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Southern Community Financial Corp. Reports Operating Results (10-K)
Posted by: gurufocus (IP Logged)
Date: March 23, 2012 07:31PM
Southern Community Financial Corp. (SCMF) filed Annual Report for the period ended 2011-12-31. Southn Commnty has a market cap of $31.5 million; its shares were traded at around $1.85 with a P/E ratio of 62.3 and P/S ratio of 0.4.
Highlight of Business Operations:Net Income (Loss). Our net income for 2011 was $3.1 million, an increase of $26.2 million from net loss of $23.1 million recorded in 2010. Net income available to common shareholders was $520 thousand for the year ended December 31, 2011 and net loss available to common shareholders was ($25.7) million for 2010. Net income (loss) per share available to common shareholders was $0.03 basic and diluted for the year ended December 31, 2011 and ($1.53) basic and diluted for 2010. Net interest income for 2011 was $48.8 million, down $3.5 million or 6.7%, compared with 2010, due primarily to a $161.1 million decrease in the average balance of loans outstanding year-over-year. The most significant factor of the improved earnings was the decreased level of asset quality costs, including a provision for loan losses of $15.2 million compared to $39.0 million for the prior year. Non-interest income for 2011 was $14.0 million which represents a decrease of $1.6 million, or 10.0%, from non-interest income of $15.6 million reported for 2010. The largest decrease in non-interest income was from mortgage banking activities which decreased $908 thousand, while the largest increase was from gain on sale of investment securities which increased $458 thousand for the year. Non-interest expense decreased $3.1 million, or 6.5%, compared with the previous year. The largest decrease in non-interest expense resulted from salaries and employee benefits including decreases of $1.9 million in salaries and commissions and $899 thousand in employee benefits. The largest increase was the FDIC insurance premium which increased $1.6 million. During 2011, average earning assets decreased $100.4 million or 6.9% to $1.46 billion, and average interest bearing liabilities decreased $102.6 million or 7.7%. A total unfavorable volume variance of $5.2 million resulted in the decline in the net interest income more than offsetting the favorable rate variance of $1.7 million.
Non-Interest Expense. Non-interest expense decreased $3.1 million year over year due to cost reduction initiatives established in prior years and continued during 2011. These cost reductions included salary reductions for executive management, a salary freeze for all employees and eliminating the 401(k) employer match. The result of these actions was a reduction in salaries and commissions of $1.7 million and reduced employee benefit cost of $899 thousand, including a decrease of $328 thousand in the 401(k) match, a $302 thousand decrease in a Supplementary Executive Retirement Plan, a reduction of $128 thousand in payroll taxes and a $98 thousand reduction in employee insurance costs. Foreclosed asset related expenses decreased by $1.1 million as writedowns in the carrying values of foreclosed assets decreased $321 thousand, or 11.6%, and expenses to maintain foreclosed property, net of gains on sales of foreclosed assets, decreased $762 thousand, or 71.9%. Gains on sales of foreclosed assets increased $260 thousand on higher volume of sales ($15.9 million in 2011 versus $11.4 million in 2010). Occupancy and equipment expense decreased $260 thousand, or 3.5%, primarily due to decreases in depreciation on furniture and equipment of $164 thousand and in depreciation on information technology equipment of $71 thousand. The FDIC deposit insurance assessment for 2011 totaled $3.8 million, an increase of $1.6 million compared to 2010 due to increased premiums charged in connection with the previously announced Consent Order. Included in the decrease in other expenses of $754 thousand, was a $413 thousand decrease due to the discontinuance of a buyer incentive promotion in the second half of 2010 and throughout 2011.
