-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CSt5KRGntMIH5nyxUgDr9Lp1W0KTH8T/hi9Lt08bDksGpD8rYXRi/ceQt4nzy/3M rM6AYIh0vx459j3bJ21hOA== 0000948520-08-000063.txt : 20080509 0000948520-08-000063.hdr.sgml : 20080509 20080509150853 ACCESSION NUMBER: 0000948520-08-000063 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080509 DATE AS OF CHANGE: 20080509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHCOAST FINANCIAL CORP CENTRAL INDEX KEY: 0001083689 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 803884050 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25933 FILM NUMBER: 08817974 BUSINESS ADDRESS: STREET 1: POST OFFICE BOX 1561 CITY: MT PLEASANT STATE: SC ZIP: 29465 BUSINESS PHONE: 8438840504 MAIL ADDRESS: STREET 1: POST OFFICE 1561 CITY: MT PLEASANT STATE: SC ZIP: 29465 10-Q 1 sthcst10q1-08.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) ------ OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2008 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF ------ THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _________to_________ Commission File No. 0-25933 SOUTHCOAST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) South Carolina 57-1079460 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 530 Johnnie Dodds Boulevard Mt. Pleasant, South Carolina 29464 (Address of principal executive offices) 843-884-0504 (Registrant's telephone number, including area code) ------------------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] State the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 4,679,859 shares of common stock, no par value, as of April 30, 2008 SOUTHCOAST FINANCIAL CORPORATION INDEX
PART I - FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - March 31, 2008 and December 31, 2007...................................2 Condensed Consolidated Statements of Income - Three months ended March 31, 2008 and 2007.......................3 Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income - Three months ended March 31, 2008 and 2007...................................................................4 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2008 and 2007...................5 Notes to Condensed Consolidated Financial Statements.........................................................6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................10-17 Item 3. Quantitative and Qualitative Disclosure about Market Risk.....................................................17 Item 4. Controls and Procedures......................................................................................17 PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ..................................................17 Item 6. Exhibits .....................................................................................................17 Signatures ............................................................................................................18 Exhibit Index .........................................................................................................19
See notes to condensed consolidated financial statements. SOUTHCOAST FINANCIAL CORPORATION Condensed Consolidated Balance Sheets PART I - FINANCIAL INFORMATION Item 1 - Financial Statements
March 31, December 31, 2008 2007 ---- ---- (Unaudited) (Audited) Assets Cash and cash equivalents: Cash and due from banks .............................................................. $ 22,327,321 $ 7,033,156 Federal funds sold ................................................................... 1,176,000 3,774,000 ------------- ------------- Total cash and cash equivalents .................................................. 23,503,321 10,807,156 Investment securities Available for sale ................................................................... 63,173,205 58,467,574 Federal Home Loan Bank Stock, at cost ................................................ 4,734,500 4,141,700 ------------- ------------- Total investment securities ...................................................... 67,907,705 62,609,274 Loans held for sale .................................................................... - 384,000 Loans, net of allowance of $4,239,647 and $4,297,337 ................................... 381,076,191 374,116,734 Property and equipment, net ............................................................ 26,687,352 26,735,228 Company owned life insurance ........................................................... 20,673,106 20,467,919 Other assets ........................................................................... 6,049,678 5,731,776 ------------- ------------- Total assets ....................................................................... $ 525,897,353 $ 500,852,087 ============= ============= Liabilities Deposits Noninterest-bearing .................................................................. $ 30,821,218 $ 32,607,181 Interest bearing ..................................................................... 324,243,023 310,147,640 ------------- ------------- Total deposits ..................................................................... 355,064,241 342,754,821 Securities sold under agreements to repurchase ......................................... 10,880,459 7,730,401 Advances from Federal Home Loan Bank ................................................... 86,000,000 73,500,000 Junior subordinated debentures ......................................................... 10,310,000 10,310,000 Other liabilities ...................................................................... 4,137,852 3,815,558 ------------- ------------- Total liabilities .................................................................. 466,392,552 438,110,780 ------------- ------------- Shareholders' Equity Common stock (no par value; 20,000,000 shares authorized; 4,717,500 shares outstanding at March 31, 2008 and 5,009,903 at December 31, 2007) .................... 56,098,927 60,157,384 Retained earnings ...................................................................... 3,342,060 2,597,714 Accumulated other comprehensive income (loss) .......................................... 63,814 (13,791) ------------- ------------- Total shareholders' equity ......................................................... 59,504,801 62,741,307 ------------- ------------- Total liabilities and shareholders' equity ......................................... $ 525,897,353 $ 500,852,087 ============= =============
