Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
COMMISSION FILE NO. 000-49780
SOUTHERN COMMUNITY BANCORP
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Florida 59-3619325
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
250 North Orange Avenue, Orlando, Florida 32801
-----------------------------------------------
(Address of Principal Executive Offices)
(407) 648-1844
-----------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (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 [ ] No [X]
As of October 31, 2003, the issuer had 7,073,067 outstanding shares of
common stock, par value $1.00 per share.
================================================================================
SOUTHERN COMMUNITY BANCORP
FORM 10-Q
September 30, 2003
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets -
September 30, 2003 and 2002 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Earnings (Unaudited) -
Three Months Ended September 30, 2003 and 2002 5
Condensed Consolidated Statements of Earnings (Unaudited) -
Nine Months Ended September 30, 2003 and 2002 6
Condensed Consolidated Statements of Comprehensive Income
(Unaudited):
Three Months Ended September 30, 2003 and 2002 7
Nine Months Ended September 30, 2003 and 2002 7
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2003 and 2002 8
Condensed Consolidated Statement of Stockholders' Equity (Unaudited) -
Nine Months Ended September 30, 2003 10
Notes to Condensed Consolidated Financial Statements (Unaudited) 11
Review by Independent Accountants 16
Report on Review by Independent Accountants 17
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
Item 4. Controls and Procedures 34
PART II: OTHER INFORMATION 35
Item 2. Changes in Securities 35
Item 6. Exhibits and Reports on Form 8-K 35
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
($ in thousands, except per share amounts)
At September 30,
-----------------------------
2003 2002
--------- ---------
ASSETS
Cash and due from banks $ 23,323 12,250
Interest-earning deposits and federal funds sold 10,616 77,935
--------- ---------
Cash and cash equivalents 33,939 90,185
Securities available for sale 108,596 63,623
Security held to maturity 3,415 --
Loans, net of allowance for loan losses of $8,418 in 2003 and $6,095 in 2002 675,913 439,188
Accrued interest receivable 3,246 2,624
Federal Home Loan Bank stock, at cost 1,934 212
Premises and equipment, net 19,485 18,309
Deferred income tax asset 2,522 900
Bank owned life insurance 5,132 4,002
Goodwill 971 971
Foreclosed assets, net 822 185
Other assets 644 690
--------- ---------
Total assets $ 856,619 620,889
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest-bearing demand deposits 74,854 53,611
Money-market deposits 116,498 91,003
Savings and NOW deposits 246,496 142,622
Time deposits 295,800 268,235
--------- ---------
Total deposits 733,648 555,471
Advances from Federal Home Loan Bank 32,250 --
Subordinated debentures 10,000 --
Other borrowings 8,346 1,912
Official checks 3,930 4,056
Other liabilities 2,795 2,328
--------- ---------
Total liabilities 790,969 563,767
--------- ---------
Stockholders' equity:
Common stock, $1.00 par value, 10,000,000 shares authorized, 7,073,067
and 6,693,064 shares issued and outstanding in 2003 and 2002 7,073 6,693
Additional paid-in capital 54,465 49,654
Retained earnings 5,195 66
Accumulated other comprehensive income (loss) (1,083) 709
--------- ---------
Total stockholders' equity 65,650 57,122
--------- ---------
Total liabilities and stockholders' equity $ 856,619 620,889
========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
($ in thousands, except per share amounts)
At
December 31,
2002
------------
ASSETS
Cash and due from banks $ 19,127
Interest-earning deposits and federal funds sold 16,596
--------
Cash and cash equivalents 35,723
Securities available for sale 89,677
Security held to maturity 3,452
Loans, net of allowance for loan losses of $6,262 500,267
Accrued interest receivable 2,806
Federal Home Loan Bank stock, at cost 212
Premises and equipment, net 18,852
Deferred income tax asset 1,424
Bank owned life insurance 4,954
Goodwill 971
Foreclosed assets, net 302
Other assets 146
--------
Total assets $658,786
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest-bearing demand deposits $ 59,313
Money-market deposits 101,800
Savings and NOW deposits 153,207
Time deposits 279,097
--------
Total deposits 593,417
Other borrowings 1,423
Official checks 3,787
Other liabilities 2,060
--------
Total liabilities 600,687
--------
Stockholders' equity:
Common stock, $1.00 par value, 10,000,000 shares
authorized, 6,693,064 shares issued and outstanding 6,693
Additional paid-in capital 49,654
Retained earnings 795
Accumulated other comprehensive income 957
--------
Total stockholders' equity 58,099
--------
Total liabilities and stockholders' equity $658,786
========
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
($ in thousands, except per share amounts)
Three Months Ended
September 30,
--------------------------------
2003 2002
---------- ----------
Interest income:
Loans $ 10,535 8,168
Securities 933 674
Other 25 321
---------- ----------
Total interest income 11,493 9,163
Interest expense:
Deposits 4,209 3,945
Other borrowings 346 7
---------- ----------
Total interest expense 4,555 3,952
---------- ----------
Net interest income 6,938 5,211
Provision for loan losses 1,026 1,106
---------- ----------
Net interest income after provision for loan losses 5,912 4,105
---------- ----------
Noninterest income:
Service charges on deposit accounts 203 135
Other fees 446 160
Earnings on bank-owned life insurance 57 57
Gain (loss) on sale of securities available for sale 65 (2)
Gain on sale of charter 1,000 --
Other income 278 102
---------- ----------
Total noninterest income 2,049 452
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,346 2,071
Occupancy expense 924 753
Data processing 306 255
Printing and office supplies 92 90
Marketing and advertising 139 108
Professional fees 225 150
Other expense 506 413
---------- ----------
Total noninterest expense 4,538 3,840
---------- ----------
Earnings before income taxes 3,423 717
Income taxes 1,276 262
---------- ----------
Net earnings $ 2,147 455
========== ==========
Basic earnings per share $ .30 .07
========== ==========
Weighted-average number of common shares outstanding for basic 7,059,835 6,693,064
========== ==========
Diluted earnings per share $ .29 .07
========== ==========
Weighted-average number of common shares outstanding for diluted 7,471,051 6,914,468
========== ==========
Dividends per share -- --
========== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
($ in thousands, except per share amounts)
Nine Months Ended
September 30,
--------------------------------
2003 2002
---------- ----------
Interest income:
Loans $ 29,240 22,182
Securities 2,669 1,781
Other 102 652
---------- ----------
Total interest income 32,011 24,615
---------- ----------
Interest expense:
Deposits 12,218 10,900
Other borrowings 537 30
---------- ----------
Total interest expense 12,755 10,930
---------- ----------
Net interest income 19,256 13,685
Provision for loan losses 2,746 1,952
---------- ----------
Net interest income after provision for loan losses 16,510 11,733
---------- ----------
Noninterest income:
Service charges on deposit accounts 611 371
Other fees 1,070 542
Earnings on bank-owned life insurance 178 152
Gain on sale of securities available for sale 354 120
Gain on sale of charter 1,000 --
Other income 764 387
---------- ----------
Total noninterest income 3,977 1,572
---------- ----------
Noninterest expense:
Salaries and employee benefits 7,042 5,794
Occupancy expense 2,694 2,207
Data processing 915 739
Printing and office supplies 271 258
Marketing and advertising 400 335
Professional fees 638 372
Preopening expense -- 134
Other expense 1,495 1,144
---------- ----------
Total noninterest expense 13,455 10,983
---------- ----------
Earnings before income taxes 7,032 2,322
Income taxes 2,632 850
---------- ----------
Net earnings $ 4,400 1,472
========== ==========
Basic earnings per share $ .64 $ .25
========== ==========
Weighted-average number of common shares outstanding for basic 6,884,651 5,925,934
========== ==========
Diluted earnings per share $ .64 .24
========== ==========
Weighted-average number of common shares outstanding for diluted 7,270,503 6,148,290
========== ==========
Dividends per share -- --
========== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements.
