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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 June 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
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(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
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(Address of Principal Executive Offices)
(407) 648-1844
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(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 July 18, 2003, the issuer had 7,052,352 outstanding shares of
common stock, par value $1.00 per share.
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SOUTHERN COMMUNITY BANCORP
FORM 10-Q
June 30, 2003
INDEX
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets -
June 30, 2003 and 2002 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Earnings (Unaudited) -
Three Months Ended June 30, 2003 and 2002 5
Condensed Consolidated Statements of Earnings (Unaudited) -
Six Months Ended June 30, 2003 and 2002 6
Condensed Consolidated Statements of Comprehensive Income (Unaudited) -
Three Months Ended June 30, 2003 and 2002 7
Condensed Consolidated Statements of Comprehensive Income (Unaudited) -
Six Months Ended June 30, 2003 and 2002 8
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Month Ended June 30, 2003 and 2002 9
Condensed Consolidated Statement of Stockholders' Equity (Unaudited) -
Six Months Ended June 30, 2003 11
Notes to Condensed Consolidated Financial Statements (Unaudited) 12
Review by Independent Public Accountants 17
Independent Accountants' Report 18
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
Item 4. Controls and Procedures 32
PART II: OTHER INFORMATION 33
Item 2. Changes in Securities 33
Item 6. Exhibits and Reports on Form 8-K 33
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AT JUNE 30,
----------------------
2003 2002
-------- --------
ASSETS
Cash and due from banks $ 21,999 11,604
Interest-earning deposits and federal funds sold 4,317 60,832
-------- --------
Cash and cash equivalents 26,316 72,436
Securities available for sale 117,613 52,505
Security held to maturity 3,427 --
Loans, net of allowance for loan losses of $7,582 in 2003 and $5,190 in 2002 611,214 405,818
Accrued interest receivable 2,896 2,170
Federal Home Loan Bank stock, at cost 1,729 212
Premises and equipment, net 18,496 17,653
Deferred income tax asset 1,609 1,078
Bank owned life insurance 5,075 3,945
Goodwill 971 971
Foreclosed assets, net 4 207
Other assets 551 301
-------- --------
Total assets $789,901 557,296
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest-bearing demand deposits 58,940 48,103
Money-market deposits 109,039 58,587
Savings and NOW deposits 202,731 138,830
Time deposits 292,476 246,910
-------- --------
Total deposits 663,186 492,430
Advances from Federal Home Loan Bank 34,000 --
Subordinated debentures 4,500 --
Other borrowings 13,737 2,691
Official checks 7,614 3,406
Other liabilities 2,038 2,433
-------- --------
Total liabilities 725,075 500,960
-------- --------
Stockholders' equity:
Common stock, $1.00 par value, 10,000,000 shares authorized, 7,046,352
and 6,693,064 shares issued and outstanding in 2003 and 2002 7,046 6,693
Additional paid-in capital 54,118 49,654
Retained earnings (accumulated deficit) 3,048 (389)
Accumulated other comprehensive income 614 378
-------- --------
Total stockholders' equity 64,826 56,336
-------- --------
Total liabilities and stockholders' equity $789,901 557,296
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
($ 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
JUNE 30,
--------------------------
2003 2002
---------- ----------
Interest income:
Loans $ 9,770 7,321
Securities 942 644
Other interest-earning assets 44 195
---------- ----------
Total interest income 10,756 8,160
---------- ----------
Interest expense:
Deposits 4,109 3,565
Other borrowings 183 8
---------- ----------
Total interest expense 4,292 3,573
---------- ----------
Net interest income 6,464 4,587
Provision for loan losses 975 441
---------- ----------
Net interest income after provision for loan losses 5,489 4,146
---------- ----------
Noninterest income:
Service charges on deposit accounts 213 116
Other fees 361 218
Earnings on bank-owned life insurance 59 48
Gain on sale of securities available for sale 289 89
Other income 256 173
---------- ----------
Total noninterest income 1,178 644
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,367 1,902
Occupancy expense 926 721
Data processing 311 247
Printing and office supplies 97 80
Marketing and advertising 139 107
Professional fees 266 118
Preopening expense -- 65
Other expense 559 369
---------- ----------
Total noninterest expense 4,665 3,609
---------- ----------
Earnings before income taxes 2,002 1,181
Income taxes 753 431
---------- ----------
Net earnings $ 1,249 750
========== ==========
Basic earnings per share $ .18 .13
========== ==========
Weighted-average number of common shares outstanding for basic 6,796,085 5,580,263
========== ==========
Diluted earnings per share $ .17 .13
========== ==========