See notes to condensed consolidated financial statements. -2- SOUTHCOAST FINANCIAL CORPORATION Condensed Consolidated Statements of Income (Unaudited) For the Three months ended March 31, --------- 2008 2007 ---- ---- Interest income Loans, including fees ........................... $6,834,242 $6,973,916 Investment securities ........................... 818,167 602,434 Federal funds sold .............................. 11,677 216,687 ---------- ---------- Total interest income ....................... 7,664,086 7,793,037 ---------- ---------- Interest expense Deposits and borrowings ......................... 4,210,892 4,151,600 ---------- ---------- Net interest income ................................ 3,453,194 3,641,437 Provision for loan losses ...................... 381,047 - ---------- ---------- Net interest income after provision for loan losses ................................. 3,072,147 3,641,437 ---------- ---------- Noninterest income Service fees on deposit accounts ................ 268,667 218,587 Fees on loans sold .............................. 75,242 98,360 Gain on sale of available for sale securities ... 153,465 91,951 Gain on sale of property and equipment .......... - 13,000 Company owned life insurance earnings ........... 205,187 24,473 Other ........................................... 91,984 156,114 ---------- ---------- Total noninterest income .................... 794,545 602,485 ---------- ---------- Noninterest expenses Salaries and employment benefits ................ 1,723,443 1,728,354 Occupancy ....................................... 282,386 266,931 Furniture and equipment ......................... 292,403 277,802 Advertising and public relations ................ 10,476 59,970 Professional fees ............................... 95,388 176,255 Travel and entertainment ........................ 53,627 73,281 Telephone, postage and supplies ................. 104,282 113,605 Other operating expenses ........................ 360,832 272,690 ---------- ---------- Total noninterest expenses .................. 2,922,837 2,968,888 ---------- ---------- Income before income taxes ......................... 943,855 1,275,034 Income tax ..................................... 199,509 444,122 ---------- ---------- Net income ......................................... $ 744,346 $ 830,912 ========== ========== Basic net income per common share .................. $ 0.16 $ 0.14 Diluted net income per common share ................ $ 0.16 $ 0.14 Weighted average shares outstanding Basic ........................................... 4,792,108 5,849,085 Diluted ......................................... 4,792,108 5,854,599 See notes to condensed consolidated financial statements. -3- SOUTHCOAST FINANCIAL CORPORATION Condensed Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income For the three months ending March 31, 2008 and 2007 (Unaudited)
Accumulated other Common Stock comprehensive ------------ Retained income Shares Amount earnings (loss) Total ------ ------ -------- ------ ----- Balance, December 31, 2006 .......................... 5,470,316 $ 75,315,774 $ 3,503,162 $ (16,324) $78,802,612 Net income for the period ........................ 830,912 830,912 Other comprehensive income net of taxes of $42,976: Unrealized holding gains on securities available for sale ............. 76,401 76,401 Less reclassification adjustment for gains included in net income, net of taxes of $33,103 .............................. (58,849) (58,849) ----------- Comprehensive income ............................. 848,464 Stock dividend ................................... 518,440 4,334,074 (4,334,074) - Shares repurchased and retired .................. (287,542) (6,407,901) (6,407,901) Employee stock purchase plan ..................... 1,622 28,548 28,548 --------- ------------ ------------ ------------ ----------- Balance, March 31, 2007 ............................. 5,702,836 $ 73,270,495 $ - $ 1,228 $73,271,723 ========= ============ ============ ============ =========== Balance, December 31, 2007 .......................... 5,009,903 $ 60,157,384 $ 2,597,714 $ (13,791) $62,741,307 Net income for the period ........................ 744,346 744,346 Other comprehensive income net of taxes of $98,900: Unrealized holding gains on securities available for sale ........... 175,823 175,823 Less reclassification adjustment for gains included in net income, net of taxes of $55,247 ............................. (98,218) (98,218) ----------- Comprehensive income ............................. 821,951 Shares repurchased and retired ................... (295,152) (4,097,630) (4,097,630) Employee stock purchase plan ..................... 2,749 39,173 39,173 --------- ------------ ------------ ------------ ----------- Balance, March 31, 2008 ............................. 4,717,500 $ 56,098,927 $ 3,342,060 $ 63,814 $59,504,801 ========= ============ ============ ============ ===========
See notes to condensed consolidated financial statements. -4- SOUTHCOAST FINANCIAL CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31, --------- 2008 2007 ---- ---- Operating activities Net income ............................................................................ $ 744,346 $ 830,912 Adjustments to reconcile net income to net cash provided (used) by operating activities Deferred income taxes ............................................................. 45,767 403,119 Provision for loan losses ......................................................... 381,047 - Depreciation and amortization ..................................................... 257,667 374,511 Discount accretion and premium amortization ....................................... (8,910) (4,301) Gain on sale of securities ........................................................ (153,465) (91,951) Gain on sale of property and equipment ............................................ - (13,000) Originations of loans held for sale ............................................... (14,972,238) (20,506,677) Proceeds from sales of loans held for sale ........................................ 15,356,238 20,315,256 Increase in value of Company Owned Life Insurance ................................. (205,187) (24,473) Increase in other assets .......................................................... (376,868) (536,243) Increase in other liabilities ..................................................... 