Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
Southcoast Financial Corporation
(the “Company”) is a South Carolina corporation organized in 1999 for the purpose of being a holding company for Southcoast Community Bank (the “Bank”). During 2004, Southcoast Investments, Inc. was formed as a wholly-owned subsidiary of the Company, primarily for the purpose of holding properties of the Company and Bank. The Company's primary purpose is that of owning the Bank. The Company is regulated by the Federal Reserve Board. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Bank was incorporated in 1998 and operates as a South Carolina chartered bank providing full banking services to its customers. The Bank is subject to regulation by the South Carolina State Board of Financial Institutions and the Federal Deposit Insurance Corporation. During 2005, the Company formed Southcoast Capital Trust III for the purpose of issuing trust preferred securities.
Pending Merger Transaction
- On August 14, 2015, the Company entered into a definitive agreement with BNC Bancorp (“BNC”) the holding company for Bank of North Carolina, pursuant to which BNC will acquire all of the common stock of the Company in a stock transaction. Under the terms of the agreement, which has been approved by the Boards of Directors of both companies and by the shareholders of the Company (approval of shareholders of BNC is not required), the Company’s shareholders will receive shares of BNC common stock based upon the volume weighted average price of BNC common stock for a 20-day trading period prior to the closing of the merger ("VWAP"), subject to minimum and maximum exchange ratios as follow: if the VWAP immediately prior to the merger is equal to or greater than $22.00, then each share of the Company’s common stock will be converted into 0.6068 shares of BNC common stock; if the VWAP immediately prior to the merger is less than $22.00 but greater than $19.00, then each share of the Company’s common stock will be converted into $13.35 payable in shares of BNC common stock (with the exchange ratio equal to $13.35 divided by the VWAP); and if the VWAP is equal to or less than $19.00, then each share of the Company’s common stock will be converted into 0.7026 shares of BNC common stock. The merger is currently awaiting regulatory approval, and is expected to close in the second quarter of 2016. For further information, please see the Proxy Statement/Prospectus of the Company/BNC filed with the Securities and Exchange Commission on December 23, 2015
Estimates
– The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates.
Concentration of Credit Risk
– Most of the Company’s business activity is with customers located in the adjoining South Carolina counties of Charleston, Berkeley, and Dorchester. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in these counties. Tourism, shipping, technology, and aerospace are major industries in the Company’s market area. Though the Company does not have a direct credit concentration in any of these industries, a downturn in any of them could negatively impact the local economy, which in turn could pose a credit risk to the Company.
Risk characteristics present in the Company’s loan portfolio vary by portfolio segment but are largely influenced by current loan to value ratios for real estate secured loans. At December 31, 2015, 94% of the Company’s outstanding loan balances were secured by real estate. After several years of declines, real estate values in the Company’s market area have largely recovered over the last several years. However, any future declines in real estate values may pose credit risk to the Company. Residential 1-4 Family loans comprise 62% of the Company’s outstanding loan balances. An increase in foreclosures on these loan types in the Company’s market area could increase unsold homes inventory, leading to decreases in market value. Such a scenario would increase the credit risk for existing loans made prior to the market value declines. Loans secured by commercial real estate comprise 22% of the Company’s outstanding loan balances and may be at risk of deterioration during times of decreasing market rental rates and increasing levels of office space vacancies. These conditions may occur during general economic downturns or during downturns in the specific industries significant to the Company’s market area.
Cash and Cash Equivalents
- Cash and cash equivalents may consist of cash on hand and due from banks, federal funds sold and securities purchased under agreements to resell. Generally, federal funds are sold for a one-day period and securities purchased under agreements to resell mature in less than 90 days.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
–
(Continued)
Investment Securities
- The Company classifies investments in equity and debt securities into three categories:
Available-for-sale
: These are securities which are not classified as either held to maturity or as trading securities. These securities are reported at fair value. Unrealized gains and losses are reported, net of income taxes, as separate components of shareholders’ equity (accumulated other comprehensive income). Gains or losses on dispositions of securities are based on the difference between the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. Premiums and discounts are amortized into interest income by a method that approximates a level yield.
Held-to-maturity
: These are debt securities which the Company has the ability and intent to hold until maturity. These securities are stated at cost, adjusted for amortization of premiums and the accretion of discounts. The Company has no held to maturity securities.
Trading
: These are securities which are bought and held principally for the purpose of selling in the near future. Trading securities are reported at fair market value, and related unrealized gains and losses are recognized in the income statement. The Company has no trading securities.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
Loans Held-for-Sale
- Loans held-for-sale consist of 1 - 4 family residential mortgage loans, which are reported at the lower of cost or fair value on an aggregate loan basis. Net unrealized losses, if any, are recognized through a valuation allowance. Loans held for sale were reported at cost at December 31, 2015 and 2014, as there were no unrealized losses at either date. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of loans sold.
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on sales of loans.
Loans and Interest Income on Loans
–
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the principal balance outstanding, net of purchase premiums and discounts, and an allowance for loan losses. The allowance for loan losses is deducted from total loans on the balance sheet. Interest income is recognized on an accrual basis over the term of the loan based on the principal amount outstanding.
All types of loans are generally placed on non-accrual status when principal or interest becomes contractually ninety days past due, or when payment in full is not anticipated, unless the estimated net realizable value of collateral is sufficient to assure the likelihood of collection of the principal balance and accrued interest. When a loan of any type is placed on non-accrual status, interest accrued but not received is generally reversed against interest income. If collectability is in doubt, cash receipts on all types of non-accrual loans are not recorded as interest income, but are instead used to reduce principal. Loans of all types are not returned to accrual status unless there has been an improvement in the borrower’s financial condition, generally supported by at least six months of timely loan payments, and in the case of certain commercial loans, financial statements. Past due status for all types of loans is based on the contractual terms of the loans.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
–
(Continued)
Allowance for Loan Losses
-
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired. Loans modified in a troubled debt restructuring accrue interest if their terms are at market rate and if they are performing in accordance with their modified terms. Loans modified in a troubled debt restructuring do not accrue interest if their terms are below market rate or if they are not performing in accordance with their modified terms. For accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Generally, the Company accounts for impaired loans based on the value of the loans’ underlying collateral if it is considered more likely than not that repossession of the collateral is the most likely form of collection of the outstanding balance. For loans not deemed to be dependent on collateral liquidation as the most likely source of repayment, the present value of expected cash flows is used to determine impairment. Troubled debt restructurings performing in accordance with their modified terms are measured for impairment using the present value of expected cash flows.
For nonaccruing impaired loans, all cash receipts are to be applied to principal. Once the reported principal balance has been reduced to zero, future cash receipts are to be applied to interest income to the extent that any interest has been foregone. Further cash receipts are to be recorded as recoveries to the Allowance for Loan Losses of any amounts previously charged off.
Generally, all types of impaired loans with balances of $250,000 or greater are evaluated for impairment on an individual basis. To the extent impairment is calculated for a loan evaluated on an individual basis, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. All types of impaired loans with balances less than $250,000 are generally collectively evaluated for impairment, and accordingly, they are not identified for impairment disclosures.
In determining the required general reserves portion of the allowance for loan losses, management calculates historical losses experienced by loan type. Management also calculates a historical weighted average delinquency rate by loan type, with loans past due 30-59 days given single weight, loans past due 60-89 days given double weight, and loans past due 90 days or more given triple weight. Current weighted delinquency rates for loans in the various pools are then calculated and indexed to the historical weighted average delinquency rates. The total balance by general reserve loan type is then multiplied by the average historical losses as adjusted by the indexed historical past due rate and this amount is added to required general reserves. Management currently utilizes a twelve quarter time horizon for historical losses and delinquencies. In determining the proper historical time horizon, management considers the time horizon which most appropriately reflects the current condition of the portfolio.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
–
(Continued)
Management provides additional general reserves by loan type for loans with grades of 3 through 9 which are not individually evaluated for impairment by multiplying the total balances of these loans by the average default probabilities for the corresponding loan grades for the five most recent years. These amounts are then multiplied by the average loss severities by loan type for the five most recent years, and then added to required general reserves. Management elected to use five year historical periods for its default probability and loss severity calculations in order to derive meaningful sample sizes across a range of economic conditions.
Several environmental factors are also incorporated into the general reserves portion of the allowance for loan losses. These include reserves for loans with loans to value higher than the Company’s policy guidelines, loans with variable or adjustable rates of interest, and general loan portfolio growth.
Federal Home Loan Bank (FHLB) Stock
- The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Property and Equipment
– Land is carried at cost. Property, furniture and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leases are amortized over their useful lives or the lease term whichever is shorter. Maintenance and repairs are charged to operations, while major improvements are capitalized. Upon retirement, sale, or other disposition, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in income from operations.
Other Real Estate Owned
–
Other real estate owned includes real estate acquired through foreclosure or deed in lieu of foreclosure. Other real estate owned is initially recorded at its estimated fair market value less estimated selling costs. Any write-downs at the dates of acquisition are charged to the allowance for loan losses. Expenses to maintain such assets, subsequent write-downs, and gains and losses on disposal are included in other expenses.
Loan Commitments and Related Financial Instruments
-
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Employee Benefit Plans
-
Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Company Owned Life Insurance
– Company owned life insurance represents the cash value of policies on certain current and former officers of the Bank.
Income Taxes
-
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
–
(Continued)
Earnings Per Common Share
-
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. The Company has no potentially dilutive financial instruments outstanding.
Comprehensive Income
-
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
Loss Contingencies
-
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are currently any such matters that would have a material effect on the financial statements.
Dividend Restriction
s
- Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders.
Fair Value of Financial Instruments
- Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Statement of Cash Flows
- Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.
Reclassifications
- Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09 – Revenue from Contracts with Customers (“ASU 2019-09”). ASU 2014-09 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective prospectively, for annual and interim periods, beginning after December 15, 2017. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.
In June 2014, the FASB issued ASU 2014-11 – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 impacted FASB ASC 860
Transfers and Servicing
by changing the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require new disclosures. An entity is required to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. An entity must also provide additional information about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The amendments in this update became effective for interim and annual periods beginning after December 15, 2014 and did not have a material impact on the consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03 – Interest – Imputation of Interest (“ASU 2015-03”). ASU 2015-03 simplifies presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption is permitted. It should be applied on a retrospective basis. The Company is currently evaluating the impact this standard will have on the Company’s financial position or disclosures, but it is not expected to have a material impact.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
–
(Continued)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make a policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases and amounts previously recognized in accordance with the business combinations guidance for leases. For public companies, ASU 2016-02 is effective prospectively, for annual and interim periods, beginning after December 15, 2018. The Company does not expect this standard to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10).
The amendments in this Update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition the amendments in this Update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement for to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities.
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances, computed by applying prescribed percentages to its various types of deposits, either at the bank or on deposit with the Federal Reserve Bank. At December 31, 2015 and 2014, the Bank met these requirements. Reserve requirements totaled $4,498,000 and $4,264,000 at December 31, 2015 and 2014, respectively.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and fair value of investment securities are as follows:
(Dollars in thousands)
|
|
December 31, 201
5
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
21,502
|
|
|
$
|
7
|
|
|
$
|
191
|
|
|
$
|
21,318
|
|
Municipal securities
|
|
|
3,433
|
|
|
|
249
|
|
|
|
-
|
|
|
|
3,682
|
|
Other
|
|
|
8,218
|
|
|
|
53
|
|
|
|
1,236
|
|
|
|
7,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,153
|
|
|
$
|
309
|
|
|
$
|
1,427
|
|
|
$
|
32,035
|
|
|
|
December 31, 2014
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
24,915
|
|
|
$
|
103
|
|
|
$
|
80
|
|
|
$
|
24,938
|
|
Municipal securities
|
|
|
3,924
|
|
|
|
260
|
|
|
|
-
|
|
|
|
4,184
|
|
Other
|
|
|
8,208
|
|
|
|
37
|
|
|
|
2,098
|
|
|
|
6,147
|
|
Total
|
|
$
|
37,047
|
|
|
$
|
400
|
|
|
$
|
2,178
|
|
|
$
|
35,269
|
|
The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2015 and December 31, 2014.
Available for Sale
(Dollars in thousands)
|
|
December 3
1, 2015
|
|
|
|
Less than
|
|
|
Twelve Months
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
or More
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
$
|
16,896
|
|
|
$
|
191
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,896
|
|
|
$
|
191
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
2,332
|
|
|
|
1,236
|
|
|
|
2,332
|
|
|
|
1,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,896
|
|
|
$
|
191
|
|
|
$
|
2,332
|
|
|
$
|
1,236
|
|
|
$
|
19,228
|
|
|
$
|
1,427
|
|
|
|
December 31, 2014
|
|
|
|
Less than
|
|
|
Twelve Months
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
or More
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,990
|
|
|
$
|
80
|
|
|
$
|
15,990
|
|
|
$
|
80
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
1,610
|
|
|
|
2,098
|
|
|
|
1,610
|
|
|
|
2,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,600
|
|
|
$
|
2,178
|
|
|
$
|
17,600
|
|
|
$
|
2,178
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3 - INVESTMENT SECURITIES
(Continued)
Securities classified as available-for-sale are recorded at fair value.
Unrealized losses on securities in a continuous loss position for twelve months or more totaled $1,236,000, which included two securities comprising 100% of total unrealized losses, and $2,178,000, which included three securities comprising 96% of total unrealized losses, at December 31, 2015 and December 31, 2014, respectively.
The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost.
The unrealized loss attributable to “Other” securities relates primarily to valuations on two collateralized debt obligations which consist of pooled trust preferred securities. The Company believes, based on industry analyst reports, credit ratings, and third party other-than-temporary loss impairment evaluations, that the deterioration in the value of these securities is attributable to a combination of the lack of liquidity in both of these securities and credit quality concerns for one of the two securities. These securities are considered Level 3 securities in the fair value hierarchy as they both trade in less than liquid markets.
