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.
On August 14, 2015, the Company entered into a definitive agreement with BNC Bancorp ("BNC") the holding company for Bank of North Carolina, pursuant to which BNC will acquire all of the common stock of the Company in a stock transaction valued at approximately $95.5 million, based on the closing price of BNC common stock on August 13, 2015. Under the terms of the agreement, which has been approved by the Boards of Directors of both companies, the Company's shareholders will receive shares of BNC common stock based upon the volume weighted average price of BNC common stock for a 20-day trading period prior to the closing of the merger ("VWAP"), subject to minimum and maximum exchange ratios as follow: if the VWAP immediately prior to the merger is equal to or greater than $22.00, then each share of the Company’s common stock will be converted into 0.6068 shares of BNC common stock; if the VWAP immediately prior to the merger is less than $22.00 but greater than $19.00, then each share of the Company’s common stock will be converted into $13.35 payable in shares of BNC common stock (with the exchange ratio equal to $13.35 divided by the VWAP); and if the VWAP is equal to or less than $19.00, then each share of the Company’s common stock will be converted into 0.7026 shares of BNC common stock. The transaction, which has received approval of the shareholders of the Company, is subject to regulatory approval, and is expected to close in the second quarter of 2016.
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
In May 2014, the FASB issued ASU 2014-09 – Revenue from Contracts with Customers (“ASU 2019-09”). ASU 2014-09 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective prospectively, for annual and interim periods, beginning after December 15, 2017. The Company is currently evaluating the impact this standard will have on the Company’s results of operations, financial position or disclosures.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10).
The amendments in this Update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition the amendments in this Update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement for to disclose the method(s)
and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities.
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note
4
–
Recently Issued Accounting Standards
–
(continued)
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The new standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a
lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make a policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases and amounts previously recognized in accordance with the business combinations guidance for leases. For public companies, ASU 2016-02 is effective prospectively, for annual and interim periods, beginning after December 15, 2018. The Company does not expect this standard to have a material impact on its consolidated financial statements.
Note 5
–
Investment Securities
The amortized cost and fair value of investment securities are as follows:
(Amounts in thousands)
|
|
March 31, 2016
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
20,813
|
|
|
$
|
74
|
|
|
$
|
42
|
|
|
$
|
20,845
|
|
Municipal securities
|
|
|
3,434
|
|
|
|
243
|
|
|
|
-
|
|
|
|
3,677
|
|
Other
|
|
|
8,222
|
|
|
|
109
|
|
|
|
1,339
|
|
|
|
6,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,469
|
|
|
$
|
426
|
|
|
$
|
1,381
|
|
|
$
|
31,514
|
|
|
|
December 31, 2015
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
21,502
|
|
|
$
|
7
|
|
|
$
|
191
|
|
|
$
|
21,318
|
|
Municipal securities
|
|
|
3,433
|
|
|
|
249
|
|
|
|
-
|
|
|
|
3,682
|
|
Other
|
|
|
8,218
|
|
|
|
53
|
|
|
|
1,236
|
|
|
|
7,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,153
|
|
|
$
|
309
|
|
|
$
|
1,427
|
|
|
$
|
32,035
|
|
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note
5
–
Investment Securities
–
(continued)
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, 2016 and December 31, 2015.
Available for Sale
(Amounts in thousands)
|
|
March 31, 2016
|
|
|
|
Less than
|
|
|
Twelve Months
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
or More
|
|
|
Total
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
$
|
10,168
|
|
|
$
|
22
|
|
|
$
|
3,465
|
|
|
$
|
20
|
|
|
$
|
13,633
|
|
|
$
|
42
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
2,233
|
|
|
|
1,339
|
|
|
|
2,233
|
|
|
|
1,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,168
|
|
|
$
|
22
|
|
|
$
|
5,698
|
|
|
$
|
1,359
|
|
|
$
|
15,866
|
|
|
$
|
1,381
|
|
|
|
December 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
|
|
$
|
16,896
|
|
|
$
|
191
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,896
|
|
|
$
|
191
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
2,332
|
|
|
|
1,236
|
|
|
|
2,332
|
|
|
|
1,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,896
|
|
|
$
|
191
|
|
|
$
|
2,332
|
|
|
$
|
1,236
|
|
|
$
|
19,228
|
|
|
$
|
1,427
|
|
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 $1,359,000, or 98% of unrealized losses, and $1,236,000, or 87% of unrealized losses, at March 31, 2016 and December 31, 2015, respectively. The majority of the unrealized losses for both periods related to Other securities, which were comprised of two 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.
