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EXCEL - IDEA: XBRL DOCUMENT - SOUTHCOAST FINANCIAL CORP | Financial_Report.xls |
EX-32 - EXHIBIT 32 - SOUTHCOAST FINANCIAL CORP | ex32.htm |
EX-31.1 - EXHIBIT 31.1 - SOUTHCOAST FINANCIAL CORP | ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - SOUTHCOAST FINANCIAL CORP | ex31-2.htm |
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
|
|
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
|
For the Quarterly Period Ended March 31, 2015 | ||
OR | ||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF | ||
THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _________to_________
Commission File No.
0-25933
SOUTHCOAST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina |
57-1079460 | |
(State or other jurisdiction |
(I.R.S. Employer | |
of incorporation or organization) |
Identification No.) |
530 Johnnie Dodds Boulevard
Mt. Pleasant, South Carolina 29464
(Address of principal executive offices)
843-884-0504
(Registrant's telephone number, including area code)
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 [ X ] No [ ]
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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] |
Accelerated filer [ ] | |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) |
Smaller reporting company [ X ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [ X ]
State the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
7,103,751 shares of common stock, no par value, as of April 30, 2015
SOUTHCOAST FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION |
Page No. | |
|
|
|
Item 1. |
Financial Statements (Unaudited) |
2 |
Condensed Consolidated Balance Sheets – March 31, 2015 and December 31, 2014 | 2 | |
Condensed Consolidated Statements of Income – Three months ended March 31, 2015 and 2014 | 3 | |
Condensed Consolidated Statements of Comprehensive Income – Three months ended March 31, 2015 and 2014 | 4 | |
Condensed Consolidated Statements of Changes in Shareholders' Equity – Three months ended March 31, 2015 and 2014 | 5 | |
Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2015 and 2014 | 6 | |
Notes to Condensed Consolidated Financial Statements | 7 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 29 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 39 |
Item 4. | Controls and Procedures | 39 |
PART II - OTHER INFORMATION | ||
Item 6. | Exhibits | 40 |
Signatures | 40 | |
Exhibit Index | 41 |
SOUTHCOAST FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
(Dollars in thousands)
March 31, |
December 31, |
|||||||
2015 |
2014 |
|||||||
(Unaudited) |
||||||||
Assets |
||||||||
Cash and cash equivalents: |
||||||||
Cash and due from banks |
$ | 39,937 | $ | 33,572 | ||||
Federal funds sold |
7,534 | - | ||||||
Total cash and cash equivalents |
47,471 | 33,572 | ||||||
Investment securities |
||||||||
Available for sale |
35,287 | 35,269 | ||||||
Federal Home Loan Bank Stock, at cost |
3,569 | 4,000 | ||||||
Loans, net of allowance of $4,875 and $5,602 |
362,755 | 358,546 | ||||||
Premises and equipment, net |
19,747 | 20,455 | ||||||
Other real estate owned, net |
3,375 | 3,686 | ||||||
Company owned life insurance |
13,062 | 12,984 | ||||||
Deferred tax asset, net |
4,427 | 5,636 | ||||||
Other assets |
2,624 | 2,685 | ||||||
Total assets |
$ | 492,317 | $ | 476,833 | ||||
Liabilities |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 61,255 | $ | 48,700 | ||||
Interest-bearing |
293,277 | 282,334 | ||||||
Total deposits |
354,532 | 331,034 | ||||||
Federal funds purchased |
- | 3,065 | ||||||
Securities sold under agreements to repurchase |
350 | 737 | ||||||
Federal Home Loan Bank Borrowings |
74,000 | 80,000 | ||||||
Junior subordinated debentures |
10,310 | 10,310 | ||||||
Other liabilities |
3,305 | 4,382 | ||||||
Total liabilities |
442,497 | 429,528 | ||||||
Shareholders’ Equity |
||||||||
Common stock (no par value; 20,000,000 shares authorized; 7,099,979 shares issued and outstanding at March 31, 2015 and 7,096,574 at December 31, 2014) |
54,667 | 54,643 | ||||||
Accumulated deficit |
(4,222 | ) | (6,200 | ) | ||||
Accumulated other comprehensive loss |
(625 | ) | (1,138 | ) | ||||
Total shareholders’ equity |
49,820 | 47,305 | ||||||
Total liabilities and shareholders’ equity |
$ | 492,317 | $ | 476,833 |
See Notes to Condensed Consolidated Financial Statements
SOUTHCOAST FINANCIAL CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in thousands)
For the Three Months Ended |
||||||||
March 31, |
||||||||
2015 |
2014 |
|||||||
Interest income |
||||||||
Loans, including fees |
$ | 4,604 | $ | 4,235 | ||||
Investment securities |
252 | 301 | ||||||
Cash and federal funds sold |
8 | 6 | ||||||
Total interest income |
4,864 | 4,542 | ||||||
Interest expense |
||||||||
Deposits and borrowings |
849 | 912 | ||||||
Net interest income |
4,015 | 3,630 | ||||||
Provision for loan losses |
(900 | ) | - | |||||
Net interest income after provision for loan losses |
4,915 | 3,630 | ||||||
Noninterest income |
||||||||
Service fees on deposit accounts |
388 | 355 | ||||||
Gain on sale of mortgage loans held for sale |
20 | 6 | ||||||
Company owned life insurance earnings |
78 | 81 | ||||||
Gain on sale of premises and equipment |
750 | - | ||||||
Other |
45 | 46 | ||||||
Total noninterest income |
1,281 | 488 | ||||||
Noninterest expenses |
||||||||
Salaries and employment benefits |
1,830 | 1,759 | ||||||
Occupancy |
277 | 296 | ||||||
Furniture and equipment |
424 | 423 | ||||||
Software |
13 | 21 | ||||||
Insurance |
132 | 145 | ||||||
Professional fees |
202 | 192 | ||||||
Telephone, postage, and supplies |
87 | 83 | ||||||
Gain on sale of other real estate owned |
(25 | ) | (105 | ) | ||||
Other real estate owned impairment provision, and other expenses, net of rental income |
4 | 38 | ||||||
Other operating expenses |
196 | 278 | ||||||
Total noninterest expenses |
3,140 | 3,130 | ||||||
Income before income taxes |
3,056 | 988 | ||||||
Income tax expense |
1,078 | 345 | ||||||
Net income |
$ | 1,978 | $ | 643 | ||||
Basic net income per common share |
$ | .28 | $ | .09 | ||||
Diluted net income per common share |
$ | .28 | $ | .09 | ||||
Weighted average shares outstanding |
||||||||
Basic |
7,099,979 | 7,085,818 | ||||||
Diluted |
7,099,979 | 7,085,818 |
See Notes to Condensed Consolidated Financial Statements
SOUTHCOAST FINANCIAL CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
For the Three Months Ended |
||||||||
March 31, |
||||||||
2015 |
2014 |
|||||||
Net income |
$ | 1,978 | $ | 643 | ||||
Other comprehensive income : |
||||||||
Unrealized gains on available for sale securities |
801 | 507 | ||||||
Tax effect |
(288 | ) | (182 | ) | ||||
Total other comprehensive income |
513 | 325 | ||||||
Comprehensive income |
$ | 2,491 | $ | 968 |
See Notes to Condensed Consolidated Financial Statements
SOUTHCOAST FINANCIAL CORPORATION
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 2015 and 2014
(Unaudited)
(Dollars in thousands)
Accumulated | ||||||||||||||||||||
Other | ||||||||||||||||||||
Common Stock | Accumulated | Comprehensive | ||||||||||||||||||
Shares | Amount | Deficit | Loss | Total | ||||||||||||||||
Balance, January 1, 2014 |
7,082,062 | $ | 54,544 | $ | (9,937 | ) | $ | (2,038 | ) | $ | 42,569 | |||||||||
Net income for the period |
643 | 643 | ||||||||||||||||||
Other comprehensive income, net of tax |
325 | 325 | ||||||||||||||||||
Comprehensive income |
968 | |||||||||||||||||||
Employee stock purchase plan |
3,756 | 21 | .- | - | 21 | |||||||||||||||
Balance, March 31, 2014 |
7,085,818 | $ | 54,565 | $ | (9,294 | ) | $ | (1,713 | ) | $ | 43,558 | |||||||||
Balance, January 1, 2015 |
7,096,574 | $ | 54,643 | $ | (6,200 | ) | $ | (1,138 | ) | $ | 47,305 | |||||||||
Net income for the period |
1,978 | 1,978 | ||||||||||||||||||
Other comprehensive income, net of tax |
513 | 513 | ||||||||||||||||||
Comprehensive income |
2,491 | |||||||||||||||||||
Employee stock purchase plan |
3,405 | 24 | .- | - | 24 | |||||||||||||||
Balance, March 31, 2015 |
7,099,979 | $ | 54,667 | $ | (4,222 | ) | $ | (625 | ) | $ | 49,820 |
See Notes to Condensed Consolidated Financial Statements
SOUTHCOAST FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
For the Three Months Ended |
||||||||
March 31, |
||||||||
2015 |
2014 |
|||||||
Operating activities |
||||||||
Net income |
$ | 1,978 | $ | 643 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Decrease in deferred income taxes |
921 | 313 | ||||||
Provision for loan losses |
(900 | ) | - | |||||
Depreciation and amortization |
201 | 222 | ||||||
Discount accretion and premium amortization |
34 | 35 | ||||||
Gain on sale of other real estate owned |
(25 | ) | (105 | ) | ||||
Change in deferred gain on sale of other real estate owned |
24 | - | ||||||
Impairment charges on other real estate owned |
- | 6 | ||||||
Originations of loans held for sale |
(915 | ) | - | |||||
Proceeds from sales of loans held for sale |
935 | 277 | ||||||
Gain on sale of mortgage loans held for sale |
(20 | ) | (6 | ) | ||||
Gain on sale of premises and equipment |
(750 | ) | - | |||||
Company owned life insurance earnings |
(78 | ) | (81 | ) | ||||
Decrease in other assets |
61 | 48 | ||||||
Decrease in other liabilities |
(1,077 | ) | (856 | ) | ||||
Net cash provided by operating activities |
389 | 496 | ||||||
Investing activities |
||||||||
Calls, maturities, and paydowns of investment securities available-for-sale |
749 | 644 | ||||||
Purchases of Federal Home Loan Bank stock |
(534 | ) | (270 | ) | ||||
Sales of Federal Home Loan Bank stock |
965 | 642 | ||||||
Net increase in loans |
(3,309 | ) | (7,020 | ) | ||||
Purchases of premises and equipment |
(37 | ) | (22 | ) | ||||
Proceeds from sales of premises and equipment |
1,294 | - | ||||||
Proceeds from sales of other real estate owned |
312 | 833 | ||||||
Capital expenditures related to other real estate owned |
- | (12 | ) | |||||
Net cash used by investing activities |
(560 | ) | (5,205 | ) | ||||
Financing activities |
||||||||
Net increase in deposits |
23,498 | 15,633 | ||||||
Decrease in federal funds purchased |
(3,065 | ) | (3,115 | ) | ||||
Decrease in securities sold under agreements to repurchase |
(387 | ) | (9 | ) | ||||
Decrease in Federal Home Loan Bank Borrowings |
(6,000 | ) | (7,000 | ) | ||||
Net proceeds from issuances of stock |
24 | 21 | ||||||
Net cash provided by financing activities |
14,070 | 5,530 | ||||||
Increase in cash and cash equivalents |
13,899 | 821 | ||||||
Cash and cash equivalents, beginning of period |
33,572 | 28,460 | ||||||
Cash and cash equivalents, end of period |
$ | 47,471 | $ | 29,281 | ||||
Cash paid for: |
||||||||
Interest |
$ | 1,174 | $ | 1,262 | ||||
Income Taxes |
$ | 62 | - | |||||
Supplemental noncash investing and financing activities: |
||||||||
Change in unrealized losses on available-for-sale securities |
$ | (801 | ) | $ | (507 | ) | ||
Loans to finance sales of other real estate owned |
$ | - | $ | 260 |
See Notes to Condensed Consolidated Financial Statements
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission. Accordingly they do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Note 2 - Organization
Southcoast Financial Corporation (the “Company”) is a South Carolina corporation organized in 1999 for the purpose of being a holding company for Southcoast Community Bank (the “Bank”). On April 29, 1999, pursuant to a Plan of Exchange approved by the shareholders, all of the outstanding shares of capital stock of the Bank were exchanged for shares of common stock of the Company. The Company presently engages in no business other than that of owning the Bank and another subsidiary, Southcoast Investment Corporation, and has no employees.
