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SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 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   Indicate by check number 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 the past 90 days: Yes   x   No   
o Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange
Act): Yes   o   No   
x As of April 21, 2004, the issuer had 7,215,561 outstanding shares of
common stock, par value $1.00 per share.




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##### Table of Contents



SOUTHERN COMMUNITY BANCORP
FORM 10-Q
March 31, 2004 INDEX Page No.PART I: FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets -
March 31, 2004 and 2003 (Unaudited) and December 31, 2003
    
    
    3Condensed Consolidated Statements of Earnings (Unaudited) -
Three Months Ended March 31, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Comprehensive Income
(Unaudited)  Three Months Ended March 31, 2004 and 2003
    
    
    6Condensed
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 2004 and 2003
    
    
    7Condensed Consolidated Statement of Stockholders Equity (Unaudited) -
Three Months Ended March 31, 2004
    
    
    9Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    10Review by Independent Accountants
    
    
    16Item 2.
    
    Managements Discussion and Analysis of Results of Operations
and Financial Condition
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    28PART II: OTHER INFORMATIONItem 2.
    
    Changes in Securities and Use of Proceeds
    
    
    29Item 3.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    29Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    30CERTIFICATION OF CEO PURSUANT TO SECTION 302CERTIFICATION OF CFO PURSUANT TO SECTION 302CERTIFICATION OF CEO PURSUANT TO SECTION 906CERTIFICATION OF CFO PURSUANT TO SECTION 906
 2




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PART I
FINANCIAL INFORMATION 
 Item 1. Financial Statements. SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES 
 Condensed Consolidated Balance Sheets (Unaudited)
($ in thousands, except per share amounts)
 At March 31,2004
    
    2003AssetsCash and due from banks
    
    $
    11,541
    
    
    
    20,428Interest-bearing deposits and federal funds sold
    
    
    65,395
    
    
    
    17,414Cash and cash equivalents
    
    
    76,936
    
    
    
    37,842Securities available for sale
    
    
    117,524
    
    
    
    84,616Security held to maturity
    
    
    2,957
    
    
    
    3,439Loans, net of allowance for loan losses of $9,764 in 2004 and $6,886 in 2003
    
    
    787,734
    
    
    
    551,050Accrued interest receivable
    
    
    3,368
    
    
    
    3,153Federal Home Loan Bank stock, at cost
    
    
    1,642
    
    
    
    522Premises and equipment, net
    
    
    20,935
    
    
    
    18,484Deferred income tax asset
    
    
    2,990
    
    
    
    1,504Bank owned life insurance
    
    
    6,751
    
    
    
    5,016Goodwill
    
    
    971
    
    
    
    971Foreclosed assets, net
    
    
    863
    
    
    
    207Other assets
    
    
    573
    
    
    
    402Total assets
    
    $
    1,023,244
    
    
    
    707,206Liabilities and Stockholders EquityLiabilities:Non-interest-bearing demand deposits
    
    
    88,945
    
    
    
    66,525Money-market deposits
    
    
    191,519
    
    
    
    128,512Savings and NOW deposits
    
    
    293,592
    
    
    
    179,041Time deposits
    
    
    319,034
    
    
    
    263,581Total deposits
    
    
    893,090
    
    
    
    637,659Other borrowings
    
    
    48,919
    
    
    
    1,661Official checks
    
    
    5,819
    
    
    
    6,019Other liabilities
    
    
    3,850
    
    
    
    2,527Total liabilities
    
    
    951,678
    
    
    
    647,866Stockholders equity:Common stock, $1.00 par value, 10,000,000 shares authorized,
7,215,561 and 6,729,814 shares issued and outstanding in 2004
and 2003
    
    
    7,216
    
    
    
    6,730Additional paid-in capital
    
    
    55,845
    
    
    
    50,003Retained earnings
    
    
    8,337
    
    
    
    1,799Accumulated other comprehensive income
    
    
    168
    
    
    
    808Total stockholders equity
    
    
    71,566
    
    
    
    59,340Total liabilities and stockholders equity
    
    $
    1,023,244
    
    
    
    707,206
 See Accompanying Notes to Condensed Consolidated Financial Statements. 3




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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
($ in thousands, except per share amounts) AtDecember 31,2003AssetsCash and due from banks
    
    $
    15,103Interest-bearing deposits and federal funds sold
    
    
    15,292Cash and cash equivalents
    
    
    30,395Securities available for sale
    
    
    109,157Security held to maturity
    
    
    3,272Loans, net of allowance for loan losses of $8,883
    
    
    718,969Accrued interest receivable
    
    
    3,026Federal Home Loan Bank stock, at cost
    
    
    1,934Premises and equipment, net
    
    
    20,967Deferred income tax asset
    
    
    3,659Bank owned life insurance
    
    
    5,189Goodwill
    
    
    971Foreclosed assets, net
    
    
    1,066Other assets
    
    
    644Total assets
    
    $
    899,249Liabilities and Stockholders EquityLiabilities:Non-interest-bearing demand deposits
    
    
    76,123Money-market deposits
    
    
    117,586Savings and NOW deposits
    
    
    284,955Time deposits
    
    
    293,015Total deposits
    
    
    771,679Other borrowings
    
    
    51,423Official checks
    
    
    4,972Other liabilities
    
    
    3,334Total liabilities
    
    
    831,408Stockholders equity:Common stock, $1.00 par value, 10,000,000 shares
authorized, 7,124,944 shares issued and outstanding
    