Weighted-average number of common shares outstanding for diluted 7,207,476 5,802,810
========== ==========
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)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2003 2002
---------- ----------
Interest income:
Loans $ 18,705 14,014
Securities 1,736 1,107
Other interest-earning assets 77 331
---------- ----------
Total interest income 20,518 15,452
---------- ----------
Interest expense:
Deposits 8,009 6,955
Other borrowings 191 23
---------- ----------
Total interest expense 8,200 6,978
---------- ----------
Net interest income 12,318 8,474
Provision for loan losses 1,720 846
---------- ----------
Net interest income after provision for loan losses 10,598 7,628
---------- ----------
Noninterest income:
Service charges on deposit accounts 408 236
Other fees 624 382
Earnings on bank-owned life insurance 121 95
Gain on sale of securities available for sale 289 122
Other income 486 285
---------- ----------
Total noninterest income 1,928 1,120
---------- ----------
Noninterest expense:
Salaries and employee benefits 4,696 3,723
Occupancy expense 1,770 1,454
Data processing 609 484
Printing and office supplies 179 168
Marketing and advertising 261 227
Professional fees 413 222
Preopening expense -- 131
Other expense 989 734
---------- ----------
Total noninterest expense 8,917 7,143
---------- ----------
Earnings before income taxes 3,609 1,605
Income taxes 1,356 588
---------- ----------
Net earnings $ 2,253 1,017
========== ==========
Basic earnings per share $ .33 .18
========== ==========
Weighted-average number of common shares outstanding for basic 6,888,083 5,533,846
========== ==========
Diluted earnings per share $ .31 .18
========== ==========
Weighted-average number of common shares outstanding for diluted 7,260,104 5,756,678
========== ==========
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
JUNE 30,
----------------------------
2003 2002
------- -------
Net earnings $ 1,249 750
Net change in unrealized gain on securities
available for sale, net of tax (194) 580
------- -------
Comprehensive income $ 1,055 1,330
======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
7
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2003 2002
------- -------
Net earnings $ 2,253 1,017
Net change in unrealized gain on securities
available for sale, net of tax (343) 290
------- -------
Comprehensive income $ 1,910 1,307
======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
8
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net earnings $ 2,253 1,017
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loan losses 1,720 846
Depreciation and amortization 835 863
Gain on sale of securities available for sale (289) (122)
Net amortization of premiums and discounts on securities 737 (12)
Net amortization of deferred loan fees and costs (642) (468)
Common stock issued as compensation 222 143
Earnings on bank-owned life insurance (121) (95)
Increase in accrued interest receivable (90) (87)
Increase in other assets (405) (19)
Increase in official checks 3,827 98
(Decrease) increase in other liabilities (22) 593
--------- ---------
Net cash provided by operating activities 8,025 2,757
--------- ---------
Cash flows from investing activities:
Maturities, calls and repayments of securities available for sale 27,370 10,888
Repayments of security held to maturity 24 --
Purchases of securities available for sale (76,720) (44,586)
Proceeds from sale of securities available for sale 20,439 23,247
Net increase in loans (112,127) (53,522)
Purchase Federal Home Loan Bank stock (1,517) --
Purchases of premises and equipment (639) (2,287)
Net proceeds from sales of foreclosed assets 400 187
Purchase of bank owned life insurance -- (405)
Net proceeds from sale of premises and equipment 160 --
--------- ---------
Net cash used in investing activities (142,610) (66,478)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 69,769 92,457
Net increase in advances from Federal Home Loan Bank 34,000 --
Increase in subordinated debentures 4,500 --
Net increase in other borrowings 12,314 1,033
Proceeds from issuance of common stock, net 4,595 12,538
--------- ---------
Net cash provided by financing activities 125,178 106,028
--------- ---------
Net (decrease) increase in cash and cash equivalents (9,407) 42,307
Cash and cash equivalents at beginning of period 35,723 30,129
--------- ---------
Cash and cash equivalents at end of period $ 26,316 72,436
========= =========
(continued)
9
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2003 2002
---------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,208 7,119
========== ========
Income taxes $ 1,805 490
========== ========
Noncash financing and investing activities:
Change in accumulated other comprehensive income, unrealized gain on
securities available for sale, net of tax $ (343) 290
========== ========
Transfer of loans to foreclosed assets $ 102 207
========== ========
Loans originated on sales of foreclosed assets $ -- 720
========== ========
See Accompanying Notes to Condensed Consolidated Financial Statements.