6
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
September 30. September 30,
------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Net earnings $ 2,147 455 4,400 1,472
Net change in unrealized (loss) gain on securities
available for sale, net of tax (1,697) 331 (2,040) 621
------- ------- ------- -------
Comprehensive income $ 450 786 2,360 2,093
======= ======= ======= =======
6See Accompanying Notes to Condensed Consolidated Financial Statements.
7
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
September 30,
-----------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net earnings $ 4,400 1,472
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loan losses 2,746 1,952
Depreciation and amortization 1,236 947
Gain on sale of securities available for sale (354) (120)
Net amortization of premiums and discounts on securities 1,069 5
Net amortization of deferred loan fees and costs (901) (663)
Common stock issued as compensation 222 143
Earnings on bank-owned life insurance (178) (152)
Net increase in accrued interest receivable (440) (541)
Net increase in other assets (498) (408)
Net increase in official checks 143 748
Net increase in other liabilities 735 488
--------- ---------
Net cash provided by operating activities 8,180 3,871
--------- ---------
Cash flows from investing activities:
Maturities, calls and repayments of securities available for sale 38,208 15,561
Repayments of security held to maturity 35 --
Purchases of securities available for sale (85,606) (59,887)
Proceeds from sale of securities available for sale 24,628 23,247
Net increase in loans (178,411) (87,803)
Purchase of Federal Home Loan Bank stock (1,722) --
Purchases of premises and equipment (2,029) (3,027)
Net proceeds from sales of foreclosed assets 400 209
Purchase of bank owned life insurance -- (405)
Net proceeds from sale of premises and equipment 160 --
--------- ---------
Net cash used in investing activities (204,337) (112,105)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 140,231 155,498
Net increase in advances from Federal Home Loan Bank 32,250 --
Proceeds from issuance of subordinated debentures 10,000 --
Net increase in other borrowings 6,923 254
Proceeds from issuance of common stock, net 4,969 12,538
--------- ---------
Net cash provided by financing activities 194,373 168,290
--------- ---------
Net (decrease) increase in cash and cash equivalents (1,784) 60,056
Cash and cash equivalents at beginning of period 35,723 30,129
--------- ---------
Cash and cash equivalents at end of period $ 33,939 90,185
========= =========
(continued)
8
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
(In thousands)
Nine Months Ended
September 30,
---------------------------
2003 2002
----------- ------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 12,701 11,017
=========== ======
Income taxes $ 2,815 1,098
=========== ======
Noncash financing and investing activities:
Change in accumulated other comprehensive income, unrealized (loss) gain on
securities available for sale, net of tax $ (2,040) 621
=========== ======
Transfer of loans to foreclosed assets $ 920 207
=========== ======
Loans originated on sales of foreclosed assets $ -- 720
=========== ======
See Accompanying Notes to Condensed Consolidated Financial Statements.
9
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Nine Months Ended September 30, 2003
($ in thousands)
Accumulated
Common Stock Additional Other Stock-
------------------------ Paid-In Retained Comprehensive holders'
Shares Amount Capital Earnings Income (Loss) Equity
--------- --------- --------- --------- ------------- ---------
Balance at December 31, 2002 6,693,064 $ 6,693 49,654 795 957 58,099
Net earnings (unaudited) -- -- -- 4,400 -- 4,400
Net change in unrealized gain on
securities available for sale, net
of tax benefit of $1,098 (unaudited) -- -- -- -- (2,040) (2,040)
Common stock issued as compensation
(unaudited) 21,189 21 201 -- -- 222
Sale of common stock in connection
with Employee Stock Purchase Plan
(unaudited) 14,161 14 135 -- -- 149
Sale of common stock (unaudited) 344,653 345 4,475 -- -- 4,820
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2003
(unaudited) 7,073,067 $ 7,073 54,465 5,195 (1,083) 65,650
========= ========= ========= ========= ========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
10
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 September 30, 2003 and 2002, and the results of operations
for the three-month and nine-month periods then ended and cash flows for the
nine-month periods ended September 30, 2003 and 2002. The results of operations
and other data for the three and nine months ended September 30, 2003 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2003.
Southern Community Bancorp (the "Holding Company") owns all of the
outstanding common stock of Southern Community Bank (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 state-chartered (Florida) commercial
banks and their deposits are insured up to the applicable limits by the Federal
Deposit Insurance Corporation ("FDIC") through the Bank Insurance Fund. The
South Florida Bank commenced operations on August 5, 2002.
