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SOCB > SEC Filings for SOCB > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for SOUTHCOAST FINANCIAL CORP


13-Nov-2012

Quarterly Report


Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the financial statements and related notes appearing herein and in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Results of operations for the period ending September 30, 2012 are not necessarily indicative of the results to be attained for any other period.

This Report on Form 10-Q may contain forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products and similar matters. All statements that are not historical facts are "forward-looking statements." The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Forward-looking statements include statements with respect to management's beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond the Company's control, and which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. These forward-looking statements can be identified through use of words such as "may," "will," "anticipate," "assume," "should," "indicate," "would," "believe," "contemplate," "expect," "seek," "estimate," "continue," "plan," "point to," "project," "projection," "predict," "could," "intend," "target," "potential," and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

o future economic and business conditions;

o lack of sustained growth and disruptions in the economy of the Greater Charleston area, including, but not limited to, continued falling real estate values and increasing levels of unemployment;

o government monetary and fiscal policies;

o the effects of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;

o the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services;

o the effects of credit rating downgrades on the value of investment securities issued or guaranteed by variousgovernments and government agencies, including the United States of America;

o credit risks;

o higher than anticipated levels of defaults on loans;

o perceptions by depositors about the safety of their deposits;

o the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates, including the value of collateral securing loans;

o changes in assumptions underlying allowances on deferred tax assets;

o changes in assumptions underlying, or accuracy of, analysis relating to other-than-temporary impairment of assets;

o accuracy of fair value measurements and the methods and assumptions used to estimate fair value;

o the risks of opening new offices, including, without limitation, the related costs and time of building customer relationships and integrating operations as part of these endeavors and the failure to achieve expected gains revenue growth and/or expense savings from such endeavors;

o changes in laws and regulations, including tax, banking and securities laws and regulations and deposit insurance assessments;

o the effect of agreements with regulatory authorities, which restrict various activities and impose additional administrative requirements without commensurate benefits;

o changes in the requirements of regulatory agencies;

o changes in accounting policies, rules and practices;

o changes in technology or products may be more difficult or costly, or less effective than anticipated;

o the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence;

o ability to continue to weather the current economic downturn;

o loss of consumer or investor confidence; and

o other factors and information described in any of the reports that we file with the Securities and Exchange Commission under the Securities Exchange Act of 1934.


Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The Company has no obligation, and does not undertake, to update, revise or correct any of the forward-looking statements after the date of this report. The Company has expressed its expectations, beliefs, and projections in good faith and believes they have a reasonable basis. However, there is no assurance that these expectations, beliefs or projections will result or be achieved or accomplished.

Results of Operations

The Company's net income for the nine months ended September 30, 2012 was $2.6 million or $0.49 per basic share, compared to a net loss of $11.7 million, or $2.21 per basic share, for the nine months ended September 30, 2011. The average number of basic shares outstanding for the nine months ended September 30, 2012 was 5,326,552 compared to 5,280,533 for the nine months ended September 30, 2011.

The Company's net income for the three months ended September 30, 2012 was $844,000, or $0.16 per basic share, compared to net a loss of $3.0 million, or $0.56 per basic share, for the three months ended September 30, 2011. The average number of basic shares outstanding for the three months ended September 30, 2012 was 5,336,446 compared to 5,290,429 for the three months ended September 30, 2011.

Net Interest Income

Net interest income is the difference between the interest earned on interest earning assets and the interest paid for funds acquired to support those assets, and is the principal source of the Company's earnings. Net interest income was $9.9 million for the nine months ended September 30, 2012, compared to $9.4 million for the nine months ended September 30, 2011. Net interest income was $3.4 million for the three months ended September 30, 2012, compared to $2.8 million for the three months ended September 30, 2011.

Changes that affect net interest income include changes in the average rate earned on interest earning assets, changes in the average rate paid on interest bearing liabilities, and changes in the volumes of interest earning assets and interest bearing liabilities. The Company's net interest income increased by approximately $500,000 and $587,000, respectively, for the nine months and three months ended September 30, 2012 compared to the same periods of 2011. The increase in net interest income for the nine month period was due to a reduction in interest expense which outpaced the reduction in interest income, as the Company experienced declines in its rates paid on interest bearing liabilities which outpaced decreases in its earning asset yields. The increase in net interest income for the three month period was primarily driven by a decrease in interest expense, but was also attributable to an increase in interest income. The increase in interest income between the two periods was due to an increase in interest income on loans, which was primarily driven by an increase in average loans.