10
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003
($ IN THOUSANDS)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPRE- TOTAL
---------------------- PAID-IN RETAINED HENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- --------- --------- --------- --------- -------------
Balance at December 31, 2002 6,693,064 $ 6,693 49,654 795 957 58,099
Net earnings (unaudited) -- -- -- 2,253 -- 2,253
Net change in unrealized gain on securities
available for sale, net of tax benefit
of $185 (unaudited) -- -- -- -- (343) (343)
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) 317,938 318 4,128 -- -- 4,446
--------- --------- --------- --------- --------- ---------
Balance at June 30, 2003 (unaudited) 7,046,352 $ 7,046 54,118 3,048 614 64,826
========= ========= ========= ========= ========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
11
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL. In the opinion of the management of Southern Community
Bancorp and its subsidiaries (the "Company" or "Southern"), the accompanying
condensed consolidated financial statements contain all adjustments (consisting
principally of normal recurring accruals) necessary to present fairly the
financial position at June 30, 2003 and 2002, and the results of operations for
the three-month and six-month periods then ended and cash flows for the
six-month periods ended June 30, 2003 and 2002. The results of operations and
other data for the three and six months ended June 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"),
Southern Community Bank, Atlantic (the "Daytona Beach 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 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.
2. LOAN IMPAIRMENT AND LOSSES. The Company performs a quarterly loan
loss analysis to identify impaired loans. The Company's impaired loans were as
follows (in thousands):
AT JUNE 30,
----------------------- AT DECEMBER 31,
2003 2002 2002
------ ------ ---------------
Gross loans with no related allowance $ -- -- --
Gross loans with related allowance 900 2,247 900
Less: Allowance on the loans (90) (225) (45)
------ ------ ------
Net investment in impaired loans $ 810 2,022 855
====== ====== ======
The average net investment in collateral dependent impaired loans and
interest income recognized and received on these loans were as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
2003 2002 2003 2002
------- ------- ------- -----
Average net investment in impaired loans $ 833 2,035 844 2,072
======= ======= ======= =====
Interest income recognized or impaired loans $ -- -- -- --
======= ======= ======= =====
Interest income received on impaired loans $ -- -- -- --
======= ======= ======= =====
12
An analysis of the change in the allowance for loan losses was as
follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Balance at beginning of period $ 6,886 4,834 6,262 4,457
Provision charged to earnings 975 441 1,720 846
Net charge-offs (279) (85) (400) (113)
------- ------- ------- -------
Balance at end of period $ 7,582 5,190 7,582 5,190
======= ======= ======= =======
Non-accrual and past due loans were as follows (in thousands):
AT JUNE 30,
---------------------- AT DECEMBER 31,
2003 2002 2002
------ ------ ----------------
Non-accrual loans $3,026 2,868 3,154
Past due ninety days or more, but still accruing 309 1,446 126
------ ------ ------
$3,335 4,314 3,280
====== ====== ======
3. EARNINGS PER SHARE. Earnings per share of common stock were computed
on the basis of the weighted-average number of shares of common stock
outstanding. Diluted earnings per share were computed based on the
weighted-average number of shares outstanding plus the effect of outstanding
stock options, computed using the treasury stock method. The following table
presents the calculations of earnings per share ($ in thousands, except per
share amounts):
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------
2003 2002
-------------------------------------- -------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE PER SHARE AVERAGE PER SHARE
EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT
