U.S. Securities and Exchange Commission
Form 10-Q
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Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934 |
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For the quarterly period ended September 30, 2003
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Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934 |
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For the transition period ended ____________________
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Commission File Number 000-33227
Southern Community Financial Corporation
| North Carolina | 56-2270620 | |
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| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) | ||
| 4605 Country Club Road | ||
| Winston-Salem, North Carolina | 27104 | |
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (336) 768-8500
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
7.25% Cumulative Convertible Trust Preferred Securities
7.25% Convertible Junior Subordinated Debentures
Guarantee with respect to 7.25% Convertible Trust Preferred Securities
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 preceding 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 check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 10, 2003, (the most recent practicable date), the registrant had outstanding 8,880,800 shares of Common Stock, no par value.
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Part I.
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FINANCIAL INFORMATION
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Item 1 -
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Financial Statements (Unaudited)
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Consolidated
Balance Sheets
September 30, 2003 and December 31, 2002 |
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Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 2003 and 2002 |
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Consolidated Statements of Comprehensive Income
Three Months and Nine Months Ended September 30, 2003 and 2002 |
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Consolidated Statement of Stockholders’ Equity
Nine Months Ended September 30, 2003 |
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Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002 |
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Notes to Consolidated Financial Statements
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Item 2 -
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Management’s Discussion and Analysis of Financial Condition and Results
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of Operations
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Item 3 -
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Quantitative and Qualitative Disclosures about Market Risk
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Item 4 -
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Controls and Procedures
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Part II.
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Other Information
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Item 6 -
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Exhibits and Reports on Form 8-K
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Part I. FINANCIAL INFORMATION
SOUTHERN COMMUNITY FINANCIAL CORPORATION
* Derived from audited consolidated financial statements.
See accompanying notes.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
See accompanying notes.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
See accompanying notes.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
See accompanying notes.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
See accompanying notes.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 1 – Basis of Presentation
The consolidated financial statements include the accounts of Southern
Community Financial Corporation and its wholly-owned subsidiaries, Southern
Community Capital Trust I, a trust for the convertible preferred securities,
and Southern Community Bank and Trust and its wholly-owned subsidiaries,
Southeastern Acceptance Corporation, a consumer finance company, and VCS
Management, L.L.C., the managing general partner for Venture Capital Solutions
L.P., a Small Business Investment Company. All intercompany transactions and
balances have been eliminated in consolidation. In management’s opinion, the
financial information, which is unaudited, reflects all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of
the financial information as of and for the three-month and nine-month periods
ended September 30, 2003 and 2002, in conformity with accounting principles
generally accepted in the United States of America.
The preparation of financial statements requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements, as well as the amounts of income and expense
during the reporting period. Actual results could differ from those estimates.
Operating results for the three-month and nine-month periods ended September
30, 2003 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2003.
The organization and business of Southern Community Financial Corporation (the
“Company”), accounting policies followed by the Company and other relevant
information are contained in the notes to the consolidated financial statements
filed as part of the Company’s 2002 annual report on Form 10-K. This quarterly
report should be read in conjunction with such annual report.
Certain amounts in the 2002
consolidated financial statements have been reclassified to
conform to the 2003 presentation. The reclassifications had no effect on net
income or stockholders’ equity as previously reported.
Note 2 – Per Share Data
Basic and diluted net income per share are computed based on the weighted
average number of shares outstanding during each period after retroactively
adjusting for a 5% stock dividend distributed October 15, 2002. Diluted net
income per share reflects the potential dilution that could occur if stock
options were exercised or convertible trust-preferred securities were
converted, resulting in the issuance of common stock that then shared in the
net income of the Company.
Basic and diluted net income per share have been computed using the weighted
average number of common shares outstanding or assumed to be outstanding as
summarized below:
Basic earnings per share are based upon net income as presented in the
accompanying consolidated statements of operations.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 2 – Per Share Data (Continued)
For the three months ended September 30, 2003, net income for determining
diluted earnings per share was $1,226 thousand, after adjusting for the $199
thousand after tax effect of the expense associated with the 2,088,975 dilutive
convertible preferred securities. For the three months ended September 30,
2002, there were 241,837 options that were antidilutive since the exercise
price exceeded the average market price for the period. For the three months
ended September 30, 2002, there were 2,088,975 of antidilutive shares related
to the convertible trust preferred securities. These antidilutive common stock
equivalents have been omitted from the calculation of diluted earnings per
share.
For the nine months ended September 30, 2003 net income for determining diluted
earnings per share was $3,423 thousand, after adjusting for the $597 thousand
after tax effect of the expense associated with the dilutive convertible
preferred securities. For the nine months ended September 30, 2003 and 2002,
there were 104,355, and 179,916 options, respectively, that were antidilutive
since the exercise price exceeded the average market price for the period. For
the nine months ended September 30, 2003, there were 2,088,975 of dilutive
shares related to the convertible trust preferred securities. These common
stock equivalents have been included in the calculation of diluted earnings per
share. For the nine months ended September 30, 2002, there were 2,088,975 of
antidilutive shares related to the convertible trust preferred securities.
These antidilutive common stock equivalents have been omitted from the
calculation of diluted earnings per share.
Note 3 – Stock Compensation Plans
Statement of Financial Accounting Standards (“SFAS”) No. 123,
Accounting for
Stock-Based Compensation
, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to
Employees,
whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over
the amount an employee must pay to acquire the stock. Stock options issued
under the Company’s stock option plans have no intrinsic value at the grant
date and, under Opinion No. 25, no compensation cost is recognized for them.