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 $1,831,000 and fair value of approximately $1,033,000 is receiving contractual interest payments, while the other with an amortized cost of approximately $1,741,000 and fair value of approximately $1,200,000 received an interest payment in March 2016 after an extended period of deferred interest payments. Due to the over-collateralized credit position and uninterrupted payment stream of the first security, no other-than-temporary impairment was recognized on this security. During the period of deferred interest payments on the second security, payment-in-kind interest was added to the par value of the security in lieu of cash interest payments. The Company did not accrue interest during the deferral period, and will continue to postpone accrual of interest until a sustained pattern of payments has been reestablished and the credit profile of the security has improved substantially. Presently, interest income on this security is recognized as payments are received. The Company recognized interest income on this security totaling approximately $42,000 for the three months ended March 31, 2016.
Payment-in-kind interest was triggered on the second 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, 2016, there was $234,128,000 of performing collateral in the pool. The table below summarizes balance and overcollateralization data for the individual tranches at March 31, 2016.
(Amounts in thousands)
Tranche
|
|
Current Balance
|
|
|
Required Overcollateralization %
|
|
|
Current Overcollateralization %
|
|
A
|
|
$
|
167,114
|
|
|
|
128.00
|
%
|
|
|
140.77
|
%
|
B
|
|
|
37,587
|
|
|
|
115.00
|
%
|
|
|
114.92
|
%
|
C
|
|
|
48,675
|
|
|
|
106.20
|
%
|
|
|
92.84
|
%
|
D
|
|
|
28,837
|
|
|
|
100.30
|
%
|
|
|
83.36
|
%
|
Income Notes
|
|
|
18,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
As shown above, tranches B and below currently fail their overcollateralization test. However, on the March 2016 payment date, there were sufficient collections to cure the Class B overcollateralization test and pay full current interest and a small amount of previously deferred interest to tranche C. According to the structured payment terms as described in the offering circular for this security, interest payments are diverted from subordinated tranches to pay down total principal balances in the senior most tranche failing its overcollateralization test. If and when these payments reduce the principal balance in the senior most failing tranche by enough to pass its overcollateralization requirement, the next most senior 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 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, 2016 predicts the Company will continue to receive its contractual principal and interest payments for the foreseeable future. These projections are based on assumptions developed from current financial data for the underlying issuers and may change 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. Total other-than-temporary impairment in accumulated other comprehensive income was $346,000 for the security (Security B in the table below) at March 31, 2016.
The following table provides certain relevant details on each of our collateralized debt obligations as of March 31, 2016, 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, 2016
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Security A
|
|
|
Security B
|
|
|
|
|
|
|
|
|
|
|
Book Value
|
|
$
|
1,831
|
|
|
$
|
1,741
|
|
Fair Value
|
|
$
|
1,033
|
|
|
$
|
1,200
|
|
Unrealized Loss
|
|
$
|
798
|
|
|
$
|
541
|
|
Number of underlying financial institution issuers
|
|
|
45
|
|
|
|
38
|
|
Number of deferrals and defaults
|
|
|
7
|
|
|
|
11
|
|
Additional expected deferrals/ defaults*
|
|
|
N/A
|
|
|
|
0/1
|
|
Excess Subordination as a percentage of performing collateral^
|
|
|
33.36
|
%
|
|
|
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.
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, 2016 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 within one year
|
|
$
|
499
|
|
|
$
|
511
|
|
Due after one but within five years
|
|
|
440
|
|
|
|
454
|
|
Due after five but within ten years
|
|
|
2,252
|
|
|
|
2,443
|
|
Due after ten years
|
|
|
4,315
|
|
|
|
3,002
|
|
Mortgage backed
|
|
|
20,813
|
|
|
|
20,845
|
|
Equity securities with no maturity
|
|
|
4,150
|
|
|
|
4,259
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
|
|
$
|
32,469
|
|
|
$
|
31,514
|
|
Investment securities with an aggregate amortized cost of $19,404,000 and estimated fair value of $19,525,000 at March 31, 2016, were pledged to secure public deposits and for other purposes, as required or permitted by law.
