SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission File No. 000-49780

SOUTHERN COMMUNITY BANCORP

250 North Orange Avenue, Orlando, Florida 32801

(407) 648-1844

Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:
Common stock, $1.00 par value

Indicate by check mark 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 past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

The aggregate market value of the common stock of the registrant held by non-affiliates (as of the registrant’s most recently completed second fiscal quarter) was approximately $73,131,804.

As of March 1, 2004, the registrant had 7,187,009 outstanding shares of common stock, $1.00 par value.

Documents incorporated by reference:

Part III — Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders.

SOUTHERN COMMUNITY BANCORP
TABLES OF CONTENTS
FORM 10-K
DECEMBER 31, 2003

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PART I

FORWARD LOOKING STATEMENTS

     This Form 10-K 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-K 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.

ITEM 1. DESCRIPTION OF BUSINESS

General

     Southern Community Bancorp (“Southern”) is a bank holding company which owns and operates three Florida chartered banks. These banks are as follows:

     Southern was formed in 1999 and became a bank holding company in July 1999 when it acquired all of the shares of Southern Community Bank of Central Florida (the “Central Florida Bank”) in a share exchange with the shareholders of the Central Florida Bank.

     Southern acquired Peninsula Bancorp, Inc. (“Peninsula”) on April 30, 2001. Peninsula was the parent company of Peninsula Bank of Central Florida (the “Daytona Beach Bank”). The name of the Daytona Beach Bank was subsequently changed to Southern Community Bank, Atlantic. In August 2003, the assets and liabilities of the Daytona Beach Bank were transferred to the Central Florida Bank, and the charter for the Daytona Beach Bank was sold to a third party.

     Southern opened Southern Community Bank of Southwest Florida (the “Southwest Florida Bank”) in January 2001. Southern opened Southern Community Bank of South Florida (the “South Florida Bank”) in August 2002.

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Proposed Merger with First National Bankshares of Florida, Inc.

     On March 19, 2004, First National Bankshares of Florida, Inc. (“FLB”) and Southern entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which FLB 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 the Southern’s 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’s 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 ($20.00 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 twenty trading days ending on the day the last required regulatory or shareholder approval of 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 reorganization under the Internal Revenue Code of 1986, as amended (except for 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: (i) approval of the Merger Agreement by the shareholders of FLB and Southern; (ii) receipt of banking regulatory approvals; and (iii) receipt of opinions of counsel as to the tax-free nature of certain aspects of the merger.

Strategy

     Southern’s goal is to operate its banks in the substantially the same manner as local community banks, emphasizing local leadership and local decision-making. The management of each bank makes its own credit decisions. Each bank prices and markets its own loan and deposit products. Each bank has its own board of directors, drawn mainly from members of the local business community. Each board has full authority over the bank, in contrast to an “advisory” board which lacks authority. Each bank endeavors to be an active supporter of local charities and civic organizations.

     Southern’s strategy is to capitalize on the opportunities created by the consolidation in the Florida banking industry. Southern believes that this consolidation has reduced the levels of personalized services as the larger regional financial institutions have increasingly focused on larger corporate customers and standardized loan and deposit products. More specifically, many financial institutions have centralized their loan approval practices for small businesses, leaving less responsibility and authority with the traditional loan officer. By virtue of their banking experience in Florida, Southern’s management believes that the most frequent customer complaints are based on a

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lack of personalized service and turnover in lending personnel, which limits the customer’s ability to develop a relationship with his or her banker. As a result of these factors, Southern believes there currently exists a significant opportunity to attract and maintain customers who are dissatisfied with their banks. Southern also believes it can attract experienced management personnel within its identified markets.

     Southern’s holding company structure provides flexibility for the future expansion of its banking business through the possible acquisition of other financial institutions and the formation of new banks. In addition, Southern’s holding company structure also makes it easier to raise additional capital for its banks because Southern can issue securities without the need for prior banking regulatory approval.

Southern Community Bank of Central Florida

     The Central Florida Bank is a Florida state-chartered bank which commenced operations in December 1998. The Central Florida Bank’s principal office is located in the central business district in Orlando, Florida, and it maintains branch offices in the cities of Winter Park, Altamonte Springs, Longwood, south Orlando, Lake Mary, Ormond Beach, Port Orange and Daytona Beach, Florida. At December 31, 2003, the Central Florida Bank had total assets of $605.4 million.

Southern Community Bank of Southwest Florida

     The Southwest Florida Bank is a Florida state-chartered bank which opened in January 2001. The Southwest Florida Bank serves the Bonita Springs and Naples, Florida markets. The main office of the Southwest Florida Bank is located in Bonita Springs. The bank also operates branch offices in Naples and Ft. Myers, Florida. The Southwest Florida Bank expects to open an additional branch in Estero, Florida in the next 12 months. At December 31, 2003, the Southwest Florida Bank had total assets of $161.2 million.

Southern Community Bank of South Florida

     The South Florida Bank is a Florida state-chartered bank which opened in August 2002. Its principal office is located in Boca Raton, Florida, and it operates branch offices in Fort Lauderdale, Palm Beach, West Palm Beach and Palm Beach Gardens, Florida and a loan production office in West Palm Beach, Florida. At December 31, 2003, the South Florida Bank had total assets of $140.1 million.

Southern Community Insurance Agency, Inc.

     Southern owns and operates an insurance agency named Southern Community Insurance Agency, Inc. The agency is a wholly owned subsidiary of the Central Florida Bank. The agency refers customers of Southern’s banks to another insurance agency, Insurance Office of America, Inc., for the purchase of insurance products. Insurance Office of America pays the agency a percentage of the commissions generated from customers which are referred. One of the principal shareholders of Insurance Office of America is John Ritenour, one of Southern’s directors.

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Material Transitions in 2003

     Transfer of Assets and Liabilities of Daytona Beach Bank. In August 2003, the Daytona Beach Bank transferred substantially all of its assets to the Central Florida Bank. In consideration for the transfer of the assets, the Central Florida Bank assumed all of the liabilities of the Daytona Beach Bank and paid the Daytona Beach Bank a cash amount equal to the difference between the book value of the transferred assets and the assumed liabilities. The Central Florida Bank also hired all of the former employees of the Daytona Beach Bank. Since that time, the Central Florida Bank has continued to operate all of the facilities of the Daytona Beach Bank.

