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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004 File Number 0-25933
SOUTHCOAST FINANCIAL CORPORATION
(Exact name of Registrant as specified in its Charter)
South Carolina 57-1079460
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
530 Johnnie Dodds Boulevard, Mt. Pleasant, South Carolina 29464
(Address of Principal Executive Office, Zip Code)
Registrant's Telephone Number, Including Area Code: (843) 884-0504
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
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 preceeding 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 if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K contained herein, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act) Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates
on June 30, 2004, was approximately $55,113,000. The Registrant has no
non-voting common equity outstanding. For purposes of the foregoing calculation
only, all directors and executive officers of the Registrant have been deemed
affiliates.
As of March 1, 2005, there were 2,972,173 shares of the Registrant's
Common Stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to the Shareholders for the year
ended December 31, 2004 - Parts I and II
(2) Portions of the Registrant's Proxy Statement for the 2005 Annual Meeting of
Shareholders - Part III
10-K CROSS REFERENCE INDEX
Part I Page
Item 1 Business ....................................................... 1
Item 2 Properties ..................................................... 7
Item 3 Legal Proceedings .............................................. 7
Item 4 Submission of Matters to a Vote of Security Holders ............ 7
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ............ *
Item 6 Selected Financial Data ........................................
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation ........................... *
Item 7A Quantitative and Qualitative Disclosures
About Market Risk ............................................ *
Item 8 Financial Statements and Supplementary Data .................... *
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ....................... 10
Item 9A Controls and Procedures ........................................ 10
Item 9B Other Information .............................................. 10
Part III
Item 10 Directors and Executive Officers of the Registrant ............. 10
Item 11 Executive Compensation ......................................... **
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................ 11
Item 13 Certain Relationships and Related Transactions ................. **
Part IV
Item 14 Principal Accountant Fees and Services.......................... **
Item 15 Exhibits and Financial Statement Schedules ..................... 12
* Incorporated by reference to Registrant's Annual Report to Shareholders for
the year ended December 31, 2004.
** Incorporated by reference to Registrant's Proxy Statement for the 2004
Annual Meeting of Shareholders
FORWARD-LOOKING STATEMENTS
This Report on Form 10-K 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." Words
such as "estimate," "project," "intend," "expect," "believe," "anticipate,"
"plan," and similar expressions identify forward-looking statements. These
forward-looking statements are based on current expectations, estimates and
projections about the banking industry, management's beliefs, and assumptions
made by management. Such information includes, without limitation, discussions
as to estimates, expectations, beliefs, plans, strategies, and objectives
concerning future financial and operating performance of Southcoast Financial
Corporation (the "Company"). These statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions that are
difficult to predict, particularly in light of the fact that the Company is a
relatively new company with limited operating history. Therefore, actual results
may differ materially from those expressed or forecasted in such 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. The
risks and uncertainties that may affect the operations, performances,
development and results of the Company's business include, but are not limited
to, the following: risks from changes in economic and industry conditions;
changes in interest rates; risks inherent in making loans including repayment
risks and value of collateral; dependence on senior management; and
recently-enacted or proposed legislation. Statements contained in this filing
regarding the demand for Southcoast Community Bank's products and services,
changing economic conditions, interest rates, consumer spending and numerous
other factors may be forward-looking statements and are subject to uncertainties
and risks.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this report might not occur.
PART I
Item 1. Business.
General
The Company is a South Carolina corporation organized in 1999 under the
laws of South Carolina for the purpose of being a holding company for Southcoast
Community Bank (the "Bank"). On April 29, 1999, pursuant to a Plan of Exchange
approved by the shareholders, all of the outstanding shares of capital stock of
the Bank were exchanged for shares of common stock of the Company and the
Company became the owner of all of the outstanding capital stock of the Bank.
The Company presently engages in no business other than that of owning the Bank
and has no employees.