    
    7,125Additional paid-in capital
    
    
    54,938Retained earnings
    
    
    6,916Accumulated other comprehensive income (loss)
    
    
    (1,138
    )Total stockholders equity
    
    
    67,841Total liabilities and stockholders equity
    
    $
    899,249
 See Accompanying Notes to Condensed Consolidated Financial Statements. 4




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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES 
 Condensed Consolidated Statements of Earnings (Unaudited)
($ in thousands, except per share amounts)
 Three Months EndedMarch 31,2004
    
    2003Interest income:Loans
    
    $
    11,817
    
    
    
    8,935Securities
    
    
    1,113
    
    
    
    794Other
    
    
    73
    
    
    
    33Total interest income
    
    
    13,003
    
    
    
    9,762Interest expense:Deposits
    
    
    4,415
    
    
    
    3,900Other borrowings
    
    
    375
    
    
    
    8Total interest expense
    
    
    4,790
    
    
    
    3,908Net interest income
    
    
    8,213
    
    
    
    5,854Provision for loan losses
    
    
    966
    
    
    
    745Net interest income after provision for loan losses
    
    
    7,247
    
    
    
    5,109Noninterest income:Service charges on deposit accounts
    
    
    186
    
    
    
    195Other fees
    
    
    251
    
    
    
    263Earnings on bank-owned life insurance
    
    
    62
    
    
    
    62Gain on sale of securities available for sale
    
    
    62
    
    
    
    Other income
    
    
    174
    
    
    
    230Total noninterest income
    
    
    735
    
    
    
    750Noninterest expense:Salaries and employee benefits
    
    
    3,192
    
    
    
    2,329Occupancy expense
    
    
    1,101
    
    
    
    844Data processing
    
    
    333
    
    
    
    298Printing and office supplies
    
    
    114
    
    
    
    82Marketing and advertising
    
    
    177
    
    
    
    122Professional fees
    
    
    224
    
    
    
    147Other expense
    
    
    651
    
    
    
    430Total noninterest expense
    
    
    5,792
    
    
    
    4,252Earnings before income taxes
    
    
    2,190
    
    
    
    1,607Income taxes
    
    
    769
    
    
    
    603Net earnings
    
    $
    1,421
    
    
    
    1,004Basic earnings per share
    
    $
    .20
    
    
    
    .15Diluted earnings per share
    
    $
    .19
    
    
    
    .14Dividends per share
    
    $
    
    
    
    
    
 See Accompanying Notes to Condensed Consolidated Financial Statements. 5




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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES 
 Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
 Three Months EndedMarch 31,2004
    
    2003Net earnings
    
    $
    1,421
    
    
    
    1,004Net change in unrealized gain (loss) on
securities
available for sale, net of tax
    
    
    1,306
    
    
    
    (149
    )Comprehensive income
    
    $
    2,727
    
    
    
    855
 See Accompanying Notes to Condensed Consolidated Financial Statements. 6




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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 Three months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net earnings
    
    $
    1,421
    
    
    
    1,004Adjustments to reconcile net earnings to net cash
provided by operating activities:Provision for loan losses
    
    
    966
    
    
    
    745Depreciation and amortization
    
    
    482
    
    
    
    403Deferred income taxes
    
    
    (34
    )
    
    
    Gain on sale of securities available for sale
    
    
    (62
    )
    
    
    Net amortization of premiums and discounts on securities
    
    
    119
    
    
    
    323Net amortization of deferred loan fees and costs
    
    
    (469
    )
    
    
    (232
    )Common stock issued as compensation
    
    
    449
    
    
    
    222Earnings on bank-owned life insurance
    
    
    (62
    )
    
    
    (62
    )Net increase in accrued interest receivable
    
    
    (342
    )
    
    
    (347
    )Net decrease (increase) in other assets
    
    
    71
    
    
    
    (256
    )Net increase in official checks
    
    
    847
    
    
    
    2,232Net increase in other liabilities
    
    
    565
    
    
    
    467Net cash provided by operating activities
    
    
    3,951
    
    
    
    4,499Cash flows from investing activities:Maturities, calls and repayments of securities available for sale
    
    
    9,289
    
    
    
    9,167Repayments of security held to maturity
    
    
    310
    
    
    
    12Purchases of securities available for sale
    
    
    (17,761
    )
    
    
    (4,657
    )Proceeds from sale of securities available for sale
    
    
    2,062
    
    
    
    Net increase in loans
    
    
    (69,516
    )
    
    
    (51,296
    )Redemption (purchase) of Federal Home Loan Bank stock
    
    
    292
    
    
    
    (310
    )Purchases of premises and equipment
    
    
    (450
    )
    
    
    (195
    )Net proceeds from sales of foreclosed assets
    
    
    457
    
    
    
    95Purchase of bank owned life insurance
    
    
    (1,500
    )
    
    
    Net proceeds from sale of premises and equipment
    
    
    
    
    
    
    160Net cash used in investing activities
    
    
    (76,817
    )
    
    
    (47,024
    )Cash flows from financing activities:Net increase in deposits
    
    
    121,411
    
    
    
    44,242Net (decrease) increase in other borrowings
    
    
    (2,504
    )
    
    
    238Proceeds from issuance of common stock, net
    
    
    500
    
    
    
    164Net cash provided by financing activities
    
    
    119,407
    
    
    
    44,644Net increase in cash and cash equivalents
    
    
    46,541
    
    
    
    2,119Cash and cash equivalents at beginning of period
    
    
    30,395
    
    
    
    35,723Cash and cash equivalents at end of period
    
    $
    76,936
    
    
    
