##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE
ACT OF 1934



For the quarterly period ended June 30, 2004



Commission File No. 000-49780



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SOUTHERN COMMUNITY BANCORP

(Exact Name of Registrant as Specified in its
Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 59-3619325                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



250 North Orange
Avenue, Orlando, Florida 32801

(Address of Principal Executive Offices)



(407) 648-1844

(Registrants telephone number, including area code)



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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 ̈



Indicate by checkmark whether
the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):    Yes  x    No ̈



As of August 4, 2004, the issuer had 7,307,469 outstanding shares of common stock, par value $1.00 per share.



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##### Table of Contents

SOUTHERN COMMUNITY BANCORP

FORM 10-Q

June 30, 2004



INDEX



|                                                                                              |  |                                                                                                                   |  |         
|--------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                              |  |                                                                                                                   |  | Page No.
|PART I:
FINANCIAL INFORMATION                                                                 |  |                                                                                                                  
|                                                                                              | 
|Item 1.
Condensed Consolidated Financial Statements                                           |  | 3                                                                                                                
|                                                                                              |  |                                                                                                                  
|                                                                                              |  | Condensed Consolidated Balance Sheets - June 30, 2004 and 2003 (Unaudited) and December 31, 2003                  |  | 4       
|                                                                                              |  |                                                                                                                  
|                                                                                              |  | Condensed Consolidated Statements of Earnings (Unaudited) - Three Months Ended June 30, 2004 and 2003             |  | 6       
|                                                                                              |  |                                                                                                                  
|                                                                                              |  | Condensed Consolidated Statements of Earnings (Unaudited) - Six Months Ended June 30, 2004 and 2003               |  | 8       
|                                                                                              |  |                                                                                                                  
|                                                                                              |  | Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended June 30, 2004 and 2003 |  | 7       
|                                                                                              |  |                                                                                                                  
|                                                                                              |  | Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Six Months Ended June 30, 2004 and 2003   |  | 9       
|                                                                                              |  |                                                                                                                  
|                                                                                              |  | Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2004 and 2003             |  | 10      
|                                                                                              |  |                                                                                                                  
|                                                                                              |  | Condensed Consolidated Statement of Stockholders Equity (Unaudited) - Six Months Ended June 30, 2004             |  | 12      
|                                                                                              |  |                                                                                                                  
|                                                                                              |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                  |  | 13      
|                                                                                              |  |                                                                                                                  
|                                                                                              |  | Review by Independent Registered Public Accounting Firm                                                           |  | 18      
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20                                                                                                               
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures about Market Risk                            |  | 33                                                                                                               
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 33                                                                                                               
|                                                                                              | 
|PART II:
OTHER INFORMATION                                                                    |  |                                                                                                                  
|                                                                                              | 
|Item 2.
Changes in Securities and Use of Proceeds                                             |  | 34                                                                                                               
|                                                                                              | 
|Item 6.
Exhibits and Reports on Form 8-K                                                      |  | 34                                                                                                               



2



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##### Table of Contents

PART I

FINANCIAL INFORMATION



Item 1. Financial Statements.



3



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##### Table of Contents

SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

($ in thousands, except per share amounts)



|                                                                                                                                    |  |             |           |   |      |        
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | --------- | - | ---- | -------
|                                                                                                                                    |  | At June 30,
|                                                                                                                                    |  | 2004        |           |   | 2003
|Assets                                                                                                                              |  |             |           |   |      |        
|Cash and due from banks                                                                                                             |  | $           | 13,624    |   |      | 21,999 
|Interest-bearing deposits and federal funds sold                                                                                    |  |             | 18,484    |   |      | 4,317  
|                                                                                                                                    |  |             |           |   |      |        
|Cash and cash equivalents                                                                                                           |  |             | 32,108    |   |      | 26,316 
|                                                                                                                                    |  |            
|Securities available for sale                                                                                                       |  |             | 115,562   |   |      | 117,613
|Security held to maturity                                                                                                           |  |             | 2,881     |   |      | 3,427  
|Loans, net of allowance for loan losses of $10,010 in 2004 and $7,582 in 2003                                                       |  |             | 819,626   |   |      | 611,214
|Accrued interest receivable                                                                                                         |  |             | 3,567     |   |      | 2,896  
|Federal Home Loan Bank stock, at cost                                                                                               |  |             | 1,588     |   |      | 1,729  
|Premises and equipment, net                                                                                                         |  |             | 20,757    |   |      | 18,496 
|Deferred income tax asset                                                                                                           |  |             | 4,763     |   |      | 1,609  
|Bank owned life insurance                                                                                                           |  |             | 6,820     |   |      | 5,075  
|Goodwill                                                                                                                            |  |             | 971       |   |      | 971    
|Foreclosed assets, net                                                                                                              |  |             | 452       |   |      | 4      
|Other assets                                                                                                                        |  |             | 855       |   |      | 551    
|                                                                                                                                    |  |             |           |   |      |        
|Total assets                                                                                                                        |  | $           | 1,009,950 |   |      | 789,901
|                                                                                                                                    |  |             |           |   |      |        
|Liabilities and Stockholders Equity                                                                                                |  |             |           |   |      |        
|                                                                                                                                    |  |            
|Liabilities:                                                                                                                        |  |             |           |   |      |        
|Non-interest-bearing demand deposits                                                                                                |  |             | 99,665    |   |      | 58,940 
|Money-market deposits                                                                                                               |  |             | 177,303   |   |      | 109,039
|Savings and NOW deposits                                                                                                            |  |             | 286,140   |   |      | 202,731
|Time deposits                                                                                                                       |  |             | 314,306   |   |      | 292,476
|                                                                                                                                    |  |             |           |   |      |        
|Total deposits                                                                                                                      |  |             | 877,414   |   |      | 663,186
|                                                                                                                                    |  |            
|Other borrowings                                                                                                                    |  |             | 50,004    |   |      | 52,237 
|Official checks                                                                                                                     |  |             | 8,790     |   |      | 7,614  
|Other liabilities                                                                                                                   |  |             | 1,909     |   |      | 2,038  
|                                                                                                                                    |  |             |           |   |      |        
|Total liabilities                                                                                                                   |  |             | 938,117   |   |      | 725,075
|                                                                                                                                    |  |             |           |   |      |        
|Stockholders equity:                                                                                                               |  |             |           |   |      |        
|Common stock, $1.00 par value, 10,000,000 shares authorized, 7,307,469 and 7,046,352 shares issued and outstanding in 2004 and
2003 |  |             | 7,307     |   |      | 7,046  
|Additional paid-in capital                                                                                                          |  |             | 56,962    |   |      | 54,118 
|Retained earnings                                                                                                                   |  |             | 10,626    |   |      | 3,048  
|Accumulated other comprehensive income (loss)                                                                                       |  |             | (3,062    | ) |      | 614    
|                                                                                                                                    |  |             |           |   |      |        
|Total stockholders equity                                                                                                          |  |             | 71,833    |   |      | 64,826 
|                                                                                                                                    |  |             |           |   |      |        
|Total liabilities and stockholders equity                                                                                          |  | $           | 1,009,950 |   |      | 789,901
|                                                                                                                                    |  |             |           |   |      |        



See Accompanying Notes to Condensed
Consolidated Financial Statements.



