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Southern Community Financial Corp. Reports Operating Results (10-Q)

August 10, 2009 | About:

Southern Community Financial Corp. (SCMF) filed Quarterly Report for the period ended 2009-06-30.

Southern Community Financial Corporation is the holding company of Southern Community Bank and Trust. Southern Community Financial Corp. has a market cap of $53.4 million; its shares were traded at around $3.18 with and P/S ratio of 0.49. Southern Community Financial Corp. had an annual average earning growth of 1.2% over the past 5 years.

Highlight of Business Operations:

Total assets decreased $63.0 million or 3.5% during the second quarter of 2009 driven by decreases in loans of $46.3 million or 3.6%, federal funds sold of $16.4 million or 91.6% and investment securities of $12.1 million or 3.5% to end the period at $1.73 billion. Commercial mortgage loans, which amount to $428.5 million or 34.2% of gross loans at June 30, 2009, continue to comprise the largest segment of the loan portfolio and grew $265 thousand or 0.1% for the quarter. Residential mortgage loans experienced the most growth during the quarter increasing $1.9 million or 0.5% and comprised 31.3% of the total loan portfolio. Of the $1.9 million increase in the residential mortgage loan segment, financing for 1-4 family residences increased $2.2 million, financing of land and building lots decreased $155 thousand, and home equity loans decreased $159 thousand. Construction loans experienced the largest decrease for the quarter decreasing $24.6 million or 10.1% to $218.9 million or 17.5% of total gross loans as housing construction continued to contract during the economic slowdown. Commercial and industrial loans increased $22.9 million or 10.6% and represent 15.5% of total gross loans while loans to individuals decreased $1.0 million or 1.5%. The decrease in loans outstanding can also be attributed to the transfer of certain nonperforming loans to other real estate owned which increased $7.1 million during the quarter. Investment securities decreased as part of normal balance sheet management and provided liquidity along with loan repayments to fund maturing deposits. Total deposits were $1.25 billion at quarter end, a decrease of $74.3 million or 5.6% from the prior quarter-end. The largest decline in deposits was from time deposits which decreased $68.9 million or 9.2% while non-maturity deposits decreased $5.4 million or 0.9%. The decrease in time deposits was primarily attributed to declines in brokered certificates of deposit and Certificate of Deposit Account Registry Service (CDARS) of $42.1 million and $30.0 million, respectively. Brokered certificates of deposit decreased as maturities were not renewed due to declining loan demand while the decrease in CDARS was seasonal as customers withdrew their funds to use for operations. Borrowings increased $15.8 million or 5.0% from the prior quarter end net of $15.0 million in high cost FHLB advances prepaid during the quarter. This allowed the Company to realize funding cost savings from short term borrowings including federal funds purchased and Federal Reserve borrowings.

The Company increased its provision for loan losses to $6.0 million for the quarter compared with $4.0 million for first quarter 2009 and $3.5 million for the second quarter 2008. This significantly higher provision and level of net charge-offs are the result of our proactive efforts to resolve troubled loans. This approach has led to an early identification of potential problem loans and their timely resolution, including the recognition of their loss exposure and liquidation of collateral. Annualized net charge-offs increased to 1.85% of average loans in second quarter 2009 from 1.09% of average loans for first quarter 2009 and 0.28% of average assets for the second quarter 2008. Nonperforming loans decreased to $17.9 million or 1.43% of loans at June 30, 2009 from $20.3 million or 1.56% of loans at March 31, 2009. Nonperforming assets rose to $35.7 million or 2.07% of total assets at June 30, 2009 from $31.0 million, or 1.73% of total assets, at March 31, 2009 due to the influx of foreclosed assets during the quarter. Nonperforming assets were $14.2 million or 0.80% of total assets at June 30, 2008. The activity in net charge-offs, nonperforming loans and nonperforming assets is predominately related to residential construction and development lending. The allowance for loan losses of $19.4 million at June 30, 2009 represented 1.55% of total loans and 109% coverage of nonperforming loans at current quarter-end compared with 1.49% of total loans and 95% coverage of nonperforming loans at March 31, 2009. We believe the allowance is adequate for losses inherent in the loan portfolio at June 30, 2009.

