SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 File Number 0-25933
SOUTHCOAST FINANCIAL CORPORATION
(Name of Small Business Issuer in its Charter)
South Carolina 57-1079460
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
530 Johnnie Dodds Boulevard, Mt. Pleasant, South Carolina 29464
(Address of Principal Executive Office, Zip Code)
Issuer's Telephone Number, Including Area Code: (843) 884-0504
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $3,380,945.
The aggregate market value of the Common Stock held by non-affiliates
on February 29, 2000, was approximately $6,070,000. As of February 29, 2000,
there were 1,047,987 shares of the Registrant's Common Stock, no par value,
outstanding. For purposes of the foregoing calculation only, all directors and
executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders - Part III
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
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FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements with respect to the
financial condition, results of operations, and business of the Company and the
Bank. These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) The Company and its subsidiary bank may not be able
to operate profitably; (2) Competitive pressure in the banking industry may
increase significantly; (3) Costs or difficulties related to operation of the
Bank may be greater than expected; (4) Changes in the interest rate environment
may reduce margins; (5) General economic conditions, either nationally or
regionally, may be less favorable than expected, resulting in, among other
things, a deterioration in credit demand and quality; (6) Changes may occur in
the regulatory environment; (7) Changes may occur in business conditions and/or
inflation; and (8) Changes may occur in the securities markets. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Such forward-looking
statements may be identified, without limitation, by the use of the words
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectations, beliefs or projections will result or be achieved or
accomplished.
PART I
Item 1. Description of Business.
General
Southcoast Financial Corporation (the "Company") is a South Carolina
corporation organized in 1999 under the laws of South Carolina 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 and the Company became the owner of all of the
outstanding capital stock of the Bank. The Company presently engages in no
business other than that of owning the Bank and has no employees.
The Bank is a South Carolina state bank incorporated in June, 1998,
which commenced operations as a commercial bank in July, 1998. The Bank operates
from its offices in Mt. Pleasant and Charleston, South Carolina. The main office
is located at 530 Johnnie Dodds Boulevard, in Mt. Pleasant, South Carolina, and
the Charleston office is located at 802 Savannah Highway in Charleston, South
Carolina.
The Bank offers a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. Most of the Bank's deposits are attracted
from individuals and small businesses. The Bank does not offer trust services.
The Bank offers secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial, consumer and
residential purposes. Consumer loans include: car loans, home equity improvement
loans (secured by first and second mortgages), personal expenditure loans,
education loans, overdraft lines of credit, and the like. Commercial loans
include short term unsecured loans, short and intermediate term real estate
mortgage loans, loans secured by listed stocks, loans secured by equipment
inventory, accounts receivable, and the like. Management believes that the
credit staff possesses knowledge of the community and lending skills sufficient
to enable the Bank to maintain a sufficient volume of high quality loans.
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Management of the Bank believes that the loan portfolio is adequately
diversified. There are no significant concentrations of loans in any particular
individuals, industries or groups of related individuals or industries and the
Bank has no foreign loans. The loan portfolio consists primarily of mortgage
loans and extensions of credit to businesses and individuals in its service area
within Charleston County, South Carolina. The economy of this area is
diversified and does not depend on any one industry or group of related
industries. Management has established loan policies and practices that include
set limitations on loan-to-collateral value for different types of collateral,
requirements for appraisals, obtaining and maintaining current credit and
financial information on borrowers, and credit approvals.
Other services offered by the Bank include residential mortgage loan
origination services, safe deposit boxes, night depository service, VISA(R) and
MasterCard(R) charge cards, tax deposits, and travelers checks, and twenty-four
hour automated teller service is planned. The ATM will be part of the Intercept
network.
At March 1, 2000, the Bank employed 32 persons full-time. Management of
the Bank believes that its employee relations are excellent.
Competition
Competition between commercial banks and thrift institutions (savings
and loan associations) and credit unions has intensified significantly as a
result of the elimination of many previous distinctions between the various
types of financial institutions, and the expanded powers and increased activity
of thrift institutions in areas of banking that previously had been the sole
domain of commercial banks. Recent legislation, together with other regulatory
changes by the primary regulators of the various financial institutions, has
resulted in the elimination of many distinctions between a commercial bank and
thrift institution. Consequently, competition among financial institutions of
all types is virtually unlimited with respect to legal authority to provide most
financial services.
The Bank competes in the South Carolina county of Charleston, for which
the most recent market share data available is as of June 30, 1999. At that
time, 15 banks, savings and loans, and savings banks with 105 branch locations
competed in Charleston County for aggregate deposits of approximately $3.16
billion. The Bank's share of that market was 0.86%.
Banks generally compete with other financial institutions through the
savings products and services offered, the pricing of services, the level of
service provided, the convenience and availability of services, and the degree
of expertise and personal concern with which services are offered. In the
conduct of certain areas of its business, the Bank competes with commercial
banks, credit unions, consumer finance companies, insurance companies, money
market mutual funds and other financial institutions, some of which are not
subject to the same degree of regulation and restriction imposed upon the Bank.
Many of these competitors have substantially greater resources and lending
limits than the Bank and offer certain services, such as international banking
services and trust services, that the Bank does not provide. Moreover, most of
these competitors have more numerous branch offices located throughout their
market areas, a competitive advantage that the Bank does not have to the same
degree.
The banking industry is significantly affected by prevailing economic
conditions as well as by government policies and regulations concerning, among
other things, monetary and fiscal affairs, the housing industry and financial
institutions. Deposits at banks are influenced by a number of economic factors,
including interest rates, competing instruments, levels of personal income and
savings, and the extent to which interest on retirement savings accounts is tax
deferred. Lending activities are also influenced by a number of economic
factors, including demand for and supply of housing, conditions in the
construction industry, and availability of funds. Primary sources of funds for
lending activities include savings deposits, income from investments, loan
principal repayments, and proceeds from sales of loans to conventional
participating lenders.
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Effect of Government Regulation
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Company and the
Bank.
General
As a bank holding company under the Bank Holding Company Act ("BHCA"),
the Company obtained the approval of the Board of Governors of the Federal
Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the
regulations of the Federal Reserve. Under the BHCA, the Company's activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity which the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The Company may engage in a broader range of activities if it becomes a
"financial holding company" pursuant to the Gramm-Leach-Bliley Act, which is
described below under the caption "Recent Legislation." The BHCA prohibits the
Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or from
merging or consolidating with another bank holding company without prior
approval of the Federal Reserve. Additionally, the BHCA prohibits the Company
from engaging in or from acquiring ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve to be so closely related to
banking as to be properly incident thereto. The BHCA generally does not place
territorial restrictions on the activities of such non-banking related
activities.
The Company is subject to regulation and supervision by the South
Carolina State Board of Financial Institutions (the "State Board"). A South
Carolina bank holding company must provide the State Board with information with
respect to the financial condition, operations, management and inter-company
relationships of the holding company and its subsidiaries. The State Board also
may require such other information as is necessary to keep itself informed about
whether the provisions of South Carolina law and the regulations and orders
issued thereunder by the State Board have been complied with, and the State
Board may examine any bank holding company and its subsidiaries.
Obligations of the Company to its Subsidiary Bank
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
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The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of the Bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies and State Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC have adopted risk-based and leverage capital adequacy guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks.
Failure to meet capital guidelines could subject the Bank to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.
The Company and the Bank exceeded all applicable capital requirements
by a wide margin at December 31, 1999.
Payment of Dividends
The Company is a legal entity separate and distinct from its bank
subsidiary. Most of the revenues of the Company are expected to result from
dividends paid to the Company by the Bank. There are statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by the Company to its shareholders. It is not anticipated that the Company
will pay cash dividends in the near future.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions among the Company and its
affiliates, including the amount of the Bank's loans to or investments in
nonbank affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. Further, a bank holding company and its affiliates
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Currently, the assessments imposed
on all FDIC deposits for deposit insurance have an effective rate ranging from 0
to 27 basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. However, because legislation
enacted in 1996 requires that both SAIF-insured and BIF-insured deposits pay a
pro rata portion of the interest due on the obligations issued by the Financing
Corporation ("FICO"), the FDIC is currently assessing BIF-insured deposits an
additional 1.26 basis points per $100 of deposits, and SAIF-insured deposits an
additional 6.30 basis points per $100 of deposits, to cover those obligations.
The FICO assessment will continue to be adjusted quarterly to reflect changes in
the assessment bases of the respective funds based on quarterly Call Report and
Thrift Financial Report submissions.
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Regulation of the Bank
The Bank is subject to examination by the State Board. In addition, the
Bank is subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer credit and
laws relating to branch banking. The Bank's loan operations are also subject to
certain federal consumer credit laws and regulations promulgated thereunder,
including, but not limited to: the federal Truth-In-Lending Act, governing
disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure
Act, requiring financial institutions to provide certain information concerning
their mortgage lending; the Equal Credit Opportunity Act and the Fair Housing
Act, prohibiting discrimination on the basis of certain prohibited factors in
extending credit; the Fair Credit Reporting Act, governing the use and provision
of information to credit reporting agencies; the Bank Secrecy Act, dealing with,
among other things, the reporting of certain currency transactions; and the Fair
Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies. The deposit operations of the Bank are also
subject to the Truth in Savings Act, requiring certain disclosures about rates
paid on savings accounts; the Expedited Funds Availability Act, which deals with
disclosure of the availability of funds deposited in accounts and the collection
and return of checks by banks; the Right to Financial Privacy Act, which imposes
a duty to maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Bank is also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
FDIA: restricting payment of capital distributions and management fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital restoration plan; restricting the growth of the bank's
assets and requiring prior approval of certain expansion proposals. A bank that
is "significantly undercapitalized" is also subject to restrictions on
compensation paid to senior management of the bank, and a bank that is
"critically undercapitalized" is further subject to restrictions on the
activities of the bank and restrictions on payments of subordinated debt of the
bank. The purpose of these provisions is to require banks with less than
adequate capital to act quickly to restore their capital and to have the FDIC
move promptly to take over banks that are unwilling or unable to take such
steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payment of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph. Management does not
believe that these regulations will have a material adverse effect on the
operations of the Bank.
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Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 the Company and any other adequately capitalized bank holding company
located in South Carolina can acquire a bank located in any other state, and a
bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. Unless prohibited by state law, adequately capitalized and
managed bank holding companies are permitted to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate branches within a state continue to be subject to applicable state
branching laws. South Carolina law was amended, effective July 1, 1996, to
permit such interstate branching but not de novo branching by an out-of-state
bank.
Recent Legislation
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act,
which makes it easier for affiliations between banks, securities firms and
insurance companies to take place. The Act removes Depression-era barriers that
had separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information. Most of the provisions of the Act require the
applicable regulators to adopt regulations in order to implement these
provisions.
Under provisions of the new legislation, which are effective March 11,
2000, banks, securities firms and insurance companies are able to structure new
affiliations through a holding company structure or through a financial
subsidiary. The legislation creates a new type of bank holding company called a
"financial holding company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial activities," which are activities that are (1) financial in nature;
(2) incidental to activities that are financial in nature; or (3) complimentary
to a financial activity and that do not impose a safety and soundness risk.
Significantly, the permitted financial activities for financial holding
companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
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Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions. The privacy provisions of the Act will not go
into effect until after adoption of implementing regulations by various federal
agencies.