Investment securities with an aggregate amortized cost of $2,051,000 and estimated fair value of $2,047,000 at March 31, 2016, were pledged to secure securities sold under agreements to repurchase.
Investment securities with an aggregate amortized cost of $19,274,000 and estimated fair value of $19,231,000 at December 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 $2,115,000 and estimated fair value of $2,090,000 at December 31, 2015, were pledged to secure securities sold under agreements to repurchase.
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,
|
|
|
|
2016
|
|
|
2015
|
|
Real estate secured loans:
|
|
|
|
|
|
|
|
|
Residential 1-4 Family
|
|
$
|
238,378
|
|
|
$
|
241,111
|
|
Multifamily
|
|
|
3,802
|
|
|
|
4,747
|
|
Commercial
|
|
|
83,898
|
|
|
|
85,501
|
|
Construction and land development
|
|
|
32,820
|
|
|
|
34,311
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured loans
|
|
|
358,898
|
|
|
|
365,670
|
|
Commercial and industrial
|
|
|
19,868
|
|
|
|
20,666
|
|
Consumer
|
|
|
2,792
|
|
|
|
2,623
|
|
Other
|
|
|
319
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
|
381,877
|
|
|
|
389,296
|
|
Allowance for loan losses
|
|
|
(4,421
|
)
|
|
|
(4,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
377,456
|
|
|
$
|
384,502
|
|
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.
|
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, 2016 and December 31, 2015 (including nonaccrual loans).
(Dollars in thousands)
Credit Risk Profile by Creditworthiness Category
As of March 31, 2016 and December 31, 2015
|
|
Real Estate Secured
|
|
|
|
Residential 1-4 Family
|
|
|
Multi Family
|
|
|
Commercial
|
|
|
Construction and Land
Development
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
2
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
3
|
|
|
130,585
|
|
|
|
130,016
|
|
|
|
1,329
|
|
|
|
1,352
|
|
|
|
20,285
|
|
|
|
19,079
|
|
|
|
12,121
|
|
|
|
14,566
|
|
4
|
|
|
56,549
|
|
|
|
57,945
|
|
|
|
1,125
|
|
|
|
1,050
|
|
|
|
27,301
|
|
|
|
27,536
|
|
|
|
11,810
|
|
|
|
11,561
|
|
5
|
|
|
44,048
|
|
|
|
45,911
|
|
|
|
1,019
|
|
|
|
2,014
|
|
|
|
27,258
|
|
|
|
30,072
|
|
|
|
8,213
|
|
|
|
7,489
|
|
6
|
|
|
1,651
|
|
|
|
1,495
|
|
|
|
329
|
|
|
|
331
|
|
|
|
4,031
|
|
|
|
4,080
|
|
|
|
55
|
|
|
|
57
|
|
7
|
|
|
5,356
|
|
|
|
5,555
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,023
|
|
|
|
4,734
|
|
|
|
621
|
|
|
|
638
|
|
8
|
|
|
189
|
|
|
|
189
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
238,378
|
|
|
$
|
241,111
|
|
|
$
|
3,802
|
|
|
$
|
4,747
|
|
|
$
|
83,898
|
|
|
$
|
85,501
|
|
|
$
|
32,820
|
|
|
$
|
34,311
|
|
|
|
Non-Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
446
|
|
|
$
|
2,352
|
|
|
$
|
377
|
|
|
$
|
448
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
823
|
|
|
$
|
2,800
|
|
2
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
3
|
|
|
1,675
|
|
|
|
1,783
|
|
|
|
806
|
|
|
|
630
|
|
|
|
88
|
|
|
|
89
|
|
|
|
166,889
|
|
|
|
167,515
|
|
4
|
|
|
9,163
|
|
|
|
8,301
|
|
|
|
601
|
|
|
|
420
|
|
|
|
214
|
|
|
|
227
|
|
|
|
106,763
|
|
|
|
107,040
|
|
5
|
|
|
7,704
|
|
|
|
7,326
|
|
|
|
924
|
|
|
|
1,017
|
|
|
|
17
|
|
|
|
21
|
|
|
|
89,183
|
|
|
|
93,850
|
|
6
|
|
|
6
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,072
|
|
|
|
5,968
|
|
7
|
|
|
874
|
|
|
|
899
|
|
|
|
84
|
|
|
|
108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,958
|
|
|
|
11,934
|
|
8
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189
|
|
|
|
189
|
|
9
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,868
|
|
|
$
|
20,666
|
|
|
$
|
2,792
|
|
|
$
|
2,623
|
|
|
$
|
319
|
|
|
$
|
337
|
|
|
$
|
381,877
|
|
|
$
|
389,296
|
|
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, 2016 and December 31, 2015.
