SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

Commission File No. 000-49780

SOUTHERN COMMUNITY BANCORP

250 North Orange Avenue, Orlando, Florida 32801

(407) 648-1844

     Indicate by check number whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes   x   No    o

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

     As of April 21, 2004, the issuer had 7,215,561 outstanding shares of common stock, par value $1.00 per share.

SOUTHERN COMMUNITY BANCORP
FORM 10-Q
March 31, 2004

INDEX

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PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

See Accompanying Notes to Condensed Consolidated Financial Statements.

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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
($ in thousands, except per share amounts)

See Accompanying Notes to Condensed Consolidated Financial Statements.

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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

See Accompanying Notes to Condensed Consolidated Financial Statements.

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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

See Accompanying Notes to Condensed Consolidated Financial Statements.

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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

(continued)

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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

See Accompanying Notes to Condensed Consolidated Financial Statements.

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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

See Accompanying Notes to Condensed Consolidated Financial Statements.

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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

     1. General. In the opinion of the management of Southern Community Bancorp and its subsidiaries (the “Company” or “Southern”), the accompanying condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the financial position at March 31, 2004 and 2003, and the results of operations and cash flows for the three-month periods then ended. The results of operations and other data for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004.

     Southern Community Bancorp (the “Holding Company”) owns all of the outstanding common stock of Southern Community Bank of Central Florida (the “Orlando Bank”), Southern Community Bank of Southwest Florida (the “Bonita Springs Bank”), and Southern Community Bank of South Florida (the “South Florida Bank”) (collectively, the “Banks”). The Banks are Florida chartered commercial banks and their deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”) through the Bank Insurance Fund. Prior to October 1, 2003, the Orlando Bank had a 50% equity interest in Southern Community Bank Mortgage LLC (the “Mortgage Company”). The Mortgage Company originated, processed and closed loans in central Florida. On October 1, 2003, the Orlando Bank agreed to liquidate the Mortgage Company in exchange for $250,000.

     The Orlando Bank owns all of the outstanding common stock of Southern Community Insurance Agency, Inc. (the “Insurance Agency”). The Insurance Agency refers customers of the Banks to certain insurance agencies for the purchase of insurance products.

     2. Loan Impairment and Losses. The Company performs a quarterly loan loss analysis to identify impaired loans. The Company’s impaired loans were as follows (in thousands):

     The average net investment in collateral dependent impaired loans and interest income recognized and received on these loans were as follows (in thousands):

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

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

     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):

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     4. Regulatory Capital. The Holding Company, the Orlando Bank, the Bonita Springs Bank and the South Florida Bank are required to maintain certain minimum regulatory capital requirements. The following is a summary at March 31, 2004 of the regulatory capital requirements and the actual capital on a percentage basis:

     5. Stock Option Plans. The Company has several stock option plans under which the Company is authorized to issue shares of its common stock to employees and directors pursuant to stock options and restricted stock grants. Vesting periods are established as awards are granted. At March 31, 2004, there were 1,394,060 shares available to be issued in connection with future awards under the option plans.

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     A summary of stock option transactions for the three-month periods ended March 31, 2004 and 2003 follows ($ in thousands, except per share amounts):

     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).

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     In order to calculate the fair value of the options, it was assumed that the risk-free interest rate was 4.76% for 2004 and 4.57% for 2003, there would be no dividends paid by the Company over the exercise period, the expected life of the options would be the entire exercise period and stock volatility would be zero due to the lack of an active market for the stock. For purposes of pro forma disclosures, the estimated fair value is treated as expense during the vesting period. The following information summarizes the fair value of options granted under the option plans (in thousands):

     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.

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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES

Review by Independent Public Accountants

     Hacker, Johnson & Smith PA, the Company’s independent public accountants, have made a limited review of the financial data as of March 31, 2004 and 2003 and for the three-month periods then ended, presented in this document, in accordance with standards established by the American Institute of Certified Public Accountants.

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

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Independent Accountants’ Report

Southern Community Bancorp
Orlando, Florida:

     We have reviewed the accompanying condensed consolidated balance sheets of Southern Community Bancorp and Subsidiaries (the “Company”) as of March 31, 2004 and 2003, and the related condensed consolidated statements of earnings, comprehensive income and cash flows for the three-month periods then ended and the related condensed consolidated statement of stockholders’ equity for the three-month period ended March 31, 2004. These financial statements are the responsibility of the Company’s management.