The Bank is a South Carolina state bank incorporated in June, 1998,
which commenced operations as a commercial bank in July, 1998. The Bank operates
from its offices in Mt. Pleasant, Charleston, Moncks Corner, Johns Island,
Summerville, and Goose Creek, South Carolina. The main office is located at 530
Johnnie Dodds Boulevard, in Mt. Pleasant; a second Mt. Pleasant office is
located at 602 Coleman Boulevard; the Charleston office is located at 802
Savannah Highway; the Moncks Corner office is located at 337 East Main Street;
the Johns Island office is located at 2753 Maybank Highway; the Summerville
office is located at 302 N. Main Street; and the Goose Creek office is located
at 597 Old Mount Holly Road.
The Bank offers a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. Most of the Bank's deposits are attracted
from individuals and small businesses. The Bank does not offer trust services.
The Bank offers secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial, consumer and
residential purposes. Consumer loans include: car loans, home equity improvement
loans (secured by first and second mortgages), personal expenditure loans,
education loans, overdraft lines of credit, and the like. Commercial loans
include short term unsecured loans, short and intermediate term real estate
mortgage loans, loans secured by listed stocks, loans secured by equipment
inventory, accounts receivable, and the like. Management believes that the
credit staff possesses knowledge of the community and lending skills sufficient
to enable the Bank to maintain a sufficient volume of high quality loans.
Management of the Bank believes that the loan portfolio is adequately
diversified. There are no significant concentrations of loans in any particular
individuals, industries or groups of related individuals or industries and the
Bank has no foreign loans. The loan portfolio consists primarily of mortgage
loans and extensions of credit to businesses and individuals in its service area
within the Charleston-North Charleston, South Carolina Metropolitan Statistical
Area (the "Charleston MSA"). The economy of this area is diversified and does
not depend on any one industry or group of related industries. Management has
established loan policies and practices that include set limitations on
loan-to-collateral value for different types of collateral, requirements for
appraisals, obtaining and maintaining current credit and financial information
on borrowers, and credit approvals.
Other services offered by the Bank include residential mortgage loan
origination services, safe deposit boxes, night depository service, VISA(R) and
MasterCard(R) charge cards, tax deposits, traveler's checks, and twenty-four
hour automated teller service. The ATMs are part of the Intercept network.
At March 1, 2005, the Bank employed 80 persons full-time. The Company
has no employees. Management of the Bank believes that its employee relations
are excellent.
Competition
The Bank competes in the Charleston MSA. As of June 30, 2004, 22 banks,
savings and loans, and savings banks with 155 branch locations competed in the
Charleston MSA. As of June 30, 2004, the Bank held 3.79% of total deposits in
the MSA of $6.1 billion.
Banks generally compete with other financial institutions through the
savings products and services offered, the pricing of services, the level of
service provided, the convenience and availability of services, and the degree
of expertise and personal concern with which services are offered. South
Carolina law permits statewide branching by banks and savings institutions, and
many financial institutions in the state have branch networks. Consequently,
commercial banking in South Carolina is highly competitive. Furthermore,
out-of-state banks may commence operations and compete in the Bank's primary
service area. Many large banking organizations, several of which are controlled
by out-of-state ownership, currently operate in the Bank's market area.
In the conduct of certain areas of its business, the Bank competes with
commercial banks, savings and loan associations, credit unions, consumer finance
companies, insurance companies, money market mutual funds and other financial
institutions, some of which are not subject to the same degree of regulation and
restriction imposed upon the Bank. Many of these competitors have substantially
greater resources and lending limits than the Bank and offer certain services,
such as international banking services and trust services, that the Bank does
not provide. Moreover, most of these competitors have more numerous branch
offices located throughout their market areas, a competitive advantage that the
Bank does not have to the same degree. Such competitors may also be in a
position to make more effective use of media advertising, support services, and
electronic technology than can the Bank.
The banking industry is significantly affected by prevailing economic
conditions as well as by government policies and regulations concerning, among
other things, monetary and fiscal affairs, the housing industry and financial
institutions. Deposits at banks are influenced by a number of economic factors,
including interest rates, competing instruments, levels of personal income and
savings, and the extent to which interest on retirement savings accounts is tax
deferred. Lending activities are also influenced by a number of economic
factors, including demand for and supply of housing, conditions in the
construction industry, and availability of funds. Primary sources of funds for
lending activities include savings deposits, income from investments, loan
principal repayments, and proceeds from sales of loans to conventional
participating lenders.
