UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant To Section 13 Or 15(d)of The Securities Exchange
Act Of 1934 For The Fiscal Year December 31, 1999
Or
[ ] 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 333-86371
Coastal Banking Company, Inc.
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(Exact name of registrant as specified in its charter)
South Carolina 58-2455444
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(State of Incorporation) (I.R.S. Employer Identification No.)
1001 Bay Street Suite 202
Beaufort, S.C. 29902
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(Address of principal executive offices) (Zip Code)
843-522-1228
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(Telephone Number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's loss for its most recent fiscal year was $233,280. As of
March 15, 2000, 948,281 shares of Common Stock were issued and outstanding.
The aggregate market value of the Common Stock held by non-affiliates
of the Company on March 15, 2000 is $5,930,248. This calculation is based upon
an estimate of the fair market value of the Common Stock of $8.00 per share,
which was the price of the last trade of which management is aware prior to this
date.
Transitional Small Business Disclosure Format. (Check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Company's Proxy Statement
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Item 1. Description of Business
This Report contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and the
Securities Exchange Act of 1934. These statements are based on many assumptions
and estimates and are not guarantees of future performance. Our actual results
may differ materially from those projected 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," "will,"
"expect," "anticipate," "believe," "intend," "plan," and "estimate," as well as
similar expressions, are meant to identify such forward-looking statements.
Potential risks and uncertainties include, but are not limited to:
o significant increases in competitive pressure in the banking and
financial services industries;
o changes in the interest rate environment which could reduce anticipated
or actual margins;
o changes in political conditions or the legislative or regulatory
environment;
o general economic conditions, either nationally or regionally and
especially in primary service area, becoming less favorable than
expected resulting in, among other things, a deterioration in credit
quality;
o changes occurring in business conditions and inflation;
o changes in technology;
o changes in monetary and tax policies;
o changes in the securities markets; and
o other risks and uncertainties detailed from time to time in our
filings with the Securities and Exchange Commission.
General
We were incorporated to operate as a bank holding company pursuant to the
Federal Bank Holding Company Act of 1956 and the South Carolina Banking and
Branching Efficiency Act, and to purchase 100% of the issued and outstanding
stock of Lowcountry National Bank (in organization), an association organized
under the laws of the United States, to conduct a general banking business in
Beaufort County, South Carolina.
Since our inception on June 8, 1999, as a South Carolina corporation, we
have engaged in organizational and pre-opening activities necessary to obtain
regulatory approvals and to prepare our subsidiary, Lowcountry National Bank, to
commence business as a financial institution. We have received preliminary
approval to open the bank and obtain deposit insurance from our regulators and
expect to open the bank in April 2000.
On November 1, 1999, we sold 870,000 shares of our common stock at $10 per
share and on December 2, 1999, we issued 78,821 additional shares for a total of
948,281 shares of common stock. The offering raised $8,909,624 net of estimated
underwriting discounts and commissions. Our directors and executive officers
purchased 207,000 shares of common stock at $10 per share in the offering, for a
total of $2,070,000. We intend to use approximately $6,700,000 of the proceeds
to capitalize the proposed bank.
Marketing Focus
Lowcountry National Bank will focus on the local community, emphasizing
personal service to individuals and businesses in Beaufort County. Our primary
service area includes a large portion of Beaufort County, excluding Hilton Head.
Our target market will be primarily individuals and small- to medium-sized
businesses who desire a consistent and
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professional relationship with a local banker. We plan to encorage and
relationships with individuals and companies in this area to more effectively
market the service of the bank. We believe we can offer a personal banking
relationship to our customers that is not available through larger banks.
Location and Service Area
Our 5,400 square foot main office will be located on West Sea Island
Parkway just across the Beaufort river from downtown Beaufort on Ladys Island.
We expect to complete the renovations in the first quarter of 2000 and open for
business in April 2000. We believe that the headquarters facility will
adequately serve the bank's needs for at least the first year of operation, but
we may pursue branching opportunities as they arise.
Our primary service area will consist of the portion of Beaufort County
within a 20 mile radius (specifically excluding Hilton Head Island) of our main
office. This area covers a large portion of Beaufort County, including Beaufort,
Bluffton, Burton, Callawassie Island, Coosaw, Dataw Island, Harbor Island,
Hunting Island, Fripp Island, Ladys Island, Port Royal, Spring Island, St.
Helena Island, and the rapidly growing Sun City, which is expected to contain
8,900 homes upon completion. More particularly, the service area for deposits
for the bank is within a five mile radius of our main office, with the 20 mile
radius primarily utilized for loan generation opportunities.
Lending Activities
General. We intend to emphasize a range of lending services, including
real estate, commercial, and consumer loans to individuals and small- to
medium-sized businesses and professional firms that are located in or conduct a
substantial portion of their business in Lowcountry National Bank 's market
area. We will compete for these loans with competitors who are well established
in the Beaufort County area and have greater resources and lending limits. As a
result, we may have to charge lower interest rates to attract borrowers.
Loan Approval and Review. Lowcountry National Bank 's loan approval
policies will provide for various levels of officer lending authority. When the
amount of aggregate loans to a single borrower exceeds an individual officer's
lending authority, the loan request will be considered and approved by an
officer with a higher lending limit or the directors' loan committee. Loans in
excess of the directors' loan committee's limits must be approved by the full
board of directors. Lowcountry National Bank will not make any loans to any
director, officer, or employee of Lowcountry National Bank unless the loan is
approved by the board of directors of Lowcountry National Bank and is made on
terms not more favorable to such person than would be available to a person not
affiliated with Lowcountry National Bank . Lowcountry National Bank currently
intends to adhere to Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation guidelines in its mortgage loan review process, but may
choose to alter this policy in the future. Lowcountry National Bank currently
intends to sell its mortgage loans on the secondary market, but may choose to
hold them in the portfolio in the future.
Lending Limits. Lowcountry National Bank 's lending activities will be
subject to a variety of lending limits imposed by federal law. In general,
Lowcountry National Bank will be subject to a legal limit on loans to a single
borrower equal to 15% of Lowcountry National Bank's capital and unimpaired
surplus. Different limits may apply in certain circumstances based on the type
of loan or the nature of the borrower, including the borrower's relationship to
Lowcountry National Bank. These limits will increase or decrease as Lowcountry
National Bank's capital increases or decreases. Based upon the capitalization of
Lowcountry National Bank with $6,700,000, Lowcountry National Bank will
initially have a self-imposed loan limit of $804,000, which represents 80% of
our anticipated legal lending limit of $1,005,000. These initial limits may drop
as we expect to incur losses, and therefore have less capital, in first several
years of operations. Unless Lowcountry National Bank is able to sell
participations in its loans to other financial institutions, Lowcountry National
Bank will not be able to meet all of the lending needs of loan customers
requiring aggregate extensions of credit above these limits.
Real Estate and Mortgage Loans. We estimate that loans secured by first
or second mortgages on real estate will make up 63% of Lowcountry National
Bank's loan portfolio. These loans will generally fall into one of three
categories: commercial real estate loans, construction and development loans, or
residential real estate loans. Each of these
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categories is discussed in more detail below, including their specific risks.
Home equity loans are not included because they are classified as consumer
loans, which are discussed below. Interest rates for all categories may be fixed
or adjustable, and will more likely be fixed for shorter-term loans. Lowcountry
National Bank will generally charge an origination fee for each loan.
Real estate loans are subject to the same general risks as other loans.