-------- --------- --------- -------- --------- ----------
Basic earnings per share:
Net earnings available to
common stockholders $ 1,249 6,796,085 $ .18 $ 750 5,580,263 $ .13
======= ===== ===== =====
Effect of dilutive securities -
Incremental shares from assumed
exercise of options 411,391 222,547
--------- ---------
Diluted earnings per share:
Net earnings available to common
stockholders and assumed
Conversion $ 1,249 7,207,476 $ .17 $ 750 5,802,810 $ .13
======= ========= ===== ===== ========= =====
13
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------
2003 2002
-------------------------------------- ------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE PER SHARE AVERAGE PER SHARE
EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT
-------- -------- ----------- -------- --------- ----------
Basic earnings per share:
Net earnings available to
common stockholders $ 2,253 6,888,083 $ .33 $ 1,017 5,533,846 $ .18
======= ===== ======= =====
Effect of dilutive securities -
Incremental shares from assumed
exercise of options 372,021 222,832
--------- ---------
Diluted earnings per share:
Net earnings available to common
stockholders and assumed
Conversion $ 2,253 7,260,104 $ .31 $ 1,017 5,756,678 $ .18
======= ========= ===== ======= ========= =====
4. REGULATORY CAPITAL. The Holding Company, the Orlando Bank, the
Bonita Springs Bank, the Daytona Beach Bank and the South Florida Bank are
required to maintain certain minimum regulatory capital requirements. The
following is a summary at June 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 10.42% 8.00%
Bonita Springs Bank 11.49% 8.00%
Orlando Bank 9.26% 8.00%
Daytona Beach Bank 8.52% 8.00%
South Florida Bank 12.42% 8.00%
Tier I capital to risk-weighted assets
Consolidated 8.75% 4.00%
Bonita Springs Bank 10.47% 4.00%
Orlando Bank 6.96% 4.00%
Daytona Beach Bank 7.55% 4.00%
South Florida Bank 11.27% 4.00%
Tier I capital to total assets - leverage ratio
Consolidated 8.41% 4.00%
Bonita Springs Bank 10.52% 4.00%
Orlando Bank 6.43% 4.00%
Daytona Beach Bank 7.79% 4.00%
South Florida Bank 10.32% 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 June
30, 2003, there were 1,351,935 shares available under the option plans which
14
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.
A summary of stock option transactions for the six-month periods ended
June 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 4,000 10.50 10.50 42
Forfeited (6,000) 7.50 7.50 (45)
------- -----
Balance at June 30, 2002 926,665 7.50-10.50 7.99 7,405
======= =====
Balance at December 31, 2002 984,165 $7.50-10.50 8.18 8,054
Granted 15,900 10.50-14.00 11.76 187
------- -----
Balance at June 30, 2003 1,000,065 $ 7.50-14.00 8.24 8,241
======= =====
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net earnings, as reported $ 1,249 750 2,253 1,017
Deduct: Total stock-based employee
compensation determined under the fair
value based method for all options, net
of related tax effect (75) (106) (145) (212)
-------- -------- -------- --------
Proforma net earnings $ 1,174 644 2,108 805
======== ======== ======== ========
Basic earnings per share:
As reported $ .18 .13 .33 .18
======== ======== ======== ========
Proforma $ .17 .12 .31 .15
======== ======== ======== ========
Diluted earnings per share:
As reported $ .17 .13 .31 .18
======== ======== ======== ========
Proforma $ .16 .11 .29 .14
======== ======== ======== ========
15
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 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Risk-free interest rate 3.94% 4.46% 4.26% 4.46%
======== ======== ======== ========
Weighted-average grant-date fair value per option of
options issued during the period $ 4.42 $ 3.65 $ 4.25 $ 3.65
======== ======== ======== ========
6. OTHER EVENTS. During the second quarter of 2003, the Company sold
317,938 shares of its common stock at a price of $14.00 per share in a private
placement transaction. The Company utilized $4.0 million of the proceeds to
increase the capital of the Bonita Springs Bank, and retained the balance of the
proceeds for future working capital requirements of the Company.