Net Income (Loss). Our net loss for 2010 was $23.1 million, a decrease of $40.1 million from net loss of $63.2 million recorded in 2009. Net income (loss) available to common shareholders was ($25.7) million and ($65.7) million for 2010 and 2009, respectively. Net income (loss) per share available to common shareholders was ($1.53) basic and diluted for the year ended December 31, 2010 and ($3.91) basic and diluted for 2009. Net interest income for 2010 was $52.4 million, up $612 thousand or 1.2%, compared with 2009, due to improvement in the net interest margin. The net interest margin of 3.35% improved 19 basis points from 2009. One significant factor for the loss for the year was the elevated level of asset quality costs, including a provision for loan losses of $39.0 million for the year. Non-interest income for 2010 was $15.6 million which represents an increase of $2.7 million, or 20.9%, from non-interest income of $12.9 million reported for 2009. The largest increase in non-interest income was from gain on sale of investment securities which increased $2.3 million, while losses on derivative activity decreased non-interest income $766 thousand for the year. Non-interest expense decreased $52.7 million, or 52.5%, compared with the previous year. The largest increase in non-interest expense resulted from asset quality costs including increases of $939 thousand in expenses in acquiring and maintaining foreclosed property and $599 thousand in writedowns of the carrying values of foreclosed properties. The largest decrease was related to recognizing a non-recurring goodwill impairment charge of $49.5 million during the first quarter of 2009. During 2010, average earning assets decreased $75.8 million or 4.6% to $1.56 billion, and average interest bearing liabilities decreased $65.3 million or 4.4%. A total favorable rate variance of $818 thousand resulted in the improvement in the net interest margin more than offsetting the unfavorable volume variance of $206 thousand.
Non-Interest Income. For the year ended December 31, 2010, non-interest income increased $2.7 million, or 20.9%. Gains on sales of investment securities increased $2.3 million. Income from the investment in SBIC activities increased $483 thousand with income of $631 thousand in 2010 compared to $148 thousand in 2009. The improved SBIC income resulted from realized gains from the harvest of certain investments while recognizing smaller write-downs in other investments in small companies who were not able to survive the current economic weakness. Income from investment brokerage and trust fees increased from the prior year by $315 thousand to $1.5 million. Service charges on deposit accounts increased $287 thousand, or 4.6%, of which $121 thousand was due to increased fees and growth of new deposit accounts, a $537 thousand increase in debit card income and a decrease of $371 thousand in NSF fees. Mortgage banking income increased $78 thousand due to improved pricing strategies and maintaining strong origination volume heavily refinance laden. Losses on economic hedges for 2010 were $532 thousand, a decrease of $766 thousand compared to a gain of $234 thousand in the prior year.
Non-Interest Expense. The significant decrease of $52.7 million in non-interest expense in 2010 was due primarily to recognizing a non-recurring $49.5 million goodwill impairment charge during 2009 which was related to the goodwill generated by the merger with The Community Bank in January 2004. Excluding the goodwill impairment charge, non-interest expense decreased $3.2 million due to cost reduction initiatives established during late 2009 and continuing during 2010. These cost reductions included salary reductions for executive management, a salary freeze for all employees and reducing the 401(k) employer match from 100% to 50%. The result of these actions was a reduction in salaries of $1.1 million and reduced employee benefit cost of $509 thousand, including a decrease of $347 thousand in the 401(k) match and a reduction of $77 thousand in payroll taxes. The FDIC deposit insurance assessment for 2010 totaled $2.2 million, a decrease of $901 thousand compared to 2009 when a special assessment of $789 thousand was charged. FDIC assessments for 2011 and following years will continue at increased premium rates to rebuild the Deposit Insurance Fund that has been stressed during the recent economic downturn and the Bank’s regulatory condition. Non-interest expense related to problem loans increased sharply as writedowns in the carrying values of foreclosed assets increased $599 thousand, or 24.0%, and expenses to maintain foreclosed property increased $939 thousand, or 106.3%. Gains on sales of foreclosed assets increased $233 thousand on slightly higher volume of sales ($11.4 million in 2010 versus $10.7 million in 2009). The Company began a buyer incentive program near the end of 2008 to assist contractors in the sales of speculative houses financed by the Bank. Under this program, the Bank paid up to $10 thousand to home buyers that purchased certain bank-financed speculative houses. The expense for this program during 2010 was $413 thousand compared to $1.3 million during 2009 as the program was discontinued at the end of the second quarter of 2010. Occupancy and equipment expense decreased $475 thousand, or 6.0% primarily due to decreases in depreciation on software of $248 thousand and in depreciation on information technology equipment of $105 thousand. Other non-interest expense included increases in professional expenses of $758 thousand and real estate appraisal fees of $224 thousand, partially offset by a decrease in advertising of $178 thousand. Professional expenses increased due to higher legal and collection costs largely driven by the increased volume of problem loans in 2010. Management reduced our advertising expenses during 2010 by selectively cutting back on product promotional opportunities in print media.
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