##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission File No. 000-49780 SOUTHERN COMMUNITY BANCORP   Florida
    
    59-3619325(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 250 North Orange Avenue, Orlando, Florida 32801   (407) 648-1844   Securities registered under Section 12(b) of the Exchange Act:
None Securities registered under Section 12(g) of the Exchange Act:
Common stock, $1.00 par value Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in the definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o Indicate by check mark whether registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes o No x The aggregate market value of the common stock of the registrant held by
non-affiliates (as of the registrants most recently completed second fiscal
quarter) was approximately $73,131,804. As of March 1, 2004, the registrant had 7,187,009 outstanding shares of common
stock, $1.00 par value. Documents incorporated by reference: Part III  Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders.




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP
TABLES OF CONTENTS
FORM 10-K
DECEMBER 31, 2003 PagePART I
    
    
    
    
    1ITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    
    1ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    
    17ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    18ITEM 4.
    
    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
    
    
    18PART II
    
    
    
    
    21ITEM 5.
    
    MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
    
    
    21ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    24ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    26ITEM 7A
    
    QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    55ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    55ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    55ITEM 9A
    
    CONTROLS AND PROCEDURES
    
    
    55PART III
    
    
    
    
    56ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
    
    
    56ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    56ITEM 12.
    
    SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    56ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    56ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    56PART IV
    
    
    
    
    57ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
    
    
    57Peninsula Directiors Stock Option PlanPeninsula Employees Stock Option PlanAgreement between Southern and CSILOAN AGREEMENTPromissory NotePledge and Security AgreementForm of Subordinated DebenturesCode of EthicsList of SubsidiariesPower of AttorneySection 302 CEO CertificationSection 302 CFO CertificationSection 906 PEO CertificationSection 906 CFO Certification
 1




---



##### Table of Contents



PART I FORWARD LOOKING STATEMENTS ThisForm 10-Kcontains forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward looking
statements represent Southerns expectations and beliefs including, but not
limited to, statements concerning Southerns operations, performance, financial
condition, growth or strategies. For this purpose, any statements contained in
thisForm 10-Kthat are not statements of historical fact may be deemed to be
forward looking statements. Without limiting the generality of the foregoing,
words such as may, will, expect, believe, estimate, anticipate or
continue or the negative or other variations thereof or comparable
terminology are intended to identify forward looking statements. The
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond Southerns control, and actual results may differ
materially depending on a variety of important factors, including but not
limited to the potential impact of changes in interest rates, competition,
credit risks and collateral, changes in local or regional economic conditions,
the ability of Southern to continue its growth strategy, dependence on
management and key personnel, and regulatory supervision. 
 ITEM 1. DESCRIPTION OF BUSINESS General Southern Community Bancorp (Southern) is a bank holding company which
owns and operates three Florida chartered banks. These banks are as follows: Name of Bank
    
    Principal OfficeSouthern Community Bank of Central Florida
    
    Orlando, FloridaSouthern Community Bank of Southwest Florida
    
    Bonita Springs, FloridaSouthern Community Bank of South Florida
    
    Boca Raton, Florida
 Southern was formed in 1999 and became a bank holding company in July 1999
when it acquired all of the shares of Southern Community Bank of Central
Florida (the Central Florida Bank) in a share exchange with the shareholders
of the Central Florida Bank. Southern acquired Peninsula Bancorp, Inc. (Peninsula) on April 30, 2001.
Peninsula was the parent company of Peninsula Bank of Central Florida (the
Daytona Beach Bank). The name of the Daytona Beach Bank was subsequently
changed to Southern Community Bank, Atlantic. In August 2003, the assets and
liabilities of the Daytona Beach Bank were transferred to the Central Florida
Bank, and the charter for the Daytona Beach Bank was sold to a third party. Southern opened Southern Community Bank of Southwest Florida (the
Southwest Florida Bank) in January 2001. Southern opened Southern Community
Bank of South Florida (the South Florida Bank) in August 2002. 1




---



##### Table of Contents



Proposed Merger with First National Bankshares of Florida, Inc. On March 19, 2004, First National Bankshares of Florida, Inc. (FLB) and
Southern entered into an Agreement and Plan of Merger (the Merger Agreement),
pursuant to which FLB agreed to acquire Southern through the merger of Southern
with and into FLB. Under the terms of the Merger Agreement, at the effective time of the
merger, each outstanding share of the Southerns common stock will be converted
into the right to receive 1.62 shares of FLB common stock; provided, that if
the average closing price of FLBs common stock exceeds $20.00 over the 20
consecutive trading days ending on the fifth day prior to the merger (such
average closing price, the Closing FLB Value), the exchange ratio will be
reduced to an amount that will result in each share of Southern common stock
being exchanged for a number of shares of FLB common stock having a value
(based on the Closing FLB Value) equal to the average of $32.40 ($20.00
multiplied by 1.62) and the product of 1.62 multiplied by the Closing FLB
Value. If the average closing price of FLB common stock over the twenty
trading days ending on the day the last required regulatory or shareholder
approval of the merger is obtained is less than $15.00, Southern will have the
right to terminate the Merger Agreement. The merger is intended to constitute a tax-free reorganization under the
Internal Revenue Code of 1986, as amended (except for any cash paid to a
Southern shareholder in lieu of a fractional share of FLB common stock). Consummation of the merger is subject to various conditions, including:
(i) approval of the Merger Agreement by the shareholders of FLB and Southern;
(ii) receipt of banking regulatory approvals; and (iii) receipt of opinions of
counsel as to the tax-free nature of certain aspects of the merger. Strategy Southerns goal is to operate its banks in the substantially the same
manner as local community banks, emphasizing local leadership and local
decision-making. The management of each bank makes its own credit decisions.
Each bank prices and markets its own loan and deposit products. Each bank has
its own board of directors, drawn mainly from members of the local business
community. Each board has full authority over the bank, in contrast to an
advisory board which lacks authority. Each bank endeavors to be an active
supporter of local charities and civic organizations. Southerns strategy is to capitalize on the opportunities created by the
consolidation in the Florida banking industry. Southern believes that this
consolidation has reduced the levels of personalized services as the larger
regional financial institutions have increasingly focused on larger corporate
customers and standardized loan and deposit products. More specifically, many
financial institutions have centralized their loan approval practices for small
businesses, leaving less responsibility and authority with the traditional loan
officer. By virtue of their banking experience in Florida, Southerns
management believes that the most frequent customer complaints are based on a 2




---



##### Table of Contents



lack of personalized service and turnover in lending personnel, which limits
the customers ability to develop a relationship with his or her banker. As a
result of these factors, Southern believes there currently exists a significant
opportunity to attract and maintain customers who are dissatisfied with their
banks. Southern also believes it can attract experienced management personnel
within its identified markets. Southerns holding company structure provides flexibility for the future
expansion of its banking business through the possible acquisition of other
financial institutions and the formation of new banks. In addition, Southerns
holding company structure also makes it easier to raise additional capital for
its banks because Southern can issue securities without the need for prior
banking regulatory approval. Southern Community Bank of Central Florida The Central Florida Bank is a Florida state-chartered bank which commenced
operations in December 1998. The Central Florida Banks principal office is
located in the central business district in Orlando, Florida, and it maintains
branch offices in the cities of Winter Park, Altamonte Springs, Longwood, south
Orlando, Lake Mary, Ormond Beach, Port Orange and Daytona Beach, Florida. At
December 31, 2003, the Central Florida Bank had total assets of $605.4 million. Southern Community Bank of Southwest Florida The Southwest Florida Bank is a Florida state-chartered bank which opened
in January 2001. The Southwest Florida Bank serves the Bonita Springs and
Naples, Florida markets. The main office of the Southwest Florida Bank is
located in Bonita Springs. The bank also operates branch offices in Naples and
Ft. Myers, Florida. The Southwest Florida Bank expects to open an additional
branch in Estero, Florida in the next 12 months. At December 31, 2003, the
Southwest Florida Bank had total assets of $161.2 million. Southern Community Bank of South Florida The South Florida Bank is a Florida state-chartered bank which opened in
August 2002. Its principal office is located in Boca Raton, Florida, and it
operates branch offices in Fort Lauderdale, Palm Beach, West Palm Beach and
Palm Beach Gardens, Florida and a loan production office in West Palm Beach,
Florida. At December 31, 2003, the South Florida Bank had total assets of
$140.1 million. Southern Community Insurance Agency, Inc. Southern owns and operates an insurance agency named Southern Community
Insurance Agency, Inc. The agency is a wholly owned subsidiary of the Central
Florida Bank. The agency refers customers of Southerns banks to another
insurance agency, Insurance Office of America, Inc., for the purchase of
insurance products. Insurance Office of America pays the agency a percentage
of the commissions generated from customers which are referred. One of the
principal shareholders of Insurance Office of America is John Ritenour, one of
Southerns directors. 3




---



##### Table of Contents



Material Transitions in 2003 Transfer of Assets and Liabilities of Daytona Beach Bank. In August 2003,
the Daytona Beach Bank transferred substantially all of its assets to the
Central Florida Bank. In consideration for the transfer of the assets, the
Central Florida Bank assumed all of the liabilities of the Daytona Beach Bank
and paid the Daytona Beach Bank a cash amount equal to the difference between
the book value of the transferred assets and the assumed liabilities. The
Central Florida Bank also hired all of the former employees of the Daytona
Beach Bank. Since that time, the Central Florida Bank has continued to operate
all of the facilities of the Daytona Beach Bank. At the same time as the asset transfer, Southern entered into an agreement
with an unaffiliated bank based outside of Florida to acquire the Daytona Beach
Bank corporate shell and its charter. This transaction was completed
immediately following the transfer of the Daytona Beach Banks assets and
liabilities to the Central Florida Bank. In consideration for this
transaction, the purchaser paid Southern an amount equal to the capital
accounts of the Daytona Beach Bank at the time of the merger and a premium of
$1.0 million. The purchaser acquired the Daytona Beach Bank in order to be
able to establish branch offices in Florida. Southern recorded a $1.0 million
pretax gain from this transaction. Except for the receipt of the $1.0 million
premium from the purchaser, the transaction did not affect Southerns
consolidated assets, liabilities or stockholders equity. Liquidation of Southern Community Banc Mortgage LLC. In 2001, the Central
Florida Bank and an unaffiliated company, American Heritage Mortgage
Affiliates, Inc. (American Heritage Affiliates), formed Southern Community
Banc Mortgage, LLC (the Mortgage Company), to originate residential mortgage
loans for customers of the Central Florida Bank and others. The Central
Florida Bank and American Heritage Affiliates each held a 50% in the Mortgage
Company. American Heritage Affiliates, through an agreement with its parent
company, American Heritage Mortgage Corporation (American Heritage Mortgage),
provided the staffing and administrative services required for the operations
of the Mortgage Company. In the fall of 2003, American Heritage Mortgage was
acquired by another unaffiliated company, First Horizon Home Loan Corporation
(First Horizon). In connection with its acquisition of American Heritage
Mortgage, First Horizon agreed to pay $500,000 to American Heritage Affiliates
if the Mortgage Company were dissolved, with $250,000 to be paid to the Central
Florida Bank upon dissolution of the Mortgage Company. The dissolution of the
Mortgage Company was completed in October 2003. Since the dissolution of the
Mortgage Company, the Central Florida Bank has originated residential mortgage
loans for its customers directly. One of the principal shareholders of
American Heritage Mortgage Corporation is Sal A. Nunziata, one of Southerns
directors. Purchase of Bank Branch. In December 2003, the Southwest Florida Bank
purchased a branch of Harris Bank, N.A. located in Ft. Myers, Florida. As part
of the transaction, the Southwest Florida Bank acquired $4.0 million in loans
and $1.3 million in premises and equipment. The Southwest Florida Bank paid
for the branch assets by assuming $4.9 million in deposits and making a cash
payment of $450,000. 4




---



##### Table of Contents



Products and Services Southern offers a broad array of traditional banking products and services
to its customers, including the products and services described below. Deposits. Southern offers a full range of interest bearing and
non-interest bearing accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, savings
accounts, and other time deposits of various types, ranging from daily money
market accounts to longer term certificates of deposit. Southern has tailored
the rates and terms of its accounts and time deposits to compete with the rates
and terms in Southerns principal markets. Southern seeks deposits from
residents, businesses and employees of businesses in these markets. The FDIC
insures all of Southerns accounts up to the maximum amount permitted by law.
In addition, Southern receives service charges which are competitive with other
financial institutions in its markets, covering such matters as maintenance
fees on checking accounts, per item processing fees on checking accounts,
returned check charges and other similar fees. Lending Activities. Southern uses its deposits, together with borrowings
and other sources of funds, to originate and purchase loans. Southern offers a
full range of short and medium-term small business and commercial, consumer and
real estate loans. Southern generally seeks to allocate its loan portfolio as
follows: 80% to real estate loans; 15% to small business and commercial loans;
and 5% to consumer loans. Each bank has a loan approval process which provides
for various levels of officer lending authority. When a loan amount exceeds an
officers lending authority, it is reviewed by various loan committees with
ascending lending authority, as established by each banks board of directors. The risk of non-payment of loans is inherent in all loans. However,
Southern carefully evaluates all loan applicants and attempts to minimize its
credit risk exposure by use of thorough loan application and approval
procedures that Southern has established for each category of loan. In
determining whether to make a loan, Southern considers the borrowers credit
history, analyzes the borrowers income and ability to service the loan, and
evaluates the need for collateral to secure recovery in the event of default.
Southern maintains an allowance for loan losses based upon assumptions and
judgments regarding the ultimate collectability of loans in its portfolio and a
percentage of the outstanding balances of specific loans when their ultimate
collectability is considered questionable. Southern directs its lending activities primarily to individuals and
businesses in its markets whose demand for funds falls within Southerns legal
lending limits and who are potential deposit customers. The following is a
description of each of the major categories of loans which Southern makes: Commercial Loans. This category includes loans made to individuals,
partnerships or corporate borrowers for a variety of business purposes.
Southern places particular emphasis on loans to small to medium-sized
professional firms, retail and wholesale businesses, light industry and
manufacturing concerns operating in Southerns markets. Southern considers
small businesses to include commercial, professional and retail businesses
with annual gross sales of less than $20 million or annual operating costs of
less than $5 million. Southerns commercial loans include term 5




---



##### Table of Contents



loans with both variable and fixed interest rates secured by equipment,
inventory, receivables and real estate, as well as secured and unsecured
working capital lines of credit. Risks of these types of loans depend on the
general business conditions of the local economy and the borrowers ability to
sell its products and services in order to generate sufficient business profits
to repay the loans under the agreed upon terms and conditions. Personal
guarantees may be obtained from the principals of business borrowers and third
parties to further support the borrowers ability to service the debt and
reduce the risk of non-payment. Consumer and Installment Loans. Consumer loans include lines of credit
and term loans secured by second mortgages on the residences of borrowers for a
variety of purposes, including home improvements, education and other personal
expenditures. Consumer loans also include installment loans to individuals for
personal, family and household purposes, including automobile loans to
individuals and pre-approved lines of credit. Consumer loans generally involve
more risk than first mortgage loans because the collateral for a defaulted loan
may not provide an adequate source of repayment of the principal. This risk is
due to the potential for damage to the collateral or other loss of value, while
the remaining deficiency often does not warrant further collection efforts. In
addition, consumer loan performance depends on the borrowers continued
financial stability and is, therefore, more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Real Estate Loans. Southern makes commercial real estate loans,
construction and development loans, and residential real estate loans. Commercial Real Estate. Southern offers commercial real estate loans to
developers of both commercial and residential properties. Southern manages
credit risk associated with these loans by actively monitoring such measures as
advance rate, cash flow, collateral value and other appropriate credit factors.
Risks associated with commercial real estate loans include the general risk of
the failure of the commercial borrower, which are different for each type of
business and commercial entity. Southern evaluates each business on an
individual basis and attempts to determine such business risks and credit
profile. Southern attempts to reduce credit risks in the commercial real
estate portfolio by emphasizing loans on owner-occupied office and retail
buildings where the loan-to-value ratio, established by independent appraisals,
does not exceed 80%. In addition, Southern may also require personal
guarantees of the principal owners. Acquisition, Construction and Development Loans. Southern makes
acquisition, construction and development loans on a pre-sold and speculative
basis. If the borrower has entered into an arrangement to sell or lease the
property prior to beginning construction, Southern considers the loan to be on
a pre-sold or pre-leased basis. If the borrower has not entered into an
agreement to sell the property prior to beginning construction, Southern
considers the loan to be on a speculative basis. Southern makes residential
and commercial construction loans to builders and developers and to consumers
who wish to build their own home. Southern limits the term of most
construction and development loans to 18 months, although it may structure the
payments based on a longer amortization basis. Southern bases speculative
loans on the borrowers financial strength and cash flow position. Southern
disburses loan proceeds based on the percentage of completion and only after an
experienced construction lender or appraiser inspects the project. These loans
generally command higher rates and fees commensurate with the risks warranted
in the construction lending field. The risk in construction lending depends
upon the performance of the builder, building the 6




---



##### Table of Contents



project to the plans and specifications of the borrower and Southerns ability
to administer and control all phases of the construction disbursements. Upon
completion of the construction, Southern typically converts construction loans
to permanent loans. Residential Real Estate Loans. Southern makes residential real estate
loans to qualified individuals for the purchase of existing single-family
residences in its markets. Southern makes these loans in accordance with its
appraisal policy and real estate lending policy which detail maximum loan to
value ratios and maturities. Southern believes that these loan to value ratios
are sufficient to compensate Southern for fluctuations in real estate market
value and to minimize losses that could result from a downturn in the
residential real estate market. Southern sells mortgage loans that do not
conform to its policies in the secondary markets. The risk of these loans
depends on the marketability of the loans to national investors and on interest
rate changes. Southern retains loans for its portfolio when there is
sufficient liquidity to fund the needs of the established customers and when
rates are favorable to retain the loans. The loan underwriting standards and
policies are generally the same for both loans sold in the secondary market and
those retained in Southerns portfolio. Asset and Liability Management Southerns primary assets are its loan portfolio and investment account.
Southerns liabilities consist primarily of deposits. Southerns objective is
to support asset growth primarily through the growth of core deposits, which
include deposits of all categories made by individuals, partnerships,
corporations and other entities. Consistent with the requirements of prudent
banking necessary to maintain liquidity, Southern seeks to match maturities and
rates of loans and the investment portfolio with those of deposits, although
exact matching is not always possible. Southern seeks to invest the largest
portion of its assets in commercial, consumer and real estate loans.
Southerns investment account consists primarily of marketable securities of
the United States government, federal agencies and state and municipal
governments, generally with varied maturities. Southern monitors its asset/liability mix on a regular basis with a
monthly report detailing interest-sensitive assets and interest-sensitive
liabilities presented to each banks board of directors. The objective of this
policy is to control interest-sensitive assets and liabilities in order to
minimize the impact of substantial movements in interest rates on Southerns
earnings. Correspondent Banking Correspondent banking involves providing services by one bank to another
bank which, from an economic or practical standpoint, cannot provide that
service for itself. Southern may purchase correspondent services offered by
larger banks, including check collections, purchase of federal funds,
securities safekeeping, investment services, coin and currency supplies,
overline and liquidity loan participations, and sales of loans to or
participations with correspondent banks. Southern will sell loan
participations to correspondent banks with respect to loans which exceed
Southerns lending limits. As compensation for services provided by a
correspondent bank, Southern may maintain balances with correspondents in
non-interest bearing accounts. 7




---



##### Table of Contents



Other Services Southerns other services include cash management services, safe deposit
boxes, travelers checks, direct deposit of payroll and social security checks,
wire transfers, telephone banking, and automatic drafts for various accounts.
Southern offers a debit card and VISA and/or MasterCard credit card services
through Southerns correspondent banks. Southern offers extended banking
hours, both drive-in and lobby, and after-hours depositories. Southern is
associated with a shared network of automated teller machines that customers
may use throughout Southerns market areas and other regions. Southern is
associated with third party Internet banking service providers that enable it
to provide customers with a cost effective, secure and reliable Internet
banking solution. Customers Southern believes that the recent consolidation of the Florida banking
industry provides community banks significant opportunities to build
successful, locally-oriented banks. Southern further believes that many of the
larger financial institutions do not provide the high level of personalized
services desired by many small and medium-sized businesses and their
principals. Southern focuses its marketing efforts on attracting small and
medium-sized businesses and individuals, including service companies,
manufacturing companies, commercial real estate developers, entrepreneurs and
professionals, such as physicians and attorneys. Although Southern concentrates its lending efforts on commercial business,
Southern also attracts a significant amount of consumer business. Many of its
retail customers are the principals of Southerns small and medium-sized
business customers. Southern emphasizes relationship banking, with the goal
that each customer will identify and establish a comfort level with Southerns
bank officers. Southern seeks to further develop its retail business with
individuals who appreciate a high level of personal service, contact with their
lending officer and responsive decision-making. Southern develops most of its
new business through Southerns lending officers and local boards of directors
and by pursuing an aggressive strategy of calling on customers throughout its
market areas. Competition Southern faces substantial competition in all phases of its operations
from a variety of different competitors. This competition includes:  
    
    Large national and super-regional financial institutions which have
well-established branches and significant market share in the
communities served by Southern.  
    
    Finance companies, investment banking and brokerage firms, and
insurance companies that offer bank-like products.  
    
    Credit unions, which can offer highly competitive rates on loans and
deposits because they receive tax advantages not available to
commercial banks.  
    
    Other community banks, including start-up banks, that can compete with
Southern for customers who desire a high degree of personal service. 8




---



##### Table of Contents




    
    Technology-based financial institutions including large national and
super-regional banks offering on-line deposit, bill payment, and
mortgage loan application services. Other existing community banks, and many new community bank start-ups,
have marketing strategies similar to Southerns. These other community banks
may open new branches in the communities served by Southern and compete
directly for customers who want the level of service offered by community
banks. Other community banks also compete for the same management personnel in
Florida. Various legislative actions in recent years have led to increased
competition among financial institutions. Since the enactment of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and other
laws and regulations affecting interstate bank expansion, it has been
relatively easy for financial institutions located outside of the State of
Florida to enter the Florida market, including Southerns targeted markets. In
addition, recent legislative and regulatory changes and technological advances
have enabled customers to conduct banking activities without regard to
geographic barriers through computer and telephone-based banking and similar
services. There can be no assurance that the United States Congress, the
Florida Legislature or bank regulatory agencies will not enact legislation or
promulgate rules that may further increase competitive pressures on Southern.
Southerns failure to compete effectively for customers in its market areas
could have a material adverse effect on its business, future prospects,
financial condition or results of operations. Employees As of December 31, 2003, Southern had approximately 194 full-time
equivalent employees. Southern expects to hire additional employees as needed
to support its growth. Supervision and Regulation Southern is subject to an extensive body of state and federal banking laws
and regulations which impose specific requirements and restrictions on, and
provide for general regulatory oversight with respect to, virtually all aspects
of Southerns operations. Southern is also affected by government monetary
policy and by regulatory measures affecting the banking industry in general.
The actions of the Federal Reserve System affect the money supply, and in
general, the lending abilities of banks by increasing or decreasing the costs
and availability of funds to the banks. Additionally, the Federal Reserve
System regulates the availability of bank credit in order to combat recession
and curb inflationary pressures in the economy by open market operations in
United States government securities, changes in the discount rate on bank
borrowings, and changes in the reserve requirements against bank deposits. The following is a brief summary of some of the statutes, rules and
regulations which affect Southern. This summary is qualified in its entirety
by reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of all applicable
statutes or regulations. Any change in applicable laws or regulations may have
a material adverse effect on Southerns business and prospects. 9




---



##### Table of Contents



Holding Company Regulations Southern is a bank holding company within the meaning of the Federal Bank
Holding Company Act of 1956 and the Florida Interstate Banking Act. It is
registered as a bank holding company with the Federal Reserve System and is
required to file annual reports and other information regarding its business
operations and its subsidiaries. It is also subject to the supervision of the
Federal Reserve. The Bank Holding Company Act requires every bank holding company to obtain
the prior approval of the Federal Reserve before:  
    
    acquiring all or substantially all of the assets of a bank.  
    
    acquiring direct or indirect ownership or control of more than five
percent of the voting shares of any bank.  
    
    merging or consolidating with another bank holding company. Except as authorized by the Gramm-Leach-Bliley Act of 1999, a bank holding
company is generally prohibited by the Bank Holding Company Act from engaging
in, or acquiring direct or indirect control of more than five percent of the
voting shares of any company engaged in any business other than the business of
banking or managing and controlling banks. Some of the activities the Federal
Reserve has determined by regulation to be proper incidents to the business of
banking, and thus permissible for bank holding companies, include:  
    
    making or servicing loans and certain types of leases and
related activities.  
    
    engaging in certain insurance and discount brokerage
activities.  
    
    underwriting and dealing in government securities and certain
other securities and financial instruments.  
    
    providing certain data processing and data transmission
services.  
    
    acting in certain circumstances as a fiduciary or investment
or financial advisor.  
    
    management consulting and counseling activities.  
    
    issuing and selling retail monetary instruments such as money
orders, savings bonds and travelers checks and providing check
printing and courier services.  
    
    operating trust companies and non-bank depository
institutions such as savings associations.  
    
    making investments in corporations or projects designed
primarily to promote community welfare. 10