4



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##### Table of Contents

SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheet

($ in thousands, except per share
amounts)



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



See Accompanying Notes to Condensed
Consolidated Financial Statements.



5



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##### Table of Contents

SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings (Unaudited)

($ in thousands, except per share amounts)



|                                                    |  |                            |        |      |       
|--------------------------------------------------- |  | -------------------------- | ------ | ---- | ------
|                                                    |  | Three months EndedJune 30,
|                                                    |  | 2004                       |        | 2003
|Interest income:                                    |  |                            |        |      |       
|Loans                                               |  | $                          | 12,255 |      | 9,770 
|Securities                                          |  |                            | 1,154  |      | 942   
|Other                                               |  |                            | 90     |      | 44    
|                                                    |  |                            |        |      |       
|Total interest income                               |  |                            | 13,499 |      | 10,756
|                                                    |  |                            |        |      |       
|Interest expense:                                   |  |                            |        |      |       
|Deposits                                            |  |                            | 4,534  |      | 4,109 
|Other borrowings                                    |  |                            | 383    |      | 183   
|                                                    |  |                            |        |      |       
|Total interest expense                              |  |                            | 4,917  |      | 4,292 
|                                                    |  |                            |        |      |       
|Net interest income                                 |  |                            | 8,582  |      | 6,464 
|Provision for loan losses                           |  |                            | 478    |      | 975   
|                                                    |  |                            |        |      |       
|Net interest income after provision for loan losses |  |                            | 8,104  |      | 5,489 
|                                                    |  |                            |        |      |       
|Noninterest income:                                 |  |                            |        |      |       
|Service charges on deposit accounts                 |  |                            | 196    |      | 213   
|Other fees                                          |  |                            | 257    |      | 361   
|Earnings on bank-owned life insurance               |  |                            | 69     |      | 59    
|Gain on sale of securities available for sale       |  |                            |       |      | 289   
|Other income                                        |  |                            | 187    |      | 256   
|                                                    |  |                            |        |      |       
|Total noninterest income                            |  |                            | 709    |      | 1,178 
|                                                    |  |                            |        |      |       
|Noninterest expense:                                |  |                            |        |      |       
|Salaries and employee benefits                      |  |                            | 2,860  |      | 2,367 
|Occupancy expense                                   |  |                            | 1,064  |      | 926   
|Data processing                                     |  |                            | 337    |      | 311   
|Printing and office supplies                        |  |                            | 56     |      | 97    
|Marketing and advertising                           |  |                            | 94     |      | 139   
|Professional fees                                   |  |                            | 312    |      | 266   
|Other expense                                       |  |                            | 568    |      | 559   
|                                                    |  |                            |        |      |       
|Total noninterest expense                           |  |                            | 5,291  |      | 4,665 
|                                                    |  |                            |        |      |       
|Earnings before income taxes                        |  |                            | 3,522  |      | 2,002 
|Income taxes                                        |  |                            | 1,233  |      | 753   
|                                                    |  |                            |        |      |       
|Net earnings                                        |  | $                          | 2,289  |      | 1,249 
|                                                    |  |                            |        |      |       
|Basic earnings per share                            |  | $                          | .32    |      | .18   
|                                                    |  |                            |        |      |       
|Diluted earnings per share                          |  | $                          | .30    |      | .17   
|                                                    |  |                            |        |      |       
|Dividends per share                                 |  |                            |       |      |      
|                                                    |  |                            |        |      |       



See Accompanying Notes to Condensed
Consolidated Financial Statements.



6



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##### Table of Contents

SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

(In thousands)



|                                                                                  |  |                            |        |   |      |       |  
|--------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | ----- | -
|                                                                                  |  | Three months EndedJune 30, |       
|                                                                                  |  | 2004                       |        |   | 2003 |      
|Net earnings                                                                      |  | $                          | 2,289  |   |      | 1,249 |  
|Net change in unrealized gain (loss) on securities available for sale, net of tax |  |                            | (3,230 | ) |      | (194  | )
|                                                                                  |  |                            |        |   |      |       |  
|Comprehensive income (loss)                                                       |  | $                          | (941   | ) |      | 1,055 |  
|                                                                                  |  |                            |        |   |      |       |  



See Accompanying Notes to Condensed
Consolidated Financial Statements.



7



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##### Table of Contents

SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings (Unaudited)

($ in thousands, except per share amounts)



|                                                    |  |                          |        |      |       
|--------------------------------------------------- |  | ------------------------ | ------ | ---- | ------
|                                                    |  | Six Months EndedJune 30,
|                                                    |  | 2004                     |        | 2003
|Interest income:                                    |  |                          |        |      |       
|Loans                                               |  | $                        | 24,072 |      | 18,705
|Securities                                          |  |                          | 2,267  |      | 1,736 
|Other                                               |  |                          | 163    |      | 77    
|                                                    |  |                          |        |      |       
|Total interest income                               |  |                          | 26,502 |      | 20,518
|                                                    |  |                          |        |      |       
|Interest expense:                                   |  |                          |        |      |       
|Deposits                                            |  |                          | 8,949  |      | 8,009 
|Other borrowings                                    |  |                          | 758    |      | 191   
|                                                    |  |                          |        |      |       
|Total interest expense                              |  |                          | 9,707  |      | 8,200 
|                                                    |  |                          |        |      |       
|Net interest income                                 |  |                          | 16,795 |      | 12,318
|Provision for loan losses                           |  |                          | 1,444  |      | 1,720 
|                                                    |  |                          |        |      |       
|Net interest income after provision for loan losses |  |                          | 15,351 |      | 10,598
|                                                    |  |                          |        |      |       
|Noninterest income:                                 |  |                          |        |      |       
|Service charges on deposit accounts                 |  |                          | 382    |      | 408   
|Other fees                                          |  |                          | 508    |      | 624   
|Earnings on bank-owned life insurance               |  |                          | 131    |      | 121   
|Gain on sale of securities available for sale       |  |                          | 62     |      | 289   
|Other income                                        |  |                          | 361    |      | 486   
|                                                    |  |                          |        |      |       
|Total noninterest income                            |  |                          | 1,444  |      | 1,928 
|                                                    |  |                          |        |      |       
|Noninterest expense:                                |  |                          |        |      |       
|Salaries and employee benefits                      |  |                          | 6,052  |      | 4,696 
|Occupancy expense                                   |  |                          | 2,165  |      | 1,770 
|Data processing                                     |  |                          | 670    |      | 609   
|Printing and office supplies                        |  |                          | 170    |      | 179   
|Marketing and advertising                           |  |                          | 271    |      | 261   
|Professional fees                                   |  |                          | 536    |      | 413   
|Other expense                                       |  |                          | 1,219  |      | 989   
|                                                    |  |                          |        |      |       
|Total noninterest expense                           |  |                          | 11,083 |      | 8,917 
|                                                    |  |                          |        |      |       
|Earnings before income taxes                        |  |                          | 5,712  |      | 3,609 
|Income taxes                                        |  |                          | 2,002  |      | 1,356 
|                                                    |  |                          |        |      |       
|Net earnings                                        |  |                          | 3,710  |      | 2,253 
|                                                    |  |                          |        |      |       
|Basic earnings per share                            |  |                          | .52    |      | .33   
|                                                    |  |                          |        |      |       
|Diluted earnings per share                          |  |                          | .48    |      | .31   
|                                                    |  |                          |        |      |       
|Dividends per share                                 |  |                          |       |      |      
|                                                    |  |                          |        |      |       