     We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

     Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

     We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated January 14, 2004, except for Note 23 as to which the date is March 19, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

HACKER, JOHNSON & SMITH PA
Orlando, Florida
April 8, 2004

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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.

Agreement and Plan of Merger Between Southern and First National Bankshares of Florida, Inc.

     On March 19, 2004, Southern and First National Bankshares of Florida, Inc. (“FLB”) entered into an Agreement of Plan of Merger, pursuant to which FLB has agreed to acquire Southern through the merger of Southern with and into FLB. Under the terms of the merger agreement, at the effective time of the merger, each outstanding share of Southern common stock will be converted into the right to receive 1.62 shares of FLB common stock, provided that if the average closing price of FLB common stock exceeds $20.00 over the 20 consecutive trading days ending on the fifth day prior to the merger (such average closing price, the “Closing FLB Value”), the exchange ratio will be reduced to an amount that will result in each share of Southern common stock being exchanged for a number of shares of FLB common stock having a value (based on the Closing FLB Value) equal to the average of $32.40 ($20 multiplied by 1.62) and the product of 1.62 multiplied by the Closing FLB Value.

     If the average closing price of FLB common stock over the 20 trading days ending on the day that the last required regulatory or shareholder approval for the merger is obtained is less than $15.00, Southern will have the right to terminate the merger agreement.

     The merger is intended to constitute a tax free organization under the Internal Revenue Code of 1986 as amended (except as to any cash paid to a Southern shareholder in lieu of a fractional share of FLB common stock).

     Consummation of the merger is subject to various conditions, including approval of the merger agreement by the shareholders of Southern and FLB, receipt of banking regulatory approvals and receipt of opinions of counsel as to the tax-free nature of certain aspects of the merger. Southern reported the execution of the merger agreement in a Form 8-K filed with the

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     Securities and Exchange Commission on March 22, 2004. The merger is currently expected to be consummated during the third quarter of 2004.

Results of Operations — Three Months Ended March 31, 2004 and 2003

Southern had net earnings for the first quarter of 2004 of $1,421,000, compared to $1,004,000 for the comparable period in 2003. Earnings before income taxes in the first quarter of 2004 were $2,190,000 compared $1,607,000 in the first quarter of 2003. The improvement in earnings was primarily due to a substantial increase in net interest income, which grew from $5.9 million in the first quarter of 2003 to $8.2 million in the first quarter of 2004. As discussed below, the increase in net interest income was principally a result of the growth in its assets.

Net Interest Income. Southern’s operating results depend primarily on Southern’s net interest income, which is a difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is determined by the difference between yields earned on interest-earning assets and rates paid on interest- bearing liabilities and the relative amounts of interest-earning assets and interest-bearing liabilities. Southern’s interest rates spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, Southern’s net earnings are also affected by the level of non-performing loans and foreclosed assets, as well as the level of its non-interest income, and its non-interest expenses, such as salaries and employee benefits and occupancy expense.

Interest income for the first quarter of 2004 was $13.0 million, compared to $9.8 million for the first quarter of 2003. The growth in interest income primarily reflects the growth in Southern’s assets, which grew from $707.2 million at March 31, 2003 to $1,023.2 million at March 31, 2004. This growth was partially offset by a decrease in the average yield earned on interest-earning assets. During the same period, net loans grew from $551.1 million to $787.7 million. The increase in assets is primarily attributable to the growth of Southern’s business in southeast and southwest Florida, where Southern opened three branches in 2003 and 2004.

Interest expense increased from $3.9 million for the first quarter of 2003 to $4.8 million for the comparable 2004 period. This was due to a combination of higher level of deposits and borrowings and a decrease in the average cost of deposits. Most of the deposit growth was attributable to Southern’s new branches in southeast and southwest Florida.

Southern’s net interest margin decreased from approximately 3.83% for the first quarter of 2003 to approximately 3.63% for the first quarter of 2004. The decrease in the net interest margin was principally due to a change in the mix of Southern’s assets and liabilities. In this connection, Southern’s deposits increased significantly during the first quarter of 2004 due to additional promotional efforts to obtain deposit accounts. This in turn led to an increase in Southern’s cash and cash equivalents, which are relatively low yielding assets. Southern anticipates that its net interest margin will improve as it re-deploys these funds in to higher yielding loans and other assets.