The Company anticipates that the Act and the regulations which are to
be adopted pursuant to the Act will be likely to create new opportunities for it
to offer expanded services to customers in the future, though the Company has
not yet determined what the nature of the expanded services might be or when the
Company might find it feasible to offer them. The Company further expects that
the Act will increase competition from larger financial institutions that are
currently more capable than the Company of taking advantage of the opportunity
to provide a broader range of services. However, the Company continues to
believe that its commitment to providing high quality, personalized service to
customers will permit it to remain competitive in its market area.
Legislative Proposals
New proposed legislation which could significantly affect the business
of banking has been introduced or may be introduced in Congress from time to
time. Management of the Bank cannot predict the future course of such
legislative proposals or their impact on the Company and the Bank should they be
adopted.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic conditions generally, both domestic and foreign,
and also to the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve. The Federal Reserve regulates the
supply of money through various means, including open market dealings in United
States government securities, the discount rate at which banks may borrow from
the Federal Reserve, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company and the
Bank cannot be predicted.
Item 2. Description of Property.
The Company owns the real property at 530 Johnnie Dodds Boulevard, Mt.
Pleasant, South Carolina, where its main offices are located. Another piece of
property owned by the Company in Mt. Pleasant, South Carolina, is used as an
administrative center. The Company also owns properties in Charleston County,
South Carolina, where its branch office is located, and Berkeley County, South
Carolina, which it is renovating for an additional branch. All properties are
believed to be well suited for the Company's needs.
Item 3. Legal Proceedings.
The Company is from time to time a party to various legal proceedings
arising in the ordinary course of business, but management of the Bank is not
aware of any pending or threatened litigation or unasserted claims or
assessments that are expected to result in losses, if any, that would be
material to the Company's business and operations.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
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PART II
Item 5. Market for Common Equity and Related Shareholder Matters.
The common stock of the Company is traded over-the-counter. Quotations
of bid and ask information are provided electronically by the National
Association of Securities Dealers, Inc.'s Over The Counter Bulletin Board. The
reported high and low bid prices for each quarter of 1999 and the last two
quarters of 1998 (the stock began trading in July, 1998) are shown in the
following table. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Low High
--- ----
1999
----
Fourth Quarter $7.00 $ 9.00
Third Quarter 8.00 10.25
Second Quarter 9.00 10.50
First Quarter* 7.50 9.12
1998
----
Fourth Quarter* 7.75 9.50
Third Quarter* 8.12 12.25
___________________
*Amounts adjusted to reflect an 11 for 10 stock split in the form of a 10% stock
dividend declared March 3, 1999.
As of February 28, 2000, there were approximately 986 holders of record
of the Company's common stock, excluding individual participants in security
position listings.
The Company has never paid any cash dividends, and to support its
continued capital growth, does not expect to pay cash dividends in the near
future. The dividend policy of the Company is subject to the discretion of the
Board of Directors and depends upon a number of factors, including earnings,
financial conditions, cash needs and general business conditions, as well as
applicable regulatory considerations. At present, the Company's only source of
funds with which it could pay dividends is dividend payments from the Bank.
South Carolina banking regulations restrict the amount of cash dividends that
can be paid to shareholders, and all of the Bank's cash dividends to
shareholders are subject to the prior approval of the South Carolina
Commissioner of Banking.
Item 6. Management's Discussion and Analysis or Plan of Operation.
This discussion is intended to assist in understanding the financial
condition and results of operations of the Company, and should be read in
conjunction with the financial statements and related notes contained elsewhere
herein. Because the Bank is responsible for all of the Company's operations, the
discussion will refer to the results of operations of the Bank. The Bank began
operations in the second half of 1998. Accordingly, comparisons of amounts for
1998 to 1999 may be of very limited usefulness and should not be viewed as an
indicator of future change. Per share amounts have been adjusted to reflect an
11 for 10 stock split in the form of a 10% stock dividend declared March 3,
1999.
Earnings Performance
The Bank had a net loss from operations for the year ended December 31,
1999 of $263,000, or $0.25 per share, compared to a net loss for the year ended
December 31, 1998 of $451,147 or $.43 per common share. The Bank had net
interest income (the difference between interest earned on interest earning
assets and interest paid on interest bearing liabilities) of $1,889,280 for 1999
as compared to $408,096 for 1998 The Bank also had other operating income
(principally service charges, fees and commissions) of $232,452 in 1999 and
$20,090 in 1998. The Bank provided $510,000 and $325,000 to its reserve for loan
losses in 1999 and 1998, respectively, and had other operating expenses
(principally salaries and benefits and occupancy and equipment expenses) of
$2,011,857 in 1999 and $786,741 in 1998.
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Net Interest Income
Net interest income is the amount of interest earned on interest
earning assets (loans, investment securities, time deposits in other banks and
federal funds sold), less the interest expenses incurred on interest bearing
liabilities (interest bearing deposits and borrowed money), and is the principal
source of the Bank's earnings. Net interest income is affected by the level of
interest rates, volume and mix of interest earning assets and interest bearing
liabilities and the relative funding of these assets.
During the year ended December 31, 1998, net interest income was
$408,000. For the year ended December 31, 1999, net interest income was
$1,889,000. This increase was primarily attributable to an increase in volume as
average interest earning assets increased to $34,417,000 in 1999 from $6,104,000
in 1998. The average yield on interest earning assets increased from 8.11% to
9.15% from 1998 to 1999, while the average cost of interest bearing liabilities
increased from 4.79% to 5.03%. The net yield on average interest earning assets
decreased from 6.68% in 1998 to 5.49% in 1999.
The table "Average Balances, Yields and Rates," provides a detailed
analysis of the effective yields and rates on the categories of interest earning
assets and interest bearing liabilities for the years ended December 31, 1999
and 1998.
Average Balances, Yields and Rates
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31 Year Ended December 31,
---------------------- -----------------------
1999 1998
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances(1) Expense Rates Balances(1) Expense Rates
----------- ------- ----- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $ 2,799 $ 137 4.91% $3,675 $ 194 5.28%
Investment securities 4,211 259 6.15% 524 30 5.73%
Loans, net 27,407 2,752 10.01% 1,905 271 14.23%
------- ------ ------ -----
Total interest earning assets 34,417 3,148 9.15% 6,104 495 8.11%
Other assets 3,883 627
------- ------
Total assets $38,300 $6,731
======= ======
Liabilities and shareholders' equity
Interest bearing deposits $21,996 1,110 5.05% $1,812 $ 86 4.75%
FHLB advances 3,029 149 4.91% 3 1 4.85%
------- ------ ------ ----
Total interest bearing liabilities 25,025 1,259 5.03% 1,815 87 4.79%
Noninterest bearing demand deposits 3,305 256
Other liabilities 82 28
------- ------
Total liabilities 28,412 2,099
Shareholders' equity 9,888 4,632
------- ------
Total liabilities and shareholders' equity $38,300 $6,731
======= ======
Interest rate spread (2) 4.12% 3.32%
Net interest income and net yield $1,889 5.49% $ 408 6.68%
on earning assets (3)
Interest free funds supporting earning assets (4) $9,392 $4,289
</TABLE>
(1) Average balances are computed on a daily basis.
(2) Total interest earning assets yield less the total interest bearing
liabilities rate.
(3) Net interest income divided by total interest earning assets.
(4) Total interest earning assets less total interest bearing liabilities.
9
<PAGE>
Rate/Volume Analysis of Net Interest Income
The effect of changes in average balances (volume) and rates on
interest income, interest expense and net interest income, for the periods
indicated, is shown below. The effect of a change in average balance has been
determined by applying the average rate in the earlier period to the change in
average balance in the later period, as compared with the earlier period. The
effect of a change in the average rate has been determined by applying the
average balance in the earlier period to the change in the average rate in the
later period, as compared with the earlier period. Changes resulting from
average balance/rate variances are included in changes resulting from volume.
Year Ended December 31,
1999 compared to 1998
Increase (Decrease) Due to
------------------------------------
(Dollars in Thousands)
Volume Rate Change
------ ---- ------
Interest earned on:
Federal Funds Sold ................. $ (46) $ (11) $ (57)
Investments ........................ 211 18 229
Net Loans .......................... 3,628 (1,147) 2,481
------- ------- -------
Total Interest Income ................ 3,793 (1,140) 2,653
------- ------- -------
Interest paid on:
Deposits ........................... 958 60 1,024
FHLB Advances ...................... 147 1 148
------- ------- -------
Total Interest Expense ............... 1,105 67 1,172
------- ------- -------
Change in Net Interest Income ........ $ 2,688 $(1,207) $ 1,481
======= ======= =======
During 2000, management expects that interest rates will not radically
change. Therefore, any improvements in net interest income for 2000 are expected
to be largely the result of increases in volume and changes in the mix of
interest earning assets and liabilities. Management expects to continue to use
aggressive marketing strategies to increase the Bank's market share for both
deposits and quality loans within its service area in Charleston, South
Carolina. These strategies involve offering attractive interest rates and
continuing the Bank's commitment to providing outstanding customer service.
Interest Rate Sensitivity
Interest rate sensitivity management is concerned with the timing and
magnitude of repricing of assets compared to liabilities and is an important
part of asset/liability management. The objective of interest rate sensitivity
management is to generate stable growth in net interest income, and to control
the risks associated with interest rate movement. Management constantly reviews
interest rate risk exposure and the expected interest rate environment so that
adjustments in interest rate sensitivity can be timely made.
The table, "Interest Sensitivity Analysis", indicates that, on a
cumulative basis through twelve months, rate sensitive liabilities exceeded rate
sensitive assets, resulting in an asset sensitive position at December 31, 1999
of $3.19 million for a cumulative gap ratio of 0.89%. When interest sensitive
liabilities exceed interest sensitive assets for a specific repricing "horizon",
a negative interest sensitivity gap results. The gap is positive when interest
sensitive assets exceed interest sensitive liabilities. For a bank with a
negative gap, such as the Bank, rising interest rates would be expected to have
a negative effect on net interest income and falling rates would be expected to
have the opposite effect.
The table below reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amounts of fixed rate loans are reflected at the earlier of their
contractual maturity date or the date at which the loans may be repriced
contractually. Time deposits in other banks are reflected in the deposits'
maturity dates. Repurchase agreements and other borrowed funds are reflected in
the earliest contractual repricing interval due to the immediately available
nature of these funds. Interest bearing liabilities with no contractual
10
<PAGE>
maturity, such as interest bearing transaction accounts and savings deposits,
are reflected in the earliest repricing interval due to contractual arrangements
which give management the opportunity to vary the rates paid on these deposits
within a thirty day or shorter period. However, the Bank is under no obligation
to vary the rates paid on those deposits within any given period. Fixed rate
time deposits are reflected at their contractual maturity dates. Fixed rate
advances are reflected at their contractual maturity dates, and variable rate
advances are reflected in the earliest repricing interval since they were
borrowed under the daily rate credit option, and reprice daily.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Within 4-12 Over 1-5 Over 5
3 Months Months Years Years Total
-------- ------ -------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets
Time deposits in other banks .................. $ 262 $ 0 $ 0 $ 0 $ 262
Federal funds sold ........................... 1,310 0 0 0 1,310
Other investments ............................. 0 0 2,179 942 3,121
Loans:
Fixed rate ................................. 1,869 3,007 6,603 2,693 20,172
Variable rate .............................. 9,882 10,735 3,044 155 23,816
------- ------- ------- ------ -------
Total interest earning assets ............ $13,323 $13,742 $11,826 $9,790 $48,681
======= ======= ======= ====== =======
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts ...... 0 0 0 1,194 1,194
Savings .................................... 0 0 0 5,294 5,294
Time deposits $100M and over ............... 5,910 4,044 108 0 10,062
Other time deposits ........................ 6,654 9,149 225 0 16,028
------- ------- ------- ------ -------
Total interest bearing deposits .......... 12,564 13,193 333 6,488 32,578
FHLB borrowing ............................. 2,500 2,000 2,400 0 6,900
------- ------- ------- ------ -------
Total interest bearing liabilities ....... $15,064 $15,193 $2,733 $6,488 $39,478
======= ======= ====== ====== =======
Interest sensitivity gap ......................... (1,741) (1,451) 9,093 3,302
Cumulative interest sensitivity gap .............. (1,741) (3,192) 5,901 9,203
Gap ratio ........................................ 0.88% 0.90% 4.33% 1.51%
Cumulative gap ratio ............................. 0.88% 0.89% 1.18% 1.23%
</TABLE>
Provision for Loan Losses
The allowance for loan losses, established through charges to expense
in the form of a provision for loan losses, allows for possible loan losses in
the Bank's loan portfolio. Loan losses or recoveries are charged or credited
directly to the allowance. The level of the allowance for loan losses is based
on management's judgment as to the amount required to maintain an allowance
adequate enough to provide for future losses. The Bank provided $510,000 and
$325,000 to the allowance during the years ended December 31, 1999 and 1998,
respectively.
