Coastal Carolina Bancshares (CCNB) 10-Q 2010 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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: 2,186,000 shares of common stock, par value $0.01 per share, were outstanding as of May 14, 2010.

INDEX

		Page No.
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets - March 31, 2010 (unaudited) and December 31, 2009	3
	Consolidated Statements of Operations (unaudited) - Three months ended March 31, 2010 and 2009	4
	Consolidated Statements of Shareholders’ Equity and Comprehensive Loss (unaudited) - Three months ended March 31, 2010 and 2009	5
	Consolidated Statements of Cash Flows (unaudited) - Three months ended March 31, 2010 and 2009	6
	Notes to Consolidated Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 4.	(Removed and Reserved)	21
Item 5.	Other Information	21
Item 6.	Exhibits	21

2

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Balance Sheets

	March 31,			December 31,
	2010			2009
	(Unaudited)
Assets
Cash and due from banks	$	539,404		$	741,896
Federal funds sold	—			813,827
Interest-bearing bank deposits	30,467,246			30,701,988
Securities available for sale	19,793,999			17,029,866
Federal Reserve Bank stock	525,250			525,250
Loans receivable	11,655,651			10,581,837
Allowance for loan losses	(373,302		)	(144,845		)
Loans, net	11,282,349			10,436,992
Premises and equipment, net	420,688			464,174
Other assets	420,379			444,471
Total assets	$	63,449,315		$	61,158,464
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Non-interest bearing demand	$	1,014,718		$	700,533
Interest checking	1,339,387			1,272,341
Money market	22,228,363			21,558,971
Savings	127,867			128,274
Certificates of deposit	22,189,289			20,323,745
Total deposits	46,899,624			43,983,864
Accrued expenses and other liabilities	237,750			233,446
Total liabilities	47,137,374			44,217,310
Commitments and contingencies
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, 2,186,000 issued and outstanding at March 31, 2010 and December 31, 2009	21,860			21,860
Additional paid-in capital	21,630,529			21,604,774
Unearned compensation, nonvested restricted stock	(46,111		)	(51,111		)
Retained deficit	(5,243,812		)	(4,533,543		)
Accumulated other comprehensive loss	(50,525		)	(100,826		)
Total shareholders’ equity	16,311,941			16,941,154
Total liabilities and shareholders’ equity	$	63,449,315		$	61,158,464

See notes to the consolidated financial statements.

3

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009
Interest income
Loans, including fees	$	166,842		$	—
Federal funds sold and interest-bearing bank deposits	121,462			—
Securities	186,011			—
Federal Reserve stock dividend	7,771			—
Stock subscriptions held in escrow	—			30,381
Total interest income	482,086			30,381
Interest expense
Deposits:
Interest checking	2,555			—
Money market and savings	97,705			—
Certificates of deposit < $100,000	37,221			—
Certificates of deposit > $100,000	83,144			—
Lines of credit and other borrowings	14			19,030
Total interest expense	220,639			19,030
Net interest income before provision for loan losses	261,447			11,351
Provision for loan losses	228,457			—
Net interest income after provision for loan losses	32,990			11,351
Noninterest income
Service charges on deposits	2,767			—
ATM, debit, and merchant fees	1,206			—
Gain on sale of loans	1,637			—
Leasehold improvement allowance	—			12,500
Other	831			—
Total noninterest income	6,441			12,500
Noninterest expense
Salaries and employee benefits	433,282			265,650
Occupancy and equipment	104,549			95,270
Data processing	69,139			8,353
Professional services	53,009			10,819
Marketing and business development	26,649			4,181
Corporate insurance	5,061			3,633
Postage and supplies	7,328			7,580
Telecommunications	4,938			5,256
FDIC insurance and regulatory assessments	25,706			—
Other	14,114			11,118
Total noninterest expense	743,775			411,860
Loss before income taxes	(704,344		)	(388,009		)
Income taxes	5,926			25
Net loss	$	(710,270	)	$	(388,034	)
Loss per share
Basic and diluted loss per share	$	(0.32	)	$	—
Average shares outstanding	2,186,000			—

See notes to the consolidated financial statements.