     At the same time as the asset transfer, Southern entered into an agreement with an unaffiliated bank based outside of Florida to acquire the Daytona Beach Bank corporate shell and its charter. This transaction was completed immediately following the transfer of the Daytona Beach Bank’s assets and liabilities to the Central Florida Bank. In consideration for this transaction, the purchaser paid Southern an amount equal to the capital accounts of the Daytona Beach Bank at the time of the merger and a premium of $1.0 million. The purchaser acquired the Daytona Beach Bank in order to be able to establish branch offices in Florida. Southern recorded a $1.0 million pretax gain from this transaction. Except for the receipt of the $1.0 million premium from the purchaser, the transaction did not affect Southern’s consolidated assets, liabilities or stockholders’ equity.

     Liquidation of Southern Community Banc Mortgage LLC. In 2001, the Central Florida Bank and an unaffiliated company, American Heritage Mortgage Affiliates, Inc. (“American Heritage Affiliates”), formed Southern Community Banc Mortgage, LLC (the “Mortgage Company”), to originate residential mortgage loans for customers of the Central Florida Bank and others. The Central Florida Bank and American Heritage Affiliates each held a 50% in the Mortgage Company. American Heritage Affiliates, through an agreement with its parent company, American Heritage Mortgage Corporation (“American Heritage Mortgage”), provided the staffing and administrative services required for the operations of the Mortgage Company. In the fall of 2003, American Heritage Mortgage was acquired by another unaffiliated company, First Horizon Home Loan Corporation (“First Horizon”). In connection with its acquisition of American Heritage Mortgage, First Horizon agreed to pay $500,000 to American Heritage Affiliates if the Mortgage Company were dissolved, with $250,000 to be paid to the Central Florida Bank upon dissolution of the Mortgage Company. The dissolution of the Mortgage Company was completed in October 2003. Since the dissolution of the Mortgage Company, the Central Florida Bank has originated residential mortgage loans for its customers directly. One of the principal shareholders of American Heritage Mortgage Corporation is Sal A. Nunziata, one of Southern’s directors.

     Purchase of Bank Branch. In December 2003, the Southwest Florida Bank purchased a branch of Harris Bank, N.A. located in Ft. Myers, Florida. As part of the transaction, the Southwest Florida Bank acquired $4.0 million in loans and $1.3 million in premises and equipment. The Southwest Florida Bank paid for the branch assets by assuming $4.9 million in deposits and making a cash payment of $450,000.

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Products and Services

     Southern offers a broad array of traditional banking products and services to its customers, including the products and services described below.

     Deposits. Southern offers a full range of interest bearing and non-interest bearing accounts, including commercial and retail checking accounts, money market accounts, individual retirement accounts, savings accounts, and other time deposits of various types, ranging from daily money market accounts to longer term certificates of deposit. Southern has tailored the rates and terms of its accounts and time deposits to compete with the rates and terms in Southern’s principal markets. Southern seeks deposits from residents, businesses and employees of businesses in these markets. The FDIC insures all of Southern’s accounts up to the maximum amount permitted by law. In addition, Southern receives service charges which are competitive with other financial institutions in its markets, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and other similar fees.

     Lending Activities. Southern uses its deposits, together with borrowings and other sources of funds, to originate and purchase loans. Southern offers a full range of short and medium-term small business and commercial, consumer and real estate loans. Southern generally seeks to allocate its loan portfolio as follows: 80% to real estate loans; 15% to small business and commercial loans; and 5% to consumer loans. Each bank has a loan approval process which provides for various levels of officer lending authority. When a loan amount exceeds an officer’s lending authority, it is reviewed by various loan committees with ascending lending authority, as established by each bank’s board of directors.

     The risk of non-payment of loans is inherent in all loans. However, Southern carefully evaluates all loan applicants and attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures that Southern has established for each category of loan. In determining whether to make a loan, Southern considers the borrower’s credit history, analyzes the borrower’s income and ability to service the loan, and evaluates the need for collateral to secure recovery in the event of default. Southern maintains an allowance for loan losses based upon assumptions and judgments regarding the ultimate collectability of loans in its portfolio and a percentage of the outstanding balances of specific loans when their ultimate collectability is considered questionable.

     Southern directs its lending activities primarily to individuals and businesses in its markets whose demand for funds falls within Southern’s legal lending limits and who are potential deposit customers. The following is a description of each of the major categories of loans which Southern makes:

     Commercial Loans. This category includes loans made to individuals, partnerships or corporate borrowers for a variety of business purposes. Southern places particular emphasis on loans to small to medium-sized professional firms, retail and wholesale businesses, light industry and manufacturing concerns operating in Southern’s markets. Southern considers “small businesses” to include commercial, professional and retail businesses with annual gross sales of less than $20 million or annual operating costs of less than $5 million. Southern’s commercial loans include term

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loans with both variable and fixed interest rates secured by equipment, inventory, receivables and real estate, as well as secured and unsecured working capital lines of credit. Risks of these types of loans depend on the general business conditions of the local economy and the borrower’s ability to sell its products and services in order to generate sufficient business profits to repay the loans under the agreed upon terms and conditions. Personal guarantees may be obtained from the principals of business borrowers and third parties to further support the borrowers’ ability to service the debt and reduce the risk of non-payment.

     Consumer and Installment Loans. Consumer loans include lines of credit and term loans secured by second mortgages on the residences of borrowers for a variety of purposes, including home improvements, education and other personal expenditures. Consumer loans also include installment loans to individuals for personal, family and household purposes, including automobile loans to individuals and pre-approved lines of credit. Consumer loans generally involve more risk than first mortgage loans because the collateral for a defaulted loan may not provide an adequate source of repayment of the principal. This risk is due to the potential for damage to the collateral or other loss of value, while the remaining deficiency often does not warrant further collection efforts. In addition, consumer loan performance depends on the borrower’s continued financial stability and is, therefore, more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

     Real Estate Loans. Southern makes commercial real estate loans, construction and development loans, and residential real estate loans.

     Commercial Real Estate. Southern offers commercial real estate loans to developers of both commercial and residential properties. Southern manages credit risk associated with these loans by actively monitoring such measures as advance rate, cash flow, collateral value and other appropriate credit factors. Risks associated with commercial real estate loans include the general risk of the failure of the commercial borrower, which are different for each type of business and commercial entity. Southern evaluates each business on an individual basis and attempts to determine such business’ risks and credit profile. Southern attempts to reduce credit risks in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 80%. In addition, Southern may also require personal guarantees of the principal owners.