---



##### Table of Contents



In determining whether an activity is so closely related to banking as to
be permissible for bank holding companies, the Federal Reserve is required to
consider whether the performance of the particular activities by a bank holding
company or its subsidiaries can reasonably be expected to produce benefits to
the public, such as greater convenience, increased competition and gains in
efficiency that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interests and
unsound banking practices. Generally, bank holding companies are required to
obtain prior approval of the Federal Reserve to engage in any new activity not
previously approved by the Federal Reserve. Despite prior approval, the
Federal Reserve may order a bank holding company or its subsidiaries to
terminate any activity or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that the holding companys
continued ownership, activity or control constitutes a serious risk to the
financial safety, soundness or stability of any of its bank subsidiaries. The Bank Holding Company Act and the Federal Change in Bank Control Act,
together with regulations promulgated by the Federal Reserve, require that,
depending on the particular circumstances, either the Federal Reserves
approval must be obtained or notice must be furnished to the Federal Reserve
and not disapproved prior to any person or company acquiring control of a bank
holding company, subject to certain exemptions. Control is conclusively
presumed to exist when an individual or company acquires 25% or more of any
class of voting securities of the bank holding company. Control is rebuttably
presumed to exist if a person acquires 10% or more, but less than 25%, of any
class of voting securities and either the bank holding company has registered
securities under Section 12 of the Securities Exchange Act of 1934 or no other
person owns a greater percentage of that class of voting securities immediately
after the transaction. The Federal Reserve, pursuant to regulation and published policy
statements, has maintained that a bank holding company must serve as a source
of financial strength to its subsidiary banks. In adhering to the Federal
Reserves policy, a bank holding company may be required to provide financial
support to a subsidiary bank at a time when, absent such Federal Reserve
policy, it might not be deemed advisable to provide such assistance. Under the
Bank Holding Company Act, the Federal Reserve may also require a bank holding
company to terminate any activity or relinquish control of a non-bank
subsidiary, other than a non-bank subsidiary of a bank, upon the Federal
Reserves determination that the activity or control constitutes a serious risk
to the financial soundness or stability of any subsidiary depository
institution of the bank holding company. Further, federal bank regulatory
authorities have additional discretion to require a bank holding company to
divest itself of any bank or non-bank subsidiary if the agency determines that
divestiture may aid the depository institutions financial condition. Bank Regulation Each of Southerns banks is a state bank organized under the laws of
Florida. They are all subject to the supervision of the Florida Office of
Financial Institutions and Securities Regulation and the Federal Deposit
Insurance Corporation (the FDIC). Their deposits are insured by the FDIC for
a maximum of $100,000 per depositor. For this protection, the banks must pay a
semi-annual statutory assessment and comply with the rules and regulations of
the FDIC. The Florida 11




---



##### Table of Contents



Office of Financial Institutions and Securities Regulation and the FDIC
regulate and monitor all areas of a banks operations, including:  
    
    security devices and procedures.  
    
    adequacy of capitalization and loss reserves.  
    
    loans.  
    
    investments.  
    
    borrowings.  
    
    deposits.  
    
    mergers.  
    
    issuance of securities.  
    
    payment of dividends.  
    
    interest rates payable on deposits.  
    
    interest rates or fees chargeable on loans.  
    
    establishment of branches.  
    
    corporate reorganizations.  
    
    maintenance of books and records.  
    
    adequacy of staff training to carry out safe lending and
deposit gathering practices. In addition, banks are prohibited from engaging in tie-in arrangements in
connection with any extension of credit, or the offer of any product or
service. Bank regulatory requirements also set forth various conditions
regarding the eligibility and qualifications of their officers and directors. Capital Adequacy Requirements Both bank holding companies and individual banks are subject to regulatory
capital requirements imposed by the Federal Reserve and the FDIC which vary
based on differences in risk profiles. The capital adequacy guidelines issued
by the Federal Reserve are applied to bank holding companies on a consolidated
basis. The FDICs risk-based capital guidelines apply directly to insured
state banks regardless of whether they are subsidiaries of a bank holding
company. Both agencies requirements, which are substantially similar, provide
that banking organizations must have capital (as defined in the rules) of at
least 8% of risk-weighted assets. The risk weights 12




---



##### Table of Contents



assigned to assets are based primarily on credit risks. Depending upon the
riskiness of a particular asset, it is assigned to a risk category. For
example, securities with an unconditional guarantee by the United States
government are assigned to the lowest risk category. The aggregate amount of
assets assigned to each risk category is multiplied by the risk weight assigned
to that category to determine the weighted values, which are added together to
determine total risk-weighted assets. Both the Federal Reserve and the FDIC have also adopted minimum capital
leverage ratios to be used in tandem with the risk-based guidelines in
assessing the overall capital adequacy of banks and bank holding companies.
The guidelines define a two-tier capital framework. Tier 1 capital consists of
common and qualifying preferred shareholders equity, less goodwill and other
adjustments. Tier 2 capital consists of mandatory convertible, subordinated,
and other qualifying term debt, preferred stock not qualifying for Tier 1, and
a limited allowance for credit losses up to a designated percentage of
risk-weighted assets. Under these guidelines, institutions must maintain a
specified minimum ratio of qualifying capital to risk-weighted assets. At
least 50% of an institutions qualifying capital must be core or Tier 1
capital, and the balance may be supplementary or Tier 2 capital. The
guidelines imposed on the banks include a minimum leverage ratio standard of
capital adequacy. The leverage standard requires top-rated institutions to
maintain a minimum Tier 1 capital to assets ratio of 3%, with institutions
receiving less than the highest rating required to maintain a ratio of 4% or
greater, based upon their particular circumstances and risk profiles. Federal bank regulatory authorities have adopted regulations revising the
risk-based capital guidelines to further ensure that the guidelines take
adequate account of interest rate risk. Interest rate risk is the adverse
effect that changes in market interest rates may have on a banks financial
condition and is inherent to the business of banking. Under the regulations,
when evaluating a banks capital adequacy, the revised capital standards now
explicitly include a banks exposure to declines in the economic value of its
capital due to changes in interest rates. The exposure of a banks economic
value generally represents the change in the present value of its assets, less
the change in the value of its liabilities, plus the change in the value of its
interest rate off-balance sheet contracts. The foregoing capital guidelines could affect Southern and its banks in
several ways. If Southerns banks grow rapidly, their respective capital bases
may become insufficient to support continued growth, making additional capital
infusions necessary. The capital guidelines could also impact each banks
ability to pay dividends. Rapid growth, poor loan portfolio performance or
poor earnings performance, or a combination of these factors, could change each
banks capital position in a relatively short period of time. Failure to meet
these capital requirements would require a bank to develop and file with the
FDIC a plan describing the means and a schedule for achieving the minimum
capital requirements. In addition, Southern would not be able to receive
regulatory approval of any application that required consideration of capital
adequacy, such as a branch or merger application, unless it could demonstrate a
reasonable plan to meet the capital requirement within a reasonable period of
time. 13




---



##### Table of Contents



Dividends The ability of Southern to pay cash dividends depends entirely upon the
amount of dividends paid by its bank subsidiaries. Additionally, the Florida
Business Corporation Act provides that a Florida corporation may only pay
dividends if the dividend payment would not render the corporation insolvent or
unable to meet its obligations as they come due. Florida state banks are subject to regulatory restrictions on the payment
of dividends, including a prohibition of payment of dividends from the banks
capital without the prior approval of the Florida Office of Financial
Institutions and Securities Regulation and the FDIC. Except with such prior
approval, all dividends of any Florida bank must be paid out of retained net
profits from the current period and the previous two years, after deducting
expenses, including losses and bad debts. In addition, any Florida bank is
required to transfer at least 20% of its net income to surplus until its
surplus equals the amount of paid-in capital. Other Laws State usury laws and federal laws concerning interest rates limit the
amount of interest and various other charges collected or contracted by a bank.
The lending operations of Southern are subject to federal laws applicable to
credit transactions, such as the:  
    
    Federal Truth-In-Lending Act governing disclosures of credit
terms to consumer borrowers.  
    
    Community Reinvestment Act requiring financial institutions
to meet their obligations to provide for the total credit needs of
the communities they serve, including investing their assets in
loans to low and moderate-income borrowers.  
    
    Home Mortgage Disclosure Act requiring financial institutions
to provide information to enable public officials to determine
whether a financial institution is fulfilling its obligations to
meet the housing needs of the community it serves.  
    
    Equal Credit Opportunity Act prohibiting discrimination on
the basis of race, creed or other prohibited factors in extending
credit.  
    
    Fair Credit Reporting Act governing the manner in which
consumer debts may be collected.  
    
    The rules and regulations of various federal agencies charged
with the responsibility of implementing such federal laws. The deposit and certain other operations of Southern are also subject to
provisions of the following laws: 14




---



##### Table of Contents




    
    Right to Financial Privacy Act, which imposes a duty to
maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of
financial records.  
    
    Title V of the Gramm-Leach-Bliley Act of 1999 regarding
disclosure of customers nonpublic personal information, which
requires financial institutions to publish their policies concerning
disclosure of such information and give customers the opportunity to
opt out of unwanted disclosure.  
    
    Electronic Funds Transfer Act and Regulation E, issued by the
Federal Reserve to implement that act, which govern automatic
deposits to, and withdrawals from, deposit accounts and customers
rights and liabilities arising from the use of automated teller
machines and other electronic banking services. Interstate Banking and Branching Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, eligible bank holding companies in any state are permitted, with Federal
Reserve approval, to acquire banking organizations in any other state. As a
result, most of the limitations on interstate acquisitions of banking
organizations have been eliminated. The Interstate Banking and Branching
Efficiency Act also removed substantially all of the prohibitions on interstate
branching by banks. The authority of a bank to establish and operate branches
within a state continues to be subject to applicable state branching laws.
Subject to these laws, a bank operating in any state may now establish one or
more branches within any other state without the establishment of a separate
banking structure within the other state through the merger with an existing
bank in that state. Under current Florida law, Florida banks may open branch
offices without geographic restriction with the prior approval of the Florida
Office of Financial Institutions and Securities Regulation and the FDIC and, in
the case of interstate branches, subject to certain laws of the host state.
In addition, with prior regulatory approval, Southern will be able to acquire
existing banking operations in other states. Financial Modernization The Gramm-Leach-Bliley Act of 1999 modernized the federal bank regulatory
framework by allowing the consolidation of banking institutions with other
types of financial services firms, subject to various restrictions and
requirements. In general, the Gramm-Leach-Bliley Act repealed most of the
federal statutory barriers which separated commercial banking firms from
insurance and securities firms and authorized the consolidation of such firms
in a financial services holding company. Southern has no immediate plans to
utilize the structural options created by the Gramm-Leach-Bliley Act, but
Southern may develop such plans in the future. In the meantime, Southern
provides its customers with a range of financial products and services,
including various insurance products and securities brokerage services, through
cooperative arrangements with third-party vendors. 15




---



##### Table of Contents



USA Patriot Act On October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the USA Patriot Act). The USA Patriot Act is
intended to allow the federal government to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing and broadened anti-money laundering requirements. Title
III of the USA Patriot Act takes measures intended to encourage information
sharing among bank regulatory agencies and law enforcement bodies. Certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act. Among its provisions, the USA Patriot Act requires each financial
institution: (i) to establish an anti-money laundering program; (ii) to
establish due diligence policies, procedures and controls with respect to its
private banking accounts and correspondent banking accounts involving foreign
individuals and certain foreign banks; and (iii) to avoid establishing,
maintaining, administering, or managing correspondent accounts in the United
States for, or on behalf of, a foreign bank that does not have a physical
presence in any country. In addition, the USA Patriot Act contains a provision
encouraging cooperation among financial institutions, regulatory authorities
and law enforcement authorities with respect to individuals, entities and
organizations engaged in, or reasonably suspected of engaging in, terrorist
acts or money laundering activities. The federal banking agencies have begun
proposing and implementing regulations interpreting the USA Patriot Act. It is
not anticipated that the USA Patriot Act will have a significant impact on
Southerns financial condition or results of operations. Stock Dividend On August 6, 2001, Southern declared a 2-for-1 stock split in the form of
a 100% stock dividend. The dividend was issued to stockholders of record as of
October 19, 2001. As a result of the dividend, Southern issued 2,730,101
shares of common stock. All amounts in this Annual Report on Form 10-K have
been restated to reflect the stock dividend, except as otherwise noted. 16




---



##### Table of Contents



ITEM 2. DESCRIPTION OF PROPERTY Southerns principal executive office is located at 250 North Orange
Avenue, Orlando, Florida. Southern shares this office with the main office of
the Central Florida Bank. Southerns three bank subsidiaries currently operate
a total of 18 offices. In addition, Southern has two parcels of land for
future banking offices. The following table sets forth information regarding
each of the current branch locations. Bank
    
    Branch Location
    
    Lease/OwnedCentral Florida Bank
    
    Downtown Orlando
    
    LeasedCentral Florida Bank
    
    Altamonte Springs
    
    LeasedCentral Florida Bank
    
    Winter Park
    
    OwnedCentral Florida Bank
    
    Longwood
    
    LeasedCentral Florida Bank
    
    South Orlando
    
    OwnedCentral Florida Bank
    
    Lake Mary
    
    OwnedCentral Florida Bank
    
    Daytona Beach
    
    LeasedCentral Florida Bank
    
    Ormond Beach
    
    OwnedCentral Florida Bank
    
    Port Orange
    
    OwnedCentral Florida Bank
    
    Daytona Beach
    
    LeasedSouthwest Florida Bank
    
    Bonita Springs
    
    OwnedSouthwest Florida Bank
    
    Naples
    
    OwnedSouthwest Florida Bank
    
    Fort Myers
    
    OwnedSouth Florida Bank
    
    Boca Raton
    
    LeasedSouth Florida Bank
    
    Ft. Lauderdale
    
    LeasedSouth Florida Bank
    
    West Palm Beach
    
    LeasedSouth Florida Bank
    
    Palm Beach
    
    LeasedSouth Florida Bank
    
    Palm Beach Gardens
    
    Leased
 17




---



##### Table of Contents



Southerns branch at Bonita Springs, Florida is located on the site of a
former gas station at which leaking underground fuel storage tanks caused some
contamination of the subsurface groundwater. The Florida Department of
Environmental Protection has accepted this site for clean up under the states
remediation program and has reserved $250,000 to cover the estimated clean-up
costs. Due to the relatively low priority level of the site in the States
clean-up program, Southern cannot predict when the state will commence or
complete the clean-up of the site. Southern has received an environmental
engineering assessment of the contamination and the required remediation.
Based on this report, Southern believes that the clean-up of the site will not
disrupt Southerns proposed banking services at the site. 
 ITEM 3. LEGAL PROCEEDINGS From time to time, Southern is involved in litigation arising from the
ordinary course of its business, such as claims to collect past due loans. As
of the date of this report, Southern is not engaged in any material legal
proceedings. 
 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF SOUTHERN The following table sets forth certain information with respect to
Southerns executive officers. Name
    
    Age
    
    Principal Positions with SouthernDennis G. Bedley
    
    
    47
    
    
    Director of Southern and President of South Florida BankCharlie W. Brinkley, Jr.
    
    
    50
    
    
    Chairman of the Board and Chief Executive Officer of SouthernThomas H. Dargan, Jr.
    
    
    49
    
    
    Director of Southern and Chief Executive Officer of Central Florida BankSharyn E. Dickerson
    
    
    55
    
    
    Executive Vice President and Chief Information Officer of SouthernRichard L. Garner
    
    
    50
    
    
    Director of Southern and Chief Executive Officer of Southwest Florida
BankStephen R. Jeuck
    
    
    52
    
    
    Senior Vice President and Chief Financial Officer of SouthernJohn G. Squires
    
    
    57
    
    
    President and Director of SouthernJoel E. Whittenhall
    
    
    44
    
    
    Director of Southern and President of Southwest Florida Bank
 18




---



##### Table of Contents



Dennis G. Bedleyhas served as a director of Southern as well as president
of the South Florida Bank since August 2002. From March 2001 to August 2002,
he also served as the vice president of Southern, as well as the vice president
of the Central Florida Bank. From 1998 through March 2001, he was president of
Colonial Bank, West Palm Beach, Florida. From 1996 to 1998, he was a senior
banking executive for Capital Bank in Fort Lauderdale, Florida. Charlie W. Brinkley, Jr. has served as chairman of the board and chief
executive officer of Southern since its organization in 1999, and chairman of
the Central Florida Bank since 1999. He also serves as a director of the South
Florida Bank and Southwest Florida Bank. Mr. Brinkley was an organizing
director of Southern Bank of Central Florida and served as its only president
and chief executive officer from 1988 to 1996 when it was acquired by Colonial
Bank of Montgomery, Alabama. From 1996 until 1998, Mr. Brinkley continued to
serve as president of Colonial Bank, Florida region. Mr. Brinkley began his
banking career in the Orlando area in 1978 at ComBank of Casselberry, which was
acquired by Freedom Savings and Loan Association in 1983. Thomas H. Dargan, Jr. has served as a director Southern since 2001 and
served as Chief Executive Officer of the Central Florida Bank since August
2003. He served as president and chief executive officer of the Daytona Beach
Bank from its founding in 1998 through August 2003. He has 22 years of banking
experience in Florida, including 15 years in the Daytona Beach community. He
served as president and chief executive officer of Tomoka State Bank from 1994
until its sale in 1997 to Colonial Bank. Subsequent to the transaction, he
served as president for the Volusia area of Colonial Bank. Sharyn E. Dickersonhas served as executive vice president and chief
information officer of Southern since 2000 and of the Central Florida Bank
since 1999. She previously served as senior vice president and cashier of
Citrus Bank, Orlando, from 1997 to 1999. Before that, she served as senior
vice president and cashier of Southern Bank of Central Florida from 1988 to
1994 and as senior operations officer for the Florida region for Colonial Bank
from 1994 until 1997. Richard L. Garnerbecame a vice president of Southern in 2000 and became a
director in 2001 upon the opening of the Southwest Florida Bank, of which he is
chairman and chief executive officer. He previously served as president and
chief executive officer of First National Bank of Bonita Springs (subsequently
known as First National Bank of Florida) from 1994 until the acquisition of
that bank by The Colonial BancGroup, Montgomery, Alabama, in 1998. From 1998
until 1999, Mr. Garner served as regional president and CEO of Colonial Bank,
Southwest Florida region. Stephen R. Jeuckhas served as senior vice president and chief financial
officer of Southern since 2003. He has also served as the controller of the
Company since its organization in 1999, and as vice president and chief
financial officer of the Central Florida Bank since its organization in 1998.
From 1995 until 1997, Mr. Jeuck served as vice president and controller of
Southern Bank of Central Florida and Colonial Bank, Florida. John G. Squireshas served as president of Southern since its organization
in 1999. He served as chief executive officer of the Central Florida Bank from
its organization in 1998 to 2003. 19




---



##### Table of Contents



He also serves as a director of the Central Florida Bank, the South Florida
Bank and Southwest Florida Bank. Mr. Squires was also an organizing director
of Southern Bank of Central Florida in 1988 and served as its vice-chairman
until its acquisition by Colonial Bank in 1996. From 1996 until 1997, Mr.
Squires served as an executive vice president and director of Colonial Bank,
Florida region. Mr. Squires began his Florida banking career in 1978 as
president and director of ComBank of Casselberry which was acquired by Freedom
Savings and Loan Association in 1983. Joel E. Whittenhallhas served as a vice president of Southern since 2000
and as a director since 2001. He also has served as president, chief lending
officer and director of the Southwest Florida Bank since 2001. He previously
served as executive vice president and senior lending officer of First National
Bank of Florida (subsequently acquired by Colonial Bank) from 1994 to 1999. 20




---



##### Table of Contents



PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS Trading Information There is no established public trading market for Southerns common stock. Record Holders As of February 15, 2004, there were approximately 1,000 holders of record
of the Southerns common stock. Dividends As a holding company, Southern has no significant independent sources of
revenue. Its principal source of funds are cash dividends and other payments
that it receives from its bank subsidiaries. Southern expects that its bank
subsidiaries will retain most of their earnings in order to increase their
capital and only pay dividends to Southern to cover Southerns overhead
expenses. Southerns bank subsidiaries ability to pay dividends is restricted
under Federal and state banking law. As a result, Southern has never paid any
dividends and does not anticipate that it will do so in the foreseeable future. Private Sales of Securities During the fourth quarter of 2003, Southern issued 51,877 shares of its
common stock, pursuant to Section 4(2) of the Securities Act of 1933 (the
Securities Act) in the following transactions:  
    
    In November 2003, Southern issued 47,877 shares at a price of
$14 per share in connection with purchases made by beneficiaries
under Southerns 401(k) Plan.  
    
    In November and December 2003, Southern issued 4,000 shares
at $14 per share to two officers of Southern. 21




---



##### Table of Contents



Equity Compensation Plan Information The following table presents information regarding Southerns equity
compensation plans at December 31, 2003: Number of shares ofcommon stockNumber of shares of
    
    
    
    
    
    remaining availablecommon stock to be
    
    
    
    
    
    for future issuanceissued upon
    
    Weighted-average
    
    under equityexercise of
    
    exercise price of
    
    compensation plansoutstanding
    
    outstanding
    
    (excluding securitiesoptions, warrants
    
    options, warrants
    
    reflected in firstPlan Category
    
    and rights
    
    and rights
    
    column)Equity compensation
plans approved by
security holders
    
    937,190 shares
    
    $
    8.24
    
    
    1,434,560 sharesEquity compensation
plans not approved
by security holders
    
    133,250 shares (1)
    
    $
    8.32
    
    
    107,378 shares (2) (3)Total
    
    1,070,440 shares
    
    $
    8.25
    
    
    1,541,938 shares
   (1)
    
    This amount consists of options to purchase 133,250 shares issued by
Peninsula Bancorp, Inc. and assumed by Southern in connection with the
acquisition of Peninsula Bancorp in 2001.(2)
    
    This amount includes 50,000 shares which may be issued to Charlie W.
Brinkley, Southerns chairman and chief executive officer under an agreement
providing for restricted stock grants. The agreement provides that Mr.
Brinkley will be granted the right to receive 10,000 shares each year for a
period of 10 years, commencing on January 1, 1999 and on each January 1st
thereafter through the year 2008. Mr. Brinkley has previously received grants
of 50,000 shares under the agreement and all of these shares are fully vested.
The board will determine the level of all grants after year 2003 based on the
performance of Southern. These grants, if any, will vest ratably over a three
year period from the date of grant, with one third of such shares being vested
on each of the first, second and third anniversary of the date of grant. In
the event that a majority of Southerns outstanding shares are acquired in a
merger or other transaction, all shares issuable under the agreement will be
granted to Mr. Brinkley and become fully vested. If Mr. Brinkley is terminated
without cause, all of the shares granted to him will be fully vested. If Mr.
Brinkley is terminated for cause, Mr. Brinkley will forfeit his rights to all
unvested shares.(3)
    
    This amount includes 57,378 shares available for issuance under Southerns
employee stock purchase plan. Under the terms of the plan, Southern is
authorized to sell up to 100,000 shares to Southerns employees. Employees are
eligible to participate in the plan if they are full-time employees for at
least 90 consecutive days. The plan permits eligible employees to purchase
common stock through payroll deductions, which, subject to certain limitations,
may not exceed
10% of an employees compensation. The purchase price of each share of common
stock under the purchase plan will be equal to the fair market value of common
stock. In the event that an employee participating in the plan ceases to be a
Southern employee, Southern has the right to repurchase all or any portion of
the shares purchased by such employee under the plan at any time during the
following 24 months for a purchase price equal to the fair market value of the
stock at the time of such repurchase. The plan will terminate upon the earlier
of September 16, 2004, or the date on which all of the shares reserved under
the plan have been purchased, unless the board of directors terminates the plan
on an earlier date. 22




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial data as of
and for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, that have
been derived from, and are qualified by reference to, Southerns audited
financial statements. The information set forth below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements and
related notes thereto included elsewhere in this report. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Financial Condition Data($ in thousands, except per share amounts)Assets
    
    $
    899,249
    
    
    
    658,786
    
    
    
    449,127
    
    
    
    210,813
    
    
    
    83,864Securities
    
    
    112,429
    
    
    
    93,129
    
    
    
    41,472
    
    
    
    18,746
    
    
    
    11,998Loans, net
    
    
    718,969
    
    
    
    500,267
    
    
    
    352,161
    
    
    
    150,734
    
    
    
    61,363Deposits
    
    
    771,679
    
    
    
    593,417
    
    
    
    399,973
    
    
    
    182,225
    
    
    
    65,063Stockholders equity
    
    
    67,841
    
    
    
    58,099
    
    
    
    42,348
    
    
    
    26,351
    
    
    
    11,838Book value per share
    
    $
    9.52
    
    
    
    8.68
    
    
    
    7.76
    
    
    
    7.66
    
    
    
    6.69Number of full service customer
Facilities
    
    
    18
    
    
    
    14
    
    
    
    12
    
    
    
    5
    
    
    
    4
 23




---



##### Table of Contents



Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Operating Data($ in thousands, except per share amounts)Interest income
    
    $
    44,262
    
    
    
    33,470
    
    
    
    24,432
    
    
    
    12,512
    
    
    
    3,399Interest expense
    
    
    17,474
    
    
    
    15,072
    
    
    
    14,372
    
    
    
    6,201
    
    
    
    1,186Net interest income
    
    
    26,788
    
    
    
    18,398
    
    
    
    10,060
    
    
    
    6,311
    
    
    
    2,213Provision for loan losses
    
    
    3,206
    
    
    
    2,405
    
    
    
    2,351
    
    
    
    1,174
    
    
    
    609Net interest income after loan loss
Provision
    
    
    23,582
    
    
    
    15,993
    
    
    
    7,709
    
    
    
    5,137
    
    
    
    1,604Noninterest income
    
    
    4,821
    
    
    
    2,597
    
    
    
    1,854
    
    
    
    595
    
    
    
    116Noninterest expenses
    
    
    18,902
    
    
    
    15,112
    
    
    
    10,438
    
    
    
    5,033
    
    
    
    3,216Income taxes (benefit)
    
    
    3,380
    
    
    
    1,277
    
    
    
    (295
    )
    
    
    299
    
    
    
    (554
    )Net earnings (loss)
    
    
    6,121
    
    
    
    2,201
    
    
    
    (580
    )
    
    
    400
    
    
    
    (942
    )Basic earnings (loss) per share
    
    
    .88
    
    
    
    .36
    
    
    
    (.12
    )
    
    
    .20
    
    
    
    (.55
    )Diluted earnings (loss) per share
    
    
    .84
    
    
    
    .35
    
    
    
    (.12
    )
    
    
    .20
    
    
    
    (.55
    )Total shares outstanding at end
of period
    
    
    7,124,944
    
    
    
    6,693,064
    
    
    
    5,460,202
    
    
    
    3,440,196
    
    
    
    1,768,850Return on average assets
    
    
    .78
    %
    
    
    .39
    %
    
    
    (.17
    )%
    
    
    .28
    %
    
    
    (2.11
    %)Return on average equity
    
    
    9.77
    %
    
    
    .44
    %
    
    
    (1.60
    )%
    
    
    2.98
    %
    
    
    (7.74
    %)Average equity to average assets
    
    
    7.96
    %
    
    
    8.96
    %
    
    
    10.31
    %
    
    
    9.44
    %
    
    
    27.20
    %Dividend payout ratio
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 On October 19, 2001, Southern effected a 2 for 1 stock split. All amounts
set forth in the preceding table have been revised to reflect this stock split. 24