The Company has elected to continue with the accounting methodology in Opinion
No. 25. Presented below are the pro forma disclosures of net income and
earnings per share and other disclosures as if the fair value based method of
accounting had been applied.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 4 – Loans
Following is a summary of loans at each of the balance sheet dates presented:
An analysis of the allowance for loan losses is as follows:
The following is a summary of nonperforming assets at the periods presented:
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 5 – Non-Interest Income and Other Non-Interest Expenses
The major components of non-interest income are as follows:
The major components of other non-interest expense are as follows:
Note 6 – Guarantees
The Company has issued guarantees under standby letters of credit, which
require the Company to fund the guarantee in part or in entirety, in the event
the customer fails to perform under an obligating agreement. These standby
letters of credit typically have terms ranging from 12 to 60 months.
The maximum amount of the Company’s guarantees under these standby letters of
credit along with the carrying amount of the liability under these guarantees
are as follows (in thousands):
Note 7 – Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated
with Exit or Disposal Activities
(Statement 146). This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring).
A
liability for a cost associated with an exit or disposal activity shall be
recognized and measured initially at its fair value in the period in which the
liability is incurred, except for certain qualifying employee termination
benefits. The adoption of Statement 146 by the Company on January 1, 2003 had
no significant impact to the consolidated financial statements.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities
. This interpretation addresses the
consolidation by business enterprises of variable interest entities as defined
in the interpretation. FIN 46 applies immediately to variable interests in
variable interest entities created after January 31, 2003, and to variable
interest in variable interest entities obtained after January 31, 2003. For
public enterprises with a variable interest in a variable interest entity
created before February 1, 2003, FIN 46 applies no later than the end of the
first interim or annual period ending after December 15, 2003. The Company is
in the process of determining the impact of FIN 46 on its consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities
(Statement 149). Statement 149
improves financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, Statement 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative, clarifies when a derivative contains
a financing component, amends the definition of an “underlying” to conform it
to language used in FIN 45 and amends certain other existing pronouncements.
Statement 149 is effective for contracts entered into or modified after June
30, 2003, and for hedging relationships designated after June 30, 2003. In
addition, with some exceptions, all provisions of Statement 149 should be
applied prospectively. The Company does not expect the requirements of
Statement 149 to have a material impact on its consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This Statement is
effective for financial instruments entered into or modified by the Company
after May 31, 2003, and is effective at the beginning of the first interim
period beginning after June 15, 2003. However, the FASB has deferred
indefinitely the classification and measurement provisions as they related to
certain mandatorily redeemable noncontrolling interests. The adoption
of this Statement had no significant impact on the consolidated financial
statements.
Note 8 – Pending Acquisition
On July 30, 2003, the Company announced the execution of a definitive agreement
in which the Company will acquire The Community Bank, Pilot Mountain, NC, in a
fixed exchange of cash and stock. The total per share consideration is
expected to be the sum of $9.49 plus 4.00 shares of the Company’s stock times
the average price of the Company’s common stock during a period of time shortly
before closing. As a result of the pending acquisition, the Company
anticipates to pay approximately $15.2 million in cash and issue approximately
6.4 million shares of its common stock. The transaction is valued at
approximately $76 million. This transaction is expected to close in the fourth
quarter of 2003 and has been approved by the directors of both the Company and
The Community Bank, but is subject to approval of shareholders of each, and
Federal and State Banking authorities.
Note 9 – Subsequent Event
On November 10, 2003, Southern Community Capital Trust II (the “Trust”), a
newly formed subsidiary of the company, issued 3,450,000 Cumulative Trust
Preferred Securities (the “Securities”), generating total proceeds of $34.5
million. The Securities pay distributions at an annual rate of 7.95% and
mature on December 31, 2033. The Securities will pay distributions quarterly
beginning on December 31, 2003. The Company has fully and unconditionally
guaranteed the obligations of the Trust. The Securities are also redeemable in
whole or in part any time after
December 31, 2008. Subject to certain limitations, the Securities qualify as
Tier 1 capital of the company for regulatory capital purposes. The principal
use of the net proceeds from the sale of the debentures is to provide cash for
the acquisition of The Community Bank (described above), to increase regulatory
capital, and support the growth and operations of the Company.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q may contain certain forward-looking
statements consisting of estimates with respect to our financial condition,
results of operations and business that are subject to various factors which
could cause actual results to differ materially from these estimates. These
factors include, but are not limited to, general economic conditions, changes
in interest rates, deposit flows, loan demand, real estate values, and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting our operations, pricing,
products and services.
Effective October 1, 2001, Southern Community Bank and Trust became a wholly
owned subsidiary of Southern Community Financial Corporation. Southern
Community Financial Corporation has no material assets other than those of the
bank. Southern Community Bank and Trust (the “bank”) was incorporated November
14, 1996 and began banking operations on November 18, 1996. The bank is
engaged in general commercial and retail banking in the Piedmont area of North
Carolina, principally Forsyth, Guilford and Yadkin Counties, operating under
the banking laws of North Carolina and the rules and regulations of the Federal
Deposit Insurance Corporation and on February 2, 2002 the bank became a member
of the Federal Reserve System. The bank undergoes periodic examinations by
those regulatory authorities.
Financial Condition at September 30, 2003 and December 31, 2002
During the nine-month period ending September 30, 2003, total assets increased
by $144.6 million, or 23.6%, to $756.9 million. This increase is primarily the
result of growth in the loan and investment portfolios. The increase in assets
was supported by deposit growth, coupled with wholesale borrowings.