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Noninterest Income. Noninterest income in the first quarter of 2004 totaled $735,000, compared with $750,000 in 2003. Service charges on deposit accounts totaled $186,000 in 2004, down from $195,000 in 2003. Other fees and other income totaled $425,000 in 2004, down from $493,000 in 2003. This decrease was primarily caused by a decrease in mortgage referral fees after the liquidation of Southern Community Bank Mortgage, LLC in October 2003.

Provision for Loan Losses. The provision for loan losses totaled $966,000 in the first quarter of 2004 compared to $745,000 in 2003. The allowance for loan losses at March 31, 2004 was $9.8 million. See “Allowance and Provision for Loan Losses” below.

Noninterest Expenses. Noninterest expenses for the first quarter of 2004 totaled $5.8 million, up 36.2% from $4.3 million in 2003. Noninterest expenses included the following:

•

Salaries and employee benefits represented 55.1% of total non-interest expenses in 2004. Salaries and employee benefits increased 37.1% to $3.2 million in 2004 from $2.3 million in 2003. The increase was primarily due to the addition of employees in connection with the new branches in southeast and southwest Florida, together with salary increases and higher benefit costs.

•

Occupancy expense in 2004 totaled $1,101,000, up 30.5% from $844,000 in 2003. This increase was primarily due to the opening of the new branches.

•

Other non-interest expenses for the first quarter of 2004 totaled $1,499,000, up 38.9% from $1,079,000 in 2003. Other non-interest expenses include data processing, printing and office supplies, marketing and advertising, professional fees and other expenses. The increase resulted from the opening of additional branches as well as the overall growth of Southern.

Income Taxes. Income taxes totaled $769,000 in 2004 (effective rate of 35.1%) compared to $603,000 in 2003 (effective rate of 37.5%).

Capital Expenditures

     Southern makes capital expenditures in order to improve its ability to provide quality services to its customers. Capital expenditures for the three months ended March 31, 2004 equaled $450,000 compared to $195,000 in 2003. Most of these expenses in 2004 were related to the purchase of equipment and construction of new branches.

Asset Quality and Credit Risk

     Securities. Southern maintains a high quality investment portfolio including securities of U.S. government entities, mortgage-backed securities and municipal bonds. Southern believes that the securities have very little risk of default. At March 31, 2004, all but one of the securities held in Southern’s investment portfolio were classified available for sale and all were rated “A”

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or better (with a majority rated triple “A”). A rating of “A” or better means that the bonds are of “upper medium grade, with strong ability to repay, possibly with some susceptibility to adverse economic conditions or changing circumstances.” Ratings are assigned by independent rating agencies and are subject to the accuracy of reported information concerning the issuers and the subjective judgment and analysis of the rating agencies. They are not a guarantee of collectibility.

     The following table sets forth information regarding the composition and carrying amounts of the investment portfolio at March 31, 2004 and 2003:

Investment Portfolio

     Loans. Southern maintains a high quality portfolio of real estate, commercial and consumer loans. All loans over individual lending limits are reviewed and approved by Southern’s loan committee, which ensures that loans comply with applicable credit standards. In most cases, Southern requires collateral from the borrowers. The type and amount of collateral varies, but may include residential or commercial real estate, deposits held by financial institutions, U.S. Treasury securities, other marketable securities and personal property. Southern monitors collateral values to ensure that they are maintained at proper levels.

     As of March 31, 2004, the majority of Southern’s real estate loans were loans secured by real estate in central and south Florida. This level of concentration could present a potential credit risk to Southern because the ultimate collectibility of these loans is susceptible to adverse changes in real estate market conditions in these markets. Southern has sought to address this risk by limiting most loans to a maximum of 75% of the appraised value of the underlying real estate and maximum amortization schedules of 20 years with maturity dates not exceeding five years.

     The following table divides Southern’s loan portfolio into five categories. Most of the loans are short-term and may be renewed or rolled over at maturity. At that time, Southern undertakes a complete review of the borrower’s credit worthiness and the value of any collateral. If these items are satisfactory, Southern will generally renew the loan at prevailing interest rates.

