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Southern Community Financial Corp. Reports Operating Results (10-K)
Posted by: gurufocus (IP Logged)
Date: March 24, 2011 04:21PM

Southern Community Financial Corp. (SCMF) filed Annual Report for the period ended 2010-12-31. Southern Community Financial Corp. has a market cap of $21.2 million; its shares were traded at around $1.26 with and P/S ratio of 0.2.

Highlight of Business Operations:

At December 31, 2010, the Company had total assets of $1.7 billion, net loans of $1.1 billion, deposits of $1.3 billion and shareholders equity of $92.3 million. The Company had net income (loss) available to common shareholders of ($25.7) million, ($65.7) million and $5.7 million and diluted earnings (loss) per common share of ($1.53), ($3.91) and $0.33 for the years ended December 31, 2010, 2009 and 2008, respectively.

The Piedmont Triad is the economic hub of northwest North Carolina. For fiscal year 2010/2011, the US Department of Housing and Urban Development estimated that the median family income ranged from a low of $50,400 in the Surry County area to a high of $59,800 in the Winston-Salem metropolitan area. The Piedmont Triad has a very balanced and diversified economy and a work force that exceeded 788 thousand in November 2010, according to the NC Employment Security Commission. Approximately 99% of the work force is employed in nonagricultural wage and salary positions. According to the NC Employment Security Commission, the major employment sectors in the second quarter of 2010 were healthcare (14.2%), manufacturing (14.8%), trade (15.6%), government (5.0%), financial (4.3%) and construction (4.3%). During 2010, NC Employment Security Commission statistics showed that the unemployment rate in the Piedmont Triad varied from a low of 9.6% in October to a high of 12.3% in February.

The amount of the proceeds generated from the above offerings of trust preferred securities was $44.5 million. The amount of proceeds that qualify as Tier 1 capital cannot comprise more than 25% of our core capital elements. For us, this Tier 1 limit was $34.0 million at December 31, 2010. The $10.5 million in excess of that 25% limitation qualifies as Tier 2 supplementary capital on our books.

The Bank has interests in two unconsolidated entities (VCS Management LLC and SCP Advisor LLC) to house its investment in its SBIC activities. VCS Management, LLC was formed in March 2000 as the managing general partner of what is now known as Salem Capital Partners, L.P. (“SCP I”), a small business investment company (SBIC) licensed by the Small Business Administration. The Bank has invested $1.7 million in SCP I, which has a total of $9.2 million of invested capital from various private investors including the Bank. The partnership can also borrow funds on a non-recourse basis from the Small Business Administration to increase its funds available for investment. The partnership makes investments generally in the form of subordinated debt and earns revenue through interest received on its investments and potentially through gains realized from warrants that it receives in conjunction with its debt investments. The Bank shares in any earnings of the partnership through its investment in the partnership. During 2006, Salem Capital Partners II, L.P., now Salem Halifax Capital Partners, LP (“SHCP”), was formed and licensed by the Small Business Administration, with a purpose and operations similar to SCP I. Through December 31, 2010, the Bank has contributed $1.2 million of its $2.0 million capital commitment to SHCP. As of January 2011, SCP II has commitments for $35.0 million from various private investors, including the $2.0 million from the Bank. In connection with the formation of SHCP, a new entity, SCP Advisor LLC, was formed as the management company for both SCP I and SHCP with the Bank having 15% ownership. VCS Management, LLC is currently dormant and only receives the Bank s portion of any carried interest from SCP I. For the year ended December 31, 2010, the Company earned $631 thousand, or 0.9% of total revenue, from its SBIC activities, including income from the investments in SCP I and SCHP and SBIC management fees. The revenue stream from SBIC activities has been irregular over the past two years due to the impact of economic conditions on certain portfolio companies compared with substantial gains from the exit of certain portfolio investments during 2007.

The activities in which the Bank engages are highly competitive. Commercial banking in North Carolina is extremely competitive due to early adoption of state laws which permitted statewide branching. Consequently, many commercial banks have branches located in several communities. One of the largest regional commercial banks in North Carolina and one savings institution also have their headquarters in Winston-Salem. Currently, we operate branches in Buncombe, Forsyth, Guilford, Iredell, Rockingham, Stokes, Surry, Wake and Yadkin Counties, North Carolina. In June 2010, there were 739 branches operated by fifty-one banks and eleven savings institutions in these nine counties with approximately $49.8 billion in deposits. On that date, deposits of the Bank were $1.3 billion for a 2.61% market share. The top three deposit market share leaders in this market area account for 56.9% of deposits. Many of these competing banks have capital resources and legal lending limits substantially in excess of those available to the Bank. Therefore, in our market area, the Bank has significant competition for deposits and loans from other depository institutions.

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