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Southern Community Financial Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: May 15, 2012 03:39PM
Southern Community Financial Corp. (SCMF) filed Quarterly Report for the period ended 2012-03-31.
Highlight of Business Operations:Net interest income decreased $573 thousand, or 5.0%, for the first quarter compared to the fourth quarter 2011. The interest rate environment remained stable in the first quarter as the Federal Reserve maintained the federal funds target rate consistent with the prior quarter and changes in LIBOR rates were relatively minor. Total interest income decreased $757 thousand, or 4.6%, while the cost of funds decreased $184 thousand, or 3.6%, compared to the previous quarter. The sequential decrease in interest income was attributable to a $28.4 million decrease in average loan balances and a 24 basis point decline in the earning asset yields due to the shift in the earning asset mix from loans into lower yielding investments and overnight funds. Interest expense declined primarily due to reduced cost of deposits as interest bearing deposit balances dropped significantly and the continued downward repricing of deposits. The net interest margin decreased five basis points to 3.17% compared to 3.22% for the linked quarter and decreased 25 basis points when compared to 3.42% for the first quarter of 2011. Management expects that interest margin compression will continue in the near future due to, among other factors, (i) more competitive pricing for loans, (ii) a continuation of current balance sheet trends in loan portfolio reduction and earning asset mix shift, and (iii) less impactful opportunities to reduce the cost of funds due to the low current interest rate structure of deposits.
Net Income (Loss). Our net income from operations of $815 thousand and our net available to common shareholders of $170 thousand for the three months ended March 31, 2012 improved $664 thousand and $658 thousand, respectively, from the same three month period in 2011. Net income per share available to common shareholders was $0.01 per share, both basic and diluted, for the three months ended March 31, 2012 as compared with a $0.03 loss per share, both basic and diluted, for the same period in 2011. Net interest income for the first quarter of 2012 was $10.9 million, down from $12.8 million, or a decrease of 14.9% compared with the first quarter 2011, primarily due to a $134.5 million decrease in the average balance of interest earning assets. The net interest margin of 3.17% declined 25 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 decreased loan yields due to pricing competition were the main influences on net interest income. The yield on interest earning assets decreased 39 basis points year-over-year while the cost of funds decreased only ten basis points. Due to the current unusually low interest rate environment, management’s ability to continue to reprice downward our deposits to achieve a meaningful reduction in our cost of funds is limited. The primary factor for improving our profitability in the first quarter 2012 was the reduced level of asset quality costs, including a provision for loan losses of $2.9 million compared to $4.1 million for the first quarter of 2011. Non-interest income was $3.4 million during the first quarter of 2012, which represents an increase of 18.2% from non-interest income of $2.9 million reported in the comparable period in 2011. Non-interest expense declined $848 thousand year-over-year with reductions in professional fees and FDIC assessments as significant factors.
Non-Interest Income. For the three months ended March 31, 2012, non-interest income increased $529 thousand, or 18.2%, to $3.4 million from $2.9 million for the same period in 2011 primarily as a result of increased SBIC income of $548 thousand and derivative market valuation adjustments of $690 thousand. Insufficient fund, or NSF, charges continued their trend decreasing $168 thousand based on a reduction in transaction volumes as other service charges, primarily debit card charges, increased $42 thousand based on the increase in debit card transaction volume. Gains from sales of investment securities decreased $681 thousand as part of normal balance sheet management. Both mortgage banking income and wealth management fees increased by $42 thousand from increased customer activity and sales volumes.
Non-Interest Expense. For the three months ended March 31, 2012, non-interest expenses decreased $848 thousand or 7.4%, over the same period in 2011 primarily due to decreases in legal and professional fees and FDIC deposit insurance premiums and occupancy and equipment expense. These expenses reductions were partially offset by reduced gains on sales of foreclosed properties. The reduction in legal and professional expense included savings of $194 thousand in legal fees and $198 thousand in fees on other professional services. The reduced legal fees related to a decreased volume of problem asset remediation litigation and other work. FDIC deposit insurance premiums decreased $382 thousand primarily due to decreased levels of deposits and a change in the basis of the quarterly assessment calculation. Although the premiums decreased year-over year, the premiums remained high as a result of the previously announced Consent Order and will remain at the higher assessment rates until the Consent Order is no longer in effect. Gains on sales of foreclosed assets decreased $207 thousand due to a number of factors including the higher mix of residential lots being sold this year. Salaries and employees benefits decreased $60 thousand from reduced commissions on mortgage and wealth management production and from reduced employee insurance costs. Occupancy and equipment expense decreased $144 thousand which included decreases of $68 thousand in equipment depreciation, software maintenance of $35 thousand and building repairs of $34 thousand. Expenses related to foreclosed property began to moderate but continued to be significant with foreclosed asset write-downs decreasing to $460 thousand during the first quarter of 2012 compared to $609 thousand in the first quarter of 2011. This decrease was offset by increased ongoing foreclosed asset related operating expenses which increased $68 thousand year-over-year.
Nonperforming loans decreased to $57.9 million, or 6.19% of total loans, at March 31, 2012 compared to $68.0 million, or 7.13% of loans, at December 31, 2011. This $10.1 million decrease in nonperforming loans is due to the impact of: $2.9 million in net charge-offs, $5.3 million in loans foreclosed upon and approximately $8.3 million in loan payoffs and paydowns which more than offset the $6.3 million in new additions to nonperforming loans during the first quarter. Foreclosed assets increased $4.2 million, or 21%, sequentially as $5.3 million in new foreclosed asset additions exceeded slower sales of foreclosed properties of $599 thousand and writedowns of $460 thousand.
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