Continued strong loan demand resulted in gross loans increasing $74.9 million
or 17.7% to $496.8 million from $421.9 million at year-end 2002. Commercial
mortgage loans experienced the greatest growth, increasing by $49.4 million, or
35.9%. In addition, loans secured by residential mortgages increased $13.2
million or 11.1%, while commercial and industrial lending increased $9.2
million or 12.8%, during the first nine months of 2003. The investment
portfolio increased $55.1, million or 38.9%, to $196.8 million versus $141.7
million at the beginning of the period. This growth is primarily due to
planned growth combined with pre-investment of projected maturities for the
remainder of the year.
Our total liquid assets, defined as cash and due from banks, federal funds sold
and investment securities, increased by $66.4 million during the nine months,
to $235.8 million at September 30, 2003 versus $169.4 million at the beginning
of the period. Our composition of liquid assets has benefited from the
increases in investment securities and federal funds sold.
Deposits continue to be our primary funding source. At September 30, 2003,
deposits totaled $543.9 million, an increase of $94.7 million or 21.1% from
year-end 2002. Our growth in earning assets was further supported by a $40.9
increase in FHLB advances, which totaled $116.5 million at quarter-end, up from
$75.5 million at year-end. Over this same nine-month period, short-term
borrowings have increased $4.8 million or 23.9%. The emphasis on short-term
borrowings has assisted the Company in reducing funding costs to support our
margin following further interest rate cuts by the Federal Reserve. We will
utilize various funding sources, as necessary, to support balance sheet
management and growth. Demand deposits increased $8.1 million from year-end
and totaled $50.0 million as of September 30, 2003 comprising 9.2% of total
deposits, an increase from $41.9 million at December 31, 2002.
Our capital position remains strong, with all of our regulatory capital ratios
at levels that make us “well capitalized” under federal bank regulatory capital
guidelines. At September 30, 2003, our stockholders’ equity totaled $49.2
million, an increase of $1.7 million from the December 31, 2002 balance. The
increase is the result of retained net income from operations during the period
of $2.8 million and proceeds from the exercise of stock options in the amounts
of $313,000, net of decreases in unrealized gains on investment securities
available-for-sale and cash flow hedges in the amounts of $1.2 million and
$267,000, net of tax, respectively.
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Results of Operations for the Three Months Ended September 30, 2003 and 2002
Net Income.
Our net income for the three months ended September 30, 2003 was
$1.0 million, an increase of $92,000 from the same three-month period in 2002.
Net income per share was $.12 basic and $.11 diluted for the three months ended
September 30, 2003, as compared with $.11 basic and $.10 diluted for the same
period in 2002. We have continued to experience strong growth, with total
assets averaging $745.3 million during the current three-month period as
compared to $558.5 million in the prior period, an increase of $186.8 million
or 33.5%. Our interest rate spread and net yield on average interest-earning
assets decreased 29 basis points and 37 basis points, respectively. Our net
interest income grew 20.9%, from $4.7 million for the three-month period ending
September 2002 to $5.7 million for the current quarter. Net income was also
supported by a $248,000 increase in non-interest income. These improvements
were partially offset by a 26.4% increase in non-interest expenses. Our
expense growth was concentrated in additional personnel costs, and to a lesser
extent, other infrastructure associated with expansion of our business. While
these expenses represent investments in building our franchise, they initially
hinder our earnings.
Net Interest Income.
During the three months ended September 30, 2003, our net
interest income increased by $980,000 or 20.8% over the second quarter 2002
results to $5.7 million. Net-interest income benefited from strong growth in
average earning assets, coupled with a reduction in cost on interest-bearing
liabilities which offset lower asset yields caused by the decline in interest
rates from period to period. The rates earned on a significant portion of our
loan portfolio adjust immediately when index rates, such as prime, change.
Conversely, most of our interest-bearing liabilities, including certificates of
deposit and borrowings, have rates fixed. As a result, interest rate
reductions generally result in an immediate drop in our interest income on
loans, with a delayed impact on interest expense because reductions in interest
costs will only occur upon renewals of certificates of deposit or borrowings.
Because rates stabilized at a lower level during 2002, downward repricings of
our interest-bearing liabilities have been larger than our downward repricings
of our interest-earning assets. Average total interest-earning assets
increased $180.8 million, or 34.7%, during the three months ended September 30,
2003 as compared to the same period in 2002. Our average yields on total
interest-earning assets for the same periods decreased by 132 basis points from
6.60% to 5.28%. Our average total interest-bearing liabilities increased by
$165.7 million, or 34.7%. Our average cost of total interest-bearing
liabilities decreased by 103 basis points from 3.28% to 2.25%. For the three
months ended September 30, 2003, our net interest spread was 3.03% and our net
interest margin was 3.21%. For the three months ended September 30, 2002, our
net interest spread was 3.32% and our net interest margin was 3.58%.
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Average Yield/Cost Analysis
The following table contains information relating to the Company’s average
balance sheet and reflects the average yield on assets and cost of liabilities
for the periods indicated. Such annualized yields and costs are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. The average loan portfolio balances
include non-accrual loans.
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Provision for Loan Losses.
Our provision for loan losses for the three months
ended September 30, 2003 was $465,000 representing an increase of $65,000 from
the $400,000 provision we made for the three months ended September 30, 2002.