    37,842
 (continued) 7




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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
(In thousands)
 Three months EndedMarch 31,2004
    
    2003Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    4,605
    
    
    
    3,982Income taxes
    
    $
    450
    
    
    
    240Noncash financing and investing activities:Change in accumulated other comprehensive
income, net change in unrealized (gain)
loss on securities available for sale,
net of taxes
    
    $
    1,306
    
    
    
    (149
    )Transfer of loans to foreclosed assets
    
    $
    254
    
    
    
    Tax benefit from exercise of stock options
    
    $
    49
    
    
    
    
 See Accompanying Notes to Condensed Consolidated Financial Statements. 8




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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES 
 Condensed Consolidated Statement of Stockholders Equity
Three Months Ended March 31, 2004
($ in thousands)
 Common Stock
    
    Additional
    
    
    
    
    
    AccumulatedOtherCompre-hensive
    
    TotalPaid-In
    
    Retained
    
    Income
    
    Stockholders'Shares
    
    Amount
    
    Capital
    
    Earnings
    
    (Loss)
    
    EquityBalance at December 31, 2003
    
    
    7,124,944
    
    
    $
    7,125
    
    
    
    54,938
    
    
    
    6,916
    
    
    
    (1,138
    )
    
    
    67,841Net earnings (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,421
    
    
    
    
    
    
    
    1,421Net change in unrealized gain (loss) on securities
available for sale, net of taxes
of $703 (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,306
    
    
    
    1,306Common stock issued as compensation
(unaudited)
    
    
    38,637
    
    
    
    39
    
    
    
    410
    
    
    
    
    
    
    
    
    
    
    
    449Sale of common stock in connection with
Employee Stock Purchase Plan
(unaudited)
    
    
    27,980
    
    
    
    28
    
    
    
    266
    
    
    
    
    
    
    
    
    
    
    
    294Proceeds from exercise of stock options
(unaudited)
    
    
    20,000
    
    
    
    20
    
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    150Tax benefit from exercise of stock options
(unaudited)
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    49Sale of common stock (unaudited)
    
    
    4,000
    
    
    
    4
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    56Balance at March 31, 2004 (unaudited)
    
    
    7,215,561
    
    
    $
    7,216
    
    
    
    55,845
    
    
    
    8,337
    
    
    
    168
    
    
    
    71,566
 See Accompanying Notes to Condensed Consolidated Financial Statements. 9




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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES 
 Notes to Condensed Consolidated Financial Statements (unaudited) 1. General.In the opinion of the management of Southern Community Bancorp
and its subsidiaries (the Company or Southern), the accompanying condensed
consolidated financial statements contain all adjustments (consisting
principally of normal recurring accruals) necessary to present fairly the
financial position at March 31, 2004 and 2003, and the results of operations
and cash flows for the three-month periods then ended. The results of
operations and other data for the three months ended March 31, 2004 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2004. Southern Community Bancorp (the Holding Company) owns all of the
outstanding common stock of Southern Community Bank of Central Florida (the
Orlando Bank), Southern Community Bank of Southwest Florida (the Bonita
Springs Bank), and Southern Community Bank of South Florida (the South
Florida Bank) (collectively, the Banks). The Banks are Florida chartered
commercial banks and their deposits are insured up to the applicable limits by
the Federal Deposit Insurance Corporation (FDIC) through the Bank Insurance
Fund. Prior to October 1, 2003, the Orlando Bank had a 50% equity interest in
Southern Community Bank Mortgage LLC (the Mortgage Company). The Mortgage
Company originated, processed and closed loans in central Florida. On October
1, 2003, the Orlando Bank agreed to liquidate the Mortgage Company in exchange
for $250,000. The Orlando Bank owns all of the outstanding common stock of Southern
Community Insurance Agency, Inc. (the Insurance Agency). The Insurance
Agency refers customers of the Banks to certain insurance agencies for the
purchase of insurance products. 2. Loan Impairment and Losses.The Company performs a quarterly loan loss
analysis to identify impaired loans. The Companys impaired loans were as
follows (in thousands): At March 31,
    
    At December 31,2004
    
    2003
    
    2003Gross loans with no related allowance
    
    $
    
    
    
    
    
    
    
    
    Gross loans with related allowance
    
    
    900
    
    
    
    900
    
    
    
    900Less: Allowance on the loans
    
    
    (45
    )
    
    
    (45
    )
    
    
    (45
    )Net investment in impaired loans
    
    $
    855
    
    
    
    855
    
    
    
    855
 The average net investment in collateral dependent impaired loans and
interest income recognized and received on these loans were as follows (in
thousands): Three Months EndedMarch 31,2004
    
    2003Average net investment in impaired loans
    
    $
    855
    
    
    
    855Interest income recognized or impaired loans
    
    $
    
    
    
    
    Interest income received on impaired loans
    
    $
    
    
    
    
    
 10




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An analysis of the change in the allowance for loan losses was as follows (in
thousands): Three Months EndedMarch 31,2004
    
    2003Balance at beginning of period
    
    $
    8,883
    
    
    
    6,262Provision charged to earnings
    
    
    966
    
    
    
    745Net charge-offs
    
    
    (85
    )
    
    
    (121
    )Balance at end of period
    
    $
    9,764
    
    
    
    6,886
 Non-accrual and past due loans were as follows (in thousands): At March 31,
    
    At December 31,2004
    
    2003
    
    2003Non-accrual loans
    
    $
    2,510
    
    
    
    2,882
    
    
    