EFFECT OF GOVERNMENT REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Company and the
Bank.
2
General
As a bank holding company under the Bank Holding Company Act ("BHCA"),
the Company obtained the approval of the Board of Governors of the Federal
Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the
regulations of the Federal Reserve. Under the BHCA, the Company's activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity which the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The Company may engage in a broader range of activities if it becomes a
"financial holding company" pursuant to the Gramm-Leach-Bliley Act, which is
described below under the caption "Gramm-Leach-Bliley Act." The BHCA prohibits
the Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or from
merging or consolidating with another bank holding company without prior
approval of the Federal Reserve. Additionally, the BHCA prohibits the Company
from engaging in or from acquiring ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve to be so closely related to
banking as to be properly incident thereto. The BHCA generally does not place
territorial restrictions on the activities of such non-banking related
activities.
The Company is also subject to regulation and supervision by the South
Carolina State Board of Financial Institutions (the "State Board"). A South
Carolina bank holding company must provide the State Board with information with
respect to the financial condition, operations, management and inter-company
relationships of the holding company and its subsidiaries. The State Board also
may require such other information as is necessary to keep itself informed about
whether the provisions of South Carolina law and the regulations and orders
issued thereunder by the State Board have been complied with, and the State
Board may examine any bank holding company and its subsidiaries.
Obligations of the Company to its Subsidiary Bank
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision gives depositors a preference over general and subordinated creditors
and shareholders in the event a receiver is appointed to distribute the assets
of the Bank.
3
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies and State Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC have adopted risk-based and leverage capital adequacy guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks.
Failure to meet capital guidelines could subject the Bank to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has issued additional capital guidelines for bank holding companies that engage
in certain trading activities.
The Company and the Bank exceeded all applicable capital requirements
at December 31, 2004.
Payment of Dividends
The Company is a legal entity separate and distinct from its bank
subsidiary. Most of the revenues of the Company are expected to result from
dividends paid to the Company by the Bank. There are statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by the Company to its shareholders. It is not anticipated that the Company
will pay cash dividends in the near future.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions among the Company and its
affiliates, including the amount of the Bank's loans to or investments in
nonbank affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. Further, a bank holding company and its affiliates
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Currently, the assessments imposed
on all FDIC deposits for deposit insurance have an effective rate ranging from 0
to 27 basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. However, because legislation
enacted in 1996 requires that both SAIF-insured and BIF-insured deposits pay a
pro rata portion of the interest due on the obligations issued by the Financing
Corporation ("FICO"). The FICO assessment is adjusted quarterly to reflect
changes in the assessment bases of the respective funds based on quarterly Call
Report and Thrift Financial Report submissions.
4
Regulation of the Bank
The Bank is subject to regulation and examination by the State Board.
In addition, the Bank is subject to various other state and federal laws and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit laws and laws relating to branch banking. The Bank's loan operations are
also subject to certain federal consumer credit laws and regulations promulgated
thereunder, including, but not limited to: the federal Truth-In-Lending Act,
governing disclosures of credit terms to consumer borrowers; the Home Mortgage
Disclosure Act, requiring financial institutions to provide certain information
concerning their mortgage lending; the Equal Credit Opportunity Act and the Fair
Housing Act, prohibiting discrimination on the basis of certain prohibited
factors in extending credit; the Fair Credit Reporting Act, governing the use
and provision of information to credit reporting agencies; the Bank Secrecy Act,
dealing with, among other things, the reporting of certain currency
transactions; and the Fair Debt Collection Act, governing the manner in which
consumer debts may be collected by collection agencies. The deposit operations
of the Bank are also subject to the Truth in Savings Act, requiring certain
disclosures about rates paid on savings accounts; the Expedited Funds
Availability Act, which deals with disclosure of the availability of funds
deposited in accounts and the collection and return of checks by banks; the
Right to Financial Privacy Act, which imposes a duty to maintain certain
confidentiality of consumer financial records and the Electronic Funds Transfer
Act and regulations promulgated thereunder, which govern automatic deposits to
and withdrawals from deposit accounts and customers' rights and liabilities
arising from the use of automated teller machines and other electronic banking
services.