We have continued to increase the level of our allowance for loan losses in
response to the growth in our loan portfolio. In evaluating the allowance for
loan losses, we consider factors that include an assessment of individual loan
credit risk, growth, composition and industry diversification of the portfolio,
historical loan loss experience, current delinquency levels, adverse situations
that may affect a borrower’s ability to repay, estimated value of any
underlying collateral, prevailing economic conditions and other relevant
factors. We have increased our provision during the current three-month period
due to the growth in our loan portfolio and in part because of an increased
level of net loan charge-offs, which totaled $333,000 during the three months
ended September 30, 2003, up from $247,000 during the three months ended
September 30, 2002. On an annualized basis, our percentage of net loan
charge-offs to average loans outstanding was .27% and .24% for the three months
ended September 30, 2003 and 2002, respectively. Non-performing assets
decreased to $1.9 million, or 0.25% of total assets at September 30, 2003 from
$2.4 million, or 0.41% of total assets at September 30, 2002. At September 30,
2003, the allowance for loan losses stood at $6.9 million and represented 1.40%
of period-ending loans. At December 31, 2002, the allowance for loan losses
stood at $6.3 million and represented 1.50% of period-ending loans. During the
third quarter of 2003, the bank made certain refinements to its loan risk
grading system, resulting in a required allowance for loan losses that is
lower, when compared to loans outstanding, than in previous periods. We
believe that the allowance is adequate to absorb probable losses inherent in
our loan portfolio.
Non-Interest Income.
For the three-months ended September 30, 2003,
non-interest income increased $248,000, or 24.6%, to $1.3 million from $1.0
million for the same period in the prior year. Increases for the three months
ended September 30, 2003 include an increase of $122,000, or 44.0%, in service
charges and fees on deposit accounts primarily as a result of deposit growth
and $128,000 or 125.5% in investment brokerage fees as we have increased our
marketing efforts to offer investment brokerage services to both the bank’s
existing customer base as well as new clients. Other operational income
increased by $18,000, or 14.3%. There was a minimal decrease of $21,000 or
5.7% in our mortgage origination operations due to the leveling off of activity
caused by increases in long-term rates relative to those experienced earlier in
the year.
Non-Interest Expense
. We strive to maintain non-interest expenses at levels
that we believe are appropriate given the nature of our operations and the
investments in personnel and facilities that have been necessary to support and
service our earning assets. From 1998 forward through the current three-month
period, we have consistently maintained our ratio of non-interest expenses to
average total assets below 3%. Because of our growth we have consistently seen
increases in every major component of our non-interest expenses. For the three
months ended September 30, 2003, our non-interest expense increased $1.0
million, or 26.4% over the same period in 2002. Salaries and employee benefit
expense increased $447,000, or 21.3%, and reflects the addition of personnel in
our new branches as well as additions of personnel to expand our business, and,
to a lesser degree, normal salary increases. Occupancy and equipment expense
increased $157,000, or 24.7%. Other expenses increased $417,000, or 36.8%,
reflecting the increased volume of business activity, principally increases in
lending and deposit relationships and increases in advertising and promotions.
For the three months ended September 30, 2003, on an annualized basis, our
ratio of non-interest expenses to average total assets increased to 2.66% as
compared with 2.65% for the same three months in 2002.
Provision for Income Taxes.
Our provision for income taxes, as a percentage of
income before income taxes, was 35.0% for both of the three months ended
September 30, 2003 and 2002.
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Results of Operations for the Nine Months Ended September 30, 2003 and 2002
Net Income.
Our net income for the nine months ended September 30, 2003 was
$2.8 million, an increase of $663,000 from the same nine-month period in 2002.
Net income per share was $.32 basic and $.31 diluted for the nine months ended
September 30, 2003, as compared with $.25 basic and $.24 diluted for the same
period in 2002. We have continued to experience strong growth, with total
assets averaging $671.6 million during the current nine-month period as
compared to $537.2 million in the prior period, an increase of $134.4 million
or 25.0%. Our interest rate spread and net yield on average interest-earning
assets increased 14 basis points and 3 basis points, respectively. Our net
interest income grew 26.2%, from $12.4 million for the nine-month period ending
September 2002 to $15.7 million for the current year-to-date through September
30, 2003. Net income was also supported by a $1.2 million increase in
non-interest income. These improvements were partially offset by a 27.6%
increase in non-interest expenses. Our expense growth primarily is a result of
additional personnel costs, and to a lesser extent, other infrastructure
associated with expansion of our business. While these expenses represent
investments in building our franchise, they initially hinder our earnings.
Net Interest Income.
During the nine months ended September 30, 2003, our net
interest income increased by $3.3 million or 26.2% over the $12.4 million for
the same nine-month period in 2002. Net-interest income benefited from strong
growth in average earning assets, coupled with a reduction in cost on
interest-bearing liabilities which offset lower asset yields caused by the
decline in interest rates from period to period. The rates earned on a
significant portion of our loan portfolio adjust immediately when index rates,
such as prime, change. Conversely, most of our interest-bearing liabilities,
including certificates of deposit and borrowings, have rates fixed. As a
result, interest rate reductions generally result in an immediate drop in our
interest income on loans, with a delayed impact on interest expense because
reductions in interest costs will only occur upon renewals of certificates of
deposit or borrowings. Because rates stabilized at a lower level during 2002,
downward repricing of our interest-bearing liabilities have been larger than
our downward repricing of our interest-earning assets during 2003. Average
total interest-earning assets increased $126.0 million, or 24.9%, during the
nine months ended September 30, 2003 as compared to the same period in 2002.
Our average yields on total interest-earning assets for the same periods
decreased by 83 basis points from 6.44% to 5.61%. Our average total
interest-bearing liabilities increased by $117.4 million, or 25.6%. Our
average cost of total interest-bearing liabilities decreased by 97 basis points
from 3.48% to 2.51%. For the nine months ended September 30, 2003, our net
interest spread was 3.10% and our net interest margin was 3.32%. For the nine
months ended September 30, 2002, our net interest spread was 2.96% and our net
interest margin was 3.29%.