322,295 338,637 ------------ ------------ Net cash provided by operating activities ....................................... 1,390,692 1,085,790 ------------ ------------ Investing activities Purchases of Federal Home Loan Bank stock ............................................ (592,800) (596,400) Purchases of investment securities available-for-sale ................................ (12,134,327) (3,371,123) Sales, calls, and maturities of investment securities available-for-sale ............. 8,028,805 3,147,890 Proceeds from sales of premises and equipment ........................................ - 13,000 Purchases of premises and equipment ................................................. (209,791) (853,790) Net (increase) decrease in loans ..................................................... (7,687,435) 3,621,350 ------------ ------------ Net cash provided by (used for) investing activities ............................ (12,595,548) 1,960,927 ------------ ------------ Financing activities Increase in borrowings ................................................................ 15,650,058 19,084,580 Proceeds from issuance of stock ....................................................... 39,173 28,548 Funds used to repurchase stock ........................................................ (4,097,630) (6,407,901) Net increase(decrease) in deposits .................................................... 12,309,420 (31,744,590) ------------ ------------ Net cash provided (used) by financing activities ................................ 23,901,021 (19,039,363) ------------ ------------ Increase (decrease) in cash and cash equivalents ................................ 12,696,165 (15,992,646) Cash and cash equivalents, beginning of period ........................................... 10,807,156 38,212,202 ------------ ------------ Cash and cash equivalents, end of period ................................................. $ 23,503,321 $ 22,219,556 ============ ============ Cash paid during the year for: Income taxes ......................................................................... $ 623,345 $ 413,681 Interest ............................................................................. $ 4,146,568 $ 4,264,954
See notes to condensed consolidated financial statements. -5- SOUTHCOAST FINANCIAL CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission. Accordingly they do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Note 2 - Organization Southcoast Financial Corporation (the "Company") is a South Carolina corporation organized in 1999 for the purpose of being a holding company for Southcoast Community Bank (the "Bank"). On April 29, 1999, pursuant to a Plan of Exchange approved by the shareholders, all of the outstanding shares of capital stock of the Bank were exchanged for shares of common stock of the Company. The Company presently engages in no business other than that of owning the Bank and another subsidiary, Southcoast Investment Corporation, and has no employees. Note 3 - Net Income Per Share Net income per share is computed on the basis of the weighted average number of common shares outstanding in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". The treasury stock method is used to compute the effect of stock options on the weighted average number of shares outstanding for diluted earnings per share. Note 4 - Stock Repurchase On January 18, 2008, the Company announced plans to repurchase up to 484,527 shares of its outstanding common stock. Repurchased shares are retired into authorized unissued shares. During the first quarter of 2008, the Company repurchased 295,152 shares and in April, 2008, the Company repurchased an additional 40,000 shares. As a result of the repurchase, together with 2,359 shares issued through the Company's Employee Stock Purchase Plan, the Company had 4,679,859 common shares outstanding at April 30, 2008. During the first quarter of 2007, the Company repurchased 287,542 shares of common stock in conjunction with a plan to repurchase up to 547,194 shares. Note 5 - Recently Issued Accounting Standards The following is a summary of recent authoritative pronouncements that may affect accounting, reporting, and disclosure of financial information by the Company: In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," ("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financials statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent's ownership -6- SOUTHCOAST FINANCIAL CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) Note 5 - Recently Issued Accounting Standards (continued) interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS 160 is effective for the Company on January 1, 2009. Earlier adoption is prohibited. The Company does not believe the adoption of SFAS 160 will have a material impact on its financial position, results of operations or cash flows. In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. It is intended to enhance the current disclosure framework in SFAS 133 by requiring that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. SFAS 161 is effective for the Company on January 1, 2009. This pronouncement does not impact accounting measurements but will result in additional disclosures if the Company is involved in material derivative and hedging activities at that time. In February 2008, the FASB issued FASB Staff Position No. 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions" ("FSP 140-3"). This FSP provides guidance on accounting for a transfer of a financial asset and the transferor's repurchase financing of the asset. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under Statement 140. FSP 140-3 will be effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years and earlier application is not permitted. Accordingly, this FSP is effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, the adoption of FSP 140-3 will have on its financial position, results of operations and cash flows. In April 2008, the FASB issued FASB Staff Position No. 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets". The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), "Business Combinations," and other U.S. generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and early adoption is prohibited. Accordingly, this FSP is effective for the Company on January 1, 2009. The Company does not believe the adoption of FSP 142-3 will have a material impact on its financial position, results of operations or cash flows. Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS 157") which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans). -7- SOUTHCOAST FINANCIAL CORPORATION Note 5 - Recently Issued Accounting Standards (continued) SFAS 157 defines fair value as 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. SFAS 157 also establishes 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. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets. 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 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. This category generally includes certain derivative contracts and impaired loans. 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, 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, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts. Assets and liabilities measured at fair value on a recurring basis are as follows as of March 31, 2008:
Quoted market price Significant other Significant unobservable in active markets observable inputs inputs (Level 1) (Level 2) (Level 3) --------- --------- --------- Available-for-sale investment securities .......................... $63,173,205 $ - $ - Interest rate swap derivative instrument .......................... $ - $ (563,071) $ -
The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis. The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The aggregate carrying amount of impaired loans at March 31, 2008 was $ 5,276,876. FASB Staff Position No. FAS 157-2 delays the implementation of SFAS 157 until the first quarter of 2009 with respect to goodwill, other intangible assets, real estate and other assets acquired through foreclosure and other non-financial assets measured at fair value on a nonrecurring basis. -8- SOUTHCOAST FINANCIAL CORPORATION Note 5 - Recently Issued Accounting Standards (continued) Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows. Note 6- Commitments and Contingencies In May 2006 the Company entered into a sales contract on two parcels of land contiguous to its branch location on John's Island. The land has a cost basis of $2,837,178. Under the agreement the Company agreed to sell the land, comprising approximately 13.21 acres, to the purchaser for the sum of $5,735,000. At the time of the contract the purchaser paid the Company a nonrefundable presales fee of $1,390,000 that was not applicable to the purchase price of the property. The Company recognized this as an item of noninterest income during 2006. The agreement specified a closing date on or before December 31, 2007, and provided for an extension period of one year through December 31, 2008, contingent on the payment of $30,000 monthly extension payments to the Company. Half of the monthly extension payments would be applicable to the purchase price and half would be nonapplicable. In December 2007 the purchaser exercised its right to extend the closing date of the transaction and has paid the monthly extension payments to date in accordance with the contract. Half of the payments made to date have been recognized into noninterest income as extension fee payments and half have been recorded as an escrow liability. -9- SOUTHCOAST FINANCIAL CORPORATION Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the financial statements and related notes appearing herein and in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Results of operations for the period ending March 31, 2008 are not necessarily indicative of the results to be attained for any other period. All share and per share data in this discussion has been adjusted to reflect the 10% stock dividend declared in May 2007. 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," "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 in the economy of the Greater Charleston area; 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 credit risks; o the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates; 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; 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; 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. -10- 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 three months ended March 31, 2008 was $744,346, or $0.16 per basic share, compared to $830,912, or $.14 per basic share, for the three months ended March 31, 2007. The basic earnings per share for March 31, 2008 was based on 4,792,108 shares outstanding compared to 5,849,085 shares outstanding for the quarter ended March 31, 2007. Net Interest Income Net interest income, the principal source of the Company's earnings, is the difference between the interest earned on interest earning assets and the interest paid for funds acquired to support those assets. Net interest income was $3,453,194 for the three months ended March 31, 2008, compared to $3,641,437 for the three months ended March 31, 2007. 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. Average earning assets for the three months ending March 31, 2008 increased 2.7 percent to $444.0 million from the $432.2 million reported for the three months ending March 31, 2007. The increase was primarily attributable to an increase of $13.2 million in average loans. The increase in average loans was due to the continued growth of the Charleston market area, the expansion of the Company's branches, and the Company's marketing efforts. Average interest bearing liabilities for the three months ending March 31, 2008 increased 13.0 percent to $406.4 million from the $359.7 million reported for the three months ending March 31, 2007. The $46.7 million increase was attributable to increases in average savings and transaction accounts of $28.0 million, average time deposits of $18.0 million, and average other borrowings of $12.1 million, offset by an $11.4 million decrease in average subordinated debt outstanding. The increase in total average interest bearing liabilities was necessitated by the need to fund an $11.8 million increase in average interest earning assets, the funding of the Company's stock repurchase over the last 12 months, which resulted in a $14.9 million decrease in average shareholders' equity, and the funding of $17.3 million in purchases of Company Owned Life Insurance during the final nine months of 2007. The following table compares the average balances, yields and rates for the interest sensitive segments of the Company's balance sheets for the three months ended March 31, 2008 and 2007. -11- SOUTHCOAST FINANCIAL CORPORATION Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Net Interest Income - continued