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. The Insurance Agency also has equity interests of 50% and
25% in two real estate title agencies. The Orlando Bank has a 50% equity
interest in Southern Community Bank Mortgage LLC (the "Mortgage Company"). The
Mortgage Company originates, processes and closes residential mortgage loans in
central Florida. On October 1, 2003 the Orlando Bank entered into an agreement
pursuant to which the Mortgage Company will be liquidated and dissolved and the
Orlando Bank will receive a payment of $250,000 plus its 50% share of the net
assets of the Mortgage Company in consideration of the dissolution of the
Mortgage Company. See "Dissolution of the Mortgage Company" in Item 2, below.
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 September 30, At December 31,
--------------------- ---------------
2003 2002 2002
----- ----- -----
Gross loans with no related allowance $ -- -- --
Gross loans with related allowance 900 900 900
Less: Allowance on the loans (45) (45) (45)
----- ----- -----
Net investment in impaired loans $ 835 835 855
===== ===== =====
11
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 Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
----- ----- ---- -----
Average net investment in impaired loans $ 835 1,439 835 1,861
===== ===== === =====
Interest income recognized or impaired loans $ -- -- -- --
===== ===== === =====
Interest income received on impaired loans $ -- -- -- --
===== ===== === =====
An analysis of the change in the allowance for loan losses was as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
2003 2002 2003 2002
------- ----- ----- -----
Balance at beginning of period $ 7,582 5,190 6,262 4,457
Provision charged to earnings 1,026 1,106 2,746 1,952
Net charge-offs (190) (201) (590) (314)
------- ----- ----- -----
Balance at end of period $ 8,418 6,095 8,418 6,095
======= ======= ======= =======
Non-accrual and past due loans were as follows (in thousands):
At September 30, At December 31,
---------------------- ---------------
2003 2002 2002
------ ------ ------
Non-accrual loans $1,959 3,387 3,154
Past due ninety days or more, but still accruing -- 158 126
------ ------ ------
$1,959 3,545 3,280
====== ====== ======
3. EARNINGS PER SHARE. Earnings per share of common stock were computed
on the basis of the weighted-average number of shares of common stock
outstanding. Diluted earnings per share were computed based on the
weighted-average number of shares outstanding plus the effect of outstanding
stock options, computed using the treasury stock method. The following table
presents the calculations of earnings per share ($ in thousands, except per
share amounts):
Three Months Ended September 30,
--------------------------------------------------------------------------------------
2003 2002
--------------------------------------- ----------------------------------------
Average Per Share Average Per Share
Earnings Shares Amount Earnings Shares Amount
--------- --------- --------- --------- ---------- ---------
Basic earnings per share $ 2,147 7,059,835 $.30 $ 455 6,693,064 $.07
==== ========= ========= ====
Effect of dilutive securities -
Incremental shares from assumed
exercise of options 411,216 221,404
Diluted earnings per share $ 2,147 7,471,051 $.29 $ 455 6,914,468 $.07
========= ========= ==== ========= ========= ====
12
Nine Months Ended September 30,
--------------------------------------------------------------------------------------
2003 2002
--------------------------------------- ----------------------------------------
Average Per Share Average Per Share
Earnings Shares Amount Earnings Shares Amount
--------- --------- --------- --------- ---------- ---------
Basic earnings per share $ 4,400 6,884,651 $.64 $ 1,472 5,925,934 $.25
========= ==== ========= ====
Effect of dilutive securities -
Incremental shares from assumed
exercise of options 385,852 222,356
--------- ---------
Diluted earnings per share $ 4,400 7,270,503 $.61 $ 1,472 6,148,290 $.24
========= ========= ==== ========= ========= ====
4. REGULATORY CAPITAL. The Holding Company, the Orlando Bank, the
Bonita Springs Bank and the South Florida Bank are required to maintain certain
minimum regulatory capital requirements. The following is a summary at
September 30, 2003 of the regulatory capital requirements and the actual
capital on a percentage basis:
Regulatory
Actual Requirement
------ -----------
Total capital to risk-weighted assets
Consolidated 10.44% 8.00%
Bonita Springs Bank 10.79% 8.00%
Orlando Bank 10.01% 8.00%
South Florida Bank 10.41% 8.00%
Tier I capital to risk-weighted assets
Consolidated 8.15% 4.00%
Bonita Springs Bank 9.76% 4.00%
Orlando Bank 7.14% 4.00%
South Florida Bank 9.28% 4.00%
Tier I capital to total assets - leverage ratio
Consolidated 7.92% 4.00%
Bonita Springs Bank 9.82% 4.00%
Orlando Bank 6.78% 4.00%
South Florida Bank 9.15% 4.00%
5. STOCK OPTION PLANS. The Company has several stock option plans (the
"Option Plans") under which the Company is authorized to issue shares of its
common stock to employees and directors pursuant to stock options and restricted
stock grants. Vesting periods will be determined as awards are granted. At
September 30, 2003, there were 1,351,185 shares available under the option plans
which were not subject to outstanding stock options or restricted stock grants.
Accordingly, the Company may issue stock options and restricted stock grants
with respect to such shares in the future.
13
A summary of stock option transactions for the nine-month periods ended
September 30, 2003 and 2002 follows ($ in thousands, except per share amounts):
Range Weighted-
of Per Average Aggregate
Number of Share Option Per Share Option
Shares Price Price Price
---------- ------------ --------- ------
Balance at December 31, 2001 928,665 $7.50-8.80 7.98 7,408
Granted 80,000 10.50 10.50 840
Forfeited (6,000) 7.50-8.25 7.67 (46)
---------- -------
Balance at September 30, 2002 1,002,665 7.50-10.50 8.18 8,202
========== ========== ======= =======
Balance at December 31, 2002 984,165 7.50-10.50 8.18 8,054
Granted 18,050 10.50-14.00 10.80 195
Forfeited (1,400) 10.50 10.50 (15)
---------- -------
Balance at September 30, 2003 1,000,815 7.50-14.00 8.23 8,234
========== ============ ======= =======
The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation ($ in
thousands, except per share amounts).