Note 3 - Net Income Per Share
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements, if any. The Company had no potentially dilutive shares during the periods presented in this report.
Note 4 – Recently Issued Accounting Standards
There were no recently issued authoritative pronouncements that had a material impact on the Company’s accounting, reporting, or disclosures of financial information as of March 31, 2015.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 – Investment Securities
The amortized cost and fair value of investment securities are as follows:
(Amounts in thousands) |
March 31, 2015 |
|||||||||||||||
Amortized |
Gross Unrealized |
Estimated |
||||||||||||||
Cost |
Gains |
Losses |
Fair Value |
|||||||||||||
Available for sale |
||||||||||||||||
Mortgage backed |
||||||||||||||||
Government sponsored enterprises |
$ | 24,128 | $ | 107 | $ | 34 | $ | 24,201 | ||||||||
Municipal securities |
3,925 | 283 | - | 4,208 | ||||||||||||
Other |
8,211 | 71 | 1,404 | 6,878 | ||||||||||||
Total |
$ | 36,264 | $ | 461 | $ | 1,438 | $ | 35,287 |
December 31, 2014 |
||||||||||||||||
Amortized |
Gross Unrealized |
Estimated |
||||||||||||||
|
Cost |
Gains |
Losses |
Fair Value |
||||||||||||
Available for sale | ||||||||||||||||
Mortgage backed |
||||||||||||||||
Government sponsored enterprises |
$ | 24,915 | $ | 103 | $ | 80 | $ | 24,938 | ||||||||
Municipal securities |
3,924 | 260 | - | 4,184 | ||||||||||||
Other |
8,208 | 37 | 2,098 | 6,147 | ||||||||||||
Total |
$ | 37,047 | $ | 400 | $ | 2,178 | $ | 35,269 |
The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2015 and December 31, 2014.
Available for Sale
(Amounts in thousands) |
March 31, 2015 |
|||||||||||||||||||||||
Less than |
Twelve Months |
|||||||||||||||||||||||
Twelve Months |
or More |
Total |
||||||||||||||||||||||
Unrealized |
Unrealized |
Unrealized |
||||||||||||||||||||||
Fair Value |
Losses |
Fair Value |
Losses |
Fair Value |
Losses |
|||||||||||||||||||
Mortgage backed |
$ | 15,597 | $ | 34 | $ | - | $ | - | $ | 15,597 | $ | 34 | ||||||||||||
Other |
- | - | 2,001 | 1,404 | 2,001 | 1,404 | ||||||||||||||||||
Total |
$ | 15,597 | $ | 34 | $ | 2,001 | $ | 1,404 | $ | 17,598 | $ | 1,438 |
December 31, 2014 |
||||||||||||||||||||||||
Less than |
Twelve Months |
|||||||||||||||||||||||
Twelve Months |
or More |
Total |
||||||||||||||||||||||
Unrealized |
Unrealized |
Unrealized |
||||||||||||||||||||||
Fair Value |
Losses |
Fair Value |
Losses |
Fair Value |
Losses |
|||||||||||||||||||
Mortgage backed |
$ | - | $ | - | $ | 15,990 | $ | 80 | $ | 15,990 | $ | 80 | ||||||||||||
Other |
- | - | 1,610 | 2,098 | 1,610 | 2,098 | ||||||||||||||||||
Total |
$ | - | $ | - | $ | 17,600 | $ | 2,178 | $ | 17,600 | $ | 2,178 |
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 – Investment Securities – (continued)
Securities classified as available-for-sale are recorded at fair market value. Unrealized losses on securities in a continuous loss position for twelve months or more totaled $1,404,000, or 98% of unrealized losses, and $2,178,000, or 100% of unrealized losses, at March 31, 2015 and December 31, 2014, respectively. The majority of the unrealized losses for both periods related to Other securities, which were comprised of three individual securities. It is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. Unrealized losses for Other securities declined by approximately $694,000 at March 31, 2015 when compared to December 31, 2014, primarily due to a $709,000 reduction in unrealized losses on an individual security. This security trades infrequently, but its increased valuation was based on a recent trade.
The unrealized loss attributable to Other securities primarily relates to valuations on two individual collateralized debt obligations which consist of pooled trust preferred securities. The Company believes, based on industry analyst reports, credit ratings, and third party other-than-temporary loss impairment evaluations, that the deterioration in the value of these securities is attributable to a combination of the lack of liquidity in both of these securities and credit quality concerns for one of the two securities. These securities are considered Level 3 securities in the fair value hierarchy as they both trade in less than liquid markets.
One of the Company’s collateralized debt obligations with an amortized cost of approximately $1,824,000 and fair value of approximately $1,184,000 is receiving contractual interest payments, while the other with an amortized cost of approximately $1,737,000 and fair value of approximately $1,022,000 is credited with payment-in-kind interest in lieu of cash interest payments. Due to the over-collateralized credit position of the security currently receiving interest payments, no other-than-temporary impairment was recognized on this security. Payment-in-kind interest consists of capitalization of interest amounts due on a security. In accordance with terms outlined in its offering circular, the security not currently paying interest has its deferred interest capitalized and added to the principal balance of the security. Future interest payments are accrued on these larger principal balances. The Company has discontinued the accrual of interest on this security due to its payment-in-kind status.
Payment-in-kind interest was triggered on this security due to deferrals of interest payments by individual issuers within the pool of issuers. Individual issuers are allowed to defer their interest payments for a period of up to five years. The security is divided into several tranches, with the A tranche securities being the most senior in terms of payment priority and Income Notes being the least senior. The Company owns notes in the C tranche of the security. Each tranche must pass an overcollateralization test in order for note holders in subordinate tranches to receive their contractual interest payments. The overcollateralization test is based on total performing collateral in the pool divided by total outstanding debt within the tranche. The senior most pool failing its overcollateralization test will receive principal paydowns on its outstanding notes in addition to contractual interest payments in order to cure its failure. These additional payments will be diverted from note holders in subordinate tranches who will instead receive payment-in-kind interest. At March 31, 2015, there was $234,234,000 of performing collateral in the pool. The table below summarizes balance and overcollateralization data for the individual tranches at March 31, 2015.
(Amounts in thousands) | ||||||||||||
Tranche |
Current Balance |
Required Overcollateralization % |
Current Overcollateralization % |
|||||||||
A |
$ | 172,496 | 128.00 | % | 137.38 | % | ||||||
B |
38,280 | 115.00 | % | 112.43 | % | |||||||
C |
48,095 | 106.20 | % | 91.54 | % | |||||||
D |
28,250 | 100.30 | % | 82.54 | % | |||||||
Income Notes |
18,000 |
N/A |
N/A |
As shown above, tranches B and below currently fail their overcollateralization test. According to the structured payment terms as described in the offering circular for this security, interest payments are currently being diverted from tranches subordinate to B to pay down total principal balances in the B tranche. If and when these payments reduce the principal balance in the B tranche by enough to pass its overcollateralization requirement, the C tranche securities will begin to receive contractual interest payments, and additional payments will be diverted from subordinate tranches in order to meet its overcollateralization requirement. This payment structure, known as a waterfall, is designed to continue until all tranches meet their overcollateralization requirement. However, this outcome is dependent on the level of future interest deferrals and defaults by individual issuers. Any shortfalls to contractual principal and interest payments due will be borne in reverse order of payment priority, with the most subordinate tranche having the largest loss and the senior most tranche having the smallest loss. As a note holder in the C tranche of this structure, the Company’s principal and interest claims are subordinate to the principal and interest claims of note holders in the A and B tranches. More specifically, the Company and other C note holders would stand to lose 100% of their principal and interest before note holders in the B tranche lost their first dollar, and B note holders would lose 100% of their investment before A note holders experienced any loss.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 – Investment Securities – (continued)
The Company engaged a firm specializing in security valuations to evaluate the security receiving payment-in-kind interest for other-than- temporary impairment (“OTTI”). This firm uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to measure whether there are any adverse changes in cash flows during the quarter. The OTTI model considers the structure and term of the trust preferred security and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The allocation of payments to the note classes follows the payment priority hierarchy for the individual tranches. The OTTI evaluation prepared as of March 31, 2015 predicts the Company will resume receipt of its contractual principal and interest payments during 2015, which is when the B tranche is projected to pass its overcollateralization test. These projections are based on assumptions developed from current financial data for the underlying issuers and may change in subsequent periods based on future financial data which could alter the assumptions.
The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant information including announcements of interest payment deferrals or defaults of the underlying issuers. The OTTI evaluation model assumes no recoveries on defaults. The result of the firm’s analysis indicated approximately $176,000 of credit loss as of March 31, 2011, which was recognized as an other-than-temporary loss in the first quarter of 2011 and reported in noninterest income. No credit losses had been recognized on these securities prior to 2011, and there have been no changes to credit losses recognized in earnings for any subsequent periods. Due to the credit loss recognized on this security, the Company has not accrued into interest income any of the payment-in-kind interest due on the security. Consequently, the security’s payment-in-kind interest is not reflected in the book value of the security. Total other-than-temporary impairment in accumulated other comprehensive income was $458,000 for the security (Security B in the table below) at March 31, 2015.
The following table provides certain relevant details on each of our collateralized debt obligations as of March 31, 2015, including the book value, fair value, and unrealized losses on the securities, as well as certain information about the overall pools and the current status of their underlying issuers. “Excess Subordination” is a measure of the excess performing collateral in the pool beyond the total level of debt outstanding in the pool with an equal or greater level of preference in the payment structure. It is expressed in the tables below as a percentage of performing collateral. It represents the percentage reduction in performing collateral that would precede an inability of the security to make contractually required payments to the Company.
March 31, 2015 | ||||||||
(Amounts in thousands) |
||||||||
Security A |
Security B |
|||||||
Book Value |
$ | 1,824 | $ | 1,737 | ||||
Fair Value |
$ | 1,184 | $ | 1,022 | ||||
Unrealized Loss |
$ | 640 | $ | 715 | ||||
Number of underlying financial institution issuers |
47 | 39 | ||||||
Number of deferrals and defaults |
9 | 12 | ||||||
Additional expected deferrals/ defaults* |
N/A |
0/2 |
||||||
Excess Subordination as a percentage of performing collateral^ |
28.43 | % |
N/A |
* No assessment of these numbers was made for Security A as it was not modeled for cash flows due to its current payment status and its excess subordination. For Security B, this includes issuers for which there is an estimated probability of deferral or default of 50% or greater. None of the remaining performing collateral was projected as a future deferral or default, due to low Texas ratios; two deferring issuers were projected to default.