    1,737Past due ninety days
or more, but still
accruing
    
    
    
    
    
    
    216
    
    
    
    133$
    2,510
    
    
    
    3,098
    
    
    
    1,870
 3. Earnings Per Share.Earnings per share of common stock were computed
on the basis of the weighted-average number of shares of common stock
outstanding. Diluted earnings per share were computed based on the
weighted-average number of shares outstanding plus the effect of outstanding
stock options, computed using the treasury stock method. The following table
presents the calculations of earnings per share ($ in thousands, except per
share amounts): Three Months Ended March 31,2004
    
    2003Weighted-
    
    
    
    
    
    
    
    
    
    Weighted-Average
    
    Per Share
    
    
    
    
    
    Average
    
    Per ShareEarnings
    
    Shares
    
    Amount
    
    Earnings
    
    Shares
    
    AmountBasic earnings per share:Net earnings available to
common stockholders
    
    $
    1,421
    
    
    
    7,161,666
    
    
    $
    .20
    
    
    $
    1,004
    
    
    
    6,704,088
    
    
    $
    .15Effect of dilutive securities -Incremental shares from
assumed
exercise of options
    
    
    
    
    
    
    355,221
    
    
    
    
    
    
    
    
    
    
    
    327,431Diluted earnings per share:Net earnings available
to common stockholders
and assumed
Conversion
    
    $
    1,421
    
    
    
    7,516,887
    
    
    $
    .19
    
    
    $
    1,004
    
    
    
    7,031,519
    
    
    $
    .14
 11




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4. Regulatory Capital.The Holding Company, the Orlando Bank, the Bonita
Springs Bank and the South Florida Bank are required to maintain certain
minimum regulatory capital requirements. The following is a summary at March
31, 2004 of the regulatory capital requirements and the actual capital on a
percentage basis: RegulatoryActual
    
    RequirementTotal capital to risk-weighted assetsConsolidated
    
    
    9.81
    %
    
    
    8.00
    %Bonita Springs Bank
    
    
    10.34
    %
    
    
    8.00
    %Orlando Bank
    
    
    10.13
    %
    
    
    8.00
    %South Florida Bank
    
    
    10.21
    %
    
    
    8.00
    %Tier I capital to risk-weighted assetsConsolidated
    
    
    7.41
    %
    
    
    4.00
    %Bonita Springs Bank
    
    
    9.27
    %
    
    
    4.00
    %Orlando Bank
    
    
    7.02
    %
    
    
    4.00
    %South Florida Bank
    
    
    9.12
    %
    
    
    4.00
    %Tier I
capital to total assets - leverage ratioConsolidated
    
    
    7.29
    %
    
    
    4.00
    %Bonita Springs Bank
    
    
    9.39
    %
    
    
    4.00
    %Orlando Bank
    
    
    6.68
    %
    
    
    4.00
    %South Florida Bank
    
    
    9.63
    %
    
    
    4.00
    %
 5. Stock Option Plans.The Company has several stock option plans under
which the Company is authorized to issue shares of its common stock to
employees and directors pursuant to stock options and restricted stock
grants. Vesting periods are established as awards are granted. At
March 31, 2004, there were 1,394,060 shares available to be issued in
connection with future awards under the option plans. 12




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A summary of stock option transactions for the three-month periods ended
March 31, 2004 and 2003 follows ($ in thousands, except per share
amounts): Range
    
    Weighted-Of Per
    
    Average
    
    AggregateNumber of
    
    Share Option
    
    Per Share
    
    OptionOptions
    
    Price
    
    Price
    
    PriceBalance at December 31, 2002
    
    
    984,165
    
    
    $
    7.50-10.50
    
    
    
    8.18
    
    
    
    8,054Granted
    
    
    3,900
    
    
    
    10.50
    
    
    
    10.50
    
    
    
    40Balance at March 31, 2003
    
    
    988,065
    
    
    
    7.50-10.50
    
    
    
    8.19
    
    
    
    8,094Balance at December 31, 2003
    
    
    1,070,440
    
    
    
    7.50-14.00
    
    
    
    8.25
    
    
    
    8,829Granted
    
    
    60,500
    
    
    
    14.00
    
    
    
    14.00
    
    
    
    847Forfeited
    
    
    (40,000
    )
    
    
    7.50
    
    
    
    7.50
    
    
    
    (300
    )Exercised
    
    
    (20,000
    )
    
    
    7.50
    
    
    
    7.50
    
    
    
    (150
    )Balance at March 31, 2004
    
    
    1,070,940
    
    
    $
    7.50-14.00
    
    
    
    8.61
    
    
    
    9,226
 The following table illustrates the effect on net earnings and earnings
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). Three Months EndedMarch 31,2004
    
    2003Net earnings, as reported
    
    $
    1,421
    
    
    
    1,004Deduct: Total stock-based employee compensation
determined under the fair value based method for
all awards, net of related tax effect
    
    
    (66
    )
    
    
    (70
    )Proforma net earnings
    
    $
    1,355
    
    
    
    934Basic earnings per share:As reported
    
    $
    .20
    
    
    
    .15Proforma
    
    $
    .19
    
    
    
    .14Diluted earnings per share:As reported
    
    $
    .19
    
    
    
    .14Proforma
    
    $
    .18
    
    
    
    .13
 13




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##### Table of Contents



In order to calculate the fair value of the options, it was assumed that
the risk-free interest rate was 4.76% for 2004 and 4.57% for 2003, 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 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 option plans (in thousands): Three Months EndedMarch 31,2004
    