Average earning assets for the nine months ended September 30, 2012 decreased 5.7 percent to $375.0 million from the $397.8 million reported for the nine months ended September 30, 2011. The decrease was primarily attributable to a decrease of $19.7 million in average total investments, cash, and federal funds sold. The decrease in these amounts was primarily due to sales and paydowns of available for sale securities between the two periods.

Average interest bearing liabilities for the nine months ended September 30, 2012 decreased 7.7 percent to $356.1 million from the $386.0 million reported for the nine months ended September 30, 2011. The decrease was attributable to decreases of $35.3 million and $4.2 million in average time deposits and average other borrowings, respectively. These decreases were partially offset by an increase of $9.6 million in average savings and transaction accounts. The decrease in average time deposits was attributable to a decrease of $21.8 million in average retail time deposits, and a decrease of $13.5 million in average brokered and wholesale time deposits. The decrease in average other borrowings was primarily attributable to a $4.4 million decrease in average repurchase agreements. These changes in the funding mix resulted from the Company's efforts to build its core deposits while reducing its reliance on wholesale funding sources and retail time deposits.


                        SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - (continued)

The following table compares the average balances, yields and rates for the
interest sensitive segments of the Company's balance sheets for the nine months
ended September 30, 2012 and 2011.

(Dollars in
thousands)                     For the nine months ended                    For the nine months ended
                                   September 30, 2012                           September 30, 2011
                         Average        Income/        Yield/         Average        Income/        Yield/
                         Balance        Expense        Rate(1)        Balance        Expense        Rate(1)
Assets
Cash and Federal
funds sold              $   12,848     $      23            0.24 %   $   14,532     $      25            0.24 %
Investments - taxable       48,613           793            2.17         62,104         1,237            2.66
Investments -
nontaxable (2)               5,941           178            3.99         10,480           316            4.03

Total investments and
federal funds sold          67,402           994            1.96         87,116         1,578            2.42

Loans (3)(4)               307,582        12,632            5.47        310,699        12,983            5.58

Total earning
assets/interest
income                     374,984        13,626            4.84 %      397,815        14,561            4.89 %
Other assets                57,947                                       64,215

Total assets            $  432,931                                   $  462,030

Liabilities
Savings and
transaction accounts    $  111,400           545            0.65 %   $  101,814           979            1.29 %
Time deposits              176,000         1,478            1.12        211,269         2,399            1.52
Other borrowings            58,378         1,569            3.58         62,557         1,668            3.56
Subordinated debt           10,310           154            1.99         10,310           135            1.76

Total interest
bearing
liabilities/interest
expense                    356,088         3,746            1.40        385,950         5,181            1.79

Non-interest bearing
liabilities                 44,640                                       35,240

Total liabilities          400,728         3,746            1.25        421,190         5,181            1.64

Equity                      32,203                                       40,840

Total liabilities and
equity                  $  432,931                                   $  462,030

Net interest
income/margin (5)                      $   9,880            3.51 %                  $   9,380            3.15 %

Net interest spread
(6)                                                         3.44 %                                       3.10 %

(1) Annualized
(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.
(3) Does not include nonaccruing loans.
(4) Income includes loan fees of $581,000 in 2012 and $488,000 in 2011.
(5) Net interest income divided by total earning assets.
(6) Total interest earning assets yield less interest bearing liabilities rate.


SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - (continued)

As shown above, for the nine months ended September 30, 2012 the average yield on earning assets was 4.84 percent, while the average cost of interest bearing liabilities was 1.40 percent. For the nine months ended September 30, 2011 the average yield on earning assets was 4.89 percent and the average cost of interest-bearing liabilities was 1.79 percent. Despite lower yields on individual classes of earning assets, the overall asset yield decreased only slightly due to a heavier mix of loans, which tend to be higher yielding, as a percentage of average earning assets, as well as lower volumes of loans becoming nonaccruing during the period. During the nine months ended September 30, 2012 and 2011, loans comprised approximately 82.03% and 78.10%, respectively, of earning assets. The decrease in the asset yields and average rates paid is due to market rate decreases over the last year. The net interest margin was 3.51 percent and 3.15 percent for the nine months ended September 30, 2012 and 2011, respectively. The increase in the net interest margin is primarily attributable to a $500,000 increase in net interest income accompanied by a $22.8 million decrease in average interest earning assets between the two periods. The increase in net interest income was the result of a $1,435,000 decrease in interest expense, partially offset by a $935,000 decrease in interest income. The decrease in interest expense was driven by maturities of higher cost time deposits and the repricings through rate decreases of savings and interest bearing transaction accounts.