^Security B is in a support tranche and has no excess subordination.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 – Investment Securities – (continued)
The credit quality of the collateralized debt obligations is directly related to the financial strength and ability to make contractual interest payments of the underlying issuers in these securities, most of which are banks or bank holding companies. As such, these securities may show additional OTTI in future periods if the financial condition of the underlying
issuers further deteriorates.
The amortized costs and fair values of investment securities available for sale at March 31, 2015 by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(Amounts in thousands) |
Amortized |
Fair |
||||||
Cost |
Value |
|||||||
Due after one but within five years |
$ | 440 | $ | 468 | ||||
Due after five but within ten years |
2,216 | 2,397 | ||||||
Due after ten years |
5,330 | 4,049 | ||||||
Mortgage backed |
24,128 | 24,201 | ||||||
Equity securities with no maturity |
4,150 | 4,172 | ||||||
Total investment securities available-for-sale |
$ | 36,264 | $ | 35,287 |
Investment securities with an aggregate amortized cost of $22,060,000 and estimated fair value of $22,138,000 at March 31, 2015, were pledged to secure public deposits and for other purposes, as required or permitted by law.
Investment securities with an aggregate amortized cost of $2,520,000 and estimated fair value of $2,527,000 at March 31, 2015, were pledged to secure securities sold under agreements to repurchase.
Investment securities with an aggregate amortized cost of $22,777,000 and estimated fair value of $22,809,000 at December 31, 2014, were pledged to secure public deposits and for other purposes, as required or permitted by law.
Investment securities with an aggregate amortized cost of $2,591,000 and estimated fair value of $2,593,000 at December 31, 2014, were pledged to secure securities sold under agreements to repurchase.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 - Loans
The composition of loans by major loan category is presented below:
(Dollars in thousands) |
March 31, |
December 31, |
||||||
2015 |
2014 |
|||||||
Real estate secured loans: |
||||||||
Residential 1-4 Family |
$ | 223,505 | $ | 217,518 | ||||
Multifamily |
4,826 | 5,108 | ||||||
Commercial |
86,271 | 87,906 | ||||||
Construction and land development |
29,882 | 29,060 | ||||||
Total real estate secured loans |
344,484 | 339,592 | ||||||
Commercial and industrial |
20,247 | 22,022 | ||||||
Consumer |
2,359 | 2,206 | ||||||
Other |
540 | 328 | ||||||
Total gross loans |
367,630 | 364,148 | ||||||
Allowance for loan losses |
(4,875 | ) | (5,602 | ) | ||||
$ | 362,755 | $ | 358,546 |
The Company uses a numerical grading system from 1 to 9 to assess the credit risk inherent in its loan portfolio, with Grade 1 loans having the lowest credit risk and Grade 9 loans having the highest credit risk. Loans with credit grades from 1 to 5 are considered passing grade, or acceptable, loans. Loans with grades from 6 to 9 are considered to have less than acceptable credit quality. Generally, impaired loans have credit grades of 7 or higher. Following is a listing and brief description of the various risk grades. The grading of individual loans may involve the use of estimates.
Credit Grade |
Description | |
1 |
Loans secured by cash collateral. | |
2 |
Loans secured by readily marketable collateral. | |
3 |
Top quality loans with excellent repayment sources and no significant identifiable risk of collection. | |
4 |
Acceptable loans with adequate repayment sources and little identifiable risk of collection. | |
5 |
Acceptable loans with signs of weakness as to repayment or collateral, but with mitigating factors that minimize the risk of loss. | |
6 |
Watch List or Special Mention loans with underwriting tolerances and/or exceptions with no mitigating factors that may, due to economic or other factors, increase the risk of loss. | |
7 |
Classified substandard loans inadequately protected by the paying capacity or net worth of the obligor, or of the collateral with weaknesses that jeopardize the liquidation of the debt. | |
8 |
Classified doubtful loans in which collection or liquidation in full is highly improbable. | |
9 |
Classified loss loans that are uncollectible and of such little value that continuance as an asset is not warranted. |
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loans - (Continued)
The following tables provide a summary of our credit risk profile by loan categories as of March 31, 2015 and December 31, 2014 (including nonaccrual loans).
(Dollars in thousands)
Credit Risk Profile by Creditworthiness Category
As of March 31, 2015 and December 31, 2014
Real Estate Secured |
||||||||||||||||||||||||||||||||||
Residential 1-4 Family |
Multi Family |
Commercial |
Construction and Land Development |
|||||||||||||||||||||||||||||||
2015 |
2014 |
2015 |
2014 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||||||||||
Grade |
||||||||||||||||||||||||||||||||||
1 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
2 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
3 | 111,530 | 107,353 | 1,332 | 1,350 | 15,633 | 14,965 | 11,992 | 11,197 | ||||||||||||||||||||||||||
4 | 60,052 | 56,164 | 1,096 | 1,111 | 27,301 | 28,180 | 8,102 | 7,310 | ||||||||||||||||||||||||||
5 | 44,523 | 46,873 | 2,062 | 2,309 | 33,586 | 33,081 | 9,035 | 9,571 | ||||||||||||||||||||||||||
6 | 1,607 | 1,587 | 336 | - | 5,133 | 2,042 | 66 | 269 | ||||||||||||||||||||||||||
7 | 5,161 | 4,930 | - | 338 | 4,618 | 9,638 | 687 | 703 | ||||||||||||||||||||||||||
8 | 632 | 611 | - | - | - | - | - | 10 | ||||||||||||||||||||||||||
9 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
Total |
$ | 223,505 | $ | 217,518 | $ | 4,826 | $ | 5,108 | $ | 86,271 | $ | 87,906 | $ | 29,882 | $ | 29,060 |
Non-Real Estate Secured | ||||||||||||||||||||||||||||||||||
Commercial |
Consumer |
Other |
Total |
|||||||||||||||||||||||||||||||
2015 |
2014 |
2015 |
2014 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||||||||||
Grade |
||||||||||||||||||||||||||||||||||
1 | $ | 519 | $ | 2,223 | $ | 388 | $ | 397 | $ | - | $ | - | $ | 907 | $ | 2,620 | ||||||||||||||||||
2 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
3 | 2,293 | 2,205 | 643 | 480 | 93 | 94 | 143,516 | 137,644 | ||||||||||||||||||||||||||
4 | 6,283 | 6,628 | 356 | 220 | 397 | 181 | 103,587 | 99,794 | ||||||||||||||||||||||||||
5 | 9,802 | 9,589 | 899 | 977 | 50 | 53 | 99,957 | 102,453 | ||||||||||||||||||||||||||
6 | 14 | 18 | - | - | - | - | 7,156 | 3,916 | ||||||||||||||||||||||||||
7 | 1,336 | 1,359 | 73 | 132 | - | - | 11,875 | 17,100 | ||||||||||||||||||||||||||
8 | - | - | - | - | - | - | 632 | 621 | ||||||||||||||||||||||||||
9 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
Total |
$ | 20,247 | $ | 22,022 | $ | 2,359 | $ | 2,206 | $ | 540 | $ | 328 | $ | 367,630 | $ | 364,148 |
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loans - (Continued)
The following tables provide a summary of past due loans by loan category as of March 31, 2015 and December 31, 2014.
(Dollars in thousands)
Past Due Loans For the Periods Ended March 31, 2015 and December 31, 2014 |
||||||||||||||||||||||||||||
March 31, 2015 |
30-59 Days Past Due |
60-89 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Current |
Total Loans Receivable |
Recorded Investment > 90 Days and Accruing |
|||||||||||||||||||||
Real Estate Secured |
||||||||||||||||||||||||||||
1-4 Family Residential |
$ | 2,677 | $ | 51 | $ | 1,574 | $ | 4,302 | $ | 219,203 | $ | 223,505 | $ | - | ||||||||||||||
Multifamily Residential |
- | - | - | - | 4,826 | 4,826 | - | |||||||||||||||||||||
Commercial Real Estate |
791 | 123 | 1,265 | 2,179 | 84,092 | 86,271 | 45 | |||||||||||||||||||||
Construction and Land Development |
- | - | - | - | 29,882 | 29,882 | - | |||||||||||||||||||||
Non Real Estate Secured |
- | |||||||||||||||||||||||||||
Commercial and Industrial |
53 | 39 | 402 | 494 | 19,753 | 20,247 | - | |||||||||||||||||||||
Consumer and Other |
9 | 13 | - | 22 | 2,877 | 2,899 | - | |||||||||||||||||||||
Total |
$ | 3,530 | $ | 226 | $ | 3,241 | $ | 6,997 | $ | 360,633 | $ | 367,630 | $ | 45 |
December 31, 2014 |
30-59 Days Past Due |
60-89 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Current |
Total Loans Receivable |
Recorded Investment > 90 Days and Accruing |
|||||||||||||||||||||
Real Estate Secured |
||||||||||||||||||||||||||||
1-4 Family Residential |
$ | 1,748 | $ | 955 | $ | 1,972 | $ | 4,675 | $ | 212,843 | $ | 217,518 | $ | - | ||||||||||||||
Multifamily Residential |
- | - | - | - | 5,108 | 5,108 | - | |||||||||||||||||||||
Commercial Real Estate |
794 | 1,930 | 1,073 | 3,797 | 84,109 | 87,906 | - | |||||||||||||||||||||
Construction and Land Development |
- | 52 | 10 | 62 | 28,998 | 29,060 | - | |||||||||||||||||||||
Non Real Estate Secured |
- | |||||||||||||||||||||||||||
Commercial and Industrial |
235 | 66 | 146 | 447 | 21,575 | 22,022 | - | |||||||||||||||||||||
Consumer and Other |
8 | 15 | 13 | 36 | 2,498 | 2,534 | - | |||||||||||||||||||||
Total |
$ | 2,785 | $ | 3,018 | $ | 3,214 | $ | 9,017 | $ | 355,131 | $ | 364,148 | $ | - |
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loans - (Continued)
The following table provides a summary of nonaccrual loans as of March 31, 2015 and December 31, 2014.
(Dollars in thousands)
March 31, |
December 31, |
|||||||
2015 |
2014 |
|||||||
1-4 Family Residential |
$ | 2,743 | $ | 2,956 | ||||
Multifamily Residential |
- | - | ||||||
Commercial Real Estate |
1,597 | 1,096 | ||||||
Construction and Land Development |
- | 10 | ||||||
Commercial and Industrial |
840 | 859 | ||||||
Consumer and Other |
15 | 48 | ||||||
Total |
$ | 5,195 | $ | 4,969 |
At March 31, 2015 and December 31, 2014, nonaccrual loans totaled $5.2 million and $5.0 million, respectively. The gross interest income that would have been recorded under the original terms of nonaccrual loans totaled $81,000 and $83,000 for the three months ended March 31, 2015 and March 31, 2014, respectively. At March 31, 2015 and December 31, 2014, impaired loans (which include nonaccrual loans and troubled debt restructurings (TDRs)) totaled $5.8 million and $5.6 million, respectively. The recorded investment in impaired loans individually evaluated for impairment, which include nonaccrual loans over $250,000 and TDRs, totaled $4.1 million and $3.9 million at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 loans over ninety days past due and still accruing interest totaled $45,000. There were no such loans at December 31, 2014.