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ -------- ------------ --------
Net earnings, as reported $ 2,147 455 4,400 1,472
Deduct: Total stock-based employee compensation
determined under the fair value based method for
all options, net of related tax effect (73) (106) (218) (318)
------------ -------- ------------ --------
Proforma net earnings $ 2,074 349 4,182 1,154
============ ======== ============ ========
Basic earnings per share:
As reported $ .30 .07 .64 .25
============ ======== ============ ========
Proforma $ .29 .05 .61 .19
============ ======== ============ ========
Diluted earnings per share:
As reported $ .29 .07 .61 .24
============ ======== ============ ========
Proforma $ .28 .05 .58 .19
============ ======== ============ ========
In order to calculate the fair value of the options issued, it was
assumed 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
14
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 risk-free interest rates and fair values of options granted under
the Option Plans:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2003 2003 2002
-------- -------- -------- --------
Weighted-average risk-free interest rate 4.02% 4.46% 4.18% 4.46%
Weighted-average grant-date fair value per option of
options issued during the period $ 4.49 $ 3.65 $ 4.33 $ 3.65
6. OTHER EVENTS.
In August 2003, the Orlando Bank acquired substantially all of the
assets of Southern Community Bank, Atlantic (the "Daytona Beach Bank"). In
consideration for the transfer of the assets, the Orlando Bank assumed all of
the liabilities of the Daytona Beach Bank and paid the Daytona Beach Bank in
cash an amount equal to the difference between the book value of the transferred
assets and the assumed liabilities. The Orlando Bank hired all of the former
employees of the Daytona Beach Bank and continues to operate all of the former
facilities of the Daytona Beach Bank. In connection with this transaction, the
Company sold the Daytona Beach Bank legal entity to a third party financial
institution for an amount equal to the amount of cash paid by the Orlando Bank
for the assets of the Daytona Beach Bank and a premium of $1.0 million. The
purchaser acquired the Daytona Beach Bank legal entity in order to obtain its
charter. The Company recorded a $1.0 million pretax gain from the sale.
On September 29, 2003, the Bonita Springs Bank entered into an
agreement with The Harris Bank, N.A., to acquire Harris' Ft. Myers, Florida
branch office for $1.3 million. In addition, the Bonita Springs Bank will
acquire loans with an aggregate outstanding principal balance of approximately
$4.0 million and deposits totaling approximately $5.4 million. The transaction
is expected to be consummated in November 2003. The transaction is subject to
regulatory approval.
15
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
Hacker, Johnson & Smith PA, the Company's independent public
accountants, have made a limited review of the financial data as of September
30, 2003 and 2002 and for the three and nine month periods then ended, presented
in this document, in accordance with standards established by the American
Institute of Certified Public Accountants.
Their report furnished pursuant to Article 10 of Regulation S-X is
included herein.
16
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Southern Community Bancorp
Orlando, Florida:
We have reviewed the accompanying condensed consolidated balance sheets
of Southern Community Bancorp and Subsidiaries (the "Company") as of September
30, 2003 and 2002, and the related condensed consolidated statements of earnings
and comprehensive income for the three and nine-month periods then ended, the
related condensed consolidated statement of stockholders' equity for the nine
month period ended September 30, 2003 and the related condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 2003 and
2002. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquires of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2002, 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 24, 2003 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, 2002, 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
October 17, 2003
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Southern had net earnings for the third quarter of 2003 of $2.1 million
or $.30 per basic share and $.29 per diluted share, compared to
$455,000 or $.07 per basic and diluted share for the comparable period
in 2002. Earnings before income taxes in the third quarter of 2003 were
$3.4 million, compared to $0.7 million in the third quarter of 2002.
The improvement in earnings was primarily due to a substantial increase
in net interest income, which grew from $5.2 million in the third
quarter of 2002 to $6.9 million in the third quarter of 2003. As
discussed below, the increase in net interest income was principally a
result of the growth of Southern's assets and an improvement in its net
interest margin.
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 rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and
deposit flows. In addition, Southern's net earnings are also affected
by the level of non-performing loans and foreclosed assets, as well as
the level of its non-interest income and its non-interest expenses,
such as salaries and employee benefits and occupancy expense.
Interest income for the third quarter of 2003 was $11.5 million,
compared to $9.2 million for the third quarter of 2002. The growth in
interest income primarily reflects the growth in Southern's assets,
which grew from $620.9 million at September 30, 2002 to $856.6 million
at September 30, 2003. This growth was partially offset by a decrease
in the
18
average yield earned on interest-earning assets. During the same
period, net loans grew from $439.2 million to $675.9 million. The
increase in assets is attributable to the growth of all of Southern's
banks, particularly the South Florida Bank which commenced operations
in August 2002. At that time, the South Florida Bank acquired an
existing branch of the Orlando Bank located in Boca Raton, Florida. The
growth of Southern's banks was supported by the opening of an
additional branch of the Orlando Bank in October 2002 and an additional
branch of the South Florida Bank in November 2002.
Interest expense increased from $4.0 million for the third quarter of
2002 to $4.6 million for the comparable 2003 period. This was due to a
combination of a higher level of deposits and borrowings, which more
than offset a decrease in the average cost of deposits. The deposit
growth was attributable to higher deposits at all of Southern's banks,
particularly the South Florida Bank. Southern's interest expense also
increased because Southern had a higher level of borrowings in the
third quarter of 2003 compared to 2002. These borrowings included $10.0
million in subordinated debentures issued by the Orlando Bank to
increase its regulatory capital and approximately $32.3 million
borrowed from the Federal Home Loan Bank to fund the purchase of
investment securities.
Southern's net interest margin increased from approximately 3.73% for
the third quarter of 2002 to approximately 3.76% for the third quarter
of 2003. The improvement in the net interest margin was primarily due
to the increase in the level of Southern's loans relative to Southern's
other assets. This shift had a positive impact on the net interest
margin because loans are Southern's highest interest earning asset
category. The net interest margin also improved because Southern
reallocated a significant amount of its liquid assets (such as cash and
cash equivalents) into investment securities, which have higher yields.