Average earning assets for the three months ending September 30, 2012 decreased 1.89 percent to $378.8 million from the $386.1 million reported for the three months ending September 30, 2011. The decrease was attributable to a decrease of $15.0 million in average investments, cash, and federal funds sold, partially offset by a $7.7 million increase in average loans.

Average interest bearing liabilities for the three months ending September 30, 2012 decreased 5.2 percent to $354.3 million from the $373.9 million reported for the three months ending September 30, 2011. The change was primarily due to a $21.0 million decrease in average time deposits.


                        SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - (continued)

The following table compares the average balances, yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended September 30, 2012 and 2011.

(Dollars in thousands)                 For the three months ended                      For the three months ended
                                           September 30, 2012                              September 30, 2011
                                 Average         Income/         Yield/          Average         Income/         Yield/
                                 Balance         Expense         Rate(1)         Balance         Expense         Rate(1)
Assets
Cash and Federal funds sold    $     9,775      $        7            0.26 %   $    11,776      $        8            0.28 %
Investments - taxable               50,159             264            2.09          61,364             385            2.49
Investments - nontaxable (2)         5,592              56            3.95           7,379              70            3.75

Total investments and
federal funds sold                  65,526             327            1.98          80,519             463            2.28

Loans (3)(4)                       313,311           4,255            5.39         305,618           4,018            5.22

Total earning
assets/ interest income            378,837           4,582            4.80 %       386,137           4,481            4.60 %
Other assets                        55,833                                          56,296

Total assets                   $   434,670                                     $   442,433

Liabilities
Savings and transaction
accounts                       $   110,828             170            0.61 %   $   108,173             345            1.26 %
Time deposits                      174,116             473            1.08         195,140             732            1.49
Other borrowings                    59,065             489            3.28          60,286             547            3.60
Subordinated debt                   10,310              51            1.96          10,310              45            1.72

Total interest
bearing liabilities/interest
expense                            354,319           1,183            1.32         373,909           1,669            1.77

Non-interest bearing
liabilities                         47,056                                          38,140

Total liabilities                  401,375           1,183            1.17         412,049           1,669            1.62

Equity                              33,295                                          30,384

Total liabilities and equity   $   434,670                                     $   442,433

Net interest income/margin
(5)                                             $    3,399            3.56 %                    $    2,812            2.89 %

Net interest spread (6)                                               3.47 %                                          2.83 %

(1) Annualized

(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.

(3) Does not include nonaccruing loans.

(4) Income includes loan fees of $187,000 in 2012 and $175,000 in 2011.

(5) Net interest income divided by total earning assets.

(6) Total interest earning assets yield less interest bearing liabilities rate.


SOUTHCOAST FINANCIAL CORPORATION

Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - continued
As shown above, for the three months ended September 30, 2012 the average yield on earning assets was 4.80 percent, while the average cost of interest bearing liabilities was 1.32 percent. For the three months ended September 30, 2011 the average yield on earning assets was 4.60 percent and the average cost of interest-bearing liabilities was 1.77 percent. The decrease in the average rates paid is due to market rate decreases over the last year. The increase in asset yields is primarily due to a heavier mix of loans, which tend to be higher yielding, as a percentage of average earning assets, as well as lower volumes of loans becoming nonaccruing during the period. The net interest margin was 3.56 percent and 2.89 percent for the three months ended September 30, 2012 and 2011, respectively. The increase in the net interest margin is primarily attributable to a $587,000 increase in net interest income accompanied by a $7.3 million decrease in average interest earning assets between the two periods. The increase in net interest income was the result of a $486,000 decrease in interest expense, as well as a $101,000 increase in interest income. The decrease in interest expense was driven by maturities of higher cost time deposits and the repricings through rate decreases of savings and interest bearing transaction accounts. The increase in interest income between the two periods was primarily driven by a $237,000 increase in interest income on loans. This increase was primarily related to a $964,000 reduction of total nonaccruals during the three months ended September 30, 2012, compared to an increase in total nonaccruals of $2,480,000 during the three months ended September 30, 2011.