In May 2003, the Company's Board of Directors authorized the Orlando
Bank to acquire substantially all of the assets of the Daytona Beach Bank. In
consideration for the transfer of the assets, the Orlando Bank will assume all
of the liabilities of the Daytona Beach Bank and pay in cash to the Daytona
Beach Bank an amount equal to the difference between the book value of the
transferred assets and the assumed liabilities. As a result of the transaction,
the Orlando Bank will hire all of the former employees of the Daytona Beach Bank
and operate all of the former facilities of the Daytona Beach Bank. The Company
also entered into an agreement with an unaffiliated purchaser to sell the
Daytona Beach Bank legal entity to the purchaser 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 will pay this amount at closing.
The purchaser is acquiring the Daytona Beach Bank legal entity in order to
obtain its charter. The Company expects to record a $1.0 million pretax gain
from the sale. These transactions are subject to regulatory approval and are
expected to be consummated in the third quarter of 2003.
16
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 June 30,
2003 and 2002 and for the three and six 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.
17
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 June 30,
2003 and 2002, and the related condensed consolidated statements of earnings and
comprehensive income for the three and six-month periods then ended, the related
condensed consolidated statement of stockholders' equity for the six month
period ended June 30, 2003 and the related condensed consolidated statements of
cash flows for the six-month periods ended June 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
July 17, 2003
18
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 JUNE 30, 2003 AND 2002
Southern had net earnings for the second quarter of 2003 of $1.2
million or $.18 per basic share and $.17 per diluted share, compared to
$750,000 or $.13 per basic and diluted share for the comparable period
in 2002. Earnings before income taxes in the second quarter of 2003
were $2.0 million, compared to $1.2 million in the second quarter of
2002. The improvement in earnings was primarily due to a substantial
increase in net interest income, which grew from $4.6 million in the
second quarter of 2002 to $6.5 million in the second 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 second quarter of 2003 was $10.8 million,
compared to $8.2 million for the second quarter of 2002. The growth in
interest income primarily reflects the growth in Southern's assets,
which grew from $557.3 million at June 30, 2002 to $789.9 million at
June 30, 2003. This growth was partially offset by a decrease in the
average yield earned on interest-earning assets. During the same
19
period, net loans grew from $405.8 million to $611.2 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 $3.6 million for the second quarter of
2002 to $4.3 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
incurred because Southern had a higher level of borrowings in the
second quarter of 2003 compared to 2002. These borrowings included $4.5
million in subordinated debentures issued by the Orlando Bank to
increase its regulatory capital and approximately $35.0 million
borrowed from the Federal Home Loan Bank to fund the purchase of
investment securities.
Southern's net interest margin increased from approximately 3.6% for
the second quarter of 2002 to approximately 3.8% for the second 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
$975,000 in the second quarter of 2003 compared to $441,000 in the
comparable period in 2002. The allowance for loan losses at June 30,
2003 was $7.6 million. See "Allowance and Provision for Loan Losses"
below.