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Types of Loans

     Commercial Loans. Southern makes commercial loans to businesses located in its target markets. The credit risk associated with business lending is influenced by general economic conditions, deterioration in a borrower’s capital position resulting in increasing debt to equity ratios, deterioration in a borrower’s cash position resulting in a liquidity problem, and decreasing revenues due to inefficient operations of the borrower. These loans are generally secured by corporate assets, marketable securities or other liquid financial instruments. These loans totaled approximately $136.5 million or 17.1% of total loans at March 31, 2004, compared with $133.3 million or 23.8% of total loans at March 31, 2003. The growth in commercial loans was primarily due to new loans originated in southeast Florida.

     Real Estate Loans. Southern’s real estate loans totaled $646.9 million or 80.8% of total loans at March 31, 2004, and $413.8 million or 73.8% at March 31, 2003.

     Southern makes real estate loans secured by commercial real estate, including loans to acquire or refinance office buildings, warehouses and apartments. These loans generally require a loan to value ratio of not more than 75%. Most of these loans have a maturity of five years or less. Almost all of these loans are secured by real property located in central and south Florida. These loans totaled $284.1 million or 35.5% of total loans at March 31, 2004 compared with $225.5 million or 40.2% of total loans at March 31, 2003. The growth in commercial real estate loans was primarily due to new loans originated in southeast Florida. Risks associated with commercial real estate mortgage loans include reliability of appraisals, deterioration of market values, environmental contamination, and accelerated depreciation of property due to deferred maintenance.

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     Residential real estate loans totaled $73.7 million or 9.2% of total loans at March 31, 2004, compared with $51.2 million or 9.1% at March 31, 2003. Residential real estate mortgage loans are predominately adjustable rate home mortgages which generally require a loan-to-collateral value ratio of not more than 90% and equity credit lines which generally limit the loan-to-collateral value ratio to not more than 90%. Most loans have a maximum term of five to seven years. Almost all of the residential real estate mortgage loans are secured by homes in central and south Florida. Risks associated with residential real estate mortgage loans include reliability of appraisals, deterioration of market values, environmental contamination, and accelerated depreciation of property due to deferred maintenance.

     Construction loans totaled $289.1 million or 36.1% of total loans at March 31, 2004 compared to $137.2 million or 24.5% of total loans at March 31, 2003. The increase in construction loans was due in part to the refocusing of marketing efforts. Southern primarily makes construction loans on property located in central and south Florida.

     Consumer and Other Loans. Southern offers consumer loans and personal and secured loans. The security for these loans ordinarily consists of automobiles, consumer goods, marketable securities, certificates of deposit and similar items. These loans totaled approximately $17.0 million or 2.1% of total loans, on March 31, 2004, compared with $13.1 million or 2.4% of total loans, on March 31, 2003. Risks associated with installment loans include borrowers’ loss of employment, and rapid depreciation of loan collateral.

     Commitments. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit, standby letters of credit, undisbursed loans in process and unused lines of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

     The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

     Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty.

     Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved is essentially the same as that involved in extending loans to customers.

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     Southern had legally binding commitments to extend credit, including unused lines of credit and letters of credit, totaling $300.2 million at March 31, 2004.

Nonperforming Assets and Past Due Loans

     Nonperforming assets consist of nonaccrual loans and assets acquired in partial or total satisfaction of problem loans which are known as “foreclosed assets.” Past due loans are loans that are delinquent 30 days or more which are still accruing interest.

     Southern’s credit review and approval process is critical to Southern’s ability to minimize non-performing assets on a long term basis. In addition to the negative impact on interest income, non-performing assets also increase operating costs due to the expense of collection efforts. It is Southern’s policy to place all loans which are past due 90 days or more on non-accrual status, subject to exceptions made on a case by case basis.

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

Non-Performing Assets and 90 Day Past Due Loans

     Southern’s non-performing loans and loans past due 90 days were $2.5 million at March 31, 2004, or .31% of total loans of $800.4 million. Non-performing loans at March 31, 2004 consisted of commercial and residential real estate loans. Southern believes that its non-performing loans are well secured and are unlikely to result in any material losses. Total non-performing assets and accruing loans past due 90 days or more totaled $3.4 million at March 31, 2004, compared to $3.3 million at March 31, 2003.