     Acquisition, Construction and Development Loans. Southern makes acquisition, construction and development loans on a pre-sold and speculative basis. If the borrower has entered into an arrangement to sell or lease the property prior to beginning construction, Southern considers the loan to be on a pre-sold or pre-leased basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, Southern considers the loan to be on a speculative basis. Southern makes residential and commercial construction loans to builders and developers and to consumers who wish to build their own home. Southern limits the term of most construction and development loans to 18 months, although it may structure the payments based on a longer amortization basis. Southern bases speculative loans on the borrower’s financial strength and cash flow position. Southern disburses loan proceeds based on the percentage of completion and only after an experienced construction lender or appraiser inspects the project. These loans generally command higher rates and fees commensurate with the risks warranted in the construction lending field. The risk in construction lending depends upon the performance of the builder, building the

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project to the plans and specifications of the borrower and Southern’s ability to administer and control all phases of the construction disbursements. Upon completion of the construction, Southern typically converts construction loans to permanent loans.

     Residential Real Estate Loans. Southern makes residential real estate loans to qualified individuals for the purchase of existing single-family residences in its markets. Southern makes these loans in accordance with its appraisal policy and real estate lending policy which detail maximum loan to value ratios and maturities. Southern believes that these loan to value ratios are sufficient to compensate Southern for fluctuations in real estate market value and to minimize losses that could result from a downturn in the residential real estate market. Southern sells mortgage loans that do not conform to its policies in the secondary markets. The risk of these loans depends on the marketability of the loans to national investors and on interest rate changes. Southern retains loans for its portfolio when there is sufficient liquidity to fund the needs of the established customers and when rates are favorable to retain the loans. The loan underwriting standards and policies are generally the same for both loans sold in the secondary market and those retained in Southern’s portfolio.

Asset and Liability Management

     Southern’s primary assets are its loan portfolio and investment account. Southern’s liabilities consist primarily of deposits. Southern’s objective is to support asset growth primarily through the growth of core deposits, which include deposits of all categories made by individuals, partnerships, corporations and other entities. Consistent with the requirements of prudent banking necessary to maintain liquidity, Southern seeks to match maturities and rates of loans and the investment portfolio with those of deposits, although exact matching is not always possible. Southern seeks to invest the largest portion of its assets in commercial, consumer and real estate loans. Southern’s investment account consists primarily of marketable securities of the United States government, federal agencies and state and municipal governments, generally with varied maturities.

     Southern monitors its asset/liability mix on a regular basis with a monthly report detailing interest-sensitive assets and interest-sensitive liabilities presented to each bank’s board of directors. The objective of this policy is to control interest-sensitive assets and liabilities in order to minimize the impact of substantial movements in interest rates on Southern’s earnings.

Correspondent Banking

     Correspondent banking involves providing services by one bank to another bank which, from an economic or practical standpoint, cannot provide that service for itself. Southern may purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, securities safekeeping, investment services, coin and currency supplies, overline and liquidity loan participations, and sales of loans to or participations with correspondent banks. Southern will sell loan participations to correspondent banks with respect to loans which exceed Southern’s lending limits. As compensation for services provided by a correspondent bank, Southern may maintain balances with correspondents in non-interest bearing accounts.

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Other Services

     Southern’s other services include cash management services, safe deposit boxes, traveler’s checks, direct deposit of payroll and social security checks, wire transfers, telephone banking, and automatic drafts for various accounts. Southern offers a debit card and VISA and/or MasterCard credit card services through Southern’s correspondent banks. Southern offers extended banking hours, both drive-in and lobby, and after-hours depositories. Southern is associated with a shared network of automated teller machines that customers may use throughout Southern’s market areas and other regions. Southern is associated with third party Internet banking service providers that enable it to provide customers with a cost effective, secure and reliable Internet banking solution.

Customers

     Southern believes that the recent consolidation of the Florida banking industry provides community banks significant opportunities to build successful, locally-oriented banks. Southern further believes that many of the larger financial institutions do not provide the high level of personalized services desired by many small and medium-sized businesses and their principals. Southern focuses its marketing efforts on attracting small and medium-sized businesses and individuals, including service companies, manufacturing companies, commercial real estate developers, entrepreneurs and professionals, such as physicians and attorneys.

     Although Southern concentrates its lending efforts on commercial business, Southern also attracts a significant amount of consumer business. Many of its retail customers are the principals of Southern’s small and medium-sized business customers. Southern emphasizes “relationship banking,” with the goal that each customer will identify and establish a comfort level with Southern’s bank officers. Southern seeks to further develop its retail business with individuals who appreciate a high level of personal service, contact with their lending officer and responsive decision-making. Southern develops most of its new business through Southern’s lending officers and local boards of directors and by pursuing an aggressive strategy of calling on customers throughout its market areas.

Competition

     Southern faces substantial competition in all phases of its operations from a variety of different competitors. This competition includes:

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Large national and super-regional financial institutions which have well-established branches and significant market share in the communities served by Southern.

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Finance companies, investment banking and brokerage firms, and insurance companies that offer bank-like products.

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Credit unions, which can offer highly competitive rates on loans and deposits because they receive tax advantages not available to commercial banks.

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Other community banks, including start-up banks, that can compete with Southern for customers who desire a high degree of personal service.

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Technology-based financial institutions including large national and super-regional banks offering on-line deposit, bill payment, and mortgage loan application services.

     Other existing community banks, and many new community bank start-ups, have marketing strategies similar to Southern’s. These other community banks may open new branches in the communities served by Southern and compete directly for customers who want the level of service offered by community banks. Other community banks also compete for the same management personnel in Florida.

     Various legislative actions in recent years have led to increased competition among financial institutions. Since the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and other laws and regulations affecting interstate bank expansion, it has been relatively easy for financial institutions located outside of the State of Florida to enter the Florida market, including Southern’s targeted markets. In addition, recent legislative and regulatory changes and technological advances have enabled customers to conduct banking activities without regard to geographic barriers through computer and telephone-based banking and similar services. There can be no assurance that the United States Congress, the Florida Legislature or bank regulatory agencies will not enact legislation or promulgate rules that may further increase competitive pressures on Southern. Southern’s failure to compete effectively for customers in its market areas could have a material adverse effect on its business, future prospects, financial condition or results of operations.

Employees

     As of December 31, 2003, Southern had approximately 194 full-time equivalent employees. Southern expects to hire additional employees as needed to support its growth.

Supervision and Regulation

     Southern is subject to an extensive body of state and federal banking laws and regulations which impose specific requirements and restrictions on, and provide for general regulatory oversight with respect to, virtually all aspects of Southern’s operations. Southern is also affected by government monetary policy and by regulatory measures affecting the banking industry in general. The actions of the Federal Reserve System affect the money supply, and in general, the lending abilities of banks by increasing or decreasing the costs and availability of funds to the banks. Additionally, the Federal Reserve System regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on bank borrowings, and changes in the reserve requirements against bank deposits.

     The following is a brief summary of some of the statutes, rules and regulations which affect Southern. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of all applicable statutes or regulations. Any change in applicable laws or regulations may have a material adverse effect on Southern’s business and prospects.