The Bank is also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
FDIA: restricting payment of capital distributions and management fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital restoration plan; restricting the growth of the bank's
assets and requiring prior approval of certain expansion proposals. A bank that
is "significantly undercapitalized" is also subject to restrictions on
compensation paid to senior management of the bank, and a bank that is
"critically undercapitalized" is further subject to restrictions on the
activities of the bank and restrictions on payments of subordinated debt of the
bank. The purpose of these provisions is to require banks with less than
adequate capital to act quickly to restore their capital and to have the FDIC
move promptly to take over banks that are unwilling or unable to take such
steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payment of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph. Management does not
believe that these regulations will have a material adverse effect on the
operations of the Bank.
5
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 the Company and any other adequately capitalized bank holding company
located in South Carolina can acquire a bank located in any other state, and a
bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. Unless prohibited by state law, adequately capitalized and
managed bank holding companies are permitted to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate branches within a state continue to be subject to applicable state
branching laws. South Carolina law was amended, effective July 1, 1996, to
permit such interstate branching but not de novo branching by an out-of-state
bank.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act, which makes it easier for affiliations
between banks, securities firms and insurance companies to take place, became
effective in March 2000. The Act removes Depression-era barriers that had
separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information.
Under provisions of the legislation and regulations adopted by the
appropriate regulators, banks, securities firms and insurance companies are able
to structure new affiliations through a holding company structure or through a
financial subsidiary. The legislation creates a new type of bank holding company
called a "financial holding company" which has powers much more extensive than
those of standard holding companies. These expanded powers include authority to
engage in "financial activities," which are activities that are (1) financial in
nature; (2) incidental to activities that are financial in nature; or (3)
complementary to a financial activity and that do not impose a safety and
soundness risk. Significantly, the permitted financial activities for financial
holding companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
6
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.
The Act and the regulations adopted pursuant to the Act create new
opportunities for the Company to offer expanded services to customers in the
future, though the Company has not yet determined what the nature of the
expanded services might be or when the Company might find it feasible to offer
them. The Act has increased competition from larger financial institutions that
are currently more capable than the Company of taking advantage of the
opportunity to provide a broader range of services. However, the Company
continues to believe that its commitment to providing high quality, personalized
service to customers will permit it to remain competitive in its market area.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act became effective in 2002, and mandated extensive
reforms and requirements for public companies. The SEC has adopted extensive new
regulations pursuant to the requirements of the Sarbanes-Oxley Act. The
Sarbanes-Oxley Act and the SEC's new regulations have increased the Company's
cost of doing business, particularly its fees for internal and external audit
services and legal services, and the law and regulations are expected to
continue to do so. However, the Company does not believe that it will be
affected by Sarbanes-Oxley and the new SEC regulations in ways that are
materially different or more onerous than those of other public companies of
similar size and in similar businesses.
Legislative Proposals
Proposed legislation which could significantly affect the business of
banking is introduced in Congress from time to time. Management of the Bank
cannot predict the future course of such legislative proposals or their impact
on the Company and the Bank should they be adopted.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic conditions generally, both domestic and foreign,
and also to the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve. The Federal Reserve regulates the
supply of money through various means, including open market dealings in United
States government securities, the discount rate at which banks may borrow from
the Federal Reserve, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company and the
Bank cannot be predicted.
Further Information
Further information about the business of the Company and the Bank is
set forth in this Form 10-K under Item 7 -"Management's Discussion and
Analysis of Financial Condition and Results of Operation."
Item 2. Properties.
The Company owns the real property at 530 Johnnie Dodds Boulevard, Mt.
Pleasant, South Carolina, where its main offices are located. The Company also
owns the following properties in Charleston and Berkeley Counties of South
Carolina, where its branch offices are located: 602 Coleman Boulevard, Mt.