One of the Company’s collateralized debt obligations with an amortized cost of approximately $1,829,000 and fair value of approximately $1,176,000 is receiving contractual interest payments, while the other with an amortized cost of approximately $1,739,000 and fair value of approximately $1,156,000 is receiving payment-in-kind interest in lieu of cash interest payments. Due to the over-collateralized credit position of the security currently receiving interest payments, no other-than-temporary impairment was recognized on this security. Payment-in-kind interest consists of capitalization of interest amounts due on a security. In accordance with terms outlined in its offering circular, the security not currently paying interest has its deferred interest capitalized and added to the principal balance of the security. Contractual interest payments are calculated on these larger principal balances.
Payment-in-kind interest was triggered on this security due to deferrals of interest payments by individual issuers within the pool of issuers. Individual issuers are allowed to defer their interest payments for a period of up to five years. The security is divided into several tranches, with the A tranche securities being the most senior in terms of payment priority and Income Notes being the least senior. The Company owns notes in the C tranche of the security. Each tranche must pass an overcollateralization test in order for note holders in subordinate tranches to receive their contractual interest payments. The overcollateralization test is based on total performing collateral in the pool divided by total outstanding debt within the tranche. The senior most pool failing its overcollateralization test will receive principal paydowns on its outstanding notes in addition to contractual interest payments in order to cure its failure. These additional payments will be diverted from note holders in subordinate tranches who will instead receive payment-in-kind interest. At December 31, 2015, there was $230,628,000 of performing collateral in the pool. The table below summarizes balance and overcollateralization data for the individual tranches at December 31, 2015.
(
Dollars
in thousands)
Tranche
|
|
Current Balance
|
|
|
Required
Overcollateralization %
|
|
|
Current
Overcollateralization %
|
|
A
|
|
$
|
167,866
|
|
|
|
128.0
|
%
|
|
|
138.1
|
%
|
B
|
|
|
37,756
|
|
|
|
115.0
|
%
|
|
|
112.7
|
%
|
C
|
|
|
48,523
|
|
|
|
106.2
|
%
|
|
|
91.2
|
%
|
D
|
|
|
28,685
|
|
|
|
100.3
|
%
|
|
|
81.9
|
%
|
Income Notes
|
|
|
18,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
As shown above, tranches B and below currently fail their overcollateralization test. According to the structured payment terms as established in the offering circular for this security, interest payments are currently being diverted from tranches subordinate to B to pay down total principal balances in the B tranche. If and when these payments reduce the principal balance in the B tranche by enough to pass its overcollateralization requirement, the C tranche securities will begin to receive contractual interest payments, and additional payments will be diverted from subordinate tranches in order to meet its overcollateralization requirement. This payment structure, known as a waterfall, is designed to continue until all tranches meet their overcollateralization requirement, an outcome already achieved for the A tranche note holders, as shown in the chart above. However, this outcome is dependent on the level of future interest deferrals and defaults by individual issuers. Any shortfalls to contractual principal and interest payments due will be borne in reverse order of payment priority, with the most subordinate tranche having the largest loss and the senior most tranche having the smallest loss. As a note holder in the C tranche of this structure, the Company’s principal and interest claims are subordinate to the principal and interest claims of note holders in the A and B tranches. More specifically, the Company and other C note holders would stand to lose 100% of their principal and interest before note holders in the B tranche lost their first dollar, and B note holders would lose 100% of their investment before A note holders experienced any loss.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3 - INVESTMENT SECURITIES
(Continued)
The Company engaged a firm specializing in security valuations to evaluate the security receiving payment-in-kind interest for other-than- temporary impairment (“OTTI”). This firm uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to measure whether there are any adverse changes in cash flows during the quarter. The OTTI model considers the structure and term of the trust preferred security and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The allocation of payments to the note classes follows the payment priority hierarchy for the individual tranches. The OTTI evaluation prepared as of December 31, 2015 predicts the Company will resume receipt of its contractual principal and interest payments during 2017, which is when the B tranche is projected to pass its overcollateralization test. These projections are based on assumptions developed from current financial data for the underlying issuers and may change in subsequent periods based on future financial data, which could alter the assumptions.
The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. The OTTI evaluation model assumes no recoveries on defaults. The result of the firm’s analysis indicated approximately $176,000 of credit loss as of March 31, 2011, which was recognized as an other-than-temporary loss in the first quarter of 2011 and reported in noninterest income. No credit losses had been recognized on these securities prior to 2011, and there have been no changes to credit losses recognized in earnings for any subsequent periods. Due to the credit loss recognized on this security, the Company has not accrued into interest income any of the payment-in-kind interest due on the security. Consequently, the security’s payment-in-kind interest is not reflected in the book value of the security. Total other-than-temporary impairment in accumulated other comprehensive income was $373,000 for the security (Security B in the table below) at December 31, 2015.
The following table provides certain relevant details on each of our collateralized debt obligations as of December 31, 2015, including the book value, fair value, and unrealized losses on the securities, as well as certain information about the overall pools and the current status of their underlying issuers. “Excess Subordination” is a measure of the excess performing collateral in the pool beyond the total level of debt outstanding in the pool with an equal or greater level of preference in the payment structure. It is expressed in the tables below as a percentage of performing collateral. It represents the percentage reduction in performing collateral that would precede an inability of the security to make contractually required payments to the Company.
December 31, 201
5
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Security A
|
|
|
Security B
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
$
|
1,829
|
|
|
$
|
1,739
|
|
Fair Value
|
|
$
|
1,176
|
|
|
$
|
1,156
|
|
Unrealized Loss
|
|
$
|
653
|
|
|
$
|
583
|
|
Number of underlying financial institution issuers
|
|
|
45
|
|
|
|
38
|
|
Number of deferrals and defaults
|
|
|
7
|
|
|
|
12
|
|
Additional expected deferrals/ defaults*
|
|
|
N/A
|
|
|
|
0/1
|
|
Excess Subordination as a percentage of performing collateral^
|
|
|
33.47
|
%
|
|
|
N/A
|
|
*
No assessment of these numbers was made for Security A as it was not modeled for cash flows due to its current payment status and its excess subordination. For Security B, this includes issuers for which there is an estimated probability of deferral or default of 50% or greater. None of the remaining performing collateral was projected as a future deferral or default, due to low Texas ratios; one deferring issuer was projected to default.
^Security B is in a support tranche and has no excess subordination.
The credit quality of the pooled trust preferred securities is directly related to the financial strength and ability to make contractual interest payments of the underlying issuers in these securities, most of which are banks or bank holding companies. As such, these securities may show additional other-than-temporary impairment in future periods if the financial condition of the underlying issuers further deteriorates.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3 - INVESTMENT SECURITIES
(Continued)
The amortized costs and fair values of investment securities available for sale at December 31, 2015 by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
499
|
|
|
$
|
516
|
|
Due after one but within five years
|
|
|
440
|
|
|
|
457
|
|
Due after five but within ten years
|
|
|
1,958
|
|
|
|
2,130
|
|
Due after ten years
|
|
|
4,604
|
|
|
|
3,411
|
|
Mortgage backed
|
|
|
21,502
|
|
|
|
21,318
|
|
Equity securities with no maturity
|
|
|
4,150
|
|
|
|
4,203
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
|
|
$
|
33,153
|
|
|
$
|
32,035
|
|
The proceeds from sales of securities and the associated gains are listed below:
|
|
Twelve Months Ending December 31,
|
|
|
|
2015
|
|
|
2014
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
-
|
|
|
$
|
3,229
|
|
Gross Gains
|
|
|
-
|
|
|
|
109
|
|
The tax provision related to the above net realized gains and losses was $0 and $40,000 for the periods ended December 31, 2015 and 2014.
Investment securities with an aggregate amortized cost of
$19,274,000 and estimated fair value of $19,231,000 at December 31, 2015, were pledged to secure public deposits and for other purposes, as required or permitted by law. Investment securities with an aggregate amortized cost of $2,115,000 and estimated fair value of $2,090,000 at December 31, 2015, were pledged to secure securities sold under agreements to repurchase.
NOTE 4 - LOANS
The composition of loans by major loan category is presented below:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Real estate secured loans:
|
|
|
|
|
|
|
|
|
Residential 1-4 Family
|
|
$
|
241,111
|
|
|
$
|
217,518
|
|
Multifamily
|
|
|
4,747
|
|
|
|
5,108
|
|
Commercial
|
|
|
85,501
|
|
|
|
87,906
|
|
Construction and land development
|
|
|
34,311
|
|
|
|
29,060
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured loans
|
|
|
365,670
|
|
|
|
339,592
|
|
Commercial and industrial
|
|
|
20,666
|
|
|
|
22,022
|
|
Consumer
|
|
|
2,623
|
|
|
|
2,206
|
|
Other
|
|
|
337
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
|
389,296
|
|
|
|
364,148
|
|
Allowance for loan losses
|
|
|
(4,794
|
)
|
|
|
(5,602
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net of allowance
|
|
$
|
384,502
|
|
|
$
|
358,546
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 – LOANS
(C
ontinued)
The Company uses a numerical grading system from 1 to 9 to assess the credit risk inherent in its loan portfolio, with Grade 1 loans having the lowest credit risk and Grade 9 loans having the highest credit risk. Loans with credit grades from 1 to 5 are considered passing grade, or acceptable, loans. Loans with grades from 6 to 9 are considered to have less than acceptable credit quality. Generally, impaired loans have credit grades of 7 or higher. Following is a listing and brief description of the various risk grades. The grading of individual loans may involve the use of estimates.
Credit
Grade
|
Description
|
1
|
Loans secured by cash collateral.
|
2
|
Loans secured by readily marketable collateral.
|
3
|
Top quality loans with excellent repayment sources and no significant identifiable risk of collection.
|
4
|
Acceptable loans with adequate repayment sources and little identifiable risk of collection.
|
5
|
Acceptable loans with signs of weakness as to repayment or collateral, but with mitigating factors that minimize the risk of loss.
|
6
|
Watch List or Special Mention loans with underwriting tolerances and/or exceptions with no mitigating factors that may, due to economic or other factors, increase the risk of loss.
|
7
|
Classified substandard loans inadequately protected by the paying capacity or net worth of the obligor, or of the collateral with weaknesses that jeopardize the liquidation of the debt.
|
8
|
Classified doubtful loans in which collection or liquidation in full is highly improbable.
|
9
|
Classified loss loans that are uncollectible and of such little value that continuance as an asset is not warranted.
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 – LOANS
(C
ontinued)
The following tables provide a summary of our credit risk profile by loan categories as of December 31, 2015 and December 31, 2014.
(Dollars in thousands)
Credit
R
isk Profile by Creditworthiness Category
|
|
|
Real Estate Secured
|
|
|
|
|
Residential 1-4 Family
|
|
|
Multi Family
|
|
|
Commercial
|
|
|
Construction and Land
Development
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
3
|
|
|
|
130,016
|
|
|
|
107,353
|
|
|
|
1,352
|
|
|
|
1,350
|
|
|
|
19,079
|
|
|
|
14,965
|
|
|
|
14,566
|
|
|
|
11,197
|
|
4
|
|
|
|
57,945
|
|
|
|
56,164
|
|
|
|
1,050
|
|
|
|
1,111
|
|
|
|
27,536
|
|
|
|
28,180
|
|
|
|
11,561
|
|
|
|
7,310
|
|
5
|
|
|
|
45,911
|
|
|
|
46,873
|
|
|
|
2,014
|
|
|
|
2,309
|
|
|
|
30,072
|
|
|
|
33,081
|
|
|
|
7,489
|
|
|
|
9,571
|
|
6
|
|
|
|
1,495
|
|
|
|
1,587
|
|
|
|
331
|
|
|
|
-
|
|
|
|
4,080
|
|
|
|
2,042
|
|
|
|
57
|
|
|
|
269
|
|
7
|
|
|
|
5,555
|
|
|
|
4,930
|
|
|
|
-
|
|
|
|
338
|
|
|
|
4,734
|
|
|
|
9,638
|
|
|
|
638
|
|
|
|
703
|
|
8
|
|
|
|
189
|
|
|
|
611
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
241,111
|
|
|
$
|
217,518
|
|
|
$
|
4,747
|
|
|
$
|
5,108
|
|
|
$
|
85,501
|
|
|
$
|
87,906
|
|
|
$
|
34,311
|
|
|
$
|
29,060
|
|
|
|
|
Non-Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
$
|
2,352
|
|
|
$
|
2,223
|
|
|
$
|
448
|
|
|
$
|
397
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,800
|
|
|
$
|
2,620
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
3
|
|
|
|
1,783
|
|
|
|
2,205
|
|
|
|
630
|
|
|
|
480
|
|
|
|
89
|
|
|
|
94
|
|
|
|
167,515
|
|
|
|
137,644
|
|
4
|
|
|
|
8,301
|
|
|
|
6,628
|
|
|
|
420
|
|
|
|
220
|
|
|
|
227
|
|
|
|
181
|
|
|
|
107,040
|
|
|
|
99,794
|
|
5
|
|
|
|
7,326
|
|
|
|
9,589
|
|
|
|
1,017
|
|
|
|
977
|
|
|
|
21
|
|
|
|
53
|
|
|
|
93,850
|
|
|
|
102,453
|
|
6
|
|
|
|
5
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,968
|
|
|
|
3,916
|
|
7
|
|
|
|
899
|
|
|
|
1,359
|
|
|
|
108
|
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,934
|
|
|
|
17,100
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189
|
|
|
|
621
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
20,666
|
|
|
$
|
22,022
|
|
|
$
|
2,623
|
|
|
$
|
2,206
|
|
|
$
|
337
|
|
|
$
|
328
|
|
|
$
|
389,296
|
|
|
$
|
364,148
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 – LOANS
(C
ontinued)
The following tables provide a summary of past due loans by loan category as of December 31, 2015 and December 31, 2014.
