Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2009 File Number 0-25933
SOUTHCOAST FINANCIAL CORPORATION
(Exact name of Registrant as specified 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)
Registrant's Telephone Number, Including Area Code: (843) 884-0504
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each of class: Name of each exchange on which registered:
Common Stock, No Par Value NASDAQ Global Market
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [ ] No [ ] (Not yet
applicable to registrant.)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The aggregate market value of the Common Stock held by non-affiliates
on June 30, 2009, the last business day of the Registrant's most recently
completed second fiscal quarter, was approximately $22,725,375. The Registrant
has no non-voting common equity outstanding. For purposes of the foregoing
calculation only, all directors and executive officers of the Registrant have
been deemed affiliates.
As of February 28, 2010, there were 4,550,015 shares of the
Registrant's Common Stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 2009 - Parts I and II
(2) Portions of the Registrant's Proxy Statement for the 2010 Annual Meeting of
Shareholders - Part III
10-K CROSS REFERENCE INDEX
Part I Page
Item 1 Business ....................................................... 2
Item 1A Risk Factors ................................................... 9
Item 1B Unresolved Staff Comments ...................................... 12
Item 2 Properties ..................................................... 12
Item 3 Legal Proceedings .............................................. 13
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ............ 13
Item 6 Selected Financial Data ........................................ 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation ........................... 14
Item 7A Quantitative and Qualitative Disclosures
About Market Risk ............................................ 14
Item 8 Financial Statements and Supplementary Data .................... 14
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ....................... 14
Item 9AT Controls and Procedures ........................................ 14
Item 9B Other Information .............................................. 15
Part III
Item 10 Directors, Executive Officers and Corporate Governance ......... 15
Item 11 Executive Compensation ......................................... 16
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................ 16
Item 13 Certain Relationships and Related Transactions,
and Director Independence ................................... 16
Part IV
Item 14 Principal Accountant Fees and Services.......................... 16
Item 15 Exhibits and Financial Statement Schedules ..................... 16
CAUTIONARY NOTICE WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This Report on Form 10-K contains forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products and similar matters. All statements
that are not historical facts are "forward-looking statements."
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
Forward-looking statements include, but are not limited to, statements
with respect to management's beliefs, plans, objectives, goals, expectations,
anticipations, assumptions, estimates, intentions, and future performance, and
involve known and unknown risks, uncertainties and other factors, which may be
beyond the Company's control, and which may cause actual results, performance or
achievements to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements.
All statements other than statements of historical fact are statements
that could be forward-looking statements. These forward-looking statements can
be identified through use of words such as "may," "will," "anticipate,"
"assume," "should," "indicate," "would," "believe," "contemplate," "expect,"
"seek," "estimate," "continue," "plan," "point to," "project," "predict,"
"could," "intend," "target," "potential," and other similar words and
expressions of the future. These forward-looking statements may not be realized
due to a variety of factors, including, without limitation:
o future economic and business conditions;
o lack of sustained growth in the economies of the Company's market
areas;
o government monetary and fiscal policies;
o the effects of changes in interest rates on the levels, composition
and costs of deposits, loan demand, and the values of loan collateral,
securities, and interest sensitive assets and liabilities;
o the effects of competition from a wide variety of local, regional,
national and other providers of financial, investment, and insurance
services, as well as competitors that offer banking products and
services by mail, telephone, computer and/or the Internet;
o credit risks;
o higher than anticipated levels of defaults on loans;
o perceptions by depositors about the safety of their deposits;
o the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates, including the value of
collateral securing loans;
o the risks of opening new offices, including, without limitation, the
related costs and time of building customer relationships and
integrating operations as part of these endeavors and the failure to
achieve expected gains, revenue growth and/or expense savings from
such endeavors;
o changes in laws and regulations, including tax, banking and securities
laws and regulations;
o changes in accounting policies, rules and practices;
o changes in technology or products may be more difficult or costly, or
less effective, than anticipated;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions and
economic confidence;
o our ability to weather the current economic downturn;
o loss of consumer or investor confidence; and
o other factors and information described in this report and in any of
the other reports that we file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934.
All forward-looking statements are expressly qualified in their
entirety by this cautionary notice. The Company has no obligation, and does not
undertake, to update, revise or correct any of the forward-looking statements
after the date of this report. The Company has expressed its expectations,
beliefs and projections in good faith and believes they have a reasonable basis.
However, there is no assurance that these expectations, beliefs or projections
will result or be achieved or accomplished.
PART I
Item 1. 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
significant 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, Charleston, Moncks Corner, Johns Island,
Summerville, Goose Creek and North Charleston, South Carolina. The main office
is located at 530 Johnnie Dodds Boulevard, in Mt. Pleasant; other Mt. Pleasant
offices are located at 602 Coleman Boulevard and 3305 South Morgan's Point Road;
the Charleston offices are located at 802 Savannah Highway and 1654 Sam
Rittenberg Boulevard; the Moncks Corner office is located at 337 East Main
Street; the Johns Island office is located at 2753 Maybank Highway; the
Summerville office is located at 302 N. Main Street; the Goose Creek office is
located at 597 Old Mount Holly Road; and the North Charleston office is located
at 8420 Dorchester Road.
The Bank offers a full array of commercial banking 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, among others: car loans, home
equity improvement loans (secured by first and second mortgages), personal
expenditure loans, education loans, overdraft lines of credit, and the like. The
Bank makes commercial loans to small and middle market businesses. Commercial
loans may be unsecured if they are of short duration and made to a customer with
demonstrated ability to pay, but most often they are secured. Collateral for
commercial loans may be listed securities, equipment, inventory, accounts
receivable or other business assets but will usually be local real estate. The
Bank usually makes commercial loans to businesses to provide working capital,
expand physical assets or acquire assets. Commercial loans will typically not
exceed a 20-year maturity and will usually have regular amortization payments.