See Accompanying Notes to Condensed
Consolidated Financial Statements.



8



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##### Table of Contents

SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

(In thousands)



|                                                                                  |  |                          |        |   |      |   |       |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ----- | -
|                                                                                  |  | Six months EndedJune 30, |       
|                                                                                  |  | 2004                     |        |   | 2003 |  
|Net earnings                                                                      |  | $                        | 3,710  |   |      |   | 2,253 |  
|Net change in unrealized gain (loss) on securities available for sale, net of tax |  |                          | (1,924 | ) |      |   | (343  | )
|                                                                                  |  |                          |        |   |      |   |       |  
|Comprehensive income                                                              |  | $                        | 1,786  |   |      | $ | 1,910 |  
|                                                                                  |  |                          |        |   |      |   |       |  



See Accompanying Notes to Condensed
Consolidated Financial Statements.



9



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##### Table of Contents

SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)



|                                                                                    |  |                           |          |   |      |          |  
|----------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | -------- | -
|                                                                                    |  | Six months Ended June 30, |         
|                                                                                    |  | 2004                      |          |   | 2003 |         
|Cash flows from operating activities:                                               |  |                           |          |   |      |          |  
|Net earnings                                                                        |  | $                         | 3,710    |   |      | 2,253    |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                           |          |   |      |          |  
|Provision for loan losses                                                           |  |                           | 1,444    |   |      | 1,720    |  
|Depreciation and amortization                                                       |  |                           | 918      |   |      | 835      |  
|Deferred income taxes                                                               |  |                           | (68      | ) |      |         |  
|Gain on sale of securities available for sale                                       |  |                           | (62      | ) |      | (289     | )
|Net amortization of premiums and discounts on securities                            |  |                           | 257      |   |      | 737      |  
|Net amortization of deferred loan fees and costs                                    |  |                           | (960     | ) |      | (642     | )
|Common stock issued as compensation                                                 |  |                           | 635      |   |      | 222      |  
|Earnings on bank-owned life insurance                                               |  |                           | (131     | ) |      | (121     | )
|Net increase in accrued interest receivable                                         |  |                           | (541     | ) |      | (90      | )
|Net increase in other assets                                                        |  |                           | (211     | ) |      | (405     | )
|Net increase in official checks                                                     |  |                           | 3,818    |   |      | 3,827    |  
|Net decrease in other liabilities                                                   |  |                           | (1,032   | ) |      | (22      | )
|                                                                                    |  |                           |          |   |      |          |  
|Net cash provided by operating activities                                           |  |                           | 7,777    |   |      | 8,025    |  
|                                                                                    |  |                           |          |   |      |          |  
|Cash flows from investing activities:                                               |  |                           |          |   |      |          |  
|Maturities, calls and repayments of securities available for sale                   |  |                           | 14,096   |   |      | 27,370   |  
|Repayments of security held to maturity                                             |  |                           | 385      |   |      | 24       |  
|Purchases of securities available for sale                                          |  |                           | (25,712  | ) |      | (76,720  | )
|Proceeds from sale of securities available for sale                                 |  |                           | 2,062    |   |      | 20,439   |  
|Net increase in loans                                                               |  |                           | (101,540 | ) |      | (112,127 | )
|Redemption (purchase) of Federal Home Loan Bank stock                               |  |                           | 346      |   |      | (1,517   | )
|Purchases of premises and equipment                                                 |  |                           | (708     | ) |      | (639     | )
|Net proceeds from sales of foreclosed assets                                        |  |                           | 1,013    |   |      | 400      |  
|Purchase of bank owned life insurance                                               |  |                           | (1,500   | ) |      |         |  
|Net proceeds from sale of premises and equipment                                    |  |                           |         |   |      | 160      |  
|                                                                                    |  |                           |          |   |      |          |  
|Net cash used in investing activities                                               |  |                           | (111,558 | ) |      | (142,610 | )
|                                                                                    |  |                           |          |   |      |          |  
|Cash flows from financing activities:                                               |  |                           |          |   |      |          |  
|Net increase in deposits                                                            |  |                           | 105,735  |   |      | 69,769   |  
|Net (decrease) increase in other borrowings                                         |  |                           | (1,419   | ) |      | 50,814   |  
|Proceeds from issuance of common stock, net                                         |  |                           | 1,178    |   |      | 4,595    |  
|                                                                                    |  |                           |          |   |      |          |  
|Net cash provided by financing activities                                           |  |                           | 105,494  |   |      | 125,178  |  
|                                                                                    |  |                           |          |   |      |          |  
|Net increase (decrease) in cash and cash equivalents                                |  |                           | 1,713    |   |      | (9,407   | )
|                                                                                    |  |                          
|Cash and cash equivalents at beginning of period                                    |  |                           | 30,395   |   |      | 35,723   |  
|                                                                                    |  |                           |          |   |      |          |  
|Cash and cash equivalents at end of period                                          |  | $                         | 32,108   |   |      | 26,316   |  
|                                                                                    |  |                           |          |   |      |          |  



(continued)



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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited), Continued