PROVISION FOR LOAN LOSSES. The provision for loan losses totaled $1.0
million in the third quarter of 2003 compared to $1.1 million in the
comparable period in 2002. The allowance for loan losses at September
30, 2003 was $8.4 million. See "Allowance and Provision for Loan
Losses" below.
NONINTEREST INCOME. Noninterest income in the third quarter of 2003
totaled $2.0 million, compared with $452,000 in the comparable period
in 2002. Service charges on deposit accounts totaled $203,000 in 2003,
up from $135,000 in 2002, due to an increase in the average number of
deposit accounts. Gain on sale of charter of $1.0 million in 2003
resulted from the sale of the charter of the Daytona Beach Bank. Other
fees and other income totaled $724,000 in 2003, up from $262,000 in
2002 due to an increase in insurance and mortgage referral fees and
increased loan fees attributable to the overall growth of Southern.
Gain on sale of securities available for sale was $65,000 for the three
months ended September 30, 2003 compared to a net loss of $2,000 for
the comparable 2002 period.
19
NONINTEREST EXPENSE. Noninterest expense for the third quarter of 2003
totaled $4.5 million, up 18.2% from $3.8 million in 2002. Noninterest
expenses included the following:
o Salaries and employee benefits represented 51.7% of total
non-interest expense in 2003. Salaries and employee benefits
increased 13.3% to $2.3 million in 2003 from $2.1 million in
2002. The increase was primarily due to the addition of
employees in connection with the opening of a new branch by
the Orlando Bank in October 2002, and the commencement of
operations of the South Florida Bank, together with salary
increases and higher benefit costs.
o Occupancy expense in 2003 totaled $924,000, up 22.7% from
$753,000 in 2002. This increase was primarily due to the
opening of a new branch by the Orlando Bank and the
commencement of operations of the South Florida Bank.
o Other non-interest expenses for the third quarter of 2003
totaled $1.3 million, up 24.8% from $1.0 million in 2002.
Other non-interest expense include data processing, printing
and office supplies, marketing and advertising, professional
fees and other expenses. The increase resulted from the
opening of additional branches and the overall growth of
Southern.
INCOME TAXES. Income taxes totaled $1.3 million in 2003 (effective rate
of 37.3%) compared to $262,000 in 2002 (effective rate of 36.5%).
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Southern had net earnings for the first nine months of 2003 of $4.4
million or $.64 per basic share and $.61 per diluted share, compared to
$1.5 million or $.25 per basic share and $.24 per diluted share for the
comparable period in 2002. Earnings before income taxes for the first
nine months of 2003 were $7.0 million compared $2.3 million in the
first nine months of 2002. The improvement in earnings was primarily
due to a substantial increase in net interest income, which grew from
$13.7 million in the first nine months of 2002 to $19.3 million in the
first nine months of 2003. As discussed below, the increase in net
interest income was principally a result of the growth in Southern's
assets and an improvement in its net interest margin.
NET INTEREST INCOME. Interest income for the first nine months of 2003
was $32.0 million, compared to $24.6 million for the first nine months
of 2002. The growth in interest income primarily reflects the growth in
Southern's assets, which grew from $620.9 million at September 30, 2002
to $856.6 million at September 30, 2003. 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 $439.2 million to
$675.9 million. The increase in assets is attributable to the growth of
all of Southern's banks, particularly the South Florida Bank.
20
Interest expense increased from $10.9 million for the first nine months
of 2002 to $12.8 million for the comparable 2003 period. This was due
to a combination of higher level of deposits and borrowings, which was
partially offset by a decrease in the average cost of deposits. The
deposit growth was attributable to a higher level of deposits at all of
Southern's banks, particularly the new operations in southeast Florida.
Southern's interest expense also increased because Southern had a
higher level of borrowings in the third quarter of 2003 compared to
2002. These borrowings included $10.0 million in subordinated
debentures issued by the Orlando Bank to increase its regulatory
capital and approximately $32.3 million borrowed from the Federal Home
Loan Bank to fund the purchase of investment securities.
Southern's net interest margin increased from approximately 3.63% for
the first nine months of 2002 to approximately 3.81% for the first nine
months of 2003. The improvement in the net interest margin was
primarily due to the increase in the level of Southern's loans relative
to Southern's other assets. This shift had a positive impact on the net
interest margin because loans are Southern's highest interest earning
asset category. The net interest margin also improved because Southern
reallocated a significant amount of its liquid assets (such as cash and
cash equivalents) into investment securities, which have higher yields.
PROVISION FOR LOAN LOSSES. The provision for loan losses totaled $2.7
million in the first nine months of 2003 compared to $2.0 million in
2002. The allowance for loan losses at September 30, 2003 was $8.4
million. See "Allowance and Provision for Loan Losses" below.
NONINTEREST INCOME. Noninterest income in the first nine months of 2003
totaled $4.0 million, compared with $1.6 million in 2002. Service
charges on deposit accounts totaled $611,000 in 2003, up from $371,000
in 2002, due to an increase in the average number of deposit accounts.
Gain on sale of charter of $1.0 million in 2003 resulted from the sale
of the charter of the Daytona Beach Bank. Other fees and other income
totaled $1.8 million in 2003, up from $929,000 in 2002. This increase
was primarily caused by an increase in insurance and mortgage referral
fees and increased loan fees attributable to the overall growth of
Southern. Gain on sale of securities available for sale was $354,000
during the first nine months of 2003 compared to $120,000 for the
comparable 2002 period.
NONINTEREST EXPENSE. Noninterest expense for the first nine months of
2003 totaled $13.5 million, up 22.5% from $11.0 million in 2002.
Noninterest expense included the following:
o Salaries and employee benefits represented 52.3% of total
non-interest expense in 2003. Salaries and employee benefits
increased 21.5% to $7.0 million in 2003 from $5.8 million in
2002. The increase was primarily due to the addition of
employees in connection with the opening of a new branch by
the Orlando Bank and the commencement of operations of the
South Florida Bank, together with salary increases and higher
benefit costs.
21
o Occupancy expense in 2003 totaled $2.7 million, up 22.1% from
$2.2 million in 2002. This increase was primarily due to the
opening of a new branch by the Orlando Bank and the
commencement of operations of the South Florida Bank.
o Other non-interest expenses for the first nine months of 2003
totaled $3.7 million, up 24.7% from $3.0 million in 2002.