They are particularly sensitive to fluctuations in the value of real estate,
which is generally the underlying security for real estate loans. Fluctuations
in the value of real estate, as well as other factors arising after a loan has
been made, could negatively affect a borrower's cash flow, creditworthiness, and
ability to repay the loan.
We will have the ability to originate real estate loans for sale into
the secondary market. We can limit our interest rate and credit risk on these
loans by locking the interest rate for each loan with the secondary investor and
receiving the investor's underwriting approval prior to originating the loan.
o Commercial Real Estate Loans. Commercial real estate loans will
generally have terms of five years or less, although payments may
be structured on a longer amortization basis. We will evaluate
each borrower on an individual basis and attempt to determine its
business risks and credit profile. We will attempt to reduce
credit risk in the commercial real estate portfolio by emphasizing
loans on owner-occupied office and retail buildings where the
loan-to-value ratio, established by independent appraisals, does
not exceed 80%. We will also generally require that debtor cash
flow exceed 115% of monthly debt service obligations. We will
typically review all of the personal financial statements of the
principal owners and require their personal guarantees. These
reviews generally reveal secondary sources of payment and
liquidity to support a loan request.
o Construction and Development Real Estate Loans. We will offer
adjustable and fixed rate residential and commercial construction
loans to builders and developers and to consumers who wish to
build their own home. The term of construction and development
loans will generally be limited to eighteen months, although
payments may be structured on a longer amortization basis. Most
loans will mature and require payment in full upon the sale of the
property. Construction and development loans generally carry a
higher degree of risk than long term financing of existing
properties. Repayment depends on the ultimate completion of the
project and usually on the sale of the property. Specific risks
include:
o cost overruns;
o mismanaged construction;
o inferior or improper construction techniques;
o economic changes or downturns during construction;
o a downturn in the real estate market;
o rising interest rates which may prevent sale of the
property; and
o failure to sell completed projects in a timely manner.
We will attempt to reduce risk by obtaining personal guarantees where
possible, and by keeping the loan-to-value ratio of the completed project below
specified percentages. We also may reduce risk by selling participations in
larger loans to other institutions when possible.
o Residential Real Estate Loans. Residential real estate loans
generally will have longer terms up to 30 years. We will offer
fixed and adjustable rate mortgages. We will have limited credit
risk on these loans as most will be sold to third parties soon
after closing.
Commercial Loans. Lowcountry National Bank will make loans for
commercial purposes in various lines of businesses. Commercial loans are
generally considered to have greater risk than first or second mortgages on real
estate because they may be unsecured, or if they are secured, the value of the
security may be difficult to assess and more likely to decrease than real
estate.
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Equipment loans will typically be made for a term of five years or less
at fixed or variable rates, with the loan fully amortized over the term and
secured by the financed equipment and with a loan-to-value ratio of 80% or less.
We will focus our efforts on commercial loans less than $500,000. Working
capital loans will typically have terms not exceeding one year and will usually
be secured by accounts receivable, inventory, or personal guarantees of the
principals of the business. For loans secured by accounts receivable or
inventory, principal will typically be repaid as the assets securing the loan
are converted into cash, and in other cases principal will typically be due at
maturity. Asset based lending, leasing, and factoring will be offered through
third party vendors who can handle the paper work and servicing and generally
assume most of the credit risk. Trade letters of credit, standby letters of
credit, and foreign exchange will be handled through a correspondent bank as
agent for Lowcountry National Bank.
We expect to offer small business loans utilizing government
enhancements such as the Small Business Administration's 7(a) program and SBA's
504 programs. These loans will typically be partially guaranteed by the
government, which may help to reduce Lowcountry National Bank 's risk.
Government guarantees of SBA loans will not exceed 80% of the loan value and
will generally be less.
The well established banks in the Beaufort County area will make
proportionately more loans to medium to large-sized businesses than we will.
Many of Lowcountry National Bank's anticipated commercial loans likely will be
made to small- to medium-sized businesses which may be less able to withstand
competitive, economic, and financial conditions than larger borrowers.
Consumer Loans. Lowcountry National Bank will make a variety of loans
to individuals for personal and household purposes, including secured and
unsecured installment loans and revolving lines of credit. Installment loans
typically will carry balances of less than $50,000 and be amortized over periods
up to 60 months. Consumer loans may be offered on a single maturity basis where
a specific source of repayment is available. Revolving loan products will
typically require monthly payments of interest and a portion of the principal.
Consumer loans are generally considered to have greater risk than first or
second mortgages on real estate because they may be unsecured, or if they are
secured, the value of the security may be difficult to assess and more likely to
decrease than real estate.
We will also offer home equity loans. Our underwriting criteria for and
the risks associated with home equity loans and lines of credit will generally
be the same as those for first mortgage loans. Home equity lines of credit will
typically have terms of 15 years or less, will typically carry balances less
than $125,000, and may extend up to 100% of the available equity of each
property.
Deposit Services
We intend to offer a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, commercial accounts, savings accounts, and other time deposits of
various types, ranging from daily money market accounts to longer-term
certificates of deposit. The transaction accounts and time certificates will be
tailored to our primary market area at rates competitive to those offered in the
Beaufort County area. In addition, we intend to offer certain retirement account
services, such as IRAs. We intend to solicit these accounts from individuals,
businesses, associations, organizations, and governmental authorities.
Other Banking Services
We anticipate that Lowcountry National Bank will offer other bank services
including drive up ATMs, safe deposit boxes, traveler's checks, direct deposit,
U.S. Savings Bonds, and banking by mail. We plan for Lowcountry National Bank to
become associated with the Plus and Cirrus ATM networks, which may be used by
its customers throughout Beaufort County and other regions. We believe that by
being associated with a shared network of ATMs, we will be better able to serve
our customers and will be able to attract customers who are accustomed to the
convenience of using ATMs, although we do not believe that maintaining this
association will be critical to our success. We intend to begin offering these
services shortly after opening Lowcountry National Bank. We do not expect
Lowcountry National Bank to exercise trust powers during its first year of
operation
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Market Share
As of June 30, 1999, total deposits in Lowcountry National Bank 's
primary service area were almost $566 million, which represented a 15% deposit
growth rate from 1998. Our plan over the next five years is to grow our deposit
base to $56 million. Of course, we cannot be sure that these deposit growth
rates will continue, or that we will accomplish this objective.
Employees
As of March 1 2000, the bank has three employees, and we have two
employees.
Supervision and Regulation
Both the company and the bank are subject to extensive state and
federal banking laws and regulations which impose specific requirements or
restrictions on and provide for general regulatory oversight of virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not shareholders. The following summary is qualified by
reference to the statutory and regulatory provisions discussed. Changes in
applicable laws or regulations may have a material effect on our business and
prospects. Beginning with the enactment of the Financial Institution Report
Recovery and Enforcement Act in 1989 and following with the FDIC Improvement Act
in 1991, numerous additional regulatory requirements have been placed on the
national banking industry in the past several years, and additional changes have
been proposed. Our operations may be affected by legislative changes and the
policies of various regulatory authorities. 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.
Gramm-Leach-Bliley Act
On November 4, 1999, the U.S. Senate and House of Representatives each
passed the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was signed into law by President Clinton on
November 12, 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also permits bank holding companies to engage in a
statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are "complementary" to financial activities.
The Act is intended to grant to community banks certain powers as a
matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that we face from larger institutions and other types of companies.
In fact, it is not possible to predict the full effect that the Act will have on
us. From time to time other changes are proposed to laws affecting the national
banking industry, and these changes could have a material effect on our business
and prospects. We cannot predict the nature or the extent of the effect on our
business and earnings of fiscal or monetary policies, economic controls, or new
federal or state legislation.