Other Income
The Bank had other income of $232,452 in 1999 compared to $20,090 in
1998. Other income consisted primarily of service charges on deposit accounts
and fees on loans sold.
Other Expenses
Other expenses, which consist primarily of salaries and employee
benefits, net occupancy, and data processing expenses, totaled $2,011,857 for
the year ended December 31, 1999 as compared to $786,741 for the year ended
December 31, 1998. The increase in expenses was due to increases in staff and
facilities needed to support the increase in assets.
11
<PAGE>
Income Taxes
During the year ended December 31, 1999, the Bank recorded a tax
benefit of $137,125 compared to $232,408 for the year ended December 31, 1998.
The Bank accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes." Certain items of income and expense (principally provision for loan
losses, depreciation, and pre-opening expenses) are included in one reporting
period for financial accounting purposes and another for income tax purposes.
Investment Portfolio
As of December 31, 1999, the Bank's investment portfolio comprised
approximately 5.6% of its total assets. The following table summarizes the
carrying value amounts of securities held by the Bank at December 31, 1999 and
at December 31, 1998. Available-for-sale securities are stated at estimated fair
value. The Bank had no held to maturity securities at December 31, 1999 or 1998.
Securities Portfolio Composition
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------------- ---------------------------------
Net Net
Unrealized Unrealized
Book Holding Fair Book Holding Fair
Value Gain/(Loss) Value Value Gain/(Loss) Value
----- ----------- ----- ----- ----------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U. S. Agency obligations $3,250 $(129) $ 3,121 $ 2,724 $ 9 $ 2,733
------ ----- ------- ------- --- -------
$3,250 $(129) $ 3,121 $ 2,724 $ 9 $ 2,733
====== ===== ======= ======= === =======
</TABLE>
The following table presents maturities and weighted average yields of
debt securities available for sale at December 31, 1999 stated at estimated fair
value.
Securities Portfolio Maturities and Yields
December 31, 1999
-----------------
Fair
Value Yield
----- -----
(Dollars in thousands)
U. S. Agency obligations
Due from one to five years $2,179 6.11%
Due from five to ten years 942 6.37%
------
3,121 6.19%
Total
Due from one to five years 2,179 6.11%
Due from five to ten years 942 6.37%
------
Total $3,121 6.19%
======
12
<PAGE>
Loan Portfolio
Management believes the loan portfolio is adequately diversified. There
are no significant concentrations of loans in any particular individuals or
industry or group of related individuals or industries, and there are no foreign
loans.
The amount of loans outstanding at December 31, 1999 and 1998, are
shown in the following table according to type of loan:
Loan Portfolio Composition
December 31,
------------
1999 1998
---- ----
(Dollars in thousands)
Commercial .............................. $ 7,925 $ 4,426
Real estate - Construction .............. 3,704 405
Real estate - Mortgage .................. 30,267 5,876
Consumer ................................ 2,092 440
-------- --------
Total loans ......................... 43,988 11,147
Less allowance for loan losses .......... (835) (325)
-------- --------
$ 43,153 $ 10,822
======== ========
A certain degree of risk taking is inherent in the extension of credit.
Management has established loan and credit policies designed to control both the
types and amounts of risks assumed and to ultimately minimize losses. Such
policies include limitations on loan-to-collateral values for various types of
collateral, requirements for appraisals of real estate collateral, problem loan
management practices and collection procedures, and nonaccrual and charge-off
guidelines.
Commercial loans primarily represent loans made to businesses, and may
be made on either a secured or an unsecured basis. When taken, collateral
consists of liens on receivables, equipment, inventories, furniture and
fixtures. Unsecured business loans are generally short-term with emphasis on
repayment strengths and low debt to worth ratios. Commercial lending involves
significant risk because repayment usually depends on the cash flows generated
by a borrower's business, and the debt service capacity of a business can
deteriorate because of downturns in national and local economic conditions. To
control risk, initial and continuing financial analysis of a borrower's
financial information is required.
Real estate construction loans generally consist of financing the
construction of 1-4 family dwellings and some nonfarm, nonresidential real
estate. Usually, loan to cost ratios are limited to 80% and permanent financing
commitments are required prior to the advancement of loan proceeds.
Loans secured by real estate mortgages comprised nearly 68% of the
Bank's loan portfolio at December 31, 1999. Residential real estate loans
consist mainly of first and second mortgages on single family homes, with some
multifamily loans. Loan-to-value ratios for these instruments are generally
limited to 80%. Nonfarm, nonresidential loans are secured by business and
commercial properties with loan-to-value ratios generally limited to 80%. The
repayment of both residential and business real estate loans is dependent
primarily on the income and cash flows of the borrowers, with the real estate
serving as a secondary or liquidation source of repayment.
13
<PAGE>
Maturity and Interest Sensitivity Distribution of Loans
The following table sets forth the maturity distribution of the
Company's loans, by type, at December 31, 1999, as well as the type of interest
requirement on such loans.
<TABLE>
<CAPTION>
December 31, 1999
One Year One to Five Years
Or Less Five Years Or More Total
------- ---------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and industrial $ 2,158 $ 5,111 $ 656 $ 7,925
Real estate - construction 1,174 249 2,281 3,704
Real estate - mortgage 2,061 12,543 15,663 30,267
Consumer installment 549 1,239 304 2,092
------- ------- ------- -------
Total loans $ 5,942 $19,142 $18,904 $43,988
======= ======= ======= =======
Predetermined rate, maturity greater than one year $ 6,603 $ 8,693 $15,296
Variable rate or maturity within one year $31,261 $12,539 $10,211 $28,692
</TABLE>
Nonperforming Loans; Other Problem Assets
When a loan is 90 days past due as to interest or principal or there is
serious doubt as to collectibility, the accrual of interest income is generally
discontinued unless the estimated net realizable value of collateral is
sufficient to assure collection of the principal balance and accrued interest.
When the collectibility of a significant amount of principal is in serious
doubt, the principal balance is reduced to the estimated fair value of
collateral by charge-off to the allowance for loan losses and any subsequent
collections are credited first to the remaining principal balance and then to
the allowance for loan losses as a recovery of the amount charged off. A
nonaccrual loan is not returned to accrual status unless principal and interest
are current and the borrower has demonstrated the ability to continue making
payments as agreed. At December 31, 1999, the Bank had no nonaccrual loans or
loans 90 days or more past due.
Potential Problem Loans
Management has identified and maintains a list of potential problem
loans. These are loans that are not included in nonaccrual status, or loans that
are past due 90 days or more and still accruing. A loan is added to the
potential problem list when management becomes aware of information about
possible credit problems of borrowers that causes serious doubts as to the
ability of such borrowers to comply with the current loan repayment terms. There
were no loans determined by management to be potential problem loans at December
31, 1999.
Real Estate Owned
The Bank had no real estate owned pursuant to foreclosure or
in-substance foreclosure at December 31, 1999. Real estate owned is initially
recorded at the lower of net loan principal balance or its estimated fair market
value less estimated selling costs. The estimated fair value is determined by
appraisal at the time of acquisition.
Allowance for Loan Losses
The allowance for loan losses is increased by direct charges to
operating expense. Losses on loans are charged against the allowance in the
period in which management has determined that it is more likely than not such
loans have become uncollectible. Recoveries of previously charged off loans are
credited to the allowance. The table, "Summary of Loan Loss Experience,"
summarizes loan balances at the end of each period indicated, averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category, and additions to the allowance which have been charged to expense.
14
<PAGE>
In reviewing the adequacy of the allowance for loan losses at each year
end, management took into consideration the historical loan losses experienced
by the Bank, current economic conditions affecting the borrowers' ability to
repay, the volume of loans, and the trends in delinquent, nonaccruing, and
potential problem loans, and the quality of collateral securing nonperforming
and problem loans. After charging off all known losses, management considers the
allowance for loan losses adequate to cover its estimate of possible future loan
losses inherent in the loan portfolio as of December 31, 1999.
In calculating the amount required in the allowance for loan losses,
management applies a consistent methodology that is updated quarterly. The
methodology utilizes a loan risk grading system and detailed loan reviews to
assess credit risks and the overall quality of the loan portfolio, as well as
other off-balance-sheet credit risks such as loan commitments and standby
letters of credit. Also, the calculation provides for management's assessment of
trends in national and local economic conditions that might affect the general
quality of the loan portfolio. Regulators review the adequacy of the allowance
for loan losses as part of their examination of the Bank and may require
adjustments to the allowance based upon information available to them at the
time of the examination.
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Year Ended
----------
December 31, December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Total loans outstanding at end of period ................. $43,988 $11,147
Average amount of loans outstanding ...................... 27,407 1,905
------- -------
Balance of allowance for loan losses - beginning ......... 325 0
------- -------
Loans charged off ........................................ 0 0
Total charge-offs ................................ 0 0
Recoveries of loans previously charged-off ............... 0 0
Net charge-offs .......................................... 0 0
Additions to allowance charged to expense ................ 510 325
------- -------
Balance of allowance for loan losses - ending ............ 835 325
======= =======
Ratios
Net charge-offs during period to average
loans outstanding during period .................. 0.00% 0.00%
Net charge-offs to loans at end of period ........... 0.00% 0.00%
Allowance for loan losses to average loans .......... 3.05% 17.06%
Allowance for loan losses
to loans at end of period ....................... 1.90% 2.92%
Allowance for loan losses to nonperforming loans
at end of period ................................. N/A N/A
Net charge-offs to allowance for loan losses ........ 0.00% 0.00%
Net charge-offs to provision for loan losses ........ 0.00% 0.00%
</TABLE>
15
<PAGE>
The following table presents the allocation of the allowance for loan
losses at December 31, 1999 and 1998, compared with the percent of loans in the
applicable categories to total loans.
