Southern Community Financial Corp. has a market cap of $25.6 million; its shares were traded at around $1.52 with and P/S ratio of 0.3.
Highlight of Business Operations:Total assets increased $2.7 million, or 0.2%, during the third quarter as loans declined for the eighth consecutive quarter. Loans outstanding decreased $14.8 million, or 1.2%, due to continued weak economic conditions and resulting slowdown in loan demand. The allowance for loan losses increased $5.5 million, or 18.6%, which was primarily attributable to increased nonperforming loans and a revision to the methodology used to calculate the allowance (discussed in the Asset Quality section below). Foreclosed assets remained stable, increasing only $604 thousand. The investment securities portfolio returned to a level consistent with previous quarters increasing $14.8 million, or 4.8% as funds from loan run-off were redeployed and deposit growth was invested. Total deposits were $1.32 billion at September 30, 2010, an increase of $24.8 million, or 1.9%, from June 30, 2010. The increase in deposits was primarily due to an increase of $50.8 million in wholesale time deposits used to increase balance sheet liquidity at quarter end. Demand deposits and interest bearing transaction deposits decreased $28.2 million, or 3.8%. Borrowings decreased $14.0 million, or 5.8%, from the prior quarter end continuing a trend of allowing borrowings to mature without renewal or replacement as loan demand has declined. Deposit growth has been adequate to fund new loan requests and increases to the investment securities portfolio.
The Company s provision for loan losses of $17.0 million increased from $5.5 million for the second quarter 2010 and from $6.0 million for the third quarter of 2009. The increased level of provision was a result of continued significant level of charge-offs, an increased level of nonperforming loans and the impact of revising our methodology for calculating the general allowance component of the allowance for loan losses. Despite the $7.6 million impact of these factors on the general allowance component, the specific valuation component decreased by $2.1 million on a linked quarter basis as fewer newly identified nonperforming loans required a specific loan loss allowance allocation during the third quarter. Annualized net charge-offs decreased to 3.78% of average loans in third quarter 2010 from 3.95% of average loans for second quarter 2010 and increased from 1.45% of average loans for the third quarter 2009. Nonperforming loans increased to $98.7 million, or 8.34% of loans, at September 30, 2010 from $55.5 million, or 4.63% of loans, at June 30, 2010. Of the $43.2 million increase in nonperforming loans, $26.0 million were loans whose repayment are dependent on the sale of their collateral and whose payment terms were interest only. None of these collateral dependent loans, which were placed on nonaccrual status during the third quarter, were delinquent. We have since renegotiated the payment structures on $20.1 million of these collateral dependent loans to include interest plus scheduled principal curtailments. If these borrowers maintain their current payment status under the restructured terms for a reasonable period, the loans will be restored to accrual status. Nonperforming assets rose to $118.1 million, or 7.10% of total assets, at September 30, 2010 from $74.3 million, or 4.47% of total assets, at June 30, 2010 primarily due to the increase in nonperforming loans during the quarter. The activity for this quarter in net charge-offs, nonperforming loans and nonperforming assets continues to be predominately related to construction and development. The allowance for loan losses of $35.1 million at September 30, 2010 represented 2.95% of total loans and 36% coverage of nonperforming loans at current quarter-end compared with 2.46% of total loans and 53% coverage of nonperforming loans at June 30, 2010. We believe the allowance is adequate for losses inherent in the loan portfolio at September 30, 2010.
Non-interest income was $3.1 million during the third quarter of 2010, compared to $4.4 million for the prior quarter and $4.2 million for the third quarter of 2009. The sequential decrease in non-interest income was primarily due to decreased gains on sales of investment securities of $994 thousand, a decrease in the fair value of derivatives of $346 thousand and a decrease in Small Business Investment Company (SBIC) earnings of $197 thousand. These decreases in non-interest income were partially offset by an increase of $392 thousand in mortgage banking activities attributable to increased refinance production and loan sales volumes. The year-over-year decrease of $1.1 million in non-interest income was primarily due to decreased gains on sale of investment securities of $711 thousand and a decrease in the fair value of derivatives of $700 thousand. There were increases in mortgage banking fees, service charges on deposit and investment brokerage income compared to the third quarter 2009.
During the nine month period ending September 30, 2010, total assets declined $65.8 million, or 3.8%, to $1.66 billion. The Company continued to emphasize improving the funding mix during a time of asset shrinkage due to slow loan demand. A decrease of $56.2 million in borrowings accommodated our balance sheet shrinkage. In addition, we focused on actively managing the investment portfolio and maintaining an adequate allowance for loan losses as well as a sufficient level of liquidity and regulatory capital ratios in excess of well capitalized levels. The shift in the funding mix contributed to an improvement in the net interest margin during the first nine months of 2010. We continued to shift our deposit mix toward demand deposits, lower cost money market, savings and transaction accounts and away from certificates of deposit. Our continuing efforts to strengthen customer relationships by acquiring core deposit accounts resulted in growth in demand deposits of $877 thousand, or 0.7%, and growth in money market, savings and NOW accounts of $21.0 million, or 3.6%, for the first nine months in 2010. Time deposits decreased $18.3 million largely due to a decline in brokered deposits of $38.9 million. The investment portfolio remained virtually unchanged from the last year end amount decreasing only $1.3 million, or 0.4%, during the nine month period; although $14.8 million was added during the third quarter. While the total investment portfolio has remained stable over the nine month period, the mix of investments has changed with increases of $13.4 million in municipals and $10.0 million in corporate bonds and decreases of $13.9 million in U.S. Government Agencies and $10.8 million in mortgage-backed securities. The allowance for loan losses increased $5.5 million compared to the prior year end, while increasing $14.3 million, or 68.7%, compared to September 30, 2009.
Total loans decreased $46.5 million, or 3.8%, during the nine month period with decreases in the following major categories: $20.7 million, or 11.3%, for commercial and industrial loans, $28.4 million, or 7.2%, for residential mortgage loans and $4.2 million, or 2.4%, for construction loans. Commercial mortgage loans increased $7.2 million, or 1.6%, during the period. The decrease in loans outstanding during the period can be attributed to a continued slowdown in loan demand during these difficult economic times. For the third quarter 2010, the allowance increased by $5.5 million as the provision of $17.0 million exceeded net charge-offs of $11.5 million. Net charge-offs improved slightly from the second quarter total of $11.9 million while the provision increased significantly due to factors discussed in the Asset Quality section.
Net Loss. Net loss before preferred dividends of $8.0 million and our net loss after preferred dividends of $8.6 million for the three months ended September 30, 2010 increased $7.5 million from the same three month period in 2009. Net loss available to common shareholders was $0.51 per share for both basic and diluted for the three months ended September 30, 2010 compared with a $0.06 loss per share for both basic and diluted for the same period in 2009. Net interest income for the third quarter of 2010 of $13.3 million decreased $42 thousand, or 0.3%, year-over-year, due to a decrease in interest earning assets and reversal of interest income on loans placed in a non-accrual status despite an improvement in the net interest margin which improved nine basis points to 3.39%. Repricing of interest bearing assets and liabilities continued to have an effect on the current net interest income and margin. Non-interest income of $3.1 million during the third quarter of 2010 represents a decrease of 27.0% from non-interest income of $4.2 million reported in the comparable period of 2009. Non-interest expense decreased $1.6 million, or 13.0%, compared with the same quarter a year ago. The largest decreases in non-interest expense resulted from reduced salaries and employee benefits of $657 thousand, a reduction of $470 thousand in the Company s buyer incentive plan and a reduction of $418 thousand in write-downs on the carrying value of foreclosed real estate.
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