Allowance and Provision for Loan Losses

     Southern evaluates the adequacy of its allowance for loan losses as part of its ongoing credit review and approval process. The review process is intended to identify, as early as possible, customers who may be facing financial difficulties. Once identified, the extent of the client’s financial difficulty is carefully monitored by Southern’s loan review officer, who recommends to the loan committee the portion of any credit that needs a specific reserve allocation or should be charged off. Other factors considered by the loan committee in evaluating the adequacy of the allowance include overall loan volume, historical net loan loss

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experience, the level and composition of non-accrual and past due loans, local economic conditions, and value of any collateral. From time to time, specific amounts of the reserve are designated for certain loans in connection with the loan committee’s review of the officer’s analysis of the adequacy of the allowance for loan losses.

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

     Management relied on these factors, as well as its assessment of the financial condition of specific clients facing financial difficulties, in deciding to increase the allowance for loan losses to $9.8 million at March 31, 2004, from $8.9 million at December 31, 2003 and $6.9 million at March 31, 2003.

Financial Condition

     Southern’s goal is to maintain a high quality and liquid balance sheet. Southern seeks to achieve this objective through increases in collateralized loans, a strong portfolio of real estate loans and a stable portfolio of investment securities of high quality.

     Cash and Cash Equivalents. Southern had cash and cash equivalents of $76.9 million at March 31, 2004, compared to $37.8 million at March 31, 2003. This increase was primarily the result of the substantial growth in Southern’s deposits.

     Securities. On March 31, 2004, securities were $120.5 million or 12.4% of total earning assets. Southern’s strategy for its investment account is to maintain a high quality portfolio. The investment portfolio, most of which has been classified as available for sale, increased 36.7% from $88.1 million at March 31, 2003.

     Loans. Net loans were $787.7 million as of March 31, 2004, compared to $551.1 million as of March 31, 2003. See “Asset Quality and Credit Risk — Loans,” above.

     Interest-Bearing Liabilities. Interest-bearing liabilities primarily consisted of interest-bearing deposits and other borrowings. Total interest-bearing liabilities were $853.1 million at March 31, 2004, up from $572.8 million in 2003. There was an increase in savings, money-market and NOW deposits of $177.6 million or 57.7% compared to 2003. There was also a significant increase in time deposits of $55.5 million or 21.0% compared to 2003. The growth in Southern’s deposits reflects Southern’s marketing efforts to obtain deposits in southeast Florida for the South Florida Bank and the opening of additional branches. Other borrowings increased to $48.9 million at March 31, 2004 from $1.6 million at March 31, 2003. Other borrowings consist of Federal Home Loan Bank advances, subordinated debentures and borrowings under Southern’s line of credit with SunTrust Bank NA. In this connection, Southern borrowed $5,000,000 from SunTrust Bank N.A. during the first quarter of 2004 in order to provide additional capital to its bank subsidiaries. This loan bears interests at LIBOR plus 1.85%, with interest payable quarterly and the entire balance due 364 days after funding.

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Liquidity and Rate Sensitivity

     The principal functions of asset and liability management are to provide for adequate liquidity, to manage interest rate exposure by maintaining a prudent relationship between rate sensitive assets and liabilities and to manage the size and composition of the balance sheet so as to maximize net interest income.

     Liquidity is the ability to provide funds at minimal cost to meet fluctuating deposit withdrawals or loan demand. These demands are met by maturing assets and the capacity to raise funds from internal and external sources. Southern primarily utilizes cash, federal funds sold and securities available for sale to meet its liquidity needs. Although not utilized in managing daily liquidity needs, the sale of investment securities provides a secondary source of liquidity.

     Fluctuating interest rates, increased competition and changes in the regulatory environment continue to significantly affect the importance of interest-rate sensitivity management. Rate sensitivity arises when interest rates on assets change in a different period of time or a different proportion than that of interest rates on liabilities. The primary objective of interest-rate sensitivity management is to prudently structure the balance sheet so that movements of interest rates on assets and liabilities are highly correlated and produce a reasonable net interest margin even in periods of volatile interest rates.

     Regular monitoring of assets and liabilities that are rate sensitive within 30 days, 90 days, 180 days and one year is an integral part of Southern’s rate-sensitivity management process. It is Southern’s policy to maintain a reasonable balance of rate-sensitive assets and liabilities on a cumulative one year basis, thus minimizing net interest income exposure to changes in interest rates. Southern’s sensitivity position at March 31, 2004 was such that net interest income would decrease modestly if there were an increase in short-term interest rates.

