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SOCB > SEC Filings for SOCB > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for SOUTHCOAST FINANCIAL CORP

Form 10-Q for SOUTHCOAST FINANCIAL CORP


8-Nov-2013

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, 2012. Results of operations for the period ending September 30, 2013 are not necessarily indicative of the results to be attained for any other period.

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

o future economic and business conditions;
o lack of sustained growth and disruptions in the economy of the Greater Charleston area, including, but not limited to, falling real estate values and increasing levels of unemployment;
o government monetary and fiscal policies;
o the effects of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;
o the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services;
o the effects of credit rating downgrades on the value of investment securities issued or guaranteed by various governments and government agencies, including the United States of America;
o credit risks;
o higher than anticipated levels of defaults on loans;
o perceptions by depositors about the safety of their deposits;
o the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates, including the value of collateral securing loans;
o changes in assumptions underlying allowances on deferred tax assets;
o changes in assumptions underlying, or accuracy of, analysis relating to other-than-temporary impairment of assets;
o 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 weather economic downturns;
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.

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.


SOUTHCOAST FINANCIAL CORPORATION

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

Results of Operations

The Company's net income for the nine months ended September 30, 2013 was approximately $8,735,000 or $1.23 per basic share, compared to net income of approximately $2,590,000, or $0.37 per basic share, for the nine months ended September 30, 2012. The net income for the nine months ended September 30, 2013 included a tax benefit of $6,363,000 resulting from a reversal of the valuation allowance on the Company's deferred tax asset. The average number of basic shares outstanding for the nine months ended September 30, 2013 was 7,074,183 compared to 7,044,365 for the nine months ended September 30, 2012, after adjustment for 15% stock dividends declared in 2013 and 2012.

The Company's net income for the three months ended September 30, 2013 was approximately $694,000 or $0.10 per basic share, compared to net income of approximately $844,000, or $0.12 per basic share, for the three months ended September 30, 2012. The average number of basic shares outstanding for the three months ended September 30, 2013 was 7,077,878 compared to 7,057,450 for the three months ended September 30, 2012, after adjustment for 15% stock dividends declared in 2013 and 2012.

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 $10.4 million for the nine months ended September 30, 2013, compared to $9.9 million for the nine months ended September 30, 2012. Net interest income was $3.5 million for the three months ended September 30, 2013, compared to $3.4 million for the three months ended September 30, 2012.

Changes that affect net interest income include changes in the average yield earned on interest earning assets, changes in the average rate paid on interest bearing liabilities, and changes in the volumes of interest earning assets and interest bearing liabilities. The increase in the Company's net interest income for the nine months and three months ended September 30, 2013 when compared to the same periods of 2012 was primarily due to a decrease in interest expense between the two periods, as the decrease in interest income was less than the decrease in interest expense. The decrease in interest expense was driven by decreases in average volumes and rates.

Average earning assets for the nine months ended September 30, 2013 increased 1.4 percent to $380.3 million from the $375.0 million reported for the nine months ended September 30, 2012. The increase was attributable to an increase of $12.2 million in average loans, partially offset by a $6.9 million decrease in average total investments, cash, and federal funds sold. The increase in average loans between the two periods was primarily due to increased loan originations in the final three months of 2012 and the first nine months of 2013. The decrease in the Company's average investments and federal funds sold was due to sales and calls of mortgage backed and municipal securities, accelerated paydowns on its mortgage backed securities, and the maintenance of lower levels of interest bearing deposits and federal funds sold.

Average interest bearing liabilities for the nine months ended September 30, 2013 decreased 3.4 percent to $343.9 million from the $356.1 million reported for the nine months ended September 30, 2012. The decrease was attributable to a decrease of $26.5 million in average time deposits, partially offset by increases of $8.9 million and $5.4 million in average savings and transaction accounts and other borrowings, respectively. The decrease in average time deposits was attributable to a decrease of $33.3 million in average brokered and wholesale time deposits, partially offset by a $6.8 million increase in average retail time deposits. The increase in average other borrowings was primarily attributable to a $5.5 million increase in average Federal Home Loan Bank Borrowings.


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, 2013 and 2012.



                               For the nine months ended                   For the nine months ended
                                  September 30, 2013                          September 30, 2012
                         Average        Income/        Yield/        Average        Income/        Yield/
                         Balance        Expense       Rate(1)        Balance        Expense       Rate(1)
Assets
Cash and Federal
funds sold              $   13,182     $      24           0.24 %   $   12,848     $      23           0.24 %
Investments - taxable       42,903           677           2.11         48,613           793           2.18
Investments -
nontaxable (2)               4,471           206           6.16          5,941           278           6.26

Total investments and
federal funds sold          60,556           907           2.00         67,402         1,094           2.17
Loans (3)(4)               319,735        12,468           5.21        307,582        12,632           5.49