At March 31, 2015 and December 31, 2014, all TDRs, including those on nonaccrual status, totaled $2.1 million and $3.9 million, respectively. The gross interest income that would have been recognized on TDRs according to the original loan terms during the first quarter of 2015 totaled approximately $9,000; actual interest income recognized on these loans according to the restructured terms totaled $9,000. The gross interest income that would have been recognized on TDRs according to the original loan terms during the year ended December 31, 2014 totaled approximately $38,000; actual interest income recognized on these loans according to the restructured terms totaled approximately $11,000. During the quarter ended March 31, 2015, there were no loans that had their original loan terms restructured, and no loans that had previously had their original terms restructured went into nonaccrual. During the same period, one loan totaling $1.7 million that had its original terms restructured paid off. During the same period $35,000 related to TDRs was charged off. TDRs did not have a material effect on the allowance for loan losses as of March 31, 2015 or December 31, 2014.
The following tables provide a year to date analysis of activity within the allowance for loan losses.
(Dollars in thousands) |
March 31, |
March 31, |
||||||
2015 |
2014 |
|||||||
Balance, beginning of year |
$ | 5,602 | $ | 6,041 | ||||
Provision for loan losses |
(900 | ) | - | |||||
Net (charge offs) recoveries |
173 | 105 | ||||||
Balance, end of quarter |
$ | 4,875 | $ | 6,146 |
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loans - (Continued)
For the Three Months Ended March 31, 2015 |
||||||||||||||||||||||||||||
Beginning Balance |
Charge Offs |
Recoveries |
Provisions |
Ending Allowance for Loan Losses |
||||||||||||||||||||||||
(Dollars in thousands) |
General Reserves |
Specific Reserves |
Total |
|||||||||||||||||||||||||
Real Estate Secured |
||||||||||||||||||||||||||||
1-4 Family Residential |
$ | 1,595 | $ | (35 | ) | $ | - | $ | (45 | ) | $ | 1,429 | $ | 86 | $ | 1,515 | ||||||||||||
Multifamily Residential |
61 | - | - | (34 | ) | 27 | - | 27 | ||||||||||||||||||||
Commercial Real Estate |
1,424 | - | 190 | (801 | ) | 813 | - | 813 | ||||||||||||||||||||
Construction and Land Development |
312 | - | 17 | (117 | ) | 212 | - | 212 | ||||||||||||||||||||
Non Real Estate Secured |
||||||||||||||||||||||||||||
Commercial and Industrial |
496 | - | 6 | 201 | 599 | 104 | 703 | |||||||||||||||||||||
Consumer and Other |
32 | (6 | ) | 1 | (6 | ) | 21 | - | 21 | |||||||||||||||||||
Other |
||||||||||||||||||||||||||||
Other General Reserves |
1,363 | - | - | (88 | ) | 1,275 | - | 1,275 | ||||||||||||||||||||
Unallocated |
319 | - | - | (10 | ) | 309 | - | 309 | ||||||||||||||||||||
Total |
$ | 5,602 | $ | (41 | ) | $ | 214 | $ | (900 | ) | $ | 4,685 | $ | 190 | $ | 4,875 |
For the Three Months Ended March 31, 2014 |
||||||||||||||||||||||||||||
Beginning Balance |
Charge Offs |
Recoveries |
Provisions |
Ending Allowance for Loan Losses |
||||||||||||||||||||||||
(Dollars in thousands) |
General Reserves |
Specific Reserves |
Total |
|||||||||||||||||||||||||
Real Estate Secured |
||||||||||||||||||||||||||||
1-4 Family Residential |
$ | 1,829 | $ | - | $ | 9 | $ | (329 | ) | $ | 1,394 | $ | 115 | $ | 1,509 | |||||||||||||
Multifamily Residential |
58 | - | - | 128 | 41 | 145 | 186 | |||||||||||||||||||||
Commercial Real Estate |
1,031 | - | - | (17 | ) | 1,009 | 5 | 1,014 | ||||||||||||||||||||
Construction and Land Development |
585 | - | - | (64 | ) | 479 | 42 | 521 | ||||||||||||||||||||
Non Real Estate Secured |
||||||||||||||||||||||||||||
Commercial and Industrial |
690 | (42 | ) | 94 | 27 | 769 | - | 769 | ||||||||||||||||||||
Consumer and Other |
24 | - | 44 | (34 | ) | 34 | - | 34 | ||||||||||||||||||||
Other |
||||||||||||||||||||||||||||
Other General Reserves |
1,339 | - | - | 212 | 1,551 | - | 1,551 | |||||||||||||||||||||
Unallocated |
485 | - | - | 77 | 562 | - | 562 | |||||||||||||||||||||
Total |
$ | 6,041 | $ | (42 | ) | $ | 147 | $ | - | $ | 5,839 | $ | 307 | $ | 6,146 |
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loans - (Continued)
For the Year Ended December 31, 2014 |
||||||||||||||||||||||||||||
Beginning Balance |
Charge Offs |
Recoveries |
Provisions |
Ending Allowance for Loan Losses |
||||||||||||||||||||||||
(Dollars in thousands) |
General Reserves |
Specific Reserves |
Total |
|||||||||||||||||||||||||
Real Estate Secured |
||||||||||||||||||||||||||||
1-4 Family Residential |
$ | 1,829 | $ | (52 | ) | $ | 46 | $ | (228 | ) | $ | 1,532 | $ | 63 | $ | 1,595 | ||||||||||||
Multi Family Residential |
58 | (155 | ) | 11 | 147 | 61 | - | 61 | ||||||||||||||||||||
Commercial Real Estate |
1,031 | (159 | ) | 342 | 210 | 1,424 | - | 1,424 | ||||||||||||||||||||
Construction and Land Development |
585 | (114 | ) | 21 | (180 | ) | 312 | - | 312 | |||||||||||||||||||
Non Real Estate Secured |
||||||||||||||||||||||||||||
Commercial and Industrial |
690 | (42 | ) | 218 | (370 | ) | 496 | 69039 | 496 | |||||||||||||||||||
Consumer and Other |
24 | (1 | ) | 46 | (37 | ) | 32 | - | 32 | |||||||||||||||||||
Other |
||||||||||||||||||||||||||||
Other General Reserves |
1,339 | - | - | 24 | 1,363 | - | 1,363 | |||||||||||||||||||||
Unallocated |
485 | - | - | (166 | ) | 319 | - | 319 | ||||||||||||||||||||
Total |
$ | 6,041 | $ | (523 | ) | $ | 684 | $ | (600 | ) | $ | 5,539 | $ | 63 | $ | 5,602 |
Impaired loans with a balance of $250,000 or more are evaluated individually for impairment. All other loans are collectively evaluated for impairment. The following tables provide summaries and totals of loans individually and collectively evaluated for impairment as of March 31, 2015 and December 31, 2014.
Loans Receivable: |
As of March 31, 2015 |
|||||||||||
(Dollars in thousands) | Individually evaluated | Collectively evaluated | ||||||||||
for impairment |
for impairment |
Total |
||||||||||
Real Estate Secured |
||||||||||||
1-4 Family Residential |
$ | 2,036 | $ | 221,469 | $ | 223,505 | ||||||
Multifamily Residential |
- | 4,826 | 4,826 | |||||||||
Commercial Real Estate |
1,540 | 84,731 | 86,271 | |||||||||
Construction and Land Development |
- | 29,882 | 29,882 | |||||||||
Non Real Estate Secured |
||||||||||||
Commercial and Industrial |
530 | 19,717 | 20,247 | |||||||||
Consumer and Other |
- | 2,899 | 2,899 | |||||||||
Total |
$ | 4,106 | $ | 363,524 | $ | 367,630 |
Loans Receivable: |
As of December 31, 2014 |
|||||||||||
(Dollars in thousands) | Individually evaluated | Collectively evaluated | ||||||||||
for impairment |
for impairment |
Total |
||||||||||
Real Estate Secured |
||||||||||||
1-4 Family Residential |
$ | 2,251 | $ | 215,267 | $ | 217,518 | ||||||
Multifamily Residential |
- | 5,108 | 5,108 | |||||||||
Commercial Real Estate |
1,096 | 86,810 | 87,906 | |||||||||
Construction and Land |
||||||||||||
Development |
- | 29,060 | 29,060 | |||||||||
Non Real Estate Secured |
||||||||||||
Commercial and Industrial |
545 | 21,477 | 22,022 | |||||||||
Consumer and Other |
- | 2,534 | 2,534 | |||||||||
Total |
$ | 3,892 | $ | 360,256 | $ | 364,148 |
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loans - (Continued)
(Dollars in thousands)
Impaired Loans
For the Three Months ended March 31, 2015
Unpaid Principal Balance |
Recorded Investment (1) |
Related Allowance |
Life to Date Charge offs |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||||||
With no related allowance recorded |
||||||||||||||||||||||||
1-4 Family Residential |
$ | 1,621 | $ | 1,500 | $ | - | $ | 121 | $ | 1,506 | $ | 9 | ||||||||||||
Multifamily Residential |
- | - | - | - | - | - | ||||||||||||||||||
Commercial Real Estate |
1,540 | 1,540 | - | - | 1,318 | - | ||||||||||||||||||
Construction and Land Development |
- | - | - | - | - | - | ||||||||||||||||||
Commercial and Industrial |
425 | 425 | - | - | 433 | - | ||||||||||||||||||
Consumer and Other |
- | - | - | - | - | - | ||||||||||||||||||
With an allowance recorded |
||||||||||||||||||||||||
1-4 Family Residential |
$ | 571 | $ | 536 | $ | 86 | $ | 35 | $ | 637 | $ | - | ||||||||||||
Multifamily Residential |
- | - | - | - | - | - | ||||||||||||||||||
Commercial Real Estate |
- | - | - | - | - | - | ||||||||||||||||||
Construction and Land Development |
- | - | - | - | - | - | ||||||||||||||||||
Commercial and Industrial |
105 | 105 | 104 | - | 105 | - | ||||||||||||||||||
Consumer and Other |
- | - | - | - | - | - | ||||||||||||||||||
Total |
||||||||||||||||||||||||
1-4 Family Residential |
$ | 2,192 | $ | 2,036 | $ | 86 | $ | 156 | $ | 2,143 | $ | 9 | ||||||||||||
Multifamily Residential |
- | - | - | - | - | - | ||||||||||||||||||
Commercial Real Estate |
1,540 | 1,540 | - | - | 1,318 | - | ||||||||||||||||||
Construction and Land Development |
- | - | - | - | - | - | ||||||||||||||||||
Commercial and Industrial |
530 | 530 | 104 | - | 538 | - | ||||||||||||||||||
Consumer and Other |
- | - | - | - | - | - | ||||||||||||||||||
Total |
$ | 4,262 | $ | 4,106 | $ | 190 | $ | 156 | $ | 3,999 | $ | 9 |
(1) Impaired balance; excludes accrued interest receivable and deferred fees and costs due to immateriality.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loans - (Continued)
(Dollars in thousands)
Impaired Loans
For the Three Months Ended March 31, 2014
Unpaid Principal Balance |
Recorded Investment (1) |
Related Allowance |
Life to Date Charge offs |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||||||
With no related allowance recorded |
||||||||||||||||||||||||
1-4 Family Residential |
$ | 1,571 | $ | 1,485 | $ | - | $ | 86 | $ | 1,145 | $ | 2 | ||||||||||||
Multifamily Residential |
- | - | - | - | - | - | ||||||||||||||||||
Commercial Real Estate |
1,852 | 1,852 | - | - | 1,868 | 3 | ||||||||||||||||||
Construction and Land Development |
692 | 159 | - | 533 | 159 | - | ||||||||||||||||||
Commercial and Industrial |
471 | 471 | - | - | 475 | - | ||||||||||||||||||
Consumer and Other |
- | - | - | - | - | - | ||||||||||||||||||
With an allowance recorded |
||||||||||||||||||||||||
1-4 Family Residential |
$ | 1,055 | $ | 938 | $ | 115 | $ | 117 | $ | 949 | $ | - | ||||||||||||
Multifamily Residential |
986 | 986 | 145 | - | 986 | - | ||||||||||||||||||
Commercial Real Estate |
1,128 | 705 | 5 | 423 | 703 | - | ||||||||||||||||||
Construction and Land Development |
834 | 532 | 42 | 302 | 532 | - | ||||||||||||||||||
Commercial and Industrial |
- | - | - | - | - | - | ||||||||||||||||||
Consumer and Other |
- | - | - | - | - | - | ||||||||||||||||||
Total |
||||||||||||||||||||||||
1-4 Family Residential |
$ | 2,626 | $ | 2,423 | $ | 115 | $ | 203 | $ | 2,094 | $ | 2 | ||||||||||||
Multifamily Residential |
986 | 986 | 145 | - | 986 | - | ||||||||||||||||||
Commercial Real Estate |
2,980 | 2,557 | 5 | 423 | 2,571 | 3 | ||||||||||||||||||
Construction and Land Development |
1,526 | 691 | 42 | 835 | 691 | - | ||||||||||||||||||
Commercial and Industrial |
471 | 471 | - | - | 475 | - | ||||||||||||||||||
Consumer and Other |
- | - | - | - | - | - | ||||||||||||||||||
Total |
$ | 8,589 | $ | 7,128 | $ | 307 | $ | 1,461 | $ | 6,817 | $ | 5 |
(1) Impaired balance; excludes accrued interest receivable and deferred fees and costs due to immateriality.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 - Loans – (continued)