Commercial loans to most business entities require guarantees by their
principals. The Bank also makes loans guaranteed by the U. S. Small Business
Administration.
The Bank makes loans secured by real estate mortgages that are usually
for the acquisition, improvement or construction and development of residential
and other properties. Residential real estate loans consist primarily of first
and second mortgage loans on single family homes, with some mortgage loans on
multifamily homes. Loan-to-value ratios for these loans are generally limited to
80%. Non-farm, non-residential loans are secured by business and commercial
properties usually acquired using the loan proceeds. Loan-to-value ratios on
these loans are also 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.
Real estate construction loans typically consist of financing for the
construction of 1-4 family dwellings and some non-farm, non-residential real
estate. Usually, loan-to-value ratios for these loans are limited to 80% and
permanent financing commitments are required prior to the advancement of loan
proceeds.
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Management believes that the loan portfolio is adequately diversified.
Management is not aware of any significant concentrations of loans made to any
particular individuals, industries or groups of related individuals or
industries, except for residential mortgage loans, commercial real estate loans,
and construction and land development loans. The loan portfolio consists
primarily of mortgage loans and extensions of credit to businesses and
individuals in the Bank's service areas within Charleston, Dorchester and
Berkeley Counties of South Carolina. The economy of these areas is diversified
and does not depend on any single industry or group of related industries.
Approximately 90% of loans are secured by real estate located in those three
counties or other coastal areas of South Carolina. The Bank does not make any
foreign loans.
In addition to monitoring potential concentrations of loans to
particular borrowers or groups of borrowers, industries and geographic regions,
management monitors exposure to credit risk from concentrations of lending
products and practices such as loans that subject borrowers to substantial
payment increases (e.g. principal deferral periods, loans with initial
interest-only periods, etc), and loans with high loan-to-value ratios.
Management has determined that there is no concentration of credit risk
associated with its lending policies or practices with respect to these types of
products and practices. Additionally, there are industry practices that could
subject the Company to increased credit risk should economic conditions change
over the course of a loan's life. For example, the Company makes variable rate
loans and fixed rate principal-amortizing loans with maturities prior to the
loan's being fully paid (i.e. balloon payment loans). These loans are
underwritten and monitored to manage the associated risks. Therefore, management
believes that these particular practices do not subject the Company to unusual
credit risk.
Other services the Bank offers include residential mortgage loan
origination services, safe deposit boxes, business courier service, night
depository service, telephone banking, MasterCard brand credit cards, tax
deposits, and 24-hour automated teller machines.
At March 1, 2010, the Bank employed 99 persons full-time. The Company
has no employees. Management of the Bank believes that its employee relations
are excellent.
Competition
The Bank competes in the Charleston - North Charleston MSA. As of June
30, 2009, 31 banks, savings and loans, and savings banks with 204 branch
locations competed in the Charleston - North Charleston MSA. As of June 30,
2009, the Bank held 4.15% of total deposits in the MSA of $9.1 billion.
Banks generally compete with other financial institutions through the
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. South Carolina
law permits statewide branching by banks and savings institutions, and many
financial institutions in the state have branch networks. Consequently,
commercial banking in South Carolina is highly competitive. Furthermore,
out-of-state banks may commence operations and compete in the Bank's primary
service area. Many large banking organizations, several of which are controlled
by out-of-state ownership, currently operate in the Bank's market area.
In the conduct of certain areas of its business, the Bank competes with
commercial banks, savings and loan associations, 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. Such competitors may also be in a
position to make more effective use of media advertising, support services, and
electronic technology than can the Bank.
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.
3
Available Information
The Company electronically files with the Securities and Exchange
Commission (SEC) its annual reports on Form 10-K, its quarterly reports on Form
10-Q, its periodic reports on Form 8-K, amendments to those reports filed or
furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the
"1934 Act), and proxy materials pursuant to Section 14 of the 1934 Act. The SEC
maintains a site on the Internet, www.sec.gov, that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC. The Company does not have a website, but the Bank
maintains a website at www.southcoastbank.com. As required by SEC rules, the
Company's 2009 Annual Report to Shareholders and Proxy Statement for the 2010
Annual Meeting of Shareholders will be posted on this website upon mailing of
such materials to shareholders. Reports of beneficial ownership of securities
filed on behalf of the Company's directors and executive officers pursuant to
Section 16 of the Securities Exchange Act of 1934 are also available on the
Bank's website. The Company does not post its other SEC filings on the Bank's
website because the Bank has only a small staff available to update and monitor
the website, and the Company's filings are readily available on the SEC website,
www.sec.gov, without charge. Persons who are unable to obtain such filings from
the SEC website may obtain free copies from the Company upon request.
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 "Gramm-Leach-Bliley Act." 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 also 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 fund 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 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 its
best interest. 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.
4
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 gives 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, ranging from, for example, a prohibition on the taking
of brokered deposits to the termination of deposit insurance by the FDIC or the
appointment of a receiver for the Bank.
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 issued additional capital guidelines for bank holding companies that engage
in certain trading activities.
The Company and the Bank exceeded all applicable capital requirements
at December 31, 2009.