Coastal Banking Company
The company owns the outstanding capital stock of the bank, and
therefore it is considered to be a bank holding company under the federal Bank
Holding Company Act of 1956 and the South Carolina Banking and Branching
Efficiency Act.
The Bank Holding Company Act. Under the Bank Holding Company Act, the
company is subject to periodic examination by the Federal Reserve and required
to file periodic reports of its operations and any additional information that
the Federal Reserve may require. Our activities at the bank and holding company
level are limited to:
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o banking and managing or controlling banks;
o furnishing services to or performing services for its
subsidiaries; and
o engaging in other activities that the Federal Reserve determines
to be so closely related to banking and managing or controlling
banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the Bank Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before:
o acquiring substantially all the assets of any bank;
o acquiring direct or indirect ownership or control of any voting
shares of any bank if after the acquisition it would own or
control more than 5% of the voting shares of such bank (unless it
already owns or controls the majority of such shares); or
o merging or consolidating with another bank holding company.
In addition, and subject to certain exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with regulations
thereunder, require Federal Reserve approval prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of voting
securities of a bank holding company. Control is rebuttably presumed to exist if
a person acquires 10% or more, but less than 25%, of any class of voting
securities and either the company has registered securities under Section 12 of
the Securities Exchange Act of 1934 or no other person owns a greater percentage
of that class of voting securities immediately after the transaction. The
company's common stock is registered under the Securities Exchange Act of 1934.
The regulations provide a procedure for challenge of the rebuttable control
presumption.
Under the Bank Holding Company Act, a bank holding company is generally
prohibited from engaging in, or acquiring direct or indirect control of more
than 5% of the voting shares of any company engaged in nonbanking activities
unless the Federal Reserve Board, by order or regulation, has found those
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Some of the activities that the Federal
Reserve Board has determined by regulation to be proper incidents to the
business of a bank holding company include:
o making or servicing loans and certain types of leases;
o engaging in certain insurance and discount brokerage activities;
o performing certain data processing services;
o acting in certain circumstances as a fiduciary or investment or
financial adviser;
o owning savings associations; and
o making investments in certain corporations or projects designed
primarily to promote community welfare.
The Federal Reserve Board imposes certain capital requirements on the
company under the Bank Holding Company Act, including a minimum leverage ratio
and a minimum ratio of "qualifying" capital to risk-weighted assets. These
requirements are described below under "Capital Regulations." Subject to its
capital requirements and certain other restrictions, the company is able to
borrow money to make a capital contribution to the bank, and these loans may be
repaid from dividends paid from the bank to the company. Our ability to pay
dividends will be subject to regulatory restrictions as described below in
"Greenville First Bank - Dividends." The company is also able to raise capital
for contribution to the bank by issuing securities without having to receive
regulatory approval, subject to compliance with federal and state securities
laws.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
Board policy, the company is expected to act as a source of financial strength
to the bank and to commit resources to support the bank in circumstances in
which the company might not otherwise do so. Under the Bank Holding Company Act,
the Federal Reserve Board may require a bank holding company to terminate any
activity or relinquish control of a nonbank subsidiary, other than a nonbank
subsidiary of a bank, upon the Federal Reserve Board's determination that such
activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank holding company.
Further, federal bank regulatory authorities have additional discretion to
require a bank holding company to divest itself of
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any bank or nonbank subsidiary if the agency determines that divestiture may aid
the depository institution's financial condition.
South Carolina State Regulation. As a bank holding company registered
under the South Carolina Banking and Branching Efficiency Act, we are subject to
limitations on sale or merger and to regulation by the South Carolina Board of
Financial Institutions. Prior to acquiring the capital stock of a national bank,
we are not required to obtain the approval of the Board, but we must notify them
at least 15 days prior to doing so. We must receive the Board's approval prior
to engaging in the acquisition of banking or nonbanking institutions or assets,
and we must file periodic reports with respect to our financial condition and
operations, management, and intercompany relationships between the company and
its subsidiaries.
Lowcountry National Bank
Lowcountry National Bank will operate as a national banking association
incorporated under the laws of the United States and subject to examination by
the Office of the Comptroller of the Currency. Deposits in Lowcountry National
Bank will be insured by the FDIC up to a maximum amount, which is generally
$100,000 per depositor subject to aggregation rules.
The Office of the Comptroller of the Currency and the FDIC will
regulate or monitor virtually all areas of Lowcountry National Bank 's
operations, including:
o security devices and procedures;
o adequacy of capitalization and loss reserves;
o loans;
o investments;
o borrowings;
o deposits;
o mergers;
o issuances of securities;
o payment of dividends;
o interest rates payable on deposits;
o interest rates or fees chargeable on loans;
o establishment of branches;
o corporate reorganizations;
o maintenance of books and records; and
o adequacy of staff training to carry on safe lending and deposit
gathering practices.
The Office of the Comptroller of the Currency requires Lowcountry
National Bank to maintain specified capital ratios and imposes limitations on
Lowcountry National Bank's aggregate investment in real estate, bank premises,
and furniture and fixtures. The Office of the Comptroller of the Currency will
also require Lowcountry National Bank to prepare quarterly reports on Lowcountry
National Bank's financial condition and to conduct an annual audit of its
financial affairs in compliance with its minimum standards and procedures.
Under the FDIC Improvement Act, all insured institutions must undergo
regular on site examinations by their appropriate banking agency. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the appropriate agency against each institution or affiliate as it
deems necessary or appropriate. Insured institutions are required to submit
annual reports to the FDIC, their federal regulatory agency, and their state
supervisor when applicable. The FDIC Improvement Act directs the FDIC to develop
a method for insured depository institutions to provide supplemental disclosure
of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution. The FDIC
Improvement Act also requires the federal banking regulatory agencies to
prescribe, by regulation,
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standards for all insured depository institutions and depository institution
holding companies relating, among other things, to the following:
o internal controls;
o information systems and audit systems;
o loan documentation;
o credit underwriting;
o interest rate risk exposure; and
o asset quality.
National banks and their holding companies which have been chartered or
registered or have undergone a change in control within the past two years or
which have been deemed by the Office of the Comptroller of the Currency or the
Federal Reserve Board to be troubled institutions must give the Office of the
Comptroller of the Currency or the Federal Reserve Board thirty days' prior
notice of the appointment of any senior executive officer or director. Within
the 30 day period, the Office of the Comptroller of the Currency or the Federal
Reserve Board, as the case may be, may approve or disapprove any such
appointment.
Deposit Insurance. The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for deposit insurance. A
separate Bank Insurance Fund and Savings Association Insurance Fund are
maintained for commercial banks and savings associations with insurance premiums
from the industry used to offset losses from insurance payouts when banks and
thrifts fail. In 1993, the FDIC adopted a rule which establishes a risk-based
deposit insurance premium system for all insured depository institutions. Under
this system, until mid-1995 depository institutions paid to Bank Insurance Fund
or Savings Association Insurance Fund from $0.23 to $0.31 per $100 of insured
deposits depending on its capital levels and risk profile, as determined by its
primary federal regulator on a semiannual basis. Once the Bank Insurance Fund
reached its legally mandated reserve ratio in mid-1995, the FDIC lowered
premiums for well-capitalized banks, eventually eliminating premiums for
well-capitalized banks, with a minimum semiannual assessment of $1,000. However,
in 1996 Congress enacted the Deposit Insurance Funds Act of 1996, which
eliminated even this minimum assessment. It also separated the Financial
Corporation assessment to service the interest on its bond obligations. The
amount assessed on individual institutions, including Lowcountry National Bank,
by Financial Corporation assessment is in addition to the amount paid for
deposit insurance according to the risk-related assessment rate schedule.
