SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarter ended June 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _______________ to
_________________.
Commission File Number 0-25933
SOUTHCOAST FINANCIAL CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
South Carolina 58-2384011
(State of Incorporation) (I.R.S. Employer Identification Number)
530 Johnnie Dodds Boulevard, Mt. Pleasant, SC 29464
(Address of Principal Executive Offices)
(843) 884-0504
(Issuer's Telephone Number)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter periods that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock - No Par
Value: 995,368, Shares Outstanding on July 31, 2000.
Transitional Small Business Disclosure Format (Check one):
[ ] Yes [X] No
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
SOUTHCOAST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks ................................................................. $ 3,620,437 $ 1,786,411
Federal funds sold ...................................................................... 2,310,000 1,310,000
Investment securities available for sale ................................................ 4,191,835 3,121,049
Loans, net of allowance of $895,000 and $835,000 ........................................ 60,068,945 43,153,421
Property and equipment - net ............................................................ 5,809,180 4,513,284
Other assets ............................................................................ 1,811,625 1,364,381
------------ ------------
Total assets ........................................................................ $ 77,812,022 $ 55,248,546
============ ============
LIABILITIES
Deposits
Noninterest-bearing ................................................................... $ 8,094,096 $ 5,667,155
Interest bearing ...................................................................... 48,801,607 32,577,797
------------ ------------
Total deposits ...................................................................... 56,895,703 38,244,952
Other borrowings ........................................................................ 10,849,904 6,899,904
Other liabilities ....................................................................... 619,553 382,892
------------ ------------
Total liabilities ................................................................... 68,365,160 45,527,748
------------ ------------
SHAREHOLDERS' EQUITY
Common stock (no par value; 20,000,000 shares authorized; 1,002,958 shares
outstanding at June 30, 2000 and 1,047,987
at December 31, 1999) ................................................................. 10,168,615 10,520,053
Retained deficit ........................................................................ (623,843) (714,147)
Accumulated other comprehensive (loss) .................................................. (97,910) (85,108)
------------ ------------
Total shareholders' equity .......................................................... 9,446,862 9,720,798
------------ ------------
Total liabilities and shareholders' equity .......................................... $ 77,812,022 $ 55,248,546
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SOUTHCOAST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six months Six months Three Months Three months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans, including fees ......................................... $ 2,588,306 $ 975,081 $ 1,418,537 $ 608,935
Investment securities ......................................... 139,273 112,478 81,530 65,335
Federal funds sold ............................................ 35,817 84,463 19,153 35,715
----------- ----------- ----------- -----------
Total interest income ..................................... 2,763,396 1,172,022 1,519,220 709,985
INTEREST EXPENSE
Deposits and borrowings ....................................... 1,366,066 397,420 763,348 257,878
Net interest income ....................................... 1,397,330 774,602 755,872 452,107
PROVISION FOR POSSIBLE LOAN LOSSES ............................... 60,000 450,000 30,000 225,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses ....... 1,337,330 324,602 725,872 227,107
NONINTEREST INCOME
Service fees on deposit accounts .............................. 97,695 42,302 54,986 24,025
Fees on loans sold ............................................ 58,004 30,444 45,895 15,274
Other ......................................................... 58,558 37,426 25,342 12,816
----------- ----------- ----------- -----------
Total non interest income ................................. 214,257 110,172 126,223 52,115
NONINTEREST EXPENSES
Salaries and employee benefits ................................ 906,307 576,364 498,200 324,211
Occupancy ..................................................... 62,450 30,087 30,795 16,103
Furniture and equipment ....................................... 156,358 67,766 89,605 35,189
Advertising and public relations .............................. 24,536 38,855 9,342 21,232
Professional fees ............................................. 38,721 59,865 24,033 44,150
Travel and entertainment ...................................... 57,907 39,415 31,730 24,374
Telephone, postage and supplies ............................... 90,434 52,776 47,549 29,719
Other operating ............................................... 80,474 21,314 42,815 12,316
----------- ----------- ----------- -----------
Total noninterest expenses ................................ 1,417,187 886,442 773,979 507,294
----------- ----------- ----------- -----------
Income (loss) before income taxes ......................... 134,400 (451,668) 78,116 (228,072)