4

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Shareholders’ Equity and Comprehensive Loss

(Unaudited)

						Unearned						Accumulated
				Additional		Compensation						Other			Total
	Common Stock			Paid-in		Nonvested			Retained			Comprehensive			Shareholders’
	Shares	Amount		Capital		Restricted Stock			Deficit			Loss			Equity (Deficit)
December 31, 2008	—	$	—	$	—	$	—		$	(1,551,089	)	$	—		$	(1,551,089	)
Pre-opening net loss for 2009	—	—		—		—			(388,034		)	—			(388,034		)
March 31, 2009	—	$	—	$	—	$	—		$	(1,939,123	)	$	—		$	(1,939,123	)
December 31, 2009	2,186,000	$	21,860	$	21,604,774	$	(51,111	)	$	(4,533,542	)	$	(100,826	)	$	16,941,155
Net loss	—	—		—		—			(710,270		)	—			(710,270		)
Change in unrealized gains and losses on securities	—	—		—		—			—			50,301			50,301
Total comprehensive loss	—	—		—		—			—			—			(659,969		)
Organizer/founder warrants	—	—		21,633		—			—			—			21,633
Stock-based compensation	—	—		4,122		—			—			—			4,122
Issuance of restricted stock	—	—		—		5,000			—			—			5,000
March 31, 2010	2,186,000	$	21,860	$	21,630,529	$	(46,111	)	$	(5,243,812	)	$	(50,525	)	$	16,311,941

See notes to the consolidated financial statements.

5

COASTAL CAROLINA BANCSHARES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009
Operating activities
Net loss	$	(710,270	)	$	(388,034	)
Adjustments to reconcile net loss to net cash used by operating activities:
Provision for loan losses	228,457			—
Increase in deferred loan fees, net	6,159			—
Gains on sale of loans held for sale	(1,637		)	—
Origination of loans held for sale, net	(109,969		)	—
Proceeds from sale of loans held for sale	111,606			—
Premium amortization and discount accretion on securities, net	20,329			—
Depreciation and amortization expense	48,614			36,929
Stock-based compensation expense	30,755			—
Increase in accrued interest receivable	(24,889		)	—
Increase in accrued interest payable	2,777			1,906
Decrease (increase) in deferred stock issuance costs	—			(145,499		)
Decrease (increase) in other assets	19,057			(16,292		)
Increase in other liabilities	1,527			(27,662		)
Net cash used in operating activities	(377,484		)	(538,652		)
Investing activities
Net change in loans	(1,079,973		)	—
Purchases of securities available for sale	(3,039,283		)	—
Proceeds from paydowns of securities available for sale	335,047			—
Net purchases of premises and equipment	(5,128		)	(8,930		)
Net cash used in investing activities	(3,789,337		)	(8,930		)
Financing activities
Net increase in demand deposits, interest-bearing transaction accounts and savings accounts	1,050,216			—
Net increase in certificates of deposit	1,865,544			—
Net increase (decrease) in stock subscriptions held in escrow	—			12,304,820
Net increase (decrease) in other borrowings	—			577,963
Net cash provided by financing activities	2,915,760			12,882,783
Net increase (decrease) in cash and cash equivalents	(1,251,061		)	12,335,201
Cash and cash equivalents, beginning of period	32,257,711			2,371,528
Cash and cash equivalents, end of period	$	31,006,650		$	14,706,729
Supplemental disclosures of cash flow information
Cash paid for:
Interest on deposits and borrowings	$	217,862		$	17,124
Non-cash items:
Unrealized gains on securities available for sale (net of tax expense of $29,924)	50,301			—

See notes to the consolidated financial statements.

6

COASTAL CAROLINA BANCSHARES, INC.

Notes to Consolidated Financial Statements

March 31, 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 2,186,000 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 three month period ended March 31, 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.

7

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

Loss Per Share - Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding.  Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method.  Dilutive common share equivalents include common shares issuable upon exercise of outstanding stock warrants and stock options.  There were no dilutive common share equivalents outstanding during the three months ended March 31, 2010 and 2009 due to the net loss; therefore, basic loss per share and diluted earnings per share were the same.