    2003Grant-date fair value per option of options issued
during the period
    
    $
    5.11
    
    
    
    3.72
 6. Other Events.On March 19, 2004, the Company entered into an
Agreement and Plan of Merger with First National Bankshares of Florida,
Inc. (FLB), pursuant to which the Company would be merged with and
into FLB. The merger is expected to be consummated in the third quarter
of 2004 subject to regulatory and shareholder approvals. 14




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##### Table of Contents



SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES 
 Review by Independent Public Accountants Hacker, Johnson & Smith PA, the Companys independent public accountants,
have made a limited review of the financial data as of March 31, 2004 and 2003
and for the three-month periods then ended, presented in this document, in
accordance with standards established by the American Institute of Certified
Public Accountants. Their report furnished pursuant to Article 10 of Regulation S-X is
included herein. 15




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##### Table of Contents



Independent Accountants Report Southern Community Bancorp
Orlando, Florida: We have reviewed the accompanying condensed consolidated balance sheets of
Southern Community Bancorp and Subsidiaries (the Company) as of March 31,
2004 and 2003, and the related condensed consolidated statements of earnings,
comprehensive income and cash flows for the three-month periods then ended and
the related condensed consolidated statement of stockholders equity for the
three-month period ended March 31, 2004. These financial statements are the
responsibility of the Companys management. We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquires of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion. Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated interim financial statements
referred to above for them to be in conformity with accounting principles
generally accepted in the United States of America. We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2003, and the related consolidated statements of
operations, stockholders equity and cash flows for the year then ended (not
presented herein); and in our report dated January 14, 2004, except for Note 23
as to which the date is March 19, 2004, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 2003, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived. HACKER, JOHNSON & SMITH PA
Orlando, Florida
April 8, 2004 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition  ThisForm 10-Qcontains 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-Qthat 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. Agreement and Plan of Merger Between Southern and First National Bankshares of
Florida, Inc. On March 19, 2004, Southern and First National Bankshares of Florida, Inc.
(FLB) entered into an Agreement of Plan of Merger, pursuant to which FLB has
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 Southern 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 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 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 20 trading days
ending on the day that the last required regulatory or shareholder approval for
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 organization under the
Internal Revenue Code of 1986 as amended (except as to 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
approval of the merger agreement by the shareholders of Southern and FLB,
receipt of banking regulatory approvals and receipt of opinions of counsel as
to the tax-free nature of certain aspects of the merger. Southern reported the
execution of the merger agreement in a Form 8-K filed with the 17




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##### Table of Contents



Securities and Exchange Commission on March 22, 2004. The merger is
currently expected to be consummated during the third quarter of 2004. Results of Operations  Three Months Ended March 31, 2004 and 2003  Southern had net earnings for the first quarter of 2004 of $1,421,000,
compared to $1,004,000 for the comparable period in 2003. Earnings
before income taxes in the first quarter of 2004 were $2,190,000 compared
$1,607,000 in the first quarter of 2003. The improvement in earnings was
primarily due to a substantial increase in net interest income, which
grew from $5.9 million in the first quarter of 2003 to $8.2 million in
the first quarter of 2004. As discussed below, the increase in net
interest income was principally a result of the growth in its assets.  Net Interest Income. Southerns operating results depend primarily on
Southerns net interest income, which is a difference between interest
income on interest-earning assets and interest expense on
interest-bearing liabilities. Net interest income is determined by the
difference between yields earned on interest-earning assets and rates
paid on interest- bearing liabilities and the relative amounts of
interest-earning assets and interest-bearing liabilities. Southerns
interest rates 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.  Interest income for the first quarter of 2004 was $13.0 million, compared
to $9.8 million for the first quarter of 2003. The growth in interest
income primarily reflects the growth in Southerns assets, which grew
from $707.2 million at March 31, 2003 to $1,023.2 million at March 31,
2004. 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 $551.1 million to $787.7 million. The increase in assets
is primarily attributable to the growth of Southerns business in
southeast and southwest Florida, where Southern opened three branches in
2003 and 2004.  Interest expense increased from $3.9 million for the first quarter of
2003 to $4.8 million for the comparable 2004 period. This was due to a
combination of higher level of deposits and borrowings and a decrease in
the average cost of deposits. Most of the deposit growth was
attributable to Southerns new branches in southeast and southwest
Florida.  Southerns net interest margin decreased from approximately 3.83% for the
first quarter of 2003 to approximately 3.63% for the first quarter of
2004. The decrease in the net interest margin was principally due to a
change in the mix of Southerns assets and liabilities. In this
connection, Southerns deposits increased significantly during the first
quarter of 2004 due to additional promotional efforts to obtain deposit
accounts. This in turn led to an increase in Southerns cash and cash
equivalents, which are relatively low yielding assets. Southern
anticipates that its net interest margin will improve as it re-deploys
these funds in to higher yielding loans and other assets. 18




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##### Table of Contents



Noninterest Income.Noninterest income in the first quarter of 2004
totaled $735,000, compared with $750,000 in 2003. Service charges on
deposit accounts totaled $186,000 in 2004, down from $195,000 in 2003.
Other fees and other income totaled $425,000 in 2004, down from $493,000
in 2003. This decrease was primarily caused by a decrease in mortgage
referral fees after the liquidation of Southern Community Bank Mortgage,
LLC in October 2003.  Provision for Loan Losses.The provision for loan losses totaled
$966,000 in the first quarter of 2004 compared to $745,000 in 2003. The
allowance for loan losses at March 31, 2004 was $9.8 million. See
Allowance and Provision for Loan Losses below.  Noninterest Expenses.Noninterest expenses for the first quarter of 2004
totaled $5.8 million, up 36.2% from $4.3 million in 2003. Noninterest
expenses included the following:  
    
    Salaries and employee benefits represented 55.1% of total
non-interest expenses in 2004. Salaries and employee benefits
increased 37.1% to $3.2 million in 2004 from $2.3 million in 2003.
The increase was primarily due to the addition of employees in
connection with the new branches in southeast and southwest Florida,
together with salary increases and higher benefit costs.  
    