(In
thousands)



|                                                                                                                                      |  |                          |        |   |      |       |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | ----- | -
|                                                                                                                                      |  | Six months EndedJune 30, |       
|                                                                                                                                      |  | 2004                     |        |   | 2003 |      
|Supplemental disclosures of cash flow information:                                                                                    |  |                          |        |   |      |       |  
|Cash paid during the period for:                                                                                                      |  |                          |        |   |      |       |  
|Interest                                                                                                                              |  | $                        | 9,746  |   |      | 8,208 |  
|                                                                                                                                      |  |                          |        |   |      |       |  
|Income taxes                                                                                                                          |  | $                        | 2,855  |   |      | 1,805 |  
|                                                                                                                                      |  |                          |        |   |      |       |  
|Noncash financing and investing activities:                                                                                           |  |                          |        |   |      |       |  
|Change in accumulated other comprehensive income, net change in unrealized (gain) loss on securities available for sale, net of
taxes |  | $                        | (1,924 | ) |      | (343  | )
|                                                                                                                                      |  |                          |        |   |      |       |  
|Transfer of loans to foreclosed assets                                                                                                |  | $                        | 399    |   |      | 102   |  
|                                                                                                                                      |  |                          |        |   |      |       |  
|Tax benefit from exercise of stock options                                                                                            |  | $                        | 393    |   |      |      |  
|                                                                                                                                      |  |                          |        |   |      |       |  



See Accompanying Notes to Condensed
Consolidated Financial Statements.



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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders Equity



Six Months Ended June 30, 2004

($ in thousands)



|                                                                                                        |  |              |  |                            |       |                   |        |                                             |        |  |                            |   |  |        |  
|------------------------------------------------------------------------------------------------------- |  | ------------ |  | -------------------------- | ----- | ----------------- | ------ | ------------------------------------------- | ------ |  | -------------------------- | - |  | ------ | -
|                                                                                                        |  |              |  | Additional Paid-In Capital |       | Retained Earnings |        | AccumulatedOtherComprehensive Income (Loss) |        |  | Total Stockholders Equity |  
|                                                                                                        |  | Common Stock |  |                            |       |                  
|                                                                                                        |  | Shares       |  | Amount                     |       |                   |        |                                            
|Balance at December 31, 2003                                                                            |  | 7,124,944    |  | $                          | 7,125 |                   | 54,938 |                                             | 6,916  |  | (1,138                     | ) |  | 67,841 |  
|Net earnings (unaudited)                                                                                |  |             |  |                            |      |                   |       |                                             | 3,710  |  |                           |   |  | 3,710  |  
|Net change in unrealized gain (loss) on securities available for sale, net of taxes of $703 (unaudited) |  |             |  |                            |      |                   |       |                                             |       |  | (1,924                     | ) |  | (1,924 | )
|Common stock issued as compensation (unaudited)                                                         |  | 51,925       |  |                            | 52    |                   | 583    |                                             |       |  |                           |   |  | 635    |  
|Sale of common stock in connection with Employee Stock Purchase Plan (unaudited)                        |  | 33,600       |  |                            | 33    |                   | 339    |                                             |       |  |                           |   |  | 372    |  
|Proceeds from exercise of stock options (unaudited)                                                     |  | 93,000       |  |                            | 93    |                   | 657    |                                             |       |  |                           |   |  | 750    |  
|Tax benefit from exercise of stock options (unaudited)                                                  |  |             |  |                            |      |                   | 393    |                                             |       |  |                           |   |  | 393    |  
|Sale of common stock (unaudited)                                                                        |  | 4,000        |  |                            | 4     |                   | 52     |                                             |       |  |                           |   |  | 56     |  
|                                                                                                        |  |              |  |                            |       |                   |        |                                             |        |  |                            |   |  |        |  
|Balance at June 30, 2004 (unaudited)                                                                    |  | 7,307,469    |  | $                          | 7,307 |                   | 56,962 |                                             | 10,626 |  | (3,062                     | ) |  | 71,833 |  
|                                                                                                        |  |              |  |                            |       |                   |        |                                             |        |  |                            |   |  |        |  



See Accompanying Notes to Condensed
Consolidated Financial Statements.



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##### Table of Contents

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 June 30, 2004 and 2003, the results of operations for the three-month and six month periods then ended,
and cash flows for the six month periods ended June 30, 2004 and 2003. The results of operations and other data for the three months and six months ended June 30, 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 June 30, |      |   | At December 31, 2003 |    
|                                      |  | 2004        |      |   | 2003                 |     |  
|Gross loans with no related allowance |  | $           |     |   |                      |    |   |  |    |  
|Gross loans with related allowance    |  |             | 900  |   |                      | 900 |   |  | 900 |  
|Less: Allowance on the loans          |  |             | (180 | ) |                      | (90 | ) |  | (45 | )
|                                      |  |             |      |   |                      |     |   |  |     |  
|Net investment in impaired loans      |  | $           | 720  |   |                      | 810 |   |  | 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 EndedJune 30, |     | Six Months EndedJune 30,
|                                             |  | 2004                       |     | 2003                     |     | 2004 |     | 2003
|Average net investment in impaired loans     |  | $                          | 788 |                          | 833 |      | 822 |      | 844
|                                             |  |                            |     |                          |     |      |     |      |    
|Interest income recognized or impaired loans |  | $                          |    |                          |    |      |    |      |   
|                                             |  |                            |     |                          |     |      |     |      |    
|Interest income received on impaired loans   |  | $                          |    |                          |    |      |    |      |   
|                                             |  |                            |     |                          |     |      |     |      |    



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##### Table of Contents

An analysis of the change in the allowance for loan losses was as follows (in thousands):



|                               |  |                            |        |   |                          |       |   |      |        |   |      |       |  
|------------------------------ |  | -------------------------- | ------ | - | ------------------------ | ----- | - | ---- | ------ | - | ---- | ----- | -
|                               |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |      
|                               |  | 2004                       |        |   | 2003                     |       |   | 2004 |        |   | 2003 |      
|Balance at beginning of period |  | $                          | 9,764  |   |                          | 6,886 |   |      | 8,883  |   |      | 6,262 |  
|Provision charged to earnings  |  |                            | 478    |   |                          | 975   |   |      | 1,444  |   |      | 1,720 |  
|Net charge-offs                |  |                            | (232   | ) |                          | (279  | ) |      | (317   | ) |      | (400  | )
|                               |  |                            |        |   |                          |       |   |      |        |   |      |       |  
|Balance at end of period       |  | $                          | 10,010 |   |                          | 7,582 |   |      | 10,010 |   |      | 7,582 |  
|                               |  |                            |        |   |                          |       |   |      |        |   |      |       |  