	Three Months Ended
	March 31,
	2010			2009
Net loss to common shareholders	$	(710,270	)	$	(388,034	)
Weighted-average number of common shares outstanding	2,186,000			—
Net loss per share	$	(0.32	)	$	—

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 months ended March 31, 2010 and 2009:

	Three Months Ended
	March 31,
	2010			2009
Change in unrealized gains on securities available-for-sale	$	80,225		$	—
Reclassification adjustment for gain realized in net income during the period	—			—
Net change in unrealized gains on securities	80,225			—
Deferred tax asset	(29,924		)	—
Net-of-tax amount	$	50,301		$	—

Note 3 - Recently Issued Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

In January 2010, fair value guidance was amended to require disclosures for significant amounts transferred in and out of Levels 1 and 2 and the reasons for such transfers and to require that gross amounts of purchases, sales, issuances and settlements be provided in the Level 3 reconciliation.  The new disclosures are effective for the Company for the current quarter and have been reflected in the Fair Value footnote.

Guidance related to subsequent events was amended in February 2010 to remove the requirement for an SEC filer to disclose the date through which subsequent events were evaluated.  The amendments were effective upon issuance and had no significant 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.

8

Note 4 - Securities

At March 31, 2010 and December 31, 2009, the Bank’s securities consisted of mortgage-backed securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association, summarized as follows:

	March 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Mortgage-backed securities	$	19,874,581	$	28,123	$	(108,705	)	$	19,793,999

	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

The contractual maturity distribution and yields of the Bank’s securities portfolio at March 31, 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.

	Securities
	Available For Sale
	Amortized		Estimated
	Cost		Fair Value
Mortgage-backed securities (1)
Due after one year but within five years	$	—	$	—
Due after five years but within ten years	11,777,000		11,740,256
Due after ten years	8,097,581		8,053,743
Total	$	19,874,581	$	19,793,999

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

At March 31, 2010 and December 31, 2009 the Bank also owned Federal Reserve Bank stock with a cost of $525,250 and a yield of 6%. Securities with an aggregate carrying value of $4,224,493 at March 31, 2010 and $4,310,348 at December 31, 2009, were pledged to secure public deposits. There were no sales of available-for-sale securities for the quarter ended March 31, 2010.

There were no write-downs for other-than-temporary declines in the fair value of debt securities in 2009 or the three month period ended March 31, 2010. At March 31, 2010, there were 11 mortgage-backed securities with a fair value of $15.9 million considered to be temporarily impaired. 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.

The unrealized losses at March 31, 2010, shown in the following table resulted primarily from an increase in rates across the yield curve.

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Mortgage-backed securities	$	15,860,148	$	108,705	$	—	$	—	$	15,860,148	$	108,705
Total temporarily impaired securities	$	15,860,148	$	108,705	$	—	$	—	$	15,860,148	$	108,705

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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.

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 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.

10

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

	March 31, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Cash and due from banks	$	539,404	$	539,404	$	741,896	$	741,896
Federal funds sold	—		—		813,827		813,827
Interest-bearing bank deposits	30,467,246		30,467,246		30,701,988		30,701,988
Securities available for sale	19,793,999		19,793,999		17,029,866		17,029,866
Federal Reserve Bank stock	525,250		525,250		525,250		525,250
Loans receivable, net	11,282,349		11,214,000		10,436,992		10,405,000
Financial liabilities
Demand deposits, interest-bearing transaction and savings accounts	24,710,335		24,710,335		23,660,119		23,660,119
Certificates of deposits	22,189,289		22,467,000		20,323,745		20,363,806

	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Commitments to extend credit	$	1,765,092	$	—	$	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 1Quoted 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 2Observable 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 3Unobservable 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.