---



##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Southerns
consolidated financial statements and the related notes included elsewhere in
this report. Unless otherwise noted, all share amounts have been revised to
reflect Southerns two for one stock split which was effective on October 19,
2001. Average Balance Sheets The following tables set forth the information concerning the average
balance sheets and related interest and dividends and yield for Southern for
each of the last three fiscal years. 25




---



##### Table of Contents



Net Interest Income and Expense Year Ended December 31, 2003Average
    
    Interest &Balance
    
    Dividends
    
    Yield($ in Thousands)Loans
    
    $
    623,150
    
    
    
    40,313
    
    
    
    6.47
    %Securities
    
    
    107,706
    
    
    
    3,743
    
    
    
    3.48
    %Other interest-earning assets (1)
    
    
    15,741
    
    
    
    206
    
    
    
    1.31
    %Total interest-earnings assets
    
    
    746,597
    
    
    
    44,262
    
    
    
    5.93
    %Non interest-earning assets
    
    
    40,833Total assets
    
    
    787,430Savings and NOW deposits
    
    
    211,558
    
    
    
    3,833
    
    
    
    1.81
    %Money market deposits
    
    
    119,451
    
    
    
    2,360
    
    
    
    1.98
    %Time deposits
    
    
    284,463
    
    
    
    10,363
    
    
    
    3.64
    %Total interest-bearing deposits
    
    
    615,472
    
    
    
    16,556
    
    
    
    2.69
    %Other borrowings (4)
    
    
    37,393
    
    
    
    918
    
    
    
    2.46
    %Total interest-bearing liabilities
    
    
    652,865
    
    
    
    17,474
    
    
    
    2.68
    %Non-interest-bearing deposits
    
    
    67,082Non-interest-bearing liabilities
    
    
    4,804Stockholders equity
    
    
    62,679Total liabilities and equity
    
    $
    787,430Net interest income and spread (2)
    
    
    
    
    
    $
    26,788
    
    
    
    3.25
    %Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.59
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    1.14
   (1)
    
    Includes interest-earning deposits, federal funds sold and Federal Home
Loan Bank stock.(2)
    
    Represents the difference between average interest-earning assets and
average interest-bearing liabilities.(3)
    
    Represents net interest income divided by average interest-earning assets.(4)
    
    Includes advances from Federal Home Loan Bank, subordinated debentures
and other borrowings. 26




---



##### Table of Contents



Net Interest Income and Expense Year Ended December 31, 2002Average
    
    Interest &Balance
    
    Dividends
    
    Yield($ in Thousands)Loans
    
    $
    419,996
    
    
    
    29,993
    
    
    
    7.14
    %Securities
    
    
    58,009
    
    
    
    2,597
    
    
    
    4.48
    %Other interest-earning assets(1)
    
    
    48,625
    
    
    
    880
    
    
    
    1.81
    %Total interest-earnings assets
    
    
    526,630
    
    
    
    33,470
    
    
    
    6.36
    %Non interest-earning assets
    
    
    34,198Total assets
    
    $
    560,828Savings and NOW deposits
    
    
    138,221
    
    
    
    3,333
    
    
    
    2.41
    %Money market deposits
    
    
    75,404
    
    
    
    1,792
    
    
    
    2.38
    %Time deposits
    
    
    242,410
    
    
    
    9,921
    
    
    
    4.09
    %Total interest-bearing deposits
    
    
    456,035
    
    
    
    15,046
    
    
    
    3.30
    %Other borrowings
    
    
    2,127
    
    
    
    26
    
    
    
    1.22
    %Total interest-bearing liabilities
    
    
    458,162
    
    
    
    15,072
    
    
    
    3.29
    %Non-interest-bearing deposits
    
    
    49,058Non-interest-bearing liabilities
    
    
    3,384Stockholders equity
    
    
    50,224Total liabilities and equity
    
    $
    560,828Net interest income and spread(2)
    
    
    
    
    
    
    18,398
    
    
    
    3.07
    %Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    3.49
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    1.15
   (1)
    
    Includes interest-earning deposits, federal funds sold and Federal Home
Loan Bank stock.(2)
    
    Represents the difference between average interest-earning assets and
average interest-bearing liabilities.(3)
    
    Represents net interest income divided by average interest-earning assets. 27




---



##### Table of Contents



Net Interest Income and Expense Year Ended December 31, 2001Average
    
    Interest &Balance
    
    Dividends
    
    Yield($ in Thousands)Loans
    
    $
    257,432
    
    
    
    21,455
    
    
    
    8.33
    %Securities
    
    
    25,439
    
    
    
    1,404
    
    
    
    5.52
    %Other interest-earning assets(1)
    
    
    40,744
    
    
    
    1,573
    
    
    
    3.86
    %Total interest-earnings assets
    
    
    323,615
    
    
    
    24,432
    
    
    
    7.55
    %Non interest-earning assets
    
    
    27,263Total assets
    
    $
    350,878Savings and NOW deposits
    
    
    101,299
    
    
    
    4,908
    
    
    
    4.85
    %Money market deposits
    
    
    29,516
    
    
    
    994
    
    
    
    3.37
    %Time deposits
    
    
    146,272
    
    
    
    8,437
    
    
    
    5.77
    %Total interest-bearing deposits
    
    
    277,087
    
    
    
    14,339
    
    
    
    5.17
    %Other borrowings
    
    
    1,184
    
    
    
    33
    
    
    
    2.79
    %Total interest-bearing liabilities
    
    
    278,271
    
    
    
    14,372
    
    
    
    5.16
    %Non-interest-bearing deposits
    
    
    34,195Non-interest-bearing liabilities
    
    
    2,246Stockholders equity
    
    
    36,166Total liabilities and equity
    
    $
    350,878Net interest income and spread(2)
    
    
    
    
    
    
    10,060
    
    
    
    2.39
    %Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    3.11
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    1.16
   (1)
    
    Includes interest-earning deposits, federal funds sold and Federal Home
Loan Bank stock.(2)
    
    Represents the difference between average interest-earning assets and
average interest-bearing liabilities.(3)
    
    Represents net interest income divided by average interest-earning assets. 28




---



##### Table of Contents



Rate/Volume Analysis The following table sets forth certain information regarding changes in
interest income and interest expense of Southern for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by prior volume), (2) changes in volume (change in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume). Year Ended December 31, 2003 vs. 2002Increase (Decrease) Due to Changes in:Rate
    
    Rate/Volume
    
    Volume
    
    Total(In thousands)Interest earning Assets:Loans
    
    $
    (2,822
    )
    
    
    (1,366
    )
    
    
    14,508
    
    
    
    10,320Securities
    
    
    (581
    )
    
    
    (498
    )
    
    
    2,225
    
    
    
    1,146Other interest-earning assets
    
    
    (244
    )
    
    
    165
    
    
    
    (595
    )
    
    
    (674
    )Total interest income
    
    
    (3,647
    )
    
    
    (1,699
    )
    
    
    16,138
    
    
    
    10,792Interest-bearing liabilities:Deposits:Savings and NOW deposits
    
    
    (829
    )
    
    
    (439
    )
    
    
    1,768
    
    
    
    500Money market deposits
    
    
    (302
    )
    
    
    (177
    )
    
    
    1,047
    
    
    
    568Time deposits
    
    
    (1,090
    )
    
    
    (189
    )
    
    
    1,721
    
    
    
    442Other borrowings
    
    
    26
    
    
    
    435
    
    
    
    431
    
    
    
    892Total interest expense
    
    
    (2,195
    )
    
    
    (370
    )
    
    
    4,967
    
    
    
    2,402Net change in net interest income
    
    $
    (1,452
    )
    
    
    (1,329
    )
    
    
    11,171
    
    
    
    8,390
 Year Ended December 31, 2002 vs. 2001Increase (Decrease) Due to Changes in:Rate
    
    Rate/Volume
    
    Volume
    
    Total(In thousands)Interest earning Assets:Loans
    
    $
    (3,071
    )
    
    
    13,548
    
    
    
    (1,939
    )
    
    
    8,538Securities
    
    
    (265
    )
    
    
    1,798
    
    
    
    (340
    )
    
    
    1,193Other interest-earning assets
    
    
    (836
    )
    
    
    304
    
    
    
    (161
    )
    
    
    (693
    )Total interest income
    
    
    (4,172
    )
    
    
    15,650
    
    
    
    (2,440
    )
    
    
    9,038Interest-bearing liabilities:Deposits:Savings and NOW deposits
    
    
    (2,465
    )
    
    
    1,789
    
    
    
    (899
    )
    
    
    (1,575
    )Money market deposits
    
    
    (293
    )
    
    
    1,545
    
    
    
    (454
    )
    
    
    798Time deposits
    
    
    (2,450
    )
    
    
    5,545
    
    
    
    (1,611
    )
    
    
    1,484Other borrowings
    
    
    (19
    )
    
    
    26
    
    
    
    (14
    )
    
    
    (7
    )Total interest expense
    
    
    (5,227
    )
    
    
    8,905
    
    
    
    (2,978
    )
    
    
    700Net change in net interest income
    
    $
    1,055
    
    
    
    6,745
    
    
    
    538
    
    
    
    8,338
 29




---



##### Table of Contents



Results of Operations for the Years Ended December 31, 2003 and 2002 Southern had net earnings of $6.1 million for the year ended December 31,
2003 compared to net earnings of $2.2 million for the year ended December 31,
2002. Earnings before income taxes in 2003 were $9.5 million compared to $3.5
million in 2002. The improvement in earnings was primarily due to a
substantial increase in net interest income, which grew from $18.4 million in
2002 to $26.8 million in 2003. The increase in net interest income was
principally a result of the growth of Southerns assets and an improvement in
Southerns net interest margin. Southern also benefited from higher service
charges and fees, as well as a $1.0 million gain from the sale of the Daytona
Beach Bank charter. These items more than offset increases in non-interest
expenses, such as salaries and occupancy costs. Net Interest Income.Southerns operating results depend primarily on
Southerns net interest income, which is the difference between interest income
on interest-earning assets and interest expense on interest-bearing
liabilities, consisting primarily of deposits. Net interest income is
determined by the difference between yields earned on interest-earning assets
and rates paid on interest-bearing liabilities (interest-rate spread) and the
relative amounts of interest-earning assets and interest-bearing liabilities.
Southerns interest-rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. In addition, Southerns net earnings are also affected by the level of
non-performing loans and foreclosed assets, as well as the level of its
non-interest income, and its non-interest expenses, such as salaries and
employee benefits and occupancy expense and income taxes. Interest Income and Expense.Interest income for the year ended December
31, 2003 was $44.3 million compared to $33.5 million for the year ended
December 31, 2002. The growth in interest income primarily reflects the growth
in Southerns assets, which grew from $658.8 million at December 31, 2002 to
$899.2 million at December 31, 2003, or approximately 36%. The impact of this
growth was partially offset by a decrease in the average yield earned on
interest-earning assets. During the same period, net loans grew from $500.3
million to $719.0 million, or approximately 44%. The increase in assets and
loans is attributable to the growth of all of Southerns business, particularly
the South Florida Bank which commenced operations in August 2002. Southerns
growth has been supported by the opening of 2 new branches in 2002 and 4 new
branches in 2003. Interest expense increased from $15.1 million for 2002 to $17.5 million
for 2003. Interest expense on deposits was $16.6 million for 2003, compared to
$15.0 million for 2002. The increase in interest expense is primarily due to
higher level of deposits which were used to support the growth in loans. The
deposit growth was attributable to higher deposits at all of Southerns banks,
particularly the South Florida Bank. The increase in interest expense was
largely offset by a decrease in the average cost of deposits. Interest expense on other borrowings was $918,000 for 2003 compared to
$26,000 for 2002. These borrowings included $13.0 million in subordinated
debentures issued by the Central Florida Bank to increase its regulatory
capital and approximately $30.5 million borrowed from the Federal Home Loan
Bank to fund the purchase of investment securities. 30




---



##### Table of Contents



Southerns net interest margin increased from approximately 3.49% for 2002
to approximately 3.59% for 2003. The improvement in the net interest margin
was primarily due to the increase in the level of Southerns loans relative to
Southerns other assets. This shift had a positive impact on the net interest
margin because loans are Southerns highest interest earning asset category.
The net interest margin also improved because Southern reallocated a portion of
its liquid assets (such as cash and cash equivalents) into investment
securities, which have higher yields. Provision for Loan Losses.The provision for loan losses totaled $3.2
million for the year ended December 31, 2003 and $2.4 million in 2002. The
amount of the provision for 2003 reflects the growth in Southerns loan
portfolio. See Allowance and Provision for Loan Losses below. Non-Interest Income.Non-interest income totaled $4.8 million for the
year ended December 31, 2003 compared to $2.6 million for the year ended
December 31, 2002. Non-interest income consists of service charges on deposit
accounts, income from Southerns mortgage origination business (which was
discontinued in September 2003), income from Southerns insurance agency and
other fees and income. Customer service charges on deposit accounts totaled
$811,000 in 2003, up from $624,000 in 2002, due to an increase in the average
number of deposit accounts. The income from Southerns mortgage origination
business was $382,000 in 2003, compared to $148,000 in 2002. The income from
Southerns insurance agency was $226,000 in 2003, up from $148,000 in 2002.
Southern had a gain on sale of securities available for sale of $403,000 in
2003, compared to $120,000 in 2002. Southern also had a gain of $1.0 million
in 2003 from the sale of charter of the Daytona Beach Bank and $250,000 from
the liquidation of the Mortgage Company. Non-Interest Expenses.Non-interest expenses for the year ended December
31, 2003 totaled $18.9 million, up from $15.1 million for the year ended
December 31, 2002, and was comprised of the following:  
    
    Salaries and employee benefits in 2003 totaled $9.7 million, or 51% of
total non-interest expenses, and $8.0 million or 53% in 2002. The increase was
attributable to the hiring of additional employees for Southerns new branches
and the South Florida Bank, together with salary increases and higher benefit
costs.  
    
    Occupancy and equipment expense in 2003 totaled $3.7 million or 20% of
total non-interest expenses, and $3.0 million or 20% in 2002. This increase
reflects the opening of new branches.  
    
    Other non-interest expenses in 2003 totaled $5.4 million or 29% of total
non-interest expenses, and $4.1 million or 27% in 2002. Other non-interest
expenses included data processing, printing and office supplies, marketing and
advertising, professional fees and other expenses. The increase in these
amounts was primarily due to the opening of additional branches and the overall
growth of Southern. Income Taxes.Income taxes totaled $3.4 million for 2003 (effective rate
of 35.6%) and $1.3 million in 2002 (effective rate of 36.7%). 31




---



##### Table of Contents



Results of Operations for the Years Ended December 31, 2002 and 2001 Southern had net earnings of $2.2 million for the year ended December 31,
2002 compared to net loss of $580,000 for the year ended December 31, 2001. Earnings before income taxes in 2002 were $3,478,000 compared to a loss of
$875,000 in 2001. The improvement in earnings was primarily due to a
substantial increase in net interest income, which grew from $10.1 million in
2001 to $18.4 million in 2002. As discussed below, the increase in net
interest income was principally a result of an improvement in Southerns net
interest margin and the growth in its assets. These items more than offset
increases in non-interest expenses, such as salaries and occupancy costs.
Southerns net earnings in 2002 were also reduced due to losses incurred in the
start up of the South Florida Bank. Interest Income and Expense.Interest income for the year ended December
31, 2002 was $33.5 million compared to $24.4 million for the year ended
December 31, 2001. The growth in interest income primarily reflects the growth
in Southerns assets, which grew from $449.1 million at December 31, 2001 to
$658.8 million at December 31, 2002, or approximately 46.7%. The impact of
this growth was partially offset by a decrease in the average yield earned on
interest-earning assets. During the same period, net loans grew from $352.2
million to $500.3 million, or approximately 42.0%. The increase in assets and
loans is primarily attributable to the growth of Southerns business in
southeast Florida. Interest expense was $15.1 million for the year ended December 31, 2002,
compared to $14.4 million for the year ended December 31, 2001. The increase
in interest expense is primarily due to the higher level of deposits which were
used to support the growth in loans. Most of the deposit growth was
attributable to Southerns new operations in southeast Florida. The increase
in interest expense was largely offset by a decrease in the average cost of
deposits. Southerns net interest margin increased from approximately 3.11% for 2001
to approximately 3.49% for 2002. The positive change in the net interest
margin was due in part to the repricing of certain relatively high priced
deposits at the end of December 2001. Southern had utilized these deposits in
2000 and 2001 to attract funds to support growth and liquidity. Due to the
sharp decline in market interest rates in the first nine months of 2001, these
deposits adversely impacted Southerns net interest margin during 2001.
Southerns net interest margin improved after December 31, 2001, when these
deposits were repriced to market rates. The net interest margin was also
positively impacted by higher levels of loans relative to other interest
earning assets and by the decrease in interest rates in the economy, which
reduced the yields paid by Southern on its other deposits and interest bearing
liabilities more rapidly than the rates earned on Southerns loans and
investment securities. Provision for Loan Losses.The provision for loan losses totaled
$2,405,000 for the year ended December 31, 2002 and $2,351,000 in 2001. The
amount of the provision for 2002 reflects the growth in Southerns loan
portfolio and the establishment of a new reserve at Southerns new South
Florida Bank. 32




---



##### Table of Contents



Non-Interest Income.Non-interest income totaled $2.6 million for the
year ended December 31, 2002 compared to $1.9 million for the year ended
December 31, 2001. Non-interest income consists of service charges on deposit
accounts, income from Southerns mortgage origination business, income from
Southerns insurance agency and other fees and income. Customer service
charges on deposit accounts totaled $624,000 in 2002, up from $372,000 in 2001,
due to an increase in the average number of deposit accounts. The income from
Southerns mortgage origination business was $167,000 in 2002, up from $69,000
in 2001. The income from Southerns insurance agency was $148,000 in 2002, up
from $109,000 in 2001. Southern had a gain on sale of securities available for
sale of $120,000 in 2002, compared to $642,000 in 2001. Earnings on bank owned
life insurance totaled $204,000 in 2002, compared to $166,000 in 2001. Non-Interest Expenses.Non-interest expenses for the year ended December
31, 2002 totaled $15.1 million, up from $10.4 million for the year ended
December 31, 2001, and was comprised of the following:  
    
    Salaries and employee benefits in 2002 totaled $8.0 million, or 53% of
total non-interest expenses, and $5.3 million or 51% in 2001. The increase was
attributable to the hiring of additional employees for Southerns new branches
and the South Florida Bank, together with salary increases and higher benefit
costs.  
    
    Occupancy and equipment expense in 2002 totaled $3.0 million or 20% of
total non-interest expenses, and $1.9 million or 18% in 2001. This increase
reflects the opening of new branches and the commencement of operations of the
South Florida Bank.  
    
    Preopening expenses of $133,000 in both 2002 and 2001 consisted of
organizational and preopening expenses associated with the new South Florida
Bank.  
    
    Other non-interest expenses in 2002 totaled $4.0 million or 26% of total
non-interest expenses, and $3.1 million or 29% in 2001. Other non-interest
expenses included data processing, printing and office supplies, marketing and
advertising, professional fees and other expenses. The increase in these
amounts was primarily due to the opening of additional branches, organizational
expense associated with the new South Florida Bank and the overall growth of
Southern. Income Taxes (Benefit).Income taxes (benefit) totaled $1.3 million for
2002 (effective rate of 36.7%) and $(295,000) in 2001 (effective rate of
33.7%). Capital Expenditures Southerns capital expenditures are reviewed by its board of directors.
Southern makes capital expenditures in order to expand its business and to
improve Southerns ability to provide quality services to its customers.
Capital expenditures equaled $2.6 million in 2003, and $3.9 million for the
year ended December 31, 2002. These expenditures were related to the purchase
of real property as branch locations, and the purchase of leasehold
improvements and furniture and equipment purchased for new banking facilities
opened during 2003 and 2002. The expenses in 2002 are primarily related to the
cost of construction of Southerns new offices in Lake Mary, Florida and
furnishing of other branches. The expense in 2003 primarily related to the new
branches 33




---



##### Table of Contents



in Palm Beach and West Palm Beach, Florida. Southern currently expects to have
$3.6 million in capital expenditures in 2004. Asset Quality and Credit Risk Securities.Southern maintains a high quality investment portfolio,
including U.S. government agencies, mortgage-backed securities and municipal
bonds. Southern believes that these securities have very little risk of
default. At December 31, 2003 and 2002, all of the securities held in the
investment portfolio were rated A or better. All but one of these securities
were classified available for sale. A rating of A or better means that the
bonds are of upper medium grade, with strong ability to repay, possibly with
some susceptibility to adverse economic conditions or changing circumstances.
Ratings are assigned by independent rating agencies and are subject to the
accuracy of reported information concerning the issuers and the subjective
judgment and analysis of the rating agencies. They are not a guarantee of
collectability. At December 31, 2003, approximately 24% of these securities (not including
mortgage-backed securities) were scheduled to mature in five years or less
compared with 67% at December 31, 2002. As such, Southern is subject
fluctuations in market value due to changes in the general level of interest
rates. The following table sets forth information regarding the composition and
carrying amounts of the investment portfolio at December 31, 2003, 2002 and
2001 (in thousands): 2003
    
    2002
    
    2001Securities of U.S. Government
agencies and corporations
    
    $
    44,075
    
    
    
    31,261
    
    
    
    41,472Mortgage-backed securities
    
    
    61,552
    
    
    
    61,609
    
    
    
    Municipal bonds
    
    
    6,802
    
    
    
    259
    
    
    
    Total Securities
    
    $
    112,429
    
    
    
    93,129
    
    
    
    41,472
 Southerns investment securities increased significantly in 2003 due to
Southerns decision to reallocate other liquid assets (such as cash and cash
equivalents) into higher yielding investment securities. Investment securities
also increased because Southern purchased investment securities from the
proceeds of additional borrowings from the Federal Home Loan Bank. Loans.Southern maintains a high quality portfolio of real estate,
commercial and consumer loans. All loans over individual lending limits are
reviewed and approved by Southerns loan committee, which ensures that loans
comply with applicable credit standards. In most cases, Southern requires
collateral from borrowers. The type and amount of collateral varies, but may
include residential or commercial real estate, deposits held by financial
institutions, U.S. Treasury securities, other marketable securities and
personal property. Southerns monitors collateral values to ensure that they
are maintained at proper levels. 34




---



##### Table of Contents



At December 31, 2003, approximately $583.2 million or 79.8% of Southerns
loans were real estate loans secured by real estate in central and south
Florida. This percentage increased from 74.4% at December 31, 2002. This
level of concentration could present a potential credit risk because the
ultimate collectability of these loans is susceptible to adverse changes in
real estate market conditions in these markets. Southern seeks to address this
risk by limiting most loans to a maximum of 75% of the appraised value of the
underlying real estate and maximum amortization schedules of 20 years with
maturity dates not exceeding 5 years. The following table divides Southerns loan portfolio into five
categories. Most of the loans are short-term and may be renewed or rolled over
at their maturity. At that time, Southern undertakes a complete review of the
borrowers credit worthiness and the value of any collateral. If these items
are satisfactory, Southern will generally renew the loan at prevailing interest
rates. In addition to outstanding loans, Southern enters into legally binding
commitments to extend credit, letters of credit and unused line of credit.
These commitments totaled $249.2 million at December 31, 2003, and $159.7
million at December 31, 2002. Types of Loans At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands)Commercial
    
    $
    127,914
    
    
    
    117,586
    
    
    
    88,088
    
    
    
    35,030
    
    
    
    19,123Commercial real estate
    
    
    269,165
    
    
    
    208,622
    
    
    
    113,805
    
    
    
    40,224
    
    
    
    19,346Residential real estate
    
    
    72,252
    
    
    
    49,029
    
    
    
    27,171
    
    
    
    11,070
    
    
    
    4,273Construction
    
    
    241,828
    
    
    
    121,153
    
    
    
    118,177
    
    
    
    62,520
    
    
    
    15,746Consumer and other
    
    
    19,356
    
    
    
    12,437
    
    
    
    11,629
    
    
    
    4,700
    
    
    
    3,536Total loans
    
    
    730,515
    
    
    
    508,827
    
    
    
    358,870
    
    
    
    153,544
    
    
    
    62,024Less:Allowance for loan losses
    
    
    (8,883
    )
    
    
    (6,262
    )
    
    
    (4,457
    )
    
    
    (1,795
    )
    
    
    (621
    )Net deferred loan fees
    
    
    (2,663
    )
    
    
    (2,298
    )
    
    
    (2,252
    )
    
    
    (1,015
    )
    
    
    (40
    )Loans, net
    
    $
    718,969
    
    
    
    500,267
    
    
    
    352,161
    
    
    
    150,734
    
    
    
    61,363
 The following table sets forth information regarding the maturities of
Southerns loans. For purposes of the table, demand loans are shown as being
payable in one year or less. The entire amount of a balloon loan is treated as
maturing in the year that the balloon payment is due. Maturities of Loans Based on Contractual Principal Repayments At December 31, 2003One Year
    
    Over One to
    
    Over FiveTotal Loans:
    
    or Less
    
    Five Years
    
    Years
    
    Total(in thousands)Commercial
    
    $
    34,558
    
    
    
    72,354
    
    
    
    21,002
    
    
    
    127,914Commercial real estate.
    