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
% of % of
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial $ 257 18.0% $ 120 39.7%
Real estate - construction 111 8.4% 2 3.6%
Real estate - mortgage 404 68.8% 197 52.7%
Consumer installment 63 4.8% 6 4.0%
----- ----- ----- -----
Total $ 835 100.0% $ 325 100.0%
===== ===== ===== =====
</TABLE>
Deposits
The average amounts and percentage composition of deposits held by the
Bank for the years ended December 31, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
Average Deposits
(Dollars in Thousands)
December 31, 1999 December 31, 1998
----------------- -----------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Noninterest bearing demand $ 5,667 14.8 $2,115 22.1
Interest bearing transaction accounts 1,194 3.1 388 4.1
Savings 5,294 13.9 513 5.4
Time deposits - $100M and over 10,062 26.3 2,973 31.1
Other time deposits 16,028 41.9 3,570 37.3
------- ----- ------ -----
Total deposits $38,245 100.0 $9,559 100.0
======= ===== ====== =====
</TABLE>
As of December 31, 1999, the Bank held $10,062,000 in time deposits of
$100,000 or more, with approximately $5,910,000 with maturities within three
months, $800,000 with maturities over three through six months, $3,244,000 with
maturities over six through twelve months, and $108,000 with maturities over
twelve months. Wholesale time deposits (certificates generated through
corporations, banks, credit unions, etc., on a national level) totaled
$6,330,000 as of December 31, 1999. It is a common industry practice not to
consider these types of deposits as core deposits because their retention can be
expected to be heavily influenced by rates offered, and therefore they have the
characteristics of shorter-term purchased funds. Wholesale time deposits involve
the maintenance of an appropriate matching of maturity distribution and a
diversification of sources to achieve an appropriate level of liquidity. Such
deposits are generally more volatile and interest rate sensitive than other
deposits.
16
<PAGE>
Return on Equity and Assets
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 1999 and 1998.
Years Ended December 31,
1999 1998
---- ----
Return on assets (0.69)% (6.70)%
Return on equity (2.66)% (9.74)%
Dividend payout ratio 0.00% 0.00%
Equity to asset ratio 25.82% 68.88%
Liquidity
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in the most timely and economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted into cash at minimal cost (amounts due from banks and federal funds
sold). However, the most manageable sources of liquidity are composed of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less wholesale time deposits) provide a relatively stable funding base, and were
equal to 57.8% of total assets at December 31, 1999. Asset liquidity is provided
from several sources, including amounts due from banks and federal funds sold,
and funds from maturing loans. The Bank is a member of the FHLB of Atlanta and,
as such, has the ability to borrow against the security of its 1-4 family
residential mortgage loans. At December 31, 1999, the Bank had borrowed $6.9
million from the FHLB of Atlanta and had the ability to borrow up to 15% of
assets or an additional $1.4 million. The Bank also has $3 million available
through lines of credit with other banks as an additional source of liquidity
funding. Management believes that the Bank's overall liquidity sources are
adequate to meet its operating needs.
Capital Resources
The equity capital of the Company decreased by $354,000 during 1999 as
the result of a net operating loss and unrealized losses in the investment
portfolio. On March 17, 2000 the Company announced plans to repurchase up to
100,000 shares of its common stock. Any repurchases will have the affect of
reducing the Company's equity capital by the amounts paid.
The Company and the Bank are subject to regulatory capital adequacy
standards. Under these standards, financial institutions are required to
maintain certain minimum ratios of capital to risk-weighted assets and average
total assets. Under the provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991, federal financial institution regulatory authorities
are required to implement prescribed "prompt corrective actions" upon the
deterioration of the capital position of a bank. If the capital position of an
affected institution were to fall below certain levels, increasingly stringent
regulatory corrective actions are mandated.
For bank holding companies with less than $150 million in consolidated
assets, regulatory capital adequacy is measured on a bank only basis. The Bank's
December 31, 1999 capital ratios are presented in the following table, compared
with the "well capitalized" and minimum ratios under the FDIC regulatory
definitions and guidelines:
17
<PAGE>
<TABLE>
<CAPTION>
To be well
capitalized
For capital under prompt
adequacy purposes corrective
action provisions
--------------------- ---------------------
Actual Minimum Minimum
---------------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to risk
weighted assets) $10,253 29.0% $2,832 8.0% $3,540 10.0%
Tier 1 Capital (to risk
weighted assets) 9,806 27.7% 1,416 4.0 2,124 6.0
Tier 1 Capital (to average
assets)(leverage) 9,806 18.6% 2,112 4.0 2,640 5.0
</TABLE>
Inflation
Since the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.
While the effect of inflation on banks is normally not as significant
as is its influence on those businesses which have large investments in plant
and inventories, it does have an effect. During periods of high inflation, there
are normally corresponding increases in the money supply, and banks will
normally experience above-average growth in assets, loans and deposits. Also
general increases in the prices of goods and services will result in increased
operating expenses.
Item 7. Financial Statements.
The following financial statements are included:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999
and 1998
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 1999
and 1998
Notes to Consolidated Financial Statements
18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Southcoast Financial Corporation and Subsidiary
Mt. Pleasant, South Carolina
We have audited the accompanying consolidated balance sheets of
Southcoast Financial Corporation and Subsidiary (the "Company") as of December
31, 1999 and 1998 and the related consolidated statements of operations, changes
in shareholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Southcoast Financial Corporation and Subsidiary at December 31, 1999 and 1998
and the results of their operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Elliott, Davis & Company, LLP
Greenville, South Carolina
February 3, 2000
19
<PAGE>
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
CASH AND DUE FROM BANKS ...................................................................... $ 1,786,411 $ 1,211,451
FEDERAL FUNDS SOLD ........................................................................... 1,310,000 4,220,000
INVESTMENT SECURITIES ........................................................................ 3,121,049 2,732,978
LOANS, NET ................................................................................... 43,153,421 10,821,975
PROPERTY AND EQUIPMENT, NET .................................................................. 4,513,284 1,243,133
OTHER ASSETS ................................................................................. 1,364,381 453,207
------------ ------------
Total assets .......................................................................... $ 55,248,546 $ 20,682,744
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing ..................................................................... $ 5,667,155 $ 2,114,621
Interest bearing ........................................................................ 32,577,797 7,444,869
------------ ------------
Total deposits ........................................................................ 38,244,952 9,559,490
Federal Home Loan Bank (FHLB) borrowings .................................................. 6,899,904 950,000
Other liabilities ......................................................................... 382,892 98,670
------------ ------------
Total liabilities ..................................................................... 45,527,748 10,608,160
------------ ------------
COMMITMENTS AND CONTINGENCIES - Notes 8, 10 and 13
SHAREHOLDERS' EQUITY
Common stock, no par value in 1999 and $5 par value in 1998, 20,000,000
shares authorized, 1,047,987 and 952,713 shares
issued in 1999 and 1998, respectively ................................................... 10,520,053 4,763,565
Paid-in capital ........................................................................... - 5,756,488
Retained deficit .......................................................................... (714,147) (451,147)
Accumulated other comprehensive income (loss), net of
income taxes of $43,843 and $2,925 ...................................................... (85,108) 5,678
------------ ------------
Total shareholders' equity ............................................................ 9,720,798 10,074,584
------------ ------------
Total liabilities and shareholders' equity ............................................ $ 55,248,546 $ 20,682,744
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE>
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31,
------------
1999 1998
---- ----
INTEREST INCOME
<S> <C> <C>
Loans and fees on loans ............................................................. $ 2,752,267 $ 270,972
Investment securities ............................................................... 258,901 30,303
Federal funds sold .................................................................. 137,325 193,319
----------- -----------
Total interest income ........................................................... 3,148,493 494,594
INTEREST EXPENSE
Deposits and borrowings ............................................................. 1,259,213 86,498
----------- -----------
Net interest income ............................................................. 1,889,280 408,096
PROVISION FOR POSSIBLE LOAN LOSSES ..................................................... 510,000 325,000
----------- -----------
Net interest income after provision for possible loan losses .................... 1,379,280 83,096
NONINTEREST INCOME
Service fees on deposit accounts .................................................... 101,857 7,979
Fees on loans sold .................................................................. 55,839 3,500
Other ............................................................................... 74,756 8,611
----------- -----------
Total noninterest income ........................................................ 232,452 20,090
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits ...................................................... 1,270,939 326,659
Occupancy ........................................................................... 62,686 15,834
Furniture and equipment ............................................................. 167,745 38,229
Advertising and public relations .................................................... 86,459 46,841
Professional fees ................................................................... 99,145 10,614
Travel and entertainment ............................................................ 87,416 32,420
Telephone, postage and supplies ..................................................... 159,355 25,058
Organizational and pre-opening ...................................................... - 271,538
Other operating ..................................................................... 78,112 19,548
----------- -----------
Total noninterest expenses ...................................................... 2,011,857 786,741
----------- -----------
Loss before income taxes ........................................................ (400,125) (683,555)
INCOME TAX BENEFIT ..................................................................... 137,125 232,408
----------- -----------
Net loss ........................................................................ $ (263,000) $ (451,147)
=========== ===========
NET LOSS PER COMMON SHARE .............................................................. $ (.25) $ (.43)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ........................................................... 1,047,987 1,047,987
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE>
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common stock other Total
------------ Paid-in Retained comprehensive shareholders'
Shares Amount capital deficit income (loss) equity
------ ------ ------- ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ............. - $ - $ - $ - $ - $ -
Net loss .......................... - - - (451,147) - (451,147)
Other comprehensive income
(net of income taxes of $2,926) . - - - - 5,678 5,678
------------
Comprehensive loss ................ (445,469)
Sale of stock (net of offering
costs of $912,503) .............. 952,713 4,763,565 5,756,488 - - 10,520,053
--------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 ........... 952,713 4,763,565 5,756,488 (451,147) 5,678 10,074,584
------------
Net loss .......................... - - - (263,000) - (263,000)
Other comprehensive loss
(net of income taxes of $46,768) - - - - (90,786) (90,786)
------------
Comprehensive loss ................ (353,786)
Par value conversion upon
exchange of stock ............... - 5,280,118 (5,280,118) - - -
Stock split effected in the
form of a stock dividend (10%) .. 95,274 476,370 (476,370) - - -
--------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 ........... 1,047,987 $ 10,520,053 $ - $ (714,147) $ (85,108) $ 9,720,798
========= ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
22
<PAGE>
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
December 31,
------------
1999 1998
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net loss ...................................................................... $ (263,000) $ (451,147)
Adjustments to reconcile net loss to net cash used for
operating activities
Deferred income taxes ....................................................... (137,125) (232,408)
Provision for possible loan losses .......................................... 510,000 325,000
Depreciation and amortization ............................................... 124,921 37,000
Increase in other assets .................................................... (727,281) (176,224)
Increase in other liabilities ............................................... 284,222 98,670
------------ ------------
Net cash used for operating activities .................................. (208,263) (399,109)
------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities ............................................. (525,625) (2,771,875)
Increase in federal funds sold ................................................ 2,910,000 (4,220,000)
Increase in loans, net ........................................................ (32,841,446) (11,146,975)
Purchase of property and equipment ............................................ (3,395,072) (1,280,133)
------------ ------------
Net cash used for investing activities ........................................... (33,852,143) (19,418,983)
------------ ------------
FINANCING ACTIVITIES
Increase in FHLB borrowings ................................................... 5,949,904 950,000
Sale of stock, net ............................................................ - 10,520,053
Net increase in deposits ...................................................... 28,685,462 9,559,490
------------ ------------
Net cash provided by financing activities ............................... 34,635,366 21,029,543
------------ ------------
Net increase in cash and cash equivalents ............................... 574,960 1,211,451
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ..................................... 1,211,451 -
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................................... $ 1,786,411 $ 1,211,451
============ ============
CASH PAID FOR
Interest ...................................................................... $ 1,071,591 $ 55,325
============ ============
Income taxes .................................................................. $ - $ -
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
23
<PAGE>
SOUTHCOAST FINANCIAL CORPORATION AND SUBSIDIARY
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"). 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, has
no employees and operates as one business segment. The Company is regulated by
the Federal Reserve Board. The consolidated financial statements include the
accounts of the Company and the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation. For ease of presentation,
the formation of the holding company has been treated as if it occurred at the
earliest date presented in these consolidated financial statements. This
presentation has no effect on net income or stockholders' equity.