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
The FDIC merged the Bank Insurance Fund and the Savings Association Insurance
Fund to form the Deposit Insurance Fund ("DIF") on March 31, 2006 in accordance
with the Federal Deposit Insurance Reform Act of 2005. The FDIC maintains the
DIF by assessing depository institutions an insurance premium. The amount each
institution is assessed is based upon statutory factors that include the balance
of insured deposits as well as the degree of risk the institution poses to the
insurance fund. The FDIC uses a risk-based premium system that assesses higher
rates on those institutions that pose greater risks to the DIF. Under the rule
5
adopted by the FDIC in November 2006, beginning January 1, 2007, the FDIC placed
each institution in one of four risk categories using a two-step process based
first on capital ratios (the capital group assignment) and then on other
relevant information (the supervisory group assignment). As a result of recent
bank failures, and in order to increase the amount in the DIF to reflect the
increased risk of additional bank failures and insurance claims, the FDIC raised
its assessments on banks for 2009, and collected a special assessment. The
Bank's portion of the special assessment totaled $230,000, and was paid in
September, 2009 based on deposits at June 30, 2009. The FDIC also required
insured institutions to pay three years of deposit insurance premiums in
advance. On December 30, 2009 the FDIC collected $2,101,398 from the Bank for
deposit insurance premiums. Of that amount, $133,487 related to the regular
quarterly assessment, and $1,967,911 related to the prepayment of premiums for
the years 2010, 2011 and 2012. In 2010 and the following two years, on a
quarterly basis, the FDIC will continue to calculate the assessment amount with
then current financial information, and will deduct the quarterly assessment
amount from the prepaid balance. The Bank will expense the current portion as
calculated by the FDIC.
Regulation of the Bank
The Bank is subject to regulation and 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 laws 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; 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
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 USA Patriot Act,
dealing with, among other things, requiring the establishment of anti-money
laundering programs including standards for verifying customer information at
account opening.
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 "prompt corrective
action" 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; prohibiting the
acceptance of employee benefit plan deposits; restricting the growth of the
bank's assets and requiring prior approval of certain expansion proposals. A
bank that is "significantly undercapitalized" is additionally 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.
6
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.
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 permits such interstate branching but not de
novo branching by an out-of-state bank.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act makes it easier for affiliations between
banks, securities firms and insurance companies to take place, removes
Depression-era barriers that had separated banks and securities firms, and seeks
to protect the privacy of consumers' financial information.
Under provisions of the legislation and regulations adopted by the
appropriate regulators, 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 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)
complementary 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 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.
7
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.
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 regulations govern the consumer's right to
opt-out of further disclosure of nonpublic personal financial information and
require the Bank to provide initial and annual privacy notices. The Bank is also
required to develop a comprehensive plan for the safeguarding of customer
information which encompasses all aspects of the Bank's technological
environment, business practices, and Bank facilities.
The Act and the regulations adopted pursuant to the Act create new
opportunities for the Company 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 Act has increased 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.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act became effective in 2002, and mandated extensive
reforms and requirements for public companies. The SEC has adopted extensive new
regulations pursuant to the requirements of the Sarbanes-Oxley Act. The
Sarbanes-Oxley Act and the SEC's new regulations have increased the Company's
cost of doing business, particularly its fees for internal and external audit
services and legal services, and the law and regulations are expected to
continue to do so. However, the Company does not believe that it will be
affected by Sarbanes-Oxley and the new SEC regulations in ways that are
materially different or more onerous than those of other public companies of
similar size and in similar businesses.
Government Response to 2008 Financial Crisis
During the fourth quarter of 2008 and continuing into the first quarter of 2009
the FDIC, the Federal Reserve, the Department of the Treasury and Congress took
a number of actions designed to alleviate or correct mounting problems in the
financial services industry. A number of these initiatives were directly
applicable to community banks.
Congress enacted the Emergency Economic Stabilization Act of 2008 which, among
other things, temporarily increased the maximum amount of FDIC deposit insurance
from $100,000 to $250,000 and created a Troubled Assets Relief Program ("TARP")
administered by Treasury. In October, 2008, Treasury announced a Capital
Purchase Program ("CPP") under TARP to increase the capital of healthy banks.
Under the CPP, Treasury would purchase preferred stock with warrants from
qualified banks and bank holding companies in an amount up to 3% of the seller's
risk-weighed assets as of September 30, 2008. Institutions wishing to
participate in the CPP were required to file an application with their principal
federal regulators. The Company elected not to participate in the CPP because of
(i) the cost of the preferred stock, (ii) the open-ended administrative burdens
associated with the preferred stock including having to agree to allow Treasury
to unilaterally amend the stock purchase agreement to comply with subsequent
changes in applicable federal statutes, (iii) the fact that the Company and the
Bank were already well capitalized under regulatory guidelines and expected to
continue to be so, and (iv) management's belief that other sources of capital
were, and would continue to be, available should additional capital be needed.
FDIC also implemented in October, 2008 a Temporary Liquidity Guarantee Program
pursuant to which it undertook to provide deposit insurance in an unlimited
amount for non-interest bearing transaction accounts and a debt guarantee
component to fully guarantee senior, unsecured debt issued by banks or bank
holding companies. Coverage of both components was automatic until December 5,
2008, at which time covered institutions could opt out of one or both of the
components. Institutions not opting out would be charged fees for their
participation in the components. The Company and Bank opted out of the debt
guarantee component.
8
An unfortunate consequence of the difficulties that have beset the banking
industry in the last year has been a large increase in bank failures which has
led to substantial claims being made against the FDIC's Deposit Insurance Fund.
