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Southern Community Financial Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 14, 2011 12:18PM
Southern Community Financial Corp. (SCMF) filed Quarterly Report for the period ended 2011-09-30. Southern Community Financial Corp. has a market cap of $17.67 million; its shares were traded at around $1.05 with and P/S ratio of 0.18.
Highlight of Business Operations:Net Income (Loss). Our net income from operations of $777 thousand and $138 thousand after accounting for preferred dividends of $639 thousand for the three months ended September 30, 2011 improved $8.7 million from the same three month period in 2010. Net income per share available to common shareholders was $0.01 per share, both basic and diluted, for the three months ended September 30, 2011 as compared with a $0.51 loss per share, both basic and diluted, for the same period in 2010. Net interest income for the third quarter of 2011 was $12.0 million, down $1.3 million, or 10.0%, compared with the third quarter 2010, primarily due to an $113.7 million decrease in the average balance of interest earning assets. The net interest margin of 3.29% declined ten basis points from the year ago period. The shift in the mix of earning assets from loans to lower yielding investments and overnight funds and the impact of the increase in nonaccrual loans had the main influences on the decrease in net interest income which was partially offset by the impact of the continued downward repricing of deposits. The primary factor for returning to profitable operating income in the third quarter 2011 was the reduced level of asset quality costs, including a provision for loan losses of $4.0 million compared to $17.0 million for the third quarter of 2010. Non-interest income was $3.2 million during the third quarter of 2011, which represents an increase of 4.6% from non-interest income of $3.1 million reported in the comparable period in 2010. Non-interest expense declined $559 thousand year-over-year with reductions in personnel expense and professional fees continuing to be significant factors.
Net Interest Income. During the nine months ended September 30, 2011, our net interest income totaled $37.4 million, a year-over-year decrease of $2.6 million, or 6.5%. The primary reasons for this decrease were the $84.1 million reduction in the average balance of earning assets and the shift in the mix of earning assets from loans to lower yielding investment securities and overnight funds. The impact of these two factors was partially mitigated through the downward repricing of deposits and borrowings as well as an improved funding mix as previously mentioned. Our average yield on interest-earning assets decreased 36 basis points to 4.90% for the first nine months of 2011 compared to the same period in 2010. Declining rates have also impacted our funding costs for the first nine months of 2011, as funding costs decreased 34 basis points to 1.66% from 2.00% for the comparable period a year ago. Average interest bearing liabilities decreased $81.1 million, or 6.0%, to $1.36 billion from $1.44 billion for the nine month period ended September 2010. Average demand deposits increased $12.8 million, or 10.9%, year-over-year. For the nine months ended September 30, 2011, our net interest spread decreased two basis points compared to the prior year at 3.24% while our net interest margin was 3.38% compared to 3.42% for the prior year period.
Non-Interest Income. For the nine months ended September 30, 2011, the Company reported non-interest income of $9.6 million compared to $11.4 million for the first nine months of 2010, a decrease of $1.8 million, or 15.5%. The year-over-year decrease of $708 thousand in SBIC income resulted from the loss on the SBIC s investment in one portfolio company during 2011 while no comparable loss occurred during 2010. Mortgage banking income decreased $571 thousand, or 38.9%, as new loan origination activity slowed during the 2011 period. Investment brokerage income decreased $436 thousand during the 2011 period on decreased brokerage transaction volume. The year-over-year decrease in service charges on deposits of $394 thousand was attributable to a $527 thousand decrease in NSF fees while debit card income increased $182 thousand reflecting the trend of more customer transactions being completed electronically and fewer checks being written. Gains on sales of investment securities decreased $188 thousand, or 7.9%, year-over-year as management actively managed the investment portfolio and sold investment securities that met certain criteria. Losses from derivative activity decreased $237 thousand, or 52.3%, for the period although a $384 thousand mark to market charge on the trust preferred interest rate swap transaction was incurred during the current year. As previously discussed in the second quarter 2011, the change of that interest rate swap to an ineffective status disqualified the instrument from hedge accounting, requiring a first quarter 2011 mark-to-market adjustment of $384 thousand. In the first quarter of 2010, the Company recognized a $186 thousand other than temporary impairment charge while no other than temporary impairment charge has been recognized during 2011.
Non-Interest Expense. For the nine months ended September 30, 2011, the Company reported non-interest expense of $33.2 million compared to $35.2 million for the first nine months of 2010, a decrease of $2.0 million, or 5.7%. Through a reduction in staff and cost savings programs initiated in prior quarters, management decreased discretionary spending, saving $2.0 million in salary and employee benefit expense from staff reductions and the aforementioned programs including a company-wide salary freeze and the elimination of the employer 401(k) matching contribution. Writedowns and other expenses related to foreclosed property were $2.0 million for 2011 compared to $2.5 million in the 2010 period, a decrease of $500 thousand. Gains on the sale of foreclosed assets had a positive impact on earnings totaling $563 thousand for 2011 compared to $452 thousand for 2010 as the volume of additions to foreclosed assets and their sales volume increased year-over-year. The Company started a new program during 2008 to help builders sell their inventory of bank-financed houses that had been on the market for 12 months or more. The cost for this program totaled $413 thousand for the first nine months of 2010. The program completed its original goal and was not offered after the second quarter of 2010. The Company s FDIC deposit insurance premiums increased $1.3 million year-over-year due to the Consent Order with the FDIC previously discussed. Legal fees increased $224 thousand for the nine months ended September 30, 2011 compared to last year due to the increased level of problem assets for resolution in 2011. Other professional fees decreased $70 thousand compared to the prior nine month period for services relating to regulatory compliance and external loan review. Occupancy and equipment expense decreased $178 thousand compared to the third quarter of 2010 due to decreases in equipment, furniture and fixture leases and equipment depreciation.
Nonperforming loans increased to $72.5 million, or 7.30% of total loans, at September 30, 2011 compared to $66.8 million, or 6.42% of loans, at June 30, 2011. This $5.7 million increase in nonperforming loans is after the impact of $5.1 million in net charge-offs during the third quarter. Of the $5.8 million in gross charge-offs during the quarter, $1.9 million, or 32%, were attributable to further deterioration in real estate values upon the reappraisal of the underlying collateral on existing nonperforming loans and $736 thousand in charge-offs were due to short sales or deficiency settlements. During the quarter, one lending relationship totaling $10.2 million was restructured and placed on nonaccrual status. The volume of new gross additions to nonaccrual loans for the third quarter of 2011 was $21.4 million, an increase of $5.9 million over the $15.5 million second quarter 2011 volume of gross additions to nonaccrual loans. Foreclosed assets decreased $3.9 million, or 17%, sequentially as $6.0 million in sales of foreclosed properties and $315 thousand in writedowns mitigated the impact of $2.4 million in new foreclosed asset additions during the third quarter 2011.
Stocks Discussed: SCMF,