The Bank was incorporated in 1998 and operates as a South Carolina
chartered bank and provides full banking services to its customers. The Bank is
subject to regulation by the South Carolina Board of Financial Institutions and
the Federal Deposit Insurance Corporation. Immaterial organizational
transactions which occurred in late 1997 have been presented in the 1998
financial statements for ease of presentation.
Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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 amount of income and
expenses during the reporting periods. Actual results could differ from
those estimates.
Concentrations of credit risk
The Company, through its subsidiary, makes loans to individuals and
businesses in and around Charleston County for various personal and
commercial purposes. The Company has a diversified loan portfolio and the
borrowers' ability to repay their loans is not dependent upon any specific
economic sector.
Investment securities
The Company accounts for investment securities in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The statement requires
investments in equity and debt securities to be classified into three
categories:
1. 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 market value. Unrealized gains and losses are reported, net of income
taxes, as separate components of shareholders' equity (accumulated other
comprehensive income (loss)).
2. Held to maturity: These are investment 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.
3. 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.
24
<PAGE>
Loans, interest and fee income on loans
Loans are stated at the principal balance outstanding. Unearned discount,
unamortized loan fees, and the allowance for possible loan losses are
deducted from total loans in the balance sheet. Interest income is
recognized over the term of the loan based on the principal amount
outstanding. Points on real estate loans are recognized as income to the
extent they represent the direct cost of initiating a loan. The amount in
excess of direct costs is deferred and amortized over the expected life of
the loan.
Loans are generally placed on non-accrual status when principal or interest
becomes ninety days past due, or when payment in full is not anticipated.
When a loan is placed on non-accrual status, interest accrued but not
received is generally reversed against interest income. If collectibility
is in doubt, cash receipts on non-accrual loans are not recorded as
interest income, but are used to reduce principal.
Allowance for possible loan losses
The provision for possible loan losses charged to operating expenses
reflects the amount deemed appropriate by management to establish an
adequate reserve to meet the present and foreseeable risk characteristics
of the current loan portfolio. Management's judgement is based on periodic
and regular evaluation of individual loans, the overall risk
characteristics of the various portfolio segments, past experience with
losses and prevailing and anticipated economic conditions. Loans which are
determined to be uncollectible are charged against the allowance. Provision
for possible loan losses and recoveries on loans previously charged off are
added to the allowance.
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard requires
that all lenders value loans at the loan's fair value if it is probable
that the lender will be unable to collect all amounts due according to the
terms of the loan agreement. Fair value may be determined based upon the
present value of expected cash flows, market price of the loan, if
available, or value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate.
Under SFAS No. 114, as amended by SFAS 118, when the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or
partially, all cash receipts are applied to principal. When this doubt does
not exist, cash receipts are applied under the contractual terms of the
loan agreement first to principal then to interest income. Once the
reported principal balance has been reduced to zero, future cash receipts
are applied to interest income, to the extent that any interest has been
foregone. Further cash receipts are recorded as recoveries of any amounts
previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring. For these 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. As of December 31,
1999 and 1998, the Company had no impaired loans.
Non-performing assets
Non-performing assets include real estate acquired through foreclosure or
deed taken in lieu of foreclosure, and loans on non-accrual status. Loans
are placed on non-accrual status when, in the opinion of management, the
collection of additional interest is questionable. Thereafter no interest
is taken into income unless received in cash or until such time as the
borrower demonstrates the ability to pay principal and interest. At
December 31, 1999 and 1998 the Company had no non-performing assets.
25
<PAGE>
Property and equipment
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. 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.
Organizational and preopening costs
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5), which
provides guidance on the financial reporting of start-up costs and
organization costs. SOP 98-5 requires start-up costs and organization costs
to be expensed as incurred. The Company elected early adoption of SOP 98-5
and expensed organization and pre-opening costs in 1998.
Income taxes
The financial statements have been prepared on the accrual basis. When
income and expenses are recognized in different periods for financial
reporting purposes versus for purposes of computing income taxes currently
payable, deferred taxes are provided on such temporary differences. The
Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the expected future tax consequences of
events that have been recognized in the financial statements or tax return.
Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled.
Advertising and public relations expense
Advertising, promotional and other business development costs are generally
expensed as incurred. External costs incurred in producing media
advertising are expensed the first time the advertising takes place.
External costs relating to direct mailing costs are expensed in the period
in which the direct mailings are sent.
Net loss per common share
Net loss per common share is computed on the basis of the weighted average
number of common shares outstanding in accordance with SFAS No. 128,
"Earnings per Share". For purposes of calculating net loss per share, the
calculation assumed the stock was outstanding for all of 1998. The treasury
stock method is used to compute the effect of stock options on the weighted
average number of common shares outstanding for the diluted method. Due to
net losses the diluted computation is antidilutive and is therefore not
presented. On March 3, 1999, the Company declared an eleven for ten stock
split effected in the form of a ten percent stock dividend. Per share
amounts have been retroactively restated to reflect the stock split.
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents are defined
as those amounts included in the balance sheet caption "Cash and Due From
Banks". Cash and cash equivalents have an original maturity of three months
or less.
26
<PAGE>
Fair values of financial instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," as
amended by SFAS No. 119, requires disclosure of fair value information for
financial instruments, whether or not recognized in the balance sheet,
when it is practicable to estimate the fair value. SFAS No. 107 defines a
financial instrument as cash, evidence of an ownership interest in an
entity or contractual obligations which require the exchange of cash or
other financial instruments. Certain items are specifically excluded from
the disclosure requirements, including the Company's common stock. In
addition, other nonfinancial instruments such as property and equipment
and other assets and liabilities are not subject to the disclosure
requirements.
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
Cash and due from banks - The carrying amounts of cash and due from
banks (cash on hand, due from banks and interest bearing deposits with
other banks) approximate their fair value.
Federal funds sold - The carrying amounts of federal funds sold
approximate their fair value.
Investment securities - Fair values for investment securities are
based on quoted market prices.
Loans - For variable rate loans that reprice frequently and for loans
that mature within one year, fair values are based on carrying values.
Fair values for all other loans are estimated using discounted cash
flow analyses, with interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair values
for impaired loans are estimated using discounted cash flow analyses
or underlying collateral values, where applicable.
Deposits - The fair values disclosed for demand deposits are, by
definition, equal to their carrying amounts. The carrying amounts of
variable rate, fixed-term money market accounts and short-term
certificates of deposit approximate their fair values at the reporting
date. Fair values for long-term fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities.
FHLB borrowings - The carrying amounts of FHLB borrowings approximate
their fair values.
Off balance sheet instruments - Fair values of off balance sheet
lending commitments 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.
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
All derivatives are to be measured at fair market value and recognized in
the balance sheet as assets or liabilities. This statement's effective date
was delayed by the issuance of SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS
No. 133," and is effective for fiscal years and quarters beginning after
June 15, 2000. The Company does not expect that the adoption of SFAS No.
137 will have a material impact on the presentation of the Company's
financial results or financial position.
Accounting standards that have been proposed or issued by standard-setting
groups that do not require adoption until a future date will have no
material impact on the consolidated financial statements upon adoption.
27
<PAGE>
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, 1999 and
1998 these required reserves were met by vault cash.
NOTE 3 - FEDERAL FUNDS SOLD
When the Bank's cash reserves (Note 2) are in excess of the required
amount, it may lend the excess to other banks on a daily basis. As of December
31, 1999 and 1998, federal funds sold amounted to $1,310,000 and $4,220,000,
respectively.
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and fair value of investment securities are as
follows:
December 31, 1999
-----------------
Gross unrealized
Amortized -------------------- Fair
cost gains losses value
---- ----- ------ -----
Federal agencies ...... $3,250,000 $ - $ 128,951 $3,121,049
========== ========== ========= ==========
December 31, 1998
-----------------
Federal agencies ........ $2,724,375 $ 8,603 $ - $2,732,978
========== ========== ========= ==========
The amortized cost and fair value of securities at December 31, 1999,
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
---- ----------
Due after one but within five years .......... $2,250,000 $2,178,549
Due after five but within ten years .......... 1,000,000 942,500
---------- ----------
Total investment securities .............. $3,250,000 $3,121,049
========== ==========
Investment securities with an aggregate amortized cost of $3,250,000
($3,121,049 fair value) at December 31, 1999 were pledged to secure public
deposits and for other purposes.
28
<PAGE>
NOTE 5 - FEDERAL HOME LOAN BANK STOCK
The Bank, as a member institution of the Federal Home Loan Bank of
Atlanta, is required to own capital stock in the FHLB based generally upon the
balance of residential mortgage loans and FHLB borrowings. FHLB capital stock
with a cost of $345,000 and $47,500 at December 31, 1999 and 1998, respectively,
is presented with other assets in the balance sheet and is pledged to secure
FHLB borrowings. No ready market exists for this stock, and it has no quoted
market value, however, redemption of this stock has historically been at par
value.
NOTE 6 - LOANS
The composition of loans by major loan category is presented below:
December 31,
------------
1999 1998
---- ----
Commercial ................................. $ 7,925,280 $ 4,426,000
Real estate - construction ................. 3,703,856 405,000
Real estate - mortgage ..................... 30,266,962 5,876,000
Consumer ................................... 2,092,323 439,975
------------ ------------
Loans, gross ............................... 43,988,421 11,146,975
Less allowance for possible loan losses .... (835,000) (325,000)
------------ ------------
Loans, net ................................. $ 43,153,421 $ 10,821,975
============ ============
At December 31, 1999 and 1998, there were no nonaccruing loans.
During 1999 and 1998 there were no loan charge-offs or recoveries.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Components of property and equipment included in the balance sheet
are as follows:
December 31,
------------
1999 1998
---- ----
Land ......................................... $ 702,376 $ 226,867
Furniture and equipment ...................... 1,420,456 621,869
Buildings and improvements ................... 2,552,847 431,397
---------- ----------
4,675,679 1,280,133
Accumulated depreciation ..................... 162,395 37,000
---------- ----------
Total property and equipment ............. $4,513,284 $1,243,133
========== ==========
Depreciation expense for the years ended December 31, 1999 and 1998
was $124,921 and $37,000, respectively. Depreciation is charged to operations
over the estimated useful lives of the assets. The estimated useful lives and
methods of depreciation for the principal items follow:
Type of Asset Life in Years Depreciation Method
------------- ------------- -------------------
Software 3 to 7 Straight-line
Furniture and equipment 5 to 10 Straight-line
Buildings and improvements 5 to 40 Straight-line
29
<PAGE>
NOTE 8 - DEPOSITS
The following is a detail of the deposit accounts:
December 31,
1999 1998
---- ----
Noninterest bearing ...................... $ 5,667,155 $ 2,114,621
Interest bearing
NOW .................................... 1,193,906 388,448
Money market ........................... 4,676,145 391,144
Savings ................................ 618,047 121,819
Time, less than $100,000 ............... 16,027,712 3,570,458
Time, $100,000 and over ................ 10,061,987 2,973,000
----------- -----------
Total deposits ..................... $38,244,952 $ 9,559,490
=========== ===========
Interest expense on time deposits greater than $100,000 was
approximately $370,000 and $39,000 in 1999 and 1998, respectively.