(Dollars in thousands)
Past Due Loans
|
|
December 31, 2015
|
|
30-59 Days
Past
Due
|
|
|
60-89 Days
Past
Due
|
|
|
Greater
Than 90
Days
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total Loans
Receivable
|
|
|
Recorded
Investment > 90
Days and
Accruing
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,429
|
|
|
$
|
207
|
|
|
$
|
1,055
|
|
|
$
|
2,691
|
|
|
$
|
238,420
|
|
|
$
|
241,111
|
|
|
$
|
218
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,747
|
|
|
|
4,747
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
2,848
|
|
|
|
49
|
|
|
|
302
|
|
|
|
3,199
|
|
|
|
82,302
|
|
|
|
85,501
|
|
|
|
-
|
|
Construction and Land
Development
|
|
|
81
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81
|
|
|
|
34,230
|
|
|
|
34,311
|
|
|
|
-
|
|
Non
-
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
220
|
|
|
|
170
|
|
|
|
56
|
|
|
|
446
|
|
|
|
20,220
|
|
|
|
20,666
|
|
|
|
-
|
|
Consumer and Other
|
|
|
70
|
|
|
|
1
|
|
|
|
-
|
|
|
|
71
|
|
|
|
2,889
|
|
|
|
2,960
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
4,648
|
|
|
$
|
427
|
|
|
$
|
1,413
|
|
|
$
|
6,488
|
|
|
$
|
382,808
|
|
|
$
|
389,296
|
|
|
$
|
218
|
|
December 31, 2014
|
|
30-59 Days
Past
Due
|
|
|
60-89 Days
Past
Due
|
|
|
Greater
Than 90
Days
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total Loans
Receivable
|
|
|
Recorded
Investment > 90
Days and
Accruing
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,748
|
|
|
$
|
955
|
|
|
$
|
1,972
|
|
|
$
|
4,675
|
|
|
$
|
212,843
|
|
|
$
|
217,518
|
|
|
$
|
-
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,108
|
|
|
|
5,108
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
794
|
|
|
|
1,930
|
|
|
|
1,073
|
|
|
|
3,797
|
|
|
|
84,109
|
|
|
|
87,906
|
|
|
|
-
|
|
Construction and Land
Development
|
|
|
-
|
|
|
|
52
|
|
|
|
10
|
|
|
|
62
|
|
|
|
28,998
|
|
|
|
29,060
|
|
|
|
-
|
|
Non
-
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
235
|
|
|
|
66
|
|
|
|
146
|
|
|
|
447
|
|
|
|
21,575
|
|
|
|
22,022
|
|
|
|
-
|
|
Consumer and Other
|
|
|
8
|
|
|
|
15
|
|
|
|
13
|
|
|
|
36
|
|
|
|
2,498
|
|
|
|
2,534
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
2,785
|
|
|
$
|
3,018
|
|
|
$
|
3,214
|
|
|
$
|
9,017
|
|
|
$
|
355,131
|
|
|
$
|
364,148
|
|
|
$
|
-
|
|
|
(1)
|
Principal balances only; excludes accrued interest receivable and deferred fees and costs due to immateriality.
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 – LOANS
(C
ontinued)
The following table provides a summary of nonaccrual loans as of December 31, 2015 and December 31, 2014.
(Dollars in thousands)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
2,178
|
|
|
$
|
2,956
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
412
|
|
|
|
1,096
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
10
|
|
Commercial and Industrial
|
|
|
551
|
|
|
|
859
|
|
Consumer and Other
|
|
|
8
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,149
|
|
|
$
|
4,969
|
|
At December 31, 2015 and December 31, 2014, nonaccrual loans totaled $3.1 million and $5.0 million, respectively. The gross interest income which would have been recorded under the original terms of nonaccrual loans amounted to approximately $152,000 and $312,000 at December 31, 2015 and December 31, 2014, respectively. At December 31, 2015 and December 31, 2014, impaired loans, which include non-accrual loans and troubled debt restructurings (TDRs) totaled $3.8 million and $5.6 million, respectively. The recorded investment in impaired loans individually evaluated for impairment, which include nonaccrual loans over $250,000 and TDRs, totaled $2.3 million and $3.9 million at December 31, 2015 and December 31, 2014, respectively. At December 31, 2015 there was one loan totaling $218,000 that was ninety days past due and still accruing interest. There were no such loans at December 31, 2014.
At December 31, 2015 and December 31, 2014, all TDRs, including those on nonaccrual status, totaled $1.5 million and $3.9 million, respectively. The gross interest income that would have been recognized on accruing TDRs according to the original loan terms during 2015 totaled approximately $40,000; actual interest income recognized on these loans according to the restructured terms totaled $37,000. Performing TDR loans totaled $608,000 at December 31, 2015. The gross interest income that would have been recognized on accruing TDRs according to the original loan terms during 2014 totaled approximately $41,000; actual interest income recognized on these loans according to the restructured terms totaled approximately $11,000. Performing TDR loans totaled $613,000 at December 31, 2014. During the year ended December 31, 2015, no loans had their original loan terms restructured. During the year ended December 31, 2015, there were no loans that had previously had their original terms restructured that went into nonaccrual.
During the same period, one loan totaling $1.7 million that had previously had its original terms restructured paid off, and two loans totaling $173,000, that had previously had their original loan terms restructured, were charged off.
TDRs did not have a material effect on the allowance for loan losses as of December 31, 2015 or December 31, 2014.
The following tables provide a year to date analysis of activity within the allowance for loan losses.
(Dollars in thousands)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
5,602
|
|
|
$
|
6,041
|
|
Provision (credit) for loan losses
|
|
|
(939
|
)
|
|
|
(600
|
)
|
Net recoveries
|
|
|
131
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
4,794
|
|
|
$
|
5,602
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 – LOANS
(C
ontinued)
|
|
For the Year Ended December 31, 201
5
|
|
|
|
Beginning
|
|
|
Charge Offs
|
|
|
Recoveries
|
|
|
Provisions
|
|
|
Ending Allowance for Loan Losses
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
Specific
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
Reserves
|
|
|
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,595
|
|
|
$
|
(73
|
)
|
|
$
|
-
|
|
|
$
|
(219
|
)
|
|
$
|
1,262
|
|
|
$
|
41
|
|
|
$
|
1,303
|
|
Multifamily Residential
|
|
|
61
|
|
|
|
-
|
|
|
|
155
|
|
|
|
(189
|
)
|
|
|
27
|
|
|
|
-
|
|
|
|
27
|
|
Commercial Real Estate
|
|
|
1,424
|
|
|
|
-
|
|
|
|
190
|
|
|
|
(188
|
)
|
|
|
1,426
|
|
|
|
-
|
|
|
|
1,426
|
|
Construction and Land Development
|
|
|
312
|
|
|
|
-
|
|
|
|
28
|
|
|
|
(108
|
)
|
|
|
232
|
|
|
|
-
|
|
|
|
232
|
|
Non-Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
496
|
|
|
|
(261
|
)
|
|
|
54
|
|
|
|
140
|
|
|
|
429
|
|
|
|
|
|
|
|
429
|
|
Consumer and Other
|
|
|
32
|
|
|
|
(6
|
)
|
|
|
44
|
|
|
|
(55
|
)
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other General Reserves
|
|
|
1,363
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(313
|
)
|
|
|
1,050
|
|
|
|
-
|
|
|
|
1,050
|
|
Unallocated
|
|
|
319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
312
|
|
|
|
-
|
|
|
|
312
|
|
Total
|
|
$
|
5,602
|
|
|
$
|
(340
|
)
|
|
$
|
471
|
|
|
$
|
(939
|
)
|
|
$
|
4,753
|
|
|
$
|
41
|
|
|
$
|
4,794
|
|
|
|
For the Year Ended December 31, 201
4
|
|
|
|
Beginning
|
|
|
Charge Offs
|
|
|
Recoveries
|
|
|
Provisions
|
|
|
Ending Allowance for Loan Losses
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
Specific
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
Reserves
|
|
|
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,829
|
|
|
$
|
(52
|
)
|
|
$
|
46
|
|
|
$
|
(228
|
)
|
|
$
|
1,532
|
|
|
$
|
63
|
|
|
$
|
1,595
|
|
Multifamily Residential
|
|
|
58
|
|
|
|
(155
|
)
|
|
|
11
|
|
|
|
147
|
|
|
|
61
|
|
|
|
-
|
|
|
|
61
|
|
Commercial Real Estate
|
|
|
1,031
|
|
|
|
(159
|
)
|
|
|
342
|
|
|
|
210
|
|
|
|
1,424
|
|
|
|
-
|
|
|
|
1,424
|
|
Construction and Land Development
|
|
|
585
|
|
|
|
(114
|
)
|
|
|
21
|
|
|
|
(180
|
)
|
|
|
312
|
|
|
|
-
|
|
|
|
312
|
|
Non-Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
690
|
|
|
|
(42
|
)
|
|
|
218
|
|
|
|
(370
|
)
|
|
|
496
|
|
|
|
|
|
|
|
496
|
|
Consumer and Other
|
|
|
24
|
|
|
|
(1
|
)
|
|
|
46
|
|
|
|
(37
|
)
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other General Reserves
|
|
|
1,339
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
|
|
1,363
|
|
|
|
-
|
|
|
|
1,363
|
|
Unallocated
|
|
|
485
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(166
|
)
|
|
|
319
|
|
|
|
-
|
|
|
|
319
|
|
Total
|
|
$
|
6,041
|
|
|
$
|
(523
|
)
|
|
$
|
684
|
|
|
$
|
(600
|
)
|
|
$
|
5,539
|
|
|
$
|
63
|
|
|
$
|
5,602
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 – LOANS
(C
ontinued)
Impaired loans with a balance of $250,000 or more are evaluated individually for impairment. All other loans are collectively evaluated for impairment. The following tables provide summaries and totals of loans individually and collectively evaluated for impairment as of December 31, 2015 and December 31, 2014.
(Dollars in thousands)
Loans Receivable:
|
|
As of December 31, 2015
|
|
|
|
Individually evaluated
for impairment
|
|
|
Collectively evaluated
for impairment
|
|
|
Total
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,550
|
|
|
$
|
239,561
|
|
|
$
|
241,111
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
4,747
|
|
|
|
4,747
|
|
Commercial Real Estate
|
|
|
362
|
|
|
|
85,139
|
|
|
|
85,501
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
34,311
|
|
|
|
34,311
|
|
Non Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
391
|
|
|
|
20,275
|
|
|
|
20,666
|
|
Consumer and Other
|
|
|
-
|
|
|
|
2,960
|
|
|
|
2,960
|
|
Total
|
|
$
|
2,303
|
|
|
$
|
386,993
|
|
|
$
|
389,296
|
|
Loans Receivable:
|
|
As of December 31, 2014
|
|
|
|
Individually evaluated
for impairment
|
|
|
Collectively evaluated
for impairment
|
|
|
Total
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
2,251
|
|
|
$
|
215,267
|
|
|
$
|
217,518
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
5,108
|
|
|
|
5,108
|
|
Commercial Real Estate
|
|
|
1,096
|
|
|
|
86,810
|
|
|
|
87,906
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
29,060
|
|
|
|
29,060
|
|
Non Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
545
|
|
|
|
21,477
|
|
|
|
22,022
|
|
Consumer and Other
|
|
|
-
|
|
|
|
2,534
|
|
|
|
2,534
|
|
Total
|
|
$
|
3,892
|
|
|
$
|
360,256
|
|
|
$
|
364,148
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 – LOANS
(C
ontinued)
(Dollars in thousands
)
Impaired Loans
For the
Year
Ended
December 31, 2015
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
(1)
|
|
|
Related
Allowance
|
|
|
Life to Date
Charge offs
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,415
|
|
|
$
|
1,329
|
|
|
$
|
-
|
|
|
$
|
86
|
|
|
$
|
1,357
|
|
|
$
|
37
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
362
|
|
|
|
362
|
|
|
|
-
|
|
|
|
-
|
|
|
|
380
|
|
|
|
-
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
391
|
|
|
|
391
|
|
|
|
-
|
|
|
|
-
|
|
|
|
416
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
221
|
|
|
$
|
221
|
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
222
|
|
|
$
|
-
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,636
|
|
|
$
|
1,550
|
|
|
$
|
41
|
|
|
$
|
86
|
|
|
$
|
1,579
|
|
|
$
|
37
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
362
|
|
|
|
362
|
|
|
|
-
|
|
|
|
-
|
|
|
|
380
|
|
|
|
-
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
391
|
|
|
|
391
|
|
|
|
-
|
|
|
|
-
|
|
|
|
416
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,389
|
|
|
$
|
2,303
|
|
|
$
|
41
|
|
|
$
|
86
|
|
|
$
|
2,375
|
|
|
$
|
37
|
|
(1) Impaired balance; excludes accrued interest receivable and deferred fees and costs due to immateriality.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 – LOANS
(C
ontinued)
(Dollars in thousands)
Impaired Loans
For the
Year
Ended
December 31, 2014
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
(1)
|
|
|
Related
Allowance
|
|
|
Life to Date
Charge offs
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,859
|
|
|
$
|
1,738
|
|
|
$
|
-
|
|
|
$
|
121
|
|
|
$
|
1,787
|
|
|
$
|
12
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
1,096
|
|
|
|
1,096
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,127
|
|
|
|
-
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
545
|
|
|
|
545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
565
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
513
|
|
|
$
|
513
|
|
|
$
|
63
|
|
|
$
|
-
|
|
|
$
|
517
|
|
|
$
|
-
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
2,372
|
|
|
$
|
2,251
|
|
|
$
|
63
|
|
|
$
|
121
|
|
|
$
|
2,304
|
|
|
$
|
12
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
1,096
|
|
|
|
1,096
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,127
|
|
|
|
-
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
545
|
|
|
|
545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
565
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,013
|
|
|
$
|
3,892
|
|
|
$
|
63
|
|
|
$
|
121
|
|
|
$
|
3,996
|
|
|
$
|
12
|
|
(1) Impaired balance; excludes accrued interest receivable and deferred fees and costs due to immateriality.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE
5
- PROPERTY AND EQUIPMENT
Components of property and equipment are as follows:
(Dollars in thousands)
|
|
|
|
|
|
|
December 31,
|
|
|
|
Estimated Useful Lives (years)
|
|
|
201
5
|
|
|
20
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
|
$
|
7,409
|
|
|
$
|
7,866
|
|
Furniture and equipment
|
|
3
|
-
|
10
|
|
|
|
3,292
|
|
|
|
3,550
|
|
Buildings and improvements
|
|
5
|
-
|
40
|
|
|
|
15,620
|
|
|
|
15,740
|
|
Construction in process
|
|
|
|
|
|
|
|
130
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
26,451
|
|
|
|
27,236
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
|
(7,174
|
)
|
|
|
(6,781
|
)
|
|
|
|
|
|
|
|
$
|
19,277
|
|
|
$
|
20,455
|
|
Construction in process related to one company owned property, and totaled $130,000 and $80,000 at December 31, 2015 and December 31, 2014, respectively. Depreciation expense for the years ended December 31, 2015 and 2014 was $766,000 and $842,000, respectively.