Increases in deposit insurance premiums or changes in risk classification will
increase Lowcountry National Bank's cost of funds, and we may not be able to
pass these costs on to our customers.
Transactions With Affiliates and Insiders. Lowcountry National Bank
will be subject to the provisions of Section 23A of the Federal Reserve Act,
which places limits on the amount of loans or extensions of credit to, or
investments in, or certain other transactions with, affiliates and on the amount
of advances to third parties collateralized by the securities or obligations of
affiliates. The aggregate of all covered transactions is limited in amount, as
to any one affiliate, to 10% of Lowcountry National Bank's capital and surplus
and, as to all affiliates combined, to 20% of Lowcountry National Bank's capital
and surplus. Furthermore, within the foregoing limitations as to amount, each
covered transaction must meet specified collateral requirements. Compliance is
also required with certain provisions designed to avoid the taking of low
quality assets.
Lowcountry National Bank will also be subject to the provisions of
Section 23B of the Federal Reserve Act which, among other things, prohibits an
institution from engaging in certain transactions with certain affiliates unless
the transactions are on terms substantially the same, or at least as favorable
to such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies. Lowcountry National Bank
will be subject to certain restrictions on extensions of credit to executive
officers, directors, certain principal shareholders, and their related
interests. Such extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.
Dividends. A national bank may not pay dividends from its capital. All
dividends must be paid out of undivided profits then on hand, after deducting
expenses, including reserves for losses and bad debts. In addition, a national
bank is
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prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital, unless there has been transferred to surplus
no less than one-tenth of Lowcountry National Bank's net profits of the
preceding two consecutive half-year periods (in the case of an annual dividend).
The approval of the Office of the Comptroller of the Currency is required if the
total of all dividends declared by a national bank in any calendar year exceeds
the total of its net profits for that year combined with its retained net
profits for the preceding two years, less any required transfers to surplus.
Branching. National banks are required by the National Bank Act to
adhere to branch office banking laws applicable to state banks in the states in
which they are located. Under current South Carolina law, Lowcountry National
Bank may open branch offices throughout South Carolina with the prior approval
of the Office of the Comptroller of the Currency. In addition, with prior
regulatory approval, Lowcountry National Bank will be able to acquire existing
banking operations in South Carolina. Furthermore, federal legislation has been
passed which permits interstate branching. The law permits out-of-state
acquisitions by bank holding companies, interstate branching by banks if allowed
by state law, and interstate merging by banks.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve, the FDIC, or the Office of the
Comptroller of the Currency, shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low
and moderate income neighborhoods. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or facility.
Failure to adequately meet these criteria could impose additional requirements
and limitations on Lowcountry National Bank.
Other Regulations. Interest and other charges collected or contracted
for by Lowcountry National Bank are subject to state usury laws and federal laws
concerning interest rates. Lowcountry National Bank's loan operations are also
subject to federal laws applicable to credit transactions, such as:
o the federal Truth-In-Lending Act, governing disclosures of credit
terms to consumer borrowers;
o the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public
officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the
community it serves;
o the Equal Credit Opportunity Act, prohibiting discrimination on the
basis of race, creed or other prohibited factors in extending credit;
o the Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies;
o the Fair Debt Collection Act, governing the manner in which consumer
debts may be collected by collection agencies; and
o the rules and regulations of the various federal agencies
charged with the responsibility of implementing such federal laws.
The deposit operations of Lowcountry National Bank also are subject to:
o the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial
records; and
o the Electronic Funds Transfer Act and Regulation E issued by the
Federal Reserve Board to implement that act, which governs automatic
deposits to and withdrawals from deposit accounts and customers'
rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
Capital Regulations. The federal bank regulatory authorities have
adopted risk-based capital guidelines for banks and bank holding companies that
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies and account
for off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion
10
<PAGE>
programs should not allow expansion to diminish their capital ratios and should
maintain ratios in excess of the minimums. We have not received any notice
indicating that either the Company or Lowcountry National Bank is subject to
higher capital requirements. The current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1
capital includes common shareholders' equity, qualifying perpetual preferred
stock, and minority interests in equity accounts of consolidated subsidiaries,
but excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred stock
not included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock, and
general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight applies. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is equal to Tier 1 capital as a percentage of average
total assets less intangibles, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding company may leverage
its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points.
The FDIC Improvement Act established a new capital-based regulatory
scheme designed to promote early intervention for troubled banks which requires
the FDIC to choose the least expensive resolution of bank failures. The new
capital-based regulatory framework contains five categories of compliance with
regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well capitalized" institution, a
bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of
no less than 6%, and a total risk-based capital ratio of no less than 10%, and
Lowcountry National Bank must not be under any order or directive from the
appropriate regulatory agency to meet and maintain a specific capital level.
Initially, we will qualify as "well capitalized."
Under the FDIC Improvement Act regulations, the applicable agency can treat
an institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution increases, and the
permissible activities of the institution decreases, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to do some or all of the following:
o submit a capital restoration plan;
o raise additional capital;
o restrict their growth, deposit interest rates, and other activities;
o improve their management;
o eliminate management fees; or
o divest themselves of all or a part of their operations.
Bank holding companies controlling financial institutions can be called upon to
boost the institutions' capital and to partially guarantee the institutions'
performance under their capital restoration plans.
These capital guidelines can affect us in several ways. If we grow at a
rapid pace, our capital may be depleted too quickly, and a capital infusion from
the holding company may be necessary which could impact our ability to pay
11
<PAGE>
dividends. Our capital levels will initially be more than adequate; however,
rapid growth, poor loan portfolio performance, poor earnings performance, or a
combination of these factors could change our capital position in a relatively
short period of time.
The FDIC Improvement Act requires the federal banking regulators to
revise the risk-based capital standards to provide for explicit consideration of
interest rate risk, concentration of credit risk, and the risks of untraditional
activities. We are uncertain what effect these regulations would have.
Failure to meet these capital requirements would mean that a bank would
be required to develop and file a plan with its primary federal banking
regulator describing the means and a schedule for achieving the minimum capital
requirements. In addition, such a bank would generally not receive regulatory
approval of any application that requires the consideration of capital adequacy,
such as a branch or merger application, unless Lowcountry National Bank could
demonstrate a reasonable plan to meet the capital requirement within a
reasonable period of time.
Enforcement Powers. The Financial Institution Report Recovery and
Enforcement Act expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties." Institution-affiliated parties
primarily include management, employees, and agents of a financial institution,
as well as independent contractors and consultants such as attorneys and
accountants and others who participate in the conduct of the financial
institution's affairs. These practices can include the failure of an institution
to timely file required reports or the filing of false or misleading information
or the submission of inaccurate reports. Civil penalties may be as high as
$1,000,000 a day for such violations. Criminal penalties for some financial
institution crimes have been increased to 20 years. In addition, regulators are
provided with greater flexibility to commence enforcement actions against
institutions and institution-affiliated parties. Possible enforcement actions
include the termination of deposit insurance. Furthermore, banking agencies'
power to issue cease-and-desist orders were expanded. Such orders may, among
other things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnification or
guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the ordering agency to be appropriate.