In order to increase the amount in the Deposit Insurance Fund to reflect the
increased risk of additional bank failures and insurance claims, FDIC has raised
its assessments on banks for 2009 and also made a one-time special assessment of
5 cents per $100 of assessable deposits at June 30, 2009. Under the new
methodology, assessments will range between 7 and 77.5 cents per $100 in
assessable deposits. The FDIC has also made an additional "emergency assessment"
of 5 cents per $100 of assessable assets held on June 30, 2009, not to exceed 10
cents per $100 of an institution's deposit insurance base for the second quarter
of 2009, which was payable in September 2009. In November of 2009 the FDIC
adopted a final rule amending the assessment regulation to require insured
depository institutions to prepay their quarterly risk-based assessments for the
fourth quarter of 2009, and for all of 2010, 2011, and 2012 on December 30,
2009, along with each institution's risk-based assessment for the third quarter
of 2009.
Legislative Proposals
Proposed legislation which could significantly affect the business of
banking is introduced in Congress from time to time. For example, numerous bills
are pending in Congress and the South Carolina Legislature to provide various
forms of relief to homeowners from foreclosure of mortgages as a result of
publicity surrounding economic problems resulting from subprime mortgage lending
and the economic adjustments in national real estate markets. Broader problems
in the financial sector of the economy which became apparent in 2008 have led to
numerous calls for legislative restructuring of the regulation of the sector.
Management of the Company 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.
Further Information
Further information about the business of the Company and the Bank is
set forth in this Form 10-K under Item 7 -"Management's Discussion and
Analysis of Financial Condition and Results of Operation."
Item 1A. Risk Factors
Risks Related to Our Industry
There can be no assurance that recent government actions will help
stabilize the U.S. financial system.
In response to the financial crises affecting the banking system and
financial markets and going concern threats to investment banks and other
financial institutions, various branches and agencies of the U.S. government
have put in place laws, regulations and programs to address capital and
liquidity issues in the banking system. There can be no assurance, however, as
to the actual impact that such laws, regulations and programs will have on the
financial markets, including the extreme levels of volatility, liquidity and
confidence issues, and limited credit availability currently being experienced.
The failure of such laws, regulations and programs to help stabilize the
financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit or the trading price of our
common stock.
9
Current levels of market volatility are unprecedented.
The volatility and disruption of financial and credit markets has
reached unprecedented levels for recent times. In some cases, the markets have
produced downward pressure on stock prices and credit availability for certain
issuers without regard to those issuers' underlying financial strength. If
current levels of market disruption and volatility continue or worsen, there can
be no assurance that we will not experience an adverse effect, which may be
material, on our ability to access capital and on our business, financial
condition and results of operations.
The soundness of other financial institutions could adversely affect
us.
Financial services institutions are interrelated as a result of
trading, clearing, counterparty, or other relationships. We have exposure to
many different industries and counterparties, and we routinely execute
transactions with counterparties in the financial services industry, including
brokers, dealers, commercial banks, investment banks, and government sponsored
enterprises. Many of these transactions expose us to credit risk in the event of
default of our counterparty. In addition, our credit risk may be exacerbated
when the collateral we hold cannot be realized or is liquidated at prices not
sufficient to recover the full amount of the loan or other obligation due us.
There is no assurance that any such losses would not materially and adversely
affect our results of operations or earnings.
Current market developments may adversely affect our industry, business
and results of operations.
Dramatic declines in the housing market during the prior two years,
with falling home prices and increasing foreclosures and unemployment, have
resulted in significant write-downs of asset values by financial institutions,
including government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities but spreading
to credit default swaps and other derivative securities have caused many
financial institutions to seek additional capital, to merge with larger and
stronger institutions and, in some cases, to fail. Reflecting concern about the
stability of the financial markets generally and the strength of counterparties,
many lenders and institutional investors have reduced, and in some cases, ceased
to provide funding to borrowers, including other financial institutions. The
resulting lack of available credit, lack of confidence in the financial sector,
increased volatility in the financial markets and reduced business activity
could materially and adversely, directly or indirectly, affect our business,
financial condition and results of operations.
We are subject to governmental regulation which could change and
increase our cost of doing business or have an adverse effect on our business.
We operate in a highly regulated industry and are subject to
examination, supervision and comprehensive regulation by various federal and
state agencies. Most of this regulation is designed to protect our depositors
and other customers, not our shareholders. Our compliance with the requirements
of these agencies is costly and may limit our growth and restrict certain of our
activities, including, payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, locations of offices, and
compensation of our officers. We are also subject to capitalization guidelines
established by federal authorities and our failure to meet those guidelines
could result in limitations being imposed on our activities or, in an extreme
case, in our bank's being placed in receivership. We are also subject to the
extensive and expensive requirements imposed on public companies by the
Sarbanes-Oxley Act of 2002 and related regulations.
The laws and regulations applicable to the banking industry could
change at any time, and we cannot predict the impact of these changes on our
business or profitability. Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding
companies, our cost of compliance could adversely affect our ability to operate
profitably.
We are susceptible to changes in monetary policy and other economic
factors which may adversely affect our ability to operate profitably.
Changes in governmental, economic and monetary policies may affect the
ability of our bank to attract deposits and make loans. The rates of interest
payable on deposits and chargeable on loans are affected by governmental
regulation and fiscal policy as well as by national, state and local economic
conditions. National and international economic conditions and governmental
efforts to control such conditions affect us directly and indirectly. All of
these matters are outside of our control and affect our ability to operate
profitably.
10
Risks Related to Our Business
We depend on the services of a number of key personnel, and a loss of
any of those personnel could disrupt our operations and result in reduced
revenues.