For the three months ended For the three months ended March 31, 2008 March 31, 2007 -------------- -------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate(1) Balance Expense Rate(1) ------- ------- ------- ------- ------- ------- Assets Federal funds sold ................... $ 1,660,451 $ 11,677 2.85% $ 16,483,600 $ 216,687 5.33% Investments - taxable ................ 44,516,499 593,458 5.41 42,476,641 541,538 5.17 Investments- non taxable (2) ......... 17,459,355 339,110 7.88 6,033,196 95,149 6.40 ------------ ------------ ------------ ------------ Total investments and Federal funds sold ............... 63,636,305 944,245 6.02 64,993,437 853,374 5.33 Loans (3)(4) ......................... 380,397,091 6,834,242 7.25 367,206,411 6,973,916 7.66 ------------ ------------ ------------ ------------ Total earning assets ............... 444,033,396 7,778,487 7.08 432,199,848 7,827,290 7.31 ------------ ------------ ------------ ------------ Other assets ....................... 62,803,255 40,249,336 ------------ ------------ Total assets ....................... $506,836,650 $472,449,184 ============ ============ Liabilities Savings and transaction accounts ............... $ 85,093,163 504,726 2.41% $ 57,044,553 362,444 2.58% Time deposits ........................ 219,100,830 2,613,501 4.84 201,113,926 2,473,534 4.99 Other borrowings ..................... 91,931,060 935,692 4.13 79,863,801 900,436 4.57 Subordinated debt .................... 10,310,000 156,973 6.17 21,655,000 415,186 7.78 ------------ ------------ ------------ ------------ Total interest bearing liabilities ...................... 406,435,053 4,210,892 4.20 359,677,280 4,151,600 4.68 ------------ ------------ Non-interest bearing liabilities ........................ 39,278,543 36,734,736 ------------ ------------ Total liabilities .................. 445,713,596 4,210,892 3.83 396,412,016 4,151,600 4.25 ------------ ------------ ------------ ------------ Shareholders' equity ................. 61,123,054 76,037,168 ------------ ------------ Total liabilities and shareholders' equity ............. $506,836,650 $472,449,184 ============ ============ Net interest income/margin (5) ................ $ 3,567,595 3.13% $ 3,675,690 3.42% ============ ============ Net interest spread (6) ............ 2.88% 2.63%
(1) Annualized (2) Tax equivalent yield for nontaxable investments assuming a 36% tax rate. (3) Does not include non-accruing loans. (4) Includes loan fees of $254,658 in 2008 and $245,138 in 2007. (5) Net interest income divided by total earning assets. (6) Total interest earning assets yield less total interest bearing liabilities rate. As reflected above, for the three months ended March 31, 2008 the average yield on earning assets was 7.08 percent, while the average cost of interest bearing liabilities was 4.20 percent. For the three months ended March 31, 2007 the average yield on earning assets was 7.31 percent and the average cost of interest-bearing liabilities was 4.68 percent. The decrease in the yield on earning assets is attributable to decreases in market rates of interest. The decrease in the cost of interest bearing liabilities is due to the early retirement of $11.3 million in higher rate subordinated debt and lower market rates on savings and transaction accounts, time deposits, and other borrowings. The net interest margin for the three months ended March 31, 2008, was 3.13 percent compared to 3.42 percent for the three months ended March 31, 2007. The decline in the net interest margin is primarily attributable to a decrease of $14.9 million in average shareholders' equity due to the Company's ongoing stock repurchase efforts. The Company replaced these interest free funds with interest bearing liabilities, thereby shrinking its net interest margin. The cost of total liabilities was 3.83 percent for the three months ended March 31, 2008 compared to 4.25 percent for the three months ended March 31, 2007. The following table presents changes in the Company's net interest income which are -12- SOUTHCOAST FINANCIAL CORPORATION Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Net Interest Income - continued primarily a result of changes in the volumes and rates of its interest-earning assets and interest-bearing liabilities.
Analysis of Changes in Net Interest Income For the three months ended March 31, 2008 Versus three months ended March 31, 2007(1) ------------------------------------------- Volume Rate Net Change ------ ---- ---------- Interest income: Federal funds sold ............................................ $(194,859) $ (10,151) $(205,010) Investments - taxable ......................................... 26,006 25,914 51,920 Investments - non taxable(2) .................................. 180,201 63,760 243,961 --------- --------- --------- Total investments and federal funds sold .................... 11,348 79,523 90,871 Net loans (3) ............................................... 249,141 (388,815) (139,674) --------- --------- --------- Total interest income ....................................... 260,489 (309,292) (48,803) --------- --------- --------- Interest expense: Savings and transaction accounts .............................. 178,212 (35,930) 142,282 Time deposits ................................................. 221,224 (81,257) 139,967 Other borrowings .............................................. 136,054 (100,798) 35,256 Subordinated debt ............................................. (217,515) (40,698) (258,213) --------- --------- --------- Total interest expense ...................................... 317,975 (258,683) 59,292 --------- --------- --------- Net interest income ......................................... $ (57,486) $ (50,609) $(108,095) ========= ========= =========