Effect of Governmental Monetary Policies. Our earnings are affected by
domestic economic conditions and the monetary and fiscal policies of the United
States government and its agencies. The Federal Reserve Bank's monetary policies
have had, and are likely to continue to have, an important impact on the
operating results of commercial banks through its power to implement national
monetary policy in order, among other things, to curb inflation or combat a
recession. The monetary policies of the Federal Reserve Board have major effects
upon the levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation of
the discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature or impact
of future changes in monetary and fiscal policies.
12
<PAGE>
Item 2. Description of Property.
- ----------------------------------
Lowcountry National Bank's main office will be located at 36 Sea Island
Parkway in Beaufort, South Carolina. We have already purchased this property at
a total cost of $900,000. We are renovating a 5,400 square foot facility at this
location at a projected cost of $816,000, and we expect to open this office by
April, 2000.
Item 3. Legal Proceedings.
- -----------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- --------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Item 5. Market for Common Equity and Related Stockholder Matters.
- -------------------------------------------------------------------
Since our public offering on November 1, 1999, our common stock has
been quoted on the OTC Bulletin Board under the symbol "CBCO." Our articles of
incorporation authorize us to issue up to 10,000,000 shares of common stock, of
which 948,281 shares, for a total of $9,482,810, were sold in the initial public
offering and are outstanding as of March 1, 2000. We have 864 shareholders of
record. To date, we have not paid cash dividends on our common stock. We
currently intend to retain earnings to support operations and finance expansion
and therefore do not anticipate paying cash dividends in the foreseeable future.
The following table sets forth the high and low sales price information
as quoted on the OTC Bulletin Board during the period indicated since our common
stock began trading publicly on November 2, 1999.
Stock Price
-----------
High Low
1999
- ----
Fourth Quarter $10.50 $8.75
All outstanding shares of our common stock are entitled to share
equally in dividends from funds legally available therefor, when, as and if
declared by the Board of Directors.
(b) Pursuant to Commission Rule 463, we are obligated to report on the
use of proceeds from our initial public offering. The information provided below
is given as of December 31, 1999.
(1) Our registration statement on Form SB-2 (File No.
333-86371) was declared effective by the Commission
on November 1, 1999.
(2) The offering commenced on November 1, 1999.
(3) The offering closed on November 4, 1999 upon the sale
of 870,000 shares we had registered.
(4) (i) On December 2, 1999, the underwiter
exercised its over-allotment option and
purchased an additional 78,281 securities
that we had registered.
(ii) Edgar Norris & Co., Inc., served as
underwriter for the offering.
(iii) Common stock was the only class of
securities registered in the offering.
13
<PAGE>
(iv) 1,202,000 shares of common stock were
registered, of which, 948,281 shares were
sold. Warrants to purchase 202,000 shares of
our common stock for $10.00 per share were
registered in the offering. We granted to
our organizers warrants to purchase a total
of 202,000 shares of common stock. The
warrants granted to our organizers were
based on shares they purchased.
(v) We incurred approximately $694,636 in
expenses (including sales commissions) in
connection with the issuance and
distribution of the common stock in the
offering. All of these expenses were paid
directly or indirectly to persons or
entities other than directors, officers,
persons owning 10% or more of our
securities, or our affiliates.
(vi) The net proceeds we received after deducting
the total expenses described above were
$8,788,173.
(vii) Through December 31, 1999, $989,172 of the
net proceeds of the offering were invested
in cash and $121,571 was used to pay
organization costs. None of the net proceeds
have been paid directly or indirectly to our
directors, officers, persons owning 10% or
more of our securities, and our affiliates,
except for an aggregate of $104,115 paid as
salaries to our officers and the officers of
Lowcountry National Bank.
(viii) The use of proceeds described above does not
represent a material change from the use of
proceeds disclosed in the prospectus for the
offering.
14
<PAGE>
Item 6. Management's Discussion and Analysis of Results of Operation
- ---------------------------------------------------------------------
Selected Financial Data
The following selected financial data for the period September 29, 1998
(inception) to December 31, 1999 is derived from the financial statements and
other data of the Company. The financial statements for the period September 29,
1998 (inception) to December 31, 1999, were audited by Tourville, Simpson &
Caskey, L.L.P, independent auditors. The selected financial data should be read
in conjunction with the financial statements of the Company, including the
accompanying notes, included elsewhere herein.
(Dollars in thousands) 1999
Income Statement Data:
Interest income $ 62
Interest expense 11
Net interest income 51
Provision for loan losses -
Net interest income after provision for loan losses 51
Net securities gains (losses) -
Noninterest income -
Noninterest expense 284
Income (loss) before income taxes (233)
Income tax expense (benefit) -
Net income (loss) $ (233)
Balance Sheet Data:
Assets $ 8,528
Earning assets 6,527
Securities (1) 6,527
Shareholders' equity 8,527
- ----------------------
All securities are available for sale and are stated at fair value.
15
<PAGE>
General
The Company's principal activities to date have related to its organization, the
conducting of its initial public offering, the pursuit of approvals from the OCC
for its application to charter the Bank, and the pursuit of approvals from the
FDIC for its application for insurance of the deposits of the Bank. On September
29, 1999, the Company received preliminary approval from the OCC to charter the
Bank. On November 2, 1999, the FDIC granted preliminary approval of deposit
insurance application for the Bank. We expect the Bank to open for business
during the second quarter of 2000. We completed our initial public stock
offering on December 2, 1999. The offering resulted in the issuance of 948,281
shares of the Company's common stock. Proceeds from the offering were
$9,482,810, less expenses associated with the offering totaling $694,637 through
December 31, 1999.
At December 31, 1999, the Company had total assets of $8,527,583, consisting of
securities available-for-sale of $6,527,012, cash of $989,172, property and
equipment of $972,042, and other assets of $39,357.
The Company's liabilities at December 31, 1999 were $100, consisting solely of
notes payable totaling this amount. The Company had shareholders' equity of
$8,527,483 at December 31, 1999.
The Company had a net loss of $233,280 for the period September 29, 1998
(inception) to December 31, 1999. These losses resulted from expenses incurred
in connection with activities related to the organization of the Company and the
Bank. These activities included (without limitation) the preparation and filing
of an application with the OCC to charter the Bank, the preparation and filing
of an application with the FDIC to obtain insurance of the deposits of the Bank,
responding to questions and providing additional information to the OCC and the
FDIC in connection with the application process, the selling of the Company's
common stock in the offering, meetings and discussions among various organizers
regarding application information, target markets, and capitalization issues,
and planning and organizing for the opening of the Bank. Because the Company is
in the organizational stage, it has had no operations from which to generate
revenues. However, funds from the stock sale were invested in federal funds sold
and investment securities.
Since the inception of the Company, all activities have consisted of organizing
the Company and Bank, obtaining all required regulatory approvals, and selling
stock subscriptions. All operations have been funded through the initial stock
purchases by the organizers and subsequently from the stock offering.
The Company intends to devote the next several months completing the
organization of the Bank, and organizing and developing the other business
activities of the Company. These organizational activities will include, with
respect to the Bank, completing all required steps for final approval from the
OCC for the bank to open for business, hiring qualified personnel to work in the
various offices of the Bank, conducting public relations activities on behalf of
the Bank, developing prospective business contacts for the Bank and the Company,
and taking other actions necessary for a successful bank opening. With respect
to the Company, these activities include the pursuit of approval from the OCC
seeking approval to become a bank holding company by acquiring all of the
capital stock to be issued by the Bank.