(Dollars in thousands)
Past Due Loans
For the Periods Ended March 31, 2016 and December 31, 2015
March 31, 2016
|
|
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
|
|
$
|
2,894
|
|
|
$
|
757
|
|
|
$
|
833
|
|
|
$
|
4,484
|
|
|
$
|
233,894
|
|
|
$
|
238,378
|
|
|
$
|
-
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,802
|
|
|
|
3,802
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
1,530
|
|
|
|
48
|
|
|
|
309
|
|
|
|
1,887
|
|
|
|
82,011
|
|
|
|
83,898
|
|
|
|
-
|
|
Construction and Land Development
|
|
|
120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120
|
|
|
|
32,700
|
|
|
|
32,820
|
|
|
|
-
|
|
Non Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
97
|
|
|
|
35
|
|
|
|
123
|
|
|
|
255
|
|
|
|
19,613
|
|
|
|
19,868
|
|
|
|
-
|
|
Consumer and Other
|
|
|
59
|
|
|
|
253
|
|
|
|
-
|
|
|
|
312
|
|
|
|
2,799
|
|
|
|
3,111
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,700
|
|
|
$
|
1,093
|
|
|
$
|
1,265
|
|
|
$
|
7,058
|
|
|
$
|
374,819
|
|
|
$
|
381,877
|
|
|
$
|
-
|
|
December 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
|
|
$
|
1,429
|
|
|
$
|
207
|
|
|
$
|
1,055
|
|
|
$
|
2,691
|
|
|
$
|
238,420
|
|
|
$
|
241,111
|
|
|
$
|
218
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,747
|
|
|
|
4,747
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
2,848
|
|
|
|
49
|
|
|
|
302
|
|
|
|
3,199
|
|
|
|
82,302
|
|
|
|
85,501
|
|
|
|
-
|
|
Construction and Land Development
|
|
|
81
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81
|
|
|
|
34,230
|
|
|
|
34,311
|
|
|
|
-
|
|
Non Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
220
|
|
|
|
170
|
|
|
|
56
|
|
|
|
446
|
|
|
|
20,220
|
|
|
|
20,666
|
|
|
|
-
|
|
Consumer and Other
|
|
|
70
|
|
|
|
1
|
|
|
|
-
|
|
|
|
71
|
|
|
|
2,889
|
|
|
|
2,960
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,648
|
|
|
$
|
427
|
|
|
$
|
1,413
|
|
|
$
|
6,488
|
|
|
$
|
382,808
|
|
|
$
|
389,296
|
|
|
$
|
218
|
|
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loan
s
-
(Continued)
The following table provides a summary of nonaccrual loans as of March 31, 2016 and December 31, 2015.
(Dollars in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
2,046
|
|
|
$
|
2,178
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
416
|
|
|
|
412
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
573
|
|
|
|
551
|
|
Consumer and Other
|
|
|
18
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,053
|
|
|
$
|
3,149
|
|
At March 31, 2016 and December 31, 2015, nonaccrual loans totaled $3.1 million and $3.1 million, respectively.
The gross interest income that would have been recorded under the original terms of nonaccrual loans totaled $123,000 and $81,000 for the three months ended March 31, 2016 and March 31, 2015, respectively. At March 31, 2016 and December 31, 2015, impaired loans (which include nonaccrual loans and troubled debt restructurings (TDRs)) totaled $3.8 million and $3.8 million, respectively.