Non-accrual and past due loans were as
follows (in thousands):



|                                                 |  |             |       |                      |       |  |      
|------------------------------------------------ |  | ----------- | ----- | -------------------- | ----- |  | -----
|                                                 |  | At June 30, |       | At December 31, 2003
|                                                 |  | 2004        |       | 2003                 |      
|Non-accrual loans                                |  | $           | 1,657 |                      | 3,026 |  | 1,737
|Past due ninety days or more, but still accruing |  |             |      |                      | 309   |  | 133  
|                                                 |  |             |       |                      |       |  |      
|                                                 |  | $           | 1,657 |                      | 3,335 |  | 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 June 30,
|                                                                                    |  | 2004                        |       | 2003                   
|                                                                                    |  | Earnings                    |       | Weighted-Average Shares |           | Per ShareAmount |   | Earnings |  | Weighted- Average Shares |       | Per ShareAmount
|Basic earnings per share:                                                           |  |                             |       |                         |           |                 |   |          |  |                          |       |                 |           |  |   |    
|Net earnings available to common stockholders                                       |  | $                           | 2,289 |                         | 7,229,701 |                 | $ | .32      |  | $                        | 1,249 |                 | 6,796,085 |  | $ | .18
|                                                                                    |  |                             |       |                         |           |                 |   |          |  |                          |       |                 |           |  |   |    
|Effect of dilutive securities - Incremental shares from assumed exercise of options |  |                             |       |                         | 507,268   |                 |   |          |  |                          |       |                 | 411,391   |  |   |    
|                                                                                    |  |                             |       |                         |           |                 |   |          |  |                          |       |                 |           |  |   |    
|Diluted earnings per share:                                                         |  |                             |       |                         |           |                 |   |          |  |                          |       |                 |           |  |   |    
|Net earnings available to common stockholders and assumed conversion                |  | $                           | 2,289 |                         | 7,736,969 |                 | $ | .30      |  | $                        | 1,249 |                 | 7,207,476 |  | $ | .17
|                                                                                    |  |                             |       |                         |           |                 |   |          |  |                          |       |                 |           |  |   |    



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##### Table of Contents

|                                                                                    |  |                           |       |                         |           |                 |   |          |  |                         |       |                 |           |  |   |    
|----------------------------------------------------------------------------------- |  | ------------------------- | ----- | ----------------------- | --------- | --------------- | - | -------- |  | ----------------------- | ----- | --------------- | --------- |  | - | ---
|                                                                                    |  | Six Months Ended June 30,
|                                                                                    |  | 2004                      |       | 2003                   
|                                                                                    |  | Earnings                  |       | Weighted-Average Shares |           | Per ShareAmount |   | Earnings |  | Weighted-Average Shares |       | Per ShareAmount
|Basic earnings per share:                                                           |  |                           |       |                         |           |                 |   |          |  |                         |       |                 |           |  |   |    
|Net earnings available to common stockholders                                       |  | $                         | 3,710 |                         | 7,195,871 |                 | $ | .52      |  | $                       | 2,253 |                 | 6,888,083 |  | $ | .33
|                                                                                    |  |                           |       |                         |           |                 |   |          |  |                         |       |                 |           |  |   |    
|Effect of dilutive securities - Incremental shares from assumed exercise of options |  |                           |       |                         | 519,428   |                 |   |          |  |                         |       |                 | 372,021   |  |   |    
|                                                                                    |  |                           |       |                         |           |                 |   |          |  |                         |       |                 |           |  |   |    
|Diluted earnings per share:                                                         |  |                           |       |                         |           |                 |   |          |  |                         |       |                 |           |  |   |    
|Net earnings available to common stockholders and assumed Conversion                |  | $                         | 3,710 |                         | 7,715,299 |                 | $ | .48      |  | $                       | 2,253 |                 | 7,260,104 |  | $ | .31
|                                                                                    |  |                           |       |                         |           |                 |   |          |  |                         |       |                 |           |  |   |    



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 June 30, 2004 of the regulatory
capital requirements and the actual capital on a percentage basis:



|                                                |  |        |   |  |                       |  
|----------------------------------------------- |  | ------ | - |  | --------------------- | -
|                                                |  | Actual |   |  | RegulatoryRequirement |  
|Total capital to risk-weighted assets           |  |        |   |  |                       |  
|Consolidated                                    |  | 10.13  | % |  | 8.00                  | %
|Bonita Springs Bank                             |  | 10.31  | % |  | 8.00                  | %
|Orlando Bank                                    |  | 10.77  | % |  | 8.00                  | %
|South Florida Bank                              |  | 10.52  | % |  | 8.00                  | %
|                                                |  |       
|Tier I capital to risk-weighted assets          |  |        |   |  |                       |  
|Consolidated                                    |  | 7.73   | % |  | 4.00                  | %
|Bonita Springs Bank                             |  | 9.28   | % |  | 4.00                  | %
|Orlando Bank                                    |  | 7.57   | % |  | 4.00                  | %
|South Florida Bank                              |  | 9.41   | % |  | 4.00                  | %
|                                                |  |       
|Tier I capital to total assets - leverage ratio |  |        |   |  |                       |  
|Consolidated                                    |  | 7.25   | % |  | 4.00                  | %
|Bonita Springs Bank                             |  | 9.19   | % |  | 4.00                  | %
|Orlando Bank                                    |  | 6.74   | % |  | 4.00                  | %
|South Florida Bank                              |  | 9.27   | % |  | 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 June 30, 2004, there were 1,377,810 shares available to be issued in connection with future awards under the option plans.

|
|



15



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##### Table of Contents

A summary of stock option transactions for the six-month periods ended June 30, 2004 and 2003 follows ($
in thousands, except per share amounts):



|                             |  |                   |   |  |                                |             |                                   |   |                        |  |   |       |  
|---------------------------- |  | ----------------- | - |  | ------------------------------ | ----------- | --------------------------------- | - | ---------------------- |  | - | ----- | -
|                             |  | Number of Options |   |  | Range Of Per Share OptionPrice |             | Weighted- Average Per Share Price |   | Aggregate Option Price | 
|Balance at December 31, 2002 |  | 984,165           |   |  | $                              | 7.50-10.50  |                                   | $ | 8.18                   |  | $ | 8,054 |  
|Granted                      |  | 15,900            |   |  |                                | 10.50-14.00 |                                   |   | 11.76                  |  |   | 187   |  
|                             |  |                   |   |  |                                |             |                                   |   |                        |  |   |       |  
|Balance at June 30, 2003     |  | 1,000,065         |   |  |                                | 7.50-14.00  |                                   |   | 8.24                   |  |   | 8,241 |  
|                             |  |                   |   |  |                                |             |                                   |   |                        |  |   |       |  
|Balance at December 31, 2003 |  | 1,070,440         |   |  |                                | 7.50-14.00  |                                   |   | 8.25                   |  |   | 8,829 |  
|Granted                      |  | 60,500            |   |  |                                | 14.00       |                                   |   | 14.00                  |  |   | 847   |  
|Forfeited                    |  | (23,750           | ) |  |                                | 7.50-10.50  |                                   |   | 7.66                   |  |   | (182  | )
|Exercised                    |  | (93,000           | ) |  |                                | 7.50-8.80   |                                   |   | 8.06                   |  |   | (750  | )
|                             |  |                   |   |  |                                |             |                                   |   |                        |  |   |       |  
|Balance at June 30, 2004     |  | 1,014,190         |   |  | $                              | 7.50-14.00  |                                   | $ | 8.62                   |  | $ | 8,744 |  
|                             |  |                   |   |  |                                |             |                                   |   |                        |  |   |       |  