The Company, through the Bank, will offer a full range of commercial banking
services to individuals, and small business customers in its primary service
area. These services will include personal and business loans, checking
accounts, savings, and time certificates of deposit. The loans, transaction
accounts, and time certificates will be at rates competitive with those offered
in the Bank's primary service area. Customer deposits with the Bank will be
insured to the maximum extent provided by law through the FDIC. The Bank intends
to offer night depository and bank-by-mail services and to sell travelers checks
(issued by an independent entity) and cashiers checks. The Bank does not
anticipate offering trust and fiduciary services initially and will rely on
trust and fiduciary services offered by correspondent banks until the Bank
determines that it is profitable to offer such services directly.
Initially, the Bank anticipates deriving its income principally from interest
charged on loans and, to a lesser extent, from interest earned on investments,
from fees received in connection with the origination of loans, and from other
services. The Bank's principal expenses are anticipated to be interest expense
on deposits and operating expenses.
16
<PAGE>
As a result of the offering, management believes the Company and the Bank can
satisfy future cash requirements indefinitely, and will not have to raise
additional capital during the first twelve months of operations. The Bank
intends to accept deposits and make loans and investments in accordance with an
asset and liability management framework that emphasizes appropriate levels of
liquidity and interest rate risk.
Currently, the Company has six employees and expects this number to increase to
approximately nine by the end of March 2000.
Results of Operations
For the period September 29, 1998 (inception) to December 31, 1999
The net loss for the period September 29, 1998 (inception) to December 31, 1999
was $233,280. Total interest income for the period totaled $61,870. The primary
component of this income was from interest on securities available-for-sale
which totaled $49,243. Interest on federal funds totaled $12,627 for the period.
This income was offset by expenses totaling $295,150. This was comprised
primarily of salaries and benefits of $116,551 and other expenses of $162,260.
Other expenses included the expenses associated with forming the Company and
Bank such as consulting, application and filing fees.
17
<PAGE>
COASTAL BANKING COMPANY, INC.
Management's Discussion and Analysis or Plan of Operation
Earning Assets
All of the Company's securities were classified as available-for-sale at
December 31, 1999. The following table sets forth the book value of the
securities held by the Company at December 31, 1999.
Book Value of Securities
1999
------------
(Dollars in thousands)
U.S. government agencies $6,527
Total securities $6,527
=====
The following table sets forth the scheduled maturities and average yields of
securities held at December 31, 1999.
Investment Securities Maturity Distribution and Yields
Within One
Year Total
-------------------- ---------------------
Amount Yield Amount Yield
-------------------- ---------------------
(Dollars in thousands)
U.S. government agencies $ 6,527 5.52% $ 6,527 5.52%
----- -----
Total $ 6,527 5.52% $ 6,527 5.52%
===== =====
Capital
The Company, through an underwriter, offered and sold to the general public
870,000 shares of $.01 par value common stock at an offering price of $10.00 per
share. The underwriter also exercised its over-allotment option and purchased an
additional 78,281 shares of common stock at $10.00 per share, less its discount
of $.70 per share. The total aggregate amount raised from the public stock
offering was $9,482,810. Expenses associated with the stock offering totaled
$694,637 through December 31, 1999 and have been netted against paid in capital.
18
<PAGE>
Item 7. Financial Statements
- -----------------------------
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
Index to Financial Statements
Independent Accountants' Report F-2
Financial Statements:
Balance Sheet as of December 31, 1999 F-3
Statement of Operations and Accumulated Deficit For the Period
September 29, 1998 (Inception) to December 31, 1999 F-4
Statement of Changes in Stockholders' Equity and Comprehensive Income
For the Period September 29, 1998 (Inception) to December 31, 1999 F-5
Statement of Cash Flows For the Period September 29, 1998 (Inception)
to December 31, 1999 F-6
Notes to Financial Statements F-7-F-11
F-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Coastal Banking Company, Inc.
Beaufort, South Carolina
We have audited the accompanying balance sheet of Coastal Banking Company, Inc.,
(a Company in the Development Stage) as of December 31, 1999 and related
statements of operations and accumulated deficit, stockholders' equity and
comprehensive income and cash flows for the period from inception September 29,
1998 to December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coastal Banking Company, Inc.,
(a Company in the Development Stage) as of December 31, 1999, and the results of
its operations and its cash flows for the period from inception September 29,
1998 to December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Tourville, Simpson & Caskey, L. L. P.
Columbia, South Carolina
March 9, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
Balance Sheet
December 31, 1999
<S> <C>
Assets
Cash $ 989,172
Securities available-for-sale 6,527,012
Premises and equipment 972,042
Accrued interest receivable 25,236
Other assets 14,121
-------------
Total assets $ 8,527,583
=============
Liabilities
Borrowings $ 100
-------------
Stockholders' Equity
Preferred stock, par value $.01 per share; 10,000,000 shares authorized
and unissued -
Common stock, par value $.01 per share; 10,000,000 shares authorized;
948,281 shares issued and outstanding 9,483
Paid-in-capital 8,778,690
Accumulated other comprehensive income (loss) (27,410)
Deficit accumulated in the development stage (233,280)
-------------
Total stockholders' equity 8,527,483
-------------
Total liabilities and stockholders' equity $ 8,527,583
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
Statement of Operations and Accumulated Deficit
For the Period September 29, 1998 (Inception) to December 31, 1999
Income:
Interest on securities, taxable $ 49,243
Interest on federal funds sold 12,627
-------------
Total income 61,870
-------------
Expenses:
Interest 10,689
Salaries and employee benefits 116,551
Occupancy expense 5,650
Other expenses 162,260
-------------
Total expenses 295,150
-------------
Net loss and accumulated deficit $ (233,280)
=============
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
Statement of Changes in Stockholders' Equity and Comprehensive Income
For the Period September 29, 1998 (Inception) to December 31, 1999
Accumulated Deficit
Common Stock Other Accumulated
------------------------ Paid In Comprehensive In the Develop
Shares Amount Capital Income(Loss) -ment Stage Total
---------- ------------ ------------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock 948,281 $ 9,483 $ 9,473,327 $ - $ - $ 9,482,810
Costs of common stock issuance (694,637) (694,637)
Net loss for the period
September 29, 1998
to December 31, 1999 (233,280) (233,280)
Other comprehensive income,
net of tax of $14,122 (27,410) (27,410)
-----------
Comprehensive income (260,690)
---------- --------- ----------- ----------- ------------ -----------
Balance, December 31, 1999 948,281 $ 9,483 $ 8,778,690 $ (27,410) $ (233,280) $ 8,527,483
========== ========= =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
For the Period September 29, 1998 (Inception) to December 31, 1999
Cash flows from operating activities--
Net loss and accumulated deficit $ (233,280)
Amortization less accretion on securities (24,007)
Increase in interest receivable (25,236)
Increase in other assets -
-------------
Cash used by operating activities (282,523)
-------------
Cash flows from investing activities--
Purchases of securities available for sale (6,544,536)
Purchases of premises and equipment (972,042)
-------------
Cash used by investing activities (7,516,578)
-------------
Cash flows from financing activities--
Proceeds from borrowings 100
Issuance of common stock 9,482,810
Costs of common stock issuance (694,637)
-------------
Cash provided by financing activities 8,788,273
-------------
Cash balance at end of period $ 989,172
=============
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
Notes to Financial Statements
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Coastal Banking Company, Inc. (the Company) was formed to
organize and own all of the capital stock of Lowcountry National Bank (the
Bank), a proposed national bank to be located in Beaufort County, South
Carolina, by a group of thirteen individuals (the Organizers). Upon opening, the
proposed bank will engage in general banking activities. The Organizers have
filed applications and obtained preliminary approvals with the Office of The
Comptroller of the Currency to obtain a national bank charter and with the
Federal Deposit Insurance Corporation (FDIC) for deposit insurance. It is
expected that operations will commence in the second quarter of 2000. All of the
Organizers will serve on the initial board of directors.