(1) Changes in rate/volume have been allocated on a consistent basis to rate. (2) Tax equivalent yield for nontaxable investments assuming a 36% tax rate. (3) Includes loan fees of $ 254,658 and $245,138 for the three months ended March 31, 2008 and 2007. Noninterest Income and Expenses Noninterest income for the three months ended March 31, 2008 was $794,545, compared to $602,485 for the three months ended March 31, 2007. The increase is primarily attributable to an increase of $181,000 in Company Owned Life Insurance earnings. The Company purchased $17.3 million of additional Company Owned Life Insurance during the final nine months of 2007, leading to this increase. Noninterest expenses for the three months ended March 31, 2008 were $2,922,837, compared to $2,968,888 for the three months ended March 31, 2007. The slight decrease is due to decreases in advertising and professional fees totaling $130,000 and travel and entertainment totaling $20,000, partially offset by increases in occupancy and equipment expenses totaling $30,000 and other expenses totaling $88,000. Of the increase in other expenses, $47,000 was due to increased insurance expense, primarily due to the increase in FDIC insurance premiums that became effective during the second quarter of 2007. The decrease in advertising and professional fees was due to a reduction in television, outdoor, and print ads, as well as a decrease in consulting fees. The increase in occupancy and equipment expenses was due to the opening of the Park West branch in May 2007. -13- SOUTHCOAST FINANCIAL CORPORATION Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Liquidity Liquidity is the ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of additional liabilities. Adequate liquidity is necessary to meet the requirements of customers for loans and deposit withdrawals in the most timely and economical manner. Some liquidity is ensured by maintaining assets which may be immediately converted into cash at minimal cost (amounts due from banks and federal funds sold). However, the most manageable sources of liquidity are composed of liabilities, with the primary focus of liquidity management being on the ability to obtain deposits within our Bank's service area. Core deposits (total deposits less certificates for $100,000 or more, wholesale and brokered deposits) provide a relatively stable funding base, and were equal to $175.2 million, or 49.3% of total deposits as of March 31, 2008. Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold and funds from maturing loans. Our Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLBA") and, as such has the ability to borrow against a pledge of its 1-4 family residential mortgage loans. We also have federal funds accommodation lines totaling $17 million with Nexity Bank, $15.4 million with Silverton Bank, and $10 million with First Tennessee Bank. Loans Nonfarm, nonresidential real estate loans totaling $92.6 million made up 24.0% of total loans at March 31, 2008. Construction and land development loans totaled $77.4 million, or 20.1% of the loan portfolio. All other real estate loans (primarily 1-4 family residential loans) comprised $171.2 million, or 44.4% of the portfolio. Commercial and industrial loans totaled $40.3 million, or 10.5% of total loans. Finally, installment, consumer, and other loans totaled $3.9 million, or 1.0% of total loans. Total loans increased by $6.9 million during the first quarter, due to increases of $6.0 million and $3.0 million in commercial and industrial and 1-4 family residential loans, respectively, offset by a $3.3 million decline in nonfarm, nonresidential real estate loans. At March 31, 2008, the Company had no loans 90 days past due and still accruing interest, $347,000 in other real estate owned, and $5.3 million of non-accruing loans. The majority of non-accruing loans are secured by real estate, and the overall value of real estate in the Company's market area has remained relatively stable. There were no other loans that management had determined to be potential problem loans at March 31, 2008. At December 31, 2007, the Company had $3.5 million of loans 90 days past due and still accruing interest, $194,000 in other real estate owned, and $893,000 of non-accruing loans. At March 31, 2007, the Company had $1.1 million in loans 90 days past due and still accruing interest, no other real estate owned, and $420,000 of non-accruing loans. The allowance for loan losses was 1.10% of total loans as of March 31, 2008, compared to 1.14% as of December 31, 2007 and 1.20% as of March 31, 2007. For the quarter ended March 31, 2008 the Company recorded a loan loss provision of $381,000 compared to no loan loss provision during 2007. The current year's loan loss provision is the result of an increase of $6.9 million in total loans during the first quarter, as well as an increase in total nonperforming loans and loan chargeoffs totaling $439,000. During 2007, the Company's average loans outstanding decreased by $12.0 million compared with 2006 due primarily to payoffs of brokered and wholesale loans. Due to this contraction in its loan portfolio the Company did not make a provision for loan losses during 2007. In management's opinion, the allowance for loan losses is adequate to absorb estimated losses inherent in our Company's loan portfolio. In reviewing the adequacy of the allowance for loan losses at each quarter end, management takes into consideration the historical loan losses we experienced, current economic conditions affecting the ability of our borrowers to repay, the volume of loans and the trends in delinquent, nonaccruing, and potential problem loans, and the quality of collateral securing nonperforming and problem loans. After charging off all known losses, management considers the allowance for loan losses adequate to cover its estimate of inherent losses in the loan portfolio as of March 31, 2008. The following table provides a year to date analysis of activity within the allowance for loan losses: Balance at December 31, 2007 ................................ $ 4,297,337 Current Year Loan Loss Provision ............................ 