The success of our business depends to a great extent on our customer
relationships. Our growth and development to date have depended in large part on
the efforts of our senior management team. These senior officers have primary
contact with our customers and are extremely important in maintaining
personalized relationships with our customer base, a key aspect of our business
strategy, and in increasing our market presence. The unexpected loss of services
of one or more of these key employees could have a material adverse effect on
our operations and possibly result in reduced revenues if we were unable to find
suitable replacements promptly.
We may be unable to successfully manage our sustained growth.
We began operating in July 1998 and have grown from $92.1 million in
total assets at December 31, 2000 (the end of our first year of profitable
operations) to $521.4 million in total assets at December 31, 2009, an increase
of 466%. Although we did not grow in 2009, and do not expect to continue to grow
as fast in the future as we have in the past, it is our intention to continue to
expand our asset base. Our future profitability will depend in part on our
ability to manage growth successfully. Our ability to manage growth successfully
will depend on our ability to maintain cost controls and asset quality while
attracting additional loans and deposits, as well as on factors beyond our
control, such as economic conditions and interest rate trends. If we grow too
quickly and are not able to control costs and maintain asset quality, growth
could materially adversely affect our financial performance.
Our future growth or regulatory requirements may require us to raise
additional capital in the future, but that capital may not be available when it
is needed or be available on favorable terms.
We anticipate that our capital resources following our 2005 stock
offering will continue to satisfy our capital requirements for the foreseeable
future. Nevertheless, we may need to raise additional capital to support
additional growth or to meet regulatory requirements. Our ability to raise
additional capital, if needed, will depend, among other things, on conditions in
the capital markets at that time, which are outside our control, and on our
financial condition and performance. If we cannot raise additional capital on
acceptable terms when needed, our ability to further expand our operations
through internal growth and acquisitions could be limited and, if we cannot
continue to meet regulatory capital requirements, our existence could also be
limited.
Our assets include substantial amounts of real estate acquired through
foreclosure or in settlement of loans, which we may not be able to sell without
incurring additional losses.
We have acquired, and expect to continue to acquire, substantial
amounts of real estate through foreclosure or settlement of loans in default.
When we acquire such real estate, it is written down to its estimated fair
market value less the estimated costs of selling. If we cannot sell the property
for that amount we will incur additional loss which, for one or more properties,
could materially reduce our earnings.
If our loan customers do not pay us as they have contracted to, we may
experience losses.
Our principal revenue producing business is making loans. If the loans
are not repaid, we will suffer losses. Even though we maintain an allowance for
loan losses, the amount of the allowance may not be adequate to cover the losses
we experience. We attempt to mitigate this risk by a thorough review of the
creditworthiness of loan customers. Nevertheless, there is risk that our credit
evaluations will prove to be inaccurate due to changed circumstances or
otherwise.
Our business is concentrated in Greater Charleston, and a downturn in
the economy of the Charleston area, a decline in Charleston area real estate
values or other events in our market area may adversely affect our business.
Substantially all of our business is located in the Greater Charleston
area. As a result, our financial condition and results of operations may be
affected by changes in the Charleston economy. A prolonged period of economic
recession, a general decline in Charleston area real estate values or other
adverse economic conditions in Charleston may result in decreases in demand for
our services, increases in nonpayment of loans and decreases in the value of
collateral securing loans. The existence of adverse economic conditions,
declines in real estate values or the occurrence of other adverse economic
conditions in Charleston and South Carolina could have a material adverse effect
on our business, future prospects, financial condition or results of operations.
11
We operate in an area susceptible to hurricane and other weather
related damage which could disrupt our business and reduce our profitability.
Nearly all of our business and our customers are located in coastal
South Carolina, an area that often experiences damage from hurricanes and other
weather phenomena. We attempt to mitigate such risk with insurance and by
requiring insurance on property we take as collateral. However, catastrophic
weather damage to a large portion of our market area could cause substantial
disruptions to our business and our customers' businesses which would reduce our
profitability for some period.
We face strong competition from larger, more established competitors
which may adversely affect our ability to operate profitably.
We encounter strong competition from financial institutions operating
in the greater Charleston, South Carolina area. In the conduct of our business,
we also compete with credit unions, insurance companies, money market mutual
funds and other financial institutions, some of which are not subject to the
same degree of regulation as we are. Many of these competitors have
substantially greater resources and lending abilities than we have and offer
services, such as investment banking, trust and international banking services
that we do not provide. We believe that we have competed, and will continue to
be able to compete, effectively with these institutions because of our
experienced bankers and personalized service, as well as through loan
participations and other strategies and techniques. However, we cannot promise
that we are correct in our belief. If we are wrong, our ability to operate
profitably may be negatively affected.
Technological changes affect our business, and we may have fewer
resources than many of our competitors to invest in technological improvements.
The financial services industry continues to undergo rapid
technological changes with frequent introductions of new technology-driven
products and services. In addition to enabling financial institutions to serve
clients better, the effective use of technology may increase efficiency and may
enable financial institutions to reduce costs. Our future success may depend, in
part, upon our ability to use technology to provide products and services that
provide convenience to customers and to create additional efficiencies in our
operations. We may need to make significant additional capital investments in
technology in the future, and we may not be able to effectively implement new
technology-driven products and services. Many of our competitors have
substantially greater resources to invest in technological improvements.
Our profitability and liquidity are affected by changes in interest
rates and economic conditions.