On May 1, 2003, the bank terminated one of its interest rate swap contracts for
$1.0 million, which included $59,000 of accrued interest receivable. The swap
had a notional value of $25 million and under the contract we received a fixed
rate of interest and paid a rate based on the daily average Prime. The
unwinding of this transaction resulted in proceeds to the Company and a related
gain of $951,000, which will be amortized over a twenty-nine month period, the
remaining life of the swap contact, and will contribute approximately $36,500
to interest income on a monthly basis.
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Average Yield/Cost Analysis
The following table contains information relating to the Company’s average
balance sheet and reflects the average yield on assets and cost of liabilities
for the periods indicated. Such annualized yields and costs are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. The average loan portfolio balances
include non-accrual loans.
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Provision for Loan Losses.
Our provision for loan losses for the nine months
ended September 30, 2003 was $1.7 million representing an increase of $510,000
from the $1.2 million provision we made for the nine months ended September 30,
2002. We have continued to increase the level of our allowance for loan losses
in response to the growth in our loan portfolio. In evaluating the allowance
for loan losses, we consider factors that include an assessment of individual
loan credit risk, growth, composition and industry diversification of the
portfolio, historical loan loss experience, current delinquency levels, adverse
situations that may affect a borrower’s ability to repay, estimated value of
any underlying collateral, prevailing economic conditions and other relevant
factors. We have increased our provision during the current nine-month period
due to the growth in our loans portfolio and in part because of an increased
level of net loan charge-offs, which totaled $1.1 million during the nine
months ended September 30, 2003, up from $451,000 during the nine months ended
September 30, 2002. Included in these charge-offs was $257,000 related to a
$2.0 million purchased loan participation which paid out in the second quarter.
On an annualized basis, our percentage of net loan charge-offs to average
loans outstanding was .32% and .15% for the nine months ended September 30,
2003 and 2002, respectively. Non-performing assets decreased to $1.9 million,
or 0.25% of total assets at September 30, 2003 from $2.4 million, or 0.41% of
total assets at September 30, 2002. At September 30, 2003, the allowance for
loan losses stood at $6.9 million and represented 1.40% of period-ending loans.
At December 31, 2002, the allowance for loan losses stood at $6.3 million and
represented 1.50% of period-ending loans. During the third quarter of 2003,
the bank made certain refinements to its loan risk grading system, resulting in
a required allowance for loan losses that is lower, when compared to loans
outstanding, than in previous periods. We believe that the allowance is
adequate to absorb probable losses inherent in our loan portfolio.
Non-Interest Income.
For the nine months ended September 30, 2003,
non-interest income increased by $1.2 million or 45.1% to $3.9 million from
$2.7 million for the same period in the prior year, despite a $69,000 gain on
sale of investment securities realized in the second quarter of 2002.
Increases for the nine months ended September 30, 2003 include an increase of
$259,000, or 32.0%, in service charges and fees on deposit accounts primarily
as a result of deposit earning assets, increases of $370,000, or 47.4%, in
mortgage origination operations from increased activity due to the low interest
rate environment, and $585,000 or 316.0% in investment brokerage fees as we
have increased our marketing efforts to offer investment brokerage services to
both the bank’s existing customer base as well as new clients. Other
operational income increased by $42,000, or 10.6%.
Non-Interest Expense
. We strive to maintain non-interest expenses at levels
that we believe are appropriate given the nature of our operations and the
investments in personnel and facilities that have been necessary to support and
service our earning assets. From 1998 forward through the current three-month
period, we have consistently maintained our ratio of non-interest expenses to
average total assets below 3%. Because of our growth we have consistently seen
increases in every major component of our non-interest expenses. For the nine
months ended September 30, 2003, our non-interest expense increased $2.9
million, or 27.6% over the same period in 2002. Salaries and employee benefits
expense increased $1.6 million, or 29.1%, and reflects the addition of
personnel in our new branches as well as additions of personnel to expand our
business, and, to a lesser degree, normal salary increases. Occupancy and
equipment expense increased $417,000, or 22.6%. Other expenses increased
$916,000, or 27.9%, reflecting the increased volume of business activity,
principally increases in lending and deposit relationships and increases in
advertising and promotions. For the nine months ended September 30, 2003, on
an annualized basis, our ratio of non-interest expenses to average total assets
increased to 2.74% as compared with 2.63% for the same nine months in 2002.
Provision for Income Taxes.
Our provision for income taxes, as a percentage of
income before income taxes, was 35.0% and 34.9%, respectively, for the nine
months ended September 30, 2003 and 2002.
Liquidity and Capital Resources
Market and public confidence in our financial strength and in the strength of
financial institutions in general will largely determine our access to
appropriate levels of liquidity. This confidence is significantly dependent on
our ability to maintain sound asset quality and appropriate levels of capital
resources.
Liquidity is defined as our ability to meet anticipated customer demands for
funds under credit commitments and deposit withdrawals at a reasonable cost and
on a timely basis. Management measures our liquidity position by
giving consideration to both on- and off-balance sheet sources of, and demands
for, funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents, net of federal
requirements to maintain reserves against deposit liabilities; investment
securities eligible for pledging to secure borrowings from dealers, customers
and correspondent banks pursuant to securities sold under repurchase
agreements, investments available for sale, loan repayments, loan sales,
deposits, and borrowings from the Federal Home Loan Bank and from correspondent
banks under overnight federal funds credit lines. In addition to interest
rate-sensitive deposits, the Company’s primary demand for liquidity is
anticipated fundings under credit commitments to customers.
- 19 -
Because of our continued growth, we have maintained a relatively high position
of liquidity in the form of federal funds sold and investment securities.