     Southern monitors the interest rate risk sensitivity with traditional gap measurements. These gap measurements have certain limitations in their ability to accurately portray interest sensitivity; however, they do provide a static reading of Southern’s interest rate risk exposure.

     As of March 31, 2004, Southern was liability sensitive (interest-sensitive liabilities subject to repricing exceeded interest-sensitive assets subject to repricing) on a 365-day basis to the extent of $67.2 million. This negative gap at March 31, 2004 was 6.6% of total assets compared with a negative gap of 10.2% at March 31, 2003. Southern’s target gap position is in the range of negative 20% and positive 20%. The change in Southern’s gap position reflects a shift from longer-maturity interest-earning assets.

     While the absolute level of gap is a measurement of interest rate risk, the quality of the assets and liabilities in the balance sheet must be analyzed in order to understand the degree of interest rate risk taken by Southern. Southern does not invest in any derivative products in order to manage or hedge its interest rate risk.

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Capital

     One of Southern’s primary objectives is to maintain a strong capital position to merit the confidence of customers, bank regulators and stockholders. A strong capital position helps Southern withstand unforeseen adverse developments and take advantage of attractive lending and investment opportunities when they arise.

     Southern’s tier one capital was 7.41% and the total capital was 9.81% of risk-based assets at March 31, 2004. These risk-based capital ratios were in excess of the minimum requirements of 4.0% for tier one and 8.0% for total risk-based capital ratios. Southern’s leverage ratio (tier one capital to total average quarterly assets) of 7.29% at March 31, 2004, was also in excess of the minimum 4.0% requirement.

     Southern’s goal is to maintain the regulatory capital of each of its banks so that they are “well capitalized” under applicable federal banking regulations. On March 31, 2004, all of the banks had achieved this objective.

     In the first quarter of 2004, Southern borrowed $5,000,000 from SunTrust Banks N.A. pursuant to a revolving line of credit. Southern utilized the proceeds of this loan to make capital contributions to each of its subsidiary banks.

     Southern anticipates that it will need to continue to increase its capital in order to maintain its planned growth. Southern intends to increase its capital through a combination of earnings from operations, loans from third parties, and the sale of securities.

Unrealized Gain on Securities Available for Sale

     Due to the combined effects of the growth in Southern’s available for sale investment securities and the decline in long-term interest rates during the first quarter of 2004, Southern’s comprehensive income for the three months ended March 31, 2004 increased by $1,306,000 as a result of the net unrealized gain in the market value of its investment securities that are available for sale, compared to a net unrealized loss of $149,000 during the three months ended on March 31, 2003. As a result of the change in the first quarter of 2004, which would affect Southern’s net income only in the event of the sale of these securities, Southern’s accumulated other comprehensive income (loss) increased from $(1,138,000) at December 31, 2003 to $168,000.

Critical Accounting Policies

     Southern’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. A summary of Southern’s significant accounting policies is set forth in Southern’s consolidated financial statements contained in Southern’s Form 10-K for the fiscal year ended December 31, 2004.

     Southern believes that of its significant accounting policies, those described below involve a high degree of judgment and complexity. These critical accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the consolidated financial statements. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts could differ from estimates and the

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difference could have a material impact on the consolidated financial statements. Therefore, understanding these policies is important in understanding the reported results of operations and the financial position of Southern.

     Loan Portfolio. A variety of factors impact the carrying value of Southern’s loan portfolio, including the calculation of the allowance for loan losses, valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.

     Southern believes that the determination of the allowance for loan losses represents a critical accounting policy. The allowance for loan losses is maintained at a level management considers to be adequate to absorb probable loan losses inherent in the portfolio, based on evaluations of the collectibility and historical loss experience of loans. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan losses are based on Southern’s review of the historical loan loss experience and such factors which, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. The allowance is based on ongoing assessments of the probable estimated losses inherent in the loan portfolio. Southern’s methodology for assessing the appropriate allowance level consists of several key elements described below.

     Large commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on Southern’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flows, and available legal options. Included in the review of individual loans are those that are impaired as provided in Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” as amended. Any specific reserves for impaired loans are measured based on the fair market value of the underlying collateral. Southern evaluates the collectibility of both principal and interest when assessing the need for a special reserve. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

     Homogenous loans, such as installment and residential mortgage loans, are not individually reviewed by management. Reserves are established for each pool of loans based on the expected net charge-offs. Loss rates are based on the average net charge-off history by loan category.

     Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions or loss recognition. Factors which management considers in the analysis include the effects of the local economy, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and Southern’s internal credit review function.

     An unallocated reserve is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans.

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     Specific reserves on individual loans and historical loss rates are reviewed throughout the year and adjusted as necessary based on changing borrower and collateral conditions and actual collection and charge-off experience.

     Based on the procedures discussed above, management believes that allowance for loan losses was adequate to absorb estimated loan losses associated with the loan portfolio at March 31, 2004. Actual results could differ from these estimates. However, since the allowance is affected by management’s judgment and uncertainties, there is the likelihood that materially different amounts would be reported under different conditions or assumptions. To the extent that the economy changes, collateral values change, reserve factors change, or the nature and volume of problem loans change, Southern may need to adjust its provision for loan losses. Material additions to Southern’s provision for loan losses would result in a decrease in net earnings and capital.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest-rate risk inherent in its lending and deposit taking activities. The Company has little or no risk related to trading accounts, commodities or foreign exchange.

     The Company actively monitors and manages its interest rate risk exposure. The primary objective in managing interest-rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on the Company’s net interest income and capital, while adjusting the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. Management relies primarily on its asset-liability structure to control interest rate risk. However, a sudden and substantial increase in interest rates could adversely impact the Company’s earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. There have been no significant changes in the Company’s market risk exposure since December 31, 2003.

Item 4. Controls and Procedures

     Southern maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Southern files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of these controls and procedures as of March 31, 2004, the Chief Executive Officer and Chief Financial Officer of Southern concluded that Southern’s disclosure controls and procedures, as designed and implemented, were effective.

     Southern made no significant changes in its internal controls over financial reporting during the quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 2. Changes in Securities.

     During the quarter ended March 31, 2004, Southern issued shares of its common stock in the following transactions which were not registered under the Securities Act of 1933, as amended:

     • Southern issued 15,000 shares valued at $10.50 and 12,498 shares valued at $14.00 of its common stock to its chief executive officer pursuant to an existing stock grant agreement. Southern issued the shares in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.

     • Southern issued 11,139 shares of its common stock to its directors in lieu of directors’ fees. The shares were issued at a value of $10.50 per share. Southern relied upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.

     • Southern issued 27,980 shares of its common stock to its employees pursuant to Southern’s existing employee stock purchase plan. The shares were issued at a value of $10.50 per share. Southern relied upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.

     • Southern sold 4,000 shares of its common stock to two of its officers. The shares were sold a price of $14.00 per share. Southern relied upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.

     • Southern issued 20,000 shares pursuant to the exercise of a stock option held by the estate of a former director of Southern. Southern relied upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.

Item 3. Submission of Matters to a Vote of Securities Holders

     Southern held its annual meeting of shareholders on May 4, 2004.

     At the annual meeting, Southern elected six directors to serve for a term of three years. The six persons who were elected to serve as directors were: Charlie W. Brinkley, Jr., Alfred J. Cinque, Thomas H. Dargan, Jr., Richard L. Garner, John G. Squires, and Michael E. Vestal. At the annual meeting, 4,142,487 votes were voted for the election of each of the six nominees and 14,067 votes were voted withheld.

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     The following table sets forth all of the directors of Southern including their current term and office:

     At the annual meeting, the shareholders also ratified the appointment of Hacker, Johnson & Smith P.A. as the Company’s auditors for the fiscal year ended December 31, 2004. There were 4,145,234 shares voted in favor of this proposal and none voted against.

Item 6. Exhibits.

     (a) Exhibits.

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     (b) Reports on Form 8-K.

On March 26, 2004, the Company filed a Current Report on Form 8-K to report that the Company had entered into an Agreement and Plan of Merger with First National Bankshares of Florida, Inc.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SOUTHERN COMMUNITY BANCORP (Registrant)
Date: May 13, 2004	/s/ Charlie W. Brinkley, Jr.
	Charlie W. Brinkley, Jr.
	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)

	/s/ Stephen R. Jeuck
	Stephen R. Jeuck
Date: May 13, 2004	Chief Financial Officer (Principal Accounting Officer)

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