At December 31, 1999 the scheduled maturities of time deposits are as
follows:
2000 .............................................. $25,756,392
2001 .............................................. 333,307
-----------
$26,089,699
===========
NOTE 9 - FHLB BORROWINGS
Advances from the Federal Home Loan Bank of Atlanta at December 31,
1999 are collateralized by pledges of certain residential mortgage loans and are
summarized as follows:
Maturity Rate Amount
-------- ---- ------
April, 2000 6.05% $2,000,000
August, 2001 Variable (4.25% at
December 31, 1999) 2,500,000
March, 2004 5.84 899,904
May, 2004 4.97 1,500,000
----------
$6,899,904
==========
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company has entered into a construction contract to renovate a
building to serve as a branch in Monks Corner (Berkley County), South Carolina.
The total cost for the renovation is expected to be approximately $276,000 and
the branch is expected to open in the second quarter of 2000. At December 31,
1999 no costs have been incurred under this contract.
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.
30
<PAGE>
NOTE 11 - UNUSED LINES OF CREDIT
At December 31, 1999, the Bank had unused lines of credit to purchase
federal funds totaling $3,000,000 from unrelated banks. These lines of credit
are available on a one to seven day basis for general corporate purposes of the
Bank. All of the lenders have reserved the right to withdraw these lines at
their option.
NOTE 12 - INCOME TAXES
The income tax effect of cumulative temporary differences at December
31, are as follows:
Deferred tax asset (liability)
------------------------------
1999 1998
---- ----
Allowance for possible loan losses .................. $ 283,900 $ 110,500
Net operating loss carryforward benefit ............. 85,634 121,908
Unrealized loss (gain) on investment securities ..... 43,843 (2,926)
--------- ---------
$ 413,377 $ 229,482
========= =========
The net deferred tax asset is reported under the other assets in the
balance sheets at December 31, 1999 and 1998. The net operating loss
carryforwards at December 31, 1999 expire in 2013 and 2014.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
In the ordinary course of business, and to meet the financing needs
of its customers, the Bank is a party to various financial instruments with off
balance sheet risk. These financial instruments, which include commitments to
extend credit and standby letters of credit, involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheet. The contract amount of those instruments reflects the extent
of involvement the Bank has in particular classes of financial instruments.
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.
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. At December 31, 1999, unfunded
commitments to extend credit were $4,869,000. 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, commercial and residential
real estate.
At December 31, 1999, there was a $252,000 commitment under a letter
of credit. 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 letters of credit are expected to expire without
being drawn upon, they do not necessarily represent future cash requirements.
31
<PAGE>
NOTE 14 - EMPLOYEE BENEFIT PLAN
On August 29, 1998, the Company adopted the Southcoast Financial
Corporation and Subsidiary Profit Sharing and 401(k) Plan for the benefit of all
eligible employees. The Company contributes to the Plan annually upon approval
by the Board of Directors. Contributions made to the Plan in 1999 and 1998
amounted to $27,759 and $5,643, respectively.
NOTE 15 - 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 is restricted in its ability to pay dividends to
the Company under the laws and regulations of the State of South Carolina.
Generally, these restrictions require the Bank to pay dividends derived solely
from net profits and require prior regulatory approval.
NOTE 16 - TRANSACTIONS WITH DIRECTORS, OFFICERS AND ASSOCIATES
Directors and officers of the Bank and associates of such persons are
customers of and had transactions with the Bank in the ordinary course of
business. Additional transactions may be expected to take place in the future.
Loan and deposits by directors, officers and their related interests, as of
December 31, 1999 and 1998, approximated $20,000 and $311,324, respectively.
NOTE 17 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital to risk-weighted assets, and of
Tier I capital to average assets. Management believes, as of December 31, 1999,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, 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.
The Bank's actual capital amounts and ratios and minimum regulatory amounts and
ratios are presented as follows:
32
<PAGE>
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
adequacy purposes action provisions
----------------- -----------------
Actual Minimum Minimum
------ ------- -------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(amounts in $000)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to risk weighted assets) $10,253 28.96% $2,832 8.00% $3,540 10.00%
Tier I Capital (to risk weighted assets) 9,806 27.70 1,416 4.00 2,124 6.00
Tier I Capital (to average assets) 9,806 18.57 2,112 4.00 2,640 5.00
As of December 31, 1998
Total Capital (to risk weighted assets) 10,171 92.40 880 8.00 1,100 10.00
Tier I Capital (to risk weighted assets) 9,960 90.50 440 4.00 660 6.00
Tier I Capital (to average assets) 9,960 55.49 653 4.00 816 5.00
</TABLE>
NOTE 18 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments
were as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks .............................. $ 1,786 $ 1,786 $ 1,211 $ 1,211
Federal funds sold ................................... 1,310 1,310 4,220 4,220
Investment securities ................................ 3,121 3,121 2,733 2,733
Loans ................................................ 43,988 42,613 11,147 10,822
FINANCIAL LIABILITIES
Deposits ............................................. 38,245 35,920 9,559 9,559
FHLB borrowings ...................................... 6,900 6,602 950 950
OFF BALANCE SHEET INSTRUMENTS
Commitments to extend credit ......................... 4,869 4,869 705 705
Standby letters of credit ............................ 252 252 81 81
</TABLE>
NOTE 19 - SUBSEQUENT EVENT
On March 17, 2000 the Company announced plans to repurchase up to
100,000 shares of its common stock. The share purchases are expected to take
place from time to time in the open market or through privately negotiated
transactions, starting March 20, 2000.
33
<PAGE>
NOTE 20 - PARENT COMPANY FINANCIAL INFORMATION
Following is condensed financial information of Southcoast Financial
Corporation (parent company only):
CONDENSED BALANCE SHEET
December 31, 1999
-----------------
Assets
Investment in Bank subsidiary ............................ $9,740,798
==========
Liabilities and Shareholders' Equity
Accounts payable ......................................... $ 20,000
Shareholders' equity ..................................... 9,720,798
----------
Total liabilities and shareholders' equity ........ $9,740,798
==========
CONDENSED STATEMENT OF OPERATIONS
For the year ended
December 31, 1999
-----------------
Revenues .................................................... $ -
Expenses .................................................... 20,000
---------
Loss before equity in undistributed
net loss of Bank subsidiary .............................. (20,000)
Equity in undistributed net loss of Bank subsidiary ......... (243,000)
---------
Net loss ............................................. $(263,000)
=========
CONDENSED STATEMENT OF CASH FLOWS
For the year ended
December 31, 1999
-----------------
OPERATING ACTIVITIES
Net loss .................................................... $(263,000)
Adjustments to reconcile net loss to net cash
provided by operating activities
Equity in undistributed net loss of the Bank subsidiary ... 243,000
Increase in accounts payable .............................. 20,000
---------
Net cash provided by operating activities ............. -
---------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................... -
---------
CASH AND CASH EQUIVALENTS, END OF YEAR ......................... $ -
=========
34
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The information set forth under the captions "Management of the
Company" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
registrant's definitive proxy statement to be filed with the Commission for the
2000 Annual Meeting of Shareholders is incorporated herein by reference.
Item 10. Executive Compensation.
The information set forth under the caption "Management Compensation"
in registrant's definitive proxy statement to be filed with the Commission for
the 2000 Annual Meeting of Shareholders is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in registrant's definitive proxy
statement to be filed with the Commission for the 2000 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and
Related Transactions" in registrant's definitive proxy statement to be filed
with the Commission for the 2000 Annual Meeting of Shareholders is incorporated
herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) Description of Exhibits.
Exhibit No. Description
3.1 Articles of Incorporation of Registrant*
3.2 Bylaws of Registrant*
10.1 Stock Option Plan
21 Subsidiaries of Registrant
27 Financial Data Schedule
_____________________
*Incorporated by reference to Form 10-SB filed April 30, 1999.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1999.
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Southcoast Financial Corporation
s/L. Wayne Pearson
March 30, 2000 By:--------------------------------------
L. Wayne Pearson
President and Chief Executive Officer
s/Robert M. Scott
By:--------------------------------------
Robert M. Scott
Executive Vice President
(Principal Financial and Principal
Accounting Officer)
In accordance with Exchange Act, this Report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
- -------------------------- Director March __, 2000
William A. Coates
s/Thomas E. Hamer, Sr.
- -------------------------- Director March 23, 2000
Thomas E. Hamer, Sr.
s/Paul D. Hollen, III
- -------------------------- Executive Vice President, Director March 30, 2000
Paul D. Hollen, III
s/L. Wayne Pearson
- -------------------------- President, Chief Executive Officer, Director March 30, 2000
L. Wayne Pearson
s/Norman T. Russell
- -------------------------- Director March 30, 2000
Norman T. Russell
s/Robert M. Scott
- -------------------------- Executive Vice President, Chief Financial March 23, 2000
Robert M. Scott Officer, Principal Accounting Officer, Director
s/James H. Sexton
- -------------------------- Director March 23, 2000
James H. Sexton
- -------------------------- Director March __, 2000
James P. Smith
</TABLE>
36
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
3.1 Articles of Incorporation of Registrant*
3.2 Bylaws of Registrant*
10.1 Stock Option Plan
21 Subsidiaries of Registrant
27 Financial Data Schedule
_____________________
*Incorporated by reference to Form 10-SB filed April 30, 1999.
37
Southcoast Financial Corporation
1999 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the Southcoast Financial
Corporation 1999 Stock Option Plan (the "Plan"). The purpose of the Plan is to
attract and retain the best available personnel for positions of substantial
responsibility and to provide additional incentive to directors, officers and
key employees of Southcoast Financial Corporation (the "Company"), or any
present or future parent or subsidiary of the Company, and to promote the
success of the business. The Plan is intended to provide for the grant of
"Incentive Stock Options," within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") and Non-qualified Stock Options,
options that do not so qualify. Each and every one of the provisions of the Plan
relating to Incentive Stock Options shall be interpreted to conform to the
requirements of Section 422 of the Code.
2. Definitions. As used herein, the following definitions shall apply.
(a) "Award" means the grant by the Board or the Committee of an Incentive
Stock Option or a Non-qualified Stock Option, or any combination thereof, as
provided in the Plan.
(b) "Company" shall mean Southcoast Financial Corporation, or any successor
corporation thereto.
(c) "Board" shall mean the Board of Directors of the Company, or any
successor or parent corporation thereto.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with paragraph 5(a) of the Plan.
(f) "Common Stock" shall mean common stock, no par value per share, of the
Company, or any successor or parent corporation thereto.
(g) "Continuous Employment" or "Continuous Status as an Employee" shall
mean the absence of any interruption or termination of employment with the
Company or any present or future Parent or Subsidiary of the Company. Employment
shall not be considered interrupted in the case of sick leave, military leave or
any other leave of absence approved by the Company (provided, however, in the
case of Incentive Stock Options, no such leave may extend beyond 90 days unless
reemployment rights are guaranteed by law), or in the case of transfers between
payroll locations of the Company or between the Company and any of its Parent,
its Subsidiaries or a successor.
(h) "Director" shall mean a member of the Board of the Company, or any
successor or parent corporation thereto.
(i) "Effective Date" shall mean the date specified in Section 15 hereof.
(j) "Employee" shall mean any person employed by the Company or any present
or future Parent or Subsidiary of the Company.
38
<PAGE>
(k) "Incentive Stock Option" or "ISO" shall mean an option to purchase
Shares granted by the Committee pursuant to Section 8 hereof which is subject to
the limitations and restrictions of Section 8 hereof and is intended to qualify
under Section 422 of the Code.