INCOME TAX (BENEFIT) ............................................ 44,096 (154,468) 24,959 (78,472)
----------- ----------- ----------- -----------
Net income (loss) ......................................... $ 90,304 $ (297,200) $ 53,157 $ (149,600)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE .............................. $ .09 $ (0.28) $ .05 $ (0.14)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING .............................. 1,038,898 1,047,987 1,029,807 1,047,987
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SOUTHCOAST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Total
other share-
Common stock Paid-in Retained comprehensive holders'
Shares Amount capital deficit income (loss) equity
------ ------ ------- ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 .............. 1,047,987 $ 5,239,935 $5,280,118 $ (451,147) $ 5,678 $ 10,074,584
Net loss ........................... - - - (297,200) - (297,200)
Other comprehensive income, net
of tax:
Unrealized holding losses on
Securities available for sale .. - - - - (64,205) (64,205)
Comprehensive income (loss) ........ - - - - - (361,405)
Par value conversion upon
exchange of stock ................ 5,280,118 5,280,118
BALANCE, June 30, 1999 ................ 1,047,987 $ 10,520,053 - (748,347) (58,527) $ 9,713,179
============ ============ ========== ============ ============ ============
BALANCE, JANUARY 1, 2000 .............. 1,047,987 10,520,053 (714,147) (85,108) 9,720,798
Net income ......................... - - - 90,304 90,304
Other comprehensive loss, net
of tax:
Unrealized holding losses on
securities available for sale .. - - - - (12,802) (12,802)
Comprehensive income ............... - - - - - 77,502
Repurchase of common stock ......... (45,029) (351,438) - - - (351,438)
------------ ------------ ---------- ------------ ------------ ------------
BALANCE, June 30, 2000, ............... $ 1,002,958 $ 10,168,615 $ - $ (623,843) $ (97,910) $ 9,446,862
============ ============ ========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SOUTHCOAST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended June 30
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES ........................................................... $ 90,304 $ (297,200)
Net income (loss)
Adjustments to reconcile net income (loss) to net
Cash provided by operating activities:
Income tax (benefit) ...................................................... 44,085 (154,468)
Provision for possible loan losses ........................................ 60,000 450,000
Depreciation and amortization ............................................. 150,922 50,794
Increase in other assets .................................................. (479,042) (64,272)
Increase in other liabilities ............................................. 236,661 261,364
------------ ------------
Net cash provided by operating activities ............................. 102,930 246,218
------------ ------------
INVESTING ACTIVITIES
Increase (decrease) in federal funds sold ................................... (1,000,000) 2,160,000
Purchase of investment securities available for sale ........................ (1,097,500) (1,961,130)
Net increase in loans ....................................................... (16,975,524) (16,934,032)
Purchase of corporate stock ................................................. (351,438) -
Purchase of property and equipment .......................................... (1,445,193) (1,965,811)
------------ ------------
Net cash used for investing activities ................................ (20,869,655) (18,700,973)
------------ ------------
FINANCING ACTIVITIES
Increase in Federal Home Loan Bank borrowing ................................ 3,950,000 3,050,000
Net increase in deposits .................................................... 18,650,751 17,479,062
------------ ------------
Net cash provided by financing activities ............................. 22,600,751 20,529,062
------------ ------------
Increase in cash and due from banks ................................... 1,834,026 2,074,307
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD ................................... 1,786,411 1,211,451
------------ ------------
CASH AND DUE FROM BANKS, END OF PERIOD ......................................... $ 3,620,437 $ 3,285,758
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SOUTHCOAST FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310 (b) of
Regulation S-B of the Securities and Exchange Commission. Accordingly they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
NOTE 2 - ORGANIZATION
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"). On April 29, 1999, pursuant to a Plan of
Exchange approved by the shareholders, all of the outstanding shares of capital
stock of the Bank were exchanged for shares of common stock of the Company. The
Company presently engages in no business other than that of owning the Bank and
has no employees. The results for the period ending June 30,1999, reflect the
previous filing of Southcoast Community Bank.
NOTE 3 - NET INCOME (LOSS) PER SHARE
Net income per share is computed on the basis of the weighted average
number of common shares outstanding in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share". The Company does not have
any instruments which are dilutive; therefore, only basic net income per share
of common stock is presented.
In March, 1999, the Company declared an eleven-for-ten stock split of
the Company's common stock. The weighted average number of shares and all other
share data have been restated for all periods presented to reflect this stock
split.