NONINTEREST INCOME. Noninterest income in the second quarter of 2003
totaled $1.2 million, compared with $644,000 in the comparable period
in 2002. Service charges on deposit accounts totaled $213,000 in 2003,
up from $116,000 in 2002, due to an increase in the average number of
deposit accounts. Other fees and other income totaled $617,000 in 2003,
up from $391,000 in 2002. This increase was primarily caused by an
increase in insurance and mortgage referral fees, as well as the
overall growth of Southern. Gain on sale of securities available for
sale was $289,000 for the three months ended June 30, 2003 compared to
$89,000 for the comparable 2002 period.
NONINTEREST EXPENSE. Noninterest expense for the second quarter of 2003
totaled $4.7 million, up 29.3% from $3.6 million in 2002. Noninterest
expenses included the following:
o Salaries and employee benefits represented 50.7% of total
non-interest expense in 2003. Salaries and employee benefits
increased 24.4% to $2.4 million in 2003 from $1.9 million in 2002.
20
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 $926,000, up 28.4% from $721,000
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 second quarter of 2003 totaled
$1.4 million, up 39.1% from $986,000 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 $753,000 in 2003 (effective rate of
37.6%) compared to $431,000 in 2002 (effective rate of 36.5%).
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Southern had net earnings for the first half of 2003 of $2.3 million or
$.33 per basic share and $.31 per diluted share, compared to $1.0
million or $.18 per basic and diluted share for the comparable period
in 2002. Earnings before income taxes for the first half of 2003 were
$3.6 million compared $1.6 million in the first half of 2002. The
improvement in earnings was primarily due to a substantial increase in
net interest income, which grew from $8.5 million in the first half of
2002 to $12.3 million in the first half 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 half of 2003 was
$20.5 million, compared to $15.5 million for the first half of 2002.
The growth in interest income primarily reflects the growth in
Southern's assets, which grew from $557.3 million at June 30, 2002 to
$789.9 million at June 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 $405.8 million to $611.2 million.
The increase in assets is attributable to the growth of all of
Southern's banks, particularly the South Florida Bank.
Interest expense increased from $7.0 million for the first half of 2002
to $8.2 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
Southern's banks, particularly the new operations in southeast Florida.
Southern's interest expense also incurred because Southern had a higher
level of borrowings in the second quarter of 2003 compared to 2002.
These borrowings included $4.5 million in subordinated debentures
issued by the Orlando Bank to increase its regulatory capital and
approximately $35.0 million borrowed from the Federal Home Loan Bank to
fund the purchase of investment securities.
21
Southern's net interest margin increased from approximately 3.6% for
the first half of 2002 to approximately 3.8% for the first half 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 $1.7
million in the first half of 2003 compared to $846,000 in 2002. The
allowance for loan losses at June 30, 2003 was $7.6 million. See
"Allowance and Provision for Loan Losses" below.
NONINTEREST INCOME. Noninterest income in the first half of 2003
totaled $1.9 million, compared with $1.1 million in 2002. Service
charges on deposit accounts totaled $408,000 in 2003, up from $236,000
in 2002, due to an increase in the average number of deposit accounts.
Other fees and other income totaled $1.1 million in 2003, up from
$667,000 in 2002. This increase was primarily caused by an increase in
insurance and mortgage referral fees, as well as the overall growth of
Southern. Gain on sale of securities available for sale was $289,000
during the first half of 2003 compared to $122,000 for the comparable
2002 period.
NONINTEREST EXPENSE. Noninterest expense for the first half of 2003
totaled $8.9 million, up 24.8% from $7.1 million in 2002. Noninterest
expense included the following:
o Salaries and employee benefits represented 52.7% of total
non-interest expense in 2003. Salaries and employee benefits
increased 26.1% to $4.7 million in 2003 from $3.7 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.
o Occupancy expense in 2003 totaled $1.8 million, up 21.7% from $1.5
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 half of 2003 totaled $2.5
million, up 24.7% from $2.0 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 $1.4 million in 2003 (effective rate
of 37.6%) compared to $588,000 in 2002 (effective rate of 36.6%).
