real estate market;

· changes occurring in business conditions and inflation;

· changes in deposit flows;

· changes in technology;

· the adequacy of the level of our allowance for loan losses and the lack of seasoning of our loan portfolio;

· the rate of delinquencies and amount of loans charged-off;

· the rate of loan growth;

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

· changes in monetary and tax policies;

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

· changes in the securities markets; and

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

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

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

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Overview

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

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

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

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

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

Critical Accounting Policies

We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2009, as filed in our Annual Report on Form 10-K.

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

Allowance for Loan Losses

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

Income Taxes

We use assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in our consolidated financial statements and

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income tax returns, and income tax benefit or expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises judgment in evaluating the amount and timing of recognition of resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. Valuation allowances are established to reduce deferred tax assets if it is determined to be “more likely than not” that all or some portion of the potential deferred tax asset will not be realized. Currently we have fully reserved for our deferred tax asset related to continuing operations. No assurance can be given that either the tax returns submitted by us or the income tax reported on the financial statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent non-deductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.

Legislative and Regulatory Initiatives to Address Financial and Economic Crises

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

· The Emergency Economic Stabilization Act, approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase troubled assets from banks, authorized the Securities and Exchange Commission to suspend the application of marked-to-market accounting, and raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 through December 31, 2013;

· On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;

· On October 14, 2008, the U.S. Treasury announced the creation of a new program, the Capital Purchase Program, that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable;

· On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”), which seeks to strengthen confidence and encourage liquidity in the banking system. The TLGP has two primary components that are available on a voluntary basis to financial institutions:

· Guarantee of newly-issued senior unsecured debt; the guarantee would apply to new debt issued on or before October 31, 2009 and would provide protection until December 31, 2012; issuers electing to participate would pay a 75 basis point fee for the guarantee; and

· Unlimited deposit insurance through December 31, 2009 for non-interest bearing deposit transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts (the “Transaction Account Guarantee Program” or “TAGP”); financial institutions electing to participate will pay a 10 basis point premium (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place.

· On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan, which earmarked $350 billion of the TARP funds authorized under EESA. Among other things, the Financial Stability

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Plan includes:

· A capital assistance program that will invest in mandatory convertible preferred stock of certain qualifying institutions determined on a basis and through a process similar to the Capital Purchase Program;

· A consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances;

· A new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy “toxic assets” from financial institutions; and

· Assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.

· On February 17, 2009, the American Recovery and Reinvestment Act (the “Recovery Act”) was signed into law in an effort to, among other things, create jobs and stimulate growth in the United States economy. The Recovery Act specifies appropriations of approximately $787 billion for a wide range of Federal programs and will increase or extend certain benefits payable under the Medicaid, unemployment compensation, and nutrition assistance programs. The Recovery Act also reduces individual and corporate income tax collections and makes a variety of other changes to tax laws. The Recovery Act also imposes certain limitations on compensation paid by participants in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”).

· On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced the Public-Private Partnership Investment Program for Legacy Assets which consists of two separate plans, addressing two distinct asset groups:

· The first plan is the Legacy Loan Program, which has a primary purpose to facilitate the sale of troubled mortgage loans by eligible institutions, including FDIC-insured federal or state banks and savings associations. Eligible assets are not strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the Treasury. The first sale under the Legacy Loan Program was made in the third quarter of 2009.

· The second plan is the Securities Program, which is administered by the Treasury and involves the creation of public-private investment funds (“PPIFs”) to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements. The U.S. Treasury received over 100 unique applications to participate in the Legacy Securities PPIF and in July 2009 selected nine PPIF managers. As of September 30, 2010, the PPIFs had completed their fundraising and have closed on approximately $7.4 billion of private sector equity capital, which was matched 100% by Treasury, representing $14.7 billion of total equity capital. The U.S. Treasury has also provided $14.7 billion of debt capital, representing $29.4 billion of total purchasing power. As of September 30, 2010, PPIFs have drawn-down approximately $18.6 billion of total capital which has been invested in eligible assets and cash equivalents pending investment.

· On November 12, 2009, the FDIC issued a final rule to require banks to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1, 2011.

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· On April 13, 2010, the FDIC approved an interim rule that extends the unlimited deposit insurance for non-interest bearing deposit transaction accounts under the TLGP to December 31, 2011. Coverage under the program is in addition to and separate from the basic coverage available under the FDIC’s general deposit insurance rules. We are not participating in the unlimited deposit insurance component of the TLGP.

· On July 21, 2010, the U.S. President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), a comprehensive regulatory framework that will affect every financial institution in the U.S. The Dodd-Frank Act includes, among other measures, changes to the deposit insurance and financial regulatory systems, enhanced bank capital requirements, and provisions designed to protect consumers in financial transactions. The Dodd-Frank Act also alters certain corporate governance matters affecting public companies. Among other things, the bill includes provisions that exempt smaller public companies with a market cap of under $75 million from Sarbanes-Oxley Section 404(b) audits of management’s assessment of internal controls. Over the next 16 to 18 months, regulatory agencies will implement new regulations which will establish the parameters of the new regulatory framework and provide a clearer understanding of the legislation’s effect on banks.