Non-interest income was $2.7 million during the second quarter of 2009, compared to $2.6 million for the prior quarter and $3.1 million for the second quarter of 2008. Although the total amount of non-interest income from the second quarter increased only $86 thousand compared to the first quarter, the components changed significantly. The most significant transaction of the quarter was the non-recurring $1.0 million write-off of collateral held by Lehman Brothers as the counterparty for certain terminated derivative contracts. Counsel has determined that the Company s claim against Lehman in pending bankruptcy proceedings will be classified as an unsecured creditor with no preferential status. Despite the potential for partial recovery through either insurance coverage or the bankruptcy proceedings, the Company recognized that there is material uncertainty involved in the determination of the collateral s continuing value which could result in little or no recovery of this asset. The $1.0 million in investment securities held as collateral by Lehman was written off in their entirety during the second quarter 2009. A non-recurring transaction was also recognized during the first quarter of 2009 as the Company s $404 thousand equity investment in Silverton Bank was written off due to its closure by federal banking authorities. Increases in non-interest income from continuing operations were realized in mortgage banking income, gains on sale of securities and service charges on deposits while income from our investment in small business investment company (SBIC) activity, investment brokerage income, and increases in the cash surrender value from bank-owned life insurance policies decreased compared to the first quarter. Non-interest income decreased $425 thousand in the second quarter of 2009 compared to the second quarter of 2008. The most significant decrease in income was from non-recurring gains and net cash settlement on economic hedges of $330 thousand compared to a loss of $912 thousand in the current quarter which included the $1.0 million collateral write-off mentioned above. Similar to the changes from the first quarter, increases in non-interest income from continuing operations were realized in mortgage banking income, gains on sale of securities and service charges on deposits while income from our investment in small business investment company (SBIC) activities and investment brokerage income decreased compared to the second quarter of 2008.

During the six month period ending June 30, 2009, total assets decreased by $77.1 million, or 4.3%, to $1.73 billion. The Company s balance sheet management for the quarter and year to date emphasized maintaining an adequate allowance for loan losses, maintaining adequate liquidity and keeping regulatory capital ratios in excess of the well capitalized threshold. The allowance for loan losses was increased to 1.55% of period end loans compared to 1.49% at the prior quarter end and 1.43% at the prior year end. The allowance was increased with a year to date provision of $10.0 million while net charge-offs totaled $9.5 million. Liquidity was maintained by growing deposits $20.8 million or 1.7% and repayment of loans which resulted in a $63.6 million or 4.8% decrease in loans outstanding. These funds were used to repay borrowings, which decreased $43.0 million or 11.5%, and increase the investment portfolio by $9.0 million or 2.8%.

In the loan portfolio, commercial mortgage loans, which total $428.5 million or 34.2% of gross loans, continue to comprise the largest segment with year to date growth of $9.3 million or 2.2% and was the only segment that increased during the six month period. The construction segment decreased the most during the period as the portfolio decreased $41.6 million to end the period at $218.9 million, or 17.5% of gross loans. Commercial and industrial lending decreased $27.6 million to $193.7 million at June 30, 2009 or 15.5% of the total loan portfolio. Loans secured by residential mortgages remained relatively stable for the six month period decreasing by $1.2 million or 0.3%. Loans to individuals also decreased slightly by $2.5 million or 12.1% to end the period at $18.0 million or 1.5% of gross loans.

Net Loss. Our net loss from operations for the three months ended June 30, 2009 was $2.7 million, a decrease in net loss of $46.6 million, or 94.6%, from the prior quarter and an increase in loss of $3.3 million for the same three month period in 2008 when net income was $603 thousand. Our net loss after preferred dividends increased $2.9 million compared to the prior quarter excluding the $49.5 million goodwill impairment charge. Net loss per share available to common shareholders was a $0.20 loss per share for both basic and diluted for the three months ended June 30, 2009 as compared with $0.03 earnings per share for both basic and diluted for the same period in 2008. Net interest income for the second quarter of 2009 was $12.6 million, up $799 thousand, or 6.8% compared with the second quarter 2008, due to improvement in the net interest margin. The net interest margin of 3.05% improved six basis points from the year ago period and increased four basis points on a linked quarter basis. The Federal Reserve did not change rates during the current quarter, although repricing of longer term interest bearing assets and liabilities continued to have an effect on the current net interest income and margin. The primary factor for the loss in the second quarter was the increased provision for loan losses which was $6.0 million for the quarter. Non-interest income was $2.7 million during the second quarter of 2009, which represents a decrease of 13.7% from non-interest income of $3.1 millRead the The complete Report

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