Our profitability depends upon our net interest income, which is the
difference between interest earned on our interest-bearing assets, such as loans
and investment securities, and interest expense on interest-bearing liabilities,
such as deposits and borrowings. Our net interest income is adversely affected
when market interest rates change such that the interest we pay on deposits and
borrowings increases faster than the interest we earn on loans and investments
or, conversely, when the interest we earn on loans and investments decreases
faster than the interest we pay on deposits and borrowings. Interest rates, and
consequently our results of operations, are affected by general economic
conditions (domestic and foreign) and fiscal and monetary policies. Monetary and
fiscal policies may materially affect the level and direction of interest rates.
Beginning in June 2004 through June 2006, the Federal Reserve raised rates 17
times for a total increase of 4.25%. Increases in interest rates generally
decrease the market values of interest-bearing investments and loans held and
therefore may adversely affect our liquidity and earnings. Increased interest
rates also generally affect the volume of mortgage loan originations, the resale
value of mortgage loans originated for resale, and the ability of borrowers to
perform under existing loans of all types. Since September 18, 2007, the Federal
Reserve has decreased interest rates significantly. Decreases in interest rates
generally have the opposite effect on market values of interest-bearing assets,
the volume of mortgage loan originations, the resale value of mortgage loans
originated for resale, and the ability of borrowers to perform under existing
loans of all types from the effect of increases in interest rates.
12
Risks Related to Our Common Stock
Our common stock has a limited trading market, which may limit your
ability to sell your stock.
Our common stock is traded on the Nasdaq Capital Market under the
symbol "SOCB." Since January 1, 2009, the average daily trading volume has been
approximately 2,938 shares. Accordingly, a shareholder who wishes to sell a
large number of shares may experience a delay in selling the shares or have to
sell them at a lower price in order to sell them promptly.
The market price of our common stock may continue to decline.
The market prices of financial institution equity securities, including
ours, have declined significantly over the past 18 months in response to the
financial crises affecting the banking system and financial markets. There can
be no assurance that such declines will not continue.
We may issue additional securities, which could affect the market price
of our common stock and dilute your ownership.
We may issue additional securities to raise additional capital, to
support growth, or to make acquisitions. Sales of a substantial number of shares
of our common stock, or the perception by the market that those sales could
occur, could cause the market price of our common stock to decline or could make
it more difficult for us to raise capital through the sale of common stock or to
use our common stock in future acquisitions.
We do not plan to pay cash dividends in the foreseeable future.
We have never paid cash dividends and do not plan to pay cash dividends
in the foreseeable future. We plan to use the funds that might otherwise be
available to pay dividends to increase our capital.
Declaration and payment of dividends are within the discretion of our
board of directors. Our bank will be our most likely source of funds with which
to pay cash dividends. Our bank's declaration and payment of future dividends to
us are within the discretion of the bank's board of directors, and are dependent
upon its earnings, financial condition, its need to retain earnings for use in
the business and any other pertinent factors. Payment of dividends by our bank
is also subject to various regulatory requirements.
Provisions in our articles of incorporation and South Carolina law may
discourage or prevent takeover attempts, and these provisions may have the
effect of reducing the market price for our stock.
Our articles of incorporation include several provisions that may have
the effect of discouraging or preventing hostile takeover attempts, and
therefore of making the removal of incumbent management difficult. The
provisions include staggered terms for our board of directors and requirements
of supermajority votes to approve certain business transactions. In addition,
South Carolina law contains several provisions that may make it more difficult
for a third party to acquire control of us without the approval of our board of
directors, and may make it more difficult or expensive for a third party to
acquire a majority of our outstanding common stock. To the extent that these
provisions are effective in discouraging or preventing takeover attempts, they
may tend to reduce the market price for our stock.
Our common stock is not insured, so you could lose your total
investment.
Our common stock is not a deposit, savings account or obligation of our
bank and is not insured by the Federal Deposit Insurance Corporation or any
other government agency. Should our business fail, you could lose your total
investment.
Item 1B. Unresolved Staff Comments.
The Company has not received written comments from the staff of the
Securities and Exchange Commission regarding its periodic or current reports
under the Securities Exchange Act of 1934 within the 180 days before the end of
its 2009 fiscal year.
Item 2. Properties.
The Company owns the real property at 530-534 Johnnie Dodds Boulevard,
Mt. Pleasant, South Carolina, where its main offices are located. The Company
also owns the following properties in Charleston and Berkeley Counties of South
Carolina, where its branch offices are located: 602 Coleman Boulevard, Mt.
Pleasant; 3305 South Morgan's Point Road, Mt. Pleasant; 802 Savannah Highway,
Charleston; 337 East Main Street, Moncks Corner; 597 Old Mount Holly Road, Goose
Creek; and 8420 Dorchester Road, North Charleston. The Company leases the
property at 302 N. Main Street, Summerville; 1654 Sam Rittenberg Boulevard,
Charleston; and 2753 Maybank Highway, Johns Island. All properties are believed
to be well suited for the Company's needs.
13
In 2007, the Bank acquired a parcel of real property and a building in
the Hilton Head area of South Carolina. The Bank is making improvements to the
site and exploring its options with respect to the property. In 2006, the
Company acquired a parcel of real property in Hilton Head and a parcel in
Bluffton, South Carolina, with a view to opening branches at those locations.
Because of changes in market conditions since the Company entered into binding
contracts for the purchase of these two properties, however, the Company has
slowed its expansion plans for the area and has not yet entered into
construction contracts on either parcel.
The Bank also holds 25 properties acquired through foreclosure or in
settlement of loans. All of the properties are being marketed for sale.
Item 3. Legal Proceedings.
The Bank 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.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
The information set forth under the caption "Corporate Data -- Common
Stock and Dividends" in the Registrant's Annual Report to Shareholders for the
year ended December 31, 2009 (the "2009 Annual Report"), which information is
set forth in Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is set forth
in Item 12 of this Form 10-K.