(l) "Non-qualified Stock Option" shall mean an option to purchase Shares
granted pursuant to Section 9 hereof, which option is not intended to qualify
under Section 422 of the Code.
(m) "Option" shall mean an Incentive or Non-qualified Stock Option granted
pursuant to this Plan providing the holder of such Option with the right to
purchase Common Stock.
(n) "Optioned Stock" shall mean stock subject to an Option granted pursuant
to the Plan.
(o) "Optionee" shall mean any person who receives an Option or Award
pursuant to the Plan.
(p) "Parent" shall mean any present or future corporation which would be a
"parent corporation" as defined in Subsections 424(e) and (g) of the Code.
(q) "Participant" means any officer or key employee of the Company or any
Parent or Subsidiary of the Company or any other person providing a service to
the Company who is selected by the Board or the Committee to receive an Award,
or who by the express terms of the Plan is granted an Award.
(r) "Plan" shall mean Southcoast Financial Corporation 1999 Stock Option
Plan.
(s) "Share" shall mean one share of the Common Stock.
(t) "Subsidiary" shall mean any present or future corporation which would
be a "subsidiary corporation" as defined in Subsections 424(f) and (g) of the
Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall be 50,000. Such Shares shall
be authorized but unissued shares of the Common Stock. Shares of Common Stock
subject to Options which for any reason are terminated unexercised or expire
shall again be available for issuance under the Plan.
4. Six Month Holding Period.
A total of six months must elapse between the date of the grant of an
Option and the date of the sale of Common Stock received through the exercise of
an Option.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the
Board or a Committee appointed by the Board, which shall serve at the pleasure
of the Board. Such Committee shall be constituted solely of two or more
Directors who are not currently officers or employees of the Company or any of
its subsidiaries, and who qualify to administer the Plan as contemplated by Rule
16b-3 under the Securities Exchange Act of 1934, or any successor rule.
(b) Powers of the Committee. The Board or the Committee is authorized (but
only to the extent not contrary to the express provisions of the Plan or, in the
case of the Committee, to
39
<PAGE>
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan. The Committee also
shall have and may exercise such other power and authority as may be delegated
to it by the Board from time to time. A majority of the entire Committee shall
constitute a quorum and the action of a majority of the members present at any
meeting at which a quorum is present shall be deemed the action of the
Committee. In no event may the Board or the Committee revoke outstanding Awards
without the consent of the Participant.
The Chairman of the Board of Directors of the Company and such other
officers as shall be designated by the Board or the Committee are hereby
authorized to execute instruments evidencing Awards on behalf of the Company and
to cause them to be delivered to the participants.
(c) Effect of Board's or Committee's Decision. All decisions,
determinations and interpretations of the Board or the Committee shall be final
and conclusive on all persons affected thereby.
6. Eligibility. Awards may be granted to directors, officers, key employees
and other persons. The Board or the Committee shall from time to time determine
the directors, officers, key employees and other persons who shall be granted
Awards under the Plan, the number to be granted to each such director, officer,
key employee and other persons under the Plan, and whether Awards granted to
each such Participant under the Plan shall be Incentive and/or Non-qualified
Stock Options (provided, however, Incentive Stock Options may only be granted to
persons who are employees, including officers, of the Company). In selecting
participants and in determining the number of Shares of Common Stock to be
granted to each such Participant pursuant to each Award granted under the Plan,
the Board or the Committee may consider the nature of the services rendered by
each such Participant, each such Participant's current and potential
contribution to the Company and such other factors as the Board or the Committee
may, in its sole discretion, deem relevant. Directors, officers, key employees
or other persons who have been granted an Award may, if otherwise eligible, be
granted additional Awards.
7. Term of the Plan. The Plan shall continue in effect for a term of ten
years from the Effective Date, unless sooner terminated pursuant to Section 18
hereof. No Option shall be granted under the Plan after ten years from the
Effective Date.
8. Terms and Conditions of Incentive Stock Options. Incentive Stock Options
may be granted only to Participants who are Employees. Each Incentive Stock
Option granted pursuant to the Plan shall be evidenced by a written agreement,
executed by the Company and the Optionee, which states the number of shares of
common stock subject to the Options granted thereby and the period of
exercisability of the Options, and in such form as the Board or the Committee
shall from time to time approve. Each and every Incentive Stock Option granted
pursuant to the Plan shall comply with, and be subject to, the following terms
and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive Stock Option granted under
the Plan may be exercised shall not, as to any particular Incentive Stock
Option, be less than the fair market value of the Common Stock at the time such
Incentive Stock Option is granted. For such purposes, if the Common Stock is
traded otherwise than on a national securities exchange at the time of the
granting of an Option, then the price per Share of the Optioned Stock shall be
not less than the mean between the bid and asked price on the date the Incentive
Stock Option is granted or, if there is no bid and asked price on said date,
then on the next prior business day on which there was a bid and asked price. If
no such bid and asked price is available, then the price per Share shall be
determined by the
40
<PAGE>
Board or the Committee. If the Common Stock is listed on a national securities
exchange at the time of the granting of an Incentive Stock Option, then the
price per Share shall be not less than the average of the highest and lowest
selling price on such exchange on the date such Incentive Stock Option is
granted or, if there were no sales on said date, then the price shall be not
less than the mean between the bid and asked price on such date.
(ii) In the case of an Employee who owns Common Stock representing more
than ten percent (10%) of the outstanding Common Stock at the time the Incentive
Stock Option is granted, the Incentive Stock Option price shall not be less than
one hundred and ten percent (110%) of the fair market value of the Common Stock
at the time the Incentive Stock Option is granted.
(b) Payment. Full payment for each Share of Common Stock purchased upon the
exercise of any Incentive Stock Option granted under the Plan shall be made at
the time of exercise of each such Incentive Stock Option and shall be paid in
cash. No Shares of Common Stock shall be issued until full payment therefor has
been received by the Company, and no Optionee shall have any of the rights of a
stockholder of the Company until Shares of Common Stock are issued to him.
(c) Term of Incentive Stock Option. The term of each Incentive Stock option
granted pursuant to the Plan shall be not more ten (10) years from the date each
such Incentive Stock Option is granted, provided that in the case of an Employee
who owns stock representing more than ten percent (10%) of the Common Stock
outstanding at the time the Incentive Stock Option is granted, the term of the
Incentive Stock Option shall not exceed five (5) years.
(d) Exercise Generally. Except as otherwise provided in Section 10 hereof,
no Incentive Stock Option may be exercised unless the Optionee shall have been
in the Continuous Employment of the Company at all times during the period
beginning with the date of grant of any such Incentive Stock Option and ending
on the date three months prior to the date of exercise of any such Incentive
Stock Option. The Board or the Committee may at the time of grant impose
additional conditions upon the right of an Optionee to exercise any Incentive
Stock Option granted hereunder which are not inconsistent with the terms of the
Plan or the requirements for qualification as an Incentive Stock Option under
Section 422 of the Code.
(e) Limitation on Options to be Exercised. The aggregate fair market value
(determined as of the date the Option is granted) of the Shares with respect to
which Incentive Stock Options are exercisable for the first time by each
Employee during any calendar year (under all Incentive Stock Option plans, as
defined in Section 422 of the Code, of the Company or any present or future
Parent or Subsidiary of the Company) shall not exceed $100,000. Notwithstanding
the prior provisions of this Section 8(e), the Board or the Committee may grant
Options in excess of the foregoing limitations, provided said Options shall be
clearly and specifically designated as not being Incentive Stock Options, as
defined in Section 422 of the Code.
(f) Transferability. Any Incentive Stock Option granted pursuant to the
Plan shall be exercised during an Optionee's lifetime only by the Optionee to
whom it was granted and shall not be assignable or transferable otherwise than
by will or by the laws of descent and distribution.
9. Terms and Conditions of Non-qualified Stock Options. Each Non-qualified
Stock Option granted pursuant to the Plan shall be evidenced by a written
agreement, executed by the Company and the Optionee, which states the number of
shares of common stock subject to the Options granted thereby and the period of
exercisability of the Options, and in such form as the Board or the Committee
shall from time to time approve. Each and every Non-qualified Stock Option
granted pursuant to the Plan shall comply with and be subject to the following
terms and conditions.
41
<PAGE>
(a) Option Price. The exercise price per Share of Common Stock for each
Non- qualified Stock Option granted pursuant to the Plan shall be at such price
as the Board or the Committee may determine in its sole discretion.
(b) Payment. Full payment for each Share of Common Stock purchased upon the
exercise of any Non-qualified Stock Option granted under the Plan shall be made
at the time of exercise of each such Non-qualified Stock Option and shall be
paid in cash. No Shares of Common Stock shall be issued until full payment
therefor has been received by the Company and no Optionee shall have any of the
rights of a stockholder of the Company until the Shares of Common Stock are
issued to him.
(c) Term. The term of each Non-qualified Stock Option granted pursuant to
the Plan shall be not more than ten (10) years from the date each such
Non-qualified Stock Option is granted.
(d) Exercise Generally. The Board or the Committee may impose additional
conditions upon the right of any Participant to exercise any Non-qualified Stock
Option granted hereunder which are not inconsistent with the terms of the Plan.
(e) Cashless Exercise. An Optionee who has held a Non-qualified Stock
Option for at least six months may engage in the "cashless exercise" of the
Option. In a cashless exercise, an Optionee gives the Company written notice of
the exercise of the Option together with an order to a registered broker-dealer
or equivalent third party, to sell part or all of the Optioned Stock and to
deliver enough of the proceeds to the Company to pay the Option price and any
applicable withholding taxes. If the Optionee does not sell the Optioned Stock
through a registered broker-dealer or equivalent third party, he can give the
Company written notice of the exercise of the Option and the third party
purchaser of the Optioned Stock shall pay the Option price plus any applicable
withholding taxes to the Company.
(f) Transferability. Any Non-qualified Stock Option granted pursuant to the
Plan shall be exercised during an Optionee's lifetime only by the Optionee to
whom it was granted and shall not be assignable or transferable otherwise than
by will or by the laws of descent and distribution.
10. Effect of Termination of Employment, Disability or Death on Incentive
Stock Options.
(a) Termination of Employment. In the event that any Optionee's employment
with the Company shall terminate for any reason, other than Permanent and Total
Disability (as such term is defined in Section 22 (e) (3) of the Code) or death,
all of any such Optionee's Incentive Stock Options, and all of any such
Optionee's rights to purchase or receive Shares of Common Stock pursuant
thereto, shall automatically terminate on the earlier of (i) the respective
expiration dates of any such Incentive Stock Options or (ii) the expiration of
not more than three months after the date of such termination of employment, but
only if, and to the extent that, the Optionee was entitled to exercise any such
Incentive Stock Options at the date of such termination of employment.
(b) Disability. In the event that any Optionee's employment with the
Company shall terminate as the result of the permanent and Total Disability of
such Optionee, such Optionee may exercise any Incentive Stock Options granted to
him pursuant to the Plan at any time prior to the earlier of (i) the respective
expiration dates of any such Incentive Stock Options or (ii) the date which is
one year after the date of such termination of employment, but only if, and to
the extent that, the Optionee was entitled to exercise any such Incentive Stock
Options at the date of such termination of employment.
