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Southern Community Financial Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: August 10, 2011 06:45AM

Southern Community Financial Corp. (SCMF) filed Quarterly Report for the period ended 2011-06-30. Southern Community Financial Corp. has a market cap of $27.3 million; its shares were traded at around $1.55 with and P/S ratio of 0.3.

Highlight of Business Operations:

Total assets decreased $41.9 million, or 2.6%, during the second quarter as loans declined for the eleventh consecutive quarter. Loans outstanding decreased $45.1 million, or 4.2%, due to customer deleveraging, loan remediation activities and weak loan demand resulting from the prolonged economic downturn. The allowance for loan losses remained virtually unchanged during the quarter decreasing $153 thousand, or 1.0%, during the quarter as specific allowance requirements decreased by $748 thousand to $2.3 million on a linked quarter basis as the volume of impaired loans requiring a specific allowance has decreased from $15.5 million at the prior quarter end to $14.8 million at June 30, 2011. Foreclosed assets decreased $38 thousand as $3.7 million in sales of properties and $303 thousand in writedowns offset the new foreclosed asset additions during the quarter. The investment securities portfolio remained stable increasing $6.5 million, or 1.8%. Total deposits were $1.25 billion at June 30, 2011, a decrease of $31.3 million, or 2.5%, from March 31, 2011. The decrease in deposits was concentrated in money market, NOW and savings accounts which decreased $32.4 million. This decrease in interest bearing deposits reflects a convergence of factors, the largest of which was the $13.2 million in outflows of brokered deposits. Other factors include the minor influence of overly price sensitive rate shoppers to management s downward repricing of deposits and continued increases in deposit relationships through our business development efforts, including the small business banking initiative. Demand deposits increased $1.1 million, or 0.8%, which contributed to the improved net interest margin. We expect wholesale funding to decrease as the Company seeks to grow its core deposits and $46.1 million in brokered deposits are expected to mature or be called by year-end 2011. Borrowings decreased $14.7 million, or 6.5%, from the prior quarter due primarily to the repayment of one FHLB loan.

The Company s provision for loan losses of $3.7 million decreased from $4.1 million for the first quarter 2011 and from $5.5 million for the second quarter of 2010. The decreased level of provision was a result of decreased net charge-offs of $3.9 million compared to $6.0 million in the first quarter and reduced specific allowance requirement. The specific valuation allowance decreased by $748 thousand on a linked quarter basis as fewer newly identified nonperforming loans required a specific loan loss allowance allocation during the second quarter. Annualized net charge-offs decreased to 1.46% of average loans in second quarter 2011 from 2.19% of average loans for first quarter 2011 and decreased from 3.95% of average loans for the second quarter 2010. Nonperforming loans decreased to $66.8 million, or 6.42% of loans, at June 30, 2011 from $73.7 million, or 6.80% of loans, at March 31, 2011. Nonperforming assets declined to $89.8 million, or 5.75% of total assets, at June 30, 2011 from $96.8 million, or 6.04% of total assets, at March 31, 2011 primarily due to the return of $7.1 million in loans to accrual status. The allowance for loan losses of $27.5 million at June 30, 2011 represented 2.65% of total loans and 41% coverage of nonperforming loans at current quarter-end compared with 2.55% of total loans and 38% coverage of nonperforming loans at March 31, 2011. We believe the allowance is adequate for losses inherent in the loan portfolio at June 30, 2011.

Non-interest income of $3.5 million increased $631 thousand, or 21.7%, compared to $2.9 million for the prior quarter and decreased $858 thousand, or 20%, compared to $4.4 million for the second quarter of 2010. All major components of non-interest income increased during the quarter except gains on sale of investment securities which decreased $420 thousand. Non-interest income included increases of $786 thousand in derivative activity, $132 thousand in wealth management and $93 thousand in service charge income. The decrease of $858 thousand in non-interest income compared to the same quarter in 2010 was primarily due to decreased gains on sale of investment securities of $494 thousand, reduced earnings from Small Business Investment Corporation (SBIC) of $200 thousand and a decrease in wealth management fees of $189 thousand. These comparative quarter decreases were partially offset by a $219 thousand increase in the fair value of derivatives.

Non-interest expense of $11.3 million in the second quarter of 2011 decreased $228 thousand, or 2.0%, from the prior quarter and decreased by $1.1 million, or 8.7%, compared with the year ago period. Linked quarter cost reductions were achieved in several non-interest expense categories with the largest reductions attributable to a $243 thousand decrease in foreclosed real estate related cost, $201 thousand reduction in FDIC insurance premiums and $178 thousand decrease in salaries and benefits. Earnings also benefited from a $210 thousand gain on sale of foreclosed assets although the gain was less than the $280 thousand gain recognized in the prior quarter. Expense reductions were offset by a $147 thousand increase in advertising and a $128 thousand increase in legal and professional fees. Non-interest expense decreased $1.1 million compared to the same quarter in 2010 primarily from reduced salary and employee benefits and reduced foreclosed asset related expense.

During the six month period ending June 30, 2011, total assets declined $91.4 million, or 5.5%, to $1.56 billion. The Company continued to emphasize improving the funding mix during a time of asset shrinkage due to slow loan demand. A decrease of $91.7 million in loans was offset by a decrease of $100.5 million in deposits while borrowings increased $5.2 million to continue the Company s balance sheet shrinkage. Demand deposits increased $17.4 million during the six month period while money market, NOW and savings accounts decreased $92.5 million. Time deposits decreased $25.4 million as brokered deposits (including CDARS deposits) decreased $39.9 million, while customer time deposits increased $14.5 million. The investment portfolio remained relatively unchanged from the December 31, 2010 level, increasing $4.6 million, or 1.3%, during the six month period. The mix of investments changed with an increase of $54.6 million in mortgage-backed securities and decreases of $37.3 million in US Government Agencies, $8.8 million in municipals and $3.9 million in other securities.

Net Income (Loss). Our net income from operations of $1.1 million and $511 thousand after accounting for preferred dividends of $638 thousand for the three months ended June 30, 2011 improved $882 thousand from the same three month period in 2010. Net income per share available to common shareholders was $0.03 per share, both basic and diluted, for the three months ended June 30, 2011 as compared with a $0.02 loss per share, both basic and diluted, for the same period in 2010. Net interest income for the second quarter of 2011 was $12.6 million, down $862 thousand, or 6.4%, compared with the second quarter 2010, primarily due to an $85.3 million decrease in the average balance of interest earning assets. The net interest margin of 3.43% declined three 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 impact of the increase in nonaccrual loans had the main influences on the decrease in net interest income which was partially offset by the impact of the continued downward repricing of deposits. The primary factor for returning to profitable operating income in the second quarter was the reduced level of asset quality costs, including a provision for loan losses of $3.7 million compared to $5.5 million for the second quarter of 2010. Non-interest income was $3.5 million during the second quarter of 2011, which represents a decrease of 19.5% from non-interest income of $4.4 million reported in the comparable period in 2010. Non-interest expense declined $1.1 million year-over-year with reduction in foreclosed asset related expenses, FDIC insurance and personnel expense continuing to be significant factors.

Read the The complete Report

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