    
    71,287
    
    
    
    154,557
    
    
    
    43,321
    
    
    
    269,165Residential real estate
    
    
    21,130
    
    
    
    38,282
    
    
    
    12,840
    
    
    
    72,252Construction
    
    
    65,363
    
    
    
    136,744
    
    
    
    39,721
    
    
    
    241,828Consumer and other
    
    
    5,134
    
    
    
    11,102
    
    
    
    3,120
    
    
    
    19,356Total
    
    $
    197,472
    
    
    
    413,039
    
    
    
    120,004
    
    
    
    730,515
 35




---



##### Table of Contents



Of the $533.0 million in loans due after one year, approximately 17% have
fixed interest rates and 83% have adjustable rates. Commercial Loans. Southern makes commercial loans to businesses located
in its target markets. The credit risk associated with business lending is
influenced by general economic conditions, deterioration in a borrowers
capital position resulting in increasing debt to equity ratios, deterioration
in a borrowers cash position resulting in a liquidity problem, and decreasing
revenues due to inefficient operations of the borrower. These loans are
generally secured by corporate assets, marketable securities or other liquid
financial instruments. These loans totaled $127.9 million or 17.5% of total
loans at December 31, 2003 and $117.6 million or 23.1% of total loans at
December 31, 2002. The growth in commercial loans was primarily due to new
loans originated in southeast Florida. Real Estate Loans. Southerns real estate loans totaled $583.2 million or
79.8% of total loans at December 31, 2003, and $378.8 million or 74.4% of total
loans at December 31, 2002. Southern makes real estate loans secured by commercial real estate,
including loans to acquire or refinance office buildings, warehouses and
apartments. These loans totaled $269.2 million or 36.8% of total loans at
December 31, 2003 and $208.6 million or 41.0% of total loans at December 31,
2002. Most of these loans have a maturity of five years or less. At December
31, 2003 and 2002, almost all of these loans were collateralized by real
property located in central and south Florida. These loans generally require a
loan-to-collateral value of not more than 75%. The growth in commercial real
estate loans was primarily due to new loans originated in southeast Florida.
Risks associated with commercial real estate mortgage loans include reliability
of appraisals, deterioration of market values, environmental contamination, and
accelerated depreciation of property due to deferred maintenance. Residential real estate loans totaled $72.3 million or 9.9% of total loans
at December 31, 2003 and $49.0 million, or 9.6% of total loans at December 31,
2002. Residential real estate loans are predominately adjustable rate home
mortgages which generally require a loan-to-collateral value of not more than
90% and equity credit lines which generally limit the loan-to-collateral value
to not more than 90%. Most loans have a maximum term of five years. At
December 31, 2002, almost all of the residential real estate loans were
collateralized by residences in central and south Florida. Risks associated
with residential real estate mortgage loans include reliability of appraisals,
deterioration of market values, environmental contamination, and accelerated
depreciation of property due to deferred maintenance. Construction loans totaled $241.8 million or 33.1% of loans at December
31, 2003 compared to $121.2 million or 23.8% of loans at December 31, 2002.
The growth in construction loans was attributable to strong demand in
Southerns primary markets and interest rates that continue to favor new
development. Southern primarily makes construction loans on property located
in central and south Florida. Risks associated with construction loans include
the solvency of both the builder and the property owner during the construction
period and the reliability of commitments for permanent
financing at the completion of construction, in addition to the real
estate-related risks present with both commercial and residential real estate
loans described above. At December 31, 2003, almost all construction loans
were collateralized by property in central and south Florida. 36




---



##### Table of Contents



Consumer Loans and Other. Southern offers consumer loans and personal and
secured loans. The security for these loans ordinarily consists of
automobiles, consumer goods, marketable securities, certificates of deposit and
similar items. These loans totaled $19.4 million or 2.7% of total loans at
December 31, 2003 and $12.4 million or 2.5% of total loans at December 31,
2002. Risks associated with customer loans include loss of employment of
borrowers, declines in the financial condition of borrowers resulting in
delinquencies, and rapid depreciation of loan collateral. Non-Performing Assets and Past Due Loans Non-performing assets consist of non-accrual loans and properties or
assets acquired in partial or total satisfaction of problem loans which are
known as foreclosed assets. Past due loans are loans that are delinquent 30
days or more which are still accruing interest. Southerns credit review and approval process is critical to its ability
to minimize non-performing assets on a long-term basis. In addition to the
negative impact on interest income, non-performing assets also increase
operating costs due to the expense of collection efforts. It is Southerns
policy to place all loans which are past due 90 days or more on non-accrual
status, subject to exceptions made on a case by case basis. Southern had $1.7 million in loans which were nonperforming (nonaccrual)
at December 31, 2003, or 0.24% of total loans. Southern also had $133,000 in
accruing loans which were past due more than 90 days on December 31, 2003.
Southern had $3.2 million in loans which were nonperforming (nonaccrual) at
December 31, 2002, or 0.62% of total loans. Southern also had $126,000 in
accruing loans which were past due more that 90 days on December 31, 2002. Non-performing loans at December 31, 2003 principally consisted of
commercial and residential real estate loans. Southern believes that its
non-performing loans are generally well secured and are unlikely to result in
any material losses. The following table sets forth certain information regarding nonaccrual
loans and foreclosed assets, including the ratio of such loans and foreclosed
assets to total assets as of the dates indicated: Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999($in thousands)Nonperforming (nonaccrual) loans:Residential real estate loans
    
    $
    98
    
    
    
    1,189
    
    
    
    888
    
    
    
    
    
    
    
    Commercial real estate
    
    
    1,580
    
    
    
    1,749
    
    
    
    1,699
    
    
    
    2,014
    
    
    
    Commercial loans
    
    
    47
    
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans and other
    
    
    12
    
    
    
    9
    
    
    
    1
    
    
    
    
    
    
    
    Total nonperforming (nonaccrual) loans
    
    
    1,737
    
    
    
    3,154
    
    
    
    2,588
    
    
    
    2,014
    
    
    
    Foreclosed assets:Assets acquired by foreclosure or deed in
lieu of foreclosure
    
    
    1,066
    
    
    
    302
    
    
    
    907
    
    
    
    
    
    
    
    Total nonperforming loans (nonaccrual)
and foreclosed assets
    
    $
    2,803
    
    
    
    3,456
    
    
    
    3,495
    
    
    
    2,014
    
    
    
    Total nonperforming(nonaccrual) loans to
total assets
    
    
    .19
    %
    
    
    .48
    %
    
    
    .58
    %
    
    
    .96
    %
    
    
    
    %Total nonperforming (nonaccrual) and
Foreclosed assets to total assets
    
    
    .31
    %
    
    
    .52
    %
    
    
    .78
    %
    
    
    .96
    %
    
    
    
    %
 37




---



##### Table of Contents



To date, Southern has incurred only a modest level of loan losses,
primarily due to its short operating history. Southern expects that its level
of loan losses will increase in the future as Southerns loan portfolio
matures. However, Southern believes that its allowance for loan losses will be
sufficient to absorb these loan losses.

Allowance and Provision for Loan Losses

Southern evaluates the adequacy of its allowance for loan losses as part
of Southerns on-going credit review and approval process. The review process
is intended to identify, as early as possible, customers who may be facing
financial difficulties. Once identified, the extent of the clients financial
difficulty is carefully monitored by Southerns credit administrator, who
recommends to the directors loan committee the portion of any credit that
needs a specific reserve allocation or should be charged off. Other factors
considered by the loan committee in evaluating the adequacy of the allowance
include overall loan volume, historical net loan loss experience, the level and
composition of nonaccrual and past due loans, local economic conditions, and
value of any collateral. From time to time, specific amounts of the reserve
are designated for certain loans in connection with the loan review officers
analysis of the adequacy of the allowance for loan losses.

While a portion of this allowance is typically intended to cover specific
loan losses, it is considered a general reserve which is available for all
credit-related purposes. The allowance is not a precise amount, but is derived
based upon the above factors and represents managements best estimate of the
amount necessary to adequately cover probable losses from current credit
exposures. The provision for loan losses is a charge against current earnings
and is determined by management as the amount needed to maintain an adequate
allowance.

Southern believes that the overall credit quality of its loan portfolio is
strong, as evidenced by the fact that it has had only $1.9 million and $3.3
million in nonaccrual and accruing loans past due more than ninety days at
December 31, 2003 and 2002, respectively. To date, Southern has sought to
maintain its allowance for loan losses in excess of 1% of total loans. At
December 31, 2003, its allowance was $8.9 million or 1.22% of total loans and
$6.3 million or 1.23% of total loans at December 31, 2002.

Interest income that would have been recorded under the original terms of
nonaccrual loans and the interest income actually recognized are summarized
below: Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)Interest income that would have been recognized
    
    $
    130
    
    
    
    223
    
    
    
    326
    
    
    
    117
    
    
    
    Interest income recognized
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (22
    )
    
    
    Interest foregone
    
    $
    130
    
    
    
    223
    
    
    
    246
    
    
    
    95
    
    
    
    
 38




---



##### Table of Contents



The following table sets forth information with respect to activity of
Southerns allowance for loan losses for the periods indicated: Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999($ In thousands)Average loans outstanding, net
    
    $
    623,150
    
    
    
    419,996
    
    
    
    257,432
    
    
    
    105,566
    
    
    
    26,915Allowance at beginning of year
    
    
    6,262
    
    
    
    4,457
    
    
    
    1,795
    
    
    
    621
    
    
    
    12Allowance acquired upon merger or acquisition
    
    
    50
    
    
    
    
    
    
    
    537
    
    
    
    
    
    
    
    Charge-offs:Commercial loans
    
    
    (190
    )
    
    
    (469
    )
    
    
    (99
    )
    
    
    
    
    
    
    Commercial real estate loans
    
    
    (199
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction loans
    
    
    (210
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    (66
    )
    
    
    (94
    )
    
    
    (25
    )
    
    
    
    
    
    
    Residential loans
    
    
    
    
    
    
    (64
    )
    
    
    (102
    )
    
    
    
    
    
    
    Total loans charged-off
    
    
    (665
    )
    
    
    (627
    )
    
    
    (226
    )
    
    
    
    
    
    
    Recoveries
    
    
    30
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    (635
    )
    
    
    (600
    )
    
    
    (226
    )
    
    
    
    
    
    
    Provision for loan losses charged to
operating expenses
    
    
    3,206
    
    
    
    2,405
    
    
    
    2,351
    
    
    
    1,174
    
    
    
    609Allowance at end of year
    
    $
    8,883
    
    
    
    6,262
    
    
    
    4,457
    
    
    
    1,795
    
    
    
    621Percentage of net charge-offs to average
loans outstanding
    
    
    .10
    %
    
    
    .14
    %
    
    
    0.09
    %
    
    
    
    %
    
    
    
    %Allowance as a percent of total loans
at end of year
    
    
    1.22
    %
    
    
    1.23
    %
    
    
    1.24
    %
    
    
    1.17
    %
    
    
    1.00
    %Total loans at end of year
    
    $
    730,515
    
    
    
    508,827
    
    
    
    358,870
    
    
    
    153,544
    
    
    
    62,024
 39




---



##### Table of Contents



The following table further summarizes the allocation of the allowance for
loan losses by type of loan at December 31, 2003, 2002, 2001, 2000 and 1999. Allocation of Allowance for Loan Losses December 31, 2003
    
    December 31, 2002
    
    December 31, 2001
    
    December 31, 2000
    
    December 31, 1999% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofAmount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans($ in thousands)Commercial
    
    $
    2,656
    
    
    
    17.5
    %
    
    $
    1,252
    
    
    
    23.1
    %
    
    $
    881
    
    
    
    24.5
    %
    
    
    
    
    
    $
    293
    
    
    
    22.8
    %
    
    $
    191
    
    
    
    30.8
    %Commercial
real estate
    
    
    2,042
    
    
    
    36.8
    
    
    
    2,675
    
    
    
    41.0
    
    
    
    1,138
    
    
    
    31.7
    
    
    
    
    
    
    
    462
    
    
    
    26.2
    
    
    
    165
    
    
    
    31.2Real estate -
construction
    
    
    1,793
    
    
    
    33.1
    
    
    
    1,290
    
    
    
    23.8
    
    
    
    1,182
    
    
    
    33.0
    
    
    
    
    
    
    
    481
    
    
    
    40.7
    
    
    
    132
    
    
    
    25.4Residential real
estate
    
    
    490
    
    
    
    9.9
    
    
    
    612
    
    
    
    9.6
    
    
    
    136
    
    
    
    7.6
    
    
    
    
    
    
    
    55
    
    
    
    7.2
    
    
    
    32
    
    
    
    6.9Consumer loans and
Other
    
    
    607
    
    
    
    2.7
    
    
    
    248
    
    
    
    2.5
    
    
    
    233
    
    
    
    3.2
    
    
    
    
    
    
    
    99
    
    
    
    3.1
    
    
    
    71
    
    
    
    5.7Unallocated general
reserves
    
    
    1,295
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    887
    
    
    
    
    
    
    
    
    
    
    
    405
    
    
    
    
    
    
    
    30
    
    
    
    Total allowance for
loan
Losses
    
    $
    8,883
    
    
    
    100.0
    %
    
    $
    6,262
    
    
    
    100.0
    %
    
    $
    4,457
    
    
    
    100.0
    %
    
    
    
    
    
    $
    1,795
    
    
    
    100.0
    %
    
    $
    621
    
    
    
    100.0
    %
 The following table displays loan originations by type of loan and
principal reductions during the years ended December 31, 2003, 2002, 2001, 2000
and 1999. Loan Originations and Principal Reductions Year Ended December 31,2003
    
    2002
    
    2001
    
    20000
    
    1999(In thousands)Originations:Commercial loans
    
    
    127,565
    
    
    
    108,579
    
    
    
    69,845
    
    
    
    42,702
    
    
    
    27,708Commercial real estate
    
    
    263,148
    
    
    
    193,616
    
    
    
    82,720
    
    
    
    49,034
    
    
    
    28,563Residential real estate loans
    
    
    77,997
    
    
    
    45,696
    
    
    
    21,666
    
    
    
    13,495
    
    
    
    5,712Construction
    
    
    241,280
    
    
    
    112,710
    
    
    
    109,066
    
    
    
    76,213
    
    
    
    22,850Consumer loans and other
    
    
    18,952
    
    
    
    11,849
    
    
    
    6,640
    
    
    
    5,729
    
    
    
    5,128Total loans originated
    
    
    728,942
    
    
    
    472,450
    
    
    
    289,937
    
    
    
    187,173
    
    
    
    89,961Acquired with merger or branch acquisition
    
    
    3,996
    
    
    
    
    
    
    
    43,277
    
    
    
    
    
    
    
    Principal reductions
    
    
    (511,250
    )
    
    
    (322,493
    )
    
    
    (127,888
    )
    
    
    (95,653
    )
    
    
    (29,151
    )Increase in gross loans
    
    
    221,688
    
    
    
    149,957
    
    
    
    205,326
    
    
    
    91,520
    
    
    
    60,810
 40




---



##### Table of Contents



Southerns Financial Condition Southerns goal is to maintain a high quality and liquid balance sheet.
Southern seeks to achieve this objective through a high quality portfolio of
investment securities with short to medium term maturities, and a high quality
portfolio of real estate, commercial and consumer loans. Cash and Cash Equivalents. Southern had cash and cash equivalents of
$30.4 million at December 31, 2003, compared to $35.7 million at December 31,
2002. This decrease was primarily the result of Southerns strategy to expand
its loan portfolio and redeploy excess cash into investment securities. Securities. In 2003, securities averaged $107.7 million or 14.4% of total
earning assets, as compared to $58.0 million, or 11.0% in 2002. Southerns
strategy for its investment account is to maintain a high quality portfolio
with generally short to medium term maturities. Securities were $112.4 million
at December 31, 2003, and $93.1 million at December 31, 2002. This increase
was largely attributable to Southerns efforts to invest excess cash and cash
equivalents into higher yielding securities. Southern is seeking to reduce its
level of securities through loan growth. The following tables set forth
information regarding the investment portfolio at December 31, 2003 ($ in
thousands): Remaining Maturity and Average Yield of Investment Securities
December 31, 2003 Less than
    
    One to Five
    
    
    
    
    
    
    
    
    
    More thanOne Year
    
    Years
    
    Five to Ten Years
    
    Ten Years
    
    TotalCarrying
    
    
    
    
    
    Carrying
    
    
    
    
    
    Carrying
    
    
    
    
    
    Carrying
    
    
    
    
    
    CarryingValue
    
    Yield
    
    Value
    
    Yield
    
    Value
    
    Yield
    
    Value
    
    Yield
    
    Value
    
    YieldSecurities of U.S.
government
agencies
and corporations
    
    $
    1,006
    
    
    
    5.50
    %
    
    $
    9,477
    
    
    
    4.32
    %
    
    $
    22,805
    
    
    
    4.44
    %
    
    $
    10,787
    
    
    
    3.57
    %
    
    
    44,075
    
    
    
    4.46
    %Municipal bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,058
    
    
    
    3.26
    
    
    
    5,744
    
    
    
    4.23
    
    
    
    6,802
    
    
    
    3.75
    %Mortgage-backed
Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,552
    
    
    
    5.25
    %Total
    
    $
    1,006
    
    
    
    5.50
    %
    
    $
    9,477
    
    
    
    4.32
    %
    
    $
    23,863
    
    
    
    4.39
    %
    
    $
    16,531
    
    
    
    3.74
    %
    
    $
    112,429
    
    
    
    4.85
    %
 Loans. Loans averaged $623.2 million in 2003 and $420.0 million in 2002.
Net loans grew from $352.2 million at December 31, 2001, to $500.3 million at
December 31, 2002 and to $719.0 million at December 31, 2003. Interest-Bearing Liabilities. Interest-bearing liabilities primarily
consist of deposits and federal funds purchased. Total interest-bearing
liabilities increased from $400.0 million at December 31, 2001, to $535.5
million at December 31, 2002 and $747.0 million at December 31, 2003. Total
interest-bearing liabilities averaged $652.9 million in 2003 and $458.2 million
in 2002. The growth in Southerns deposits reflects Southerns marketing
efforts to obtain deposits in southeast Florida for the South Florida Bank and
the opening of additional branches. 41




---



##### Table of Contents



Advances from the Federal Home Loan Bank and other borrowings increased
$37.0 million, to $38.4 million at December 31, 2003, from $1.4 million at
December 31, 2002. Southern utilized these funds to purchase investment
securities which had a higher current yield than the interest payable on the
borrowed funds and to fund loan growth. The Federal Home Loan Bank borrowings
bear interest at rates of 2.26% to 2.66% per year. These loans are secured by
a pledge of the mortgage-backed securities purchased with the proceeds, and are
payable in monthly installments including principal and interest over a 5 year
period with final maturities in April and May, 2008. Other borrowings also
included $7.9 million in overnight Federal funds and bank repurchase
transactions at December 31, 2003, up from $1.4 million at December 31, 2002.
These borrowings, at an average interest rate of approximately 1.17%, are
utilized by Southern as needed to manage its liquidity position as efficiently
as possible. During 2003, the Central Florida Bank also borrowed $13.0 million through
the issuance of subordinated debentures. These debentures bear interest at a
floating rate equal to the prime rate, with a minimum of 5.0% per year and a
maximum of 12.0% per year. Interest only is payable semiannually. The
principal amount of the debentures and all accrued interest is due in full in
2011. Subject to required reductions during the last 5 years prior to
maturity, the debentures qualify as Tier 2 capital of the Central Florida Bank. The following table sets forth information regarding Southerns average
deposits for 2003, 2002 and 2001. Average Deposits 2003
    
    2002
    
    2001Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageAmount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate($ in thousands)Demand
depositsnon-interest
bearing
    
    $
    67,082
    
    
    
    
    %
    
    $
    49,058
    
    
    
    
    %
    
    $
    34,195
    
    
    
    
    %Savings and NOW accounts
    
    
    211,558
    
    
    
    1.81
    %
    
    
    138,221
    
    
    
    2.41
    %
    
    
    101,299
    
    
    
    4.85
    %Money market accounts
    
    
    119,451
    
    
    
    1.98
    %
    
    
    75,404
    
    
    
    2.38
    %
    
    
    29,516
    
    
    
    3.37
    %Time deposits
    
    
    284,463
    
    
    
    3.64
    %
    
    
    242,410
    
    
    
    4.09
    %
    
    
    146,272
    
    
    
    5.77
    %Total deposits
    
    $
    682,554
    
    
    
    2.43
    %
    
    $
    505,093
    
    
    
    2.98
    %
    
    $
    311,282
    
    
    
    4.61
    %
 The following table summarizes the maturity of time deposits over $100,000
at December 31, 2003. Summary of Time Deposits over $100,000 by Maturity
(in thousands) December 31, 2003Three months or less
    
    $
    27,882Three to Six months
    
    
    19,026Six to Twelve months
    
    
    38,053Over Twelve months
    
    
    72,068Total
    
    $
    157,029
 42




---



##### Table of Contents



The following table sets forth the net deposit flows during the year ended
December 31, 2003, 2002 and 2001: Net Deposit Flows
(in thousands) December 31,2003
    
    2002
    
    2001Net increase before
interest credited
    
    $
    163,489
    
    
    
    178,257
    
    
    
    206,552Net credited
    
    
    14,773
    
    
    
    15,187
    
    
    
    11,196Net deposit increase
    
    $
    178,262
    
    
    
    193,444
    
    
    
    217,748
 Liquidity and Rate Sensitivity The principal functions of asset and liability management are to provide
for adequate liquidity, to manage interest rate exposure by maintaining a
prudent relationship between rate sensitive assets and liabilities and to
manage the size and composition of the balance sheet so as to maximize net
interest income. Liquidity is the ability to provide funds at minimal cost to meet
fluctuating deposit withdrawals or loan demand. These demands are met by
maturing assets and the capacity to raise funds from internal and external
sources. Southern primarily utilizes cash and federal funds sold to meet its
liquidity needs. Although not utilized in managing daily liquidity needs, the
sale of investment securities provides a secondary source of liquidity. Fluctuating interest rates, increased competition and changes in the
regulatory environment continue to significantly affect the importance of
interest-rate sensitivity management. Rate sensitivity arises when interest
rates on assets change in a different period of time or a different proportion
than that of interest rates on liabilities. The primary objective of
interest-rate sensitivity management is to prudently structure the balance
sheet so that movements of interest rates on assets and liabilities are highly
correlated and produce a reasonable net interest margin even in periods of
volatile interest rates. Regular monitoring of assets and liabilities that are rate sensitive
within 30 days, 90 days and one year is an integral part of Southerns
rate-sensitivity management process. It is Southerns policy to maintain a
reasonable balance of rate-sensitive assets and liabilities on a cumulative
one-year basis, thus minimizing net interest income exposure to changes in
interest rates. A ratio of 1.0 represents perfect matching of interest-earning
assets and interest-bearing liabilities. Southerns sensitivity position at
December 31, 2001, 2002 and 2003 was such that net interest income would
increase modestly if there were an increase in short-term interest rates. Southern monitors the interest rate risk sensitivity with traditional gap
measurements. The gap table has certain limitations in its ability to
accurately portray interest sensitivity; however, it does provide a static
reading of Southerns interest rate risk exposure. 43




---



##### Table of Contents



The following tables show the repricing structure of Southerns balance
sheet at December 31, 2003, 2002 and 2001 with each maturity interval referring
to the earliest repricing opportunity for each asset and liability. The
earliest repricing opportunity is the earlier of scheduled contractual
maturities or the next reset date. Liability sensitive means interest
sensitive liabilities subject to repricing exceeded interest sensitive assets
subject to repricing on a 365-day basis. Southern was liability sensitive to
the extent of $100.7 million and $37.9 million at December 31, 2003 and 2002,
respectively. This negative gap at December 31, 2003 and 2002 was 11.2% and
5.8%, respectively of total assets. Southerns target gap position is in the
range of negative 20% to positive 20%. Southern measures its gap position as a
percentage of its total assets. The change in Southerns gap position reflects
a shift in deposits, particularly certificates of deposits to shorter
maturities as well as increase in savings and NOW deposits. While the absolute level of gap is a measurement of interest rate risk,
the quality of the assets and liabilities in the balance sheet must be analyzed
in order to understand the degree of interest rate risk taken by Southern.
Southern does not invest in any derivative products in order to manage or hedge
its interest rate risk. 44




---



##### Table of Contents



Interest Rate Sensitivity & Gap ReportDecember 31, 2003
($ in Thousands) 3 Mos.
    
    3 Mos.
    
    Over 1 Yr.
    
    Over 3 Yrs. toor less
    
    to Yr.
    
    to 3 Yrs.
    
    5Yrs.
    
    Over 5 Yrs.
    