The following tables present changes in the Company's net interest income which are primarily a result of changes in the volume and rates of its interest-earning assets and interest-bearing liabilities.

                                                      Analysis of Changes in Net Interest Income
                                                     For the nine months ended September 30, 2012
                                                   Versus nine months ended September 30, 2011 (1)
                                                  Volume                 Rate              Net Change
Interest income:

Cash and Federal funds sold                    $          (2 )      $            -       $           (2 )
Investments - taxable                                   (270 )                (174 )               (444 )
Investments - non taxable (2)                           (137 )                  (1 )               (138 )

Total investments and federal funds sold                (409 )                (175 )               (584 )

Net loans (3)(4)                                        (131 )                (220 )               (351 )

Total interest income                                   (540 )                (395 )               (935 )

Interest expense:

Savings and transaction accounts                          92                  (526 )               (434 )
Time deposits                                           (402 )                (519 )               (921 )
Other borrowings                                        (112 )                  13                  (99 )
Subordinated debt                                          -                    19                   19

Total interest expense                                  (422 )              (1,013 )             (1,435 )

Net interest income                            $        (118 )      $          618       $          500

(1) Changes in rate/volume have been allocated to each category on a consistent basis between rate and volume.

(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.

(3) Income includes loan fees of $581,000 in 2012 and $488,000 in 2011.

(4) Does not include nonaccruing loans.


                        SOUTHCOAST FINANCIAL CORPORATION
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - (continued)

                                                               Analysis of Changes in Net Interest Income
                                                             For the three months ended September 30, 2012
                                                            Versus three months ended September 30, 2011 (1)
                                                         Volume                     Rate               Net Change
Interest income:

Cash and Federal funds sold                          $            (1 )         $            -         $          (1 )
Investments - taxable                                            (71 )                    (50 )                (121 )
Investments - non taxable (2)                                    (17 )                      3                   (14 )

Total investments and federal funds sold                         (89 )                    (47 )                (136 )

Net loans (3)(4)                                                 101                      136                   237

Total interest income                                             12                       89                   101

Interest expense:

Savings and transaction accounts                                   8                     (183 )                (175 )
Time deposits                                                    (79 )                   (180 )                (259 )
Other borrowings                                                 (11 )                    (47 )                 (58 )
Subordinated debt                                                  -                        6                     6

Total interest expense                                           (82 )                   (404 )                (486 )

Net interest income                                  $            94           $          493         $         587

(1) Changes in rate/volume have been allocated to each category on a consistent basis between rate and volume.

(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.

(3) Income includes loan fees of $187,000 in 2012 and $175,000 in 2011.

(4) Does not include nonaccruing loans.

Noninterest Income and Expenses

Noninterest income for the nine months ended September 30, 2012 was $2,550,000 compared to $2,179,000 for the nine months ended September 30, 2011, an increase of $371,000. This increase was partially due to a $161,000 increase in fees on loans held for sale, which totaled $216,000 and $55,000 for the nine months ended September 30, 2012 and 2011, respectively. The increase in the Company's noninterest income was also partially attributable to the recognition of $176,000 of other-than-temporary impairment on available for sale securities during the nine months ended September 30, 2011, compared to no other-than-temporary impairment for the nine months ended September 30, 2012. Also contributing to the increase in noninterest income were increases of $124,000 and $116,000 in gains on the sale of premises and equipment, and service fees on deposit accounts, respectively. The increase in service fees was attributable to a $9.6 million increase in average savings and interest bearing transaction accounts between the two periods. Growth in these types of core deposit accounts commonly generates additional deposit fee income. Offsetting the increase in noninterest income was a $193,000 decrease in gains on available for sale securities between the two periods.

Noninterest expenses for the nine months ended September 30, 2012 were $8,957,000, compared to $12,217,000 for the nine months ended September 30, 2011, a decrease of $3,260,000. This decrease was primarily due to a decrease of $2,319,000 in impairment provisions and other expenses related to other real estate owned, net of rental income. These expenses totaled $452,000 and $2,771,000 for the nine months ended September 30, 2012 and 2011, respectively. Of the $2,319,000 decrease, $2,053,000 was related solely to impairment provisions. Also contributing to the decrease in noninterest expenses was a $540,000 increase in gains on the sale of other real estate owned. These gains . . .

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