(Dollars in thousands)
Impaired Loans
For the Year Ended December 31, 2014
Unpaid Principal Balance |
Recorded Investment (1) |
Related Allowance |
Life to Date Charge offs |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||||||
With no related allowance recorded |
||||||||||||||||||||||||
1-4 Family Residential |
$ | 1,859 | $ | 1,738 | $ | - | $ | 121 | $ | 1,787 | $ | 12 | ||||||||||||
Multifamily Residential |
- | - | - | - | - | - | ||||||||||||||||||
Commercial Real Estate |
1,096 | 1,096 | - | - | 1,127 | - | ||||||||||||||||||
Construction and Land Development |
- | - | - | - | - | - | ||||||||||||||||||
Commercial and Industrial |
545 | 545 | - | - | 565 | - | ||||||||||||||||||
Consumer and Other |
- | - | - | - | - | - | ||||||||||||||||||
With an allowance recorded |
||||||||||||||||||||||||
1-4 Family Residential |
$ | 513 | $ | 513 | $ | 63 | $ | - | $ | 517 | $ | - | ||||||||||||
Multifamily Residential |
- | - | - | - | - | - | ||||||||||||||||||
Commercial Real Estate |
- | - | - | - | - | - | ||||||||||||||||||
Construction and Land Development |
- | - | - | - | - | - | ||||||||||||||||||
Commercial and Industrial |
- | - | - | - | - | - | ||||||||||||||||||
Consumer and Other |
- | - | - | - | - | - | ||||||||||||||||||
Total |
||||||||||||||||||||||||
1-4 Family Residential |
$ | 2,372 | $ | 2,251 | $ | 63 | $ | 121 | $ | 2,304 | $ | 12 | ||||||||||||
Multifamily Residential |
- | - | - | - | - | - | ||||||||||||||||||
Commercial Real Estate |
1,096 | 1,096 | - | - | 1,127 | - | ||||||||||||||||||
Construction and Land Development |
- | - | - | - | - | - | ||||||||||||||||||
Commercial and Industrial |
545 | 545 | - | - | 565 | - | ||||||||||||||||||
Consumer and Other |
- | - | - | - | - | - | ||||||||||||||||||
Total |
$ | 4,013 | $ | 3,892 | $ | 63 | $ | 121 | $ | 3,996 | $ | 12 |
(1) Impaired balance; excludes accrued interest receivable and deferred fees and costs due to immateriality.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 7 – Deferred Taxes
The Company maintains a valuation allowance of $255,000 related to its holding company net operating loss carryforward for state income taxes. Throughout the Company’s history, the holding company has consistently produced operating losses on a stand alone basis, and the realizability of this loss carryforward is considered unlikely. As of March 31, 2015, gross deferred tax assets totaled approximately $4.7 million, while deferred tax assets net of the valuation allowance totaled approximately $4.4 million.
During the three months ended March 31, 2015 and March 31, 2014, the Company recognized $1,078,000 and $345,000, respectively, of income tax expense. Of these amounts, $978,000 and $318,000 were for Federal income taxes, the majority of which represented direct reductions to the Company’s deferred tax asset related to its net operating loss carryforward. The deferred tax asset attributable to the Company’s net operating loss carryforward totaled approximately $1.9 million and $3.2 million at December 31, 2014 and December 31, 2013, respectively. Also during the three months ended March 31, 2015 and March 31, 2014, the Company’s gross unrealized securities losses declined by approximately $801,000 and $507,000, respectively, which decreased the deferred tax asset related to unrealized available for sale securities losses by approximately $288,000 and $182,000, respectively.
Note 8 – Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Generally accepted accounting principles also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, and money market funds.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, real estate appraisals, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, asset- backed securities in less liquid markets, retained residual interests in securitizations, residential mortgage servicing rights, and other real estate owned when adjusting for selling costs, and impaired loans.
The Company used the following methods and assumptions to estimate fair value:
Available for Sale Investment Securities
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available (Leve1 1). If quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Securities classified as Level 3 include asset-backed securities in less liquid markets. The fair values of level 3 available for sale investment securities are determined by a third party pricing service and reviewed by the Company’s Chief Financial Officer for reasonableness. The fair value of the trust preferred securities is computed based upon discounted cash flows estimated using interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation to the note classes. Current estimates of expected cash flows are based on the most recent trustee reports and any other relevant market information, including announcements of interest payment deferrals or defaults of underlying issuers. The payment, default and recovery assumptions are believed to reflect the assumptions of market participants. Cash flows are discounted at appropriate market rates, including consideration of credit spreads and illiquidity discounts.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Fair Value Measurements – (continued)
Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company categorizes loans subjected to nonrecurring fair value adjustments as Level 2. There were no fair value adjustments to mortgage loans held for sale as of March 31, 2015 and December 31, 2014.
Impaired Loans
Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans are carried at the lesser of their principal balance or their fair value. The Company considers problem loans with principal balances of $250,000 or greater individually for impairment. The fair value of loans individually evaluated for impairment is estimated using one of several methods, including the present value of expected cash flows, market price of the loan, if available, or fair value of the underlying collateral less estimated costs to sell. At March 31, 2015, all impaired loans deemed collateral dependent were evaluated based on the fair value of the underlying collateral less estimated costs to sell, while those not deemed collateral dependent were evaluated based on the present value of expected cash flows. Those impaired loans not requiring a specific allowance for loan losses allocation represent loans with fair values exceeding their recorded investments. Impaired loans for which a specific allowance is established based on the fair value of collateral require classification in the fair value hierarchy. If the fair value of an impaired loan is based on an observable market price of the loan, the Company records the impaired loan as nonrecurring Level 2. When the fair value of an impaired loan is based on discounted cash flows or the fair value of the underlying collateral less estimated cost to sell, the Company records the impaired loan as nonrecurring Level 3.
Other real estate owned
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals.
For both collateral dependent impaired loans and other real estate owned the Company uses appraisals prepared by certified appraisal professionals whose qualifications and licenses have been reviewed and verified by the Company. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically lead to a Level 3 classification of the inputs for determining fair value. Once the Company receives an appraisal on an impaired loan, the Chief Credit Officer and Chief Financial Officer review the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics, as well as the Company’s own loss experience. For appraisals received on other real estate owned, the Chief Financial Officer and Chief Operating Officer use a similar approach. The Company may take additional discounts against the appraisals based on the circumstances surrounding individual properties.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Fair Value Measurements – (continued)
Assets measured at fair value on a recurring basis are as follows as of March 31, 2015 and December 31, 2014 (dollars in thousands):
March 31, 2015 |
||||||||||||||||
Quoted Market Price in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total |
|||||||||||||
Available-for-sale investment securities |
||||||||||||||||
Mortgage backed |
||||||||||||||||
Government sponsored enterprises |
$ | - | $ | 24,201 | $ | - | $ | 24,201 | ||||||||
Municipals |
- | 4,208 | - | 4,208 | ||||||||||||
Other |
- | 4,172 | 2,706 | 6,878 | ||||||||||||
Total assets at fair value |
$ | - | $ | 32,581 | $ | 2,706 | $ | 35,287 |
December 31, 2014 |
||||||||||||||||
Quoted Market Price in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total |
|||||||||||||
Available-for-sale investment securities |
||||||||||||||||
Mortgage backed |
||||||||||||||||
Government sponsored enterprises |
$ | - | $ | 24,938 | $ | - | $ | 24,938 | ||||||||
Municipals |
- | 4,184 | - | 4,184 | ||||||||||||
Other |
- | 4,139 | 2,008 | 6,147 | ||||||||||||
Total assets at fair value |
$ | - | $ | 33,261 | $ | 2,008 | $ | 35,269 |
Investments in collateralized debt obligations and a single-issue trust preferred security comprise the Company’s Level 3 assets as shown above. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
There were no transfers between Level 1 and Level 2 during 2015 or 2014.
The Company has no liabilities carried at fair value or measured at fair value on a recurring basis.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Fair Value Measurements – (continued)
The following table reconciles the changes in recurring Level 3 financial instruments for the three months ended March 31, 2015 and 2014 (dollars in thousands):
March 31, |
March 31, |
|||||||
2015 |
2014 |
|||||||
Beginning of Year Balance |
$ | 2,008 | $ | 1,836 | ||||
Discount Accretion |
2 | 2 | ||||||
Reduction in Unrealized Loss |
696 | 217 | ||||||
Ending Balance |
$ | 2,706 | $ | 2,055 |
The following table presents quantitative information about Level 3 fair value measurements at March 31, 2015 (dollars in thousands):
Security Type |
Fair Value |
Valuation Technique |
Unobservable Input |
Rates |
|||||||
Collateralized Debt Obligations |
$ | 2,206 |
Discounted cash flows and recent trade |
Discount rate |
Approximately 8 |
% | |||||
Weighted default probability for deferring issuers | Approximately 36 | % | |||||||||
Recovery rate on deferring issuers | 10% - 15 | % | |||||||||
Default probability for current issuers | 0.33% - 7.50 | % | |||||||||
Trust Preferred Security |
$ | 500 |
Discounted cash flows |
Discount rate |
Approximately 4 |
% |
The significant unobservable inputs used in the fair value measurement of the Company’s collateralized debt obligations investments are prepayment rates, probability of default, and loss severity in the event of default. Significant increases/(decreases) in any of those inputs in isolation would result in a significantly lower/(higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.
In addition to the collateralized debt obligations included in the table above, the Company owns a trust preferred security backed by a single issuer for which meaningful pricing data is not readily available. The security’s book value of $500,000 is assumed to equal its fair value. The discount rate shown for the security in the table above approximates the security’s yield at March 31, 2015.