Total earning
assets/interest
income                     380,291        13,375           4.70 %      374,984        13,726           4.89 %
Other assets                54,035                                      57,947

Total assets            $  434,326                                  $  432,931

Liabilities
Savings and
transaction accounts    $  120,311           488           0.54 %   $  111,400           545           0.65 %
Time deposits              149,509           937           0.84        176,000         1,478           1.12
Other borrowings            63,805         1,346           2.82         58,378         1,569           3.59
Subordinated debt           10,310           140           1.81         10,310           154           1.99

Total interest
bearing
liabilities/interest
expense                    343,935         2,911           1.13 %      356,088         3,746           1.41 %
Non-interest bearing
liabilities                 52,132                                      44,640

Total liabilities          396,067         2,911           0.98 %      400,728         3,746           1.25 %

Equity                      38,259                                      32,203

Total liabilities and
equity                  $  434,326                                  $  432,931

Net interest
income/margin (5)                      $  10,464           3.65 %                  $   9,980           3.56 %

Net interest spread
(6)                                                        3.57 %                                      3.48 %

(1) Annualized

(2) Yield is calculated on a tax equivalent basis.

(3) Does not include nonaccruing loans.

(4) Income includes loan fees of $474,000 in 2013 and $581,000 in 2012.

(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, 2013 the average yield on earning assets was 4.70 percent, while the average cost of interest bearing liabilities was 1.13 percent. For the nine months ended September 30, 2012 the average yield on earning assets was 4.89 percent and the average cost of interest-bearing liabilities was 1.41 percent. 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 3.65 percent and 3.56 percent for the nine months ended September 30, 2013 and 2012, respectively. The increase in the net interest margin is primarily attributable to a reduction in interest expense, which outpaced the reduction in interest income, as net interest income rose by $484,000. Interest income declined by $351,000 while interest expense declined by $835,000. The decrease in interest expense was driven by maturities of higher cost time deposits, restructuring of other borrowings into new borrowings with expanded maturities and lower rates, and the partial replacement of these funding sources with core deposits consisting of lower cost savings and transaction accounts.

Average earning assets for the three months ending September 30, 2013 increased 0.78 percent to $381.7 million from the $378.8 million reported for the three months ending September 30, 2012. The increase was attributable to an increase of $5.4 million in average loans, partially offset by a decrease of $2.5 million in average investments and federal funds sold.

Average interest bearing liabilities for the three months ending September 30, 2013 decreased 3.4 percent to $342.3 million from the $354.3 million reported for the three months ending September 30, 2012. The change was due to a $33.0 million decrease in average time deposits, partially offset by increases in average savings and transaction accounts and other borrowings of $15.4 million and $5.6 million, respectively.


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, 2013 and 2012.

(Dollars in                     For the three months ended                     For the three months ended
thousands)                          September 30, 2013                             September 30, 2012
                          Average         Income/         Yield/         Average         Income/         Yield/
                          Balance         Expense        Rate(1)         Balance         Expense        Rate(1)
Assets
Cash and Federal
funds sold              $    16,420      $       11           0.28 %   $     9,775      $        7           0.26 %
Investments - taxable        42,702             280           2.60          50,159             264           2.09
Investments -
nontaxable (2)                3,907              59           5.99           5,592              87           6.17

Total investments and
federal funds sold           63,029             350           2.21          65,526             358           2.17

Loans (3)(4)                318,748           4,106           5.11         313,311           4,255           5.39

Total earning
assets/interest
income                      381,777           4,456           4.63 %       378,837           4,613           4.83 %
Other assets                 55,047                                         55,833

Total assets            $   436,824                                    $   434,670

Liabilities
Savings and
transaction accounts    $   126,236             183           0.57 %   $   110,828             170           0.61 %
Time deposits               141,090             269           0.76         174,116             473           1.08
Other borrowings             64,641             452           2.78          59,065             489           3.28
Subordinated debt            10,310              47           1.81          10,310              51           1.96

Total interest
bearing
liabilities/interest
expense                     342,277             951           1.10         354,319           1,183           1.32
Non-interest bearing
liabilities                  56,110                                         47,056

Total liabilities           398,387             951           0.95         401,375           1,183           1.17

Equity                       38,437                                         33,295

Total liabilities and
equity                  $   436,824                                    $   434,670

Net interest
income/margin (5)                        $    3,505           3.64 %                    $    3,430           3.59 %

Net interest spread
(6)                                                           3.53 %                                         3.51 %

(1) Annualized

(2) Yield is calculated on a tax equivalent basis.
(3) Does not include nonaccruing loans.
(4) Income includes loan fees of $155,000 in 2013 and $187,000 in 2012.
(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, 2013 the average yield on earning assets was 4.63 percent, while the average cost of interest bearing liabilities was 1.10 percent. For the three months ended September 30, 2012 the average yield on earning assets was 4.83 percent and the average cost of interest-bearing liabilities was 1.32 percent. 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 3.64 percent and 3.59 percent for the three months ended September 30, 2013 and 2012, respectively. The increase in the net interest margin is primarily attributable to a reduction in interest expense, which outpaced the reduction in interest income, as net interest income rose by $75,000. Interest income declined by $157,000 while interest expense declined by $232,000. The decrease in interest expense was driven by maturities of higher cost time deposits, restructuring of other borrowings into new borrowings with expanded maturities and lower rates, and the partial replacement of these funding sources with core deposits consisting of lower cost savings and transaction accounts.