6
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the financial statements and related notes appearing in the Form 10-KSB of
Southcoast Financial Corporation. It will concentrate on the six months of
operations ending June 30, 2000, compared to the same period ending June 30,
1999 and the three months of operations ending June 30, 2000, compared to the
same quarter ending June 30, 1999. Results of operations for the period ending
June 30, 2000 are not necessarily indicative of the results to be attained for
any other period. Statements included in Management's Discussion and Analysis
which are not historical in nature are intended to be, and are hereby identified
as "forward looking statements" for purposes of the safe harbor provided by
section 21E of the Securities Exchange Act of 1934, as amended. The Company
cautions readers that forward looking statements including without limitation,
those relating to the Company's new offices, future business prospects,
revenues, working capital, liquidity, capital needs, interest costs, and income,
are subject to certain risks and uncertainties that could cause actual results
to differ from those indicated in the forward looking statements, due to several
important factors herein identified, among others, and other risks and factors
identified from time to time in the Company's reports filed with the Securities
and Exchange Commission.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on interest
earning assets and the interest paid for funds acquired to support those assets.
Net interest income, the principal source of the Company's earnings, was
$1,397,330 for the six months ended June 30, 2000, compared to $774,602 for the
six months ended June 30, 1999. For the quarter ended June 30, 2000, net
interest income was $755,872 compared to $ 452,107 for the quarter ended June
30, 1999.
Changes that affect net interest income are changes in the average rate earned
on interest earning assets, changes in the average rate paid on interest bearing
liabilities, and changes in the volume of interest earning assets and interest
bearing liabilities.
Average earning assets for the six months ending June 30, 2000 increased to
$56.9 million or 119 percent from the $25.6 million reported for the six months
ending June 30,1999. The increase was mainly attributable to the increase in
loans supported by a $30.8 million increase in interest bearing liabilities
which resulted from favorable economic conditions in the Charleston, South
Carolina market, the opening of the bank's first branch in the third quarter of
1999, its second branch in May 2000 and the Company's marketing efforts.
Average earning assets for the quarter ending June 30, 2000 increased to $61.7
million or 102 percent from the $30.6 million reported for the quarter ended
June 30, 1999. Average loans increased $32.5 million, supported by an increase
in average interest bearing funds of $ 30.3 million.
The following table represents changes in the Company's net interest income
which are primarily a result of changes in volume and rates of its interest
earning assets and interest bearing liabilities. The increase in net interest
income is due to increased volume of earning assets and interest-bearing
liabilities slightly offset by a decrease in the Company's net interest spread.
The net interest spread is the difference between the yield on earning assets
minus the average rate of interest bearing liabilities.
7
<PAGE>
Average Balances, Yields and Rates
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
------------- -------------
Average Income/ Yield/ Average Income/ Yield/
balance expense rate balance expense rate
------- ------- ---- ------- ------- ----
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 1,166,512 $ 35,817 6.14% $ 3,540,561 $ 84,463 4.77%
Investments 4,248,592 139,273 6.56% 3,999,865 112,478 5.62%
----------- ---------- ----------- ----------
Total investments and
federal funds sold 5,415,104 175,090 6.47% 7,540,426 196,941 5.22%
Loans 51,456,065 2,588,306 10.06% 18,440,198 975,081 10.58%
----------- ---------- ----------- ----------
Total earning assets 56,871,169 2,763,396 9.72% 25,980,624 1,172,022 9.02%
----------- ---------- ----------- ----------
Other assets 7,006,597 2,724,396
----------- -----------
Total assets $63,877,766 $28,705,020
=========== ===========
LIABILITIES
Interest bearing deposits $39,040,511 $1,110,743 5.69% $15,194,905 $ 367,122 4.83%
FHLB advances 8,147,977 255,323 6.27% 1,156,291 30,298 5.24%
----------- ---------- ----------- ----------
Total interest bearing liabilities 47,188,488 1,366,066 5.79% 16,351,196 397,420 4.86%
Non-interest bearing liabilities 6,825,756 2,371,612
----------- ---------- ----------- ----------
Total liabilities 54,014,244 1,366,066 5.06% 18,722,808 397,420 4.25%
Equity 9,863,522 9,982,212
----------- ---------- ----------- ----------
Total liabilities and equity $63,877,766 $28,705,020
=========== ===========
Net interest income/margin $1,397,330 4.91% $ 774,602 5.96%
========== ==========
Net interest spread 3.93% 4.16%
</TABLE>
As reflected above, for the six months ended June 30, 2000 the average yield on
earning assets amounted to 9.72 percent, while the average cost of
interest-bearing liabilities was 5.79 percent. For the six months ended June
30,1999 the average yield on earning assets was 9.02 percent and the average
cost of interest-bearing liabilities was 4.86 percent. The increase in the yield
on earning assets is attributable to the increased volume of loans, which gives
the Company a greater return than the other types of earning assets. The
decrease in the yield on average loans from 10.58% to 10.06% is attributable to
the change in mix of higher earning loans as a percent of total loans. The net
interest margin is computed by subtracting interest expense from interest income
and dividing the resulting figure by average interest-earning assets. The net
interest margin for the six months ended June 30, 2000 was 4.91 percent compared
to 5.96 percent for the six months ended June 30, 1999. The decrease in the
net-interest margin is attributable to the increase in interest bearing
liabilities which resulted in an increase in the cost of total liabilities to
support earning assets. The cost of total liabilities was 5.06 percent for the
six months ended June 30, 2000 compared to 4.25 percent for the six months ended
June 30, 1999.