No changes in unrealized gains and losses for Level 3 asssets were recorded in earnings for either of the three month periods ended March 31, 2015 or March 31, 2014.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Fair Value Measurements – (continued)
Assets measured at fair value on a nonrecurring basis are as follows as of March 31, 2015 and December 31, 2014 (dollars in thousands):
March 31, 2015 |
||||||||||||||||
Quoted Market Price in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total |
|||||||||||||
Impaired Loans |
||||||||||||||||
1 - 4 Family Residential |
$ | - | $ | - | $ | 1,902 | $ | 1,902 | ||||||||
Commercial Real Estate |
- | - | 1,584 | 1,584 | ||||||||||||
Other Real Estate Owned |
||||||||||||||||
Construction and Land Development |
- | - | 54 | 54 | ||||||||||||
Total assets at fair value |
$ | - | $ | - | $ | 3,540 | $ | 3,540 |
December 31, 2014 |
||||||||||||||||
Quoted Market Price in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total |
|||||||||||||
Impaired Loans |
||||||||||||||||
1 - 4 Family Residential |
$ | - | $ | - | $ | 2,124 | $ | 2,124 | ||||||||
Commercial Real Estate |
- | - | 1,105 | 1,105 | ||||||||||||
Other Real Estate Owned |
||||||||||||||||
1 - 4 Family Residential |
- | - | 334 | 334 | ||||||||||||
Construction and Land Development |
- | - | 54 | 54 | ||||||||||||
Total assets at fair value |
$ | - | $ | - | $ | 3,617 | $ | 3,617 |
Impaired loans measured at fair value had a recorded investment of $3,402,000 with a valuation allowance of $161,000 at March 31, 2015, resulting in an additional provision for loan losses of $105,000 for the three months ended March 31, 2015. This additional provision related entirely to a Commercial and Industrial loan for which a full reserve was established. Impaired loans measured for impairment using the fair value of the collateral had a recorded investment of $3,065,000 with a valuation allowance of $ 63,000 at December 31, 2014, resulting in an additional provision for loan losses of $40,000 for the year ended December 31, 2014. This additional provision was assigned to 1 – 4 Family Residential loans.
Impaired loans measured at fair value had a recorded investment of $4,212,000 with a valuation allowance of $307,000 at March 31, 2014, resulting in an additional provision for loan losses of $177,000 for the three months ended March 31, 2014. This additional provision included $34,000 for Construction and Land Development loans, $2,000 for 1-4 Family Residential loans, $136,000 for Multifamily loans, and $5,000 for Commercial Real Estate loans.
Other real estate owned measured at fair value less estimated costs to sell had a net carrying amount of $50,000, which was made up of the outstanding balance of $165,000, net of a valuation allowance of $115,000 at March 31, 2015. No impairment provisions were made during the three months ended March 31, 2015. Other real estate owned measured at fair value less costs to sell had a net carrying amount of $361,000, which was made up of the outstanding balance of $482,000, net of a valuation allowance of $121,000, at December 31, 2014. This valuation allowance included $6,000 of impairment made during the year ended December 31, 2014, which related entirely to 1-4 Family Residential real estate.
The Company made impairment provisions for other real estate owned totaling approximately $6,000 during the three months ended March 31, 2014. The Company had no chargeoffs of other real estate owned during the three months ended March 31, 2014.
The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Fair Value Measurements – (continued)
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014:
Valuation Techniques |
Unobservable Inputs |
Range | |||||
Impaired Loans |
|||||||
1 - 4 Family Residential |
Sales comparison approach |
Bank Owned Discount |
10%-20% | ||||
Multifamily Residential | |||||||
Construction and Land Development | |||||||
Commercial Real Estate |
Sales comparison approach |
Bank Owned Discount |
10%-20% | ||||
Income approach | Capitalization Rate | 8% - 12% | |||||
Other Real Estate Owned | |||||||
Commercial Office Properties |
Sales comparison approach |
Bank Owned Discount |
10%-20% | ||||
Income approach | Capitalization Rate | 8% - 12% | |||||
Commercial Lots |
Sales comparison approach |
Bank Owned Discount |
10%-20% | ||||
Residential 1 – 4 Family Lots | |||||||
Residential 1 – 4 Family Homes | |||||||
Residential 1 – 4 Under Construction | |||||||
Multifamily Residential |
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Fair Value Measurements – (continued)
The estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):
Fair Value Measurements at March 31, 2015 Using: | ||||||||||||||||||||
Carrying |
||||||||||||||||||||
Amount |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 47,471 | $ | 47,471 | $ | - | $ | - | $ | 47,471 | ||||||||||
Available for sale investment securities |
35,287 | - | 32,581 | 2,706 | 35,287 | |||||||||||||||
Federal Home Loan Bank Stock |
3,569 |
N/A |
N/A |
N/A |
N/A |
|||||||||||||||
Loans, net |
362,755 | - | - | 361,457 | 361,457 | |||||||||||||||
Accrued interest receivable |
1,197 | - | 97 | 1,100 | 1,197 | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Deposits |
354,532 | 227,679 | 127,215 | - | 354,894 | |||||||||||||||
Short term borrowings |
350 | - | 350 | - | 350 | |||||||||||||||
Advances from Federal Home Loan Bank |
74,000 | - | 77,889 | - | 77,889 | |||||||||||||||
Junior subordinated debentures |
10,310 | - | - | 5,042 | 5,042 | |||||||||||||||
Accrued interest payable |
453 | 1 | 451 | 1 | 453 |
Fair Value Measurements at December 31, 2014 Using: | ||||||||||||||||||||
Carrying |
||||||||||||||||||||
Amount |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 33,572 | $ | 33,572 | $ | - | $ | - | $ | 33,572 | ||||||||||
Available for sale investment securities |
35,269 | - | 33,261 | 2,008 | 35,269 | |||||||||||||||
Federal Home Loan Bank Stock |
4,000 |
N/A |
N/A |
N/A |
N/A |
|||||||||||||||
Loans, net |
358,546 | - | - | 355,310 | 355,310 | |||||||||||||||
Accrued interest receivable |
1,169 | - | 97 | 1,072 | 1,169 | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Deposits |
331,034 | 210,391 | 120,950 | - | 331,341 | |||||||||||||||
Short term borrowings |
3,802 | - | 3,802 | - | 3,802 | |||||||||||||||
Advances from Federal Home Loan Bank |
80,000 | - | 83,488 | - | 83,488 | |||||||||||||||
Junior subordinated debentures |
10,310 | - | - | 5,018 | 5,018 | |||||||||||||||
Accrued interest payable |
777 | - | 776 | 1 | 777 |
Valuation Methodologies – Assets and Liabilities not recorded at Fair Value
The following is a description of the valuation methodologies used for assets and liabilities that are not recorded at fair value, but whose fair value must be estimated and disclosed:
Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified Level 1.
FHLB Stock
It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Fair Value Measurements – (continued)
Loans
Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values, resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors, resulting in a Level 2 classification.
Deposits
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount), resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date, resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.
Short-term Borrowings
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values, resulting in a Level 2 classification.
Other Borrowings
The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements, resulting in a Level 2 classification.
The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements, resulting in a Level 3 classification.
Accrued Interest Receivable/Payable
The carrying amounts of accrued interest are assigned Levels 1, 2, or 3 classifications commensurate with the assets or liabilities with which they are associated.
Off-balance Sheet Instruments
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the financial statements and related notes appearing herein and in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2014. Results of operations for the period ending March 31, 2015 are not necessarily indicative of the results to be attained for any other period.
This Report on Form 10-Q may contain 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 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," “projection,” "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 and disruptions in the economy of the Greater Charleston area, including, but not limited to, falling real estate values and increasing levels of unemployment; |
|
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 |
the effects of credit rating downgrades on the value of investment securities issued or guaranteed by various governments and government agencies, including the United States of America; |
|
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 |
changes in assumptions underlying allowances on deferred tax assets; |
|
o |
changes in assumptions underlying, or accuracy of, analysis relating to other-than-temporary impairment of assets; |
|
o |
accuracy of fair value measurements and the methods and assumptions used to estimate fair value; |
|
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 and deposit insurance assessments; |
|
o |
the effect of agreements with regulatory authorities, which restrict various activities and impose additional administrative requirements without commensurate benefits; |
|
o |
changes in the requirements of regulatory agencies; |
|
o |
changes in accounting policies, rules and practices; |
|
o |
changes in technology or products that may be more difficult or costly, or less effective than anticipated; |
|
o |
cybersecurity risk related to our dependence on internal security systems and the technology of outside service providers, as well as the potential impacts of third party security breaches; |
|
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 |
loss of consumer or investor confidence; and |
|
o |
other factors and information described in any of the reports that we file with the Securities and Exchange Commission under the Securities Exchange Act of 1934. |
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
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.
Results of Operations
The Company’s net income for the three months ended March 31, 2015 was $1,978,000 or $0.28 per basic share, compared to net income of $643,000, or $0.09 per basic share, for the three months ended March 31, 2014. The average number of basic shares outstanding for the three months ended March 31, 2015 was 7,099,979 compared to 7,085,818 for the three months ended March 31, 2014.
Net Interest Income
Net interest income is the difference between the interest earned on interest earning assets and the interest paid for funds acquired to support those assets, and is the principal source of the Company’s earnings. Net interest income was approximately $4.0 million for the three months ended March 31, 2015, compared to approximately $3.6 million for the three months ended March 31, 2014.
Changes that affect net interest income include changes in the average rate earned on interest earning assets, changes in the average rate paid on interest bearing liabilities, and changes in the volumes of interest earning assets and interest bearing liabilities. The increase in the Company’s net interest income for the three months ended March 31, 2015 compared to the same period of 2014 was due to increased interest income and decreased interest expense between the two periods. The increase in interest income related primarily to the mix of earning assets and increase in interest income on loans, driven by growth of the portfolio and partially offset by lower yielding loans. The decrease in interest expense was primarily driven by lower interest expense on time deposits. Interest expense on time deposits decreased between the two periods due to changes in both volume and rate, as the Company was able to lower its cost of funds on time deposits while changing its funding mix towards deposits with lower funding costs.
Average earning assets for the three months ended March 31, 2015 increased 8.3 percent to $415.3 million from the $383.7 million reported for the three months ended March 31, 2014. The increase was attributable to an increase of $34.3 million in average loans, partially offset by a $2.7 million decrease in average total investments, cash, and federal funds sold. The increase in average loans between the two periods was primarily due to growth in the Company’s loan portfolio. The decrease in the Company’s average investments and federal funds sold was primarily due to paydowns on mortgage backed securities.
Average interest bearing liabilities for the three months ended March 31, 2015 increased 3.9 percent to $360.7 million from the $347.1 million reported for the three months ended March 31, 2014. The increase was primarily attributable to an increase of $26.4 million in average savings and transaction accounts, partially offset by a $13.3 million decrease in average time deposits. The increase in savings and transaction accounts was primarily attributable to an increase of $22.6 million in average money market accounts. Of this amount, approximately $21.5 million was attributable to an increase in average municipal money market accounts. The decrease in average time deposits was attributable to a decrease of $24.5 million in retail time deposits, partially offset by an increase of $11.2 million in brokered and wholesale time deposits.
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Net Interest Income – (continued)
The following table compares the average balances, yields and rates for the interest sensitive segments of the Company’s balance sheets for the three months ended March 31, 2015 and 2014.