Other non-interest expenses include data processing, printing
and office supplies, marketing and advertising, professional
fees and other expenses. The increase resulted from the
opening of additional branches as well as the overall growth
of Southern.
INCOME TAXES. Income taxes totaled $2.6 million in 2003 (effective rate
of 37.4%) compared to $850 in 2002 (effective rate of 36.6%).
CAPITAL EXPENDITURES
Southern makes capital expenditures in order to improve its ability to
provide quality services to its customers. Capital expenditures for the nine
months ended September 30, 2003 equaled $2.0 million compared to $3.0 million in
2002. The expenditures in 2002 and 2003 were primarily related to the purchase,
construction and furnishing of new branches. The expenses in 2002 are primarily
related to the cost of construction of Southern's new offices in Lake Mary,
Florida and furnishing of other branches. The expense in 2003 primarily related
to the new branches in Palm Beach and West Palm Beach, Florida.
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 September 30, 2003, 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.
22
The following table sets forth information regarding the composition
and carrying amounts of the investment portfolio at September 30, 2003 and 2002:
INVESTMENT PORTFOLIO
At September 30,
------------------------
2003 2002
-------- --------
(in thousands)
Available for Sale:
U.S. Government agencies securities $ 46,946 27,992
Mortgage-backed securities 58,797 35,365
Municipal bonds 2,853 266
-------- --------
$108,596 63,623
======== ========
Held to Maturity-
Mortgage-backed security $ 3,415 --
======== ========
Southern's investment securities increased significantly in the first
nine months of 2003 due to Southern's decision to reallocate other liquid assets
(such as cash and cash equivalents) into higher yielding investment securities.
Investment securities also increased because Southern purchased approximately
$35.0 million in investment securities from the proceeds of approximately $35.0
million in borrowings from the Federal Home Loan Bank.
LOANS. Southern maintains a high quality portfolio of real estate,
commercial and consumer loans. All loans over individual lending limits are
reviewed and approved by Southern's loan committee, which ensures that loans
comply with applicable credit standards. In most cases, Southern requires
collateral from 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 September 30, 2003, 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.
23
TYPES OF LOANS
At September 30,
---------------------------
2003 2002
--------- ---------
(in thousands)
Commercial $ 122,761 108,415
Commercial real estate 271,279 181,580
Residential real estate 62,613 43,470
Construction 215,957 101,903
Consumer and other 14,316 12,155
--------- ---------
Total loans 686,926 447,523
Less:
Allowance for loan losses (8,418) (6,095)
Net deferred loan fees and other discounts (2,595) (2,240)
--------- ---------
Loans, net $ 675,913 439,188
========= =========
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 $122.8 million or 17.9%
of total loans at September 30, 2003, compared with $108.4 million or 24.2% of
total loans at September 30, 2002. The growth in commercial loans was primarily
due to new loans originated in southeast Florida.
REAL ESTATE LOANS. Southern's real estate loans totaled $549.8 million
or 80.0% of total loans at September 30, 2003, and $327.0 million or 73.1% at
September 30, 2002.
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 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 $271.3 million or 39.5% of total loans at September 30, 2003
compared with $181.6 million or 40.6% of total loans at September 30, 2002. 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.
24
Residential real estate loans totaled $62.6 million or 9.1% of total
loans at September 30, 2003, compared with $43.5 million or 9.7% at September
30, 2002. Residential real estate mortgage loans are predominately adjustable
rate home mortgages which generally require a loan-to-collateral value of not
more than 90% and equity credit lines which generally limit the
loan-to-collateral value to not more than 90%. Most loans have a maximum term of
five 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 grew to $216.0 million or 31.4% of total loans at
September 30, 2003 from $101.9 million or 22.8% of total loans at September 30,
2002. The growth in construction loans was attributable to strong demand in
Southern's primary markets and interest rates that continue to favor new
development. Southern primarily makes construction loans on property located in
central and south Florida. Risks associated with construction loans include the
solvency of both the builder and the property owner during the construction
period and the reliability of commitments for permanent financing at the
completion of construction, in addition to the real estate-related risks present
with both commercial and residential real estate loans described above.
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 $14.3 million or 2.1% of total
loans, on September 30, 2003, compared with $12.2 million or 2.7% of total
loans, on September 30, 2002. Risks associated with installment loans include
borrowers' loss of employment and declines in the borrowers' financial condition
resulting in delinquencies, and rapid depreciation of loan collateral.
COMMITMENTS. The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments are commitments to extend
credit, standby letters of credit, undisbursed loans in process and unused lines
of credit and may involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the 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
25
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 $232.5 million at
September 30, 2003. Management believes Southern has adequate resources to fund
all of commitments and that substantially all of its existing commitments will
be funded within the next year.
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets consist of nonaccrual loans and assets acquired in
partial or total satisfaction of problem loans which are known as "foreclosed
assets." Past due loans are loans that are delinquent 30 days or more which are
still accruing interest.
Southern's credit review and approval process is critical to Southern's
ability to minimize non-performing assets on a long term basis. In addition to
the negative impact on interest income, non-performing assets also increase
operating costs due to the expense of collection efforts. It is Southern's
policy to place all loans which are past due 90 days or more on non-accrual
status, subject to exceptions made on a case by case basis.
The following table presents Southern's non-performing assets and past
due loans:
NON-PERFORMING ASSETS AND 90 DAY PAST DUE LOANS
At September 30,
----------------------
2003 2002
------ ------
(in thousands)
Nonaccrual loans $1,959 3,387
Foreclosed assets 822 185
------ ------
Total nonperforming assets $2,781 3,572
====== ======
Accruing loans past due 90 days or more $ -- 158
====== ======
26
Southern's non-performing loans and loans past due 90 days were $2.0
million at September 30, 2003, or .29% of total loans of $686.9 million.
Non-performing loans at September 30, 2003 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 $2.8
million at September 30, 2003, compared to $3.7 million at September 30, 2002.
27
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 $8.4 million at September
30, 2003, from $6.3 million at December 31, 2002 and $6.1 million at September
30, 2002.