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Holding Company Regulations

     Southern is a bank holding company within the meaning of the Federal Bank Holding Company Act of 1956 and the Florida Interstate Banking Act. It is registered as a bank holding company with the Federal Reserve System and is required to file annual reports and other information regarding its business operations and its subsidiaries. It is also subject to the supervision of the Federal Reserve.

     The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

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acquiring all or substantially all of the assets of a bank.

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acquiring direct or indirect ownership or control of more than five percent of the voting shares of any bank.

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merging or consolidating with another bank holding company.

     Except as authorized by the Gramm-Leach-Bliley Act of 1999, a bank holding company is generally prohibited by the Bank Holding Company Act from engaging in, or acquiring direct or indirect control of more than five percent of the voting shares of any company engaged in any business other than the business of banking or managing and controlling banks. Some of the activities the Federal Reserve has determined by regulation to be proper incidents to the business of banking, and thus permissible for bank holding companies, include:

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making or servicing loans and certain types of leases and related activities.

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engaging in certain insurance and discount brokerage activities.

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underwriting and dealing in government securities and certain other securities and financial instruments.

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providing certain data processing and data transmission services.

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acting in certain circumstances as a fiduciary or investment or financial advisor.

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management consulting and counseling activities.

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issuing and selling retail monetary instruments such as money orders, savings bonds and travelers’ checks and providing check printing and courier services.

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operating trust companies and non-bank depository institutions such as savings associations.

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making investments in corporations or projects designed primarily to promote community welfare.

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     In determining whether an activity is so closely related to banking as to be permissible for bank holding companies, the Federal Reserve is required to consider whether the performance of the particular activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition and gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests and unsound banking practices. Generally, bank holding companies are required to obtain prior approval of the Federal Reserve to engage in any new activity not previously approved by the Federal Reserve. Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of any of its bank subsidiaries.

     The Bank Holding Company Act and the Federal Change in Bank Control Act, together with regulations promulgated by the Federal Reserve, require that, depending on the particular circumstances, either the Federal Reserve’s approval must be obtained or notice must be furnished to the Federal Reserve and not disapproved prior to any person or company acquiring control of a bank holding company, subject to certain exemptions. Control is conclusively presumed to exist when an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and either the bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction.

     The Federal Reserve, pursuant to regulation and published policy statements, has maintained that a bank holding company must serve as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve’s policy, a bank holding company may be required to provide financial support to a subsidiary bank at a time when, absent such Federal Reserve policy, it might not be deemed advisable to provide such assistance. Under the Bank Holding Company Act, the Federal Reserve may also require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary, other than a non-bank subsidiary of a bank, upon the Federal Reserve’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

Bank Regulation

     Each of Southern’s banks is a state bank organized under the laws of Florida. They are all subject to the supervision of the Florida Office of Financial Institutions and Securities Regulation and the Federal Deposit Insurance Corporation (the “FDIC”). Their deposits are insured by the FDIC for a maximum of $100,000 per depositor. For this protection, the banks must pay a semi-annual statutory assessment and comply with the rules and regulations of the FDIC. The Florida

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Office of Financial Institutions and Securities Regulation and the FDIC regulate and monitor all areas of a bank’s operations, including:

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security devices and procedures.

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adequacy of capitalization and loss reserves.

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loans.

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investments.

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borrowings.

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deposits.

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mergers.

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issuance of securities.

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payment of dividends.

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interest rates payable on deposits.

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interest rates or fees chargeable on loans.

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establishment of branches.

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corporate reorganizations.

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maintenance of books and records.

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adequacy of staff training to carry out safe lending and deposit gathering practices.

     In addition, banks are prohibited from engaging in tie-in arrangements in connection with any extension of credit, or the offer of any product or service. Bank regulatory requirements also set forth various conditions regarding the eligibility and qualifications of their officers and directors.

Capital Adequacy Requirements

     Both bank holding companies and individual banks are subject to regulatory capital requirements imposed by the Federal Reserve and the FDIC which vary based on differences in risk profiles. The capital adequacy guidelines issued by the Federal Reserve are applied to bank holding companies on a consolidated basis. The FDIC’s risk-based capital guidelines apply directly to insured state banks regardless of whether they are subsidiaries of a bank holding company. Both agencies’ requirements, which are substantially similar, provide that banking organizations must have capital (as defined in the rules) of at least 8% of risk-weighted assets. The risk weights

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assigned to assets are based primarily on credit risks. Depending upon the riskiness of a particular asset, it is assigned to a risk category. For example, securities with an unconditional guarantee by the United States government are assigned to the lowest risk category. The aggregate amount of assets assigned to each risk category is multiplied by the risk weight assigned to that category to determine the weighted values, which are added together to determine total risk-weighted assets.

     Both the Federal Reserve and the FDIC have also adopted minimum capital leverage ratios to be used in tandem with the risk-based guidelines in assessing the overall capital adequacy of banks and bank holding companies. The guidelines define a two-tier capital framework. Tier 1 capital consists of common and qualifying preferred shareholder’s equity, less goodwill and other adjustments. Tier 2 capital consists of mandatory convertible, subordinated, and other qualifying term debt, preferred stock not qualifying for Tier 1, and a limited allowance for credit losses up to a designated percentage of risk-weighted assets. Under these guidelines, institutions must maintain a specified minimum ratio of “qualifying” capital to risk-weighted assets. At least 50% of an institution’s qualifying capital must be “core” or “Tier 1” capital, and the balance may be “supplementary” or “Tier 2” capital. The guidelines imposed on the banks include a minimum leverage ratio standard of capital adequacy. The leverage standard requires top-rated institutions to maintain a minimum Tier 1 capital to assets ratio of 3%, with institutions receiving less than the highest rating required to maintain a ratio of 4% or greater, based upon their particular circumstances and risk profiles.

     Federal bank regulatory authorities have adopted regulations revising the risk-based capital guidelines to further ensure that the guidelines take adequate account of interest rate risk. Interest rate risk is the adverse effect that changes in market interest rates may have on a bank’s financial condition and is inherent to the business of banking. Under the regulations, when evaluating a bank’s capital adequacy, the revised capital standards now explicitly include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates. The exposure of a bank’s economic value generally represents the change in the present value of its assets, less the change in the value of its liabilities, plus the change in the value of its interest rate off-balance sheet contracts.