Pleasant; 802 Savannah Highway, Charleston; 337 East Main Street, Moncks Corner;
and 2753 Maybank Highway, Johns Island; and 597 Old Mount Holly Road, Goose
Creek, South Carolina. The Company leases the property at 302 N. Main Street,
Summerville, South Carolina. All properties are believed to be well suited for
the Company's needs.
Item 3. Legal Proceedings.
The Bank is from time to time a party to various legal proceedings
arising in the ordinary course of business, but management of the Bank is not
aware of any pending or threatened litigation or unasserted claims or
assessments that are expected to result in losses, if any, that would be
material to the Company's business and operations.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of 2004.
7
PART II
Item 5. Market for Registered Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
The information set forth under the caption "Corporate Data -- Common Stock and
Dividends" in the Registrant's Annual Report to Shareholders for the year ended
December 31, 2004 (the "2004 Annual Report"), which information is set forth in
Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensaton Plans
The information required by Item 201(d) of Regulation S-K is set forth in Item
12 of this Form 10-K.
Unregistered Sales of Equity Securities
The Company did not sell any securities during the year ended December 31, 2004
that were not registered under the Securities Act.
Purchases of Equity Securities by the Company and Affiliated Purchasers
Neither the Company nor any "affiliated purchaser" as defined in 17 C.F.R.
240.10b-18(a)(3) purchased any shares or units of any class of the Company's
equity securities that is registered pursuant to Section 12 of the Exchange Act
during the fourth quarter of 2004. Accordingly, no disclosure is required
pursuant to 17 C.F.R. Section 229.703.
Item 6. Selected Financial Data
The information set forth under the caption "Summary Consolidated Financial
Information" in the 2004 Annual Report, which information is set forth in
Exhibit 13 to this Form 10-K, is incorporated herein by reference.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information set forth under the caption "Management's Discussion of Analysis
of Financial Condition and Results of Operation" in the 2004 Annual Report,
which information is set forth in Exhibit 13 to this Form 10-K, is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operation --
Off Balance Sheet Risk" in the 2004 Annual Report, which information is set
forth in Exhibit 13 to this Form 10-K, is incorporated herein by reference.
9
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements, including Notes thereto, set
forth in the 2004 Annual Report, which are set forth in Exhibit 13 to this Form
10-K, are incorporated herein by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that such controls and
procedures, as of the end of the period covered by this annual report, were
effective.
No disclosure is required under 17 C.F.R. Section 229.308 (a) or (b).
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
Item 9B. Other Information.
No information was required to be disclosed in a Form 8-K during the
fourth quarter of 2004 that was not so disclosed.
10
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information set forth under the captions "Election of Directors --
Directors and Nominees" "-- Executive Officers," and "-- Audit Committee," and
"Section 16(a) Beneficial Ownership Reporting Compliance" in registrant's
definitive proxy statement filed with the Commission for the 2005 Annual Meeting
of Shareholders (the "2005 Proxy Statement") is incorporated herein by
reference.
Audit Committee Financial Expert
The Company's board of directors has determined that the Company does
not have an "audit committee financial expert," as that term is defined by Item
401(h) of Regulation S-K promulgated by the Securities and Exchange Commission,
serving on its audit committee. The Company's audit committee is a committee of
directors who are elected by the shareholders and who are independent of the
Company and its management. After reviewing the experience and training of all
of the Company's independent directors, the board of directors has concluded
that no independent director meets the SEC's very demanding definition.
Therefore, it would be necessary to find a qualified individual willing to serve
as both a director and member of the audit committee and have that person
elected by the shareholders in order to have an "audit committee financial
expert" serving on the Company's audit committee. The Company's audit committee
is, however, authorized to use consultants to provide financial accounting
expertise in any instance where members of the committee believe such assistance
would be useful. Accordingly, the Company does not believe that it needs to have
an "audit committee financial expert" on its audit committee.
Audit Committee
The Company has a separately designated standing audit committee
established pursuant to Section 3(a)(58)(A) of the Exchange Act. The members of
the audit committee are Tommy B. Baker, William A. Coates, and James H. Sexton.
Code of Ethics
The Company has adopted a code of ethics (as defined by 17 C.F.R.