    TotalAssets:Loans (1)
    
    $
    423,766
    
    
    
    35,035
    
    
    
    194,215
    
    
    
    54,968
    
    
    
    22,531
    
    
    
    730,515Securities
    
    
    5,866
    
    
    
    10,306
    
    
    
    17,409
    
    
    
    17,513
    
    
    
    61,335
    
    
    
    112,429Other interest-earning
Assets (2)
    
    
    17,226
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,226Total interest-earning assets
    
    $
    446,858
    
    
    
    45,341
    
    
    
    211,624
    
    
    
    72,481
    
    
    
    83,866
    
    
    
    860,170Interest-bearing liabilities:Savings and NOW Deposits(3)
    
    
    284,955
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    284,955Money-market deposits (3)
    
    
    117,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117,586Time deposits (3)
    
    
    59,602
    
    
    
    102,803
    
    
    
    128,339
    
    
    
    2,271
    
    
    
    
    
    
    
    293,015Advances from Federal Home
Loan Bank
    
    
    1,750
    
    
    
    5,250
    
    
    
    14,000
    
    
    
    9,500
    
    
    
    
    
    
    
    30,500Subordinated debentures
    
    
    13,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000Other borrowings
    
    
    7,923
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,923Total interest-bearing
Liabilities
    
    
    484,816
    
    
    
    108,053
    
    
    
    142,339
    
    
    
    11,771
    
    
    
    
    
    
    
    746,979GAP
    
    
    (37,958
    )
    
    
    (62,712
    )
    
    
    69,285
    
    
    
    60,710
    
    
    
    83,866
    
    
    
    113,191Cumulative GAP
    
    
    (37,958
    )
    
    
    (100,670
    )
    
    
    (31,385
    )
    
    
    29,325
    
    
    
    113,191Ratio of interest-earning
assets to interest-bearing
liabilities
    
    
    .92
    
    
    
    .42
    
    
    
    1.49
    
    
    
    6.16
    
    
    
    N/A
    
    
    
    1.15Cumulative ratio of
interest-earning assets to
interest-bearing liabilities
    
    
    .92
    
    
    
    .83
    
    
    
    .96
    
    
    
    1.04
    
    
    
    1.15Cumulative GAP to total
assets
    
    
    (4.2
    )%
    
    
    (11.2
    )%
    
    
    (3.5
    )%
    
    
    3.3
    %
    
    
    12.6
    %
 Notes to Preceding Table   (1)
    
    In preparing the above table, adjustable-rate loans are included in the
period in which the interest rates are next scheduled to adjust rather
than in the period in which the loans mature. Fixed-rate loans are
scheduled, including repayment, according to their maturities.(2)
    
    Includes interest-earning deposits and federal funds sold, which reprice
daily and Federal Home Loan Bank Stock, which reprices quarterly.(3)
    
    Savings, NOW and money-market deposits are regarded as readily accessible
withdrawable accounts. Time deposits are scheduled according to their
respective maturity dates. 45




---



##### Table of Contents



Capital One of Southerns primary objectives is to maintain a strong capital
position to merit the confidence of customers, bank regulators and
shareholders. A strong capital position helps Southern to withstand unforeseen
adverse developments and to take advantage of attractive lending and investment
opportunities when they raise. Southerns tier one capital was 7.96% and the total capital was 10.53% of
risk-based assets at December 31, 2003. These risk-based capital ratios were
well in excess of the minimum requirements of 4.0% for tier one and 8.0% for
total risk-based capital ratios. Southerns leverage ratio (tier one capital
to total average quarterly assets) of 7.72% at December 31, 2003, was also in
excess of the minimum 4.0% requirement. Southerns goal is to increase the capital of its banks so that each of
them is well capitalized under applicable federal banking regulations. At
December 31, 2003, all of the banks had achieved this objective. During 2003, Southern sold 323,253 shares of its common stock at a price
of $14.00 per share in a private placement transaction. Southern received
gross proceeds of $4.5 million from this offering. Southern contributed $4.0
million of this amount to increase the capital of the Southwest Florida Bank,
which will utilize the funds for general working capital purposes, including
making loans and purchasing investment securities. The balance was retained by
Southerns holding company for general working capital purposes. During the second half of 2003, the Central Florida Bank issued $13.0
million of subordinated debentures to institutional investors. The Central
Florida Bank utilized the proceeds from the sale of the debentures for general
working capital purposes, including making loans and purchasing investment
securities. Southern anticipates that it will need to continue to increase its capital
in order to maintain its planned growth. Southern intends to increase its
capital through a combination of earnings from operations, loans from third
parties and the sale of securities. In this connection, Southern intends to
establish a revolving line of credit with SunTrust Bank N.A., in the amount of
$5.0 million. Amounts advanced under the line will bear interest at LIBOR plus
1.85%, with interest payable quarterly, and the entire balance due 364 days
after closing. 46




---



##### Table of Contents



The following table sets forth Southerns required and actual capital
amounts and percentages at December 31, 2002 and 2003 ($ in thousands): December 31, 2002Actual
    
    RequiredAmount
    
    %
    
    Amount
    
    %Tier 1 Capital(to Risk-Weighted
Assets)
    
    $
    56,172
    
    
    
    9.57
    %
    
    $
    23,475
    
    
    
    4.0
    %Total Capital(to Risk-Weighted
Assets)
    
    $
    62,434
    
    
    
    10.64
    %
    
    $
    46,949
    
    
    
    8.0
    %Tier 1 Capital(to Total Assets)
    
    $
    56,172
    
    
    
    8.71
    %
    
    $
    25,796
    
    
    
    4.0
    %
 December 31, 2003Actual
    
    RequiredAmount
    
    %
    
    Amount
    
    %Tier 1 Capital(to Risk-Weighted
Assets)
    
    $
    68,009
    
    
    
    7.96
    %
    
    $
    34,162
    
    
    
    4.0
    %Total Capital(to Risk-Weighted
Assets)
    
    $
    89,891
    
    
    
    10.53
    %
    
    $
    68,324
    
    
    
    8.0
    %Tier 1 Capital(to Total Assets)
    
    $
    68,009
    
    
    
    7.72
    %
    
    $
    35,235
    
    
    
    4.0
    %
 Unrealized Loss on Securities Available for Sale Due to the combined effects of the growth in Southerns available for sale
investment securities and the rise in long-term interest rates during the
second half of 2003, Southerns comprehensive income for 2003 was reduced by
$3.2 million as a result of the unrealized loss in the market value of its
investment securities that are available for sale, compared to an unrealized
gain of $1.3 million in the value of the securities portfolio during 2002. The
net change in unrealized income attributable to the portfolio is a function of
both the growth of $19.5 million, or 21.7%, in the volume of Southerns
securities available for sale, including primarily U.S. government agency and
mortgage-backed securities, and the decline in market value of those securities
resulting from rising long-term interest rates in the third quarter. As a
result of this change, which would affect Southerns net income only in the
event of the sale of these securities, Southerns accumulated other
comprehensive income was $957,000 at December 31, 2002, compared to a loss of
$1,138,000 at December 31, 2003. 47




---



##### Table of Contents



Sale of Daytona Beach Bank Charter In August 2003, the Daytona Beach Bank transferred substantially all of
its assets to the Central Florida Bank. In consideration for the transfer of
the assets, the Central Florida Bank assumed all of the liabilities of the
Daytona Beach Bank and paid the Daytona Beach Bank a cash amount equal to the
difference between the book value of the transferred assets and the assumed
liabilities. The Central Florida Bank also hired all of the former employees
of the Daytona Beach Bank. Since that time, the Central Florida Bank has
continued to operate all of the facilities of the Daytona Beach Bank. At the same time as the asset transfer, Southern entered into an agreement
with an unaffiliated bank based outside of Florida to acquire the Daytona Beach
Bank corporate shell and its charter. This transaction was completed
immediately following the transfer of the Daytona Beach Banks assets and
liabilities to the Central Florida Bank. In consideration for this
transaction, the purchaser paid Southern an amount equal to the capital
accounts of the Daytona Beach Bank at the time of the merger and a premium of
$1.0 million. The purchaser acquired the Daytona Beach Bank in order to be
able to establish branch offices in Florida. Southern recorded a $1.0 million
pretax gain from this transaction. Except for the receipt of the $1.0 million
premium from the purchaser, the transaction did not affect Southerns
consolidated assets, liabilities or stockholders equity. Dissolution of Mortgage Company In 2001, the Central Florida Bank and an unaffiliated company, American
Heritage Mortgage Affiliates, Inc. (American Heritage Affiliates), formed
Southern Community Banc Mortgage, LLC (the Mortgage Company), to originate
residential mortgage loans for customers of the Central Florida Bank and
others. The Central Florida Bank and American Heritage Affiliates each held
50% in the Mortgage Company. American Heritage Affiliates, through an
agreement with its parent company, American Heritage Mortgage Corporation
(American Heritage Mortgage), provided the staffing and administrative
services required for the operations of the Mortgage Company. In the fall of
2003, American Heritage Mortgage was acquired by another unaffiliated company,
First Horizon Home Loan Corporation (First Horizon). In connection with its
acquisition of American Heritage Mortgage, First Horizon agreed to pay $500,000
to American Heritage Affiliates if the Mortgage Company were dissolved, with
$250,000 to be paid to the Central Florida Bank upon dissolution of the
Mortgage Company. The dissolution of the Mortgage Company was completed in
November 2003. Since the dissolution of the Mortgage Company, the Central
Florida Bank has originated residential mortgage loans for its customers
directly. Branch Activities On July 14, 2003, the South Florida Bank opened a branch office in leased
facilities in Palm Beach, Florida. In July, 2003, the South Florida Bank also
purchased a site in West Palm Beach where it intends to construct a new branch
facility. The purchase price for the West Palm Beach branch site was $1.2
million. Pending construction of the planned permanent facility, the West Palm
Beach branch will operate from an adjacent leased facility. Construction of
the permanent facility is expected to be completed in mid-2005 at a cost of
approximately $800,000. On June 14, 2003, the 48




---



##### Table of Contents



South Florida Bank entered into a lease agreement for a proposed branch office
to be located on PGA Boulevard in Palm Beach Gardens, Florida. The PGA branch
office opened in January 2004. Purchase of Bank Branch. In December 2003, the Southwest Florida Bank
purchased a branch of Harris Bank, N.A. located in Ft. Myers, Florida. As part
of the transaction, the Southwest Florida Bank acquired $4.0 million in loans
and $1.3 million in premises and equipment. The Southwest Florida Bank paid
for branch assets by assuming $4.9 million in deposits and making a cash
payment of $450,000. Impact of Inflation and Changing Prices The financial statements and related data presented in this report have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars,
without considering changes in the relative purchasing power of money over time
due to inflation. Unlike most industrial companies, substantially all of
Southerns assets and liabilities of are monetary in nature. As a result,
interest rates have a more significant impact on Southerns performance than
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services, since such prices are affected by inflation to a larger extent than
interest rates. Future Accounting Requirements Recent Pronouncements.In November 2002, the Financial Accounting
Standards Board (the FASB) issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others(FIN 45), which expands previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 requires the Company to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for
initial recognition and measurement of the liability is applied on a
prospective basis to guarantees issued or modified after December 31, 2002.
The adoption of FIN 45 did not have a material effect on Southerns
consolidated financial statements. In January 2003, the FASB issued (Revised in December 2003) FASB
Interpretation No. 46 Consolidation of Variable Interest Entities(FIN 46)
which addresses consolidation by business enterprises of variable interest
entities. FIN 46 applies to variable interest entities created after January
31, 2003. The Company has no variable interest entities, therefore FIN 46 had
no effect on Southerns consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.SFAS No. 146 provides guidance on
the recognition and measurement of liabilities for costs associated with exit
or disposal activities. SFAS No. 146 is effective for exit and disposal
activities that are initiated after December 31, 2002. The adoption of this
Statement had no effect on Southerns consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities.This Statement amends and
clarifies financial accounting and 49




---



##### Table of Contents



reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities.This Statement is effective for contracts
entered into or modified after June 30, 2003. The adoption of this Statement
had no effect on Southerns consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of this
Statement had no effect on Southerns consolidated financial statements. Critical Accounting Policies Southerns consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the U.S. (see Summary of
Significant Accounting Policies in Southerns consolidated financial
statements). Southern believes that of its significant accounting policies,
those described below involve a high degree of judgment and complexity. These
critical accounting policies require estimates and assumptions that affect the
amounts of assets, liabilities, revenues and expenses reported in the
consolidated financial statements. Due to their nature, estimates involve
judgment based upon available information. Actual results or amounts could
differ from estimates and the difference could have a material impact on the
consolidated financial statements. Therefore, understanding these policies is
important in understanding the reported results of operations and the financial
position of Southern. Loan Portfolio.A variety of factors impact the carrying value of
Southerns loan portfolio, including the calculation of the allowance for loan
losses, valuation of underlying collateral, the timing of loan charge-offs and
the amount and amortization of loan fees and deferred origination costs. Southern believes that the determination of the allowance for loan losses
represents a critical accounting policy. The allowance for loan losses is
maintained at a level management considers to be adequate to absorb probable
loan losses inherent in the portfolio, based on evaluations of the
collectibility and historical loss experience of loans. Credit losses are
charged and recoveries are credited to the allowance. Provisions for loan
losses are based on Southerns review of the historical loan loss experience
and such factors which, in managements judgment, deserve consideration under
existing economic conditions in estimating probable credit losses. The
allowance is based on ongoing assessments of the probable estimated losses
inherent in the loan portfolio. Southerns methodology for assessing the
appropriate allowance level consists of several key elements described below. Large commercial loans that exhibit probable or observed credit weaknesses
are subject to individual review. Where appropriate, reserves are allocated to
individual loans based on Southerns estimate of the borrowers ability to
repay the loan given the availability of collateral, other sources 50




---



##### Table of Contents



of cash flows, and available legal options. Included in the review of
individual loans are those that are impaired as provided in Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan as amended. Any specific reserves for impaired loans are measured
based on the fair market value of the underlying collateral. Southern
evaluates the collectibility of both principal and interest when assessing the
need for a special reserve. Historical loss rates are applied to other
commercial loans not subject to specific reserve allocations. Homogenous loans, such as installment and residential mortgage loans, are
not individually reviewed by management. Reserves are established for each
pool of loans based on the expected net charge-offs. Loss rates are based on
the average net charge-off history by loan category. Historical loss rates for commercial and consumer loans may be adjusted
for significant factors that, in managements judgment, reflect the impact of
any current conditions or loss recognition. Factors which management considers
in the analysis include the effects of the local economy, trends in the nature
and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans),
changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and Southerns
internal credit review function. An unallocated reserve is maintained to recognize the imprecision in
estimating and measuring loss when evaluating reserves for individual loans or
pools of loans. Specific reserves on individual loans and historical loss rates are
reviewed throughout the year and adjusted as necessary based on changing
borrower and collateral conditions and actual collection and charge-off
experience. Based on the procedures discussed above, management believes that
allowance for loan losses was adequate to absorb estimated loan losses
associated with the loan portfolio at December 31, 2003. Actual results could
differ from these estimates. However, since the allowance is affected by
managements judgment and uncertainties, there is the likelihood that
materially different amounts would be reported under different conditions or
assumptions. To the extent that the economy changes, collateral values change,
reserve factors change, or the nature and volume of problem loans change,
Southern may need to adjust its provision for loan losses. Material additions
to Southerns provision for loan losses would result in a decrease in net
earnings and capital. The allowance for loan losses is also discussed in Note 3 to Southerns
consolidated financial statements. The significant accounting policies are
discussed generally in Note 1 to Southerns consolidated financial statements. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations Southern is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, unused lines
of credit and construction loans and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amounts recognized in the consolidated balance sheet.
The contract or notional 51




---



##### Table of Contents



amounts of those instruments reflect the extent of Southerns involvement
in particular classes of financial instruments. Southerns exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
unused lines of credit and construction loans and standby letters of credit is
represented by the contractual amount of those instruments. Southern uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed-expiration dates or other termination clauses
and may require payment of a fee. Since certain commitments expire without
being drawn upon, the total committed amounts do not necessarily represent
future cash requirements. Southern evaluates each customers credit worthiness
on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by Southern upon extension of credit, is based on managements credit
evaluation of the counter party. Standby letters of credit are conditional commitments issued by Southern
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. The following is a summary of Southerns contractual obligations,
including certain on-balance sheet obligations, at December 31, 2003 (in
thousands): Payments Due by PeriodLess
    
    
    
    
    
    
    
    
    
    MoreThan 1
    
    1-3
    
    3-5
    
    Than 5Contractual Obligations
    
    Total
    
    Year
    
    Years
    
    Years
    
    YearsFederal Home Loan Bank advances
    
    $
    30,500
    
    
    
    7,000
    
    
    
    14,000
    
    
    
    9,500
    
    
    
    Subordinated debentures
    
    
    13,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000Other borrowings
    
    
    7,923
    
    
    
    7,923
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    7,874
    
    
    
    1,339
    
    
    
    2,678
    
    
    
    2,056
    
    
    
    1,801Loan commitments
    
    
    72,716
    
    
    
    72,716
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    7,164
    
    
    
    7,164
    
    
    
    
    
    
    
    
    
    
    
    Undisbursed construction and line of
credit loans
    
    
    169,319
    
    
    
    169,319
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    308,496
    
    
    
    265,461
    
    
    
    16,678
    
    
    
    11,556
    
    
    
    14,801
 52




---



##### Table of Contents



ITEM 7A QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and
rates. Southerns market risk arises primarily from interest rate risk
inherent in Southerns lending and deposit taking activities. Southern has
little or no risk related to trading accounts, commodities or foreign exchange. Southern actively monitors and manages its interest rate risk exposure.
The primary objective in managing interest-rate risk is to limit, within
established guidelines, the adverse impact of changes in interest rates on its
net interest income and capital, while adjusting its asset-liability structure
to obtain the maximum yield-cost spread on that structure. Management relies
primarily on its asset-liability structure to control interest rate risk.
However, a sudden and substantial increase in interest rates could adversely
impact Southerns earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto and filed as part of this Form 10-K are Southerns
consolidated financial statements required by Regulation S-K. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 
 ITEM 9A CONTROLS AND PROCEDURES Southern maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that Southern files or
submits under the Securities Exchange Act of 1934, is recorded, processed,
summarized and reported within the time period specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation of
those controls and procedures as of December 31, 2003, the Chief Executive
Officer and Chief Financial Officer of Southern concluded that Southerns
disclosure controls and procedures were adequate. 53




---



##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information required by Item 10 regarding executive officers is set forth
at the end of the Part I of this Annual Report on Form 10-K. Information set forth in the 2004 Proxy Statement under the caption
Directors is incorporated by reference. 
 ITEM 11. EXECUTIVE COMPENSATION The information set forth in the 2004 Proxy Statement under the caption
Executive Compensation is incorporated by reference. 
 ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption Principal Shareholders and
Security Ownership of Management in the 2004 Proxy Statement is incorporated
by reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption Transactions with Management
and Others in the 2004 Proxy Statement is incorporated by reference. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information set forth under the caption Ratification of Appointment
of Independent Accountants in the 2004 Proxy Statement is incorporated by
reference. 54




---



##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page(A)
    
    Financial Statements and SchedulesIndependent Auditors Report.Consolidated Balance Sheets as of
December 31, 2003 and 2002.Consolidated Statements of
Operations for the years ended
December 31, 2003, 2002 and 2001.Consolidated Statements of Stockholders Equity for the
years ended December 31, 2003, 2002 and 2001.Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001.Notes to Consolidated Financial Statements 
December 31, 2003 and 2002 for Each of the Years in the
Three-Year Period Ended December 31, 2003.(B)
    
    Reports on Form 8-KNot applicable(C)
    
    Exhibits
 3.1
    
    Articles of Incorporation, as
amended, of Registrant. (a)3.2
    
    Bylaws of Registrant. (a)4.1
    
    Specimen Common Stock Certificate
of Registrant. (a)10.1
    
    Employees Incentive Stock
Option Plan of Registrant. (a)10.2
    
    Directors Statutory Stock
Option Plan of Registrant. (a)10.3
    
    Amended and Restated Employee Stock
Purchase Plan of Registrant. (a)10.4
    
    Salary Continuation Agreement between the Registrant and
Charlie W. Brinkley, Jr. dated February 23, 1999.(a)10.5
    
    Salary Continuation Agreement between the Registrant and John
G. Squires dated February 23, 1999. (a)10.6
    
    Salary Continuation Agreement between the Registrant and
Dennis Bedley dated February 26, 2003. (d)10.7
    
    Salary Continuation Agreement between the Registrant and
Richard Garner dated July 11, 2003. (d)
 55




---



##### Table of Contents



10.8
    
    Salary Continuation Agreement between the Registrant and Joel
Whittenhall dated July 11, 2003. (d)10.9
    
    Lease Agreement dated April 22, 1998 between Marx Realty and
Improvement Co., Inc. and Registrant.(a)10.10
    
    Lease Agreement dated November 30, 1998 between Patrick J.
Armstrong and Registrant. (a)10.11
    
    Restricted Stock Agreement made effective as of January 1,
1999 between the Registrant and Charlie W. Brinkley, Jr. (a)10.12
    
    2001 Equity Incentive Plan. (d)10.13
    
    Agreement regarding Termination Benefits dated as of
November 17, 2000 between the Registrant and Charlie Brinkley. (d)10.14
    
    Agreement regarding Termination Benefits dated as of
November 20, 2000 between the Registrant and John Squires. (d)10.15
    
    Agreement regarding Termination Benefits dated as of June 6,
2002 between the Registrant and Dennis Bedley. (d)10.16
    
    Agreement regarding Termination Benefits dated as of June 6,
2002 between the Registrant and Richard Garner. (d)10.17
    
    Agreement regarding Termination Benefits dated as of June 6,
2002 between the Registrant and Joel Whittenhall. (d)10.18
    
    Merger Agreement, dated as of March 19, 2004, between First
National Bankshares of Florida, Inc. and Southern. (e)10.19
    
    Peninsula Directors Stock Option
Plan.*10.20
    
    Peninsula Employees Stock Option
Plan.*10.21
    
    Agreement between Southern and CSI.*10.22
    
    Loan Agreement between Southern and SunTrust Bank, N.A.*10.23
    
    Promissory Note issued by Southern
in favor of SunTrust Bank, N.A.*10.24
    
    Advances, Specific Collateral, Pledge and Security Agreement
between Southern and the Federal Home Loan Bank.*10.25
    
    Form of Subordinated Debenture.*14.1
    
    Code of Ethics.*21.1
    
    List of Subsidiaries of Registrant.*24.1
    
    Power of Attorney.*31.1
    
    Certification of Chief Executive Officer, pursuant to Rule
13a  14(a).*31.2
    
    Certification of Chief Financial Officer, pursuant to Rule
13a  14(a).*32.1
    
    Certification of Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
   (a)
    
    Previously filed as an Exhibit to Southerns
Registration Statement on Form SB-2 (File No. 333-35548).(b)
    
    Previously filed as an Exhibit to Southerns
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2000 (filed with the Commission on October 20,
2000).(c)
    
    Previously filed as an Exhibit to Southerns
Quarterly Report on Form 10-QSB for the Quarter ended March
31, 2001 (filed with the Commission on May 15, 2001).(d)
    
    Previously filed as an Exhibit to Southerns
Annual Report on Form 10-KSB for the year ended December 31,
2002 (filed with the Commission on March 17, 2003).(e)
    
    Previously filed as an Exhibit to Southerns
Current Repot on Form 8-K (filed with the Commission on
March 26, 2004).(*)
    
    Filed as part of this report. 56




---



##### Table of Contents



SIGNATURES In accordance with Section 13(a) or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. SOUTHERN COMMUNITY BANCORPDate: March 29, 2004
    By:
    /s/ Charlie W. Brinkley, Jr.Charlie W. Brinkley, Jr.Chairman of the Board and
Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated. Name
    
    Title
    
    Date/s/ Charlie W. Brinkley, Jr.
Charlie W. Brinkley, Jr.
    
    Chairman of the Board and
Chief Executive Officer
    
    March 29, 2004/s/ John G. Squires
John G. Squires
    
    President and Director
    
    March 29, 2004/s/ George D. Anderson
George D. Anderson
    
    Director
    
    March 29, 2004/s/ Dennis G. Bedley
Dennis G. Bedley
    
    Director
    
    March 29, 2004/s/ Alfred J. Cinque
Alfred J. Cinque
    
    Director
    
    March 29, 2004/s/ Thomas H. Dargan, Jr.
Thomas H. Dargan, Jr.
    
    Director
    
    March 29, 2004/s/ P.T. Fleuchaus
P.T. Fleuchaus
    
    Director
    
    March 29, 2004/s/ Richard L. Garner
Richard L. Garner
    
    Director
    
    March 29, 2004
 57




---



##### Table of Contents



Name
    
    Title
    
    Date/s/ Dennis E. Gilkey
Dennis E. Gilkey
    
    Director
    
    March 29, 2004/s/ Jennings L. Hurt, III
Jennings L. Hurt, III
    
    Director
    
    March 29, 2004/s/ Clark D. Jensen
Clark D. Jensen
    
    Director
    
    March 29, 2004/s/ Sanford Miller
Sanford Miller
    
    Director
    
    March 29, 2004/s/ Sal A. Nunziata
Sal A. Nunziata
    
    Director
    
    March 29, 2004/s/ John K. Ritenour
John K. Ritenour
    
    Director
    
    March 29, 2004/s/ Stanley H. Sandefur
Stanley H. Sandefur
    
    Director
    
    March 29, 2004/s/ Gregory K. Talbott
Gregory K. Talbott
    
    Director
    
    March 29, 2004/s/ Joel E. Whittenhall
Joel E. Whittenhall
    
    Director
    
    March 29, 2004/s/ Michael Vestal
Michael Vestal
    
    Director
    
    March 29, 2004/s/ Stephen R. Jeuck
Stephen R. Jeuck
    
    Senior Vice President and
Chief Financial Officer
    
    March 29, 2004
 58




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Index to Consolidated Financial Statements PageIndependent Auditors Report
    
    F-2Consolidated Balance Sheets, December 31, 2003 and 2002
    
    F-3Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001
    
    F-4Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 2003,
   2002 and 2001
    
    F-5Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001
    
    F-7Notes to Consolidated Financial Statements at December 31, 2003 and 2002
and for Each of the
   Years in the Three-Year Period Ended
December 31, 2003
    
    F-9
 All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in the
Consolidated Financial Statements and related Notes. F-1




---



##### Table of Contents



Independent Auditors Report Southern Community Bancorp
Orlando, Florida: We have audited the accompanying consolidated balance sheets of Southern
Community Bancorp and subsidiaries (the Company) at December 31, 2003 and
2002, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the years in the three-year period ended
December 31, 2003. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2003,
in conformity with accounting principles generally accepted in the United
States of America. HACKER, JOHNSON & SMITH PA
Orlando, Florida
January 14, 2004, except for Note 23 as to
which the date is March 19, 2004 F-2




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Consolidated Balance Sheets
($ in thousands, except per share amounts) At December 31,2003
    
    2002AssetsCash and due from banks
    
    $
    15,103
    
    
    
    19,127Interest-earning deposits
    
    
    916
    
    
    
    12,077Federal funds sold
    
    
    14,376
    
    
    
    4,519Cash and cash equivalents
    
    
    30,395
    
    
    
    35,723Securities available for sale
    
    
    109,157
    
    
    
    89,677Securities held to maturity
    
    
    3,272
    
    
    
    3,452Loans, net of allowance for loan losses of
$8,883 in 2003 and $6,262 in 2002
    
    
    718,969
    
    
    
    500,267Accrued interest receivable
    
    
    3,026
    
    
    
    2,806Federal Home Loan Bank stock, at cost
    
    
    1,934
    
    
    
    212Premises and equipment, net
    
    
    20,967
    
    
    
    18,852Deferred income tax asset
    
    
    3,659
    
    
    
    1,424Foreclosed assets, net
    
    
    1,066
    
    
    
    302Bank-owned life insurance
    
    
    5,189
    
    
    
    4,954Goodwill
    
    
    971
    
    
    
    971Other assets
    
    
    644
    
    
    
    146Total assets
    
    $
    899,249
    
    
    
    658,786Liabilities and Stockholders EquityLiabilities:Noninterest-bearing demand deposits
    
    
    76,123
    
    
    
    59,313Money-market deposits
    
    
    117,586
    
    
    
    101,800Savings and NOW deposits
    
    
    284,955
    
    
    
    153,207Time deposits
    
    
    293,015
    
    
    
    279,097Total deposits
    
    
    771,679
    
    
    
    593,417Advances from Federal Home Loan Bank
    
    
    30,500
    
    
    
    Subordinated debentures
    
    
    13,000
    
    
    
    Other borrowings
    
    
    7,923
    
    
    
    1,423Official checks
    
    
    4,972
    
    
    
    3,787Other liabilities
    
    
    3,334
    
    
    
    2,060Total liabilities
    
    
    831,408
    
    
    
    600,687Commitments and contingencies (Notes 4, 10, 18 and 23)Stockholders equity:Common stock, $1 par value, 10,000,000 shares authorized,
7,124,944 and 6,693,064 shares issued and outstanding in 2003 and 2002
    
    
    7,125
    
    
    
    6,693Additional paid-in capital
    
    
    54,938
    
    
    