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 EndedJune 30, |       |   | Six Months EndedJune 30, |      
|                                                                                                                                        |  | 2004                       |       |   | 2003                     |       |   | 2004 |       |   | 2003 |      
|Net earnings, as reported                                                                                                               |  | $                          | 2,289 |   |                          | 1,249 |   |      | 3,710 |   |      | 2,253 |  
|                                                                                                                                        |  |                            |       |  
|Deduct: Total stock-based employee compensation determined under the fair value based method for all options, net of related tax
effect |  |                            | (66   | ) |                          | (75   | ) |      | (132  | ) |      | (145  | )
|                                                                                                                                        |  |                            |       |   |                          |       |   |      |       |   |      |       |  
|Proforma net earnings                                                                                                                   |  | $                          | 2,223 |   |                          | 1,174 |   |      | 3,578 |   |      | 2,108 |  
|                                                                                                                                        |  |                            |       |   |                          |       |   |      |       |   |      |       |  
|Basic earnings per share:                                                                                                               |  |                            |       |   |                          |       |   |      |       |   |      |       |  
|As reported                                                                                                                             |  | $                          | .32   |   |                          | .18   |   |      | .52   |   |      | .33   |  
|                                                                                                                                        |  |                            |       |   |                          |       |   |      |       |   |      |       |  
|Proforma                                                                                                                                |  | $                          | .31   |   |                          | .17   |   |      | .50   |   |      | .31   |  
|                                                                                                                                        |  |                            |       |   |                          |       |   |      |       |   |      |       |  
|Diluted earnings per share:                                                                                                             |  |                            |       |   |                          |       |   |      |       |   |      |       |  
|As reported                                                                                                                             |  | $                          | .30   |   |                          | .17   |   |      | .48   |   |      | .31   |  
|                                                                                                                                        |  |                            |       |   |                          |       |   |      |       |   |      |       |  
|Proforma                                                                                                                                |  | $                          | .29   |   |                          | .16   |   |      | .46   |   |      | .29   |  
|                                                                                                                                        |  |                            |       |   |                          |       |   |      |       |   |      |       |  



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##### Table of Contents

In order to calculate the fair value of the options, it was assumed that 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 during the period:



|                                                                                      |  |                            |  |      |                          |   |      |   |      |      |  |   |      |  
|------------------------------------------------------------------------------------- |  | -------------------------- |  | ---- | ------------------------ | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                                      |  | Three Months EndedJune 30, |  |      | Six Months EndedJune 30, |  
|                                                                                      |  | 2004                       |  | 2003 |                          |   | 2004 |   |      | 2003 | 
|Risk-free interest rate                                                               |  |                           |  |      | 3.94                     | % |      |   | 4.76 | %    |  |   | 4.26 | %
|                                                                                      |  |                            |  |      |                          |   |      |   |      |      |  |   |      |  
|Weighted-average grant-date fair value per option of options issued during the period |  |                           |  | $    | 4.42                     |   |      | $ | 5.11 |      |  | $ | 4.25 |  
|                                                                                      |  |                            |  |      |                          |   |      |   |      |      |  |   |      |  

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.



On August 2, 2004, FLB entered into a definitive
agreement with Fifth Third Bancorp (FITB). Under this agreement, FITB will acquire all of outstanding common shares of FLB. The acquisition is expected to be consummated in the first quarter of 2005 pending regulatory and shareholder
approval.



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##### Table of Contents

SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES



Review by Independent Registered Public Accounting Firm



Hacker, Johnson & Smith PA, the Companys independent registered public accounting firm, have made a limited review of the financial data as of June 30, 2004 and 2003 and for the three- and six-month periods then ended, presented
in this document, in accordance with standards established by the Public Company Accounting Oversight Board.



Their report furnished pursuant to Article 10 of Regulation S-X is included herein.



18



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



Southern Community Bancorp

Orlando, Florida:



We have
reviewed the accompanying condensed consolidated balance sheets of Southern Community Bancorp and Subsidiaries (the Company) as of June 30, 2004 and 2003, and the related condensed consolidated statements of earnings and comprehensive
income for the three- and six-month periods then ended, the related condensed consolidated statement of stockholders equity for the six month period ended June 30, 2004 and the related condensed consolidated statements of cash flows for the
six-month period ended June 30, 2004 and 2003. These interim financial statements are the responsibility of the Companys management.



We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the
Public Company Accounting Oversight Board, 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 accompanying interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.



We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, 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

August 2, 2004



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



This Form 10-Q contains 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 this Form 10-Q that 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 1.6686 shares of FLB common stock, provided that if the average closing price of FLB common stock exceeds $19.42 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 ($19.42 multiplied by 1.6686) and the product of 1.6686 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 $14.56, 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 Securities and Exchange Commission on March 22, 2004. The merger is currently expected to be
consummated during the third quarter of 2004.



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Results of Operations - Three Months Ended June 30, 2004 and 2003



Southern had net earnings for the second quarter of 2004 of $2.3 million,
compared to $1.2 million for the comparable period in 2003. Earnings before income taxes in the second quarter of 2004 were $3.5 million compared $2.0 million in the second quarter of 2003. The improvement in earnings was primarily due to a
substantial increase in net interest income, which grew from $6.5 million in the second quarter of 2003 to $8.6 million in the second quarter of 2004. As discussed below, the increase in net interest income was principally a result of the growth in
Southerns 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 second quarter of 2004 was $13.5 million, compared to $10.8 million for the second quarter of 2003. The growth in interest income
primarily reflects the growth in Southerns assets, which grew from $789.9 million at June 30, 2003 to $1 billion at June 30, 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 $611.2 million to $819.6 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 $4.3 million for the
second quarter of 2003 to $4.9 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 3.8% for the second quarter of 2003 to approximately 3.6% for the second 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 loans represented a higher percentage of total assets in the second quarter of 2004 than in the second quarter of 2003. This shift improved Southerns net interest
margin because loans are Southerns highest yielding category of interest-earning assets.