· Internationally, both the Basel Committee on Banking Supervision (the “Basel Committee”) and the Financial Stability Board (established in April 2009 by the Group of Twenty (“G-20”) Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation, and transparency) have committed to raise capital standards and liquidity buffers within the banking system (“Basel III”). On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1 common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with implementation by January 2019. The U.S. federal banking agencies support this agreement. The Basel Committee is expected to finalize the new capital and liquidity standard later this year and to present them for approval of the G-20 Finance Minister and Central Bank Governors in November 2010.

· On September 27, 2010, the U.S. President signed into law the Small Business Jobs and Credit Act which, among other things, creates a $30 billion fund to provide capital for banks with assets under $10 billion to increase their small-business lending. The U.S. Treasury is currently working to finalize terms of participation for this fund.

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

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

Results of Operations

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

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interest income is affected by the timing of the repricing of these interest-earning assets and interest-bearing liabilities.

Three months ended September 30, 2010 and 2009

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

Nine months ended September 30, 2010

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

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

Assets and Liabilities

General

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

Loans

Loans typically provide higher interest yields than other types of interest-earning assets. The following table

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summarizes the composition of our loan portfolio as of September 30, 2010 and December 31, 2009.

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

Nonperforming Assets

At September 30, 2010, nonaccrual loans totaled $37,547, related to one lending relationship, compared to no nonaccrual loans as of December 31, 2009. There were no accruing loans which were contractually past due 90 days or more as to principal or interest payments at September 30, 2010 and December 31, 2009. Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. The nonaccrual loan relationship is considered impaired. The bank recognized a partial charge off during the third quarter of 2010 totaling $110,000 on the loan relationship that is classified as nonaccrual. The remaining balance is adequately supported by the value of the collateral. There were no impaired loans as of December 31, 2009. As of September 30, 2010, we were not aware of any other loans that were not already considered for impairment or categorized as impaired or on nonaccrual.

Provision and Allowance for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged to expense on our consolidated statement of operations. The allowance for loan losses was $354,559 as of September 30, 2010, or 1.80% of total loans, compared to $144,845 as of December 31, 2009, or 1.37% of total loans . The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectibility of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons. Due to our limited operating history, to date the provision for loan losses has been made primarily as a result of our assessment of general loan loss risk compared to banks of similar size and maturity.

Due to our short operating history, the loans in our loan portfolio and our lending relationships are of very recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process known as seasoning. As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. Periodically, we will adjust the amount of the allowance based on changing circumstances. We will charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can

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be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period especially considering the overall weakness in the commercial real estate market in our market areas.

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

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

Deposits

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

Liquidity

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

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

Off-Balance Sheet Risk

Through the operations of our bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2010, we had issued commitments to extend credit of $2.8 million through various types of lending arrangements, compared to $660,743 as of December 31, 2009. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower.

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Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

Capital Resources

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

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

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

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

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

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

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(Unaudited)	Tier 1 Leverage		Tier 1 Risk-Based		Total Risk-Based
Minimum Required	4.00	%	4.00	%	8.00	%
Minimum Required to be well capitalized	5.00	%	6.00	%	10.00	%

De novo requirement	8.00	%

Actual Ratios at September 30, 2010
Coastal Carolina National Bank	23.00	%	64.31	%	65.57	%
Consolidated	24.35	%	68.07	%	69.32	%

Actual Ratios at December 31, 2009
Coastal Carolina National Bank	30.04	%	89.62	%	90.42	%
Consolidated	31.18	%	93.63	%	94.43	%

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

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, 2010. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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

Part II — Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable

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

Not applicable

Item 3. Default Upon Senior Securities

Not applicable

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Item 4. [Removed and Reserved.]

Item 5. Other Information

Not applicable

Item 6. Exhibits

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

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

32 Section 1350 Certifications.

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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 12, 2010	By:	/s/ Michael D. Owens
	Michael D. Owens
	President and Chief Executive Officer
	(Principal Executive Officer)


	By:	/s/ Dawn Kinard
	Dawn 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.

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Part I Financial Information Item 1. Financial Statements Note 1 - Business and Basis Of Presentation Note 2 - Summary Of Significant Accounting Policies Note 3 - Recently Issued Accounting Pronouncements Note 4 - Securities Note 5 - Fair Value Measurements Note 6 Subsequent Events Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Default Upon Senior Securities Item 4. [removed and Reserved.]Item 5. Other Information Item 6. Exhibits

CCNB 10-Q Quarter ended Sept. 30, 2010