(c) Death. In the event of the death of an Optionee, any Incentive Stock
Options granted to such Optionee may be exercised by the person or persons to
whom the Optionee's rights under any such Incentive Stock Options pass by will
or by the laws of descent and distribution (including the Optionee's estate
during the period of administration) at any time prior to the earlier of (i) the
respective
42
<PAGE>
expiration dates of any such Incentive Stock Options or (ii) the date which is
one year after the date of death of such Optionee but only if, and to the extent
that, the Optionee was entitled to exercise any such Incentive Stock Options at
the date of death. For purposes of this Section 10(c), any Incentive Stock
Option held by an Optionee shall be considered exercisable at the date of his
death if the only unsatisfied condition precedent to the exercisability of such
Incentive Stock Option at the date of death is the passage of a specified period
of time. At the discretion of the Board or the Committee, upon exercise of such
Options the Optionee may receive Shares or cash or combination thereof. If cash
shall be paid in lieu of Shares, such cash shall be equal to the difference
between the fair market value of such Shares and the exercise price of such
Options on the exercise date.
(d) Incentive Stock Options Deemed Exercisable. For purposes of Sections
10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any Optionee
shall be considered exercisable at the date of termination of his employment if
any such Incentive Stock Option would have been exercisable at such date of
termination of employment.
(e) Termination of Incentive Stock Options. To the extent that any
Incentive Stock Option granted under the Plan to any Optionee whose employment
with the Company terminates shall not have been exercised within the applicable
period set forth in this Section 10, any such Incentive Stock Option, and all
rights to purchase or receive Shares of Common Stock pursuant thereto, as the
case may be, shall terminate on the last day of the applicable period.
11. Effect of Termination of Employment, Disability or Death on
Non-qualified Stock Options. The terms and conditions of Non-qualified Stock
Options relating to the effect of the termination of an Optionee's employment,
disability of an Optionee or his death shall be such terms and conditions as the
Board or the Committee shall, in its sole discretion, determine at the time of
termination, unless specifically provided for by the terms of the Agreement at
the time of grant of the Award.
12. Right of Repurchase and Restrictions on Disposition. The Board or the
Committee, in its sole discretion, may include at the time of award, as a term
of any Incentive Stock Option or Non-qualified Stock Option, the right (the
"Repurchase Right") but not the obligation, to repurchase all or any amount of
the Shares acquired by an Optionee pursuant to the exercise of any such Options.
The intent of the Repurchase Right is to encourage the continued employment of
the Optionee. The Repurchase Right shall provide for, among other things, a
specified duration of the Repurchase Right, a specified price per Share to be
paid upon the exercise of the Repurchase Right and a restriction on the
disposition of the Shares by the Optionee during the period of the Repurchase
Right. The Repurchase Right may permit the Company to transfer or assign such
right to another party. The Company may exercise the Repurchase Right only to
the extent permitted by applicable law.
13. Recapitalization, Merger, Consolidation, Change in Control and Similar
Transactions.
(a) Adjustment. The aggregate number of Shares of Common Stock for which
Options may be granted hereunder, the number of Shares of Common Stock covered
by each outstanding Option, and the exercise price per Share of Common Stock of
each such Option, shall all be proportionately adjusted for any increase or
decrease in the number of issued and outstanding Shares of Common Stock
resulting from a subdivision or consolidation of Shares (whether by reason of
merger, consolidation, recapitalization, reclassification, splitup, spin-off,
stock split, combination of shares, or otherwise) or the payment of a stock
dividend (but only on the Common Stock) or any other increase or decrease in the
number of such Shares of Common Stock effected without the receipt of
consideration by the Company (other than Shares held by dissenting
stockholders).
(b) Change in Control. All outstanding Awards shall become immediately
exercisable in the event of a change in control or imminent change in control of
the Company. In the event of such
43
<PAGE>
a change in control or imminent change in control, the Optionee shall, at the
discretion of the Board or the Committee, be entitled to receive cash in an
amount equal to the fair market value of the Common Stock subject to any
Incentive or Non-qualified Stock Option over the Option Price of such Shares, in
exchange for the surrender of such Options by the Optionee on that date. For
purposes of this Section 13, "change in control" shall mean: (i) the execution
of an agreement for the sale of all, or a material portion, of the assets of the
Company; (ii) the execution of an agreement for a merger or recapitalization of
the Company or any merger or recapitalization whereby the Company is not the
surviving entity; (iii) a change of control of the Company, as otherwise defined
or determined by the State Board of Financial Institutions pursuant to the laws
of the State of South Carolina, or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of 25% or more
of the outstanding voting securities of the Company by any person, trust, entity
or group. This limitation shall not apply to the purchase of shares by
underwriters in connection with a public offering of Company stock, or the
purchase of shares of up to 25% of any class of securities of the Company by a
tax qualified employee stock benefit plan of the Company or to a transaction
which forms a holding company for the Company, if the shareholders of the
Company own substantially the same proportionate interests of the stock of the
holding company immeiately after the transaction except for changes caused by
the exercise of dissenter's rights. The term "person" refers to an individual or
a corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. For purposes of this Section 13, "imminent change in
control" shall refer to any offer or announcement, oral or written, by any
person or persons acting as a group, to acquire control of the Company. Whether
there is an imminent change in control shall be determined by the Board or the
Committee. The decision of the Board or the Committee as to whether a change in
control or imminent change in control has occurred shall be conclusive and
binding.
(c) Cancellation and Payment for Options in the Event of Extraordinary
Corporate Action. Subject to any required action by the stockholders of the
Company, in the event of any change in control, recapitalization, merger,
consolidation, exchange of shares, spin-off, reorganization, tender offer,
liquidation or other extraordinary corporate action or event, the Board or the
Committee, in its sole discretion, shall have the power, prior or subsequent to
such action or event to:
(i) cancel any or all previously granted Options, provided that
consideration is paid to the Optionee in connection therewith which
consideration is sufficient to put the Optionee in as favorable a financial
position as he would have been if the options had not been cancelled; and/or
(ii) subject to Section 13(a) and (b) above, make such other adjustments in
connection with the Plan as the Board or the Committee, in its sole discretion,
deems necessary, desirable, appropriate or advisable; provided, however, that no
action shall be taken by the Committee which would cause Incentive Stock Options
granted pursuant to the Plan to fail to meet the requirements of Section 422 of
the Code.
Except as expressly provided in Sections 13(a) and 13(b) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the events
described in this Section 13.
(d) Acceleration. The Board or the Committee shall at all times have the
power to accelerate the exercise date of Options previously granted under the
Plan.
14. Time of Granting Options. The date of grant of an Option under the Plan
shall, for all purposes, be the date on which the Board or the Committee makes
the determination to grant such Option. Notice of the determination of the grant
of an Option shall be given to each individual to whom an Option
44
<PAGE>
is so granted within a reasonable time after the date of such grant in a form
determined by the Board or the Committee.
15. Effective Date. The Plan shall become effective upon adoption by the
Board of Directors. Options may be granted prior to ratification of the Plan by
the stockholders of the Company if the exercise of such Options is subject to
such stockholder ratification.
16. Approval by Stockholders. The Plan shall be approved by stockholders of
the Company within twelve months before or after the date the Plan becomes
effective.
17. Modification of Options. At any time and from time to time, the Board
may or may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option, provided no such
modification, extension or renewal shall confer on the holder of said Option any
right or benefit which could not be conferred on him by the grant of a new
Option at such time, or shall not materially decrease the Optionee's benefits
under the Option without the consent of the holder of the Option, except as
otherwise permitted under Section 18 hereof. Notwithstanding anything herein to
the contrary, the Board or the Committee shall have the authority to cancel
outstanding Options with the consent of the Optionee and to reissue new Options
at a lower exercise price, (provided, however, the exercise price for Incentive
Stock Options shall in no event be less than the then fair market value per
share of Common Stock), in the event that the fair market value per share of
Common Stock at any time prior to the date of exercise of outstanding Options
falls below the exercise price of such Options.
18. Amendment and Termination of the Plan.
(a) Action by the Board. The Board may alter, suspend or discontinue the
Plan, except that no action of the Board may increase (other than as provided in
Section 13 hereof) the maximum number of Shares permitted to be optioned under
the Plan, materially increase the benefits accruing to Participants under the
Plan or materially modify the requirements for eligibility for participation in
the Plan unless such action of the Board shall be subject to approval or
ratification by the stockholders of the Company.
(b) Change in Applicable Law. Notwithstanding any other provision contained
in the Plan, in the event of a change in any federal or state law, rule or
regulation which would make the exercise of all or part of any previously
granted Incentive and/or Non-qualified Stock Option unlawful or subject the
Company to any penalty, the Committee may restrict any such exercise without the
consent of the Optionee or other holder thereof in order to comply with any such
law, rule or regulation or to avoid any such penalty.
19. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to any Option granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law and the requirements
of any stock exchange upon which the Shares may then be listed.
The inability of the Company to obtain approval from any regulatory body or
authority deemed by the Company's counsel to be necessary to the lawful issuance
and sale of any Shares hereunder shall relieve the Company of any liability in
respect of the non-issuance or sale of such Shares.
As a condition to the exercise of an Option, the Company may require the
person exercising the Option to make such representations and warranties as may
be necessary to assure the availability of an exemption from the registration
requirements of federal or state securities law.
45
<PAGE>
20. Reservation of Shares. During the term of the Plan, the Company will
reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the Plan or
the grant of any Incentive or Non-qualified Stock Option under the Plan. No
trust fund shall be created in connection with the Plan or any grant of any
Incentive or Non-qualified Stock Option hereunder and there shall be no required
funding of amounts which may become payable to any Participant.
22. Withholding Tax. The Company shall have the right to deduct from all
amounts paid in cash with respect to the cashless exercise of Options under the
Plan any taxes required by law to be withheld with respect to such cash
payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option pursuant to the Plan, the Company shall
have the right to require the Participant or such other person to pay the
Company the amount of any taxes which the Company is required to withhold with
respect to such Shares, or, in lieu thereof, to retain, or sell without notice,
a number of such Shares sufficient to cover the amount required to be withheld.
23. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of South Carolina, except to the extent
that federal law shall be deemed to apply.
24. Compliance With Rule 16b-3. With respect to persons to whom options are
granted hereunder who are subject to Section 16 of the Securities Exchange Act
of 1934: (i) this Plan is intended to comply with all applicable conditions of
Rule 16b-3 or its successors, (ii) all transactions involving
insider-participants are subject to such conditions are expressly set forth in
the Plan, and (iii) any provision of the Plan or action by the Plan's
administrators that is contrary to a condition of Rule 16b-3 shall not apply to
insider-participants.
46
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Name Jurisdiction of Incorporation
- ---- -----------------------------
Southcoast Community Bank South Carolina
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1999 and the Consolidated Statement
of Operations for the year ended December 31, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,524
<INT-BEARING-DEPOSITS> 262
<FED-FUNDS-SOLD> 1,310
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,121
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 43,988
<ALLOWANCE> 835
<TOTAL-ASSETS> 55,249
<DEPOSITS> 38,245
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 383
<LONG-TERM> 4,900
0
0
<COMMON> 10,520
<OTHER-SE> (714)
<TOTAL-LIABILITIES-AND-EQUITY> 55,249
<INTEREST-LOAN> 2,752
<INTEREST-INVEST> 259
<INTEREST-OTHER> 137
<INTEREST-TOTAL> 3,148
<INTEREST-DEPOSIT> 1,110
<INTEREST-EXPENSE> 1,259
<INTEREST-INCOME-NET> 1,889
<LOAN-LOSSES> 510
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,012
<INCOME-PRETAX> (400)
<INCOME-PRE-EXTRAORDINARY> (263)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (263)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
<YIELD-ACTUAL> 5.49
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 325
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 835
<ALLOWANCE-DOMESTIC> 835
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