     The foregoing capital guidelines could affect Southern and its banks in several ways. If Southern’s banks grow rapidly, their respective capital bases may become insufficient to support continued growth, making additional capital infusions necessary. The capital guidelines could also impact each bank’s ability to pay dividends. Rapid growth, poor loan portfolio performance or poor earnings performance, or a combination of these factors, could change each bank’s capital position in a relatively short period of time. Failure to meet these capital requirements would require a bank to develop and file with the FDIC a plan describing the means and a schedule for achieving the minimum capital requirements. In addition, Southern would not be able to receive regulatory approval of any application that required consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.

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Dividends

     The ability of Southern to pay cash dividends depends entirely upon the amount of dividends paid by its bank subsidiaries. Additionally, the Florida Business Corporation Act provides that a Florida corporation may only pay dividends if the dividend payment would not render the corporation insolvent or unable to meet its obligations as they come due.

     Florida state banks are subject to regulatory restrictions on the payment of dividends, including a prohibition of payment of dividends from the banks’ capital without the prior approval of the Florida Office of Financial Institutions and Securities Regulation and the FDIC. Except with such prior approval, all dividends of any Florida bank must be paid out of retained net profits from the current period and the previous two years, after deducting expenses, including losses and bad debts. In addition, any Florida bank is required to transfer at least 20% of its net income to surplus until its surplus equals the amount of paid-in capital.

Other Laws

     State usury laws and federal laws concerning interest rates limit the amount of interest and various other charges collected or contracted by a bank. The lending operations of Southern are subject to federal laws applicable to credit transactions, such as the:

•

Federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers.

•

Community Reinvestment Act requiring financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low and moderate-income borrowers.

•

Home Mortgage Disclosure Act requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves.

•

Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit.

•

Fair Credit Reporting Act governing the manner in which consumer debts may be collected.

•

The rules and regulations of various federal agencies charged with the responsibility of implementing such federal laws.

     The deposit and certain other operations of Southern are also subject to provisions of the following laws:

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•

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records.

•

Title V of the Gramm-Leach-Bliley Act of 1999 regarding disclosure of customers’ nonpublic personal information, which requires financial institutions to publish their policies concerning disclosure of such information and give customers the opportunity to opt out of unwanted disclosure.

•

Electronic Funds Transfer Act and Regulation E, issued by the Federal Reserve to implement that act, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Interstate Banking and Branching

     Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, eligible bank holding companies in any state are permitted, with Federal Reserve approval, to acquire banking organizations in any other state. As a result, most of the limitations on interstate acquisitions of banking organizations have been eliminated. The Interstate Banking and Branching Efficiency Act also removed substantially all of the prohibitions on interstate branching by banks. The authority of a bank to establish and operate branches within a state continues to be subject to applicable state branching laws. Subject to these laws, a bank operating in any state may now establish one or more branches within any other state without the establishment of a separate banking structure within the other state through the merger with an existing bank in that state. Under current Florida law, Florida banks may open branch offices without geographic restriction with the prior approval of the Florida Office of Financial Institutions and Securities Regulation and the FDIC and, in the case of interstate branches, subject to certain laws of the “host” state. In addition, with prior regulatory approval, Southern will be able to acquire existing banking operations in other states.

Financial Modernization

     The Gramm-Leach-Bliley Act of 1999 modernized the federal bank regulatory framework by allowing the consolidation of banking institutions with other types of financial services firms, subject to various restrictions and requirements. In general, the Gramm-Leach-Bliley Act repealed most of the federal statutory barriers which separated commercial banking firms from insurance and securities firms and authorized the consolidation of such firms in a “financial services holding company.” Southern has no immediate plans to utilize the structural options created by the Gramm-Leach-Bliley Act, but Southern may develop such plans in the future. In the meantime, Southern provides its customers with a range of financial products and services, including various insurance products and securities brokerage services, through cooperative arrangements with third-party vendors.

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USA Patriot Act

     On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”). The USA Patriot Act is intended to allow the federal government to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the USA Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

     Among its provisions, the USA Patriot Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA Patriot Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. The federal banking agencies have begun proposing and implementing regulations interpreting the USA Patriot Act. It is not anticipated that the USA Patriot Act will have a significant impact on Southern’s financial condition or results of operations.

Stock Dividend

     On August 6, 2001, Southern declared a 2-for-1 stock split in the form of a 100% stock dividend. The dividend was issued to stockholders of record as of October 19, 2001. As a result of the dividend, Southern issued 2,730,101 shares of common stock. All amounts in this Annual Report on Form 10-K have been restated to reflect the stock dividend, except as otherwise noted.

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ITEM 2. DESCRIPTION OF PROPERTY

     Southern’s principal executive office is located at 250 North Orange Avenue, Orlando, Florida. Southern shares this office with the main office of the Central Florida Bank. Southern’s three bank subsidiaries currently operate a total of 18 offices. In addition, Southern has two parcels of land for future banking offices. The following table sets forth information regarding each of the current branch locations.

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     Southern’s branch at Bonita Springs, Florida is located on the site of a former gas station at which leaking underground fuel storage tanks caused some contamination of the subsurface groundwater. The Florida Department of Environmental Protection has accepted this site for clean up under the state’s remediation program and has reserved $250,000 to cover the estimated clean-up costs. Due to the relatively low priority level of the site in the State’s clean-up program, Southern cannot predict when the state will commence or complete the clean-up of the site. Southern has received an environmental engineering assessment of the contamination and the required remediation. Based on this report, Southern believes that the clean-up of the site will not disrupt Southern’s proposed banking services at the site.

ITEM 3. LEGAL PROCEEDINGS

     From time to time, Southern is involved in litigation arising from the ordinary course of its business, such as claims to collect past due loans. As of the date of this report, Southern is not engaged in any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     Not applicable.

EXECUTIVE OFFICERS OF SOUTHERN

     The following table sets forth certain information with respect to Southern’s executive officers.

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     Dennis G. Bedley has served as a director of Southern as well as president of the South Florida Bank since August 2002. From March 2001 to August 2002, he also served as the vice president of Southern, as well as the vice president of the Central Florida Bank. From 1998 through March 2001, he was president of Colonial Bank, West Palm Beach, Florida. From 1996 to 1998, he was a senior banking executive for Capital Bank in Fort Lauderdale, Florida.

     Charlie W. Brinkley, Jr. has served as chairman of the board and chief executive officer of Southern since its organization in 1999, and chairman of the Central Florida Bank since 1999. He also serves as a director of the South Florida Bank and Southwest Florida Bank. Mr. Brinkley was an organizing director of Southern Bank of Central Florida and served as its only president and chief executive officer from 1988 to 1996 when it was acquired by Colonial Bank of Montgomery, Alabama. From 1996 until 1998, Mr. Brinkley continued to serve as president of Colonial Bank, Florida region. Mr. Brinkley began his banking career in the Orlando area in 1978 at ComBank of Casselberry, which was acquired by Freedom Savings and Loan Association in 1983.