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, 2013
                                                     Versus nine months ended September 30, 2012(1)
                                                   Volume                  Rate                Net Change
Interest income:

Cash and Federal funds sold                    $            -         $            1         $            1
Investments - taxable                                     (93 )                  (23 )                 (116 )
Investments - non taxable (2)                             (69 )                   (3 )                  (72 )

Total investments and federal funds sold                 (162 )                  (25 )                 (187 )

Net loans (3)(4)                                          500                   (664 )                 (164 )

Total interest income                                     338                   (689 )                 (351 )

Interest expense:

Savings and transaction accounts                           43                   (100 )                  (57 )
Time deposits                                            (223 )                 (318 )                 (541 )
Other borrowings                                          146                   (369 )                 (223 )
Subordinated debt                                           -                    (14 )                  (14 )

Total interest expense                                    (34 )                 (801 )                 (835 )

Net interest income                            $          372         $          112         $          484

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

(2) Yield is calculated on a tax equivalent basis.

(3) Income includes loan fees of $474,000 in 2013 and $581,000 in 2012.

(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, 2013
                                                       Versus three months ended September 30, 2012 (1)
                                                   Volume                     Rate                Net Change
Interest income:

Cash and Federal funds sold                    $             5           $           (1 )       $             4
Investments - taxable                                      (39 )                     55                      16
Investments - non taxable (2)                              (26 )                     (2 )                   (28 )

Total investments and federal funds sold                   (60 )                     52                      (8 )

Net loans (3)(4)                                            74                     (223 )                  (149 )

Total interest income                                       14                     (171 )                  (157 )

Interest expense:

Savings and transaction accounts                            24                      (11 )                    13
Time deposits                                              (90 )                   (114 )                  (204 )
Other borrowings                                            46                      (83 )                   (37 )
Subordinated debt                                            -                       (4 )                    (4 )

Total interest expense                                     (20 )                   (212 )                  (232 )

Net interest income                            $            34           $           41         $            75

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

(2) Yield is calculated on a tax equivalent basis.

(3) Income includes loan fees of $155,000 in 2013 and $187,000 in 2012.

(4) Does not include nonaccruing loans.

Noninterest Income and Expenses

Noninterest income for the nine months ended September 30, 2013 was approximately $1,840,000, compared to approximately $2,550,000 for the nine months ended September 30, 2012, a decrease of approximately $710,000. This was primarily due to decreases of approximately $521,000 and $124,000 in gains on sales of available for sale securities and gains on the sale of premises and equipment, respectively.

Noninterest expenses for the nine months ended September 30, 2013 were $9,858,000, compared to $8,957,000 for the nine months ended September 30, 2012, an increase of $901,000. This increase was primarily due to a $729,000 decrease in gains on the sale of other real estate owned. These gains totaled $314,000 and $1,043,000 for the nine months ended September 30, 2013 and September 30, 2012, respectively. Of the $964,000 of gains for the nine months ended September 30, 2012, approximately $550,000 was related to the sale of one property. The Company did not finance the purchase of this property for the buyer. Partially offsetting this decrease in gains on the sale of other real estate owned was a $319,000 reduction in expenses and impairments, net of rental income related to other real estate owned. This amount totaled a net expense of $133,000 for the nine months ended September 30, 2013, compared to a net expense of $452,000 for the nine months ended September 30, 2012. Salaries and employee benefits totaled $5,260,000 for the nine months ended September 30, 2013, compared to $4,870,000 for the nine months ended September 30, 2012, an increase of $390,000. The increase in salaries and employee benefits was primarily attributable to salary adjustments and bonuses which occurred during the nine months ended September 30, 2013.

Noninterest income for the three months ended September 30, 2013 was $560,000, compared to $1,070,000 for the three months ended September 30, 2012, a decrease of $510,000. This was primarily due to decreases of $411,000 and $94,000 in gains on sales of available for sale securities and gains on loans held for sale, respectively.


SOUTHCOAST FINANCIAL CORPORATION

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

Noninterest Income and Expenses - (continued)

Noninterest expenses for the three months ended September 30, 2013 were $3,350,000, compared to $3,211,000 for the three months ended September 30, 2012, an increase of $139,000. This increase was primarily due to increases of $66,000 and $102,000 in salaries and employee benefits and furniture and equipment expense, respectively. The increase in furniture and equipment expenses was primarily related to increased vendor maintenance costs related to . . .

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