381,047 Charge- offs: Domestic: Commercial, financial, and agricultural .............. (438,737) Installment loans to individuals ..................... - Foreign: ............................................... - Recoveries: Installment loans to individuals ..................... - ----------- Balance at March 31, 2008 ................................... $ 4,239,647 =========== -14- SOUTHCOAST FINANCIAL CORPORATION Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Deposits Deposits increased $12.3 million during the first three months of 2008 to $355.1 million at March 31, 2008. The increase was primarily attributable to an increase of $16.6 million in brokered and wholesale time deposits, partially offset by a $4.7 million decrease in retail time deposit accounts. The current market rate environment and aggressive rate offerings by competitors are attributed for the decline in retail time deposits. Other Borrowings Other borrowings include FHLBA advances (below). FHLBA Advances are collateralized by pledged FHLBA stock and certain residential mortgage loans. FHLBA advances are summarized as follows: Maturity Rate Balance ----------------- -------------- --------------- May 2008 4.67% $ 5,000,000 June 2008 2.40% 5,500,000 July 2008 3.00% 7,500,000 November 2008 2.50% 2,000,000 September 2010 5.55% 7,000,000 February 2011 3.09% 4,500,000 March 2011 2.96% 7,500,000 September 2013 2.46% 10,000,000 June 2014 3.92% 2,000,000 October 2016 4.25% 5,000,000 November 2016 4.08% 5,000,000 January 2017 4.35% 5,000,000 January 2017 4.40% 5,000,000 January 2017 4.46% 5,000,000 January 2017 4.60% 5,000,000 March 2018 2.33% 5,000,000 --------------- Balance $ 86,000,000 =============== Junior Subordinated Debentures On May 3, 2002, December 16, 2002, and August 5, 2005, in three separate transactions, Southcoast Capital Trust I, II, and III (the "Capital Trusts"), non-consolidated subsidiaries of the Company, issued and sold a total of 21,655 floating rate securities, with a $1,000 liquidation amount per security (the "Capital Securities"). Institutional buyers bought 21,000 of the Capital Securities denominated as preferred securities and the Company bought the other 655 Capital Securities which are denominated as common securities. The proceeds of those sales, $21.7 million, were used by the Capital Trusts to buy $21.7 million of junior subordinated debentures from the Company which are reported on its consolidated balance sheets. The Capital Securities mature or are mandatorily redeemable upon maturity on June 30, 2032, December 16, 2032, and September 30, 2035, respectively, or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part, on or after June 30, 2007, December 30, 2007, and September 30, 2010. The Company may also redeem the capital securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium. During 2007 the Company exercised its right to redeem the Capital Securities issued by Southcoast Capital Trust I and Southcoast Capital Trust II. As a result the Company retired total debt related to these securities of $11,345,000. See Note 11 to the consolidated financial statements and the information set forth in Exhibit 13 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations- Junior Subordinated Debentures" filed with our Form 10-K for the year ended December 31, 2007, for more information about the terms of the junior subordinated debentures. The securities issued by Southcoast Capital Trust III were effectively converted from a floating rate to a fixed rate through the use of an interest rate swap agreement. The agreement provides for the Company to make payments at a fixed rate of 6.32% in exchange for receiving payments at a variable rate (three month LIBOR plus 150 basis points). See Note 12 to the consolidated financial statements filed with our Form 10-K for the year ended December 31, 2007, for more information about the terms of the rate swap agreement. -15- SOUTHCOAST FINANCIAL CORPORATION Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Capital Resources The capital base for the Company decreased by $3.2 million for the first three months of 2008, due to our repurchase of 295,152 shares of common stock for an aggregate purchase price of $4.1 million, partially offset by net income of $744,346, other comprehensive income of $77,605, and proceeds from stock issuances of $39,173 through our Employee Stock Purchase Plan. The Company's tier one capital to average assets ratio was 13.75 percent as of March 31, 2008 compared to 15.16 percent as of December 31, 2007. The Federal Reserve Board and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Our Tier 1 capital consists of common shareholders' equity minus certain intangible assets plus junior subordinated debt subject to certain limitations. Our Tier 2 capital consists of the allowance for loan losses subject to certain limitations and our junior subordinated debt in excess of 25% of our Tier 1 capital for the Company. A bank holding company's qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. The Company and our Bank are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. Only the strongest bank holding companies and banks are allowed to maintain capital at the minimum requirement. All others are subject to maintaining ratios 100 to 200 basis points above the minimum. As of March 31, 2008, the Company and the Bank exceeded our capital requirements levels as shown in the following table.
Capital Ratios -------------- Well Capitalized Adequately Capitalized (Dollars in thousands) Actual Requirement Requirement ------ ----------- ----------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- The Bank Total capital (to risk-weighted assets) ................ $54,821 14.26% $38,452 10.00% $30,762 8.00% Tier 1 capital (to risk-weighted assets) ............... 50,770 13.20% 23,071 6.00% 15,381 4.00% Tier 1 capital (to average assets) ..................... 50,770 10.42% 24,354 5.00% 19,483 4.00% The Company Total capital (to risk-weighted assets) ................ $69,704 18.43% N/A N/A $32,098 8.00% Tier 1 capital (to risk-weighted assets) ............... 73,944 17.37% N/A N/A 16,049 4.00% Tier 1 capital (to average assets) ..................... 73,944 13.75% N/A N/A 20,272 4.00%
Off Balance Sheet Risk We make contractual commitments to extend credit and issue standby letters of credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. In addition to commitments to extend credit, we also issue standby letters of credit which are assurances to a third party that they will not suffer a loss if our customer fails to meet a contractual obligation to the third party. At March 31, 2008, we had issued commitments to extend credit of $33.1 million and standby letters of credit of $1.4 million through various types of commercial lending arrangements. Approximately $29.6 million of these commitments to extend credit had variable rates. The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at March 31, 2008.