In 2015, the Company received sales proceeds totaling $1,294,000 on a parcel of land with a small building adjacent to its corporate headquarters. The property had a basis of $545,000, and the Company recognized a gain on sale of $749,000. Additionally, the Company recorded a $15,000 loss on the disposal of one of its vehicles. The vehicle was given to the Company’s Chief Executive Officer as bonus compensation.
The Company leases certain branch properties and equipment under operating leases. Two branch leases have current lease terms expiring in 2016 and 2023, one with two five-year renewal options remaining, and the other with one ten-year renewal option remaining. The Company had a lease agreement for eleven ATM machines, which expired in December 2015 and required monthly payments totaling $16,000, accounting for the nearly half of the Company’s annual lease expense during 2015 and 2014. The Company entered into a longer term lease agreement during 2011 for office space that expires in 2032 that is also being accounted for as an operating lease. Total lease expense paid for the leases discussed above and included in the statements of operations totaled $412,000 for each of the years ended December 31, 2015 and 2014, respectively.
Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one month, for each of the next five years in the aggregate are:
(Dollars in thousands)
|
|
|
|
|
2016
|
|
$
|
195
|
|
2017
|
|
|
179
|
|
2018
|
|
|
183
|
|
2019
|
|
|
185
|
|
2020
|
|
|
66
|
|
Thereafter
|
|
|
154
|
|
|
|
|
|
|
Total
|
|
$
|
962
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6 – OTHER REAL ESTATE OWNED
The aggregate carrying amount of other real estate owned at December 31, 2015 and 2014 was $327,000 and $3,686,000, respectively. All of the Company’s other real estate owned represents properties acquired through foreclosure or deed in lieu of foreclosure. The following table details the change in this balance during 2015 and 2014.
(Dollars in thousands)
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
201
5
|
|
|
201
4
|
|
Real estate acquired in settlement of loans, beginning of period
|
|
$
|
3,686
|
|
|
$
|
5,249
|
|
New real estate acquired in settlement of loans at lower of fair value or principal balance
|
|
|
-
|
|
|
|
747
|
|
Capital expenditures on real estate acquired in settlement of loans
|
|
|
-
|
|
|
|
14
|
|
Sales of real estate acquired in settlement of loans
|
|
|
(3,640
|
)
|
|
|
(2,622
|
)
|
Gains on sale of real estate acquired in settlement of loans
|
|
|
325
|
|
|
|
641
|
|
Net change in deferred gain on real estate acquired in settlement
of loans
|
|
|
(44
|
)
|
|
|
(337
|
)
|
Less: Impairment recognized
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Real estate acquired in settlement of loans, end of period
|
|
$
|
327
|
|
|
$
|
3,686
|
|
Property in other real estate owned at December 31, 2015 consisted of commercial lots. Property in other real estate owned at December 31, 2014 consisted of commercial lots, residential 1-4 family homes, and commercial office properties.
During 2015 and 2014, the Company recorded sales proceeds on other real estate owned totaling $3,640,000 and $2,622,000, respectively. Sales proceeds on other real estate owned for which the Company made loans to facilitate the sale of the property during 2015 and 2014 totaled $3,328,000 and $1,557,000, respectively. The gross loans to facilitate these sales during 2015 and 2014 totaled $3,525,000 and $1,453,000, respectively. During the year ended 2015, gross loans to facilitate sales of other real estate owned consisted of two transactions, and were $197,000 greater than the sales proceeds to which the loans related. Of this amount, $193,000 related to one of the sales transactions for which 100% of the purchase price and closing costs were financed with cash at closing paid to a borrower that brought other unencumbered real estate collateral valued at approximately $1.1 million to the transaction, while the remaining amount related to seller closing costs in excess of borrower down payments in the other sales transaction. During the year ended December 31, 2015, the Company recognized as income $65,000 of gains previously deferred from sales that occurred prior to 2015 and realized deferred gains related to loans to facilitate sales of other real estate owned totaling $21,000 that occurred during 2015. During 2014, the Company recognized as income $337,000 of gains previously deferred from sales that occurred prior to 2014.
During 2015 and 2014, the Company recognized $0 and $6,000, respectively, of impairment expense on other real estate owned. These impairments were the result of periodic reappraisals of the properties and management’s estimates of short term liquidation values. At December 31, 2015 and 2014, the carrying amount of other real estate owned included valuation allowances totaling $115,000 and $121,000, respectively. These amounts were reflective of impairments taken on individual properties still held by the Company as of these two dates.
At December 31, 2015 and December 31, 2014, 1-4 family loans in the process of foreclosure totaled $0 and $41,000, respectively.
NOTE 7 – DEPOSITS
The following is a detail of deposit accounts:
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Noninterest bearing deposits
|
|
$
|
55,755
|
|
|
$
|
48,700
|
|
Interest bearing
|
|
|
|
|
|
|
|
|
NOW
|
|
|
65,930
|
|
|
|
62,210
|
|
Money market
|
|
|
80,729
|
|
|
|
70,166
|
|
Savings
|
|
|
33,446
|
|
|
|
29,315
|
|
Time, less than $250,000
|
|
|
91,060
|
|
|
|
114,410
|
|
Time, $250,000 and over
|
|
|
12,537
|
|
|
|
6,233
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
339,457
|
|
|
$
|
331,034
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7 – DEPOSITS
(Continued)
At December 31, 2015 and 2014, the Bank had approximately $1,066,000 and $13,237,000, respectively, in time deposits from customers outside its market area. This includes $0 and $12,283,000 in brokered and wholesale deposits in 2015 and 2014, respectively. Contractual rates of interest on brokered and wholesale deposits outstanding at December 31, 2014, ranged from a low of 0.25% to a high of 0.30%.
At December 31, 2015 the scheduled maturities of time deposits are as follows:
(Dollars in thousands)
2016
|
|
$
|
95,078
|
|
2017
|
|
|
7,882
|
|
2018
|
|
|
363
|
|
2019
|
|
|
20
|
|
2020
|
|
|
254
|
|
|
|
$
|
103,597
|
|
NOTE 8- SHORT-TERM BORROWINGS
Short-term borrowings payable include securities sold under agreements to repurchase which generally mature on a one to thirty day basis, federal funds purchased, and borrowings from the discount window of the Federal Reserve Bank of Richmond. Information concerning short-term borrowings is summarized as follows:
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Balance at end of the year
|
|
$
|
6,760
|
|
|
$
|
3,802
|
|
Average balance during year
|
|
|
1,302
|
|
|
|
2,343
|
|
Average interest rate during year
|
|
|
0.25
|
%
|
|
|
0.23
|
%
|
Maximum month-end balance during the year
|
|
$
|
9,126
|
|
|
$
|
9,808
|
|
The Company has collateralized the repurchase agreements with securities with an aggregate cost basis and fair value of $2,115,000 and $2,090,000 respectively, at December 31, 2015.
At December 31, 2015 and 2014, the investment securities underlying these agreements were all mortgage backed securities.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Atlanta (“FHLBA”) are collateralized by FHLBA stock and pledges of certain residential mortgage loans and are summarized as follows:
(Dollars in thousands)
|
|
|
December 31
|
|
Maturity
|
|
Rate
|
|
|
2015
|
|
|
2014
|
|
February 2015
|
|
|
0.36
|
%
|
|
$
|
-
|
|
|
$
|
18,000
|
|
January 2016
|
|
|
0.40
|
%
|
|
|
15,000
|
|
|
|
-
|
|
January 2016
|
|
|
0.38
|
%
|
|
|
5,000
|
|
|
|
-
|
|
March 2016
|
|
|
2.04
|
%
|
|
|
10,000
|
|
|
|
10,000
|
|
March 2016
|
|
|
0.49
|
%
|
|
|
9,000
|
|
|
|
-
|
|
May 2016
|
|
|
0.75
|
%
|
|
|
2,000
|
|
|
|
2,000
|
|
March 2017
|
|
|
2.31
|
%
|
|
|
2,000
|
|
|
|
2,000
|
|
May 2017
|
|
|
1.07
|
%
|
|
|
2,000
|
|
|
|
2,000
|
|
March 2018
|
|
|
2.33
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
April 2018
|
|
|
3.03
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
May 2018
|
|
|
1.38
|
%
|
|
|
2,000
|
|
|
|
2,000
|
|
March 2019
|
|
|
3.56
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
March 2019
|
|
|
3.51
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
May 2019
|
|
|
1.69
|
%
|
|
|
2,000
|
|
|
|
2,000
|
|
May 2020
|
|
|
2.01
|
%
|
|
|
2,000
|
|
|
|
2,000
|
|
March 2021
|
|
|
3.71
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
March 2021
|
|
|
3.74
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
March 2021
|
|
|
3.80
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
March 2021
|
|
|
3.87
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
$
|
91,000
|
|
|
$
|
80,000
|
|
Each of the fixed rate advances is subject to early termination options. The FHLBA reserves the right to terminate each agreement at an earlier date.
NOTE 10 - UNUSED LINES OF CREDIT
At December 31, 2015, the Bank had unused lines of credit to purchase federal funds totaling approximately $27.6 million from unrelated banks. These lines of credit are available on a one to fifteen day basis for general corporate purposes of the Bank. The lenders have reserved the right to withdraw the lines at their option. The Company may also borrow from the FHLBA based on a predetermined formula. Borrowings on this line totaled $91.0 million at December 31, 2015. Additional funds of approximately $27.7 million were available on the line. Advances are subject to approval by the FHLBA and may require the Company to pledge additional collateral. The Company has pledged approximately $166.8 million in loans as qualifying collateral for these borrowings. Also at December 31, 2015, the Company had an unused line of credit totaling approximately $27.1 million with the Federal Reserve Bank of Richmond to borrow funds from its discount window. The Company had pledged loans totaling approximately $43.4 million as collateral for these borrowings.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11 - JUNIOR SUBORDINATED DEBENTURES
On August 5, 2005, Southcoast Capital Trust III (the "Capital Trust"), a non-consolidated subsidiary of the Company, issued and sold a total of 10,310 floating rate securities, with a $1,000 liquidation amount per security (the "Capital Securities"). Institutional buyers bought 10,000 of the Capital Securities denominated as preferred securities and the Company bought the other 310 Capital Securities which are denominated as common securities. The proceeds of those sales, $10.3 million, were used by the Capital Trust to buy $10.3 million of junior subordinated debentures from the Company which are reported on its consolidated balance sheets. The Capital Securities issued by the Capital Trust remain outstanding and mature or are mandatorily redeemable on September 30, 2035. The Company has the right to redeem these securities on or after September 30, 2010.
The Company’s investment in the common securities of the Capital Trust totaled $310,000 at December 31, 2015 and December 31, 2014, and is included in “Available for Sale Securities” on its consolidated balance sheets. The preferred securities of the Capital Trust, totaling $10.0 million, qualify as Tier 1 capital under Federal Reserve Board guidelines, subject to limitations.
The Capital Securities issued by the Capital Trust accrue and pay distributions quarterly at a rate per annum equal to the three-month LIBOR, which was 0.60 percent at December 31, 2015, plus 150 basis points. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Capital Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of September 30, 2035. The Company’s payment of interest on the Capital Securities is subject to the Company’s compliance with Federal Reserve Board guidelines regarding the payment of dividends.