These aggregated $216.2 million at September 30, 2003 an increase of $63.5
million from $152.8 million at December 31, 2002. The increase is the result
of growth in the investment portfolio, a portion of which was pre-investing
anticipated bond maturities for the remainder of the year. Supplementing
customer deposits as a source of funding, we have available lines of credit in
the amounts of $27.0 million and $100.0 million from various correspondent
banks to purchase federal funds and repurchase agreements, respectively, on a
short-term basis. We also have credit availability to borrow up to $181.2
million from the Federal Home Loan Bank of Atlanta, with $116.5 million
outstanding at September 30, 2003 and the ability to borrow up to $113.2
million from the Federal Reserve Bank of Richmond, with no outstanding balances
at September 30, 2003. At September 30, 2003, our outstanding commitments to
extend credit consisted of loan commitments of $73.4 million and amounts
available under home equity credit lines, other credit lines and standby
letters of credit of $44.8 million, $41.1 million and $12.3 million,
respectively. We believe that our combined aggregate liquidity position is
sufficient to meet the funding requirements of loan demand and deposit
maturities and withdrawals in the near term.
Throughout our nine-year history, our loan demand has exceeded our growth in
core deposits. We have therefore relied heavily on time deposits as a source
of funds. Time deposits represented 62% of our total deposits at September 30,
2003, and 65% at December 31, 2002. Certificates of deposit of $100,000 or
more represented 33% of our total deposits at September 30, 2003 and 29% at
December 31, 2002. The bank utilizes brokered and out-of-market deposits which
amounted to $162.0 million at September 30, 2003.
At September 30, 2003, our Tier I capital
to average quarterly asset ratio was 8.60%, and all of our capital ratios exceeded the minimums established for a
well-capitalized bank by regulatory measures. Our Tier I risk-based capital
ratio at September 30, 2003 was 10.98%.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46,
Consolidation of Variable Interest Entities
, that
addresses the consolidation rules to be applied to “variable interest
entities.” FIN 46 has raised questions about whether certain entities, such as
Southern Community Capital Trust I and newly formed Southern Community Capital
Trust II, are considered variable interest entitles and should therefore not be
consolidated by the companies that use them to issue trust preferred
securities. If we conclude, in light of an interpretation of FIN 46 as applied
to our trusts, that our trusts should no longer be consolidated, then we would
be required to make certain adjustments to our consolidated financial
statements to reflect the deconsolidation.
The FASB also recently issued Statement of Financial Accounting Standards No.
150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
, which provides accounting guidance for the appropriate
financial reporting balance sheet classification of trust preferred securities.
Traditionally, trusts used for issuing trust preferred securities have been
consolidated by their parent companies and trust preferred securities have been
treated as eligible for Tier I regulatory capital treatment by bank holding
companies under Federal Reserve Board rules and regulations. Accordingly, we
have consolidated our existing trust in preparing our consolidated financial
statements in the past and our outstanding convertible trust preferred
securities have been treated as Tier I regulatory capital. Further, we have
classified our existing outstanding convertible trust preferred securities as
liabilities on our consolidated balance sheets in the past, and believe this
classification is consistent with new FAS 150.
Given the issues raised by FIN 46 and FAS 150, there could be a change to the
regulatory capital treatment of trust preferred securities issued by U.S. bank
holding companies. Specifically, it is possible that the Federal Reserve Board
may conclude that trust preferred securities should no longer be treated as
Tier I regulatory capital.
If Tier I treatment for our trust preferred securities were disallowed, there
would be a reduction in our consolidated capital ratios. If the Federal Reserve
Board were to grant Tier 2 status to our trust preferred securities
transactions, we believe that we would remain “well capitalized” under Federal
Reserve Board guidelines. If the Federal Reserve Board does not grant Tier 2
status, we nonetheless believe that we would remain in compliance with all of
the Federal Reserve Board’s existing minimum capital requirements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse changes
in market price and interest rates. This risk of loss can be reflected in
diminished current market values and/or reduced potential net interest income
in future periods.
The Company’s market risk arises primarily from interest rate risk inherent in
its lending and deposit-taking and borrowing activities. The structure of the
Company’s loan and liability portfolios is such that a significant decline in
interest rates may adversely impact net market values and net interest income.
The Company does not maintain a trading account nor is the Company subject to
currency exchange risk or commodity price risk.
Management believes, with the exception of the investment securities portfolio
due to recent growth in this asset category and market conditions which has
resulted in yields reducing from 5.84% to 4.90% and wholesale borrowing overall
costs which have declined from 3.25% to 2.55% from year-end 2002 and September
30, 2003, respectively, there has not been any significant change in the
overall analysis of financial instruments considered market risk sensitive, as
measured by the factors of contractual maturities, average interest rates and
estimated fair values, since the analysis prepared and presented in conjunction
with the Form 10-K Annual Report for the fiscal year ended December 31, 2002.
Item 4. Controls and Procedures
As of the end of the period covered by
this report, the Company’s management, including the Chief Executive Officer and Chief
Financial Officer, had evaluated the effectiveness of the
Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-14. Based on their evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. There were no significant
changes in the Company’s internal controls during the
Company’s last fiscal quarter that could
significantly affect the Company’s internal control over
financial reporting.