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Noninterest Income. Noninterest income in the second quarter of 2004 totaled $709,000,
compared with $1.2 million in 2003. Included in the 2003 period was a gain on sale of securities available for sale of $289,000. Service charges on deposit accounts totaled $196,000 in the second quarter of 2004, down from $213,000 in 2003, due to
higher levels of deposits which do not pay service charges (such as certificates of deposit). Other fees and other income totaled $444,000 in 2004, down from $617,000 in 2003, 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 $478,000 in the second quarter of 2004 compared to $975,000 in 2003. The allowance for loan losses at June 30, 2004 was $10.0 million. See Allowance and
Provision for Loan Losses below.



Noninterest
Expenses. Noninterest expenses for the second quarter of 2004 totaled $5.3 million, up 13.4% from $4.7 million in 2003. Noninterest expenses included the following:



| |  | Salaries and employee benefits represented 54.1% of total non-interest expenses in 2004. Salaries and employee benefits increased 20.8% to $2.9 million in 2004 from $2.4 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 $1.1 million, up 14.9% from $926,000 in 2003. This increase was primarily due to the opening of the new branches.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other non-interest expenses for the second quarter of 2004 totaled $1.4 million, down 0.4% from 2003. Other non-interest expenses include data processing, printing and office
supplies, marketing and advertising, professional fees and other expenses.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Income Taxes. Income taxes totaled $1.2 million in 2004 (effective rate of 35.0%) compared to $753,000 in 2003 (effective rate of 37.6%).



Results of Operations - Six Months Ended June 30, 2004 and 2003



Southern had net earnings for the first half of 2004 of $3.7 million, compared to $2.3 million for the comparable period in
2003. Earnings before income taxes in the first half of 2004 were $5.7 million compared $3.6 million in the first half of 2003. The improvement in earnings was primarily due to a substantial increase in net interest income, which grew from $12.3
million in the first half of 2003 to $16.8 million in the first half of 2004. As discussed below, the increase in net interest income was principally a result of the growth in its assets.



Net Interest Income. Interest income for the first half of
2004 was $26.5 million, compared to $20.5 million for the first half of 2003. The growth in interest income primarily reflects the growth in Southerns assets, which grew from $789.9 million at



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June 30, 2003 to $1 billion at June 30, 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 $611.2 million to $819.6 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 $8.2 million for the first half of 2003 to $9.7 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 3.8% for the first half of 2003 to approximately 3.6% for the first half 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 loans represented a higher percentage of total assets in the second quarter of 2004 than in
the second quarter of 2003. This shift improved Southerns net interest margin because loans are Southerns highest yielding category of interest earning assets.



Noninterest Income. Noninterest income in the first half of 2004 totaled $1.4 million, compared with $1.9
million in 2003. The decrease is partly attributable to a $227,000 decrease in gain on sale of securities available for sale. Service charges on deposit accounts totaled $382,000 in 2004, down from $408,000 in 2003. Other fees and other income
totaled $869,000 in 2004, down from $1.1 million in 2003, 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 $1.4 million in the first half of 2004 compared to $1.7 million in 2003. The allowance for loan losses at June 30, 2004 was $10.0 million. See Allowance and Provision for Loan Losses below.



Noninterest Expenses. Noninterest expenses for the first half
of 2004 totaled $11.1 million, up 24.3% from $8.9 million in 2003. Noninterest expenses included the following:



| |  | Salaries and employee benefits represented 54.6% of total non-interest expenses in 2004. Salaries and employee benefits increased 28.9% to $6.1 million in 2004 from $4.7 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 $2.2 million, up 22.3% from $1.8 million in 2003. This increase was primarily due to the opening of the new branches.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other non-interest expenses for the first half of 2004 totaled $2.9 million, up 16.9% from $2.5 million 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Income Taxes. Income taxes totaled $2.0 million in 2004 (effective rate of 35.0%) compared
to $1.4 million in 2003 (effective rate of 37.6%).



Capital Expenditures



Southern makes capital expenditures in order to improve
its ability to provide quality services to its customers. Capital expenditures for the six months ended June 30, 2004 equaled $708,000 compared to $639,000 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 June 30, 2004, all but one of the securities held in
Southerns investment portfolio were classified available for sale and all were rated A 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 June 30, 2004 and 2003:



Investment Portfolio

|                                    |  |                |         |      |        
|----------------------------------- |  | -------------- | ------- | ---- | -------
|                                    |  | At June 30,   
|                                    |  | 2004           |         | 2003
|                                    |  | (in thousands)
|Available for Sale:                 |  |                |         |      |        
|U.S. Government agencies securities |  | $              | 43,264  |      | 45,538 
|Mortgage-backed securities          |  |                | 49,810  |      | 70,246 
|Municipal bonds                     |  |                | 22,488  |      | 1,829  
|                                    |  |                |         |      |        
|                                    |  | $              | 115,562 |      | 117,613
|                                    |  |                |         |      |        
|Held to Maturity-                   |  |                |         |      |        
|Mortgage-backed securities          |  | $              | 2,881   |      | 3,427  
|                                    |  |                |         |      |        

|
|



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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 June
30, 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.



Types of Loans

|                                           |  |                |         |   |      |         |  
|------------------------------------------ |  | -------------- | ------- | - | ---- | ------- | -
|                                           |  | At June 30,    |        
|                                           |  | 2004           |         |   | 2003 |        
|                                           |  | (in thousands) |        
|Commercial                                 |  | $              | 97,421  |   |      | 142,317 |  
|Commercial real estate                     |  |                | 356,059 |   |      | 244,473 |  
|Residential real estate                    |  |                | 81,036  |   |      | 58,839  |  
|Construction                               |  |                | 283,579 |   |      | 161,378 |  
|Consumer and other                         |  |                | 14,135  |   |      | 14,043  |  
|                                           |  |                |         |   |      |         |  
|Total loans                                |  |                | 832,230 |   |      | 621,050 |  
|Less:                                      |  |                |         |   |      |         |  
|Allowance for loan losses                  |  |                | (10,010 | ) |      | (7,582  | )
|Net deferred loan fees and other discounts |  |                | (2,594  | ) |      | (2,254  | )
|                                           |  |                |         |   |      |         |  
|Loans, net                                 |  | $              | 819,626 |   |      | 611,214 |  
|                                           |  |                |         |   |      |         |  

|
|



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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 $97.4 million or 11.7% of total loans at June 30, 2004, compared with $142.3 million or 22.9% of total loans at June 30, 2003.



Real Estate Loans. Southerns real estate loans totaled $720.7 million or 86.6% of total loans at June 30, 2004, and $464.7 million or
74.8% at June 30, 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 $356.1 million or 42.8% of total loans at June 30, 2004 compared with $244.5 million or 39.4% of total loans at June 30, 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.