    49,654Retained earnings
    
    
    6,916
    
    
    
    795Accumulated other comprehensive income (loss)
    
    
    (1,138
    )
    
    
    957Total stockholders equity
    
    
    67,841
    
    
    
    58,099Total liabilities and stockholders equity
    
    $
    899,249
    
    
    
    658,786
 See accompanying Notes to Consolidated Financial Statements. F-3




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Consolidated Statements of Operations
($ in thousands, except per share amounts) Year Ended December 31,2003
    
    2002
    
    2001Interest income:Loans
    
    $
    40,313
    
    
    
    29,993
    
    
    
    21,455Securities
    
    
    3,743
    
    
    
    2,597
    
    
    
    1,404Other
    
    
    206
    
    
    
    880
    
    
    
    1,573Total interest income
    
    
    44,262
    
    
    
    33,470
    
    
    
    24,432Interest expense:Deposits
    
    
    16,556
    
    
    
    15,046
    
    
    
    14,339Other borrowings
    
    
    918
    
    
    
    26
    
    
    
    33Total interest expense
    
    
    17,474
    
    
    
    15,072
    
    
    
    14,372Net interest income
    
    
    26,788
    
    
    
    18,398
    
    
    
    10,060Provision for loan losses
    
    
    3,206
    
    
    
    2,405
    
    
    
    2,351Net interest income after provision for loan losses
    
    
    23,582
    
    
    
    15,993
    
    
    
    7,709Noninterest income:Service charges on deposit accounts
    
    
    811
    
    
    
    624
    
    
    
    372Other fees
    
    
    1,366
    
    
    
    976
    
    
    
    404Gain on the sale of securities available for sale
    
    
    403
    
    
    
    120
    
    
    
    642Gain on sale of charter
    
    
    1,000
    
    
    
    
    
    
    
    Earnings on bank-owned life insurance
    
    
    235
    
    
    
    204
    
    
    
    166Other income
    
    
    1,006
    
    
    
    673
    
    
    
    270Total noninterest income
    
    
    4,821
    
    
    
    2,597
    
    
    
    1,854Noninterest expenses:Salaries and employee benefits
    
    
    9,732
    
    
    
    7,998
    
    
    
    5,307Occupancy expense
    
    
    3,729
    
    
    
    2,982
    
    
    
    1,926Data processing
    
    
    1,225
    
    
    
    1,019
    
    
    
    727Printing and office supplies
    
    
    379
    
    
    
    375
    
    
    
    312Marketing and advertising
    
    
    498
    
    
    
    381
    
    
    
    276Professional fees
    
    
    913
    
    
    
    554
    
    
    
    474Telephone
    
    
    614
    
    
    
    334
    
    
    
    217Preopening expenses
    
    
    
    
    
    
    133
    
    
    
    133Other expense
    
    
    1,812
    
    
    
    1,336
    
    
    
    1,066Total noninterest expenses
    
    
    18,902
    
    
    
    15,112
    
    
    
    10,438Earnings (loss) before income taxes (benefit)
    
    
    9,501
    
    
    
    3,478
    
    
    
    (875
    )Income taxes (benefit)
    
    
    3,380
    
    
    
    1,277
    
    
    
    (295
    )Net earnings (loss)
    
    $
    6,121
    
    
    
    2,201
    
    
    
    (580
    )Earnings (loss) per share:Basic
    
    $
    .88
    
    
    
    .36
    
    
    
    (.12
    )Diluted
    
    $
    .84
    
    
    
    .35
    
    
    
    (.12
    )
 See accompanying Notes to Consolidated Financial Statements. F-4




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Consolidated Statements of Stockholders Equity Years Ended December 31, 2003, 2002 and 2001
($ in thousands) AccumulatedRetained
    
    OtherCommon
Stock
    
    Additional
    
    Earnings
    
    Comprehensive
    
    TotalPaid-In
    
    (Accumulated
    
    Income
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Deficit)
    
    (Loss)
    
    EquityBalance at December 31, 2000
    
    
    1,720,098
    
    
    $
    1,720
    
    
    
    25,173
    
    
    
    (826
    )
    
    
    284
    
    
    
    26,351Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (580
    )
    
    
    
    
    
    
    (580
    )Net change in unrealized gain on
securities available for sale, net of
tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (196
    )
    
    
    (196
    )Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (776
    )Common stock issued as
compensation
    
    
    750
    
    
    
    1
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    11Sale of common stock in connection
with 401(k) Profit Sharing Plan
    
    
    7,816
    
    
    
    8
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    117Sale of common stock in connection
with Employee Stock Purchase Plan
    
    
    5,548
    
    
    
    5
    
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    84Proceeds from common stock offering,
net of offering costs of $5
    
    
    66,001
    
    
    
    66
    
    
    
    1,018
    
    
    
    
    
    
    
    
    
    
    
    1,084Proceeds from private placement
common stock offering, net of
offering costs of $4
    
    
    305,975
    
    
    
    306
    
    
    
    4,876
    
    
    
    
    
    
    
    
    
    
    
    5,182Common stock issued in connection with
merger with Peninsula Bancorp, Inc.
    
    
    623,913
    
    
    
    624
    
    
    
    9,671
    
    
    
    
    
    
    
    
    
    
    
    10,295Two-for-one stock split
    
    
    2,730,101
    
    
    
    2,730
    
    
    
    (2,730
    )
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2001
    
    
    5,460,202
    
    
    
    5,460
    
    
    
    38,206
    
    
    
    (1,406
    )
    
    
    88
    
    
    
    42,348Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,201
    
    
    
    
    
    
    
    2,201Net change in unrealized gain on
securities available for sale,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    869
    
    
    
    869Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,070Common stock issued as compensation
    
    
    17,353
    
    
    
    18
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    143Sale of common stock in connection with
401(k) Profit Sharing Plan
    
    
    34,569
    
    
    
    35
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    285Sale of common stock in connection
with Employee Stock Purchase Plan
    
    
    15,393
    
    
    
    15
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    127Sale of common stock in connection with
employment agreements
    
    
    14,500
    
    
    
    14
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    123Proceeds from common stock offering,
net of offering costs of $83
    
    
    1,151,047
    
    
    
    1,151
    
    
    
    10,852
    
    
    
    
    
    
    
    
    
    
    
    12,003Balance at December 31, 2002
    
    
    6,693,064
    
    
    $
    6,693
    
    
    
    49,654
    
    
    
    795
    
    
    
    957
    
    
    
    58,099
 (continued) F-5




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Consolidated Statements of Stockholders Equity, Continued Years Ended December 31, 2003, 2002 and 2001
($ in thousands) AccumulatedRetained
    
    OtherCommon
Stock
    
    Additional
    
    Earnings
    
    Comprehensive
    
    TotalPaid-In
    
    (Accumulated
    
    Income
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Deficit)
    
    (Loss)
    
    EquityBalance at December 31, 2002
    
    
    6,693,064
    
    
    $
    6,693
    
    
    
    49,654
    
    
    
    795
    
    
    
    957
    
    
    
    58,099Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,121
    
    
    
    
    
    
    
    6,121Net change in unrealized gain (loss)
on securities available for sale,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,095
    )
    
    
    (2,095
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,026Common stock issued as compensation
    
    
    21,189
    
    
    
    21
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    222Sale of common stock in connection with
401(k) Profit Sharing Plan
    
    
    47,877
    
    
    
    48
    
    
    
    421
    
    
    
    
    
    
    
    
    
    
    
    469Sale of common stock in connection
with Employee Stock Purchase Plan
    
    
    14,161
    
    
    
    14
    
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    149Proceeds from private placement
common stock offering
    
    
    348,653
    
    
    
    349
    
    
    
    4,527
    
    
    
    
    
    
    
    
    
    
    
    4,876Balance at December 31, 2003
    
    
    7,124,944
    
    
    $
    7,125
    
    
    
    54,938
    
    
    
    6,916
    
    
    
    (1,138
    )
    
    
    67,841
 See accompanying Notes to Consolidated Financial Statements. F-6




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows
(In thousands) Year Ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings (loss)
    
    $
    6,121
    
    
    
    2,201
    
    
    
    (580
    )Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:Provision for loan losses
    
    
    3,206
    
    
    
    2,405
    
    
    
    2,351Depreciation and amortization
    
    
    1,673
    
    
    
    1,314
    
    
    
    774Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    35Deferred income tax benefit
    
    
    (1,106
    )
    
    
    (658
    )
    
    
    (881
    )Net amortization of deferred loan fees and costs
    
    
    (1,259
    )
    
    
    (841
    )
    
    
    (302
    )Net amortization of premiums and discounts on securities
    
    
    1,233
    
    
    
    203
    
    
    
    (29
    )Common stock issued as compensation
    
    
    222
    
    
    
    143
    
    
    
    11Gain on sale of securities available for sale
    
    
    (403
    )
    
    
    (120
    )
    
    
    (642
    )Earnings on bank-owned life insurance
    
    
    (235
    )
    
    
    (204
    )
    
    
    (166
    )Net increase in accrued interest receivable
    
    
    (220
    )
    
    
    (723
    )
    
    
    (659
    )Net (increase) decrease in other assets
    
    
    (409
    )
    
    
    136
    
    
    
    (53
    )Net increase in official checks
    
    
    1,185
    
    
    
    479
    
    
    
    1,732Net increase in other liabilities
    
    
    1,274
    
    
    
    220
    
    
    
    886Net cash provided by operating activities
    
    
    11,282
    
    
    
    4,555
    
    
    
    2,477Cash flows from investing activities:Proceeds from sale of securities available for sale
    
    
    32,777
    
    
    
    23,247
    
    
    
    17,032Maturities and repayments of securities available for sale
    
    
    42,172
    
    
    
    28,932
    
    
    
    25,622Purchases of securities available for sale
    
    
    (98,479
    )
    
    
    (99,128
    )
    
    
    (61,120
    )Purchase of securities held to maturity
    
    
    
    
    
    
    (3,452
    )
    
    
    Repayments of securities held to maturity
    
    
    176
    
    
    
    
    
    
    
    Net increase in loans, exclusive of acquisitions
    
    
    (218,445
    )
    
    
    (149,389
    )
    
    
    (161,926
    )Purchases of premises and equipment, exclusive of acquisitions
    
    
    (2,648
    )
    
    
    (3,937
    )
    
    
    (6,458
    )Net proceeds from sale of premises and equipment
    
    
    160
    
    
    
    
    
    
    
    1,215Cash paid in branch acquisition
    
    
    (449
    )
    
    
    
    
    
    
    Cash and cash equivalents acquired in connection with
merger with Peninsula Bancorp, Inc.
    
    
    
    
    
    
    
    
    
    
    12,127Purchase of bank owned life insurance
    
    
    
    
    
    
    (1,305
    )
    
    
    (692
    )Purchase of Federal Home Loan Bank stock
    
    
    (1,722
    )
    
    
    
    
    
    
    Proceeds from sale of foreclosed assets, net
    
    
    1,028
    
    
    
    324
    
    
    
    283Net cash used in investing activities
    
    
    (245,430
    )
    
    
    (204,708
    )
    
    
    (173,917
    )Cash flows from financing activities:Net increase in deposits, exclusive of acquisitions
    
    
    173,326
    
    
    
    193,444
    
    
    
    167,588Proceeds from FHLB advances
    
    
    35,000
    
    
    
    
    
    
    
    Repayment of FHLB advances
    
    
    (4,500
    )
    
    
    
    
    
    
    Proceeds from subordinated debentures
    
    
    13,000
    
    
    
    
    
    
    
    Net increase (decrease) in other borrowings
    
    
    6,500
    
    
    
    (235
    )
    
    
    201Proceeds from issuance of common stock, net
    
    
    5,494
    
    
    
    12,538
    
    
    
    6,467Net cash provided by financing activities
    
    
    228,820
    
    
    
    205,747
    
    
    
    174,256Net (decrease) increase in cash and cash equivalents
    
    
    (5,328
    )
    
    
    5,594
    
    
    
    2,816Cash and cash equivalents at beginning of year
    
    
    35,723
    
    
    
    30,129
    
    
    
    27,313Cash and cash equivalents at end of year
    
    $
    30,395
    
    
    
    35,723
    
    
    
    30,129
 (continued) F-7




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
(In thousands) Year Ended December 31,2003
    
    2002
    
    2001Supplemental disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    17,442
    
    
    
    15,121
    
    
    
    13,982Income taxes
    
    $
    4,253
    
    
    
    1,641
    
    
    
    427Noncash financing and investing activities:Net change in accumulated other comprehensive income,
net change in unrealized gain (loss) on securities
available for sale, net of tax
    
    $
    (2,095
    )
    
    
    869
    
    
    
    (196
    )Transfer of loans to foreclosed assets
    
    $
    1,792
    
    
    
    439
    
    
    
    1,190Loans originated on sales of foreclosed assets
    
    $
    
    
    
    
    720
    
    
    
    Assets and liabilities acquired in connection with
acquisition of Peninsula Bancorp, Inc. in 2001
and branch acquisition in 2003:Securities available for sale
    
    $
    
    
    
    
    
    
    
    
    3,890Loans, net
    
    $
    3,996
    
    
    
    
    
    
    
    42,740Premises and equipment
    
    $
    1,300
    
    
    
    
    
    
    
    2,054Deposits
    
    $
    4,936
    
    
    
    
    
    
    
    50,160Other borrowings
    
    $
    
    
    
    
    
    
    
    
    1,457Other assets, net of other liabilities
    
    $
    
    
    
    
    
    
    
    
    95Goodwill
    
    $
    
    
    
    
    
    
    
    
    1,006Core deposit intangible
    
    $
    89
    
    
    
    
    
    
    
    Common stock issued
    
    $
    
    
    
    
    
    
    
    
    10,295
 See accompanying Notes to Consolidated Financial Statements. F-8




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,
2003 and 2002 and For Each of the
Years in the Three-Year Period Ended December 31, 2003 (1) Summary of Significant Accounting Policies Organization.Southern Community Bancorp (the Holding Company) is a
multi-bank holding company and owns 100% of the outstanding common stock
of Southern Community Bank of Central Florida (formerly known as Southern
Community Bank prior to its name change in 2003), Southern Community Bank
of Southwest Florida, and Southern Community Bank of South Florida
(collectively, the Banks). Southern Community Bank of South Florida was
formed in June 2002 and commenced operations on August 5, 2002. Southern
Community Bank of Southwest Florida was formed in 2000 and commenced
operations on January 2, 2001. The Holding Company acquired Southern
Community Bank, Atlantic on April 30, 2001 in connection with its
acquisition of Peninsula Bancorp, Inc. (See Note 20). Southern Community
Bank, Atlantic, was known as Peninsula Bank, prior to its name change in
January 2002. During 2003, Southern Community Bank of Central Florida
acquired all of the assets and assumed all of the liabilities of Southern
Community Bank, Atlantic and the charter for Southern Community Bank,
Atlantic was sold to a third party for $1.0 million. Southern Community
Bank of Central Florida owns 100% of the outstanding common stock of
Southern Community Insurance Agency, Inc. (the Insurance Agency). In
January 2001, Southern Community Bank of Central Florida and a third party
formed Southern Community Bank Mortgage LLC (the Mortgage Company).
Each of them held a 50% equity interest in the Mortgage Company. On
October 1, 2003, Southern Community Bank of Central Florida agreed to
liquidate the Mortgage Company in exchange for $250,000. The Mortgage
Company originated, processed and closed residential loans in central
Florida. The Holding Companys only business activity is the ownership of the
Banks. The Banks are state (Florida) chartered commercial banks. The
Banks offer a variety of financial services to individual and corporate
customers through their eighteen banking offices located in Orange,
Seminole, Volusia, Lee, Collier, Broward and Palm Beach Counties, Florida.
The deposits of the Banks are insured by the Federal Deposit Insurance
Corporation. The Insurance Agency refers customers of the Banks to
insurance agencies for the purchase of insurance products. Southern
Community Bank of Central Florida formed 1600 East Robinson Street, Inc.
in 2001 for the purpose of holding certain foreclosed assets and was
dissolved after selling these assets in 2002. Basis of Presentation.The accompanying consolidated financial statements
include the accounts of the Holding Company and its subsidiaries
(collectively, the Company). All significant intercompany accounts
and transactions have been eliminated in consolidation. The accounting
and reporting practices of the Company conform to accounting principles
generally accepted in the United States of America and to general
practices within the banking industry. The following summarizes the
more significant of these policies and practices: Use of Estimates.In preparing consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the balance sheet and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Material estimates that are particularly susceptible
to significant change in the near term relate to the determination of
the allowance for loan losses and deferred tax assets. (continued) F-9




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued Cash and Cash Equivalents.For purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash and balances due from
banks and federal funds sold, all of which mature within ninety days. The Banks are required by law or regulation to maintain cash reserves in
the form of vault cash or in a noninterest-earning account with the
Federal Reserve Bank or in noninterest-earning accounts with other
qualified banks. These reserve requirements at December 31, 2003 and 2002
were approximately $3.6 million and $1.2 million, respectively. Securities.The Company may classify its securities as either trading, held
to maturity or available for sale. Trading securities are held
principally for resale and recorded at their fair values. Unrealized
gains and losses on trading securities are included immediately in
operations. Held-to-maturity securities are those which the Company has
the positive intent and ability to hold to maturity and are reported at
amortized cost. Available-for-sale securities consist of securities not
classified as trading securities nor as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are excluded from operations and reported in other
comprehensive income (loss). Gains and losses on the sale of
available-for-sale securities are recorded on the trade date and are
determined using the specific-identification method. Premiums and
discounts on securities are recognized in interest income using the
interest method over the period to maturity. Loans.Loans that management has the intent and the Company has the ability
to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal adjusted for any charge-offs,
the allowance for loan losses, and any deferred fees or costs on
originated loans. Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan. The accrual of interest on loans is discontinued at the time the loan is
ninety days delinquent unless the loan is well collateralized and in
process of collection. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest is
considered doubtful. All interest accrued but not collected for loans that are placed on
nonaccrual or charged-off is reversed against interest income. The
interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured. Allowance for Loan Losses.The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan
losses charged to operations. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance. (continued) F-10




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued Allowance for Loan Losses, Continued.The allowance for loan losses is
evaluated on a regular basis by management and is based upon managements
periodic review of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations
that may affect the borrowers ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. A loan is considered impaired when, based on current information
and events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the
delay, the borrowers prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis for commercial, construction and
commercial real estate loans by either the present value of expected
future cash flows discounted at the loans effective interest rate,
the loans obtainable market price, or the fair value of the
collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures. Foreclosed Assets.Assets acquired through, or in lieu of, loan foreclosure
are held for sale and are initially recorded at the lower of fair value
or the loan balance at the date of foreclosure, establishing a new cost
basis. Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of carrying amount
or fair value less cost to sell. Premises and Equipment.Land is carried at cost. Buildings, leasehold
improvements and furniture and equipment are carried at cost, less
accumulated depreciation and amortization computed principally using the
straight-line method over the estimated useful lives of the assets. The
Company amortizes leasehold improvements over the lease term, which
could include lease renewal periods, if it is the intent of management
to exercise the renewal option on the lease. The Company capitalizes
interest during the construction period of major capital projects such
as the construction of office facilities. Interest costs capitalized
were approximately $44,000 and $103,000 during the years ended December
31, 2002 and 2001, respectively. No interest costs were capitalized
during the year ended December 31, 2003. Goodwill.Goodwill resulted from the purchase of Peninsula Bancorp, Inc. in
2001 and represents the excess of the acquisition cost over the fair
value of the net assets acquired. Prior to January 1, 2002, goodwill
was amortized on the straight-line method over twenty years. (continued) F-11




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued Goodwill, Continued.In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires
goodwill to be tested for impairment on an annual basis and between annual
tests in certain circumstances, and written down when impaired, rather
than being amortized as previous accounting standards required.
Furthermore, SFAS 142 requires purchased intangible assets other than
goodwill to be amortized over their useful lives unless these lives are
determined to be indefinite. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. In accordance with SFAS 142, the
Company ceased amortizing goodwill totaling $971,000 as of January 1,
2002. Based on the impairment tests performed, there was no impairment of
goodwill in 2002 or 2003. There can be no assurance that future goodwill
impairment tests will not result in a charge to earnings. The following table presents the impact of SFAS 142 on net loss had the
accounting standard been in effect for the year ended December 31, 2001
(in thousands): Year EndingDecember 31,2001Net loss  as reported
    
    $
    (580
    )Adjustments:Amortization of goodwill
    
    
    35Income tax benefit
    
    
    (13
    )Net loss  adjusted
    
    $
    (558
    )
 The effect on basic and diluted loss per share in 2001 was not
material. Transfer of Financial Assets.Transfers of financial assets are accounted
for as sales, when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when (1) the
assets have been isolated from the Company, (2) the transferee obtains
the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (3) the
Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity. Income Taxes.Deferred income tax assets and liabilities are recorded to
reflect the tax consequences on future years of temporary differences
between revenues and expenses reported for financial statement and those
reported for income tax purposes. Deferred tax assets and liabilities
are measured using the enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to
be realized or settled. Valuation allowances are provided against assets
which are not likely to be realized. The Holding Company and its subsidiaries file a consolidated income tax
return. Income taxes are allocated to the Holding Company and the
subsidiaries as though separate income tax returns were filed. (continued) F-12




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued Organizational and Preopening Costs.Preopening and organizational costs
associated with Southern Community Bank of South Florida totaled
approximately $83,000 in both 2002 and 2001 (net of tax benefits of
approximately $50,000 for both periods) and were charged to expense as
incurred during the organizational period during those years. Stock Compensation Plans.Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation,as amended by
SFAS No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure(collectively SFAS No. 123) encourages all entities to
adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant
date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an
entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees(APB No. 25), whereby compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Companys stock option plans have
no intrinsic value at the grant date, and under APB No. 25 no
compensation cost is recognized for them. The Company has elected to
continue with the accounting methodology in APB No. 25. The following
table illustrates the effect on net earnings (loss) and earnings (loss)
per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation (in
thousands, except per share amounts). Year Ended December 31,2003
    
    2002
    
    2001Net earnings (loss), as reported
    
    $
    6,121
    
    
    
    2,201
    
    
    
    (580
    )Deduct: Total stock-based employee compensation
determined under the fair value based method for
all awards, net of related tax effect
    
    
    (294
    )
    
    
    (424
    )
    
    
    (724
    )Proforma net earnings (loss)
    
    $
    5,827
    
    
    
    1,777
    
    
    
    (1,304
    )Basic earnings (loss) per share:As reported
    
    $
    .88
    
    
    
    .36
    
    
    
    (.12
    )Proforma
    
    $
    .84
    
    
    
    .29
    
    
    
    (.28
    )Diluted earnings (loss) per share:As reported
    
    $
    .84
    
    
    
    .35
    
    
    
    (.12
    )Proforma
    
    $
    .80
    
    
    
    .28
    
    
    
    (.28
    )
 (continued) F-13




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued Stock Compensation Plans, Continued.In order to calculate the fair value
of the options, it was assumed that the average risk-free interest rate
was 4.17% for 2003, 4.46% for 2002 and 5.68% for 2001, there would be no
dividends paid by the Company over the exercise period, the expected life
of the options would be the entire exercise period and stock volatility
would be zero due to the lack of an active trading market for the stock.
For purposes of pro forma disclosures, the estimated fair value is treated
as expense during the vesting period. The following information
summarizes the fair value of options granted under the plans (in
thousands, except per share amounts): Year Ended December 31,2003
    
    2002
    
    2001Grant-date fair value of options issued during the year
    
    $
    100
    
    
    
    186
    
    
    
    1,327Grant-date per share value of options issued
during the year
    
    $
    3.56
    
    
    
    2.28
    
    
    
    2.50
 Off-Balance Sheet Instruments.In the ordinary course of business, the
Company has entered into off-balance-sheet instruments consisting of
commitments to extend credit, standby letters of credit, undisbursed loans
in process and unused lines of credit. Such financial instruments are
recorded in the consolidated financial statements when they are funded. Fair Values of Financial Instruments.The fair value of a financial
instrument is the current amount that would be exchanged between willing
parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances,
there are no quoted market prices for the Companys various financial
instruments. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument or may not necessarily represent
the underlying fair value of the Company. The following methods and
assumptions were used by the Company in estimating fair values of
financial instruments disclosed herein: Cash and Cash Equivalents.The carrying amounts of cash and cash
equivalents approximate their fair value. Securities.Fair values for securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments. Federal Home Loan Bank Stock.Fair value of the Companys investment in
Federal Home Loan Bank (FHLB) stock is based on its redemption value,
which is its cost of $100 per share. Loans.For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for certain fixed-rate mortgage (e.g. one-to-four
family residential), commercial real estate and commercial loans are
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for nonperforming loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable. (continued) F-14




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued Fair Values of Financial Instruments, Continued. Deposit Liabilities.The fair values disclosed for demand, NOW,
money-market and savings deposits are, by definition, equal to the amount
payable on demand at the reporting date (that is, their carrying amounts).
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities of time deposits. Accrued Interest.The carrying amounts of accrued interest approximate
their fair values. Other Borrowings.The carrying value of borrowings related to customer
repurchase agreements and federal funds purchased approximate fair value. Advances from Federal Home Loan Bank and Subordinated Debentures.The
fair value for advances from Federal Home Loan Bank and subordinated
debentures are estimated using discounted cash flow analysis based on the
Companys current incremental borrowing rates for similar types of
borrowing arrangements. Off-Balance-Sheet Instruments.Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties credit standing. Advertising.The Company expenses all media advertising as incurred. Earnings (Loss) Per Share.Basic earnings (loss) per share is computed on
the basis of the weighted-average number of common shares outstanding.
For 2003 and 2002, diluted earnings per share is computed based on the
weighted-average number of shares outstanding plus the effect of
outstanding stock options, computed using the treasury stock method.
For 2001, such options were antidilutive. Earnings (loss) per common
share have been computed based on the following: Year Ended December 31,2003
    
    2002
    
    2001Weighted-average number of common
shares outstanding used to calculatebasic earnings (loss) per common share
    
    
    6,938,483
    
    
    
    6,121,395
    
    
    
    4,717,487Effect of dilutive stock options
    
    
    323,098
    
    
    
    222,118
    
    
    
    Weighted-average number of common
shares outstanding used to calculate
diluted earnings (loss) per common share
    
    
    7,261,581
    
    
    
    6,343,513
    
    
    