In accordance with the debenture terms noted above the Company deferred its quarterly dividend payment on these securities beginning with the December 2011 payment. Amounts so deferred compounded quarterly according to the same variable rate terms noted above. During this period of deferral the Company capitalized the dividend payments due, adding them to the principal outstanding for accrual purposes. The Company reinstated quarterly dividend payments beginning with the March 30, 2014 payment, when it also paid in full all interest arrearage in accordance with the requirements of the debenture terms. Accrued interest on these debentures totaled $1,200 and $1,000 at December 31, 2015 and December 31, 2014, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the Company’s financial position.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE
13
- INCOME TAXES
Income tax expense (benefit) was as follows:
(Dollars in thousands)
|
|
201
5
|
|
|
201
4
|
|
Current expense
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
470
|
|
|
$
|
57
|
|
State
|
|
|
222
|
|
|
|
173
|
|
Deferred expense (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,867
|
|
|
|
1,899
|
|
State
|
|
|
(40
|
)
|
|
|
(57
|
)
|
Change in valuation allowance
|
|
|
26
|
|
|
|
38
|
|
Total
|
|
$
|
2,545
|
|
|
$
|
2,110
|
|
Income tax expense is allocated as follows:
(Dollars in thousands)
|
|
201
5
|
|
|
201
4
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2,307
|
|
|
$
|
1,604
|
|
Other comprehensive gain
|
|
|
238
|
|
|
|
506
|
|
Total
|
|
$
|
2,545
|
|
|
$
|
2,110
|
|
The income tax effect of cumulative temporary differences for deferred tax assets at December 31, 2015 and 2014 is as follows:
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
1,630
|
|
|
$
|
1,904
|
|
Allowance for impairment of other real estate owned
|
|
|
39
|
|
|
|
41
|
|
Net operating loss (NOL) carryforward
|
|
|
196
|
|
|
|
1,895
|
|
Unrealized loss on investment securities
|
|
|
402
|
|
|
|
640
|
|
Deferred revenue
|
|
|
31
|
|
|
|
107
|
|
Deferred compensation
|
|
|
792
|
|
|
|
697
|
|
Depreciation
|
|
|
249
|
|
|
|
162
|
|
Other
|
|
|
786
|
|
|
|
523
|
|
Total deferred tax assets
|
|
|
4,125
|
|
|
|
5,969
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
73
|
|
|
|
90
|
|
Total deferred tax liabilities
|
|
|
73
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
4,052
|
|
|
|
5,879
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(269
|
)
|
|
|
(243
|
)
|
Total net deferred tax asset
|
|
$
|
3,783
|
|
|
$
|
5,636
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE
13
- INCOME TAXES
(Continued)
As of December 31, 2015, the Company maintained a full valuation allowance of $269,000 on its holding company state income tax items. Included in these items was a net operating loss carryforward totaling $165,000. Throughout the Company’s history, the holding company has consistently produced operating losses on a standalone basis, and the realizability of any of its deferred tax items continues to remain in doubt.
The Company has deferred tax assets totaling $31,000 relating to realizable Federal income tax net operating loss carryforwards of $91,000. These carryforwards expire in 2033. The Company believes it will generate sufficient profits to utilize its carryforwards prior to these expiration dates.
The provision for income taxes is reconciled to the amount of income tax computed at the federal statutory rate on income (loss) before income taxes for the years ended December 31, as follows:
(Dollars in thousands)
|
|
201
5
|
|
|
201
4
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Tax expense at statutory rate
|
|
$
|
2,165
|
|
|
|
34
|
%
|
|
$
|
1,816
|
|
|
|
34
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State tax (net of federal benefit)
|
|
|
120
|
|
|
|
2
|
|
|
|
77
|
|
|
|
1
|
|
Officers’ life insurance
|
|
|
(85
|
)
|
|
|
(1
|
)
|
|
|
(287
|
)
|
|
|
(5
|
)
|
Municipal interest
|
|
|
(47
|
)
|
|
|
(1
|
)
|
|
|
(49
|
)
|
|
|
(1
|
)
|
Merger expenses
|
|
|
97
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
Other tax preference items
|
|
|
31
|
|
|
|
0
|
|
|
|
9
|
|
|
|
0
|
|
Valuation allowance change
|
|
|
26
|
|
|
|
0
|
|
|
|
38
|
|
|
|
1
|
|
Tax expense
|
|
$
|
2,307
|
|
|
|
36
|
%
|
|
$
|
1,604
|
|
|
|
30
|
%
|
The Company is no longer subject to examination by taxing authorities for years before 2012.
The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 14 - RELATED PARTY TRANSACTIONS
Directors, executive officers and their affiliates are customers of and have banking transactions with the Bank in the ordinary course of business. A summary of loan transactions with directors and executive officers, including their affiliates, is as follows:
(Dollars in thousands)
|
|
December 31,
|
|
|
|
201
5
|
|
|
201
4
|
|
Balance, beginning of year
|
|
$
|
1,586
|
|
|
$
|
1,680
|
|
New loans
|
|
|
-
|
|
|
|
-
|
|
Repayments
|
|
|
(80
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
1,506
|
|
|
$
|
1,586
|
|
Deposits by directors and executive officers, including their affiliates, at December 31, 2015 and 2014 totaled $968,000 and $806,000, respectively.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments include commitments to extend credit and standby letters of credit. They involve elements of credit and interest rate risk in excess of the amounts shown on the balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments is as follows:
(Dollars in thousands)
|
|
December 31,
|
|
|
|
201
5
|
|
|
201
4
|
|
Commitments to extend credit
|
|
$
|
26,566
|
|
|
$
|
27,753
|
|
Standby letters of credit
|
|
|
441
|
|
|
|
62
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral varies but may include accounts receivable, inventory, equipment, marketable securities and property. Since many letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements and the fair value of any liability associated with letters of credit is insignificant.
The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, if material, along with any related fees received from potential borrowers, are recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans.
Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. Due to the small amount and frequent turnover of loans held-for-sale, the derivative value is considered immaterial.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 16 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Plan for the benefit of all eligible employees. Upon ongoing approval of the Board of Directors, the Company matches 100 percent of employee contributions up to the first three percent of compensation, plus 50 percent of employee contributions on the next two percent of compensation, subject to certain adjustments and limitations. The Company may also make an elective three percent contribution to the Plan accounts of all eligible employees. Contributions made to the Plan in 2015 and 2014 amounted to $153,000 and $127,000, respectively.
The Company entered into a Supplemental Executive Retirement Plan (SERP) during 2008 with its Chief Executive Officer. The Company accrued deferred compensation expense of $253,000 and $231,000 in 2015 and 2014, respectively, in relation to this plan. The accrued liability for the SERP at December 31, 2015 and 2014 totaled $2,123,000 and $1,870,000, respectively.
The Company has entered into Endorsement Split Dollar Agreements with two of its executive officers relating to split dollar life insurance policies covering each of them. The Company is the sole owner of these life insurance policies and is required to maintain the policies in full force and effect and pay any premiums due on the policies. The agreements provide that if the executive’s death occurs before the earlier of the date of his termination of employment with the Company or the date that is six months after the executive attains age 70, the executive’s beneficiary will be entitled to the net death proceeds under the policies. The executive’s interest in the policies will be extinguished at the earlier of the date of his termination of employment or six months after the date on which he attains age 70, and the Company will be entitled to any remaining proceeds of the policies, provided a change in control has not occurred. In the event of a change in control prior to the termination of the executive’s employment, the Company is required to transfer to the executive ownership of the policy. The agreements also provide that the Company may not amend or terminate the executive’s interest in the policies unless the policies are replaced with comparable ones, including a new split dollar agreement. The agreements also provide for a claims and review procedure in the event persons have not received benefits under the agreement to which they believe they are entitled. If they had died on December 31, 2015, the death benefits payable to the executives’ beneficiaries upon the executive’s death would have totaled $2,741,000.
During 2014, the Company terminated an existing Endorsement Split Dollar Agreement with another of its executive officers. The terms of the split dollar agreement terminated were identical to those described above. In exchange for a payment of $271,000, which represented half of the policy’s cash surrender value, the Company sold ownership of the policy to the executive and relinquished all claims to future death benefits. The Company also agreed to make an annual payment of $120,000 to the executive, which he will use to timely pay the annual premium on the policy until the earliest of the executive’s separation from service, his death, or a change in control. If the annual premium for the policy is reduced for any reason, the annual payment to the executive will be reduced by the same amount. The death benefits associated with this policy total $7,500,000. Immediately prior to execution of the termination agreement, the death benefits payable to the executive’s beneficiaries would have totaled $6,780,000.
NOTE 17 - EMPLOYEE STOCK PURCHASE PLAN
From 2000 until 2015, the Company maintained successive five-year Employee Stock Purchase Plans for the benefit of officers and employees which allowed officers and employees to have the Company make payroll withholdings for the purpose of buying Company stock. The most recent plan expired in 2015 and was not replaced with a new plan. The purchase price under the plans was 85 percent of the closing quoted market price of the first or last business day of the quarter, whichever was less. Shares were purchased immediately following the last business date of the quarter. During 2015 and 2014, the Company issued 7,177 and 14,512 shares of common stock, respectively, under the 2010 plan. Proceeds from stock issuances during 2015 and 2014 totaled $51,000 and $99,000, respectively.
NOTE 18 - DIVIDENDS
There are no current plans to initiate payment of cash dividends and future dividend policy will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors. The Bank’s ability to pay dividends to the Company is restricted by the laws and regulations of the State of South Carolina. Generally, these restrictions require the Bank to obtain the prior written consent of the South Carolina Commissioner of Banking to pay dividends. The Merger Agreement between the Company and BNC also restricts the Company’s ability to pay dividends.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 19 - REGULATORY MATTERS
The Company’s total shareholders’ equity increased by approximately $4.5 million during 2015, primarily due to net income of $4,062,000 and other comprehensive income of $422,000. The Company’s Tier 1 capital to average assets ratio was 12.77 percent as of December 31, 2015 compared to 11.98 percent as of December 31, 2014.
The Federal Reserve Board and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 150%. Under the risk-based standard, capital is classified into two tiers. The Company’s and the Bank’s Tier 1 capital consists of common shareholders’ equity minus a portion of deferred tax assets plus, in the case of the Company, junior subordinated debt subject to certain limitations. Tier 1 Capital includes Common Equity Tier 1 and Additional Tier 1, which consists of additions for certain items to Common Equity Tier 1. None of these additions apply to the Company or the Bank; therefore, for both entities Common Equity Tier 1 capital equals Tier 1 capital. The Company’s and the Bank’s Tier 2 capital consists of the allowance for loan losses subject to certain limitations and, in the case of the Company, its junior subordinated debt in excess of 25% of its Tier 1 capital. A bank holding company’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are illustrated in the chart below. The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. These requirements are set by regulation and are shown in the table below. These requirements are applicable to all but the most highly-rated institutions that are not anticipating or experiencing significant growth and have well-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity and good earnings. The regulators may require individual bank holding companies and banks to maintain higher levels of capital depending on the regulators’ assessment of the risks faced by the bank holding company or the bank.
As of December 31, 2015, the most recent notification of the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
As of December 31, 2015, and December 31, 2014, the Company and the Bank exceeded each of the applicable capital requirements shown in the following table.
|
|
Capital Ratios
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Minimum Basel III
Phase In
|
|
|
Minimum Basel III
Fully Phased In
|
|
|
Well Capitalized
|
|
|
|
Actual
|
|
|
Requirement
|
|
|
Requirement
|
|
|
Requirement
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
The Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted
assets)
|
|
$
|
58,788
|
|
|
|
16.75
|
%
|
|
$
|
28,077
|
|
|
|
8.00
|
%
|
|
$
|
36,841
|
|
|
|
10.50
|
%
|
|
$
|
35,097
|
|
|
|
10.00
|
%
|
Tier 1 capital (to risk-weighted
assets)
|
|
|
54,390
|
|
|
|
15.50
|
%
|
|
|
21,058
|
|
|
|
6.00
|
%
|
|
|
29,832
|
|
|
|
8.50
|
%
|
|
|
28,077
|
|
|
|
8.00
|
%
|
Common equity Tier 1 capital
(to risk-weighted assets)
|
|
|
54,390
|
|
|
|
15.50
|
%
|
|
|
15,793
|
|
|
|
4.50
|
%
|
|
|
24,568
|
|
|
|
7.00
|
%
|
|
|
22,813
|
|
|
|
6.50
|
%
|
Tier 1 capital (to average assets)
|
|
|
54,390
|
|
|
|
11.36
|
%
|
|
|
19,150
|
|
|
|
4.00
|
%
|
|
|
19,150
|
|
|
|
4.00
|
%
|
|
|
23,938
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted
assets)
|
|
$
|
67,364
|
|
|
|
18.84
|
%
|
|
$
|
28,602
|
|
|
|
8.00
|
% (1)
|
|
$
|
37,540
|
|
|
|
10.50
|
% (1)
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 capital (to risk-weighted
assets)
|
|
|
62,866
|
|
|
|
17.58
|
%
|
|
|
21,451
|
|
|
|
6.00
|
% (1)
|
|
|
30,389
|
|
|
|
8.50
|
% (1)
|
|
|
N/A
|
|
|
|
N/A
|
|
Common equity Tier 1 capital (
to risk-weighted assets)
|
|
|
62,866
|
|
|
|
17.58
|
%
|
|
|
16,088
|
|
|
|
4.50
|
% (1)
|
|
|
25,026
|
|
|
|
7.00
|
% (1)
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 capital (to average assets)
|
|
|
62,866
|
|
|
|
12.77
|
%
|
|
|
19,695
|
|
|
|
4.00
|
% (1)
|
|
|
19,695
|
|
|
|
4.00
|
% (1)
|
|
|
N/A
|
|
|
|
N/A
|
|
(1) Minimum requirements for bank holding companies with greater than $1 billion in consolidated total assets (the Company is not currently subject to these requirements).