229.406) that applies to its principal executive officer and principal financial
officer. The Company will provide a copy of the code of ethics, free of charge,
to any person upon written request to Robert M. Scott, Executive Vice President,
SouthCoast Financial Corporation, 530 Johnnie Dodds Boulevard, Mt. Pleasant,
South Carolina 29464.
Item 11. Executive Compensation.
The information set forth under the caption "Management Compensation"
in the 2005 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information set forth under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the 2005
Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth aggregated information as of December
31, 2004 about all of the Company's compensation plans (including individual
compensation arrangements) under which equity securities of the Company are
authorized for issuance:
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column(a))
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation
plans approved by
security holders 68,038 $9.77 18,918
Equity compensation
plans not approved
by security holders -0- -0- -0-
------ ----- ------
Total 68,038 $9.77 18,918
====== ===== ======
11
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and
Related Transactions" in the 2005 Proxy Statement is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services.
The information set forth under the captions "Independent Public
Accountants - Fees Paid to Independent Auditors" and "--Audit Committee
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors" in the 2005 Proxy Statement is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) - Report of Independent Registered Public Accounting Firm
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statements of Shareholders Equity and Comprehensive
Income
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules - None
(3) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of Registrant(1)
3.2 Bylaws of Registrant(1)
4.1 Form of Common Stock Certificate(3)
10.1 1999 Stock Option Plan(2)
10.2 Form of Stock Option Agreement(3)
10.3 Purchase Agreement among the Registrant, Southcoast Capital Trust
I and Bayview Financial Trading Group, L.P., dated as of May 3,
2002 (4)
10.4 Amended and Restated Declaration of Trust among the Registrant,
Wells Fargo Delaware Trust Company, Wells Fargo Bank, National
Association, L. Wayne Pearson, Robert A. Daniel, Jr. and Robert
M. Scott, dated as of May 3, 2002 (4)
10.5 Indenture between Registrant and Wells Fargo Bank, National
Association, dated as of May 3, 2002 (4)
10.6 Guarantee Agreement between the Registrant and Wells Fargo Bank,
National Association, dated as of May 3, 2002 (4)
10.7 Registrant's Junior Subordinated Deferrable Interest Debentures,
dated as of May 3, 2002 (4)
10.8 Purchase Agreement among the Registrant, Southcoast Capital Trust
II and Trapeza CDO, LLC, dated as of December 16, 2002(5)
10.9 Amended and Restated Trust Agreement among Southcoast Financial
Corporation, The Bank of New York, The Bank of New York
(Delaware), L. Wayne Pearson, Paul D. Hollen, III and Robert M.
Scott, dated as of December 16, 2002(5)
10.10 Junior Subordinated Indenture between Registrant and The Bank of
New York, dated as of December 16, 2002(5)
10.11 Guarantee Agreement between Registrant and The Bank of New York,
dated as of December 16, 2002(5)
10.12 Floating Rate Junior Subordinated Note, dated as of December 16,
2002(5)
10.13 Form of Employment Agreements between the Company and each of L.
Wayne Pearson, Paul D. Hollen, III and Robert M. Scott, dated as
of August 12, 2003(6)
10.14 Southcoast Financial Corporation Employee Stock Purchase Plan (7)
13 Portions of the Annual Report to Shareholders for the Year Ended
December 31, 2004
21 Subsidiaries of Registrant (5)
23 Consent of Accountants
31.1 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
32 Section 1350 Certifications
- ----------------------
(1) Incorporated by reference to Form 10-SB filed April 10, 1999.
(2) Incorporated by reference to Form 10-KSB for the year ended December 31,
1999.
(3) Incorporated by reference to Form 10-KSB for the year ended December 31,
2000.
(4) Incorporated by reference to Form 10-QSB for the quarter ended March 31,
2002.
(5) Incorporated by reference to Form 10-KSB for the year ended December 31,
2002.
(6) Incorporated by reference to exhibits to Form SB-2 filed August 3, 2003
(File No. 333-108480).
(7) Incorporated by reference to proxy materials filed on Schedue 14A in
connection with the Registrant's May 11, 2000 Annual Meeting of
Shareholders.