FINANCIAL CONDITION
Southern's goal is to maintain a high quality and liquid balance sheet.
Southern seeks to achieve this objective through increases in collateralized
loans, a strong portfolio of real estate loans and a stable portfolio of
investment securities of high quality.
CASH AND CASH EQUIVALENTS. Southern had cash and cash equivalents of
$33.9 million at September 30, 2003, compared to $90.2 million at September 30,
2002. This decrease was primarily the result of Southern's strategy to expand
its loan portfolio and redeploy excess cash into investment securities.
SECURITIES. On September 30, 2003, securities were $112.0 million or
14.0% of total earning assets. The investment portfolio, most of which has been
classified as available for sale, increased 76.1% from $63.6 million at
September 30, 2002. This increase was largely attributable to Southern's efforts
to increase excess cash and cash equivalents into high yielding securities.
Southern also acquired approximately $32.0 million in investment securities from
the proceeds of approximately $32.0 million loan from the Federal Home Loan
Bank.
28
LOANS. Net loans were $675.9 million as of September 30, 2003, compared
to $439.2 million as of September 30, 2002. See "Asset Quality and Credit Risk
- -- Loans," above.
INTEREST-BEARING LIABILITIES. Interest-bearing liabilities primarily
consist of interest-bearing deposits and other borrowings. Total
interest-bearing liabilities were $709.4 million at September 30, 2003, up 40.8%
from $503.8 million in 2002. There was an increase in savings, money-market and
NOW deposits of $129.4 million or 55.4% compared to 2002. There was also an
increase in time deposits of $27.6 million or 10.3% compared to 2002. The growth
in Southern's deposits reflects Southern's marketing efforts to obtain deposits
in southeast Florida for its new South Florida Bank and the opening of an
additional branch in the Orlando Bank.
Other borrowings increased $42.7 million, to $50.6 million at September
30, 2003, from $1.9 million at September 30, 2002. These borrowings included
approximately $32.2 million borrowed from the Federal Home Loan Bank. Southern
utilized these funds to purchase investment securities which had a higher
current yield than the interest payable on the borrowed funds. The Federal Home
Loan Bank borrowings bear interest at rates of 2.26% to 2.66%. These loans are
secured by a pledge of the mortgage-backed securities purchased with the
proceeds. The loans are payable in monthly installments including principal and
interest over a 5 year period with final maturities in April and May, 2008.
Other borrowings also included $8.3 million in overnight Fed funds and bank
repurchase transactions at September 30, 2003, up from $1.9 million at September
30, 2002. These borrowings, at an average interest rate of approximately 1.25%,
are utilized by Southern as needed to manage its liquidity position as
efficiently as possible.
During 2003, Southern's Orlando Bank also borrowed $10.0 million
through the issuance of subordinated debentures. These debentures bear interest
at a floating rate equal to the prime rate, with a minimum of 5.0% per year and
a maximum of 12.0% per year. Interest only is payable semiannually. The
principal amount of the debentures and all accrued interest is due in full in
2011. Subject to required reductions during the last 5 years prior to maturity,
the debentures qualify as Tier 2 capital of the Orlando Bank.
LIQUIDITY AND RATE SENSITIVITY
The principal functions of asset and liability management are to
provide for adequate liquidity, to manage interest rate exposure by maintaining
a prudent relationship between rate sensitive assets and liabilities and to
manage the size and composition of the balance sheet so as to maximize net
interest income.
Liquidity is the ability to provide funds at minimal cost to meet
fluctuating deposit withdrawals or loan demand. These demands are met by
maturing assets and the capacity to raise funds from internal and external
sources. Southern primarily utilizes cash, federal funds sold and securities
available for sale to meet its liquidity needs. Although not utilized in
managing daily liquidity needs, the sale of investment securities provides a
secondary source of liquidity.
29
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 September 30, 2003 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. The gap table has certain limitations in its ability to
accurately portray interest sensitivity; however, it does provide a static
reading of Southern's interest rate risk exposure.
As of September 30, 2003, 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 $95.6 million.
This negative gap at September 30, 2003 was 11.2% of total assets compared to
2.6% at September 30, 2002. 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 to 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 tier one capital was 8.15% and the total capital was 10.44%
of risk-based assets at September 30, 2003. These risk-based capital ratios were
well in excess of the minimum requirements of 4.0% for tier one and 8.0% for
total risk-based capital ratios. Southern's leverage ratio (tier one capital to
total average quarterly assets) of 7.92% at September 30, 2003, was also in
excess of the minimum 4.0% requirement. Southern has committed to the Federal
Reserve that it will maintain, on a consolidated basis, a ratio of total capital
to risk based assets of at least 10% until January 2004.
30
Southern's goal is to increase the capital of its banks so that each of
them is "well capitalized" under applicable federal banking regulations. At
September 30, 2003, all of the banks other than the Orlando Bank had achieved
this objective. Southern expects the Orlando Bank to reach this objective in the
second half of 2003.
In the second quarter of 2003, Southern sold 316,538 shares of its
common stock at a price of $14.00 per share in a private placement transaction.
Southern received gross proceeds of $4.4 million from this offering. It
contributed $4.0 million of this amount to increase the capital of the Bonita
Springs Bank which will utilize the funds for general working capital purposes,
including making loans and purchasing investment securities. Southern retained
the balance of the proceeds for general working capital purposes. Southern also
received an additional $94,000 (6,715 shares) from this offering in the third
quarter of 2003.
Between June 30, 2003 and September 18, 2003, the Orlando Bank issued
$10.0 million of subordinated debentures to institutional investors. The Orlando
Bank will utilize the proceeds from the sale of the debentures for general
working capital purposes, including making loans and purchasing investment
securities.
Southern anticipates that it will need to continue to increase its
capital in order to maintain its planned growth. Southern intends to increase
its capital through a combination of earnings from operations, third party loans
and the sale of securities.
UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE
Due to the combined effects of the growth in Southern's available for
sale investment securities and the rise in long-term interest rates during the
third quarter, Southern's comprehensive income for the three months ended
September 30, 2003 was reduced by $1.7 million as a result of the net unrealized
loss in the market value of its investment securities that are available for
sale, compared to a net unrealized gain of $331,000 in the value of the
securities portfolio during the three months ended September 30, 2002. For the
nine months ended September 30, 2003, the net unrealized loss of $2.0 million in
the available for sale securities portfolio compared to a net unrealized gain of
$621,000 for the nine months ended September 30, 2002. The net change in net
unrealized income attributable to the portfolio is a function of both the growth
of $45 million, or 71%, in the volume of Southern's securities available for
sale, including primarily U.S. government agency and mortgage-backed securities,
and the decline in market value of those securities resulting from rising
long-term interest rates in the third quarter. As a result of this change, which
would affect Southern's net income only in the event of the sale of these
securities, Southern's accumulated other comprehensive income of $709,000 at
September 30, 2002, declined to a loss of $1.1 million at September 30, 2003,
reducing total stockholder's equity by that amount.
SALE OF DAYTONA BEACH BANK CHARTER
In August 2003, the Orlando Bank acquired substantially all of the
assets of the Daytona Beach Bank. In consideration for the transfer of the
assets, the Orlando Bank assumed all of the liabilities of the Daytona Beach
Bank and paid to the Daytona Beach Bank a cash amount equal
31
to the difference between the book value of the transferred assets and the
assumed liabilities. In connection with the transaction, the Orlando Bank hired
all of the former employees of the Daytona Beach Bank and continues to operate
all of the former facilities of the Daytona Beach Bank.
The Company also entered into an agreement to merge the Daytona Beach
Bank into an unaffiliated bank based in another state. This transaction was
completed immediately following the transfer of the Daytona Beach Bank's assets
and liabilities to the Orlando Bank. In consideration for the merger, the
acquiring bank paid the Company an amount equal to the capital accounts of the
Daytona Beach Bank at the time of the merger and a premium of $1.0 million. The
purchaser acquired the Daytona Beach Bank in an interstate bank merger
transaction in order to gain the ability to establish branch offices in Florida.
The Company recorded a $1.0 million pretax gain from the sale.
Except for the receipt of the $1.0 million premium from the purchaser,
the foregoing transactions did not affect Southern's consolidated assets,
liabilities or stockholders equity.
DISSOLUTION OF MORTGAGE COMPANY
Each of the Orlando Bank and an unaffiliated company, American Heritage
Mortgage Affiliates, Inc. ("American Heritage Affiliates"), holds a 50% interest
in a Florida limited liability company, Southern Community Banc Mortgage, LLC
(the "Mortgage Company"), which originates residential mortgage loans for
customers of the Orlando Bank and others. American Heritage Affiliates, through
an agreement with its parent company, American Heritage Mortgage Corporation
("American Heritage Mortgage"), provides the staffing and administrative
services required for the operations of the Mortgage Company. American Heritage
Mortgage was recently acquired by another unaffiliated company, First Horizon
Home Loan Corporation ("First Horizon"), and, as a result of that transaction,
American Heritage Affiliates will no longer provide administrative and clerical
support to the Mortgage Company. In connection with its acquisition of American
Heritage Mortgage, First Horizon has agreed to pay $500,000 to American Heritage
Affiliates if the Mortgage Company is dissolved. That payment will then be
divided between American Heritage Affiliates and the Orlando Bank upon
dissolution of the Mortgage Company. It is anticipated that the dissolution of
the Mortgage Company will be completed in November 2003. Following the
dissolution of the Mortgage Company, the Orlando Bank will originate residential
mortgage loans for its customers directly.
BRANCH ACTIVITIES
On July 14, 2003, the Boca Raton Bank opened a branch office in leased
facilities in Palm Beach, Florida. In July, 2003, the Boca Raton Bank also
purchased a site in West Palm Beach where it intends to construct a new branch
facility. The purchase price for the West Palm Beach branch site was $1.2
million. Pending construction of the planned permanent facility, the West Palm
Beach branch will operate from an adjacent leased facility. Construction of the
permanent facility is expected to be completed in mid-2005 at a cost of
approximately $800,000. On June 14, 2003, the Boca Raton Bank entered into a
lease agreement for a proposed branch office to be located on PGA Boulevard in
Palm Beach Gardens, Florida. Pending regulatory approval, the proposed PGA
branch office will open in December, 2003 or January, 2004.
32
On September 29, 2003, the Bonita Springs Bank entered into an
agreement with The Harris Bank, N.A., to acquire a branch office located in Fort
Myers, Florida for $1.3 million. In addition, the Bonita Springs Bank will
acquire loans with an aggregate of outstanding principal balances of
approximately $4.0 million and deposits totaling approximately $5.4 million. The
transaction is expected to be consummated in November 2003, subject to the
receipt of required regulatory approval.
33
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.
Management 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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Southern's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of Southern's disclosure controls and procedures as
of September 30, 2003. Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer of Southern have concluded that Southern's disclosure
controls and procedures are effective. During the quarter ended September 30,
2003, Southern made no significant changes in its internal control over
financial reporting.
34
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
During the quarter ended September 30, 2003, Southern sold shares of
its common stock in the following transactions which were not registered under
the Securities Act of 1933, as amended:
In July, 2003, Southern sold an additional 6,715 shares of common stock
at $14.00 per share in a private placement transaction to 2 investors. Southern
issued the shares in reliance upon the exemption for registration set forth in
Section 4(2) of the Securities Act of 1933, as amended. One of the investors was
an accredited investor, as such term is defined under Regulation D under the
Securities Act, and the other was an employee of Southern.
In August, 2003, Southern sold 20,000 shares of common stock at $14.00
per share to William Spearman, an officer of the Bonita Springs Bank.
ITEM 6. EXHIBITS.
(a) EXHIBITS.
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted by Section 906 of
Sarbanes-Oxley Act of 2002
32.2 Certification of and Chief Financial Officer pursuant to 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.
35
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: November 14, 2003 /s/ CHARLIE W. BRINKLEY, JR.
-----------------------------------------
Charlie W. Brinkley, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2003 /s/ STEPHEN R. JEUCK
-----------------------------------------
Stephen R. Jeuck
Chief Financial Officer
(Principal Accounting Officer)
36