Unregistered Sales of Equity Securities
The Company did not sell any securities during the year ended December
31, 2009 that were not registered under the Securities Act of 1933.
Purchases of Equity Securities by the Company and Affiliated Purchasers
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total Number (d) Maximum
of Shares (or Number (or
(a) Total (b) Units) Purchased Approximate Dollar
Number of Average as Part of Value) of Shares (or
Period Shares (or Price Paid Publicly Units) that May Yet
Units) Per Share Announced Plans Be Purchased Under
Purchased (or Unit) or Programs the Plans or
Programs
--------------------- ----------------- ---------------------- ------------------------ ------------------------------
10/1-10/31/09 - - - 144,598
11/1-11/30/09 - - - 144,598
12/1-12/31/09 - - - 144,598
Total
On July 24, 2007, the Board of Directors authorized the repurchase of
10% of its outstanding stock. The Company announced this repurchase plan on July
25, 2007. Stock dividends occurring subsequent to the authorization were
included in the authorization. The authorization required that purchases be made
in the open market and permited block trades, all in accordance with Rule 10b-18
under the Securities Exchange Act of 1934. The July 25, 2007 repurchase plan
does not have an expiration date. At December 31, 2009, 144,598 shares remained
authorized for purchase under the program.
14
Item 6. Selected Financial Data
The information set forth under the caption "Selected Consolidated
Financial Data" in the 2009 Annual Report, which information is set forth in
Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information set forth under the caption "Management's Discussion
and Analysis" in the 2009 Annual Report, which information is set forth in
Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information set forth under the captions "Management's Discussion
and Analysis -- Market Risk - Interest Rate Sensitivity" and "-- Off Balance
Sheet Arrangements" in the 2009 Annual Report, which information is set forth in
Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements, including Notes thereto, in the
2009 Annual Report, which are set forth in Exhibit 13 to this Form 10-K, are
incorporated herein by reference. Supplementary financial information is set
forth in Note 28 to such financial statements.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable
Item 9AT. Controls and Procedures.
Effectiveness of Disclosure Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that such controls and
procedures, as of the end of the period covered by this Annual Report on Form
10-K, were effective.
Management's Annual Report on Internal Control over Financial Reporting
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Southcoast Financial Corporation is responsible for
establishing and maintaining adequate internal control over financial reporting
for the company. Internal control over financial reporting is a process designed
to provide reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition, transactions are executed in accordance with
appropriate management authorization and accounting records are reliable for the
preparation of financial statements in accordance with generally accepted
accounting principles. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management has assessed the effectiveness of Southcoast Financial
Corporation's internal control over financial reporting as of December 31, 2009.
In making our assessment, management has utilized the framework published by the
Committee of Sponsoring Organizations ("COSO") of the Treadway Commission
"Internal Control-Integrated Framework." Based on our assessment, management has
concluded that, as of December 31, 2009, the Company's internal control over
financial reporting was effective.
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management's report in this annual report.
Date: December 31, 2009
/s/L. Wayne Pearson /s/William C. Heslop
------------------------------------ -----------------------------------------
L. Wayne Pearson William C. Heslop
President and Chief Executive Officer Senior Vice President and Chief Financial
Officer
15
Changes in Internal Control over Financial Reporting
There has been no change in the Company's internal control over
financial reporting during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item 9B. Other Information.
No information was required to be disclosed in a Form 8-K during the
fourth quarter of 2009 that was not so disclosed.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information set forth under the captions "Election of Directors --
Directors and Nominees" and "-- Executive Officers," and "Committees of our
Board of Directors -- Audit Committee," and "Section 16(a) Beneficial Ownership
Reporting Compliance" in registrant's definitive proxy statement filed with the
Commission for the 2010 Annual Meeting of Shareholders (the "2010 Proxy
Statement") is incorporated herein by reference.
Code of Ethics
The Company has adopted a code of ethics (as defined by 17 C.F.R.
229.406) that applies to its principal executive officer and principal financial
officer. The Company will provide a copy of the code of ethics, free of charge,
to any person upon written request to William C. Heslop, Senior Vice President,
Southcoast Financial Corporation, 534 Johnnie Dodds Boulevard, Mt. Pleasant,
South Carolina 29464.
Audit Committee Financial Expert
The Company's board of directors has determined that the Company does
not have an "audit committee financial expert," as that term is defined by Item
407(d)(5) of Regulation S-K promulgated by the Securities and Exchange
Commission, serving on its audit committee. The Company's audit committee is a
committee of directors who are independent of the Company and its management.
After reviewing the experience and training of all of the Company's independent
directors, the board of directors has concluded that no independent director
meets the SEC's very demanding definition. Therefore, it would be necessary to
find a qualified individual willing to serve as both a director and member of
the audit committee and have that person elected as a director by the
shareholders in order to have an "audit committee financial expert" serving on
the Company's audit committee. The Company's audit committee is, however,
authorized to use consultants to provide financial accounting expertise in any
instance where members of the committee believe such assistance would be useful.
Accordingly, the Company does not believe that it needs to have an "audit
committee financial expert" on its audit committee.
16
Item 11. Executive Compensation.