Organizational and Pre-Opening Costs - Activities since inception have consisted
of organizational activities necessary to obtain regulatory approvals and
preparation activities to commence business as a commercial bank. Organizational
costs are primarily legal fees, consulting fees, and application fees related to
the incorporation and initial organization of the Bank. Pre-opening costs are
primarily employees' salaries and benefits, temporary occupancy expense and
other operational expenses related to the preparation for the Bank's opening.
The organizational and pre-opening costs will be charged against the Bank's
initial period's operating results.
The Company has incurred approximately $295,150 in organizational and
pre-opening costs for the period September 29, 1998 (inception) to December 31,
1999.
Offering Expenses - Offering expenses, consisting principally of direct
incremental costs of the public stock offering, have been deducted from the
proceeds of the offering. These expenses were approximately $694,637 through
December 31, 1999.
Securities Available-for-Sale - Securities available-for-sale are carried at
amortized cost and adjusted to estimated fair value by recognizing the aggregate
unrealized gains or losses in a valuation account. Aggregate market valuation
adjustments are recorded in stockholders' equity net of deferred income taxes.
Reductions in market value considered by management to be other than temporary
are reported as a realized loss and a reduction in the cost basis of the
security. The adjusted cost basis of investments available-for-sale is
determined by specific identification and is used in computing the gain or loss
upon sale.
Premises and Equipment - Premises and equipment are stated at cost since the
assets have not been placed in service. The provision for depreciation will be
computed by the straight-line method, based on the estimated useful lives for
buildings of 40 years and furniture and equipment of 5 to 10 years. Leasehold
improvements will be amortized over 20 years. The cost of assets sold or
otherwise disposed of, and the related allowance for depreciation will be
eliminated from the accounts and the resulting gains or losses reflected in the
income statement when incurred.
F-7
<PAGE>
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
Notes to Financial Statements
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Comprehensive Income - Accounting principles generally require that recognized
revenue, 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 components of other comprehensive income and related tax effects are as
follows:
For the period
September 29, 1998
to December 31, 1999
----------------------
Unrealized holding gains (losses) on
available-for-sale securities $ (41,532)
Reclassification adjustment for losses
(gains) realized in income -
--------------
Net unrealized gains (41,532)
Tax effect 14,122
--------------
Net-of-tax amount $ (27,410)
==============
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available-for-sale at
December 31, 1999 were:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government agencies and corporations $ 6,568,544 $ 65 $ (41,597) $ 6,527,012
============ =========== ============ =============
There were no sales of securities in 1999.
</TABLE>
F-8
<PAGE>
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
Notes to Financial Statements
NOTE 2 - INVESTMENT SECURITIES - Continued
The following is a summary of maturities of securities available-for-sale as of
December 31, 1999. The amortized cost and estimated fair values are based on the
contractual maturity dates. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty.
Estimated
Amortized Fair
Cost Value
-------------- -------------
Due within one year or less $ 6,568,544 $ 6,527,012
============== =============
There were no securities pledged at December 31, 1999.
NOTE 3 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1999:
1999
-------------
Land $ 781,644
Buildings 108,772
Furniture and equipment 41,169
Construction in progress 40,457
-------------
972,042
Less, accumulated depreciation -
-------------
Premises and equipment, net $ 972,042
=============
At December 31, 1999, the Company has committed to spend approximately $800,000
to complete the renovation of the building acquired to serve as the corporate
headquarters.
NOTE 4 - BORROWINGS
As of December 31, 1999, borrowings consist of $100 drawn on a $500,000
unsecured line of credit obtained from The Bankers Bank of Atlanta, Georgia.
The line of credit was being used to fund the Company's organizational and
pre-opening costs.
F-9
<PAGE>
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
Notes to Financial Statements
NOTE 5 - STOCKHOLDERS' EQUITY
Common stock - Coastal Banking Company, Inc. has the authority to issue up to
10,000,000 shares of voting common stock, par value $.01 per share.
Preferred stock - Coastal Banking Company, Inc. has the authority to issue up to
10,000,000 shares of preferred stock, par value $.01 per share. Also, Coastal
Banking Company, Inc. has the right to establish and designate from time to time
any part or all of the shares by filing an amendment to Coastal Banking Company,
Inc.'s Articles of Incorporation, which is effective without shareholder action,
in such series and with such preferences, limitations, and relative rights as
may be determined by the Board of Directors. The number of authorized shares of
preferred stock may be increased or decreased by the affirmative vote of the
holders of the majority of the shares of common stock, without a vote of the
holders of the shares of preferred stock.
Cumulative voting rights - Coastal Banking Company, Inc. has elected not to have
cumulative voting, and no shares issued by Coastal Banking Company, Inc. may be
cumulatively voted.
Preemptive rights - The stockholders of Coastal Banking Company, Inc. shall not
have any preemptive rights regarding any issuance of Coastal Banking Company,
Inc.'s common stock.
Stock Offering - The Company, through its underwriter, Edgar M. Norris & Co.,
Inc., offered and sold to the general public 870,000 shares of $.01 par value
common stock at an offering price of $10.00 per share. Edgar M. Norris also
exercised its over-allotment option and purchased an additional 78,281 shares of
common stock at $10.00 per share, less its discount of $.70 per share. The total
aggregate amount raised from the public stock offering was $9,482,810. Expenses
associated with the stock offering totaled $694,637 through December 31, 1999
and have been netted against paid in capital.
The Organizers received one stock warrant for each share of common stock
purchased in the offering. The exercise price for the warrants will be $10.00
per share and may be exercised over a ten year period. The warrants will be
subject to certain conditions and limitations.
NOTE 6 - STOCK OPTIONS
The Company has entered into an agreement with a consultant to assist with the
formation of the Bank. As part of the consultant's fee, he was granted options
to purchase 10,000 shares of the Company's common stock for $10 per share. The
options are for a ten year period beginning with the date of the public stock
offering.
NOTE 7 - INCOME TAXES
As of December 31, 1999, Coastal Banking Company, Inc. had a net operating loss
carryforward of $233,280.
There was no provision (benefit) for income taxes for the period from September
29, 1998 to December 31, 1999, since a 100% valuation reserve is being
maintained for the net operating loss carryforward.
F-10
<PAGE>
COASTAL BANKING COMPANY, INC.
(A Company in the Development Stage)
Notes to Financial Statements
NOTE 8 - OTHER OPERATING EXPENSE
Other operating expense for the period September 29, 1998 (inception) to
December 31, 1999, is summarized below:
1999
---------------
Professional fees $ 34,321
Consultant fees 82,867
Insurance 4,347
Telephone 3,790
Other 36,935
-------------
$ 162,260
NOTE 9 - EMPLOYMENT CONTRACT
Coastal Banking Company, Inc. has entered into a five-year employment contract
with its President beginning August 12, 1999. Subject to certain conditions, at
the end of each year of the contract, the contract shall be extended for an
additional year so that the remaining term of the contract shall continue to be
five years. The contract provides that the President will receive an initial
annual salary of $96,000, and shall receive a minimum annual increase equal to
the increase in the Consumer Price Index.
The contract provides that the President shall receive a $10,000 cash bonus on
the date the Bank opens for business and shall be eligible to receive an annual
cash bonus not to exceed 5% of the Bank's pretax income if the Bank achieves
certain performance levels established by the board of directors.