22
CAPITAL EXPENDITURES
Southern makes capital expenditures in order to improve its ability to
provide quality services to its customers. Capital expenditures for the six
months ended June 30, 2003 equaled $639,000 compared to $2.3 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 branch in 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 June 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.
The following table sets forth information regarding the composition
and carrying amounts of the investment portfolio at June 30, 2003 and 2002:
INVESTMENT PORTFOLIO
AT JUNE 30,
--------------------------
2003 2002
-------- --------
(IN THOUSANDS)
Available for Sale:
U.S. Government agencies securities $ 45,538 31,120
Mortgage-backed securities 70,246 21,132
Municipal bonds 1,829 253
-------- --------
$117,613 52,505
======== ========
Held to Maturity-
Mortgage-backed security $ 3,427 --
======== ========
Southern's investment securities increased significantly in the first
half 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
23
$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 June 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.
TYPES OF LOANS
AT JUNE 30,
-----------------------------
2003 2002
--------- ---------
(IN THOUSANDS)
Commercial $ 142,317 98,735
Commercial real estate 244,473 168,282
Residential real estate 58,839 39,125
Construction 161,378 95,265
Consumer and other 14,043 11,859
--------- ---------
Total loans 621,050 413,266
Less:
Allowance for loan losses (7,582) (5,190)
Net deferred loan fees and other discounts (2,254) (2,258)
--------- ---------
Loans, net $ 611,214 405,818
========= =========
24
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 $142.3 million or 22.9%
of total loans at June 30, 2003, compared with $98.7 million or 23.9% of total
loans at June 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 $464.7 million
or 74.8% of total loans at June 30, 2003, and $302.7 million or 73.2% at June
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 $244.5 million or 39.3% of total loans at June 30, 2003 compared
with $168.3 million or 40.7% of total loans at June 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.
Residential real estate loans totaled $58.8 million or 9.5% of total
loans at June 30, 2003, compared with $39.1 million or 9.4% at June 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 totaled $161.4 million or 26.0% of total loans at
June 30, 2003 compared to $95.3 million or 23.1% of total loans at June 30,
2002. Southern primarily makes construction loans on property located in central
and south Florida.
CONSUMER AND OTHER LOANS. Southern offers consumer loans and personal
and secured loans. The security for these loans ordinarily consists of
automobiles, consumer goods, marketable securities, certificates of deposit and
similar items. These loans totaled approximately $14.0 million or 2.3% of total
loans, on June 30, 2003, compared with $11.9 million or 2.9% of total loans, on
June 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
25
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 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 $185.7 million at June
30, 2003. Management believes Southern has adequate resources to fund all of
commitments and that substantially all of its existing commitments will be
funded in 2003.
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.
26
The following table presents Southern's non-performing assets and past
due loans:
NON-PERFORMING ASSETS AND 90 DAY PAST DUE LOANS
AT JUNE 30,
-----------------------
2003 2002
------ ------
(IN THOUSANDS)
Nonaccrual loans $3,026 2,868
Foreclosed assets 4 207
------ ------
Total nonperforming assets $3,030 3,075
====== ======
Accruing loans past due 90 days or more $ 309 1,446
====== ======
Southern's non-performing loans and loans past due 90 days were $3.3
million at June 30, 2003, or .54% of total loans of $621.1 million.
Non-performing loans at June 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 $3.3 million at June
30, 2003, compared to $4.5 million at June 30, 2002.
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
27
deciding to increase the allowance for loan losses to $7.6 million at June 30,
2003, from $6.3 million at December 31, 2002 and $5.2 million at June 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
$26.3 million at June 30, 2003, compared to $72.4 million at June 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 June 30, 2003, securities were $121.0 million or 16.4%
of total earning assets. The investment portfolio, most of which has been
classified as available for sale, increased 130.5% from $52.5 million at June
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 $35.0 million in investment securities from
the proceeds of approximately $35.0 million loan for the Federal Home Loan Bank.