The information set forth under the caption "Management Compensation"
in the 2010 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information set forth under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of our Management" in the
2010 Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth aggregated information as of December
31, 2009 about all of the Company's compensation plans (including individual
compensation arrangements) under which equity securities of the Company are
authorized for issuance:
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column(a))(1)
(a) (b) (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation
plans approved by
security holders - $ - 53,547
Equity compensation
plans not approved
by security holders - - -
------ ------ ------
Total - $ - 53,547
====== ====== ======
(1) Represents shares remaining available for issuance under the Company's 2005
Employee Stock Purchase Plan.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
The information set forth under the captions "Governance Matters --
Director Independence" and "Certain Relationships and Related Transactions" in
the 2010 Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information set forth under the caption "Independent Registered
Public Accounting Firm" in the 2010 Proxy Statement is incorporated herein by
reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) - Report of Independent Registered Public Accounting Firm
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statements of Shareholders Equity and Comprehensive
Income
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules - None
(3) Exhibits - Please see Exhibit Index for a list of exhibits
17
SIGNATURE
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Southcoast Financial Corporation
March 15, 2010 By: s/L. Wayne Pearson
-----------------------------------------------
L. Wayne Pearson
Chairman and Chief Executive Officer
By: s/William C. Heslop
----------------------------------------------
William C. Heslop
Senior Vice President and Chief Financial
Officer
(Principal Financial and Principal
Accounting Officer)
Pursuant to the Requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
-------------------------- Director March __, 2010
Tommy B. Baker
s/William A. Coates
-------------------------- Director March 15, 2010
William A. Coates
s/Stephen F. Hutchinson
-------------------------- Director March 15, 2010
Stephen F. Hutchinson
s/L. Wayne Pearson
-------------------------- Chairman, Chief Executive Officer, Director March 15, 2010
L. Wayne Pearson
s/Robert M. Scott
-------------------------- Director March 15, 2010
Robert M. Scott
-------------------------- Director March __, 2010
James P. Smith
18
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of Registrant(1)
3.2 Bylaws of Registrant, as amended September 13, 2008(8)
4.1 Form of Common Stock Certificate(3)
10.1 1999 Stock Option Plan(2)
10.2 Form of Stock Option Agreement(3)
10.3 Amended and Restated Declaration of Trust among the Registrant,
Wells Fargo Delaware Trust Company, Wells Fargo Bank, National
Association, L. Wayne Pearson, Robert A. Daniel, Jr. and Robert
M. Scott, dated as of May 3, 2002 (4)
10.4 Amended and Restated Trust Agreement among Southcoast Financial
Corporation, The Bank of New York, The Bank of New York
(Delaware), L. Wayne Pearson, Paul D. Hollen, III and Robert M.
Scott, dated as of December 16, 2002(5)
10.5 Form of Amended and Restated Employment Agreements, dated as of
December 29, 2008, between the Company and each of Paul D.
Hollen, III, Robert A. Daniel, Jr., William B. Seabrook, and
William C. Heslop (6)
10.6 Form of Endorsement Split Dollar Agreement, dated as of December
29, 2008, between Southcoast Community Bank and each of Paul D.
Hollen, III, Robert A. Daniel, Jr., William B. Seabrook, and
William C. Heslop (6)
10.7 Southcoast Financial Corporation 2005 Employee Stock Purchase
Plan (7)
10.8 Junior Subordinated Indenture between Registrant and Wilmington
Trust Company dated as of August 5, 2005 (12)
10.9 Guarantee Agreement between Registrant and Wilmington Trust
Company, dated as of August 5, 2005 (12)
10.10 Placement Agreement among Registrant, Southcoast Capital Trust
III and Credit Suisse First Boston LLC dated as of August 5, 2005
(12)
10.11 Form of Endorsement Split Dollar Agreement between the Company
and each of Tommy B. Baker, William A. Coates, Stephen F.
Hutchinson, Robert M. Scott, James H. Sexton, and James P. Smith,
dated December 13, 2007(9)
10.12 Amended and Restated Employment Agreement, dated as of August 14,
2008, among Southcoast Financial Corporation, Southcoast
Community Bank and L. Wayne Pearson (10)
10.13 Salary Continuation Agreement between Southcoast Community Bank
and L. Wayne Pearson (13)
10.14 Endorsement Split Dollar Agreement, dated as of August 14, 2008,
between Southcoast Financial Corporation and L. Wayne Pearson
(10)
13 Portions of the Annual Report to Shareholders for the Year Ended
December 31, 2009 incorporated by reference into this Form 10-K
21 Subsidiaries of Registrant (11)
23 Consent of Elliott Davis, LLC
31.1 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
32 Section 1350 Certifications
----------------------
(1) Incorporated by reference to exhibits to Form 10-SB filed April 30, 1999.
(2) Incorporated by reference to exhibits to Form 10-KSB for the year ended
December 31, 1999.
(3) Incorporated by reference to exhibits to Form 10-KSB for the year ended
December 31, 2000.
(4) Incorporated by reference to exhibits to Form 10-QSB for the quarter ended
March 31, 2002.
(5) Incorporated by reference to exhibits to Form 10-KSB for the year ended
December 31, 2002.
(6) Incorporated by reference to exhibits to Form 8-K, filed January 5, 2009
(7) Incorporated by reference to exhibits to Form S-8, filed September 9, 2005
(File No. 333-128197).
(8) Incorporated by reference to exhibit to Form 8-K filed September 14, 2007.
(9) Incorporated by reference to exhibits to Form 8-K filed December 19, 2007.
(10) Incorporated by reference to exhibits to Form 8-K filed August 20, 2008.
(11) Incorporated by reference to exhibits to Form 10-K for the year ended
December 31, 2007.
(12) Incorporated by reference to exhibits to Form S-1 (Registration No.
333-128247), filed August 12, 2005.
(13) Incorporated by reference to exhibits to Form 8-K filed April 3, 2009.
19