     Thomas H. Dargan, Jr. has served as a director Southern since 2001 and served as Chief Executive Officer of the Central Florida Bank since August 2003. He served as president and chief executive officer of the Daytona Beach Bank from its founding in 1998 through August 2003. He has 22 years of banking experience in Florida, including 15 years in the Daytona Beach community. He served as president and chief executive officer of Tomoka State Bank from 1994 until its sale in 1997 to Colonial Bank. Subsequent to the transaction, he served as president for the Volusia area of Colonial Bank.

     Sharyn E. Dickerson has served as executive vice president and chief information officer of Southern since 2000 and of the Central Florida Bank since 1999. She previously served as senior vice president and cashier of Citrus Bank, Orlando, from 1997 to 1999. Before that, she served as senior vice president and cashier of Southern Bank of Central Florida from 1988 to 1994 and as senior operations officer for the Florida region for Colonial Bank from 1994 until 1997.

     Richard L. Garner became a vice president of Southern in 2000 and became a director in 2001 upon the opening of the Southwest Florida Bank, of which he is chairman and chief executive officer. He previously served as president and chief executive officer of First National Bank of Bonita Springs (subsequently known as First National Bank of Florida) from 1994 until the acquisition of that bank by The Colonial BancGroup, Montgomery, Alabama, in 1998. From 1998 until 1999, Mr. Garner served as regional president and CEO of Colonial Bank, Southwest Florida region.

     Stephen R. Jeuck has served as senior vice president and chief financial officer of Southern since 2003. He has also served as the controller of the Company since its organization in 1999, and as vice president and chief financial officer of the Central Florida Bank since its organization in 1998. From 1995 until 1997, Mr. Jeuck served as vice president and controller of Southern Bank of Central Florida and Colonial Bank, Florida.

     John G. Squires has served as president of Southern since its organization in 1999. He served as chief executive officer of the Central Florida Bank from its organization in 1998 to 2003.

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He also serves as a director of the Central Florida Bank, the South Florida Bank and Southwest Florida Bank. Mr. Squires was also an organizing director of Southern Bank of Central Florida in 1988 and served as its vice-chairman until its acquisition by Colonial Bank in 1996. From 1996 until 1997, Mr. Squires served as an executive vice president and director of Colonial Bank, Florida region. Mr. Squires began his Florida banking career in 1978 as president and director of ComBank of Casselberry which was acquired by Freedom Savings and Loan Association in 1983.

     Joel E. Whittenhall has served as a vice president of Southern since 2000 and as a director since 2001. He also has served as president, chief lending officer and director of the Southwest Florida Bank since 2001. He previously served as executive vice president and senior lending officer of First National Bank of Florida (subsequently acquired by Colonial Bank) from 1994 to 1999.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Trading Information

     There is no established public trading market for Southern’s common stock.

Record Holders

     As of February 15, 2004, there were approximately 1,000 holders of record of the Southern’s common stock.

Dividends

     As a holding company, Southern has no significant independent sources of revenue. Its principal source of funds are cash dividends and other payments that it receives from its bank subsidiaries. Southern expects that its bank subsidiaries will retain most of their earnings in order to increase their capital and only pay dividends to Southern to cover Southern’s overhead expenses. Southern’s bank subsidiaries’ ability to pay dividends is restricted under Federal and state banking law. As a result, Southern has never paid any dividends and does not anticipate that it will do so in the foreseeable future.

Private Sales of Securities

     During the fourth quarter of 2003, Southern issued 51,877 shares of its common stock, pursuant to Section 4(2) of the Securities Act of 1933 (the “Securities Act”) in the following transactions:

•

In November 2003, Southern issued 47,877 shares at a price of $14 per share in connection with purchases made by beneficiaries under Southern’s 401(k) Plan.

•

In November and December 2003, Southern issued 4,000 shares at $14 per share to two officers of Southern.

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Equity Compensation Plan Information

     The following table presents information regarding Southern’s equity compensation plans at December 31, 2003:

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ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected historical financial data as of and for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, that have been derived from, and are qualified by reference to, Southern’s audited financial statements. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this report.

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     On October 19, 2001, Southern effected a 2 for 1 stock split. All amounts set forth in the preceding table have been revised to reflect this stock split.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with Southern’s consolidated financial statements and the related notes included elsewhere in this report. Unless otherwise noted, all share amounts have been revised to reflect Southern’s two for one stock split which was effective on October 19, 2001.

Average Balance Sheets

     The following tables set forth the information concerning the average balance sheets and related interest and dividends and yield for Southern for each of the last three fiscal years.

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Net Interest Income and Expense

26

Net Interest Income and Expense

27

Net Interest Income and Expense

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Rate/Volume Analysis

     The following table sets forth certain information regarding changes in interest income and interest expense of Southern for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume).

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Results of Operations for the Years Ended December 31, 2003 and 2002

     Southern had net earnings of $6.1 million for the year ended December 31, 2003 compared to net earnings of $2.2 million for the year ended December 31, 2002. Earnings before income taxes in 2003 were $9.5 million compared to $3.5 million in 2002. The improvement in earnings was primarily due to a substantial increase in net interest income, which grew from $18.4 million in 2002 to $26.8 million in 2003. The increase in net interest income was principally a result of the growth of Southern’s assets and an improvement in Southern’s net interest margin. Southern also benefited from higher service charges and fees, as well as a $1.0 million gain from the sale of the Daytona Beach Bank charter. These items more than offset increases in non-interest expenses, such as salaries and occupancy costs.

     Net Interest Income. Southern’s operating results depend primarily on Southern’s net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities, consisting primarily of deposits. Net interest income is determined by the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest-rate spread”) 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 and income taxes.

     Interest Income and Expense. Interest income for the year ended December 31, 2003 was $44.3 million compared to $33.5 million for the year ended December 31, 2002. The growth in interest income primarily reflects the growth in Southern’s assets, which grew from $658.8 million at December 31, 2002 to $899.2 million at December 31, 2003, or approximately 36%. The impact of 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 $500.3 million to $719.0 million, or approximately 44%. The increase in assets and loans is attributable to the growth of all of Southern’s business, particularly the South Florida Bank which commenced operations in August 2002. Southern’s growth has been supported by the opening of 2 new branches in 2002 and 4 new branches in 2003.

     Interest expense increased from $15.1 million for 2002 to $17.5 million for 2003. Interest expense on deposits was $16.6 million for 2003, compared to $15.0 million for 2002. The increase in interest expense is primarily due to higher level of deposits which were used to support the growth in loans. The deposit growth was attributable to higher deposits at all of Southern’s banks, particularly the South Florida Bank. The increase in interest expense was largely offset by a decrease in the average cost of deposits.