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 2000 June 30, 1999
------------- -------------
Average Income/ Yield/ Average Income/ Yield/
balance expense rate balance expense rate
------- ------- ---- ------- ------- ----
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 1,188,867 $ 19,153 6.44% $ 2,910,713 $ 35,715 4.91%
Investments 5,029,710 81,530 6.48% 4,632,690 65,335 5.64%
----------- ---------- ----------- --------
Total investments and
federal funds sold 6,218,577 100,683 6.47% 7,543,403 101,050 5.36%
Loans 55,471,068 1,418,537 10.23% 23,014,557 608,935 10.58%
----------- ---------- ----------- --------
Total earning assets 61,689,645 1,519,220 9.85% 30,557,960 709,985 9.29%
----------- ---------- ----------- --------
Other assets 7,171,910 3,370,376
----------- -----------
Total assets $68,861,555 $33,928,336
=========== ===========
LIABILITIES
Interest bearing deposits $42,113,253 612,851 5.82% $19,313,760 $233,794 4.84%
FHLB advances 9,348,746 150,497 6.44% 1,873,656 24,084 5.14%
----------- ---------- ----------- --------
Total interest bearing liabilities 51,461,999 763,348 5.93% 21,187,416 257,878 4.87%
Non-interest bearing liabilities 7,520,863 2,839,435
----------- ---------- ----------- --------
Total liabilities 58,982,862 763,348 5.18% 24,026,851 257,878 4.29%
Equity 9,878,693 9,901,485
----------- ---------- ----------- --------
Total liabilities and equity $68,861,555 $33,928,336
=========== ===========
Net interest income/margin $ 755,872 4.90% $452,107 5.92%
========== ========
Net interest spread 3.92% 4.42%
</TABLE>
As reflected above, for the three months ended June 30, 2000 the average yield
on earning assets amounted to 9.85 percent, while the average cost of
interest-bearing liabilities was 5.93 percent. For the three months ended June
30,1999 the average yield on earning assets was 9.29 percent and the average
cost of interest-bearing liabilities was 4.87 percent. The increase in the yield
on earning assets is attributable to the increased volume of loans, which gives
the Company a greater return than the other types of earning assets. The
decrease in the yield on average loans from 10.58% to 10.23% is attributable to
the change in mix of higher earning loans as a percent of total loans. The net
interest margin is computed by subtracting interest expense from interest income
and dividing the resulting figure by average interest-earning assets. The net
interest margin for the three months ended June 30, 2000 was 4.90 percent
compared to 5.92 percent for the three months ended June 30, 1999. The decrease
in the net-interest margin is attributable to the increase in interest bearing
liabilities which resulted in an increase in the cost of total liabilities to
support earning assets. The cost of total liabilities was 5.18 percent for the
three months ended June 30, 2000 compared to 4.29 percent for the three months
ended June 30, 1999.
The following tables represent changes in the Company's net interest income
which are primarily a result of changes in the volume and rates of its
interest-earning assets and interest-bearing liabilities.