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 19 - REGULATORY MATTERS
(continued)
|
|
Capital Ratios
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
Minimum Basel III
Phase In
|
|
|
Minimum Basel III
Fully Phased In
|
|
|
Well Capitalized
|
|
|
|
Actual
|
|
|
Requirement
|
|
|
Requirement
|
|
|
Requirement
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
The Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted
assets)
|
|
$
|
51,750
|
|
|
|
15.49
|
%
|
|
$
|
26,733
|
|
|
|
8.00
|
%
|
|
$
|
35,088
|
|
|
|
10.50
|
%
|
|
$
|
33,417
|
|
|
|
10.00
|
%
|
Tier 1 capital (to risk-weighted
assets)
|
|
|
47,536
|
|
|
|
14.23
|
%
|
|
|
20,050
|
|
|
|
6.00
|
%
|
|
|
28,404
|
|
|
|
8.50
|
%
|
|
|
26,733
|
|
|
|
8.00
|
%
|
Common equity Tier 1 capital
(to risk-weighted assets)
|
|
|
47,536
|
|
|
|
14.23
|
%
|
|
|
15,038
|
|
|
|
4.50
|
%
|
|
|
23,392
|
|
|
|
7.00
|
%
|
|
|
21,721
|
|
|
|
6.50
|
%
|
Tier 1 capital (to average assets)
|
|
|
47,536
|
|
|
|
10.61
|
%
|
|
|
17,921
|
|
|
|
4.00
|
%
|
|
|
17,921
|
|
|
|
4.00
|
%
|
|
|
22,402
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted
assets)
|
|
$
|
59,168
|
|
|
|
17.43
|
%
|
|
$
|
27,152
|
|
|
|
8.00
|
% (1)
|
|
$
|
35,638
|
|
|
|
10.50
|
% (1)
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 capital (to risk-weighted
assets)
|
|
|
54,907
|
|
|
|
16.18
|
%
|
|
|
20,364
|
|
|
|
6.00
|
% (1)
|
|
|
28,850
|
|
|
|
8.50
|
% (1)
|
|
|
N/A
|
|
|
|
N/A
|
|
Common equity Tier 1 capital
(to risk-weighted assets)
|
|
|
54,907
|
|
|
|
16.18
|
%
|
|
|
15,273
|
|
|
|
4.50
|
% (1)
|
|
|
23,758
|
|
|
|
7.00
|
% (1)
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 capital (to average assets)
|
|
|
54,907
|
|
|
|
11.98
|
%
|
|
|
18,331
|
|
|
|
4.00
|
% (1)
|
|
|
18,331
|
|
|
|
4.00
|
% (1)
|
|
|
N/A
|
|
|
|
N/A
|
|
(1) Minimum requirements for bank holding companies with greater than $500 million in consolidated total assets (the Company was not subject to these requirements)
NOTE 20 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Generally accepted accounting principles also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
- Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, and money market funds.
Level 2
- Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3
- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, real estate appraisals, 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, asset-backed securities in less liquid markets, retained residual interests in securitizations, residential mortgage servicing rights, and other real estate owned when adjusting for selling costs, and impaired loans.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
The Company used the following methods and assumptions to estimate fair value:
Available for Sale Investment Securities
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available (Leve1 1). If quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Securities classified as Level 3 include asset-backed securities in less liquid markets. The fair values of Level 3 available for sale investment securities are determined by a third party pricing service and reviewed by the Company’s Chief Financial Officer for reasonableness. The fair value of the trust preferred securities is computed based upon discounted cash flows estimated using interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation to the note classes. Current estimates of expected cash flows are based on the most recent trustee reports and any other relevant market information, including announcements of interest payment deferrals or defaults of underlying issuers. The payment, default and recovery assumptions are believed to reflect the assumptions of market participants. Cash flows are discounted at appropriate market rates, including consideration of credit spreads and illiquidity discounts.
Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company categorizes loans subjected to nonrecurring fair value adjustments as Level 2. There were no fair value adjustments to mortgage loans held for sale as of December 31, 2015 and December 31, 2014.
Impaired Loans
Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans are carried at the lesser of their principal balance or their fair value. The Company considers problem loans with principal balances of $250,000 or greater individually for impairment. The fair value of loans individually evaluated for impairment is estimated using one of several methods, including the present value of expected cash flows, market price of the loan, if available, or fair value of the underlying collateral less estimated costs to sell. At December 31, 2015, all impaired loans deemed collateral dependent were evaluated based on the fair value of the collateral less estimated costs to sell. Those impaired loans not requiring a specific allowance for loan losses allocation represent loans with fair values equal to or exceeding their recorded investments. Impaired loans for which a specific allowance is established based on the fair value of collateral require classification in the fair value hierarchy. If the fair value of an impaired loan is based on an observable market price of the loan the Company records the impaired loan as nonrecurring Level 2. When the fair value of an impaired loan is based on discounted cash flows or the fair value of the underlying collateral less estimated costs to sell the Company records the impaired loan as nonrecurring Level 3.
Other real estate owned
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals.
For both collateral dependent impaired loans and other real estate owned the Company uses appraisals prepared by certified appraisal professionals whose qualifications and licenses have been reviewed and verified by the Company. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically lead to a Level 3 classification of the inputs for determining fair value. Once the Company receives an appraisal on an impaired loan, the Chief Credit Officer and Chief Financial Officer review the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics, as well as the Company’s own loss experience. For appraisals received on other real estate owned, the Chief Financial Officer and Chief Operating Officer use a similar approach. The Company may take additional discounts against the appraisals based on the circumstances surrounding individual properties.
S
OUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Assets measured at fair value on a recurring basis are as follows as of December 31, 2015 and December 31, 2014
(Dollars in thousands)
:
|
|
December 31, 201
5
|
|
|
|
Quoted
Market Price in
Active Markets
(
Level 1
)
|
|
|
Significant
Other Observable
Inputs
(
Level 2
)
|
|
|
Significant
Unobservable
Inputs
(
Level 3
)
|
|
|
Total
|
|
Available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
-
|
|
|
$
|
21,318
|
|
|
$
|
-
|
|
|
$
|
21,318
|
|
Municipals
|
|
|
-
|
|
|
|
3,682
|
|
|
|
-
|
|
|
|
3,682
|
|
Other
|
|
|
-
|
|
|
|
4,203
|
|
|
|
2,832
|
|
|
|
7,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
29,203
|
|
|
$
|
2,832
|
|
|
$
|
32,035
|
|
|
|
December 31, 201
4
|
|
|
|
Quoted
Market Price in
Active Markets
(
Level 1
)
|
|
|
Significant
Other Observable
Inputs
(
Level 2
)
|
|
|
Significant
Unobservable
Inputs
(
Level 3
)
|
|
|
Total
|
|
Available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
-
|
|
|
$
|
24,938
|
|
|
$
|
-
|
|
|
$
|
24,938
|
|
Municipals
|
|
|
-
|
|
|
|
4,184
|
|
|
|
-
|
|
|
|
4,184
|
|
Other
|
|
|
-
|
|
|
|
4,139
|
|
|
|
2,008
|
|
|
|
6,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
33,261
|
|
|
$
|
2,008
|
|
|
$
|
35,269
|
|
Investments in collateralized debt obligations and trust preferred securities comprise the Company’s Level 3 assets as shown above. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
There were no transfers between Level 1 and Level 2 during 2015 or 2014.
The Company has no liabilities carried at fair value or measured at fair value on a recurring basis.
The following table reconciles the changes in recurring Level 3 financial instruments for the twelve months ended December 31, 2015 and 2014
(
Dollars
in thousands)
:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Beginning of year balance
|
|
$
|
2,008
|
|
|
$
|
1,836
|
|
Discount accretion
|
|
|
10
|
|
|
|
10
|
|
Unrealized gain
|
|
|
814
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,832
|
|
|
$
|
2,008
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
The following table presents quantitative information about Level 3 fair value measurements at December 31, 2015
(Dollars in thousands)
:
Security Type
|
|
Fair Value
|
|
|
Valuation
Technique
|
|
Unobservable Input
|
|
Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
Debt Obligations
|
|
$
|
2,332
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
Approximately
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
Weighted default probability for
deferring issuers
|
|
Approximately
|
|
26%
|
|
|
|
|
|
|
|
|
|
|
Recovery rate on deferring issuers
|
|
|
10%
|
-
|
15%
|
|
|
|
|
|
|
|
|
|
Default probability for current issuers
|
|
|
1.00%
|
-
|
7.50%
|
|
Trust Preferred Security
|
|
$
|
500
|
|
|
Discounted
cash flows
|
|
Discount rate
|
|
Approximately
|
|
4%
|
|
|
The significant unobservable inputs used in the fair value measurement of the Company’s collateralized debt obligations investments are prepayment rates, probability of default, and loss severity in the event of default. Significant increases/(decreases) in any of those inputs in isolation would result in a significantly lower/(higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.
In addition to the collateralized debt obligations included in the table above, the Company owns a trust preferred security backed by a single issuer for which meaningful pricing data is not readily available. The security’s book value of $500,000 is assumed to equal its fair value. The discount rate shown for the security in the table above approximates the security’s yield rate at December 31, 2015.
There were no changes in unrealized gains and losses recorded in earnings for either of the years ended December 31, 2015 or December 31, 2014.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Assets measured at fair value on a nonrecurring basis are as follows as of December 31, 2015 and December 31, 2014
(Dollars in thousands)
:
|
|
December 31, 2015
|
|
|
|
Quoted
Market Price in
Active Markets
(
Level 1
)
|
|
|
Significant
Other Observable
Inputs
(
Level 2
)
|
|
|
Significant
Unobservable
Inputs
(
Level 3
)
|
|
|
Total
|
|
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 - 4 Family Residential
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,398
|
|
|
$
|
1,398
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
324
|
|
|
|
324
|
|
Other Real Estate Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,776
|
|
|
$
|
1,776
|
|
|
|
December 31, 2014
|
|
|
|
Quoted
Market Price in
Active Markets
(
Level 1
)
|
|
|
Significant
Other
O
bservable
Inputs
(
Level 2
)
|
|
|
Significant
Unobservable
Inputs
(
Level 3
)
|
|
|
Total
|
|
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 - 4 Family Residential
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,124
|
|
|
$
|
2,124
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1,105
|
|
|
|
1,105
|
|
Other Real Estate Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 – 4 Family Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
334
|
|
|
|
334
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,617
|
|
|
$
|
3,617
|
|
Impaired loans that are measured for impairment using the fair value of the collateral had a recorded investment of $1,643,000 with a valuation allowance of $41,000 at December 31, 2015, with no additional provision for loan losses for the year ended December 31, 2015. Impaired loans that are measured for impairment using the fair value of the collateral had a recorded investment of $3,065,000 with a valuation allowance of $63,000 at December 31, 2014, resulting in an additional provision for loan losses of $40,000 for the year ended December 31, 2014. These additional provisions were all assigned to 1 – 4 Family Residential loans.
Other real estate owned measured at fair value less costs to sell had a net carrying amount of $50,000, which is made up of the outstanding balance of $165,000, net of a valuation allowance of $115,000, at December 31, 2015. This valuation allowance did not include any impairment made during the year ended December 31, 2015. Other real estate owned measured at fair value less costs to sell had a net carrying amount of $361,000, which is made up of the outstanding balance of $482,000, net of a valuation allowance of $121,000, at December 31, 2014. This valuation allowance included $6,000 of impairment made during the year ended December 31, 2014. All of this impairment related to 1-4 Family Residential real estate.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2015 and December 31, 2014:
|
|
Valuation Techniques
|
|
|
Unobservable Inputs
|
|
Range
|
|
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 Family Homes
|
|
Sales comparison approach
|
|
|
Bank Owned Discount
|
|
10%
|
-
|
20%
|
|
Commercial Real Estate
|
|
Sales comparison approach
|
|
|
Bank Owned Discount
|
|
10%
|
-
|
20%
|
|
|
|
Income approach
|
|
|
Capitalization Rate
|
|
8%
|
-
|
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
Sales comparison approach
|
|
|
Bank Owned Discount
|
|
10%
|
-
|
20%
|
|
|
|
Income approach
|
|
|
Capitalization Rate
|
|
8%
|
-
|
12%
|
|
Residential 1-4 Family Homes
|
|
Sales comparison approach
|
|
|
Bank Owned Discount
|
|
10%
|
-
|
205
|
|
Residential 1-4 Family Home Lots
|
|
|
|
|
|
|
|
|
|
|
Commercial Lots
|
|
|
|
|
|
|
|
|
|
|
The estimated fair values of the Company’s financial instruments are as follows
(Dollars in thousands):
|
|
Fair Value Measurements at
December 31
, 201
5
Using:
|
|
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,944
|
|
|
$
|
40,944
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
40,944
|
|
Available for sale investment securities
|
|
|
32,035
|
|
|
|
-
|
|
|
|
29,203
|
|
|
|
2,832
|
|
|
|
32,035
|
|
Federal Home Loan Bank Stock
|
|
|
4,291
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans held for sale
|
|
|
1,711
|
|
|
|
-
|
|
|
|
1,711
|
|
|
|
-
|
|
|
|
1,711
|
|
Loans, net
|
|
|
384,502
|
|
|
|
-
|
|
|
|
-
|
|
|
|
384,755
|
|
|
|
384,755
|
|
Accrued interest receivable
|
|
|
1,149
|
|
|
|
-
|
|
|
|
95
|
|
|
|
1,054
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
339,457
|
|
|
|
235,860
|
|
|
|
103,652
|
|
|
|
-
|
|
|
|
339,512
|
|
Short term borrowings
|
|
|
6,760
|
|
|
|
-
|
|
|
|
6,760
|
|
|
|
-
|
|
|
|
6,760
|
|
Advances from Federal Home Loan Bank
|
|
|
91,000
|
|
|
|
-
|
|
|
|
94,004
|
|
|
|
-
|
|
|
|
94,004
|
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,301
|
|
|
|
6,301
|
|
Accrued interest payable
|
|
|
324
|
|
|
|
-
|
|
|
|
323
|
|
|
|
1
|
|
|
|
324
|
|
|
|
Fair Value Measurements at December 31, 201
4
Using:
|
|
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,572
|
|
|
$
|
33,572
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33,572
|
|
Available for sale investment securities
|
|
|
35,269
|
|
|
|
-
|
|
|
|
33,261
|
|
|
|
2,008
|
|
|
|
35,269
|
|
Federal Home Loan Bank Stock
|
|
|
4,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans, net
|
|
|
358,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
355,310
|
|
|
|
355,310
|
|
Accrued interest receivable
|
|
|
1,169
|
|
|
|
-
|
|
|
|
97
|
|
|
|
1,072
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
331,034
|
|
|
|
210,391
|
|
|
|
120,950
|
|
|
|
-
|
|
|
|
331,341
|
|
Short term borrowings
|
|
|
3,802
|
|
|
|
-
|
|
|
|
3,802
|
|
|
|
-
|
|
|
|
3,802
|
|
Advances from Federal Home Loan Bank
|
|
|
80,000
|
|
|
|
-
|
|
|
|
83,488
|
|
|
|
-
|
|
|
|
83,488
|
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,018
|
|
|
|
5,018
|
|
Accrued interest payable
|
|
|
777
|
|
|
|
-
|
|
|
|
776
|
|
|
|
1
|
|
|
|
777
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Valuation Methodologies
– Assets and Liabilities not recorded at Fair Value
The following is a description of the valuation methodologies used for assets and liabilities that are not recorded at fair value, but whose fair value must be estimated and disclosed:
Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified Level 1.