    Occupancy expense in 2004 totaled $1,101,000, up 30.5% from
$844,000 in 2003. This increase was primarily due to the opening of
the new branches.  
    
    Other non-interest expenses for the first quarter of 2004
totaled $1,499,000, up 38.9% from $1,079,000 in 2003. Other
non-interest expenses include data processing, printing and office
supplies, marketing and advertising, professional fees and other
expenses. The increase resulted from the opening of additional
branches as well as the overall growth of Southern.  Income Taxes.Income taxes totaled $769,000 in 2004 (effective rate of
35.1%) compared to $603,000 in 2003 (effective rate of 37.5%). Capital Expenditures Southern makes capital expenditures in order to improve its ability to
provide quality services to its customers. Capital expenditures for the three
months ended March 31, 2004 equaled $450,000 compared to $195,000 in 2003.
Most of these expenses in 2004 were related to the purchase of equipment and
construction of new branches. Asset Quality and Credit Risk Securities.Southern maintains a high quality investment portfolio
including securities of U.S. government entities, mortgage-backed securities
and municipal bonds. Southern believes that the securities have very little
risk of default. At March 31, 2004, all but one of the securities held in
Southerns investment portfolio were classified available for sale and all were
rated A 19




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##### Table of Contents



or better (with a majority rated triple A). 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 collectibility. The following table sets forth information regarding the composition and
carrying amounts of the investment portfolio at March 31, 2004 and 2003: Investment Portfolio At March 31,2004
    
    2003(in thousands)Available for Sale:U.S. Government agencies securities
    
    $
    45,082
    
    
    
    31,521Mortgage-backed securities
    
    
    56,274
    
    
    
    52,837Municipal bonds
    
    
    16,168
    
    
    
    258$
    117,524
    
    
    
    84,616Held to Maturity-Mortgage-backed securities
    
    $
    2,957
    
    
    
    3,439
 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 the 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 monitors collateral values to ensure that they are
maintained at proper levels. As of March 31, 2004, the majority of Southerns real estate loans were
loans secured by real estate in central and south Florida. This level of
concentration could present a potential credit risk to Southern because the
ultimate collectibility of these loans is susceptible to adverse changes in
real estate market conditions in these markets. Southern has sought 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 five 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 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. 20




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##### Table of Contents



Types of Loans At March 31,2004
    
    2003(in thousands)Commercial
    
    $
    136,507
    
    
    
    133,277Commercial real estate
    
    
    284,053
    
    
    
    225,475Residential real estate
    
    
    73,710
    
    
    
    51,201Construction
    
    
    289,121
    
    
    
    137,155Consumer and other
    
    
    16,988
    
    
    
    13,113Total loans
    
    
    800,379
    
    
    
    560,221Less:Allowance for loan losses
    
    
    (9,764
    )
    
    
    (6,886
    )Net deferred loan fees and other discounts
    
    
    (2,881
    )
    
    
    (2,285
    )Loans, net
    
    $
    787,734
    
    
    
    551,050
 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 approximately $136.5 million or
17.1% of total loans at March 31, 2004, compared with $133.3 million or 23.8%
of total loans at March 31, 2003. The growth in commercial loans was primarily
due to new loans originated in southeast Florida. Real Estate Loans.Southerns real estate loans totaled $646.9 million or
80.8% of total loans at March 31, 2004, and $413.8 million or 73.8% at March
31, 2003. Southern makes real estate loans secured by commercial real estate,
including loans to acquire or refinance office buildings, warehouses and
apartments. These loans generally require a loan to value ratio of not more
than 75%. Most of these loans have a maturity of five years or less. Almost
all of these loans are secured by real property located in central and south
Florida. These loans totaled $284.1 million or 35.5% of total loans at March
31, 2004 compared with $225.5 million or 40.2% of total loans at March 31,
2003. 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. 21




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##### Table of Contents



Residential real estate loans totaled $73.7 million or 9.2% of total loans
at March 31, 2004, compared with $51.2 million or 9.1% at March 31, 2003.
Residential real estate mortgage loans are predominately adjustable rate home
mortgages which generally require a loan-to-collateral value ratio of not more
than 90% and equity credit lines which generally limit the loan-to-collateral
value ratio to not more than 90%. Most loans have a maximum term of five to
seven years. Almost all of the residential real estate mortgage loans are
secured by homes 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 $289.1 million or 36.1% of total loans at March
31, 2004 compared to $137.2 million or 24.5% of total loans at March 31, 2003.
The increase in construction loans was due in part to the refocusing of
marketing efforts. Southern primarily makes construction loans on property
located in central and south Florida. Consumer and Other Loans.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 approximately $17.0 million or 2.1% of
total loans, on March 31, 2004, compared with $13.1 million or 2.4% of total
loans, on March 31, 2003. Risks associated with installment loans include
borrowers loss of employment, and rapid depreciation of loan collateral. Commitments.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 amount recognized in the condensed
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. 22