9
<PAGE>
Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
For the six months ended June 30 2000
versus six months ended June 30 1999
------------------------------------
Volume Rate Net change
------ ---- ----------
<S> <C> <C> <C>
Federal funds sold ............................................ $ (56,621) $ 7,975 $ (48,646)
Investments ................................................... 6,989 19,806 26,795
----------- ----------- -----------
Total investments and federal funds sold ...................... (49,632) 27,781 (21,851)
Total loans ................................................... 1,746,539 (133,314) 1,613,225
----------- ----------- -----------
Total earning assets .......................................... 1,696,908 (105,534) 1,591,374
Total interest-bearing liabilities ............................ 759,054 209,592 968,646
----------- ----------- -----------
Net interest income ........................................... $ 937,854 $ (315,126) $ 622,728
=========== =========== ===========
</TABLE>
Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
For the three months ended June 30 2000
versus three months ended June 30 1999
--------------------------------------
Volume Rate Net change
------ ---- ----------
<S> <C> <C> <C>
Federal funds sold ............................................... $ (21,136) $ 4,574 $ (16,562)
Investments ...................................................... 5,598 10,597 16,195
--------- --------- ---------
Total investments and federal funds sold ......................... (15,538) 15,171 (367)
Total loans ...................................................... 858,475 (48,873) 809,602
--------- --------- ---------
Total earning assets ............................................. 842,937 (33,702) 809,235
Total interest-bearing liabilities ............................... 371,929 133,541 505,470
--------- --------- ---------
Net interest income .............................................. $ 471,008 $(167,243) $ 303,765
========= ========= =========
</TABLE>
RESULTS OF OPERATIONS
The Company's net income for the six months ended June 30, 2000 was $90,304 or
$.09 per share, compared to a loss of $297,200 or $.28 per share, for the six
months ended June 30,1999. The amount of the Company's provision for loan losses
for the six month was $60,000, which was substantially less than the $450,000
provided in the first half of 1999. Since opening the bank in July 1998,
management has sought to have an allowance for loan losses that was adequate to
cover the level of loss that management believed to be inherent in the portfolio
as a whole taking into account the relative size of the allowance and the size
of the Company's largest loans. In the third quarter of 1999, management
concluded that the allowance for loan losses was large enough to allow for the
risk of loss of one or two of the Company's largest loans while maintaining a
reserve allowance for the loan portfolio as a whole. Consequently, the Company
started in third quarter of 1999 making quarterly provisions that were less than
in prior quarters. As of June 30, 2000, the reserve for loan losses as a percent
of total loans was 1.47%.
10
<PAGE>
Non-interest income for the six months ended June 30, 2000 was $214,257,
compared to $110,172 for the six months ended June 30, 1999. Fees generated from
the increase in deposit accounts and fees on loans sold were the main reason for
the 94% increase in non-interest income.
Non-interest expenses for the six months ended June 30, 2000 were $1,417,187,
compared to $886,442 for the six months ended June 30,1999. The increase of
$530,745 is mainly attributable to increases in salaries and benefits, occupancy
cost and furniture and equipment expenses. These increases primarily relate to
expenses associated with the preparation of and opening of the bank's first two
branches and increase in administrative staff to support the growth. The West
Ashley branch opened in September 1999 and the Moncks Corner branch opened in
May 2000.
The Company's net income for the quarter ending June 30, 2000 was $53,157 or $
.05 per share, compared to a loss of $ 149,600 or $ .14 per share, for the three
months ending June 30, 1999. The provision for loan losses recorded in the
quarter ending June 30, 2000 was $30,000 compared to $ 225,000 for the quarter
ending June 30, 1999.
Non-interest income for the three months ended June 30, 2000 was $126,223
compared to $52,115 for the three months ended June 30, 1999. Increased deposit
accounts, resulting in increased fees on deposits and increased fees on loans
sold account for the major portion of the increase.
Non-interest expenses for the three months ended June 30, 2000 were $773,979,
compared to $ 507,294 for the three months ended June 30, 1999. The increase of
$266,685 is mainly attributable to increases in salaries and benefits, occupancy
cost and furniture and equipment expenses. These increases primarily relate to
the opening of the two new branches and the related cost to support the bank's
growth.
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of liabilities.
The Company manages both assets and liabilities to achieve appropriate levels of
liquidity. Cash and short-term investments are the Company's primary sources of
asset liquidity. These funds provide a cushion against short-term fluctuations
in cash flow from both deposits and loans. The investment portfolio is the
Company's principal source of secondary asset liquidity. However, the
availability of this source of funds is influenced by market conditions.
Individual and commercial deposits and borrowings from the Federal Home Loan
Bank are the Company's primary source of funds for credit activities. The
Company also has a $3 million line of credit with the Bankers Bank of Atlanta.
Management believes that the Company's liquidity sources are adequate to meet
its operating needs.
LOANS
Commercial financial and agricultural loans made up 30 percent of the total loan
portfolio as of June 30, 2000, totaling $18.0 million. Loans secured by real
estate for construction and land development totaled $2.4 million or 4 percent
of the total loan portfolio while all other loans secured by real estate totaled
$38.1 million or 62 percent of the total loan portfolio as of June 30, 2000.