FHLB Stock
It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans
Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values
, resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality
, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair values of loans do not necessarily represent an exit price.
The fair values of loans held for sale are estimated based upon binding contracts and quotes from third party investors
, resulting in a Level 2 classification.
Deposits
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount)
, resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date
, resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits
, resulting in a Level 2 classification.
Short-term Borrowings
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values
, resulting in a Level 2 classification.
Other Borrowings
The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements
, resulting in a Level 2 classification.
The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements
, resulting in a Level 3 classification.
Accrued Interest Receivable/Payable
The carrying amounts of accrued interest are assigned Levels 1, 2, or 3 classifications commensurate with the assets or liabilities to which they are associated.
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Off-balance Sheet Instruments
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION
Following is condensed financial information of Southcoast Financial Corporation (
parent company only
):
CONDENSED BALANCE SHEETS
(Dollars in thousands)
|
|
December 31,
|
|
|
|
201
5
|
|
|
201
4
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,719
|
|
|
$
|
4,593
|
|
Investments available for sale
|
|
|
192
|
|
|
|
102
|
|
Investment in subsidiaries
|
|
|
54,418
|
|
|
|
49,129
|
|
Property and equipment, net
|
|
|
3,863
|
|
|
|
3,877
|
|
Receivables from subsidiaries
|
|
|
802
|
|
|
|
-
|
|
Other real estate owned, net
|
|
|
184
|
|
|
|
184
|
|
Deferred tax asset, net
|
|
|
1,095
|
|
|
|
1,630
|
|
Other assets
|
|
|
70
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
64,343
|
|
|
$
|
59,585
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,193
|
|
|
$
|
1,970
|
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
10,310
|
|
Shareholders’ equity
|
|
|
51,840
|
|
|
|
47,305
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
64,343
|
|
|
$
|
59,585
|
|
CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
201
5
|
|
|
201
4
|
|
Income
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$
|
-
|
|
|
$
|
3,000
|
|
Interest and dividends
|
|
|
4
|
|
|
|
2
|
|
Expenses
|
|
|
(1,166
|
)
|
|
|
(499
|
)
|
Income (loss) before income taxes
|
|
|
(1,162
|
)
|
|
|
2,503
|
|
Income tax benefit
|
|
|
(299
|
)
|
|
|
(383
|
)
|
Income (loss) before equity in undistributed net income of
subsidiaries
|
|
|
(863
|
)
|
|
|
2,886
|
|
Equity in undistributed net income of subsidiaries
|
|
|
4,925
|
|
|
|
851
|
|
Net income
|
|
$
|
4,062
|
|
|
$
|
3,737
|
|
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION
–
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
201
5
|
|
|
2014
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,062
|
|
|
$
|
3,737
|
|
Adjustments to reconcile net income to net cash used by operating activities
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of subsidiaries
|
|
|
(4,925
|
)
|
|
|
(851
|
)
|
Depreciation
|
|
|
14
|
|
|
|
14
|
|
(Increase) decrease in deferred taxes
|
|
|
503
|
|
|
|
(293
|
)
|
(Increase) decrease in other assets
|
|
|
(802
|
)
|
|
|
767
|
|
Increase (decrease) in other liabilities
|
|
|
223
|
|
|
|
(183
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities
|
|
|
(925
|
)
|
|
|
3,191
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
-
|
|
Purchase of Other real estate owned from banking subsidiary
|
|
|
-
|
|
|
|
(184
|
)
|
Capital contribution to banking subsidiary
|
|
|
-
|
|
|
|
(232
|
)
|
Net cash used by investing activities
|
|
|
-
|
|
|
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of stock
|
|
|
51
|
|
|
|
99
|
|
Net cash provided by financing activities
|
|
|
51
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(874
|
)
|
|
|
2,874
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of year
|
|
|
4,593
|
|
|
|
1,719
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
3,719
|
|
|
$
|
4,593
|
|
Item 9.
|
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
|
Not Applicable
Item 9A.
|
Controls and Procedures.
|
Effectiveness of Disclosure Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or 240.15d-15(b) of the Company’s disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Company’s chief executive officer and chief financial officer concluded that such controls and procedures, as of the end of the period covered by this Annual Report on Form 10-K, were effective.
Management’s Annual Report on Internal Control over Financial Reporting
MANAGEMENT REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
The management of Southcoast Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with appropriate management authorization and accounting records are reliable for the preparation of financial statements in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of Southcoast Financial Corporation’s internal control over financial reporting as of December 31, 2015. In making our assessment, management has utilized the framework published in 2013 by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission “Internal Control-Integrated Framework.” Based on our assessment, management has concluded that, as of December 31, 2015, the Company’s internal control over financial reporting was effective.
Date: March 24, 2016
s/L. Wayne Pearson
|
|
s/William C. Heslop
|
L. Wayne Pearson
|
|
William C. Heslop
|
President and Chief Executive Officer
|
|
Senior Vice President and Chief Financial Officer
|
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
|
Other Information.
|
No information was required to be disclosed in a Form 8-K during the fourth quarter of 2016 that was not so disclosed.
PART III
Item 10.
|
Directors, Executive Officers and Corporate Governance.
|
Directors
Set forth below is information about our current directors. Each director is also a director of our wholly owned subsidiary, Southcoast Community Bank (our “Bank”).
Name
|
Age
|
Business Experience During the Past Five Years
|
|
Director
Since
|
|
|
|
|
Directors whose
terms of office
continue until the Annual Meeting of Shareholders in 201
8
:
|
|
|
|
|
Tommy B. Baker
|
70
|
Owner- Baker Motors of Charleston (automobile dealership).
|
2005
|
|
|
|
|
William A. Coates
|
66
|
Attorney and shareholder, Roe, Cassidy, Coates & Price, P.A., Greenville, South Carolina (attorneys) since January 1, 2002; attorney and shareholder, Love, Thornton, Arnold & Thomson, P.A., Greenville, South Carolina (attorneys) 1980-2001; Vice Chairman of our Company and our Bank.
|
1998*
|
|
|
|
|
Stephen F. Hutchinson
|
69
|
President, The Hutchinson Company, Inc. (real estate).
|
2005
|
|
|
|
|
Directors whose terms of office
will continue until the Annual Meeting of Shareholders in 2016:
|
|
|
|
|
L. Wayne Pearson
|
68
|
Chairman, Chief Executive Officer, and President of our Company and our Bank since June, 1998.
|
1998*
|
|
|
|
|
Robert M. Scott
|
72
|
Treasurer, Secretary and Executive Vice President of our Company and our Bank since November, 2011; Chief Financial Officer of our Company and our Bank from June, 1998 until May, 2006; Secretary of our Company and our Bank since June, 1998.
|
1998*
|
|
|
|
|
Director whose
term of office
will
continue
until the Annual Meeting of Shareholders in 2017:
|
|
|
|
|
James P. Smith, CLU, ChFC
|
61
|
President and Chief Executive Officer, Atlantic Coast Advisory Group (insurance sales) since 2004; Member of MUSC Children’s Hospital Fund Raising Advisory Board, 2008.
|
1998*
|
*Includes membership on the Board of Directors of our Bank prior to organization of our Company as a holding company for our Bank in 1999.
None of the directorS nor any of the principal executive officers are related by blood, marriage or adoption in the degree of first cousin or closer.
The Nominating Committee believes the combined business and professional experience of the Company’s directors, and their various areas of expertise make them a useful resource to management and qualify them for service on the Board. Most of our Board members have served on the Board since our organization, and Mr. Pearson has been our Chief Executive Officer and Chairman since our organization. During their tenures, these directors have gained considerable institutional knowledge about the Company and its operations, which has made them effective board members. Because the Company’s operations are complex and highly regulated, continuity of service and this development of institutional knowledge help make the Board more efficient and more effective at developing long-range plans than it would be if there were frequent turnover in Board membership. When Board members retire from the Board, the Nominating Committee seeks out replacements who it believes will make significant contributions to the Board for a variety of reasons, including among others, business and financial experience and expertise, business and government contacts, relationship skills, knowledge of the Company, and diversity.
Mr. Pearson was an organizer of our Company and our Bank, and has served as the president and Chief Executive Officer and Chairman of the Board of Directors of our Company and our Bank since that time. He has over 40 years’ experience in banking and has significant banking contacts throughout the state of South Carolina.
Mr. Scott was also an organizer of our Company and our Bank, and has served as a director of each since that time. He also served as the Chief Financial Officer of the Company and the Bank from the Company’s organization through May 2006. In November 2011, he rejoined the Company and the Bank as Treasurer and Executive Vice-President. He has over 40 years’ experience in banking and has significant contacts within the industry.
Mr. Coates, who is currently our Vice Chairman, was also an organizer of our Company and our Bank, and has served as a director of each since that time. He has been an attorney in the state of South Carolina for over 30 years. His legal experience and insights are a valuable resource to our Board. Additionally, during his many years of legal practice, he has developed significant contacts throughout the state and utilizes information gained from those contacts to provide guidance to the Board regarding economic conditions beyond our direct service area.
Mr. Smith was also an organizer of our Company and our Bank, and has served as a director of each since that time. He has over 30 years’ experience in the financial services industry, most recently as the President and Chief Executive Officer of Atlantic Coast Advisory Group, an insurance brokerage firm. He uses his in depth knowledge of financial risk management tools to provide guidance to us on matters involving risk and risk management.
Mr. Hutchinson has served as a member of our Board of Directors since 2005, and is also a member of our Bank’s Board of Directors. Prior to his election to our Board of Directors, he served on the advisory board of our Summerville region. He has over 30 years’ experience in the real estate development industry in the greater Charleston area. He provides the Board with insights into the real estate market in the area, which we use in developing our long range strategy, as well as in understanding individual loans requiring board approval.
Mr. Baker has served as a member of our Board of Directors since 2005, and is also a member of our Bank’s Board of Directors. He has over 30 years’ experience in the automobile dealership industry. In that time he has developed extensive knowledge of financing, as well as the skills required to develop and implement a successful long range business and marketing strategy for an organization. As a member of our Board, he translates this knowledge and skill set to the financial services industry in providing guidance to the Board on long range strategy and short term implementation of that strategy.
Executive Officers
Our executive officers are L. Wayne Pearson, Robert A. Daniel, Jr., Robert M. Scott, William B. Seabrook, William R. Billings, and William C. Heslop. Messrs. Pearson and Scott are directors and information about their ages and business experience is set forth above. Information about Messrs. Daniel, Seabrook, Billings, and Heslop is set forth below.
Name
|
Age
|
Business Experience During Past Five Years
|
|
Robert A. Daniel, Jr.
|
65
|
Executive Vice President of our Company and our Bank since 2005; Chief Lending Officer of our Bank since 1998; Senior Vice President of our Bank from 1999 to 2005.
|
|
|
|
William B. Seabrook
|
59
|
Executive Vice President of our Company and our Bank since 2005, and Chief Operating Officer of our Company since May, 2009; Head of Retail Banking for our Bank since 2004; Senior Vice President of our Bank from 2004 to 2005; correspondent banker with FTN Financial, a division of First Tennessee Bank from 1997 to 2004.
|
|
|
|
William R. Billings
|
56
|
Executive Vice President of our Bank since May 2010, and Senior Credit Officer of our Bank since November 2006; Senior Vice President of our Bank from November 2006 until May 2010; Senior Vice President of Wachovia Wealth Management from 2001-2006; Senior Vice President and Consumer Bank Director of Wachovia from 1998-2001; Certified Financial Planner since 2006.
|
|
|
|
William C. Heslop
|
40
|
Senior Vice President and Chief Financial Officer of our Company and our Bank since May, 2006; certified public accountant with Elliott Davis, LLC from January, 2003 to April, 2006.
|
Section 16(a)
B
eneficial
O
wnership
Reporting C
ompliance
As required by Section 16(a) of the Securities Exchange Act of 1934, our directors, executive officers and certain individuals are required to report periodically their ownership of our common stock and any changes in ownership to the Securities and Exchange Commission. Based on a review of Section 16(a) reports available to us and any representations made to us, our directors and executive officers timely filed all required reports for 2015.
Code of Ethics
The Company has adopted a code of ethics (as defined by 17 C.F.R. 229.406) that applies to its principal executive officer and principal financial/accounting officer. The Company will provide a copy of the code of ethics, free of charge, to any person upon written request to William C. Heslop, Senior Vice President, Southcoast Financial Corporation, 534 Johnnie Dodds Boulevard, Mt. Pleasant, South Carolina 29464.
Audit Committee
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee, all of whom are independent under the NASDAQ rules are William A. Coates, Tommy B. Baker and Stephen F. Hutchinson.
Audit Committee Financial Expert
The Company’s board of directors has determined that the Company does not have an “audit committee financial expert,” as that term is defined by Item 407(d)(5) of Regulation S-K promulgated by the Securities and Exchange Commission, serving on its audit committee. The Company’s audit committee is a committee of directors who are independent of the Company and its management. After reviewing the experience and training of all of the Company’s independent directors, the board of directors has concluded that no independent director meets the SEC’s very demanding definition of an “audit committee financial expert.” Therefore, it would be necessary to find a qualified individual willing to serve as both a director and member of the audit committee and have that person elected as a director by the shareholders in order to have an “audit committee financial expert” serving on the Company’s audit committee. The Company’s audit committee is, however, authorized to use consultants to provide financial accounting expertise in any instance where members of the committee believe such assistance would be useful. Accordingly, the Company does not believe that it needs to have an “audit committee financial expert” on its audit committee.