11

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

	Quoted		Significant
	Market Price		Other		Significant
	in Active		Observable		Unobservable
	Markets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
March 31, 2010
Mortgage-backed securities	$	—	$	19,793,999	$	—
Total	$	—	$	19,793,999	$	—
December 31, 2009
Mortgage-backed securities	$	—	$	17,029,866	$	—
Total	$	—	$	17,029,866	$	—

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

	Quoted		Significant
	Market Price		Other		Significant
	in Active		Observable		Unobservable
	Markets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
March 31, 2010
Impaired loans	$	—	$	239,926	$	—
Total	$	—	$	239,926	$	—
December 31, 2009
Impaired loans	$	—	$	—	$	—
Total	$	—	$	—	$	—

As of March 31, 2010 and December 31, 2009, the Company had no liabilities carried at fair value or measured at fair value on a 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 the Company considers to be level 2 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;

·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 developments over the last 24 months in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company.  Beginning in 2008 and continuing through the first quarter of 2010, 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.

Overview

Coastal Carolina Bancshares, Inc. is a bank holding company headquartered in Myrtle Beach, South Carolina.  We

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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.

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.

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 quarter ended March 31, 2010 and also analyzes our financial condition as of March 31, 2010.  Because our banking subsidiary opened for business on June 8, 2009, a comparison of the quarter ended March 31, 2009 to the quarter ended March 31, 2010 would not be meaningful.

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.

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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 “more likely than not” that all or some portion of the potential deferred tax asset will not be realized.  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 two 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; 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.

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·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 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 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.

·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.

·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.

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Although it is likely that further regulatory actions will arise as the Federal government attempts to address the economic situation, we cannot predict the 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

We incurred a net loss of $710,270 for the three months ended March 31, 2010.  Our primary source of revenue is net interest income.  Net interest income is the difference between income earned on interest-bearing assets and interest paid on deposits and borrowings used to support such assets. The level of net interest income is determined by the balances of interest-earning assets and interest-bearing liabilities and corresponding interest rates earned and paid on those assets and liabilities, respectively.  In addition to the volume of and corresponding interest rates associated with these interest-earning assets and interest-bearing liabilities, net interest income is affected by the timing of the repricing of these interest-earning assets and interest-bearing liabilities.

Interest income was $482,086, of which $186,011 was from investment securities and $121,462 was from federal funds sold and interest-bearing bank deposits, during the quarter ended March 31, 2010.  We incurred interest expense of $220,639 during this same period, a majority of which was related to deposit accounts.  The provision for loan loss was $228,457 for the quarter ended March 31, 2010.  We anticipate the growth in loans in future quarters will drive the growth in assets and the growth in interest income.  The primary source of funding for our loan portfolio is deposits that are acquired locally.  Our net interest spread and net interest margin were 1.20% and 1.70%, respectively, for the three months ended March 31, 2010.

Non-interest income for the three months ended March 31, 2010 totaled $6,441, consisting primarily of service charges on deposit accounts and gain on sale of loans.  We incurred non-interest expense of $743,775 during the three months ended March 31, 2010.  The most significant component of non-interest expense is salaries and employee benefits, which totaled $433,282 during this period.  We also incurred $104,549 of occupancy and equipment expenses, $69,139 of data processing expenses, $53,009 of professional services expenses, $26,649 in marketing and business development expenses and $25,706 in FDIC and regulatory assessments.

Assets and Liabilities

General

Total assets as of March 31, 2010 were $63.4 million, representing an increase of $2.3 million or 3.8% compared to December 31, 2009 total assets of $61.2 million.  The increase in assets is primarily due to a $2.8 million increase in securities available for sale.  At March 31, 2010, total assets consisted principally of $30.5 million in interest-bearing deposits with other financial institutions, $19.8 million in available-for-sale investment securities and $11.3 million in net loans.  Liabilities at March 31, 2010 totaled $47.1 million, represented almost entirely by retail customer deposits.  At March 31, 2010, shareholders’ equity was $16.3 million.  Book value per share was $7.46 at March 31, 2010.

Loans

Since loans typically provide higher interest yields than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. The following table summarizes the composition of our loan portfolio as of March 31, 2010.

