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Southern Community Financial Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: May 12, 2011 09:18AM

Southern Community Financial Corp. (SCMF) filed Quarterly Report for the period ended 2011-03-31. Southern Community Financial Corp. has a market cap of $29.4 million; its shares were traded at around $1.75 with and P/S ratio of 0.3.

Highlight of Business Operations:

Total assets decreased $49.5 million, or 3.0%, during the first quarter as loans declined for the tenth consecutive quarter. Loans outstanding decreased $46.6 million, or 4.1%, due to net reductions from foreclosures, payoffs of several large construction and commercial loans and continued weak loan demand. The allowance for loan losses decreased $1.9 million, or 6.5% during the quarter as loans requiring a specific allowance decreased by $2.1 million to $3.1 million on a linked quarter basis as the volume of impaired loans requiring a specific allowance has decreased from $27.8 million at the prior year end to $15.5 million. Foreclosed assets increased $5.7 million as new foreclosures were $9.1 million, writedowns were $609 thousand and sales were $2.8 million. The investment securities portfolio remained stable decreasing $1.9 million, or 0.5%. Total deposits were $1.28 billion at March 31, 2011, a decrease of $69.2 million, or 5.1%, from December 31, 2010. The decrease in deposits was primarily due to money market, NOW and savings accounts which decreased $61.4 million. Demand deposits increased $16.3 million, or 14.8%, which contributed to the improved net interest margin. Brokered deposits and CDARS declined $26.7 million while customer deposits increased $2.6 million. We expect wholesale funding to decrease as the Company seeks to grow its core deposits. Borrowings increased $19.8 million, or 9.7%, from the prior quarter end to provide liquidity from decreased deposits.

The Company s provision for loan losses of $4.1 million decreased from $6.5 million for the fourth quarter 2010 and from $10.0 million for the first quarter of 2010. The decreased level of provision was a result of decreased net charge-offs of $6.0 million compared to $12.0 million in the fourth quarter and reduced loans requiring a specific allowance. The specific valuation allowance decreased by $2.2 million on a linked quarter basis as fewer newly identified nonperforming loans required a specific loan loss allowance allocation during the first quarter. Annualized net charge-offs decreased to 2.19% of average loans in first quarter 2011 from 4.10% of average loans for fourth quarter 2010 and increased from 1.20% of average loans for the first quarter 2010. Nonperforming loans decreased to $73.7 million, or 6.80% of loans, at March 31, 2011 from $91.8 million, or 8.08% of loans, at December 31, 2010. Nonperforming assets declined to $96.8 million, or 6.04% of total assets, at March 31, 2011 from $109.1 million, or 6.60% of total assets, at December 31, 2010 primarily due to the return of $11.2 million in loans to accrual status. The activity for this quarter in net charge-offs, nonperforming loans and nonperforming assets was relatively evenly distributed between residential mortgage loans, commercial real estate and construction and development loans. The allowance for loan losses of $27.7 million at March 31, 2011 represented 2.55% of total loans and 38% coverage of nonperforming loans at current quarter-end compared with 2.60% of total loans and 28% coverage of nonperforming loans at December 31, 2010. We believe the allowance is adequate for losses inherent in the loan portfolio at March 31, 2011.

Non-interest income was $2.9 million during the first quarter of 2011, compared to $4.2 million for the prior quarter and $4.0 million for the first quarter of 2010. All major components of non-interest income decreased during the quarter except the Small Business Investment Company (SBIC) earnings which increased $116 thousand. Non-interest income included decreases of $526 thousand in derivative activity, $451 thousand in mortgage fees, $191 thousand of securities gains, $129 thousand in service charges on customer accounts and $118 thousand in wealth management fees. The year-over-year decrease of $1.0 million in non-interest income was primarily due to decreased gains on sale of investment securities of $410 thousand and a decrease in the fair value of derivatives of $574 thousand. Similar to the prior quarter, no major component of non-interest income increased compared to the first quarter of 2010, although a $186 thousand other than temporary impairment charge in the first quarter of 2010 did not recur during the first quarter of 2011.

Non-interest expense of $11.5 million in the first quarter of 2011 decreased $1.1 million, or 8.9%, from the prior quarter and decreased by $359 thousand, or 3.0%, compared with the year ago period. Linked quarter Cost reductions were achieved throughout non-interest expense categories with the largest reductions attributable to a $1.3 million decrease in write-downs on carrying values of foreclosed real estate, $199 thousand reduction in the costs of acquiring and maintaining foreclosed real estate and $358 thousand decrease in salaries and benefits. Earnings also benefited from a $280 thousand gain on sale of foreclosed assets compared to a $22 thousand loss in the prior quarter. Cost reductions were offset by a $598 thousand increase in FDIC cost and legal and professional fees which increased $149 thousand. Non-interest expense remained relatively flat year-over-year decreasing $359 thousand although several components had significant changes.

During the three month period ending March 31, 2011, total assets declined $49.5 million, or 3.0%, to $1.60 billion. The Company continued to emphasize improving the funding mix during a time of asset shrinkage due to slow loan demand. A decrease of $69.2 million in deposits 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 three months of 2011. We continued to shift our deposit mix toward demand deposits which increased $16.3 million during the quarter. Total time deposits decreased $24.2 million as brokered deposits decreased $14.6 million and CDARS deposits decreased an additional $12.1 million; while customer time deposits increased $2.6 million. The investment portfolio remained virtually unchanged from the last year end amount decreasing only $1.9 million, or 0.5%, during the three month period. While the total investment portfolio has remained stable over the three month period, the classifications changed as held to maturity increased $7.2 million while available for sale decreased $9.1 million. The mix of investments also changed with increases of $16.3 million in mortgage-backed securities, decreases of $16.4 million in US Government Agencies and $1.8 million in other securities.

Net Income (Loss). Our net income from operations of $151 thousand and our net loss after the accrual of preferred dividends of $488 thousand for the three months ended March 31, 2011 improved $4.8 million from the same three month period in 2010. Net loss per share available to common shareholders was $0.03 per share for both basic and diluted for the three months ended March 31, 2011 as compared with a $0.31 loss per share for both basic and diluted for the same period in 2010. Net interest income for the first quarter of 2011 was $12.8 million, down $416 thousand, or 3.1%, compared with the first quarter 2010, due to a decrease in interest earning assets. The net interest margin of 3.42% improved one basis point from the year ago period. The Federal Reserve did not change rates during the current quarter, although repricing of interest bearing assets and liabilities continued to have an effect on the current net interest income and margin. The primary factor for returning to profitable operating income in the first quarter was the reduced level of asset quality costs, including a provision for loan losses of $4.1 million compared to $10.0 million for the first quarter of 2010. Non-interest income was $2.9 million during the first quarter of 2011, which represents a decrease of 26.6% from non-interest income of $4.0 million reported in the comparable period in 2010. Non-interest expense declined $360 thousand year-over-year with cost of non-performing loans, FDIC insurance and personnel cost continuing to be significant factors.

Read the The complete Report

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