    4,717,487
 (continued) F-15




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued Comprehensive Income (Loss).Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net earnings
(loss). Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, are reported
as a separate component of the equity section of the consolidated balance
sheets, such items along with net earnings (loss), are components of
comprehensive income (loss). The components of other comprehensive income
and related tax effects are as follows (in thousands): Before
    
    Tax
    
    AfterTax
    
    Effect
    
    TaxYear Ended December 31, 2003:Unrealized holding loss
    
    $
    (2,821
    )
    
    
    (977
    )
    
    
    (1,844
    )Reclassification adjustment for gains included
in net earnings
    
    
    (403
    )
    
    
    (152
    )
    
    
    (251
    )$
    (3,224
    )
    
    
    (1,129
    )
    
    
    (2,095
    )Year Ended December 31, 2002:Unrealized holding gains
    
    
    1,459
    
    
    
    515
    
    
    
    944Reclassification adjustment for gains included
in net earnings
    
    
    (120
    )
    
    
    (45
    )
    
    
    (75
    )$
    1,339
    
    
    
    470
    
    
    
    869Year Ended December 31, 2001:Unrealized holding gains
    
    
    341
    
    
    
    123
    
    
    
    218Reclassification adjustment for gains included
in net loss
    
    
    (642
    )
    
    
    (228
    )
    
    
    (414
    )$
    (301
    )
    
    
    (105
    )
    
    
    (196
    )
 Reclassifications.Certain reclassifications have been made to prior period
balances in order to conform to the current year presentation. (continued) F-16




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued Recent Pronouncements.In November 2002, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness to Others(FIN 45), which expands previously issued
accounting guidance and disclosure requirements for certain guarantees.
FIN 45 requires the Company to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for
initial recognition and measurement of the liability is applied on a
prospective basis to guarantees issued or modified after December 31, 2002.
The adoption of FIN 45 did not have a material affect on the Companys
consolidated financial statements. In January 2003, the FASB issued (Revised in December 2003) FASB
Interpretation No. 46 Consolidation of Variable Interest Entities(FIN
46) which addresses consolidation by business enterprises of variable
interest entities. FIN 46 applies to variable interest entities created
after January 31, 2003. The Company has no variable interest entities,
therefore FIN 46 had no effect on the Companys consolidated financial
statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.SFAS No. 146 provides
guidance on the recognition and measurement of liabilities for costs
associated with exit or disposal activities. SFAS No. 146 is effective for
exit and disposal activities that are initiated after December 31, 2002.
The adoption of this Statement had no effect on the Companys consolidated
financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities.This Statement is effective for contracts entered into or
modified after June 30, 2003. The adoption of this Statement had no effect
on the Companys consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of this Statement had no effect on the Companys
consolidated financial statements. (continued) F-17




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) Securities Securities have been classified according to managements intent. The
carrying amount of securities and their approximate fair value are
summarized as follows (in thousands): Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueDecember 31, 2003:Available for Sale:U.S. government agency securities
    
    $
    44,928
    
    
    
    
    
    
    
    (853
    )
    
    
    44,075Mortgage-backed securities
    
    
    59,199
    
    
    
    
    
    
    
    (919
    )
    
    
    58,280Municipal bonds
    
    
    6,780
    
    
    
    22
    
    
    
    
    
    
    
    6,802Total
    
    $
    110,907
    
    
    
    22
    
    
    
    (1,772
    )
    
    
    109,157Held to Maturity -Mortgage-backed security
    
    $
    3,272
    
    
    
    
    
    
    
    (7
    )
    
    
    3,265December 31, 2002:Available for Sale:U.S. government agency securities
    
    
    30,629
    
    
    
    632
    
    
    
    
    
    
    
    31,261Mortgage-backed securities
    
    
    57,324
    
    
    
    833
    
    
    
    
    
    
    
    58,157Municipal bonds
    
    
    250
    
    
    
    9
    
    
    
    
    
    
    
    259Total
    
    $
    88,203
    
    
    
    1,474
    
    
    
    
    
    
    
    89,677Held to Maturity -Mortgage-backed security
    
    $
    3,452
    
    
    
    
    
    
    
    
    
    
    
    3,452
 The following summarizes sales of securities available for sale (in
thousands): Year Ended December 31,2003
    
    2002
    
    2001Proceeds from sales
    
    $
    32,777
    
    
    
    23,247
    
    
    
    17,032Gross gains
    
    
    410
    
    
    
    120
    
    
    
    644Gross losses
    
    
    (7
    )
    
    
    
    
    
    
    (2
    )Net gain
    
    $
    403
    
    
    
    120
    
    
    
    642
 (continued) F-18




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) Securities, Continued The scheduled maturities of securities at December 31, 2003 are as follows (in
thousands): Available for Sale
    
    Held to MaturityFair
    
    Amortized
    
    Fair
    
    AmortizedCost
    
    Value
    
    Cost
    
    ValueDue in less than one year
    
    $
    1,000
    
    
    
    1,006
    
    
    
    
    
    
    
    Due from one to five years
    
    
    9,291
    
    
    
    9,477
    
    
    
    
    
    
    
    Due from five to ten years
    
    
    24,431
    
    
    
    23,863
    
    
    
    
    
    
    
    Due more than ten years
    
    
    16,986
    
    
    
    16,531
    
    
    
    
    
    
    
    Mortgaged-backed securities
    
    
    59,199
    
    
    
    58,280
    
    
    
    3,272
    
    
    
    3,265$
    110,907
    
    
    
    109,157
    
    
    
    3,272
    
    
    
    3,265
 At December 31, 2003 and 2002, the Company had pledged
securities with carrying values of approximately $3.7 million and
$3.3 million, respectively, for public deposits and approximately
$2.9 million and $3.6 million, respectively, had been pledged as
collateral for borrowings under customer repurchase agreements.
In addition, the Company had pledged securities with carrying
values of approximately $31.9 million as collateral for advances
from Federal Home Loan Bank at December 31, 2003. (3) Loans The components of loans were as follows (in thousands): At December 31,2003
    
    2002Commercial real estate
    
    $
    269,165
    
    
    
    208,622Construction
    
    
    241,828
    
    
    
    121,153Commercial
    
    
    127,914
    
    
    
    117,586Residential real estate
    
    
    72,252
    
    
    
    49,029Consumer and other
    
    
    19,356
    
    
    
    12,437Total loans
    
    
    730,515
    
    
    
    508,827Less:Allowance for loan losses
    
    
    (8,883
    )
    
    
    (6,262
    )Net deferred loan fees and other discounts
    
    
    (2,663
    )
    
    
    (2,298
    )Loans, net
    
    $
    718,969
    
    
    
    500,267
 (continued) F-19




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (3) Loans, Continued The following is a summary of the activity in the allowance for loan losses
(in thousands): Year Ended December 31,2003
    
    2002
    
    2001Allowance, at beginning of year
    
    $
    6,262
    
    
    
    4,457
    
    
    
    1,795Provision for loan losses
    
    
    3,206
    
    
    
    2,405
    
    
    
    2,351Charge-offs, net
    
    
    (635
    )
    
    
    (600
    )
    
    
    (226
    )Allowance acquired
    
    
    50
    
    
    
    
    
    
    
    537Allowance, at end of year
    
    $
    8,883
    
    
    
    6,262
    
    
    
    4,457
 The following summarizes the amounts of impaired loans, all of which are
collateral dependent (in thousands): At December 31,2003
    
    2002Loans identified as impaired:Gross loans with no related allowance for losses
    
    $
    
    
    
    
    Gross loans with related allowance for
losses recorded
    
    
    900
    
    
    
    900Less: Allowances on these loans
    
    
    (45
    )
    
    
    (45
    )$
    855
    
    
    
    855
 The average net investment in impaired loans and interest income
recognized and received on impaired loans was as follows (in thousands): Year Ended December 31,2003
    
    2002
    
    2002Average net investment in impaired loans
    
    $
    855
    
    
    
    1,610
    
    
    
    2,384Interest income recognized on impaired loans
    
    $
    
    
    
    
    
    
    
    
    80Interest income received on impaired loans
    
    $
    
    
    
    
    
    
    
    
    80
 Nonaccrual and past due loans were as follows (in thousands): At December 31,2003
    
    2002Nonaccrual loans
    
    $
    1,737
    
    
    
    3,154Past due ninety days or more, but still accruing
    
    
    133
    
    
    
    126$
    1,870
    
    
    
    3,280
 (continued) F-20




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (4) Premises and Equipment Premises and equipment were as follows (in thousands): At December 31,2003
    
    2002Land
    
    $
    6,383
    
    
    
    4,193Buildings
    
    
    9,765
    
    
    
    9,277Leasehold improvements
    
    
    2,940
    
    
    
    2,669Furniture and equipment
    
    
    6,392
    
    
    
    5,337Total, at cost
    
    
    25,480
    
    
    
    21,476Less accumulated depreciation and amortization
    
    
    (4,513
    )
    
    
    (2,624
    )Premises and equipment, net
    
    $
    20,967
    
    
    
    18,852
 The Company purchased land in West Palm Beach and intends to begin
construction of a new branch facility during 2004. The Company expects
to expend approximately $1.8 million in construction and equipment
costs. The Company leases certain office facilities under operating leases. Some
of the leases contain escalation clauses and expense pass-throughs and
have renewal options ranging from 5 to 15 years. Rent expense under
operating leases for the years ended December 31, 2003, 2002 and 2001
was approximately $1,024,000, $855,000 and $606,000, respectively.
Future minimum rental commitments under noncancelable leases are
approximately as follows (in thousands): Year Ending December 31:
    
    Amount2004
    
    $
    1,3392005
    
    
    1,3732006
    
    
    1,3052007
    
    
    1,1992008
    
    
    857Thereafter
    
    
    1,801$
    7,874
 (5) Deposits The aggregate amount of time deposits with a minimum denomination of
$100,000, were approximately $157.0 million and $124.7 million at December
31, 2003 and 2002, respectively. At December 31, 2003, the scheduled maturities of time deposits were as
follows (in thousands):  Year Ending December 31,
    
    Amount2004
    
    $
    162,4052005
    
    
    100,3602006
    
    
    27,9792007
    
    
    1,4042008
    
    
    867$
    293,015
 (continued) F-21




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (6) Other Borrowings The Company enters into repurchase agreements with customers. These
agreements require the Company to pledge securities as collateral for
borrowings under these agreements. At December 31, 2003 and 2002, the
outstanding balance of such borrowings totaled approximately $1.9 million
and $1.4 million and the Company pledged securities with carrying values of
approximately $2.9 million and $3.6 million, respectively, as collateral
for these agreements. At December 31, 2003, other borrowings also include
federal funds purchased totaling $6.0 million. (7) Advances from Federal Home Loan Bank Advances from the Federal Home Loan Bank (FHLB) were as follows ($ in
thousands): At December 31,InterestRate
    
    2003
    
    20022.66%
    
    $
    21,667
    
    
    
    2.26%
    
    
    8,833
    
    
    
    $
    30,500
    
    
    
    
 These advances require monthly interest payments and have required
principal payments as follows (in thousands): Year EndingDecember 31,
    
    Amount2004
    
    $
    7,0002005
    
    
    7,0002006
    
    
    7,0002007
    
    
    7,0002008
    
    
    2,500$
    30,500
 At December 31, 2003, pursuant to the collateral agreement with the
FHLB, advances are collateralized by the Companys FHLB stock and
securities available for sale with a carrying value of approximately
$31.9 million. (8) Subordinated Debentures During 2003, the Company issued $13.0 million of uncollateralized
subordinated debentures. The subordinated debentures bear interest at
prime rate subject to a minimum rate of 5% and a maximum rate of 12%.
Interest is payable semi-annually and principal is due in 2011. (9) Benefit Agreements The Company has entered into Salary Continuation Agreements (the
Agreements) with certain officers which require the Company to provide
salary continuation benefits to these officers upon retirement. The
Agreements require the Company to pay annual benefits for up to twenty
years following their normal retirement ages. The Company has purchased
life insurance policies on these officers which although not formerly
linked, have future cash values that exceed the estimated future benefits.
The Company recognized expenses of approximately $160,000, $116,000 and
$61,000 during the years ended December 31, 2003, 2002 and 2001,
respectively and has accrued liabilities of approximately $440,000 and
$280,000 at December 31, 2003 and 2002, respectively, relating to these
Agreements. (continued) F-22




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Financial Instruments The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments are commitments to extend credit,
standby letters of credit, undisbursed loans in process and unused lines of
credit and may involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amounts recognized in the consolidated
balance sheets. The contract amounts of these instruments reflect the
extent of involvement the Company has in these financial instruments. The Companys exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments as it
does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customers credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based on managements credit
evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit
risk involved is essentially the same as that involved in extending
loans to customers. The estimated fair values of the Companys financial instruments were as
follows (in thousands): At December 31, 2003
    
    At December 31, 2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    30,395
    
    
    
    30,395
    
    
    
    35,723
    
    
    
    35,723Securities available for sale
    
    
    109,157
    
    
    
    109,157
    
    
    
    89,677
    
    
    
    89,677Securities held to maturity
    
    
    3,272
    
    
    
    3,265
    
    
    
    3,452
    
    
    
    3,452Federal Home Loan Bank stock
    
    
    1,934
    
    
    
    1,934
    
    
    
    212
    
    
    
    212Loans
    
    
    718,969
    
    
    
    729,433
    
    
    
    500,267
    
    
    
    504,244Accrued interest receivable
    
    
    3,026
    
    
    
    3,026
    
    
    
    2,806
    
    
    
    2,806Financial liabilities:Deposit liabilities
    
    
    771,679
    
    
    
    784,205
    
    
    
    593,417
    
    
    
    601,921Advances from Federal Home Loan Bank
    
    
    30,500
    
    
    
    30,686
    
    
    
    
    
    
    
    Subordinated debentures
    
    
    13,000
    
    
    
    13,000
    
    
    
    
    
    
    
    Other borrowings
    
    
    7,923
    
    
    
    7,923
    
    
    
    1,423
    
    
    
    1,423
 (continued) F-23




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Financial Instruments, Continued Commitments to extend credit, standby letters of credit, undisbursed loans in
process and unused lines of credit typically result in loans with a
market interest rate when funded. A summary of the contractual amounts
of the Companys financial instruments with off-balance-sheet risk at
December 31, 2003, follows (in thousands): EstimatedContract
    
    Carrying
    
    FairAmount
    
    Amount
    
    ValueCommitments to extend credit
    
    $
    72,716
    
    
    
    
    
    
    
    Standby letters of credit
    
    $
    7,164
    
    
    
    
    
    
    
    Undisbursed loans in process
    
    $
    155,876
    
    
    
    
    
    
    
    Unused lines of credit
    
    $
    13,443
    
    
    
    
    
    
    
    
 (11) Credit Risk The Company grants real estate, commercial and consumer loans to
customers primarily in the State of Florida with the majority of such
loans in Orange, Seminole, Broward, Palm Beach, Collier, Volusia and Lee
Counties. Therefore, the Companys exposure to credit risk is
significantly affected by changes in the economy of these counties. (12) Income Taxes Allocation of Federal and state income taxes between current and deferred
portions is as follows (in thousands): Year Ended December 31,2003
    
    2002
    
    2001Current:Federal
    
    $
    4,046
    
    
    
    1,652
    
    
    
    501State
    
    
    440
    
    
    
    283
    
    
    
    85Total current
    
    
    4,486
    
    
    
    1,935
    
    
    
    586Deferred:Federal
    
    
    (944
    )
    
    
    (562
    )
    
    
    (752
    )State
    
    
    (162
    )
    
    
    (96
    )
    
    
    (129
    )Total deferred
    
    
    (1,106
    )
    
    
    (658
    )
    
    
    (881
    )$
    3,380
    
    
    
    1,277
    
    
    
    (295
    )
 (continued) F-24




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) Income Taxes, Continued The reasons for the differences between the statutory Federal income tax
rate and the effective tax rate are summarized as follows ($ in thousands): Year Ended December 31,2003
    
    2002
    
    2001% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofAmount
    
    Earnings
    
    Amount
    
    Earnings
    
    Amount
    
    LossIncome taxes (benefit) at
statutory rate
    
    $
    3,230
    
    
    
    34.0
    %
    
    $
    1,183
    
    
    
    34.0
    %
    
    $
    (297
    )
    
    
    (34.0
    )%Increase (decrease) resulting from:State income taxes, net of tax
credits and Federal benefit
    
    
    183
    
    
    
    1.9
    
    
    
    123
    
    
    
    3.5
    
    
    
    (29
    )
    
    
    (3.3
    )Other
    
    
    (33
    )
    
    
    (.3
    )
    
    
    (29
    )
    
    
    (.8
    )
    
    
    31
    
    
    
    3.7Income taxes (benefit)
    
    $
    3,380
    
    
    
    35.6
    %
    
    $
    1,277
    
    
    
    36.7
    %
    
    $
    (295
    )
    
    
    (33.6
    )%
 The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows (in thousands): At December 31,2003
    
    2002Deferred tax assets:Allowance for loan losses
    
    $
    3,144
    
    
    
    2,118Start up and organizational costs
    
    
    179
    
    
    
    267Deferred compensation
    
    
    165
    
    
    
    105Purchase accounting adjustments
    
    
    4
    
    
    
    16Unrealized loss on securities available for sale
    
    
    612
    
    
    
    Other
    
    
    51
    
    
    
    62Gross deferred tax assets
    
    
    4,155
    
    
    
    2,568Deferred tax liabilities:Accrual to cash conversion
    
    
    (114
    )
    
    
    (229
    )Depreciation
    
    
    (382
    )
    
    
    (398
    )Unrealized gain on securities available for sale
    
    
    
    
    
    
    (517
    )Gross deferred tax liabilities
    
    
    (496
    )
    
    
    (1,144
    )Net deferred tax asset
    
    $
    3,659
    
    
    
    1,424
 (continued) F-25




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (13) Related Party Transactions In the ordinary course of business, the Company has made loans, at terms
and rates prevailing at the time, to the Companys principal officers,
directors and their affiliates. The following summarizes these loans to
related parties (in thousands): Year Ended December 31,2003
    
    2002
    
    2001Outstanding balance, beginning of the year
    
    $
    31,239
    
    
    
    11,139
    
    
    
    7,026Loans funded
    
    
    4,622
    
    
    
    23,432
    
    
    
    5,217Principal repayments
    
    
    (18,243
    )
    
    
    (3,332
    )
    
    
    (1,104
    )Outstanding balance, end of year
    
    $
    17,618
    
    
    
    31,239
    
    
    
    11,139
 The following summarizes the Companys other related party transactions (in
thousands): At or For the Year Ended December 31,2003
    
    2002
    
    2001Funds on deposit with the Company
    
    $
    15,013
    
    
    
    8,194
    
    
    
    23,738Rent expense on branch facilities leased
from related parties
    
    $
    295
    
    
    
    270
    
    
    
    129Insurance premiums paid to a related party insurance agent
    
    $
    189
    
    
    
    190
    
    
    
    331Insurance commission and referral fee
income from related parties
    
    $
    206
    
    
    
    112
    
    
    
    98Legal expenses paid to a related party
    
    $
    101
    
    
    
    101
    
    
    
    87
 (continued) F-26




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (14) Stock Option Plans In March 2001, the Company adopted the 2001 Equity Incentive Plan (the
2001 Plan). Under the 2001 Plan, the Company is authorized to issue up
to 2,000,000 shares of its common stock to employees and directors pursuant
to stock options and restricted stock grants. Vesting periods will be
determined as awards are granted. At December 31, 2003, there were
1,414,560 shares available to be issued in connection with future awards
under the 2001 Plan. In 1999, the Company adopted an employee incentive stock option plan (the
1999 Plan). Under the 1999 Plan, the total number of shares which may be
issued is 212,000. The option price shall not be less than the greater of
the par value of the common stock or the fair market value at the date of
grant and the options vest ratably over a five year period. At December
31, 2003, no options remained available for future grants under the 1999
Plan. In 1999, the Company adopted a directors nonstatutory stock option plan
(the Director Plan). Under the Director Plan, the total number of shares
which may be issued is 140,000. The option price shall not be less than
the greater of the par value of the common stock or the fair market value
at the date of grant and all options are immediately exercisable when
granted. At December 31, 2003, no options remained available for future
grants under the Director Plan. In connection with the acquisition of Peninsula discussed in Note 20, the
Company assumed options to purchase 135,125 shares of common stock, of
which 133,000 options were still outstanding at December 31, 2003. A summary of stock option transactions follows ($ in thousands, except per
share amounts): RangeNumber
    
    of Per
    
    Weighted-of Shares
    
    Share
    
    Average
    
    AggregateSubject
    
    Option
    
    Per Share
    
    Optionto Options
    
    Price
    
    Price
    
    PriceBalance at December 31, 2000
    
    
    340,000
    
    
    $
    7.50
    
    
    
    7.50
    
    
    
    2,550Granted
    
    
    530,090
    
    
    
    7.50-8.475
    
    
    
    8.07
    
    
    
    4,280Assumed in connection with
Peninsula merger
    
    
    135,125
    
    
    
    8.00-8.80
    
    
    
    8.33
    
    
    
    1,125Forfeited
    
    
    (15,000
    )
    
    
    7.50
    
    
    
    7.50
    
    
    
    (112
    )Balance at December 31, 2001
    
    
    990,215
    
    
    
    7.50-8.80
    
    
    
    7.92
    
    
    
    7,843Granted
    
    
    81,500
    
    
    
    10.50
    
    
    
    10.50
    
    
    
    856Forfeited
    
    
    (26,000
    )
    
    
    7.50-8.25
    
    
    
    8.08
    
    
    
    (210
    )Balance at December 31, 2002
    
    
    1,045,715
    
    
    
    7.50-10.50
    
    
    
    8.12
    
    
    
    8,489Granted
    
    
    28,000
    
    
    
    10.50-14.00
    
    
    
    13.25
    
    
    
    371Forfeited
    
    
    (3,275
    )
    
    
    8.80-10.50
    
    
    
    9.53
    
    
    
    (31
    )Balance at December 31, 2003
    
    
    1,070,440
    
    
    $
    7.50-14.00
    
    
    
    8.25
    
    
    
    8,829
 (continued) F-27




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (14) Stock Option Plans, Continued All options granted under stock option plans have ten year lives. The
weighted-average remaining contractual life of options outstanding at
December 31, 2003, 2002 and 2001 was 6.7 years, 7.9 years and 8.6 years,
respectively. The options are exercisable as follows: Number of
    
    Weighted-AverageYear Ending December 31,
    
    Shares
    
    Exercise PriceCurrently exercisable
    
    
    718,218
    
    
    $
    7.952004
    
    
    
    189,871
    
    
    
    8.582005
    
    
    
    78,538
    
    
    
    9.252006
    
    
    
    52,813
    
    
    
    8.842007
    
    
    
    16,900
    
    
    
    9.642008
    
    
    
    14,100
    
    
    
    9.391,070,440
    
    
    $
    8.25
 (15) Profit Sharing Plan The Company has a 401(k) profit sharing plan (the 401(k) Plan) which is
available to all employees electing to participate after meeting certain
length-of-service requirements. The Companys annual matching
contributions to the 401(k) Plan may be made in the form of the Companys
common stock or as directed by each participant and are discretionary.
The Companys expense in connection with the 401(k) Plan was $204,000,
$128,000 and $45,000 during the years ended December 31, 2003, 2002 and
2001, respectively. One of the investment choices available under the 401(k) Plan allows for
participants to purchase the Companys common stock. Participants
electing to purchase stock defer salary each pay period and the Company
issues shares after the end of the fiscal year. The total number of common
shares allocated to the 401(k) Plan is 150,000, of which 41,612 were
available for future issuances at December 31, 2003. (16) Employee Stock Purchase Plan The Company has a Employee Stock Purchase Plan (the Stock Purchase Plan)
under which employees can elect to purchase the Companys common stock
through payroll deductions. Employees defer salary each pay period and
the Company issues shares after the end of the fiscal year. The total
number of common shares allocated to the Stock Purchase Plan is 100,000,
of which 57,378 were available for future issuances at December 31, 2003. (continued) F-28




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (17) Regulatory Matters Banking regulations place certain restrictions on dividends and loans or
advances made by the Banks to the Holding Company. Each Bank is limited in the amount of cash dividends that may be paid. The
amount of cash dividends that may be paid is based on the Banks net
earnings of the current year combined with the Banks retained earnings of
the preceding two years, as defined by state banking regulations. However,
for any dividend declaration, the Company must consider additional factors
such as the amount of current period net earnings, liquidity, asset
quality, capital adequacy and economic conditions. It is likely that these
factors would further limit the amount of dividends which the Banks could
declare. In addition, bank regulators have the authority to prohibit
banks from paying dividends if they deem such payment to be an unsafe or
unsound practice. The Company and the Banks are subject to various regulatory capital
requirements administered by the regulatory banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Banks and the
Companys consolidated financial statements. Under capital adequacy
guidelines, the Company and the Banks must meet specific capital
guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Under the regulatory framework for
prompt and corrective action the Banks must also meet specific capital
guidelines. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors. Prompt corrective action provisions are not applicable
to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and
percentages (set forth in the following table) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined) and
of Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2003 and 2002, the Company and the Banks met
all capital adequacy requirements to which they were subject. (continued) F-29




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (17) Regulatory Matters, Continued As of December 31, 2003, the most recent notification from the regulatory
authorities categorized the Banks as either well or adequately capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage percentages as
set forth in the following tables. There are no conditions or events since
that notification that management believes have changed the Banks
categories. The Companys and the Banks actual capital amounts and
percentages are also presented in the table ($ in thousands). MinimumTo Be WellFor Capital
    
    Capitalized UnderAdequacy
    
    Prompt CorrectiveActual
    
    Purposes
    
    Action ProvisionsAmount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %As of December 31, 2003:Total Capital to Risk- Weighted assets:Consolidated
    
    $
    89,891
    
    
    
    10.5
    %
    
    $
    68,324
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    10.0
    %Southern Community Bank of
Central Florida
    
    
    59,194
    
    
    
    10.4
    
    
    
    45,510
    
    
    
    8.0
    
    
    $
    56,887
    
    
    
    10.0Southern Community Bank of
Southwest Florida
    
    
    16,713
    
    
    
    10.6
    
    
    
    12,576
    
    
    
    8.0
    
    
    
    15,720
    
    
    
    10.0Southern Community Bank of
South Florida
    
    
    13,057
    
    
    