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##### Table of Contents



Southern had legally binding commitments to extend credit, including
unused lines of credit and letters of credit, totaling $300.2 million at March
31, 2004. Nonperforming Assets and Past Due Loans Nonperforming assets consist of nonaccrual loans and 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 Southerns
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. The following table presents Southerns non-performing assets and past due
loans: Non-Performing Assets and 90 Day Past Due Loans At March 31,2004
    
    2003(In thousands)Nonaccrual loans
    
    $
    2,510
    
    
    
    2,882Foreclosed assets
    
    
    863
    
    
    
    207Total nonperforming assets
    
    $
    3,373
    
    
    
    3,089Accruing loans past due 90 days or more
    
    $
    
    
    
    
    216
 Southerns non-performing loans and loans past due 90 days were $2.5
million at March 31, 2004, or .31% of total loans of $800.4 million.
Non-performing loans at March 31, 2004 consisted of commercial and residential
real estate loans. Southern believes that its non-performing loans are well
secured and are unlikely to result in any material losses. Total
non-performing assets and accruing loans past due 90 days or more totaled $3.4
million at March 31, 2004, compared to $3.3 million at March 31, 2003. Allowance and Provision for Loan Losses Southern evaluates the adequacy of its allowance for loan losses as part
of its ongoing 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 loan review officer, who
recommends to the 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 23




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##### Table of Contents



experience, the level and composition of non-accrual 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 committees review of the officers analysis of the adequacy of the
allowance for loan losses. While the largest 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. Management relied on these factors, as well as its assessment of the
financial condition of specific clients facing financial difficulties, in
deciding to increase the allowance for loan losses to $9.8 million at March 31,
2004, from $8.9 million at December 31, 2003 and $6.9 million at March 31,
2003. Financial Condition Southerns goal is to maintain a high quality and liquid balance sheet.
Southern seeks to achieve this objective through increases in collateralized
loans, a strong portfolio of real estate loans and a stable portfolio of
investment securities of high quality. Cash and Cash Equivalents. Southern had cash and cash equivalents of
$76.9 million at March 31, 2004, compared to $37.8 million at March 31, 2003.
This increase was primarily the result of the substantial growth in Southerns
deposits. Securities.On March 31, 2004, securities were $120.5 million or 12.4% of
total earning assets. Southerns strategy for its investment account is to
maintain a high quality portfolio. The investment portfolio, most of which has
been classified as available for sale, increased 36.7% from $88.1 million at
March 31, 2003. Loans.Net loans were $787.7 million as of March 31, 2004, compared to
$551.1 million as of March 31, 2003. See Asset Quality and Credit Risk 
Loans, above. Interest-Bearing Liabilities. Interest-bearing liabilities primarily
consisted of interest-bearing deposits and other borrowings. Total
interest-bearing liabilities were $853.1 million at March 31, 2004, up from
$572.8 million in 2003. There was an increase in savings, money-market and NOW
deposits of $177.6 million or 57.7% compared to 2003. There was also a
significant increase in time deposits of $55.5 million or 21.0% compared to
2003. 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. Other borrowings increased to $48.9 million at
March 31, 2004 from $1.6 million at March 31, 2003. Other borrowings consist
of Federal Home Loan Bank advances, subordinated debentures and borrowings
under Southerns line of credit with SunTrust Bank NA. In this connection,
Southern borrowed $5,000,000 from SunTrust Bank N.A. during the first quarter
of 2004 in order to provide additional capital to its bank subsidiaries. This
loan bears interests at LIBOR plus 1.85%, with interest payable quarterly and
the entire balance due 364 days after funding. 24




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##### Table of Contents



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, federal funds sold and securities
available for sale 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, 180 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. Southerns sensitivity position at March 31, 2004
was such that net interest income would decrease modestly if there were an
increase in short-term interest rates. Southern monitors the interest rate risk sensitivity with traditional gap
measurements. These gap measurements have certain limitations in their ability
to accurately portray interest sensitivity; however, they do provide a static
reading of Southerns interest rate risk exposure. As of March 31, 2004, Southern was liability sensitive (interest-sensitive
liabilities subject to repricing exceeded interest-sensitive assets subject to
repricing) on a 365-day basis to the extent of $67.2 million. This negative
gap at March 31, 2004 was 6.6% of total assets compared with a negative gap of
10.2% at March 31, 2003. Southerns target gap position is in the range of
negative 20% and positive 20%. The change in Southerns gap position reflects
a shift from longer-maturity interest-earning assets. 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. 25




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##### 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
stockholders. A strong capital position helps Southern withstand unforeseen
adverse developments and take advantage of attractive lending and investment
opportunities when they arise. Southerns tier one capital was 7.41% and the total capital was 9.81% of
risk-based assets at March 31, 2004. These risk-based capital ratios were 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 7.29% at March 31, 2004, was also in excess
of the minimum 4.0% requirement. Southerns goal is to maintain the regulatory capital of each of its banks
so that they are well capitalized under applicable federal banking
regulations. On March 31, 2004, all of the banks had achieved this objective. In the first quarter of 2004, Southern borrowed $5,000,000 from SunTrust
Banks N.A. pursuant to a revolving line of credit. Southern utilized the
proceeds of this loan to make capital contributions to each of its subsidiary
banks. 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. Unrealized Gain on Securities Available for Sale Due to the combined effects of the growth in Southerns available for sale
investment securities and the decline in long-term interest rates during the
first quarter of 2004, Southerns comprehensive income for the three months
ended March 31, 2004 increased by $1,306,000 as a result of the net unrealized
gain in the market value of its investment securities that are available for
sale, compared to a net unrealized loss of $149,000 during the three months
ended on March 31, 2003. As a result of the change in the first quarter of
2004, which would affect Southerns net income only in the event of the sale of
these securities, Southerns accumulated other comprehensive income (loss)
increased from $(1,138,000) at December 31, 2003 to $168,000. Critical Accounting Policies Southerns consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States. A summary
of Southerns significant accounting policies is set forth in Southerns
consolidated financial statements contained in Southerns Form 10-K for the
fiscal year ended December 31, 2004. 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 26