The recorded investment in impaired loans individually evaluated for impairment, which include nonaccrual loans over $250,000 and TDRs, totaled $2.3 million and $2.3 million at March 31, 2016 and December 31, 2015, respectively. At December 31, 2015 loans over ninety days past due and still accruing interest totaled $218,000. There were no such loans at March 31, 2016.
At March 31, 2016 and December 31, 2015, all TDRs, including those on nonaccrual status, totaled $1.5 million and $1.5 million, respectively.
The gross interest income that would have been recognized on TDRs according to the original loan terms during the first quarter of 2016 totaled approximately $10,000; 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, 2015 totaled approximately $40,000; actual interest income recognized on these loans according to the restructured terms totaled approximately $37,000.
During the quarter ended March 31, 2016, 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, no amounts related to TDR’s paid off or were charged off. TDRs did not have a material effect on the allowance for loan losses as of March 31, 2016 or December 31, 2015.
The following tables provide a year to date analysis of activity within the allowance for loan losses.
(Dollars in thousands)
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
4,794
|
|
|
$
|
5,602
|
|
Provision (credit) for loan losses
|
|
|
(500
|
)
|
|
|
(900
|
)
|
Net (charge offs) recoveries
|
|
|
127
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
Balance, end of quarter
|
|
$
|
4,421
|
|
|
$
|
4,875
|
|
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loan
s
-
(Continued)
|
|
For the Three Months Ended March 31, 2016
|
|
|
|
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
|
|
$
|
1,303
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
95
|
|
|
$
|
1,357
|
|
|
$
|
41
|
|
|
$
|
1,398
|
|
Multifamily Residential
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Commercial Real Estate
|
|
|
1,426
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(496
|
)
|
|
|
930
|
|
|
|
-
|
|
|
|
930
|
|
Construction and Land
Development
|
|
|
232
|
|
|
|
-
|
|
|
|
127
|
|
|
|
(133
|
)
|
|
|
226
|
|
|
|
-
|
|
|
|
226
|
|
Non Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
429
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24
|
)
|
|
|
405
|
|
|
|
-
|
|
|
|
405
|
|
Consumer and Other
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
|
|
66
|
|
|
|
-
|
|
|
|
66
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other General Reserves
|
|
|
1,050
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
1,030
|
|
|
|
-
|
|
|
|
1,030
|
|
Unallocated
|
|
|
312
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
|
|
351
|
|
|
|
-
|
|
|
|
351
|
|
Total
|
|
$
|
4,794
|
|
|
$
|
-
|
|
|
$
|
127
|
|
|
$
|
(500
|
)
|
|
$
|
4,380
|
|
|
$
|
41
|
|
|
$
|
4,421
|
|
|
|
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
|
|
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loan
s
-
(Continued)
|
|
For the Year Ended December 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
|
|
|
$
|
(73
|
)
|
|
$
|
-
|
|
|
$
|
(219
|
)
|
|
$
|
1,262
|
|
|
$
|
41
|
|
|
$
|
1,303
|
|
Multi Family Residential
|
|
|
61
|
|
|
|
-
|
|
|
|
155
|
|
|
|
(189
|
)
|
|
|
27
|
|
|
|
-
|
|
|
|
27
|
|
Commercial Real Estate
|
|
|
1,424
|
|
|
|
-
|
|
|
|
190
|
|
|
|
(188
|
)
|
|
|
1,426
|
|
|
|
-
|
|
|
|
1,426
|
|
Construction and Land
Development
|
|
|
312
|
|
|
|
-
|
|
|
|
28
|
|
|
|
(108
|
)
|
|
|
232
|
|
|
|
-
|
|
|
|
232
|
|
Non Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
496
|
|
|
|
(261
|
)
|
|
|
54
|
|
|
|
140
|
|
|
|
429
|
|
|
|
-
|
|
|
|
429
|
|
Consumer and Other
|
|
|
32
|
|
|
|
(6
|
)
|
|
|
44
|
|
|
|
(55
|
)
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other General Reserves
|
|
|
1,363
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(313
|
)
|
|
|
1,050
|
|
|
|
-
|
|
|
|
1,050
|
|
Unallocated
|
|
|
319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
312
|
|
|
|
-
|
|
|
|
312
|
|
Total
|
|
$
|
5,602
|
|
|
$
|
(340
|
)
|
|
$
|
471
|
|
|
$
|
(939
|
)
|
|
$
|
4,753
|
|
|
$
|
41
|
|
|
$
|
4,794
|
|
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, 2016 and December 31, 2015.