     Interest expense on other borrowings was $918,000 for 2003 compared to $26,000 for 2002. These borrowings included $13.0 million in subordinated debentures issued by the Central Florida Bank to increase its regulatory capital and approximately $30.5 million borrowed from the Federal Home Loan Bank to fund the purchase of investment securities.

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     Southern’s net interest margin increased from approximately 3.49% for 2002 to approximately 3.59% for 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 portion 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 $3.2 million for the year ended December 31, 2003 and $2.4 million in 2002. The amount of the provision for 2003 reflects the growth in Southern’s loan portfolio. See “Allowance and Provision for Loan Losses” below.

     Non-Interest Income. Non-interest income totaled $4.8 million for the year ended December 31, 2003 compared to $2.6 million for the year ended December 31, 2002. Non-interest income consists of service charges on deposit accounts, income from Southern’s mortgage origination business (which was discontinued in September 2003), income from Southern’s insurance agency and other fees and income. Customer service charges on deposit accounts totaled $811,000 in 2003, up from $624,000 in 2002, due to an increase in the average number of deposit accounts. The income from Southern’s mortgage origination business was $382,000 in 2003, compared to $148,000 in 2002. The income from Southern’s insurance agency was $226,000 in 2003, up from $148,000 in 2002. Southern had a gain on sale of securities available for sale of $403,000 in 2003, compared to $120,000 in 2002. Southern also had a gain of $1.0 million in 2003 from the sale of charter of the Daytona Beach Bank and $250,000 from the liquidation of the Mortgage Company.

     Non-Interest Expenses. Non-interest expenses for the year ended December 31, 2003 totaled $18.9 million, up from $15.1 million for the year ended December 31, 2002, and was comprised of the following:

•

Salaries and employee benefits in 2003 totaled $9.7 million, or 51% of total non-interest expenses, and $8.0 million or 53% in 2002. The increase was attributable to the hiring of additional employees for Southern’s new branches and the South Florida Bank, together with salary increases and higher benefit costs.

•

Occupancy and equipment expense in 2003 totaled $3.7 million or 20% of total non-interest expenses, and $3.0 million or 20% in 2002. This increase reflects the opening of new branches.

•

Other non-interest expenses in 2003 totaled $5.4 million or 29% of total non-interest expenses, and $4.1 million or 27% in 2002. Other non-interest expenses included data processing, printing and office supplies, marketing and advertising, professional fees and other expenses. The increase in these amounts was primarily due to the opening of additional branches and the overall growth of Southern.

     Income Taxes. Income taxes totaled $3.4 million for 2003 (effective rate of 35.6%) and $1.3 million in 2002 (effective rate of 36.7%).

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Results of Operations for the Years Ended December 31, 2002 and 2001

     Southern had net earnings of $2.2 million for the year ended December 31, 2002 compared to net loss of $580,000 for the year ended December 31, 2001.

     Earnings before income taxes in 2002 were $3,478,000 compared to a loss of $875,000 in 2001. The improvement in earnings was primarily due to a substantial increase in net interest income, which grew from $10.1 million in 2001 to $18.4 million in 2002. As discussed below, the increase in net interest income was principally a result of an improvement in Southern’s net interest margin and the growth in its assets. These items more than offset increases in non-interest expenses, such as salaries and occupancy costs. Southern’s net earnings in 2002 were also reduced due to losses incurred in the start up of the South Florida Bank.

     Interest Income and Expense. Interest income for the year ended December 31, 2002 was $33.5 million compared to $24.4 million for the year ended December 31, 2001. The growth in interest income primarily reflects the growth in Southern’s assets, which grew from $449.1 million at December 31, 2001 to $658.8 million at December 31, 2002, or approximately 46.7%. The impact of 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 $352.2 million to $500.3 million, or approximately 42.0%. The increase in assets and loans is primarily attributable to the growth of Southern’s business in southeast Florida.

     Interest expense was $15.1 million for the year ended December 31, 2002, compared to $14.4 million for the year ended December 31, 2001. The increase in interest expense is primarily due to the higher level of deposits which were used to support the growth in loans. Most of the deposit growth was attributable to Southern’s new operations in southeast Florida. The increase in interest expense was largely offset by a decrease in the average cost of deposits.

     Southern’s net interest margin increased from approximately 3.11% for 2001 to approximately 3.49% for 2002. The positive change in the net interest margin was due in part to the repricing of certain relatively high priced deposits at the end of December 2001. Southern had utilized these deposits in 2000 and 2001 to attract funds to support growth and liquidity. Due to the sharp decline in market interest rates in the first nine months of 2001, these deposits adversely impacted Southern’s net interest margin during 2001. Southern’s net interest margin improved after December 31, 2001, when these deposits were repriced to market rates. The net interest margin was also positively impacted by higher levels of loans relative to other interest earning assets and by the decrease in interest rates in the economy, which reduced the yields paid by Southern on its other deposits and interest bearing liabilities more rapidly than the rates earned on Southern’s loans and investment securities.

     Provision for Loan Losses. The provision for loan losses totaled $2,405,000 for the year ended December 31, 2002 and $2,351,000 in 2001. The amount of the provision for 2002 reflects the growth in Southern’s loan portfolio and the establishment of a new reserve at Southern’s new South Florida Bank.

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     Non-Interest Income. Non-interest income totaled $2.6 million for the year ended December 31, 2002 compared to $1.9 million for the year ended December 31, 2001. Non-interest income consists of service charges on deposit accounts, income from Southern’s mortgage origination business, income from Southern’s insurance agency and other fees and income. Customer service charges on deposit accounts totaled $624,000 in 2002, up from $372,000 in 2001, due to an increase in the average number of deposit accounts. The income from Southern’s mortgage origination business was $167,000 in 2002, up from $69,000 in 2001. The income from Southern’s insurance agency was $148,000 in 2002, up from $109,000 in 2001. Southern had a gain on sale of securities available for sale of $120,000 in 2002, compared to $642,000 in 2001. Earnings on bank owned life insurance totaled $204,000 in 2002, compared to $166,000 in 2001.

     Non-Interest Expenses. Non-interest expenses for the year ended December 31, 2002 totaled $15.1 million, up from $10.4 million for the year ended December 31, 2001, and was comprised of the following:

•

Salaries and employee benefits in 2002 totaled $8.0 million, or 53% of total non-interest expenses, and $5.3 million or 51% in 2001. The increase was attributable to the hiring of additional employees for Southern’s new branches and the South Florida Bank, together with salary increases and higher benefit costs.