Installment loans and other consumer loans to individuals comprised $2.5 million
or 4 percent of the total loan portfolio. The allowance for loan losses was 1.47
percent of loans as of June 30, 2000 compared to 1.90 percent as of December 31,
1999. In management's opinion, the allowance for loan losses is adequate. At
June 30, the Company had no loans that were 90 days or more past due or
non-accruing.
11
<PAGE>
CAPITAL RESOURCES
The capital base for the Company decreased by $273,936 for the six months ending
June 30, 2000, due to the $351,438 paid out for the repurchase of 45,029 shares
of stock, offset by the operating income and unrealized losses on available for
sale securities. On March 17, 2000, the Company announced plans to repurchase up
to 100,000 shares of its common stock. Any repurchase will have the effect of
reducing the Company's equity capital by the amount paid. The Company's equity
to asset ratio was 12.1 percent as of June 2000 compared to 17.6 percent as of
December 31, 1999.
The Federal Deposit Insurance Corporation has established risk-based capital
requirements for banks. As of June 30, 2000, the Company's subsidiary bank
exceeds the capital requirement levels that are to be maintained.
Capital Ratios
<TABLE>
<CAPTION>
Well Capitalized Adequately Capitalized
Actual Requirement Requirement
------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted
assets .................................... $10,549 20.57% $ 5,128 10.00% $ 4,103 8.00%
Tier 1 capital to risk weighted
assets .................................... 9,905 19.31 3,077 6.00 2,051 4.00
Tier 1 capital to average assets ............. 9,905 14.38 3,443 5.00 2,754 4.00
</TABLE>
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company are primarily monetary in nature. Therefore,
interest rates have a more significant impact on the Company's performance than
do the effects of changes in the general rate of inflation and changes in
prices. In addition, interest rates do not necessarily move in the same
magnitude as the prices of goods and services. Management seeks to manage the
relationships between interest sensitive assets and liabilities in order to
protect against wide rate fluctuations, including those resulting from
inflation.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its annual meeting of shareholders on May 11, 2000.
(b) and (c) The following persons were elected as directors with the votes
shown:
NAME FOR WITHHOLD
---- --- --------
William A. Coates .......................... 945,398 4,159
Thomas E. Hamer, Sr ........................ 945,398 4,159
Paul D. Hollen, III ........................ 945,398 4,159
L. Wayne Pearson ........................... 945,398 4,159
Norman T. Russell .......................... 945,398 4,159
Robert M. Scott ............................ 945,398 4,159
James H. Sexton, Jr ........................ 945,398 4,159
James P. Smith ............................. 945,398 4,159
The following other matters were voted on as shown:
Approval of the Adoption of the Employee Stock Purchase Plan
FOR 398,056 shares
AGAINST 41,049 shares
ABSTAIN 3,030 shares
Approval of the 1999 Stock Option Plan
FOR 397,896 shares
AGAINST 42,259 shares
ABSTAIN 1,980 shares
13
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K.
-------
a) Exhibits
Exhibit No.
From Item 601 of
Regulation S-B Description
---------------------------- ------------------------------
10.1 Southcoast Financial Corporation
Employee Stock Purchase Plan
(incorporated by reference to appendix
to proxy statement filed in connection
with May 11, 2000 Annual Meeting of
Shareholders)
10.2 Southcoast Financial Corporation 1999
Stock Option Plan (incorporated by
reference to appendix to proxy statement
filed in connection with May 11, 2000
Annual Meeting of Shareholders)
27 Financial Data Schedule
b) Reports on form 8-K. None.
-------------------
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Southcoast Financial Corporation
Registrant
Date: August 14, 2000 By: s/L. Wayne Pearson
---------------------------------------------
L. Wayne Pearson
President and Chief Executive Officer
Date: August 14, 2000 By: s/ Robert M. Scott
---------------------------------------------
Robert M. Scott
Executive Vice President and Chief
Financial Officer
14
<PAGE>
Exhibit Index
Exhibit No.
From Item 601 of
Regulation S-B Description
---------------------------- ------------------------------
10.1 Southcoast Financial Corporation
Employee Stock Purchase Plan
(incorporated by reference to appendix
to proxy statement filed in connection
with May 11, 2000 Annual Meeting of
Shareholders)
10.2 Southcoast Financial Corporation 1999
Stock Option Plan (incorporated by
reference to appendix to proxy statement
filed in connection with May 11, 2000
Annual Meeting of Shareholders)
27 Financial Data Schedule