Loans Receivable:
|
|
As of March 31, 2016
|
|
(Dollars in thousands)
|
|
Individually
evaluated for
impairment
|
|
|
Collectively
evaluated for
impairment
|
|
|
Total
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,540
|
|
|
$
|
236,838
|
|
|
$
|
238,378
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
3,802
|
|
|
|
3,802
|
|
Commercial Real Estate
|
|
|
368
|
|
|
|
83,530
|
|
|
|
83,898
|
|
Construction and Land
Development
|
|
|
-
|
|
|
|
32,820
|
|
|
|
32,820
|
|
Non Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
383
|
|
|
|
19,485
|
|
|
|
19,868
|
|
Consumer and Other
|
|
|
-
|
|
|
|
3,111
|
|
|
|
3,111
|
|
Total
|
|
$
|
2,291
|
|
|
$
|
379,586
|
|
|
$
|
381,877
|
|
Loans Receivable:
|
|
As of December 31, 201
5
|
|
(Dollars in thousands)
|
|
Individually
evaluated for
impairment
|
|
|
Collectively
evaluated
for
impairment
|
|
|
Total
|
|
Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,550
|
|
|
$
|
239,561
|
|
|
$
|
241,111
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
4,747
|
|
|
|
4,747
|
|
Commercial Real Estate
|
|
|
362
|
|
|
|
85,139
|
|
|
|
85,501
|
|
Construction and Land
Development
|
|
|
-
|
|
|
|
34,311
|
|
|
|
34,311
|
|
Non Real Estate Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
391
|
|
|
|
20,275
|
|
|
|
20,666
|
|
Consumer and Other
|
|
|
-
|
|
|
|
2,960
|
|
|
|
2,960
|
|
Total
|
|
$
|
2,303
|
|
|
$
|
386,993
|
|
|
$
|
389,296
|
|
SOUTHCOAST FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Loan
s
-
(Continued)
(Dollars in thousands)
Impaired Loans
For the Three Months ended March 31, 2016
|
|
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
|
|
$
|
1,404
|
|
|
$
|
1,318
|
|
|
$
|
-
|
|
|
$
|
86
|
|
|
$
|
1,324
|
|
|
$
|
8
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
368
|
|
|
|
368
|
|
|
|
-
|
|
|
|
-
|
|
|
|
365
|
|
|
|
-
|
|
Construction and Land
Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
383
|
|
|
|
383
|
|
|
|
-
|
|
|
|
-
|
|
|
|
387
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
222
|
|
|
$
|
222
|
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
222
|
|
|
$
|
-
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction and Land
Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,626
|
|
|
$
|
1,540
|
|
|
$
|
41
|
|
|
$
|
86
|
|
|
$
|
1,546
|
|
|
$
|
8
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
368
|
|
|
|
368
|
|
|
|
-
|
|
|
|
-
|
|
|
|
365
|
|
|
|
-
|
|
Construction and Land
Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
383
|
|
|
|
383
|
|
|
|
-
|
|
|
|
-
|
|
|
|
492
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,377
|
|
|
$
|
2,291
|
|
|
$
|
41
|
|
|
$
|
86
|
|
|
$
|
2,403
|
|
|
$
|
8
|
|
(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 – Loan
s
-
(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
Year
Ended
December 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
|
|
$
|
1,415
|
|
|
$
|
1,329
|
|
|
$
|
-
|
|
|
$
|
86
|
|
|
$
|
1,357
|
|
|
$
|
37
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
362
|
|
|
|
362
|
|
|
|
-
|
|
|
|
-
|
|
|
|
380
|
|
|
|
-
|
|
Construction and Land
Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
391
|
|
|
|
391
|
|
|
|
-
|
|
|
|
-
|
|
|
|
416
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
221
|
|
|
$
|
221
|
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
222
|
|
|
$
|
-
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction and Land
Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
1,636
|
|
|
$
|
1,550
|
|
|
$
|
41
|
|
|
$
|
86
|
|
|
$
|
1,579
|
|
|
$
|
37
|
|
Multifamily Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial Real Estate
|
|
|
362
|
|
|
|
362
|
|
|
|
-
|
|
|
|
-
|
|
|
|
380
|
|
|
|
-
|
|
Construction and Land
Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and Industrial
|
|
|
391
|
|
|
|
391
|
|
|
|
-
|
|
|
|
-
|
|
|
|
416
|
|
|
|
-
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,389
|
|
|
$
|
2,303
|
|
|
$
|
41
|
|
|
$
|
86
|
|
|
$
|
2,375
|
|
|
$
|
37
|
|
(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 $286,000 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, 2016, gross deferred tax assets totaled approximately $4.0 million, while deferred tax assets net of the valuation allowance totaled approximately $3.7 million.