•

Occupancy and equipment expense in 2002 totaled $3.0 million or 20% of total non-interest expenses, and $1.9 million or 18% in 2001. This increase reflects the opening of new branches and the commencement of operations of the South Florida Bank.

•

Preopening expenses of $133,000 in both 2002 and 2001 consisted of organizational and preopening expenses associated with the new South Florida Bank.

•

Other non-interest expenses in 2002 totaled $4.0 million or 26% of total non-interest expenses, and $3.1 million or 29% in 2001. Other non-interest expenses included data processing, printing and office supplies, marketing and advertising, professional fees and other expenses. The increase in these amounts was primarily due to the opening of additional branches, organizational expense associated with the new South Florida Bank and the overall growth of Southern.

     Income Taxes (Benefit). Income taxes (benefit) totaled $1.3 million for 2002 (effective rate of 36.7%) and $(295,000) in 2001 (effective rate of 33.7%).

Capital Expenditures

     Southern’s capital expenditures are reviewed by its board of directors. Southern makes capital expenditures in order to expand its business and to improve Southern’s ability to provide quality services to its customers. Capital expenditures equaled $2.6 million in 2003, and $3.9 million for the year ended December 31, 2002. These expenditures were related to the purchase of real property as branch locations, and the purchase of leasehold improvements and furniture and equipment purchased for new banking facilities opened during 2003 and 2002. The expenses in 2002 are primarily related to the cost of construction of Southern’s new offices in Lake Mary, Florida and furnishing of other branches. The expense in 2003 primarily related to the new branches

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in Palm Beach and West Palm Beach, Florida. Southern currently expects to have $3.6 million in capital expenditures in 2004.

Asset Quality and Credit Risk

     Securities. Southern maintains a high quality investment portfolio, including U.S. government agencies, mortgage-backed securities and municipal bonds. Southern believes that these securities have very little risk of default. At December 31, 2003 and 2002, all of the securities held in the investment portfolio were rated “A” or better. All but one of these securities were classified “available for sale.” 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 collectability.

     At December 31, 2003, approximately 24% of these securities (not including mortgage-backed securities) were scheduled to mature in five years or less compared with 67% at December 31, 2002. As such, Southern is subject fluctuations in market value due to changes in the general level of interest rates.

     The following table sets forth information regarding the composition and carrying amounts of the investment portfolio at December 31, 2003, 2002 and 2001 (in thousands):

     Southern’s investment securities increased significantly in 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 investment securities from the proceeds of additional 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 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’s monitors collateral values to ensure that they are maintained at proper levels.

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     At December 31, 2003, approximately $583.2 million or 79.8% of Southern’s loans were real estate loans secured by real estate in central and south Florida. This percentage increased from 74.4% at December 31, 2002. This level of concentration could present a potential credit risk because the ultimate collectability of these loans is susceptible to adverse changes in real estate market conditions in these markets. Southern seeks 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 5 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 their 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. In addition to outstanding loans, Southern enters into legally binding commitments to extend credit, letters of credit and unused line of credit. These commitments totaled $249.2 million at December 31, 2003, and $159.7 million at December 31, 2002.

Types of Loans

     The following table sets forth information regarding the maturities of Southern’s loans. For purposes of the table, demand loans are shown as being payable in one year or less. The entire amount of a balloon loan is treated as maturing in the year that the balloon payment is due.

Maturities of Loans Based on Contractual Principal Repayments

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     Of the $533.0 million in loans due after one year, approximately 17% have fixed interest rates and 83% have adjustable rates.

     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 $127.9 million or 17.5% of total loans at December 31, 2003 and $117.6 million or 23.1% of total loans at December 31, 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 $583.2 million or 79.8% of total loans at December 31, 2003, and $378.8 million or 74.4% of total loans at December 31, 2002.

     Southern makes real estate loans secured by commercial real estate, including loans to acquire or refinance office buildings, warehouses and apartments. These loans totaled $269.2 million or 36.8% of total loans at December 31, 2003 and $208.6 million or 41.0% of total loans at December 31, 2002. Most of these loans have a maturity of five years or less. At December 31, 2003 and 2002, almost all of these loans were collateralized by real property located in central and south Florida. These loans generally require a loan-to-collateral value of not more than 75%. 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 $72.3 million or 9.9% of total loans at December 31, 2003 and $49.0 million, or 9.6% of total loans at December 31, 2002. Residential real estate 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 years. At December 31, 2002, almost all of the residential real estate loans were collateralized by residences 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 $241.8 million or 33.1% of loans at December 31, 2003 compared to $121.2 million or 23.8% of loans at December 31, 2002. The growth in construction loans was attributable to strong demand in Southern’s primary markets and interest rates that continue to favor new development. Southern primarily makes construction loans on property located in central and south Florida. Risks associated with construction loans include the solvency of both the builder and the property owner during the construction period and the reliability of commitments for permanent financing at the completion of construction, in addition to the real estate-related risks present with both commercial and residential real estate loans described above. At December 31, 2003, almost all construction loans were collateralized by property in central and south Florida.

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     Consumer Loans and Other. 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 $19.4 million or 2.7% of total loans at December 31, 2003 and $12.4 million or 2.5% of total loans at December 31, 2002. Risks associated with customer loans include loss of employment of borrowers, declines in the financial condition of borrowers resulting in delinquencies, and rapid depreciation of loan collateral.

Non-Performing Assets and Past Due Loans

     Non-performing assets consist of non-accrual loans and properties or 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 its 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.

     Southern had $1.7 million in loans which were nonperforming (nonaccrual) at December 31, 2003, or 0.24% of total loans. Southern also had $133,000 in accruing loans which were past due more than 90 days on December 31, 2003. Southern had $3.2 million in loans which were nonperforming (nonaccrual) at December 31, 2002, or 0.62% of total loans. Southern also had $126,000 in accruing loans which were past due more that 90 days on December 31, 2002.

     Non-performing loans at December 31, 2003 principally consisted of commercial and residential real estate loans. Southern believes that its non-performing loans are generally well secured and are unlikely to result in any material losses.

     The following table sets forth certain information regarding nonaccrual loans and foreclosed assets, including the ratio of such loans and foreclosed assets to total assets as of the dates indicated:

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     Interest income that would have been recorded under the original terms of nonaccrual loans and the interest income actually recognized are summarized below:

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     The following table sets forth information with respect to activity of Southern’s allowance for loan losses for the periods indicated:

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     The following table further summarizes the allocation of the allowance for loan losses by type of loan at December 31, 2003, 2002, 2001, 2000 and 1999.

Allocation of Allowance for Loan Losses