12
SIGNATURE
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Southcoast Financial Corporation
March 30, 2005 By: s/L. Wayne Pearson
-----------------------------------------------
L. Wayne Pearson
Chairman and Chief Executive Officer
By: s/Robert M. Scott
----------------------------------------------
Robert M. Scott
Executive Vice President
(Principal Financial and Principal
Accounting Officer)
Pursuant to the Requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
- -------------------------- Director March __, 2005
Tommy B. Baker
s/William A. Coates
- -------------------------- Director March 29, 2005
William A. Coates
s/Paul D. Hollen, III
- -------------------------- Executive Vice President, Director March 30, 2005
Paul D. Hollen, III
- -------------------------- Director March __, 2005
Stephen F. Hutchinson
s/L. Wayne Pearson
- -------------------------- Chairman, Chief Executive Officer, Director March 30, 2005
L. Wayne Pearson
s/Robert M. Scott
- -------------------------- Executive Vice President, Chief Financial March 29, 2005
Robert M. Scott Officer, Principal Accounting Officer, Director
s/James H. Sexton
- -------------------------- Director March 30, 2005
James H. Sexton
- -------------------------- Director March __, 2005
James P. Smith
13
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of Registrant(1)
3.2 Bylaws of Registrant(1)
4.1 Form of Common Stock Certificate(3)
10.1 1999 Stock Option Plan(2)
10.2 Form of Stock Option Agreement(3)
10.3 Purchase Agreement among the Registrant, Southcoast Capital Trust
I and Bayview Financial Trading Group, L.P., dated as of May 3,
2002 (4)
10.4 Amended and Restated Declaration of Trust among the Registrant,
Wells Fargo Delaware Trust Company, Wells Fargo Bank, National
Association, L. Wayne Pearson, Robert A. Daniel, Jr. and Robert
M. Scott, dated as of May 3, 2002 (4)
10.5 Indenture between Registrant and Wells Fargo Bank, National
Association, dated as of May 3, 2002 (4)
10.6 Guarantee Agreement between the Registrant and Wells Fargo Bank,
National Association, dated as of May 3, 2002 (4)
10.7 Registrant's Junior Subordinated Deferrable Interest Debentures,
dated as of May 3, 2002 (4)
10.8 Purchase Agreement among the Registrant, Southcoast Capital Trust
II and Trapeza CDO, LLC, dated as of December 16, 2002(5)
10.9 Amended and Restated Trust Agreement among Southcoast Financial
Corporation, The Bank of New York, The Bank of New York
(Delaware), L. Wayne Pearson, Paul D. Hollen, III and Robert M.
Scott, dated as of December 16, 2002(5)
10.10 Junior Subordinated Indenture between Registrant and The Bank of
New York, dated as of December 16, 2002(5)
10.11 Guarantee Agreement between Registrant and The Bank of New York,
dated as of December 16, 2002(5)
10.12 Floating Rate Junior Subordinated Note, dated as of December 16,
2002(5)
10.13 Form of Employment Agreements between the Company and each of L.
Wayne Pearson, Paul D. Hollen, III and Robert M. Scott, dated as
of August 12, 2003(6)
10.14 Southcoast Financial Corporation Employee Stock Purchase Plan (7)
13 Portions of the Annual Report to Shareholders for the Year Ended
December 31, 2004
21 Subsidiaries of Registrant (5)
23 Consent of Accountants
31.1 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
32 Section 1350 Certifications
- ----------------------
(1) Incorporated by reference to Form 10-SB filed April 10, 1999.
(2) Incorporated by reference to Form 10-KSB for the year ended December 31,
1999.
(3) Incorporated by reference to Form 10-KSB for the year ended December 31,
2000.
(4) Incorporated by reference to Form 10-QSB for the quarter ended March 31,
2002.
(5) Incorporated by reference to Form 10-KSB for the year ended December 31,
2002.
(6) Incorporated by reference to exhibits to Form SB-2 filed August 3, 2003
(File No. 333-108480).
(7) Incorporated by reference to proxy materials filed on Schedue 14A in
connection with the Registrant's May 11, 2000 Annual Meeting of
Shareholders.
14