LOANS. Net loans were $611.2 million as of June 30, 2003, compared to
$405.8 million as of June 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 $656.5 million at June 30, 2003, up 46.5% from
$448.0 million in 2002. There was an increase in savings, money-market and NOW
deposits of $114.4 million or 57.9% compared to 2002. There was also a
significant increase in time deposits of $45.6 million or 18.5% 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 $49.5 million to $52.2 million at June 30,
2003 from $2.7 million at June 30, 2002. These borrowings included approximately
$35.0 million borrowed from the Federal Home Loan Bank. Southern utilized the
proceeds of this loan to purchase investment securities which had a higher
current yield than the loan. Southern's Orlando Bank also borrowed $4.5 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% and a maximum
of 12.0%. 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. The Orlando Bank currently expects to issue an additional $5.5
million in debentures during the third quarter of this year.
28
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 June 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 June 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 $99.9 million.
This negative gap at June 30, 2003 was 12.7% of total assets compared to 0.7% at
June 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.
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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 8.75% and the total capital was 10.42%
of risk-based assets at June 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 8.41% at June 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.
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 June
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 from this offering in the third quarter of 2003.
In June 2003, the Orlando Bank issued $4.5 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.
OTHER DEVELOPMENTS
In May 2003, the Company's Board of Directors authorized the Orlando
Bank to acquire substantially all of the assets of the Daytona Beach Bank due to
the natural overlap of their market areas. In consideration for the transfer of
the assets, the Orlando Bank will assume all of the liabilities of the Daytona
Beach Bank and pay in cash to the Daytona Beach Bank an amount equal to the
difference between the book value of the transferred assets and the assumed
liabilities. As a result of the transaction, the Orlando Bank will hire all of
the former employees of the Daytona Beach Bank and continue to operate all of
the former facilities of the Daytona Beach Bank. This transfer has been approved
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by the State of Florida Office of Financial Regulation and the Federal Deposit
Insurance Corporation. Southern currently expects to complete the transfer in
August 2003.
The Company also entered into an agreement to merge the Daytona Beach
Bank into an unaffiliated bank based in another state, after completion of the
transfer of the Daytona Beach Bank's assets and liabilities to the Orlando Bank.
In consideration for the merger, the acquiring bank will pay to 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 will pay this amount at
closing. The purchaser is acquiring the Daytona Beach Bank in an interstate bank
merger transaction in order to gain the ability to establish branch offices in
Florida. The Company expects to record a $1.0 million pretax gain from the sale.
This transaction has been approved by the Office of the Comptroller of the
Currency. Southern currently expects to complete this transaction immediately
after the transfer of the assets of the Daytona Beach Bank.
Except for the receipt of the $1.0 million premium from the purchaser,
the foregoing transactions will not affect Southern's consolidated assets,
liabilities or stockholders equity.
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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
EVALUATION OF DISCLOSURE 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 performed within 90
days of the filing date of this report, the Chief Executive Officer and Chief
Financial Officer of Southern concluded that Southern's disclosure controls and
procedures were adequate.
CHANGES IN INTERNAL CONTROLS. Southern made no significant changes in its
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation by the Chief Executive
Officer and Chief Financial Officer.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
During the quarter ended June 30, 2003, Southern sold shares of its
common stock in the following transaction which was not registered under the
Securities Act of 1933, as amended:
The Company sold 316,538 shares of common stock at $14.00 per share in
a private placement transaction. 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. A total of 85 of the purchasers were accredited investors, as
such term is defined under Regulation D under the Securities Act. The remaining
16 purchasers were non-accredited investors.
ITEM 6. EXHIBITS.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
31.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(a)
31.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(a)
32.1 Certification of Chief Executive Officer 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN COMMUNITY BANCORP
(Registrant)
Date: August 7, 2003 /s/ CHARLIE W. BRINKLEY, JR.
----------------------------------
Charlie W. Brinkley, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: August 7, 2003 /s/ STEPHEN R. JEUCK
----------------------------------
Stephen R. Jeuck
Chief Financial Officer
(Principal Accounting Officer)
34