    10.1
    
    
    
    10,349
    
    
    
    8.0
    
    
    
    12,936
    
    
    
    10.0Tier I Capital to Risk-Weighted Assets:Consolidated
    
    
    68,009
    
    
    
    8.0
    
    
    
    34,162
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    6.0Southern Community Bank of
Central Florida
    
    
    40,446
    
    
    
    7.1
    
    
    
    22,755
    
    
    
    4.0
    
    
    
    34,132
    
    
    
    6.0Southern Community Bank of
Southwest Florida
    
    
    15,047
    
    
    
    9.6
    
    
    
    6,288
    
    
    
    4.0
    
    
    
    9,432
    
    
    
    6.0Southern Community Bank of
South Florida
    
    
    11,589
    
    
    
    9.0
    
    
    
    5,174
    
    
    
    4.0
    
    
    
    7,762
    
    
    
    6.0Tier I Capital to Total Assets:Consolidated
    
    
    68,009
    
    
    
    7.7
    
    
    
    35,235
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    5.0Southern Community Bank of
Central Florida
    
    
    40,446
    
    
    
    6.7
    
    
    
    24,053
    
    
    
    4.0
    
    
    
    30,066
    
    
    
    5.0Southern Community Bank of
Southwest Florida
    
    
    15,047
    
    
    
    10.1
    
    
    
    5,977
    
    
    
    4.0
    
    
    
    7,471
    
    
    
    5.0Southern Community Bank of
South Florida
    
    
    11,589
    
    
    
    8.7
    
    
    
    5,313
    
    
    
    4.0
    
    
    
    6,642
    
    
    
    5.0
 (continued) F-30




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (17) Regulatory Matters, Continued MinimumTo Be WellFor Capital
    
    Capitalized UnderAdequacy
    
    Prompt CorrectiveActual
    
    Purposes
    
    Action ProvisionsAmount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %As of December 31, 2002:Total Capital to Risk- Weighted assets:Consolidated
    
    $
    62,434
    
    
    
    10.6
    %
    
    $
    46,949
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    10.0
    %Southern Community Bank of
Central Florida
    
    
    26,800
    
    
    
    8.6
    
    
    
    24,937
    
    
    
    8.0
    
    
    $
    31,171
    
    
    
    10.0Southern Community Bank of
Southwest Florida
    
    
    10,215
    
    
    
    9.5
    
    
    
    8,589
    
    
    
    8.0
    
    
    
    10,736
    
    
    
    10.0Southern Community Bank, Atlantic
    
    
    10,192
    
    
    
    10.3
    
    
    
    7,905
    
    
    
    8.0
    
    
    
    9,881
    
    
    
    10.0Southern Community Bank of
South Florida
    
    
    11,859
    
    
    
    17.1
    
    
    
    5,563
    
    
    
    8.0
    
    
    
    6,954
    
    
    
    10.0Tier I Capital to Risk-Weighted Assets:Consolidated
    
    
    56,172
    
    
    
    9.6
    
    
    
    23,475
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    6.0Southern Community Bank of
Central Florida
    
    
    23,361
    
    
    
    7.5
    
    
    
    12,468
    
    
    
    4.0
    
    
    
    18,703
    
    
    
    6.0Southern Community Bank of
Southwest Florida
    
    
    9,120
    
    
    
    8.5
    
    
    
    4,295
    
    
    
    4.0
    
    
    
    6,442
    
    
    
    6.0Southern Community Bank, Atlantic
    
    
    9,239
    
    
    
    9.4
    
    
    
    3,952
    
    
    
    4.0
    
    
    
    5,929
    
    
    
    6.0Southern Community Bank of
South Florida
    
    
    11,085
    
    
    
    15.9
    
    
    
    2,782
    
    
    
    4.0
    
    
    
    4,173
    
    
    
    6.0Tier I Capital to Total Assets:Consolidated
    
    
    56,172
    
    
    
    8.7
    
    
    
    25,796
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    5.0Southern Community Bank of
Central Florida
    
    
    23,361
    
    
    
    6.7
    
    
    
    13,968
    
    
    
    4.0
    
    
    
    17,460
    
    
    
    5.0Southern Community Bank of
Southwest Florida
    
    
    9,120
    
    
    
    8.3
    
    
    
    4,419
    
    
    
    4.0
    
    
    
    5,523
    
    
    
    5.0Southern Community Bank, Atlantic
    
    
    9,239
    
    
    
    9.6
    
    
    
    3,869
    
    
    
    4.0
    
    
    
    4,836
    
    
    
    5.0Southern Community Bank of
South Florida
    
    
    11,085
    
    
    
    12.3
    
    
    
    3,614
    
    
    
    4.0
    
    
    
    4,517
    
    
    
    5.0
 (18) Legal Contingencies Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect
on the Companys consolidated financial statements. (continued) F-31




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (19) Holding Company Financial Information The Holding Companys financial information follows (in thousands): Condensed Balance Sheets At December 31,2003
    
    2002AssetsCash
    
    $
    260
    
    
    
    1,961Premises and equipment, net
    
    
    158
    
    
    
    141Other assets
    
    
    249
    
    
    
    428Investment in subsidiaries
    
    
    67,200
    
    
    
    55,656Total assets
    
    $
    67,867
    
    
    
    58,186Liabilities and Stockholders EquityOther liabilities
    
    
    26
    
    
    
    87Stockholders equity
    
    
    67,841
    
    
    
    58,099Total liabilities and stockholders equity
    
    $
    67,867
    
    
    
    58,186
 Condensed Statements of Operations Year Ended December 31,2003
    
    2002
    
    2001Interest income
    
    $
    44
    
    
    
    54
    
    
    
    1Gain on sale of charter
    
    
    1,000
    
    
    
    
    
    
    
    Management fees
    
    
    118
    
    
    
    1,105
    
    
    
    Total income
    
    
    1,162
    
    
    
    1,159
    
    
    
    1Salaries and employee benefits
    
    
    856
    
    
    
    718
    
    
    
    215Preopening expenses
    
    
    
    
    
    
    133
    
    
    
    133Other expenses
    
    
    1,047
    
    
    
    443
    
    
    
    171Total expenses
    
    
    1,903
    
    
    
    1,294
    
    
    
    519Loss before income tax benefit and earnings
(loss) of subsidiaries
    
    
    (741
    )
    
    
    (135
    )
    
    
    (518
    )Income tax benefit
    
    
    (423
    )
    
    
    (50
    )
    
    
    (195
    )Loss before earnings (loss) of subsidiaries
    
    
    (318
    )
    
    
    (85
    )
    
    
    (323
    )Earnings (loss) of subsidiaries
    
    
    6,439
    
    
    
    2,286
    
    
    
    (257
    )Net earnings (loss)
    
    $
    6,121
    
    
    
    2,201
    
    
    
    (580
    )
 F-32




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (19) Holding Company Financial Information, Continued Condensed Statements of Cash Flows Year Ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings (loss)
    
    $
    6,121
    
    
    
    2,201
    
    
    
    (580
    )Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:Depreciation
    
    
    77
    
    
    
    18
    
    
    
    Common stock issued as compensation
    
    
    222
    
    
    
    143
    
    
    
    11Equity in undistributed (earnings) loss of
subsidiaries
    
    
    (6,439
    )
    
    
    (2,286
    )
    
    
    257Decrease (increase) in other assets
    
    
    140
    
    
    
    (223
    )
    
    
    (106
    )(Decrease) increase in other liabilities
    
    
    (22
    )
    
    
    (86
    )
    
    
    134Net cash provided by (used in) operating
activities
    
    
    99
    
    
    
    (233
    )
    
    
    (284
    )Cash flows from investing activities:Purchases of premises and equipment
    
    
    (94
    )
    
    
    (159
    )
    
    
    Investment in subsidiaries
    
    
    (7,200
    )
    
    
    (12,085
    )
    
    
    (4,574
    )Net cash used in investing activities
    
    
    (7,294
    )
    
    
    (12,244
    )
    
    
    (4,574
    )Cash flows from financing activity-Proceeds from sales of common stock, net
    
    
    5,494
    
    
    
    12,538
    
    
    
    6,467Net (decrease) increase in cash and cash equivalents
    
    
    (1,701
    )
    
    
    61
    
    
    
    1,609Cash at beginning of the year
    
    
    1,961
    
    
    
    1,900
    
    
    
    291Cash at end of year
    
    $
    260
    
    
    
    1,961
    
    
    
    1,900Noncash transactions:Change in investment in subsidiaries due to change
in accumulated other comprehensive income
(loss), net change in unrealized gain (loss) on
securities available for sale, net of income tax
    
    $
    (2,095
    )
    
    
    869
    
    
    
    (196
    )Common stock issued in connection with
acquisition of Peninsula Bancorp, Inc.
    
    $
    
    
    
    
    
    
    
    
    10,295
 (continued) F-33




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (20) Acquisitions On April 30, 2001, the Holding Company acquired Peninsula Bancorp, Inc.
(Peninsula). The Holding Company issued 623,913 shares of common stock
in exchange for all of the outstanding shares of Peninsula. Peninsula was
the parent company of Peninsula Bank of Central Florida (Peninsula
Bank), a state bank with three offices in Volusia County, Florida. The
Holding Company accounted for this transaction using the purchase method
of accounting. The excess purchase price over fair market value of the
net assets acquired of $1.0 million was allocated to goodwill. The
consolidated financial statements include the results of Peninsula from
the date of acquisition. The unaudited proforma results below assume the
acquisition occurred at the beginning of the year ended December 31, 2001
(in thousands, except per share amounts). Year EndedDecember 31,2001Interest income:Net interest income
    
    $
    10,642Net loss
    
    $
    (628
    )Loss per share:Basic
    
    $
    (.13
    )Diluted
    
    $
    (.13
    )
 In managements opinion, the unaudited proforma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisitions been consummated at the beginning of 2001 or
of future operations of the combined entities under the ownership and
management of the Company. On December 1, 2003, the Company purchased a branch of Harris Bank, N.A
located in Fort Myers, Florida. The Company paid approximately $449,000
in cash and assumed $4.9 million in deposits to acquire $4.0 million in
loans and $1.3 million in premises and equipment related to this office.
This transaction resulted in a core deposit intangible asset of $89,000.
This intangible asset, which is included in other assets in the
accompanying consolidated balance sheets, is being amortized over three
years. (21) Stock Dividend The Companys Board of Directors declared a two-for-one stock split,
effected in the form of a 100% stock dividend, on August 6, 2001 to
stockholders of record on October 19, 2001 which resulted in the issuance
of 2,730,101 shares of common stock and corresponding decrease of
$2,730,101 in additional paid-in capital. The stock split has been
reflected in the accompanying consolidated financial statements and all
per share information and stock option plan data has been restated to
reflect this split. (continued) F-34




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (22) Selected Quarterly Results (Unaudited) The following table presents summarized quarterly data (in thousands,
except per share amounts): First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalYear Ended December 31, 2003:Interest income
    
    $
    9,762
    
    
    
    10,756
    
    
    
    11,493
    
    
    
    12,251
    
    
    
    44,262Interest expense
    
    
    3,908
    
    
    
    4,292
    
    
    
    4,555
    
    
    
    4,719
    
    
    
    17,474Net interest income
    
    
    5,854
    
    
    
    6,464
    
    
    
    6,938
    
    
    
    7,532
    
    
    
    26,788Provision for loan losses
    
    
    745
    
    
    
    975
    
    
    
    1,026
    
    
    
    460
    
    
    
    3,206Net interest income after provision for loan losses
    
    
    5,109
    
    
    
    5,489
    
    
    
    5,912
    
    
    
    7,072
    
    
    
    23,582Noninterest income
    
    
    750
    
    
    
    1,178
    
    
    
    2,049
    
    
    
    844
    
    
    
    4,821Noninterest expenses
    
    
    (4,252
    )
    
    
    (4,665
    )
    
    
    (4,538
    )
    
    
    (5,447
    )
    
    
    (18,902
    )Earnings before income taxes
    
    
    1,607
    
    
    
    2,002
    
    
    
    3,423
    
    
    
    2,469
    
    
    
    9,501Income taxes
    
    
    603
    
    
    
    753
    
    
    
    1,276
    
    
    
    748
    
    
    
    3,380Net earnings
    
    $
    1,004
    
    
    
    1,249
    
    
    
    2,147
    
    
    
    1,721
    
    
    
    6,121Earnings per share:Basic
    
    $
    .15
    
    
    
    .18
    
    
    
    .30
    
    
    
    .25
    
    
    
    .88Diluted
    
    $
    .14
    
    
    
    .17
    
    
    
    .29
    
    
    
    .24
    
    
    
    .84Year Ended December 31, 2002:Interest income
    
    $
    7,235
    
    
    
    8,103
    
    
    
    9,106
    
    
    
    9,026
    
    
    
    33,470Interest expense
    
    
    3,405
    
    
    
    3,573
    
    
    
    3,952
    
    
    
    4,142
    
    
    
    15,072Net interest income
    
    
    3,830
    
    
    
    4,530
    
    
    
    5,154
    
    
    
    4,884
    
    
    
    18,398Provision for loan losses
    
    
    405
    
    
    
    441
    
    
    
    1,106
    
    
    
    453
    
    
    
    2,405Net interest income after provision for loan losses
    
    
    3,425
    
    
    
    4,089
    
    
    
    4,048
    
    
    
    4,431
    
    
    
    15,993Noninterest income
    
    
    533
    
    
    
    701
    
    
    
    509
    
    
    
    854
    
    
    
    2,597Noninterest expenses
    
    
    (3,534
    )
    
    
    (3,609
    )
    
    
    (3,840
    )
    
    
    (4,129
    )
    
    
    (15,112
    )Earnings before income taxes
    
    
    424
    
    
    
    1,181
    
    
    
    717
    
    
    
    1,156
    
    
    
    3,478Income taxes
    
    
    157
    
    
    
    431
    
    
    
    262
    
    
    
    427
    
    
    
    1,277Net earnings
    
    $
    267
    
    
    
    750
    
    
    
    455
    
    
    
    729
    
    
    
    2,201Earnings per share:Basic
    
    $
    .05
    
    
    
    .13
    
    
    
    .07
    
    
    
    .11
    
    
    
    .36Diluted
    
    $
    .05
    
    
    
    .13
    
    
    
    .07
    
    
    
    .10
    
    
    
    .35
 (continued) F-35




---



##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (22) Selected Quarterly Results (Unaudited), Continued First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalYear Ended December 31, 2001:Interest income
    
    $
    4,844
    
    
    
    5,867
    
    
    
    6,790
    
    
    
    6,931
    
    
    
    24,432Interest expense
    
    
    2,725
    
    
    
    3,486
    
    
    
    3,976
    
    
    
    4,185
    
    
    
    14,372Net interest income
    
    
    2,119
    
    
    
    2,381
    
    
    
    2,814
    
    
    
    2,746
    
    
    
    10,060Provision for loan losses
    
    
    484
    
    
    
    661
    
    
    
    409
    
    
    
    797
    
    
    
    2,351Net interest income after provision for loan losses
    
    
    1,635
    
    
    
    1,720
    
    
    
    2,405
    
    
    
    1,949
    
    
    
    7,709Noninterest income
    
    
    570
    
    
    
    345
    
    
    
    356
    
    
    
    583
    
    
    
    1,854Noninterest expenses
    
    
    (1,716
    )
    
    
    (2,375
    )
    
    
    (2,827
    )
    
    
    (3,520
    )
    
    
    (10,438
    )Earnings (loss) before income taxes (benefit)
    
    
    489
    
    
    
    (310
    )
    
    
    (66
    )
    
    
    (988
    )
    
    
    (875
    )Income taxes (benefit)
    
    
    183
    
    
    
    (118
    )
    
    
    (19
    )
    
    
    (341
    )
    
    
    (295
    )Net earnings (loss)
    
    $
    306
    
    
    
    (192
    )
    
    
    (47
    )
    
    
    (647
    )
    
    
    (580
    )Earnings (loss) per share:Basic
    
    $
    .09
    
    
    
    (.05
    )
    
    
    (.01
    )
    
    
    (.15
    )
    
    
    (.12
    )Diluted
    
    $
    .09
    
    
    
    (.05
    )
    
    
    (.01
    )
    
    
    (.15
    )
    
    
    (.12
    )
 (23) Definitive Agreement On March 19, 2004, the Company entered into a definitive agreement with
First National Bankshares of Florida, Inc. (First National) to sell all
of the Companys common stock to First National. The transaction is
expected to be consummated in the third quarter of 2004 subject to
regulatory and stockholder approvals. F-37




---



##### Table of Contents



Independent Auditors Report on Supplementary Information Southern Community Bancorp
Orlando, Florida We have audited the accompanying consolidated financial statements of
Southern Community Bancorp and Subsidiaries at and for the year ended December
31, 2003, and have issued our report thereon dated January 14,
2004, except for Note 23, as to which the date is March 19,
2004. Our audit
was conducted for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The consolidating information in the
accompanying schedules is presented for purposes of additional analysis of the
consolidated financial statements rather than to present the financial position
and results of operations of the individual companies. The consolidating
information has been subjected to the auditing procedures applied in the audit
of the consolidated financial statements and, in our opinion, is fairly stated
in all material respects in relation to the consolidated financial statements
taken as a whole. HACKER, JOHNSON & SMITH PA
Orlando, Florida
January 14, 2004 F-38




---



##### Table of Contents



Schedule SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Consolidating Balance Sheet
December 31, 2003
(In thousands) Southern
    
    Southern
    
    SouthernCommunity
    
    Community
    
    CommunitySouthern
    
    Bank
    
    Bank of
    
    Bank ofCommunity
    
    of Central
    
    Southwest
    
    South
    
    
    
    
    
    ConnsolidatedBancorp
    
    Florida
    
    Florida
    
    Florida
    
    Eliminations
    
    TotalAssetsCash and cash equivalents
    
    $
    260
    
    
    
    22,103
    
    
    
    6,875
    
    
    
    9,316
    
    
    
    8,159
    
    
    
    30,395Securities available for sale
    
    
    
    
    
    
    84,049
    
    
    
    14,018
    
    
    
    11,090
    
    
    
    
    
    
    
    109,157Securities held to maturity
    
    
    
    
    
    
    3,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,272Loans, net
    
    
    
    
    
    
    472,685
    
    
    
    131,074
    
    
    
    115,210
    
    
    
    
    
    
    
    718,969Accrued interest receivable
    
    
    
    
    
    
    2,017
    
    
    
    529
    
    
    
    480
    
    
    
    
    
    
    
    3,026Federal Home Loan Bank stock
    
    
    
    
    
    
    1,729
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    1,934Premises and equipment, net
    
    
    158
    
    
    
    11,478
    
    
    
    6,833
    
    
    
    2,498
    
    
    
    
    
    
    
    20,967Foreclosed assets, net
    
    
    
    
    
    
    1,066
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,066Investment in subsidiaries
    
    
    67,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,200
    
    
    
    Bank-owned life insurance
    
    
    
    
    
    
    3,444
    
    
    
    797
    
    
    
    948
    
    
    
    
    
    
    
    5,189Deferred income tax asset
    
    
    65
    
    
    
    2,364
    
    
    
    754
    
    
    
    476
    
    
    
    
    
    
    
    3,659Other assets
    
    
    184
    
    
    
    245
    
    
    
    130
    
    
    
    85
    
    
    
    
    
    
    
    644Goodwill
    
    
    
    
    
    
    971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    971Total
    
    $
    67,867
    
    
    
    605,423
    
    
    
    161,215
    
    
    
    140,103
    
    
    
    75,359
    
    
    
    899,249Liabilities and Stockholders EquityLiabilities:Deposits
    
    
    
    
    
    
    508,067
    
    
    
    138,576
    
    
    
    125,195
    
    
    
    159
    
    
    
    771,679Official checks
    
    
    
    
    
    
    2,945
    
    
    
    1,314
    
    
    
    713
    
    
    
    
    
    
    
    4,972Other borrowings
    
    
    
    
    
    
    7,923
    
    
    
    6,000
    
    
    
    2,000
    
    
    
    8,000
    
    
    
    7,923Advances from Federal Home Loan
Bank
    
    
    
    
    
    
    30,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,500Subordinated debentures
    
    
    
    
    
    
    13,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000Other liabilities
    
    
    26
    
    
    
    2,447
    
    
    
    534
    
    
    
    327
    
    
    
    
    
    
    
    3,334Total liabilities
    
    
    26
    
    
    
    564,882
    
    
    
    146,424
    
    
    
    128,235
    
    
    
    8,159
    
    
    
    831,408Stockholders equity:Common stock
    
    
    7,125
    
    
    
    6,633
    
    
    
    5,000
    
    
    
    5,000
    
    
    
    16,633
    
    
    
    7,125Additional paid-in capital
    
    
    54,938
    
    
    
    23,127
    
    
    
    8,800
    
    
    
    7,685
    
    
    
    39,612
    
    
    
    54,938Retained earnings (accumulated deficit).
    
    
    6,916
    
    
    
    11,656
    
    
    
    1,246
    
    
    
    (809
    )
    
    
    12,093
    
    
    
    6,916Accumulated other comprehensive
income (loss)
    
    
    (1,138
    )
    
    
    (875
    )
    
    
    (255
    )
    
    
    (8
    )
    
    
    (1,138
    )
    
    
    (1,138
    )Total stockholders equity
    
    
    67,841
    
    
    
    40,541
    
    
    
    14,791
    
    
    
    11,868
    
    
    
    67,200
    
    
    
    67,841Total
    
    $
    67,867
    
    
    
    605,423
    
    
    
    161,215
    
    
    
    140,103
    
    
    
    75,359
    
    
    
    899,249
 (continued) F-39




---



##### Table of Contents



Schedule SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Consolidating Statement of Earnings
Year Ended December 31, 2003(In thousands) Southern
    
    Southern
    
    SouthernCommunity
    
    Community
    
    CommunitySouthern
    
    Bank
    
    Bank of
    
    Bank ofCommunity
    
    of Central
    
    Southwest
    
    South
    
    
    
    
    
    ConsolidatedBancorp
    
    Florida
    
    Florida
    
    Florida
    
    Eliminations
    
    TotalInterest income:Loans
    
    $
    
    
    
    
    26,981
    
    
    
    7,116
    
    
    
    6,216
    
    
    
    
    
    
    
    40,313Securities
    
    
    
    
    
    
    3,068
    
    
    
    481
    
    
    
    194
    
    
    
    
    
    
    
    3,743Other
    
    
    44
    
    
    
    160
    
    
    
    63
    
    
    
    32
    
    
    
    93
    
    
    
    206Total interest income
    
    
    44
    
    
    
    30,209
    
    
    
    7,660
    
    
    
    6,442
    
    
    
    93
    
    
    
    44,262Interest expense:Deposits
    
    
    
    
    
    
    10,464
    
    
    
    3,069
    
    
    
    3,066
    
    
    
    43
    
    
    
    16,556Borrowings
    
    
    
    
    
    
    918
    
    
    
    15
    
    
    
    35
    
    
    
    50
    
    
    
    918Total interest expense
    
    
    
    
    
    
    11,382
    
    
    
    3,084
    
    
    
    3,101
    
    
    
    93
    
    
    
    17,474Net interest income
    
    
    44
    
    
    
    18,827
    
    
    
    4,576
    
    
    
    3,341
    
    
    
    
    
    
    
    26,788Provision for loan losses
    
    
    
    
    
    
    1,991
    
    
    
    521
    
    
    
    694
    
    
    
    
    
    
    
    3,206Net interest income after provision
for loan losses
    
    
    44
    
    
    
    16,836
    
    
    
    4,055
    
    
    
    2,647
    
    
    
    
    
    
    
    23,582Noninterest income:Service charges on deposit accounts
    
    
    
    
    
    
    671
    
    
    
    110
    
    
    
    30
    
    
    
    
    
    
    
    811Other fees
    
    
    
    
    
    
    929
    
    
    
    269
    
    
    
    168
    
    
    
    
    
    
    
    1,366Gain on sale of securities available
for sale
    
    
    
    
    
    
    283
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    403Earnings of subsidiaries
    
    
    6,440
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,440
    
    
    
    Gain on sale of charter
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Earnings on bank-owned life insurance
    
    
    
    
    
    
    152
    
    
    
    35
    
    
    
    48
    
    
    
    
    
    
    
    235Other income
    
    
    118
    
    
    
    838
    
    
    
    95
    
    
    
    73
    
    
    
    118
    
    
    
    1,006Total noninterest income
    
    
    7,558
    
    
    
    2,873
    
    
    
    629
    
    
    
    319
    
    
    
    6,558
    
    
    
    4,821Noninterest expenses:Salaries and employee benefits
    
    
    855
    
    
    
    5,551
    
    
    
    1,560
    
    
    
    1,766
    
    
    
    
    
    
    
    9,732Occupancy expense
    
    
    205
    
    
    
    2,409
    
    
    
    569
    
    
    
    546
    
    
    
    
    
    
    
    3,729Data processing
    
    
    12
    
    
    
    861
    
    
    
    208
    
    
    
    144
    
    
    
    
    
    
    
    1,225Printing and office supplies
    
    
    37
    
    
    
    209
    
    
    
    44
    
    
    
    89
    
    
    
    
    
    
    
    379Marketing and advertising
    
    
    
    
    
    
    355
    
    
    
    74
    
    
    
    69
    
    
    
    
    
    
    
    498Professional fees
    
    
    361
    
    
    
    398
    
    
    
    90
    
    
    
    64
    
    
    
    
    
    
    
    913Telephone
    
    
    15
    
    
    
    441
    
    
    
    66
    
    
    
    92
    
    
    
    
    
    
    
    614Other expense
    
    
    419
    
    
    
    653
    
    
    
    436
    
    
    
    422
    
    
    
    118
    
    
    
    1,812Total noninterest expenses
    
    
    1,904
    
    
    
    10,877
    
    
    
    3,047
    
    
    
    3,192
    
    
    
    118
    
    
    
    18,902Earnings (loss) before income taxes
    
    
    5,698
    
    
    
    8,832
    
    
    
    1,637
    
    
    
    (226
    )
    
    
    6,440
    
    
    
    9,501Income taxes (benefit)
    
    
    (423
    )
    
    
    3,281
    
    
    
    605
    
    
    
    (83
    )
    
    
    
    
    
    
    3,380Net earnings (loss)
    
    $
    6,121
    
    
    
    5,551
    
    
    
    1,032
    
    
    
    (143
    )
    
    
    6,440
    
    
    
    6,121
 F-40