- 20 -
CONSOLIDATED BALANCE SHEETS
September 30, 2003
December 31,
(Unaudited)
2002*
(Amounts in thousands,
except share data)
$
19,571
$
16,632
19,436
11,084
139,486
96,930
57,301
44,749
496,810
421,938
(6,948
)
(6,342
)
489,862
415,596
18,033
15,962
13,171
11,286
$
756,860
$
612,239
$
50,019
$
41,869
159,038
115,981
334,825
291,366
543,882
449,216
25,000
20,180
116,475
75,526
17,250
17,250
5,022
2,528
707,629
564,700
43,436
43,123
4,657
1,830
1,138
2,586
49,231
47,539
$
756,860
$
612,239
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
September 30,
September 30,
2003
2002
2003
2002
(Amounts in thousands, except per share data)
$
6,998
$
6,757
$
20,177
$
18,978
1,646
1,431
4,495
3,437
685
436
1,804
1,847
9
32
33
102
9,338
8,656
26,509
24,364
369
370
875
1,061
2,022
2,565
6,444
8,349
118
134
242
285
824
561
2,273
1,422
324
325
972
807
3,657
3,955
10,806
11,924
5,681
4,701
15,703
12,440
465
400
1,690
1,180
5,216
4,301
14,013
11,260
1,257
1,009
3,851
2,654
2,549
2,102
7,062
5,469
793
636
2,259
1,842
1,550
1,133
4,194
3,278
4,892
3,871
13,515
10,589
1,581
1,439
4,349
3,325
553
503
1,522
1,161
$
1,028
$
936
$
2,827
$
2,164
$
.12
$
.11
$
.32
$
.25
.11
.10
.31
.24
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
Nine Months Ended
September 30,
September 30,
2003
2002
2003
2002
(Amounts in thousands)
$
1,028
$
936
$
2,827
$
2,164
(1,670
)
1,258
(1,921
)
1,760
643
(484
)
740
(685
)
—
—
—
(69
)
—
—
—
26
(1,027
)
774
(1,181
)
1,032
(8
)
1,085
(196
)
1,311
3
(348
)
95
(435
)
(137
)
(19
)
(267
)
(19
)
52
7
101
7
(90
)
725
(267
)
864
(1,117
)
1,499
(1,448
)
1,896
$
(89
)
$
2,435
$
1,379
$
4,060
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Accumulated
Common Stock
Other
Total
Retained
Comprehensive
Stockholders'
Shares
Amount
Earnings
Income
Equity
(Amounts in thousands, except share data)
8,791,683
$
43,123
$
1,830
$
2,586
$
47,539
—
—
2,827
—
2,827
—
—
—
(1,448
)
(1,448
)
78,124
313
—
—
313
8,869,807
$
43,436
$
4,657
$
1,138
$
49,231
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2003
2002
(Amounts in thousands)
$
2,827
$
2,164
1,362
956
1,690
1,180
—
(69
)
38
(3
)
49
(19
)
(837
)
(3,452
)
1,497
2,089
6,626
2,846
(8,352
)
12,043
(84,431
)
(111,771
)
(59,469
)
(23,251
)
39,589
17,054
46,925
26,000
—
21,220
(76,964
)
(50,910
)
951
208
(3,273
)
(3,922
)
13
3
684
292
(108
)
(641
)
(144,435
)
(113,675
)
94,666
55,357
4,820
5,020
40,949
30,000
—
17,250
313
82
140,748
107,709
2,939
(3,120
)
16,632
18,878
$
19,571
$
15,758
Three Months Ended
Nine Months Ended
September 30,
September 30,
2003
2002
2003
2002
8,822,564
8,793,836
8,802,090
8,789,307
597,450
276,274
310,457
280,315
2,088,975
—
2,088,975
—
11,508,989
9,070,110
11,201,522
9,069,622
Notes to Consolidated Financial Statements
Three Months Ended
Nine Months Ended
September 30,
September 30,
2003
2002
2003
2002
(Amounts in thousands,
except per share data)
$
1,028
$
936
$
2,827
$
2,164
67
129
227
378
$
961
$
807
$
2,600
$
1,786
$
.12
$
.11
$
.32
$
.25
.11
.09
.30
.20
$
.11
$
.10
$
.31
$
.24
.10
.09
.29
.20
Notes to Consolidated Financial Statements
September 30, 2003
December 31, 2002
Percent
Percent
Amount
of Total
Amount
of Total
(Amounts in thousands)
$
131,781
26.53
%
$
118,572
28.10
%
187,240
37.69
%
137,812
32.66
%
71,459
14.38
%
64,500
15.29
%
81,169
16.34
%
71,948
17.05
%
25,161
5.06
%
29,106
6.90
%
496,810
100.00
%
421,938
100.00
%
6,948
6,342
$
489,862
$
415,596
Three Months Ended
Nine Months Ended
September 30,
September 30,
2003
2002
2003
2002
(Amounts in thousands)
$
6,816
$
5,976
$
6,342
$
5,400
465
400
1,690
1,180
(349
)
(249
)
(1,133
)
(494
)
16
2
49
43
(333
)
(247
)
(1,084
)
(451
)
$
6,948
$
6,129
$
6,948
$
6,129
September 30,
December 31,
2003
2002
(Amounts in thousands)
$
1,201
$
1,823
662
383
$
1,863
$
2,206
Notes to Consolidated Financial Statements
Three Months Ended
Nine Months Ended
September 30,
September 30,
2003
2002
2003
2002
(Amounts in thousands)
$
399
$
277
$
1,069
$
810
345
366
1,151
781
230
102
770
185
138
138
424
414
—
—
—
69
145
126
437
395
$
1,257
$
1,009
$
3,851
$
2,654
Three Months Ended
Nine Months Ended
September 30,
September 30,
2003
2002
2003
2002
(Amounts in thousands)
$
113
$
85
$
312
$
243
235
144
624
419
367
350
998
954
90
46
346
164
745
508
1,914
1,498
$
1,550
$
1,133
$
4,194
$
3,278
September 30,
December 31,
2003
2002
$
12,286
$
11,090
$
11
$
16
Notes to Consolidated Financial Statements
Three Months Ended
Three Months Ended
September 30, 2003
September 30, 2002
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(Dollars in thousands)
$
489,226
$
6,998
5.67
%
$
402,571
$
6,757
6.66
%
126,188
1,646
5.18
%
84,453
1,431
6.72
%
83,588
685
3.26
%
28,318
436
6.11
%
2,320
9
1.37
%
5,144
32
2.47
%
701,322
9,338
5.28
%
520,486
8,656
6.60
%
44,022
38,012
$
745,344
$
558,498
$
149,241
369
0.98
%
$
103,491
370
1.42
%
157,945
1,068
2.68
%
197,430
1,625
3.27
%
161,329
954
2.35
%
90,145
940
4.14
%
37,469
118
1.24
%
22,173
134
2.43
%
120,611
824
2.71
%
47,635
561
4.67
%
17,250
324
7.47
%
17,251
325
7.43
%
643,845
3,657
2.25
%
478,125
3,955
3.28
%
47,053
33,482
5,038
2,076
49,408
44,815
$
745,344
$
558,498