Residential real estate loans totaled $81.0 million or 9.7% of total loans at June 30, 2004, compared with $58.8 million or 9.5% at June 30, 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 $283.6 million or 34.1% of total loans at June 30, 2004 compared to $161.4 million or 26.0% of total loans at June 30, 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 $14.1 million or 1.7% of total loans, on June 30, 2004, compared with $14.0 million
or 2.3% of total loans, on June 30, 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



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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.



Southern had legally binding commitments to extend credit, including unused lines of credit and letters of credit, totaling $289.5 million at June 30, 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.



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The following table presents Southerns non-performing assets and past due loans:



Non-Performing Assets and 90 Day Past Due Loans



|                                        |  |                |       |      |      
|--------------------------------------- |  | -------------- | ----- | ---- | -----
|                                        |  | At June 30,   
|                                        |  | 2004           |       | 2003
|                                        |  | (In thousands)
|Nonaccrual loans                        |  | $              | 1,657 |      | 3,026
|Foreclosed assets                       |  |                | 452   |      | 4    
|                                        |  |                |       |      |      
|Total nonperforming assets              |  | $              | 2,109 |      | 3,030
|                                        |  |                |       |      |      
|Accruing loans past due 90 days or more |  | $              |      |      | 309  
|                                        |  |                |       |      |      



Southerns
non-performing loans and loans past due 90 days were $2.1 million at June 30, 2004, or 0.25% of total loans of $832.2 million. Non-performing loans at June 30, 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 $2.1 million at June 30, 2004, compared to $3.3 million at June 30, 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 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 $10.0 million at June 30, 2004, from $8.9 million at December 31, 2003 and $7.6 million at June 30, 2003.



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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.



During the second quarter of 2004, Southerns total assets decreased by 1.4%, from $1.023 billion at March 31, 2004 to $1.009 billion at June 30,
2004. This decrease was primarily attributable to Southerns effort to increase profitability by reducing rates on its deposit accounts. These efforts resulted in a 7.3% decrease in deposits.



Cash and Cash Equivalents. Southern had cash and cash
equivalents of $32.1 million at June 30, 2004, compared to $76.9 million at March 31, 2004. This decrease was primarily the result of the redeployment of Southerns cash and cash equivalents into loans.



Securities. On June 30, 2004, securities were $118.4 million or
compared to $120.5 million on March 31, 2004. Southerns goal during the second quarter was to maintain its investment portfolio until the completion of the merger with FLB.



Loans. Net loans were $819.6 million as of June 30, 2004, compared to $787.7 million as of March 31, 2004.
Southern continued its efforts to improve earnings by redeploying cash and cash equivalents into loans in the second quarter. 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 $827.8 million at June 30, 2004, down from $893.1 million in March 31, 2004. The decrease in Southerns deposits reflects the impact
of the Southerns efforts to improve profitability by decreasing rates on deposits. Other borrowings increased to $50.0 million at June 30, 2004 from $48.9 million at March 31, 2004. Other borrowings consist of Federal Home Loan Bank advances,
subordinated debentures and borrowings under Southerns line of credit. In this connection, Southern established a new $10.0 million line of credit agreement with First National Bank of Florida during the second quarter of 2004. Southern has
borrowed $7.0 million under this facility, with approximately $5.0 million being used to repay Southerns prior $5.0 million line of credit with SunTrust Bank and the balance being used to make capital contributions to Southerns banking
subsidiaries. The new line of credit bears interest at 90-day LIBOR plus 1.85%, with interest payable quarterly and the entire balance due 364 days after funding.



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



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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 June 30, 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 June 30, 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 $80.1 million. This negative gap at June 30, 2004 was 7.9% of total assets compared with a
negative gap of 12.7% at June 30, 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.



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 capital position improved during the
second quarter of 2004 because of a 1.4% decrease in Southerns total assets, as well as the positive impact of net earnings of $2.3 million during this quarter.



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Southerns tier one capital was 7.73% and the total capital was 10.13% of risk-based assets at June
30, 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 7.25% at
June 30, 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 June 30, 2004, all of the banks had achieved this objective.



During the first quarter 2004, Southern borrowed $5.0 million
from SunTrust Bank pursuant to a revolving line of credit. Southern utilized the proceeds of this loan to make capital contributions to each of its subsidiary banks. During the second quarter of 2004, Southern refinanced this loan with a new line of
credit with First National Bank of Florida. Southern borrowed $7.0 million under the new line, with approximately $5.0 million being used to repay the SunTrust loan and $2.0 million being used to make additional capital contributions to
Southerns 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



Southerns comprehensive income for the three and six months ended June
30, 2004 decreased as a result of the $3.2 million and $1.9 million, respectively, in net unrealized loss in the market value of its investment securities that are available for sale during these periods. The drop in market value was due to the
increase in long-term interest rates during these periods. As a result of the losses, Southerns accumulated other comprehensive income (loss) increased from a $1.1 million loss at December 31, 2003 to a loss of $3.1 million at June 30, 2004.



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 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.



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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.



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.



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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 June 30, 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 June 30, 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 June 30, 2004 that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART II

OTHER INFORMATION



Item 2. Changes in Securities.



During the quarter ended June 30, 2004, Southern issued shares of its common stock in the following transactions which were not registered under the Securities Act of 1933, as amended:



| |  | On June 17, 2004, Southern issued 73,000 shares to certain employees and directors in connection with their exercise of outstanding stock options. Southern received $600,000 in
payment of the exercise price of these options.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On June 17, 2004, Southern issued 10,000 shares as a stock grant to its chief executive officer pursuant to the terms of an existing stock grant agreement. These shares were valued
at $14.00 per share.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On June 17, 2004, Southern issued 3,288 shares to certain directors in lieu of directors fees earned in January and February 2004. These shares were valued at $14.00 per
share.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On June 17, 2004, Southern issued 5,620 shares to employees pursuant to Southerns Stock Purchase Plan with respect to contributions made between January 1, 2004 and March 19,
2004. These shares were valued at $14.00 per share.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 6. Exhibits.



| | (a) | Exhibits.
| | --- | ---------



|            |  |                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2003                                              
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2003                                              
|            | 
|32.1        |  | 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
|            | 
|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.
| | --- | --------------------



Not applicable.



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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: August 12, 2004 |  | /s/ Charlie W. Brinkley, Jr.                                                                                         
|                      |  | Charlie W. Brinkley, Jr. Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)
|                      | 
|Date: August 12, 2004 |  | /s/ Stephen R. Jeuck                                                                                                 
|                      |  | Stephen R. Jeuck Chief Financial Officer (Principal Accounting Officer)                                              



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EXHIBIT INDEX



|        |  |                                                                                                                                             
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Ex. No. |  | Description                                                                                                                                 
|31.1    |  | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2003                                              
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2003                                              
|        | 
|32.1    |  | 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
|        | 
|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