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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 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. 27




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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 March 31, 2004. 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. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss from adverse changes in market prices and
rates. The Companys market risk arises primarily from interest-rate risk
inherent in its lending and deposit taking activities. The Company has little
or no risk related to trading accounts, commodities or foreign exchange. The Company 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 the
Companys net interest income and capital, while adjusting the Companys
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 the Company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. There have been no
significant changes in the Companys market risk exposure since December 31,
2003. 
 Item 4. Controls and Procedures Southern maintains 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 periods specified in the rules and
forms of the Securities and Exchange Commission. Based upon their evaluation
of these controls and procedures as of March 31, 2004, the Chief Executive
Officer and Chief Financial Officer of Southern concluded that Southerns
disclosure controls and procedures, as designed and implemented, were
effective. Southern made no significant changes in its internal controls over
financial reporting during the quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 28




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PART II
OTHER INFORMATION 
 Item 2. Changes in Securities. During the quarter ended March 31, 2004, Southern issued shares of its
common stock in the following transactions which were not registered under the
Securities Act of 1933, as amended:  Southern issued 15,000 shares valued at $10.50 and 12,498 shares valued
at $14.00 of its common stock to its chief executive officer pursuant to an
existing stock grant agreement. Southern issued the shares in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act of
1933, as amended.  Southern issued 11,139 shares of its common stock to its directors in
lieu of directors fees. The shares were issued at a value of $10.50 per
share. Southern relied upon the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933, as amended.  Southern issued 27,980 shares of its common stock to its employees
pursuant to Southerns existing employee stock purchase plan. The shares were
issued at a value of $10.50 per share. Southern relied upon the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933, as
amended.  Southern sold 4,000 shares of its common stock to two of its officers.
The shares were sold a price of $14.00 per share. Southern relied upon the
exemption from registration set forth in Section 4(2) of the Securities Act of
1933, as amended.  Southern issued 20,000 shares pursuant to the exercise of a stock option
held by the estate of a former director of Southern. Southern relied upon the
exemption from registration set forth in Section 4(2) of the Securities Act of
1933, as amended. 
 Item 3. Submission of Matters to a Vote of Securities Holders Southern held its annual meeting of shareholders on May 4, 2004. At the annual meeting, Southern elected six directors to serve for a term
of three years. The six persons who were elected to serve as directors were:
Charlie W. Brinkley, Jr., Alfred J. Cinque, Thomas H. Dargan, Jr., Richard L.
Garner, John G. Squires, and Michael E. Vestal. At the annual meeting,
4,142,487 votes were voted for the election of each of the six nominees and
14,067 votes were voted withheld. 29




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The following table sets forth all of the directors of Southern including
their current term and office: Name of Director
    
    Expiration of
TermDennis G. Bedley
    
    
    2005George D. Anderson
    
    
    2005P.T. Fleuchaus
    
    
    2005Dennis E. Gilkey
    
    
    2005Jennings L. Hurt, III
    
    
    2005John K. Ritenour
    
    
    2005Clark D. Jensen
    
    
    2006Sanford H. Miller
    
    
    2006Sal A. Nunziata
    
    
    2006Stanley H. Sandefur
    
    
    2006Gregory K. Talbott
    
    
    2006Joel E. Whittenhall
    
    
    2006Charlie W. Brinkley, Jr.
    
    
    2007Alfred J. Cinque
    
    
    2007Thomas H. Dargan, Jr.
    
    
    2007Richard L. Garner
    
    
    2007John G. Squires
    
    
    2007Michael E. Vestal
    
    
    2007
 At the annual meeting, the shareholders also ratified the appointment of
Hacker, Johnson & Smith P.A. as the Companys auditors for the fiscal year
ended December 31, 2004. There were 4,145,234 shares voted in favor of this
proposal and none voted against. 
 Item 6. Exhibits. (a) Exhibits. Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant
to Section 302 of Sarbanes-Oxley Act of 200331.2
    
    Certification of Chief Financial Officer pursuant
to Section 302 of Sarbanes-Oxley Act of 200332.1
    
    Certification of Chief Executive Officer pursuant
to Section 18 U.S.C. Section 1350, as adopted by Section 906
of Sarbanes-Oxley Act of 2002
 30




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32.2
    
    Certification of Chief Financial Officer pursuant
to Section 18 U.S.C. Section 1350, as adopted by Section 906
of Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K.  On March 26, 2004, the Company filed a Current Report on Form 8-K
to report that the Company had entered into an Agreement and Plan
of Merger with First National Bankshares of Florida, Inc. 31




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. SOUTHERN COMMUNITY BANCORP
(Registrant)Date: May 13, 2004
    /s/  Charlie W. Brinkley, Jr.Charlie W. Brinkley, Jr.Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer) /s/ Stephen R. JeuckStephen R. JeuckDate: May 13, 2004
    Chief Financial Officer
(Principal Accounting Officer) 32