$
5,681
3.03
%
$
4,701
3.32
%
3.21
%
3.58
%
108.93
%
108.86
%
Nine Months Ended
Nine Months Ended
September 30, 2003
September 30, 2002
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(Dollars in thousands)
$
458,328
$
20,177
5.89
%
$
387,367
$
18,978
6.55
%
113,841
4,495
5.28
%
74,038
3,437
6.21
%
56,863
1,804
4.24
%
37,143
1,847
6.65
%
2,955
33
1.49
%
7,451
102
1.83
%
631,987
26,509
5.61
%
505,999
24,364
6.44
%
39,660
31,206
$
671,647
$
537,205
$
128,489
875
0.91
%
$
99,369
1,061
1.43
%
139,961
3,168
3.03
%
125,721
3,737
3.97
%
169,598
3,276
2.58
%
158,685
4,612
3.89
%
24,256
242
1.33
%
17,949
285
2.12
%
96,255
2,273
3.16
%
40,265
1,422
4.72
%
17,250
972
7.53
%
16,417
807
7.45
%
575,809
10,806
2.51
%
458,406
11,924
3.48
%
43,057
33,464
4,105
1,813
48,676
43,522
$
671,647
$
537,205
$
15,703
3.10
%
$
12,440
2.96
%
3.32
%
3.29
%
109.76
%
110.38
%
- 21 -
(a)
Exhibits.
Exhibit 31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
Exhibit 31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
Exhibit 32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b)
Reports on Form 8-K.
On July 24, 2003, the Company filed a Form 8-K with the SEC reporting
operating results for the three and six months ended June 30, 2003.
On July 30, 2003, the Company filed a Form 8-K with the SEC reporting
the execution of a definitive agreement in which the Company will
acquire The Community Bank, Pilot Mountain, North Carolina in a fixed
exchange of cash and stock.
On July 30, 2003, the Company filed a Form 8-K with the SEC announcing
that the Company will host a conference regarding the definitive
agreement in which the Company will acquire The Community Bank, Pilot
Mountain, North Carolina in a fixed exchange of cash and stock.
On September 5, 2003, the Company filed a Form 8-K with the SEC
reporting that the Company proposes to sell $30 million of Trust
Preferred Securities to be issued by a subsidiary to be formed for that
purpose, Southern Community Capital Trust II.
On September 25, 2003, the Company filed a Form 8-K with the SEC
announcing that the Company will participate in the Sunbelt Community
Bank Conference in Atlanta, Georgia.
On September 26, 2003, the Company filed a Form 8-K with the SEC
reporting the filing of a registration statement relating to the public
offering of 3,000,000 shares of Trust Preferred Securities. The
proposed aggregate offering amount is $30 million.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN COMMUNITY FINANCIAL CORPORATION
Date: November 14, 2003
By:
/s/ F. Scott Bauer
F. Scott Bauer
Chairman, President and Chief Executive Officer
Date: November 14, 2003
By:
/s/ Richard M. Cobb
Richard M. Cobb
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
- 22 -
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, F. Scott Bauer, certify that:
(1)
I have reviewed this quarterly report on Form 10-Q of Southern Community
Financial Corporation, a North Carolina holding company (the
“registrant”);
(2)
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3)
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4)
The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)
Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c)
Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
(5)
The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: November 14, 2003
By:
/s/ F. Scott Bauer
F. Scott Bauer
Chairman, President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard M. Cobb, certify that:
(1)
I have reviewed this quarterly report on Form 10-Q of Southern Community
Financial Corporation, a North Carolina holding company (the
“registrant”);
(2)
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3)
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4)
The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)
Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c)
Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
(5)
The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: November 14, 2003
By:
/s/ Richard M. Cobb
Richard M. Cobb
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
Exhibit 32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The undersigned hereby certifies that, to his knowledge,
(i)
the Form 10-Q
filed by Southern Community Financial Corporation (the “Issuer”) for the
quarter ended September 30, 2003, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(ii)
the
information contained in that report fairly presents, in all material respects,
the financial condition and results of operations of the Issuer on the dates
and for the periods presented therein.
A signed original of this written
statement required by Section 906 has been provided to the Issuer and
will be retained by the Issuer and furnished to the Securities and
Exchange Commission or its staff upon request.
SOUTHERN COMMUNITY FINANCIAL CORPORATION
Date: November 14, 2003
By:
/s/ F. Scott Bauer
F. Scott Bauer
Chairman, President and Chief Executive Officer
Date: November 14, 2003
By:
/s/ Richard M. Cobb
Richard M. Cobb
Executive Vice President, Chief Operating Officer
and Chief Financial Officer