During the three months ended March 31, 2016 and March 31, 2015, the Company recognized $672,000 and $1,078,000, respectively, of income tax expense. Of these amounts, $585,000 and $978,000 were for Federal income taxes. Due to the Company’s net operating loss carryforward, the majority of Federal income tax expense during the three months ended March 31, 2015 directly reduced the Company’s deferred tax asset, while the majority of Federal income tax expense during the three months ended March 31, 2016 were accrued to income taxes payable. The deferred tax asset attributable to the Company’s net operating loss carryforward totaled approximately $196,000 and $1.9 million at December 31, 2015 and December 31, 2014, respectively. Also during the three months ended March 31, 2016 and March 31, 2015, the Company’s gross unrealized securities losses declined by approximately $163,000 and $801,000, respectively, which decreased the deferred tax asset related to unrealized available for sale securities losses by approximately $58,000 and $288,000, 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, 2016 and December 31, 2015.
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, 2016, 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, 2016 and December 31, 2015
(dollars in thousands)
:
|
|
March 31, 2016
|
|
|
|
Quoted
Market Price in
Active Markets
(
Level 1
)
|
|
|
Significant
Other
O
bservable
Inputs
(
Level 2
)
|
|
|
Significant Unobservable
Inputs
(
Level 3
)
|
|
|
Total
|
|
Available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
-
|
|
|
$
|
20,845
|
|
|
$
|
-
|
|
|
$
|
20,845
|
|
Municipals
|
|
|
-
|
|
|
|
3,677
|
|
|
|
-
|
|
|
|
3,677
|
|
Other
|
|
|
-
|
|
|
|
4,259
|
|
|
|
2,733
|
|
|
|
6,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
28,781
|
|
|
$
|
2,733
|
|
|
$
|
31,514
|
|
|
|
December 31, 2015
|
|
|
|
Quoted
Market Price in
Active Markets
(
Level 1
)
|
|
|
Significant
Other
O
bservable
Inputs
(
Level 2
)
|
|
|
Significant Unobservable
Inputs
(
Level 3
)
|
|
|
Total
|
|
Available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
-
|
|
|
$
|
21,318
|
|
|
$
|
-
|
|
|
$
|
21,318
|
|
Municipals
|
|
|
-
|
|
|
|
3,682
|
|
|
|
-
|
|
|
|
3,682
|
|
Other
|
|
|
-
|
|
|
|
4,203
|
|
|
|
2,832
|
|
|
|
7,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
29,203
|
|
|
$
|
2,832
|
|
|
$
|
32,035
|
|
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 2016 or 2015.
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, 2016 and 2015
(
dollars
in thousands)
:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Beginning of Year Balance
|
|
$
|
2,832
|
|
|
$
|
2,008
|
|
Discount Accretion
|
|
|
4
|
|
|
|
2
|
|
Unrealized gain (loss)
|
|
|
(103
|
)
|
|
|
696
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
2,733
|
|
|
$
|
2,706
|
|
The following table presents quantitative information about Level 3 fair value measurements at March 31, 2016
(dollars in thousands)
:
Security Type
|
|
Fair Value
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
Debt Obligations
|
|
$
|
2,233
|
|
|
Discounted cash flows and recent trade
|
|
Discount rate
|
|
Approximately 7%
|
|
|
|
|
|
|
|
|
|
Weighted default probability for
deferring issuers
|
|
Approximately 21%
|
|
|
|
|
|
|
|
|
|
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, 2016.