Item 11.
|
Executive Compensation.
|
MANAGEMENT COMPENSATION
Overview of Executive Compensation
Our Compensation Committee administers our executive officer compensation program. (As used in this discussion, “named executive officers” refers specifically to our Chief Executive Officer, Mr. Pearson, and our two other next most highly compensated executive officers, Messrs. Scott and Seabrook, as shown in the Summary Compensation Table, and “executive officers” refers generally to all of our executive officers.) The Committee has historically followed an informal policy of providing our executive officers with a total compensation package consisting of salary, bonuses, insurance and other benefits, and, occasionally, stock options. The Committee’s objectives in setting executive compensation are:
|
●
|
to set salaries and benefits and, from time to time, award options, at competitive levels designed to encourage our executive officers to perform at their highest levels in order to increase earnings and value to shareholders;
|
|
●
|
where appropriate, to award bonuses and increase salaries to reward our executive officers for performance; and
|
|
●
|
to retain our key executives.
|
Compensation is designed to reward our individual executive officers both for their personal performance and for performance of our Company with respect to growth in assets and earnings, expansion and increases in shareholder value. Base salary and bonus are designed to be commensurate with each executive officer’s scope of responsibilities, leadership, and management experience and effectiveness, and to reward annual achievements.
The Committee has not historically set specific advance goals for personal or corporate performance, and the Committee does not apply rigid formulas or necessarily react to short-term changes in business performance in determining the mix or amount of compensation elements. The Committee makes its decisions about the amounts of the various types of compensation, and allocations between long-term and current compensation, allocations between cash and non-cash compensation, and allocations among various forms of compensation, in its discretion based on the Committee’s subjective assessment of how these amounts and allocations will best meet the Committee’s overall compensation goals outlined above.
Components of 201
5
Executive Compensation
Minimum base salaries and certain additional benefits are set forth in employment agreements with our named executive officers. During 2015, executive compensation consisted primarily of base salary, bonuses and retirement benefits. In 2015, the Compensation Committee awarded five percent salary increases to each of our named executive officers, with the exception of Mr. Pearson, who did not receive an increase, and to certain other executive officers. In 2015, the Committee also awarded bonuses to Messrs. Pearson, Scott and Seabrook and certain other executive officers based on their commitments of substantial additional time and effort in successfully negotiating the proposed merger transaction between us and BNC Bancorp, and in overseeing and participating in the extensive due diligence activities relating to the transaction, in addition to discharging their regular duties. Additionally in 2015, the Committee approved transfer to Mr. Pearson of title to the Bank-owned vehicle assigned for his use, which had an estimated market value at the time of transfer of $40,000. We have not awarded executive officers any short or long-term incentive compensation or equity awards since 2008, and did not make any such awards in 2015.We also provide various additional benefits to executive officers, including health, life and disability insurance plans, split dollar insurance, employment and change of control arrangements, and perquisites. A more detailed discussion of each of these components of executive compensation, the reasons for awarding such types of compensation, the considerations in setting the amounts of each component of compensation, the amounts actually awarded for the periods indicated, and various other related matters is set forth in the sections and tables that follow.
Factors Considered in Setting Compensation
In setting compensation the Compensation Committee considers each executive’s knowledge, skills, scope of authority and responsibilities, job performance and tenure with us as an executive officer, as well as our perception of the fairness of the compensation paid to each executive in relation to what we pay our other executive officers, and the business and financial performance of our Company. The Committee also considers recommendations from our Chief Executive Officer in setting his compensation and compensation for the other executive officers.
Although the Compensation Committee considers competitive market compensation paid by other financial institutions in South Carolina and the southeast derived from proxy statements and publicly available compilations prepared by regional investment banking firms, the Committee does not attempt to maintain a target percentile within a peer group.
We review our compensation program and levels of compensation paid to all of our executive officers annually and may make adjustments based on the foregoing factors as well as other subjective factors.
Timing of Executive Compensation Decisions
Annual salary reviews and adjustments and bonus are routinely made in January of each year at the first regularly scheduled Compensation Committee and Board meetings. Compensation determinations may also be made at other times during the year, especially in the case of newly hired executives or promotions of existing employees that could not be deferred until the next scheduled meeting. Board and Committee meetings are generally scheduled well in advance of the meeting dates, and these scheduling decisions are made without regard to anticipated earnings or other major announcements. We do, however, routinely release earnings after our regular Board meetings.
Base Salaries and Bonuses
The Compensation Committee believes it is appropriate to set base salaries at a reasonable level that will provide executive officers with a predictable income base on which to structure their personal budgets. The employment agreements with each of the named executive officers and our other executive officers set minimum thresholds for base salaries, but the Compensation Committee may set annual base salaries in excess of those minimum thresholds. In setting base salaries, the Committee considers the scope of our executive officers’ responsibilities, their performance, and the period over which they have performed such responsibilities, as well as the overall condition of our Company, its level of success in recent years and its goals and budget for the current year. The Committee then makes a subjective determination of the salary level for each executive officer. Salaries are reviewed annually, but are not adjusted automatically. For the past several years, including 2015, the Committee considered generally the matters discussed below in setting salaries for each individual executive officer.
In setting the salary for Mr. Pearson, our Chief Executive Officer, the Committee has taken note of the regulatory changes that are continuing to increase the complexity and challenges of operating our business, and of Mr. Pearson’s continued personal leadership and business skills that are critical to us, particularly during the past several years of difficult local and national economic conditions. The Committee also has considered information it had regarding salary levels of other chief executive officers of financial institutions in South Carolina and the southeast, and set a salary level that the Committee believed was fair to Mr. Pearson and to our Company.
In setting salaries for our other named executive officers, the Committee has taken into consideration the recommendations of our Chief Executive Officer and the following contributions. For Mr. Scott, the Committee has considered his long-term experience as our previous Chief Financial Officer and as a banker in general, and his extensive knowledge of our business and the business of banking generally, as well as the fact that he agreed to come out of retirement to help us work through the difficult economic environment of the past several years. For Mr. Seabrook, our Chief Operating Officer, the Committee has considered the role he has played in growth of our branches in loans, deposits and profitability, his responsibilities in connection with personnel decisions, and his role as a loan officer.
As noted above, In 2015, the Compensation Committee awarded five percent salary increases to each of our named executive officers, with the exception of Mr. Pearson, who did not receive an increase, and to certain other executive officers.
The Compensation Committee sets bonuses, if any, for executive officers taking into account our overall success, increase in market share, performance relative to budget and the individual executive’s performance and contribution to our success. As noted above, in 2015, the Committee awarded bonuses to each of Southcoast’s named executive officers based on their commitments of substantial additional time and effort in successfully negotiating the proposed merger transaction between us and BNC Corporation, and in overseeing and participating in the extensive due diligence activities relating to the transaction, in addition to discharging their regular duties.
Stock Options
Stock options have been awarded from time to time, and generally have been set by the Committee at levels believed to be competitive with other financial institutions of similar size and to advance our goal of retaining key executives, as well as levels believed to appropriately align the interests of management with the interests of shareholders. Because options are granted with exercise prices set at fair market value of our common stock on the date of grant, executives can only benefit from the options if the price of our stock increases. The Committee does not award options every year, and has not awarded options since 2004.
Other Benefits
We provide our executive officers with medical and dental, life and disability insurance benefits, and we make contributions to our 401(k) plan on their behalf on the same basis as contributions are made for all other employees.
We also pay country club dues for each of our named executive officers and provide Messrs. Pearson and Seabrook with an automobile allowance. We consider the club dues to be directly and integrally related to performance of our named executive officers’ duties. In addition, we encourage, and pay for our named executives and their spouses, to attend banking conventions and seminars. The Compensation Committee has determined that these benefits play an important role in our named executive officers’ business development activities on behalf of our Company. The Compensation Committee has also determined that providing such benefits helps to retain key executives and is an important factor in keeping our executive compensation packages competitive in our market area.
All of the foregoing benefits awarded to our executives in 2015 were set at levels believed to be competitive with other community financial institutions in South Carolina.
Employment Agreements, Split Dollar Life Insurance, and Salary Continuation Agreement
We have entered into employment agreements with Messrs. Pearson, Scott and Seabrook. These agreements are described under “ -- Employment Agreements and Potential Payments upon Termination of Employment or Change of Control.” As discussed in that section, the employment agreements provide, among other things, for payments to Messrs. Pearson, Scott and Seabrook upon termination of their employment other than for cause or upon a change of control of our Company. The events set forth as triggering events for the payments were selected because they are events similar to those provided for in many employment agreements for executive officers of financial institutions throughout South Carolina. It has become increasingly common in South Carolina for community financial institutions to provide for such payments under such conditions. We believe these arrangements are an important factor in attracting and retaining our named executive officers by assuring them financial and employment status protections in the event we terminate their employment for our own business purposes without cause, or control of our Company changes. We believe such assurances of financial and employment protections help free executives from personal concerns over their futures, and, thereby, can help to align their interests more closely with those of shareholders, particularly in negotiating transactions that could result in a change of control.
We have also entered into agreements relating to split dollar life insurance with Mr. Seabrook, and with our non-employee directors, Messrs. Coates, Hutchinson, and Smith. Although we had also previously entered into split dollar agreements with Messrs. Scott and Baker, their agreements have terminated as a result of their attaining age 70. The agreement with Mr. Seabrook is described under “ -- Split Dollar Life Insurance/Endorsement Split Dollar Agreement.” Also discussed in that section is the termination of a split dollar life insurance agreement that we had previously entered into with Mr. Pearson. The agreements with our non-employee directors are described under “—Director Split Dollar Agreements.” These agreements provide benefits to us and to the executives’ and directors’ beneficiaries upon their deaths. We believe this type of agreement is an important factor in retaining our executive officers and directors because they are required to be employed by us, or serving on our Board, at death or disability or a change in control, or remain employed by us, or serving on our Board, until retirement, for their beneficiaries to receive benefits under the policies without having to make payments for such benefits.
Additionally, in 2008 we entered into a salary continuation agreement with our Chief Executive Officer, Mr. Pearson. This agreement is described under “- Salary Continuation Agreement.” We believe that this salary continuation agreement is important to provide our Chief Executive Officer with a level of retirement security appropriate to the level of benefits he has regularly conferred on the Company and the Bank since the organization of the Bank in 1998 and is expected to continue to confer in the future.
Tax and Accounting Considerations
We expense salary, bonus and benefit costs as they are incurred for tax and accounting purposes. Salary, bonus and some benefit payments are taxable to the recipients as ordinary income. The tax and accounting treatment of the various elements of compensation, while important and taken into consideration, is not a major factor in our decision making with respect to compensation.
Security Ownership Guidelines and Hedging
We do not have any formal security ownership guidelines for our executive officers, but most of our executive officers own a significant number of shares. We do not have any policies regarding our executive officers’ hedging the economic risk of ownership of our shares.
Financial Restatement
The Board of Directors does not have a policy with respect to adjusting retroactively any cash or equity based incentive compensation paid to our executive officers where payment was conditioned on achievement of certain financial results that were subsequently restated or otherwise adjusted in a manner that would reduce the size of an award or payment, or with respect to recovery of any amount determined to have been inappropriately received by an individual executive. The Board will be required to adopt such a policy after the Nasdaq adopts the related listing standards in accordance with regulations that are required to be adopted by the Securities and Exchange Commission (“SEC”) pursuant to the Dodd-Frank Act. Although the SEC has proposed such regulations, final regulations and Nasdaq listing standards have not yet been adopted. Until the Board adopts such a formal policy, if such a restatement were ever to occur, the Board would expect to address recovery of any such compensation paid to executive officers on a case-by-case basis in light of all of the relevant circumstances.
Non-binding Shareholder Advisory Votes on Executive Compensation and Frequency of Votes on Executive Compensation
Pursuant to the requirements of Section 14A of the Securities Exchange Act of 1934 and related SEC regulations, at our 2015 annual meeting of shareholders, we submitted to our shareholders a non-binding advisory vote on approval of executive compensation. Of the total shares voted, 91% voted in favor of the proposal. However, the results of the advisory vote did not affect the Compensation Committee’s decisions relating to executive compensation decisions and policies.
Also pursuant to the requirements of Section 14A of the Securities Exchange Act of 1934 and related SEC regulations, at our 2015 annual meeting of shareholders, we submitted to our shareholders a non-binding advisory vote on whether to hold the non-binding advisory vote on executive compensation every year, every two years, or every three years. The Committee and the Board took into consideration that, of the shares voting on the non-binding advisory vote on frequency of the vote on executive compensation, more shares voted in favor of a one year frequency than on either of the other frequency alternatives. In light of this vote, the Board has set the current frequency of the non-binding advisory vote on executive compensation at every year, to remain in effect until the next non-binding advisory vote on frequency of the vote on executive compensation. Therefore, at the 2015 Annual Meeting, shareholders were again given the opportunity to vote on a non-binding advisory resolution relating to executive compensation. If the merger with BNC Bancorp is not completed, the next non-binding advisory vote on executive compensation will be at the 2016 annual meeting, and the next vote on a non-binding advisory proposal relating to the frequency of the vote on executive compensation will be at the 2019 annual meeting.
Summary of
2015
Named Executive Officer Compensation
The following table sets forth for the years ended December 31, 2015 and 2014 information about compensation awarded to, earned by or paid to our Chief Executive Officer and our two next most highly compensated executive officers. Further information about each component of compensation is included in the discussion on the foregoing pages.