Additionally, the President will receive other benefits including being eligible
for the grant of stock options. Upon the adoption of a stock option plan the
President will be granted the option to purchase 5% of the Company's common
stock sold in the stock offering.
F-11
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
None.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- ----------------------------------------------------------------------
In response to this Item, the information contained on page 11 of our
Proxy Statement for the Annual Meeting of Shareholders to be held on May 23,
2000 is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
In response to this Item, the information contained on page 8 of our
Proxy Statement for the Annual Meeting of Shareholders to be held on May 23,
2000 is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
In response to this Item, the information contained on page 10 of our
Proxy Statement for the Annual Meeting of Shareholders to be held on May 23,
2000 is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
In response to this Item, the information contained on page 11 of our
Proxy Statement for the Annual Meeting of Shareholders to be held on May 23,
2000 is incorporated herein by reference.
Item 13. Exhibits, List and Reports on Form 8-K
- -------------------------------------------------
(a) The following documents are filed as part of this report:
1.1 Form of Underwriting agreement between the company and Edgar M. Norris
& Co., Inc. (incorporated by reference to Exhibit 1.1 of the
Registration Statement on Form SB-2, File No. 333-86371)
3.1. Articles of Incorporation (incorporated by reference to Exhibit 3.1 of
the Registration Statement on Form SB-2, File No. 333-86371).
3.2 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form SB-2,
File No. 333-86371).
3.3. Bylaws (incorporated by reference to Exhibit 3.3 of the Registration
Statement on Form SB-2, File No. 333-86371).
4.1. See Exhibits 3.1, 3.2, and 3.3 for provisions in the company's Articles
of Incorporation and Bylaws defining the rights of holders' of the
common stock (incorporated by reference to Exhibits 3.1 and 3.2 of the
Registration Statement on Form SB-2, File No. 333-86371).
4.2. Form of certificate of common stock (incorporated by reference to
Exhibit 4.2 of the Registration Statement on Form SB-2, File No.
333-86371).
5.1. Opinion Regarding Legality (incorporated by reference to Exhibit 5.1 of
the Registration Statement on Form SB-2, File No. 333-86371).
10.1 Employment Agreement dated August 12, 1999 between the company and
Randolph Kohn (incorporated by reference to Exhibit 10.1
of the Registration Statement on Form SB-2, File No. 333-86371).
10.2 Purchase and Sale dated February 2, 1999, between Lowcountry National
Bank and Sterling Graydon and Helene Dowling (incorporated by reference
to Exhibit 10.2 of the Registration Statement on Form SB-2, File No.
333-86371).
20
<PAGE>
10.3 Line of Credit Agreement with The Banker's Bank dated April 1, 1999
(incorporated by reference to Exhibit 10.3 of the
Registration Statement on Form SB-2, File No. 333-86371).
10.5 Form of Stock Warrant Agreement (incorporated by reference to Exhibit
10.8 of the Registration Statement on Form SB-2, File No. 333-86371).
27.1 *Financial Data Schedule (for electronic filing purposes)
------------------------
*Filed herewith
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of 1999.
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COASTAL BANKING COMPANY, INC.
Date: March 29, 2000 By: /s/ Randolph C. Kohn
------------------ -------------------------------------
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Randolph C. Kohn, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-KSB, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Marjorie Trask Gray
- --------------------------------
Marjorie Trask Gray, DMD Director March 29, 2000
/s/ Dennis O. Green
- --------------------------------
Dennis O. Green, CPA Director, Vice- March 29, 2000
Chairman of the Board
/s/ Mark B. Heles
- --------------------------------
Mark B. Heles Director March 29, 2000
/s/ J. Phillip Hodges
- --------------------------------
J. Phillip Hodges, Jr. Director March 29, 2000
/s/ James W. Holden
- --------------------------------
James W. Holden, Jr., DVM Director March 29, 2000
/s/ Ladson F. Howell
- --------------------------------
Ladson F. Howell Director March 29, 2000
Chairman of the Board
/s/ James C. Key
- --------------------------------
James C. Key Director March 29, 2000
22
<PAGE>
/s/ Randolph C. Kohn
- --------------------------------
Randolph C. Kohn Director, President and March 29, 2000
Chief Executive Officer
/s/ Ron Lewis
- --------------------------------
Ron Lewis Director March 29, 2000
/s/ Charlie T. Lovering
- --------------------------------
Charlie T. Lovering Senior Vice President March 29, 2000
and Chief Financial
Officer
/s/ Lila N. Meeks
- --------------------------------
Lila N. Meeks Director March 29, 2000
/s/ Robert B. Pinkerton
- --------------------------------
Robert B. Pinkerton Director March 29, 2000
/s/ John M. Trask
- --------------------------------
John M. Trask, III Director March 29, 2000
/s/ Matt A. Trumps
- --------------------------------
Matt A. Trumps Director March 29, 2000
</TABLE>
23
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------- -----------
1.1 Form of Underwriting agreement between the company and Edgar M. Norris
& Co., Inc. (incorporated by reference to Exhibit 1.1 of the
Registration Statement on Form SB-2, File No. 333-86371)
3.1. Articles of Incorporation (incorporated by reference to Exhibit 3.1 of
the Registration Statement on Form SB-2, File No. 333-86371).
3.2 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 of the Registration Statement on
Form SB-2, File No. 333-86371).
3.3. Bylaws (incorporated by reference to Exhibit 3.3 of the Registration
Statement on Form SB-2, File No. 333-86371).
4.1. See Exhibits 3.1, 3.2, and 3.3 for provisions in the company's Articles
of Incorporation and Bylaws defining the rights of holders' of the
common stock (incorporated by reference to Exhibits 3.1 and 3.2 of the
Registration Statement on Form SB-2, File No. 333-86371).
4.2. Form of certificate of common stock (incorporated by reference to
Exhibit 4.2 of the Registration Statement on Form SB-2, File No.
333-86371).
5.1. Opinion Regarding Legality (incorporated by reference to Exhibit 5.1 of
the Registration Statement on Form SB-2, File No. 333-86371).
10.1 Employment Agreement dated August 12, 1999 between the company and
Randolph Kohn (incorporated by reference to Exhibit 10.1
of the Registration Statement on Form SB-2, File No. 333-86371).
10.2 Purchase and Sale dated February 2, 1999, between Lowcountry National
Bank and Sterling Graydon and Helene Dowling (incorporated by reference
to Exhibit 10.2 of the Registration Statement on Form SB-2, File No.
333-86371).
10.3 Line of Credit Agreement with The Banker's Bank dated April 1, 1999
(incorporated by reference to Exhibit 10.3 of the
Registration Statement on Form SB-2, File No. 333-86371).
10.5 Form of Stock Warrant Agreement (incorporated by reference to Exhibit
10.8 of the Registration Statement on Form SB-2, File No. 333-86371).
27.1 *Financial Data Schedule (for electronic filing purposes)
-----------------------------
*Filed herewith
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001093897
<NAME> Coastal Banking Company
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> SEP-29-1999
<PERIOD-END> DEC-31-1999
<CASH> 989,172
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,527,012
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 8,527,583
<DEPOSITS> 0
<SHORT-TERM> 100
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 9,483
<OTHER-SE> 8,778,690
<TOTAL-LIABILITIES-AND-EQUITY> 8,527,583
<INTEREST-LOAN> 0
<INTEREST-INVEST> 49,243
<INTEREST-OTHER> 12,627
<INTEREST-TOTAL> 61,870
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 10,689
<INTEREST-INCOME-NET> 51,181
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> (233,280)
<INCOME-PRE-EXTRAORDINARY> (233,280)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (233,280)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