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, 2016 or March 31, 2015.
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, 2016 and December 31, 2015
(dollars in thousands)
:
|
|
March 31, 201
6
|
|
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,387
|
|
|
$
|
1,387
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
332
|
|
|
|
332
|
|
Other Real Estate Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,773
|
|
|
$
|
1,773
|
|
|
|
December 31, 201
5
|
|
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,398
|
|
|
$
|
1,398
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
324
|
|
|
|
324
|
|
Other Real Estate Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,776
|
|
|
$
|
1,776
|
|
Impaired loans measured for impairment using the fair value of the collaeral had a recorded investment of $1,640,000 with a valuation allowance of $41,000 at March 31
, 2016, with no additional provision for loan losses for the three months ended March 31, 2016. Impaired loans measured for impairment using the fair value of the collateral had a recorded investment of $1,643,000 with a valuation allowance of $ 41,000 at December 31, 2015, with no additional provision for loan losses for the year ended December 31, 2015.
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.
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, 2016 and December 31, 2015. The valuation allowance at March 31, 2016 and December 31, 2015 did not include any impairment provisions made during either the three months ended March 31, 2016 or during the year ended December 31, 2015.
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.
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, 2016 and December 31, 2015:
|
|
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
N
otes 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, 2016 Using:
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,596
|
|
|
$
|
26,596
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,596
|
|
Available for sale investment securities
|
|
|
31,514
|
|
|
|
-
|
|
|
|
28,781
|
|
|
|
2,733
|
|
|
|
31,514
|
|
Federal Home Loan Bank Stock
|
|
|
3,508
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans held for sale
|
|
|
197
|
|
|
|
-
|
|
|
|
197
|
|
|
|
-
|
|
|
|
197
|
|
Loans, net
|
|
|
377,456
|
|
|
|
-
|
|
|
|
-
|
|
|
|
380,328
|
|
|
|
380,328
|
|
Accrued interest receivable
|
|
|
1,223
|
|
|
|
-
|
|
|
|
81
|
|
|
|
1,142
|
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
338,308
|
|
|
|
242,602
|
|
|
|
95,803
|
|
|
|
-
|
|
|
|
338,405
|
|
Short term borrowings
|
|
|
1,367
|
|
|
|
-
|
|
|
|
1,367
|
|
|
|
-
|
|
|
|
1,367
|
|
Advances from Federal Home Loan Bank
|
|
|
72,000
|
|
|
|
-
|
|
|
|
75,676
|
|
|
|
-
|
|
|
|
75,676
|
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,376
|
|
|
|
6,376
|
|
Accrued interest payable
|
|
|
359
|
|
|
|
2
|
|
|
|
356
|
|
|
|
1
|
|
|
|
359
|
|
|
|
Fair Value Measurements at December 31, 2015 Using:
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,944
|
|
|
$
|
40,944
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
40,944
|
|
Available for sale investment securities
|
|
|
32,035
|
|
|
|
-
|
|
|
|
29,203
|
|
|
|
2,832
|
|
|
|
32,035
|
|
Federal Home Loan Bank Stock
|
|
|
4,291
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans held for sale
|
|
|
1,711
|
|
|
|
-
|
|
|
|
1,711
|
|
|
|
-
|
|
|
|
1,711
|
|
Loans, net
|
|
|
384,502
|
|
|
|
-
|
|
|
|
-
|
|
|
|
384,755
|
|
|
|
384,755
|
|
Accrued interest receivable
|
|
|
1,149
|
|
|
|
-
|
|
|
|
85
|
|
|
|
1,064
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
339,457
|
|
|
|
235,860
|
|
|
|
103,652
|
|
|
|
-
|
|
|
|
339,512
|
|
Short term borrowings
|
|
|
6,760
|
|
|
|
-
|
|
|
|
6,760
|
|
|
|
-
|
|
|
|
6,760
|
|
Advances from Federal Home Loan Bank
|
|
|
91,000
|
|
|
|
-
|
|
|
|
94,004
|
|
|
|
-
|
|
|
|
94,004
|
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,301
|
|
|
|
6,301
|
|
Accrued interest payable
|
|
|
324
|
|
|
|
2
|
|
|
|
321
|
|
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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