For the three months ended |
For the three months ended |
|||||||||||||||||||||||
March 31, 2015 |
March 31, 2014 |
|||||||||||||||||||||||
Average |
Income/ |
Yield/ |
Average |
Income/ |
Yield/ |
|||||||||||||||||||
Balance |
Expense |
Rate(1) |
Balance |
Expense |
Rate(1) |
|||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and Federal funds sold |
$ | 15,015 | $ | 8 | 0.20 | % | $ | 11,636 | $ | 6 | 0.21 | % | ||||||||||||
Investments – taxable |
36,364 | 214 | 2.36 | 42,469 | 263 | 2.48 | ||||||||||||||||||
Investments - nontaxable |
3,924 | 59 | 6.04 | 3,919 | 59 | 6.04 | ||||||||||||||||||
Total investments and federal funds sold |
55,303 | 281 | 2.04 | 58,024 | 328 | 2.27 | ||||||||||||||||||
Loans (2)(3) |
360,012 | 4,604 | 5.12 | 325,643 | 4,235 | 5.21 | ||||||||||||||||||
Total earning assets/interest income |
415,315 | 4,885 | 4.72 | % | 383,667 | 4,563 | 4.77 | % | ||||||||||||||||
Other assets |
53,849 | 57,429 | ||||||||||||||||||||||
Total assets |
$ | 469,164 | $ | 441,096 | ||||||||||||||||||||
Liabilities |
||||||||||||||||||||||||
Savings and transaction accounts |
$ | 162,087 | 154 | 0.38 | % | $ | 135,677 | 177 | 0.52 | % | ||||||||||||||
Time deposits |
121,580 | 204 | 0.67 | 134,917 | 246 | 0.73 | ||||||||||||||||||
Other borrowings |
66,704 | 447 | 2.69 | 66,152 | 444 | 2.69 | ||||||||||||||||||
Subordinated debt |
10,310 | 44 | 1.71 | 10,310 | 45 | 1.77 | ||||||||||||||||||
Total interest bearing liabilities/interest expense |
360,681 | 849 | 0.94 | % | 347,056 | 912 | 1.05 | % | ||||||||||||||||
Non-interest bearing liabilities |
59,921 | 50,977 | ||||||||||||||||||||||
Total liabilities |
420,602 | 398,033 | ||||||||||||||||||||||
Equity |
48,562 | 43,063 | ||||||||||||||||||||||
Total liabilities and equity |
$ | 469,164 | $ | 441,096 | ||||||||||||||||||||
Net interest income/margin (4) |
$ | 4,036 | 3.89 | % | $ | 3,651 | 3.81 | % | ||||||||||||||||
Net interest spread (5) |
3.78 | % | 3.72 | % |
(1) Annualized
(2) Does not include nonaccruing loans.
(3) Income includes loan fees of $151,000 in 2015 and $171,000 in 2014.
(4) Net interest income divided by total earning assets.
(5) Total interest earning assets yield less interest bearing liabilities rate.
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Net Interest Income – (continued)
As shown above, for the three months ended March 31, 2015 the average yield on earning assets was 4.72 percent, while the average cost of interest bearing liabilities was 0.94 percent. For the three months ended March 31, 2014 the average yield on earning assets was 4.77 percent and the average cost of interest-bearing liabilities was 1.11 percent. The decrease in the overall asset yield is due to lower rates on new assets, causing decreases in yields for each of the components of interest bearing assets. The decrease in the cost of average interest bearing liabilities was due to decreases in average rates paid on time deposits and savings and transaction accounts. The net interest margin was 3.89 percent and 3.81 percent for the three months ended March 31, 2015 and 2014, respectively. The increase in the net interest margin was attributable to an increase of $385,000 in net interest income, which was comprised of an increase in interest income of $322,000 and a decrease in interest expense of $63,000. The increase in interest income was primarily due to a $369,000 increase in interest income on loans, while the interest expense reduction was primarily attributable to a $42,000 decrease in interest expense on time deposits.
The following tables present changes in the Company’s net interest income which are primarily a result of changes in the volume and rates of its interest-earning assets and interest-bearing liabilities.
Analysis of Changes in Net Interest Income |
||||||||||||
For the three months ended March 31, 2015 |
||||||||||||
Versus three months ended March 31, 2014 (1) |
||||||||||||
Volume |
Rate |
Net Change |
||||||||||
Interest income: |
||||||||||||
Cash and Federal funds sold |
$ | 2 | $ | - | $ | 2 | ||||||
Investments - taxable |
(38 | ) | (11 | ) | (49 | ) | ||||||
Investments - non taxable |
- | - | - | |||||||||
Total investments and federal funds sold |
(36 | ) | (11 | ) | (47 | ) | ||||||
Net loans (2)(3) |
442 | (73 | ) | 369 | ||||||||
Total interest income |
406 | (84 | ) | 322 | ||||||||
Interest expense: |
||||||||||||
Savings and transaction accounts |
35 | (58 | ) | (23 | ) | |||||||
Time deposits |
(24 | ) | (18 | ) | (42 | ) | ||||||
Other borrowings |
3 | - | 3 | |||||||||
Subordinated debt |
- | (1 | ) | (1 | ) | |||||||
Total interest expense |
14 | (77 | ) | (63 | ) | |||||||
Net interest income |
$ | 392 | $ | 7 | $ | 385 |
(1) |
Changes in rate/volume have been allocated to each category on a consistent basis between rate and volume. |
(2) |
Income includes loan fees of $151,000 in 2015 and $171,000 in 2014. |
(3) |
Does not include nonaccruing loans. |
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Noninterest Income and Expenses
Noninterest income for the three months ended March 31, 2015 was $1,281,000, compared to $488,000 for the three months ended March 31, 2014, an increase of $793,000. The increase was primarily due to a $750,000 gain recognized on the sale of premises and equipment during the three months ended March 31, 2015. The premises disposed of was an unoccupied lot adjacent to the Company’s headquarters and main office. There were no such gains during the three months ended March 31, 2014. Also contributing to the increase in noninterest income were increases of $33,000 and $14,000 in service fees on deposit accounts, and gains on the sale of mortgage loans held for sale, respectively.
Noninterest expenses for the three months ended March 31, 2015 were $3,140,000, compared to $3,130,000 for the three months ended March 31, 2014, an increase of $10,000. The largest contributing factor to this increase was an $80,000 decrease in gains on sale of other real estate owned, which are accounted for as an offset to noninterest expense. Additionally, salaries and benefits increased by $71,000 due primarily to routine salary increases. Partially offsetting these increases were decreases of $34,000 and $95,000 related to other real estate impairment provisions and expenses and the Allowance for Unfunded Commitments, respectively. The Allowance for Unfunded Commitments provides for future losses on contractual commitments to extend credit that have not yet been funded. The adequacy of the Allowance for Unfunded Commitments is analyzed on a quarterly basis.
Income Taxes
The Company’s income tax expense for the three months ended March 31, 2015 totaled $1,078,000, comprised of $978,000 for Federal income taxes and $100,000 for South Carolina income taxes. The Company’s income tax expense for the three months ended March 31, 2014 totaled $345,000, comprised of $318,000 for Federal income taxes and $27,000 for South Carolina income taxes. The effective tax rates for these periods were 35.3% and 34.9% for the three months ended March 31, 2015 and March 31, 2014, respectively.
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 of liquidity management being on the ability to obtain deposits within the Bank’s service area. Core deposits (total deposits less certificates of deposit $250,000 or more, wholesale and brokered deposits) provide a relatively stable funding base, and were equal to 93.4% of total deposits as of March 31, 2015. 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 Federal Home Loan Bank of Atlanta (”FHLBA”) and, as such has the ability to borrow against pledges of its 1-4 family residential mortgage loans and its commercial real estate loans. Available borrowings under this line totaled $23.7 million at March 31, 2015. The Company also has federal funds accommodations of $10 million with Alostar Bank of Commerce, $10 million with Zion’s Bank, $5 million with Center State Bank, and $8 million with First Tennessee Bank. These accommodations may be withdrawn at any time at the sole discretion of these institutions. Additionally, the Company has a borrowing line with the Federal Reserve Bank of Richmond’s discount window. The Company has pledged its portfolios of construction and land development loans, and commercial and industrial loans against this borrowing line. Total available borrowings under this line were $26.4 million at March 31, 2015.
Loans
Gross loans totaled approximately $367,630,000 and $364,148,000 at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, the Company had $5.2 million of nonaccrual loans and $45,000 of loans 90 days delinquent and still accruing interest. Of these, $4.3 million are secured by real estate. The primary risk of loss on these loans is a potential deterioration of real estate collateral values. At December 31, 2014, the Company had $5.0 million of nonaccrual loans and no loans 90 days past due and still accruing interest. At March 31, 2014, the Company had $8.5 million of nonaccrual loans and $102,000 of loans 90 days past due and still accruing interest. The allowance for loan losses was 1.33 percent of loans as of March 31, 2015, compared to 1.54 percent as of December 31, 2014 and 1.81 percent as of March 31, 2014.
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Loans – (continued)
For three months ended March 31, 2015 the Company credited its loan loss provision for $900,000. For the three months ended March 31, 2014 the Company recorded no loan loss provision. Net recoveries for the three months ended March 31, 2015 and March 31, 2014 totaled approximately $173,000 and $105,000, respectively. The need for future loan loss provisions will be influenced by loan defaults, loan delinquency levels, loan chargeoffs beyond what has already been provided for on individual loans, the level of loans with credit grades of 6 through 9, and the need for additional specific reserves on loans individually evaluated for impairment, among other factors. In reviewing the adequacy of the allowance for loan losses at each quarter end, management takes into consideration the historical loan losses we experienced, current levels of past due loans by loan type, the historical severity of loan losses by loan type, loan to value exceptions in our loan portfolio, potential repayment risk for floating and adjustable rate loans due to the potential for rising interest rates, risks posed by unseasoned loans during periods of growth in the loan portfolio, and collateral values of impaired loans deemed to be collateral dependent. As referenced in Note 6, the Company’s general reserves portion of its allowance for loan losses decreased by $854,000 during the three months ended March 31, 2015, from $5,539,000 at December 31, 2014 to $4,685,000 at March 31, 2015. The main factor leading to the loan loss provision credit of $900,000 for the three months ended March 31, 2015 was a reduction in required general reserves related to loan default and loss severities risks totaling approximately $522,000. This reduction was the result of the inclusion of 2014 loan defaults and chargeoffs and recoveries data into the calculation of historical averages for these factors. Due to a comparatively low level of defaults, and net recoveries totaling $161,000 during 2014, the Company’s historical average defaults and loss severities were lessened significantly by the inclusion of 2014 data. Additionally, the Company’s required general reserves also decreased by approximately $251,000 due to a combination of loan upgrades and migrations from general reserves to specific reserves for impaired loans that had calculated impairments of zero.
For the three months ended March 31, 2015, net recoveries to average loans outstanding totaled 0.19% on an annualized basis while the allowance for loan losses to gross loans totaled 1.33% at March 31, 2015. For the three months ended March 31, 2014, net recoveries to average loans outstanding totaled 0.13% on an annualized basis while the allowance for loan losses to gross loans totaled 1.81% at March 31, 2014.
Management identifies and maintains a list of potential problem loans. These are loans that are internally risk graded substandard or below but which are not included in nonaccrual status and are not past due 90 days or more. A loan is added to the potential problem list when management becomes aware of information about possible credit problems of the borrower which raises serious doubts as to the ability of such borrower to comply with the current loan repayment terms. At March 31, 2015 potential problem loans totaled $7.4 million. The Company’s potential problem loans were comprised of $687,000 of construction and land development real estate loans, $3.5 million of nonfarm, nonresidential real estate loans, $2.7 million of 1-4 family mortgage loans, and $450,000 of various loan types not secured by real estate, primarily commercial and industrial loans. At December 31, 2014 potential problem loans totaled $12.0 million. The Company’s potential problem loans were comprised of $703,000 of construction and land development real estate loans, $7.0 million of nonfarm, nonresidential real estate loans, $3.5 million of 1-4 family mortgage loans, $338,000 of multifamily real estate loans, and $513,000 of various loan types not secured by real estate, primarily commercial and industrial loans. As the majority of potential problem loans are real estate secured, management closely tracks the current values of real estate collateral when assessing the collectibility of these loans.