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	March 31			Percentage
	2010			of Total
Construction and land development	$	3,667,576		31.4	%
Real estate - residential mortgage	1,045,822			8.9
Real estate - other	5,693,305			48.7
Commercial and industrial	1,015,937			8.7
Consumer and other	269,763			2.3
Gross loans	11,692,403			100.0	%
Allowance for loan losses	(373,302		)	—
Deferred loan fees, net	(36,752		)	—
Total loans, net	$	11,282,349		—

Nonperforming Assets

The bank has not charged off any loans since commencing operations. At March 31, 2010, nonaccrual loans totaled $239,926.  There were no accruing loans which were contractually past due 90 days or more as to principal or interest payments at March 31, 2010.  Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual will be recognized as income when received provided no impairment exists under the loan.  At March 31, 2010, we were not aware of any potential problem loans that were not already considered for impairment or categorized as impaired or non-accrual.

The following is a summary of information pertaining to impaired and nonaccrual loans at March 31, 2010 and December 31, 2009:

	March 31		Decmeber 31
	2010		2009
Impaired loans without a valuation allowance	$	39,926	$	—
Impaired loans with a valuation allowance	200,000		—
Total impaired loans	$	239,926	$	—

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 $373,302 as of March 31, 2010. 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

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provision for loan losses, which would adversely affect our results of operations and financial condition.  Periodically, we will adjust the amount of the allowance based on changing circumstances. We will charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period 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 our credit grading system which we apply to each loan.

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 March 31, 2010, we had $46.9 million in deposits, which consisted primarily of $2.4 million in demand deposit accounts, $22.2 million in certificates of deposit, and $22.3 million of savings and money market accounts.

Liquidity

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

Our primary sources of liquidity are deposits, scheduled repayments on our loans, and interest on and maturities of our investments. We plan to meet our future cash needs through the liquidation of temporary investments and the generation of deposits. Occasionally, we might sell investment securities in connection with the management of our interest sensitivity gap or to manage cash availability. We may also utilize our cash and due from banks, security repurchase agreements, and federal funds sold to meet liquidity requirements as needed. In addition, we have the ability, on a short-term basis, to purchase federal funds from other financial institutions. As of March 31, 2010, our primary sources of liquidity included interest-bearing deposits with financial institutions of $30.5 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 March 31, 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 March 31, 2010, we had issued commitments to extend credit of $1.8 million through various types of lending arrangements.  We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

Capital Resources

Total shareholders’ equity decreased from $16.9 million at December 31, 2009 to $16.3 million at March 31, 2010. The decrease is primarily a result of net loss for the quarter ended March 31, 2010 of $710,270.

Our bank and the company are subject to various regulatory capital requirements administered by the federal

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banking agencies. However, the Federal Reserve guidelines contain an exemption from the capital requirements for “small bank holding companies” which in 2006 were amended to cover most bank holding companies with less than $500 million in total assets that do not have a material amount of debt or equity securities outstanding registered with the SEC.  Since our stock is not registered under Section 12 of the Securities Exchange Act of 1934, we believe 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. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

At the bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. To be considered “adequately capitalized” under these capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%.  To be considered “well-capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. For the first years of operation, during our bank’s “de novo” period, the bank will be required to maintain a leverage ratio of at least 8%. The bank exceeded its minimum regulatory capital ratios as of March 31, 2010, as well as the ratios to be considered “well capitalized.”

The following table sets forth the bank’s various capital ratios at March 31, 2010.

Tier 1 leverage capital	24.70	%
Tier 1 risk-based capital	110.62	%
Total risk-based capital	111.89	%

We believe our capital is sufficient to fund the activities of the bank in its initial stages of operation and the rate of asset growth will not negatively impact the capital base.  As of March 31, 2010, there were no significant firm commitments outstanding for capital expenditures.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not required.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (who is both the Company’s principal executive 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 Chief Executive has concluded that our current disclosure controls and procedures are effective as of March 31, 2010.  There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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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

Item 4.   [Removed and Reserved.]

Item 5. Other Information

Not applicable

Item 6.  Exhibits

31Rule 15d-14(a) Certification of the Principal Executive Officer and Principal Financial Officer.

32Section 1350 Certification.

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SIGNATURES

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

	Coastal Carolina Bancshares, Inc.
Date:  May 14, 2010	By:	/s/ Michael D. Owens
	Michael D. Owens
	President and Chief Executive Officer
	(Principal Executive, Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit
Number	Description
31	Rule 15d-14(a) Certification of the Principal Executive Officer and Principal Financial Officer.
32	Section 1350 Certification.

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