After One After Three Through Through Greater Within One Three Twelve Within One Than Month Months Months Year One Year Total ----- ------ ------ ---- -------- ----- Unused commitments to extend credit ............ $ 1,887,847 $ 1,953,883 $14,758,596 $18,600,326 $14,459,433 $33,059,759 Standby letters of credit ...................... 104,601 107,970 1,083,868 1,296,439 53,831 1,350,270 ----------- ----------- ----------- ----------- ----------- ----------- Totals ..................................... $ 1,992,448 $ 2,061,853 $15,842,464 $19,896,765 $14,513,264 $34,410,029 =========== =========== =========== =========== =========== ===========
-16- SOUTHCOAST FINANCIAL CORPORATION Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Off Balance Sheet Risk - continued Based on historical experience, many of the commitments and letters of credit will expire unfunded. Accordingly, the amounts shown in the table above do not necessarily reflect the Company's need for funds in the periods shown. Further, through our various sources of liquidity, we believe that we will be able to fund these obligations as they arise. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on the company's credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. Item 3. - Quantitative and Qualitative Disclosures About Market Risk. Information about the Company's exposure to market risk was disclosed in its Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission on March 7, 2008. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing. Item 4. - Controls and Procedures. Based on the evaluation required by 17 C.F.R. Sections 240.13a-15(b) or 240.15d-15(b) of the Company's disclosure controls and procedures (as defined in 17 C.F.R. Section 240.13a-15(e) and 240.15d-15(e), the Company's chief executive officer and chief financial officer concluded that such controls and procedures, as of the end of the period covered by this quarterly report, were effective. There has been no change in the Company's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (c) Issuer Purchases of Equity Securities
(a) Total Number (b) Average (c) Total Number of Maximum Number of Shares Price Paid Shares Purchased as of Shares that May yet be Period Purchased Per Share Part of Publicly Announced Purchased Under the Plans or Programs (1) Plans or Programs 1/1/08-1/31/08 ..................... 175,418 $ 14.03 175,418 477,773 2/1/08-2/28/08 ..................... 117,934 13.66 117,934 359,839 3/1/08-3/31/08 ..................... 1,800 14.06 1,800 358,039
(1) On July 24, 2007, the Board of Directors authorized the repurchase of up to 547,556 shares of the Company's outstanding stock. The Company announced the repurchase plan on July 25, 2007. The Company completed the repurchase authorized under this announcement during January 2008. On January 14, 2008, the Board of Directors authorized the repurchase of up to an additional 484,527 shares, or 10%, of the Company's common stock. The Company announced the repurchase plan on January 18, 2008. Stock dividends occurring subsequent to the authorizations are included in the authorizations. Purchases will be made in the open market and block trades will be permitted, all in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. The plan does not have a termination date. Item 6. Exhibits 31-1 Rule 13a-14(a) Certifications of CEO -17- SOUTHCOAST FINANCIAL CORPORATION 31-2 Rule 13a-14(a) Certifications of CFO 32Section 1350 Certification SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 8, 2008 By: s/L. Wayne Pearson ---------------------------- L. Wayne Pearson Chief Executive Officer Date: May 8, 2008 By: s/William C. Heslop ---------------------------- William C. Heslop Senior Vice President and Chief Financial Officer -18- SOUTHCOAST FINANCIAL CORPORATION Exhibit Index 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided by applicable rules of the Securities and Exchange Commission. -19-
EX-31.1 2 sthcst10q1-08ex31_1.txt Exhibit 31.1 SOUTHCOAST FINANCIAL CORPORATION CERTIFICATIONS I, L. Wayne Pearson certify that: 1. I have reviewed this quarterly report on Form 10-Q of Southcoast Financial Corporation: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f) ) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 8, 2008 /s/ L. Wayne Pearson ------------------- ------------------------------ L. Wayne Pearson Chief Executive Officer EX-31.2 3 sthcst10q1-08ex31_2.txt Exhibit 31.2 SOUTHCOAST FINANCIAL CORPORATION CERTIFICATIONS I, William C. Heslop certify that: 1. I have reviewed this quarterly report on Form 10-Q of Southcoast Financial Corporation: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f) ) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 8, 2008 /s/ William C. Heslop ------------------- ------------------------ William C. Heslop Chief Financial Officer EX-32 4 sthcst10q1-08ex32.txt Exhibit 32 SOUTHCOAST FINANCIAL CORPORATION CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 The undersigned, who are the chief executive officer and the chief financial officer of Southcoast Financial Corporation, each hereby certifies that, to the best of his knowledge, the accompanying Form 10-Q of the issuer fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and that information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer. Date: May 8, 2008 /s/ L. Wayne Pearson ----------- -------------------------------- L. Wayne Pearson Chief Executive Officer /s/ William C. Heslop -------------------------------- William C. Heslop Chief Financial Officer
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