Other Real Estate Owned
Other real estate owned totaled approximately $3.4 million as of March 31, 2015, $3.7 million at December 31, 2014, and $4.3 million as of March 31, 2014, net of a valuation reserve. Sales of other real estate owned totaled approximately $312,000 and $1.1 million for the three months ended March 31, 2015, and 2014, respectively. The Company generated loans to facilitate the sales of other real estate owned totaling $0 and $260,000 during the three months ended March 31, 2015 and March 31, 2014, respectively. Impairment charges on other real estate owned totaled $0 and $6,000 for the three months ended March 31, 2015, and 2014, respectively.
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Deposits
Deposits increased $23.5 million during the first three months of 2015 to $354.5 million at March 31, 2015. Included in this amount were increases of $12.6 million in noninterest bearing deposits and $10.9 million in interest bearing accounts. The increase in interest bearing deposits was due to increases of $6.2 million, $3.6 million, and $1.1 million in time deposits, interest bearing transaction accounts, and savings and money market demand accounts, respectively. The growth in time deposits was primarily attributable to a $5.6 million increase in retail time deposits. Brokered and wholesale time deposits totaled $12.9 million and $12.3 million at March 31, 2015 and December 31, 2014, respectively.
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued
Federal Home Loan Bank Borrowings
Other borrowings are primarily comprised of FHLBA advances. FHLBA advances are collateralized by pledged FHLBA stock and certain residential mortgage and commercial real estate loans. FHLBA advances outstanding at March 31, 2015 and December 31, 2014 are summarized as follows:
March 31, 2015 |
||||||||
(Dollars in Thousands) |
||||||||
Maturity |
Rate |
Balance |
||||||
March 2016 |
2.04 | % | $ | 10,000 | ||||
March 2016 |
0.36 | % | 12,000 | |||||
May 2016 |
0.75 | % | 2,000 | |||||
March 2017 |
2.31 | % | 2,000 | |||||
May 2017 |
1.07 | % | 2,000 | |||||
March 2018 |
2.33 | % | 5,000 | |||||
April 2018 |
3.03 | % | 5,000 | |||||
May 2018 |
1.38 | % | 2,000 | |||||
March 2019 |
3.56 | % | 5,000 | |||||
March 2019 |
3.51 | % | 5,000 | |||||
May 2019 |
1.69 | % | 2,000 | |||||
May 2020 |
2.01 | % | 2,000 | |||||
March 2021 |
3.71 | % | 5,000 | |||||
March 2021 |
3.74 | % | 5,000 | |||||
March 2021 |
3.80 | % | 5,000 | |||||
March 2021 |
3.87 | % | 5,000 | |||||
Balance |
$ | 74,000 |
December 31, 2014 |
||||||||
(Dollars in Thousands) |
||||||||
Maturity |
Rate |
Balance |
||||||
February 2015 |
0.36 | % | $ | 18,000 | ||||
March 2016 |
2.04 | % | 10,000 | |||||
May 2016 |
0.75 | % | 2,000 | |||||
March 2017 |
2.31 | % | 2,000 | |||||
May 2017 |
1.07 | % | 2,000 | |||||
March 2018 |
2.33 | % | 5,000 | |||||
April 2018 |
3.03 | % | 5,000 | |||||
May 2018 |
1.38 | % | 2,000 | |||||
March 2019 |
3.56 | % | 5,000 | |||||
March 2019 |
3.51 | % | 5,000 | |||||
May 2019 |
1.69 | % | 2,000 | |||||
May 2020 |
2.01 | % | 2,000 | |||||
March 2021 |
3.71 | % | 5,000 | |||||
March 2021 |
3.74 | % | 5,000 | |||||
March 2021 |
3.80 | % | 5,000 | |||||
March 2021 |
3.87 | % | 5,000 | |||||
Balance |
$ | 80,000 |
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued
Junior Subordinated Debentures
On August 5, 2005 Southcoast Capital Trust III (the "Capital Trust"), a non-consolidated subsidiary of the Company, issued and sold a total of 10,310 floating rate securities, with a $1,000 liquidation amount per security (the "Capital Securities"). Institutional buyers bought 10,000 of the Capital Securities denominated as preferred securities and the Company bought the other 310 Capital Securities which are denominated as common securities. The proceeds of those sales, $10.3 million, were used by the Capital Trust to buy $10.3 million of junior subordinated debentures from the Company which are reported on its consolidated balance sheets. The Capital Securities mature or are mandatorily redeemable upon maturity on September 30, 2035, or upon earlier optional redemption as provided in the indenture. Since September 30, 2010, the Company has had the right to redeem the Capital Securities in whole or in part. See Note 11 to the consolidated financial statements for the year ended December 31, 2014, and the information set forth in Exhibit 13 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Junior Subordinated Debentures” filed with our Form 10-K for the year ended December 31, 2014, for more information about the terms of the junior subordinated debentures.
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued
Capital Resources
The Company’s total shareholders’ equity increased by approximately $2.5 million during the first three months of 2015, primarily due to net income of $1,978,000, other comprehensive income of $513,000, and proceeds from stock issuances of approximately $24,000 pursuant to our Employee Stock Purchase Plan. The Company’s Tier 1 capital to average assets ratio was 12.11 percent as of March 31, 2015 compared to 11.98 percent as of December 31, 2014.
The Federal Reserve Board and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. The Company’s and the Bank’s Tier 1 capital consists of common shareholders’ equity minus a portion of deferred tax assets plus, in the case of the Company, junior subordinated debt subject to certain limitations. Tier 1 Capital includes Common Equity Tier 1 and Additional Tier 1, which consists of additions for certain items to Common Equity Tier 1. None of these additions apply to the Company or the Bank; therefore, for both entities Common Equity Tier 1 capital equals Tier 1 capital. The Company’s and the Bank’s Tier 2 capital consists of the allowance for loan losses subject to certain limitations and, in the case of the Company, its junior subordinated debt in excess of 25% of its Tier 1 capital. A bank holding company’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are illustrated in the chart below. The Company and the Bank are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. These requirements are set by regulation and are shown in the table below. These requirements are applicable to all but the most highly-rated institutions that are not anticipating or experiencing significant growth and have well-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity and good earnings. The regulators may require individual bank holding companies and banks to maintain higher levels of capital depending on the regulators’ assessment of the risks faced by the bank holding company or the bank. As of March 31, 2015, the Company and the Bank exceeded each of the capital requirements shown in the following table.
Capital Ratios |
||||||||||||||||||||||||||||||||
Minimum Basel III |
Minimum Basel III |
Well Capitalized |
||||||||||||||||||||||||||||||
Actual |
Requirement |
Requirement |
Requirement |
|||||||||||||||||||||||||||||
(Dollars in thousands) |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||||||||||||
The Bank |
||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
$ | 55,240 | 16.07 | % | $ | 27,503 | 8.00 | % | $ | 36,098 | 10.50 | % | $ | 34,379 | 10.00 | % | ||||||||||||||||
Tier 1 capital (to risk-weighted assets) |
50,904 | 14.81 | % | 20,628 | 6.00 | % | 29,222 | 8.50 | % | 27,503 | 8.00 | % | ||||||||||||||||||||
Common equity Tier 1 capital (to risk-weighted assets) |
50,904 | 14.81 | % | 15,471 | 4.50 | % | 24,065 | 7.00 | % | 22,346 | 6.50 | % | ||||||||||||||||||||
Tier 1 capital (to average assets) |
50,904 | 11.09 | % | 18,363 | 4.00 | % | 18,363 | 4.00 | % | 22,954 | 5.00 | % | ||||||||||||||||||||
The Company |
||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
$ | 62,778 | 17.93 | % | $ | 28,012 | 8.00 | % | $ | 36,765 | 10.50 | % |
N/A |
N/A |
||||||||||||||||||
Tier 1 capital (to risk-weighted assets) |
58,395 | 16.68 | % | 21,009 | 6.00 | % | 29,762 | 8.50 | % |
N/A |
N/A |
|||||||||||||||||||||
Common equity Tier 1 capital (to risk-weighted assets) |
58,395 | 16.68 | % | 15,757 | 4.50 | % | 24,510 | 7.00 | % |
N/A |
N/A |
|||||||||||||||||||||
Tier 1 capital (to average assets) |
58,395 | 12.11 | % | 19,288 | 4.00 | % | 19,288 | 4.00 | % |
N/A |
N/A |
SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Off Balance Sheet Risk
The Company makes contractual commitments to extend credit and issues standby letters of credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. In addition to commitments to extend credit, the Company also issues standby letters of credit which are assurances to a third party that it will not suffer a loss if the customer fails to meet a contractual obligation to the third party. At March 31, 2015, the Company had issued commitments to extend credit of approximately $28.1 million and letters of credit of approximately $99,000 through various types of commercial lending arrangements. Approximately $16.6 million of these commitments to extend credit had variable rates.
The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at March 31, 2015.
Within One Month |
After One Through Three Months |
After Three Through Twelve Months |
Within One Year |
Greater Than One Year |
Total |
|||||||||||||||||||
Unused commitments to extend credit |
$ | 1,115 | $ | 1,649 | $ | 7,639 | $ | 10,403 | $ | 17,741 | $ | 28,144 | ||||||||||||
Standby letters of credit |
- | 5 | 30 | 35 | 64 | 99 | ||||||||||||||||||
Totals |
$ | 1,115 | $ | 1,654 | $ | 7,669 | $ | 10,438 | $ | 17,805 | $ | 28,243 |
Based on historical experience, many of the commitments and letters of credit will expire unfunded. Accordingly, the amounts shown in the table above do not necessarily reflect the Company’s need for funds in the periods shown. Further, through its various sources of liquidity, the Company believes it will be able to fund these obligations as they arise. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on the Company’s credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk.
Information about the Company’s exposure to market risk was disclosed in its Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission on March 12, 2015. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.
Item 4. - Controls and Procedures.
Based on the evaluation required by 17 C.F.R. Sections 240.13a-15(b) or 240.15d-15(b) of the Company’s disclosure controls and procedures (as defined in 17 C.F.R. Section 240.13a-15(e) and 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 quarterly report, were effective.
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.
SOUTHCOAST FINANCIAL CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits
31-1 |
Rule 13a-14(a) Certifications of CEO |
31-2 |
Rule 13a-14(a) Certifications of CFO |
32 |
Section 1350 Certification |
101.INS** |
XBRL Instance |
101.SCH** |
XBRL Taxonomy Extension Schema |
101.CAL** |
XBRL Taxonomy Extension Calculation |
101.DEF** |
XBRL Taxonomy Extension Definition |
101.LAB** |
XBRL Taxonomy Extension Labels |
101.PRE** |
XBRL Taxonomy Extension Presentation |
SIGNATURES
Pursuant to the requirements 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.
Date:May 14, 2015 |
By: |
/s/ L. Wayne Pearson |
L. Wayne Pearson | ||
Chief Executive Officer |
Date:May 14, 2015 |
By: |
/s/ William C. Heslop |
William C. Heslop | ||
Chief Financial Officer |
SOUTHCOAST FINANCIAL CORPORATION
Exhibit Index
31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided by applicable rules of the Securities and Exchange Commission. |
101.INS** |
XBRL Instance |
101.SCH** |
XBRL Taxonomy Extension Schema |
101.CAL** |
XBRL Taxonomy Extension Calculation |
101.DEF** |
XBRL Taxonomy Extension Definition |
101.LAB** |
XBRL Taxonomy Extension Labels |
101.PRE** |
XBRL Taxonomy Extension Presentation |
** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
41