U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
x
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
o
Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period ended _______________
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
7.95% Cumulative Trust Preferred Securities
7.95% Junior Subordinated Debentures
Guarantee with respect to 7.95% Cumulative 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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 30, 2004, (the most recent practicable date), the registrant had outstanding 17,656,191 shares of Common Stock, no par value.
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| Part I | FINANCIAL INFORMATION | |||||
| Item 1 - | Financial Statements (Unaudited) | |||||
| Consolidated Balance Sheets | ||||||
| March 31, 2004 and December 31, 2003 | 3 | |||||
| Consolidated Statements of Operations | ||||||
| Three Months Ended March 31, 2004 and 2003 | 4 | |||||
| Consolidated Statements of Comprehensive Income | ||||||
| Three Months Ended March 31, 2004 and 2003 | 5 | |||||
| Consolidated Statement of Stockholders’ Equity | ||||||
| Three Months Ended March 31, 2004 | 6 | |||||
| Consolidated Statements of Cash Flows | ||||||
| Three Months Ended March 31, 2004 and 2003 | 7 | |||||
| Notes to Consolidated Financial Statements | 9 | |||||
| Item 2 - | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||||
| Item 3 - | Quantitative and Qualitative Disclosures about Market Risk | 20 | ||||
| Item 4 - | Controls and Procedures | 20 | ||||
| Part II | Other Information | |||||
| Item 6 - | Exhibits and Reports on Form 8-K | 22 | ||||
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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
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 Bank and Trust and its wholly-owned subsidiary, VCS Management,
L.L.C., the managing general partner for Salem Capital Partners L.P., a Small
Business Investment Company; and The Community Bank of Pilot Mountain, North
Carolina, which was acquired on January 12, 2004. 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 periods ended March 31, 2004 and 2003, 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 period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2004.
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 2003 annual report on Form 10-K. This quarterly
report should be read in conjunction with such annual report.
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. 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. The convertible trust preferred securities were converted or
redeemed during the quarter ended March 31, 2004.
Basic and diluted net income per share have been computed based upon net income
as presented in the accompanying consolidated statements of operations divided
by the weighted average number of common shares outstanding or assumed to be
outstanding as summarized below:
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 2 — Per Share Data (Continued)
For the three months ended March 31, 2004 net income for determining diluted
earnings per share was $1,686 thousand, with no adjustment for the after tax
effect of the expense associated with the dilutive convertible preferred
securities which were converted or redeemed during the quarter. Due to the
conversion, the after tax effect of the expense associated with the dilutive
convertible preferred securities adjustment was nominal, as less than one
thousand dollars in interest expense was paid on redeemed shares. For the
three months ended March 31, 2003 net income for determining diluted earnings
per share was $1,146 thousand, after adjusting for the $199 thousand after tax
effect of the expense associated with the dilutive convertible preferred
securities. For the three months ended March 31, 2004 and 2003, there were
5,850 and 115,193 options, respectively, that were antidilutive since the
exercise price exceeded the average market price for the period. For the three
months ended March 31, 2004 and 2003, there were 818,861 and 2,088,975 of
dilutive shares, respectively, related to the convertible trust preferred
securities. These dilutive common stock equivalents have been included in the
calculation of diluted earnings per share for their respective periods.
Note 3 — Business Combination
On July 30, 2003, the Company entered into an “Agreement and Plan of
Reorganization and Merger” with The Community Bank of Pilot Mountain, North
Carolina. The Company’s Board of Directors believes that the merger is in the
best interest of the Company and its shareholders because it presents an
important opportunity to increase shareholder value through growth by acquiring
a strong financial institution in new contiguous markets that are logical for
the Company’s expansion. The acquisition was approved at a special
shareholders’ meeting on December 11, 2003 and the transaction took place
effective at 12:01 am on January 12, 2004. The Community Bank shareholders
could elect to receive cash, Company stock, or a mixture of cash and stock with
an overall consideration mix of approximately 85% stock and 15% cash. As a
result of the acquisition, the Company paid approximately $15.3 million for
shares exchanged for cash and issued 6,426,532 additional shares of stock. The
acquisition was accounted for using the purchase method of accounting.
The following table reflects the unaudited pro forma combined results of
operations for the three months ended March 31, 2004 and 2003, assuming the
acquisition had occurred at the beginning of fiscal year 2003.
In management’s opinion, these unaudited results are not necessarily indicative
of what actual combined results of operations might have been if the
acquisition had been effective at the beginning of fiscal year 2003.
A summary of the total purchase price of the transaction is as follows:
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 4 — Business Combination
A summary of the estimated value of The Community Bank assets acquired and
liabilities assumed is as follows (in thousands):
Note 5 — 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 6 — 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
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 7 — 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 8 — Recent Accounting Pronouncements
In January 2003, the FASB issued and subsequently amended Interpretation No.
46, Consolidation of Variable Interest Entities, an interpretation of ARB No.
51 (Interpretation 46). Interpretation 46 addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. Interpretation 46 applied immediately to variable interests in
variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. The
Company has no investments in variable interest entities that require
consolidation under Interpretation 46. However, the application of
Interpretation 46 resulted in the de-consolidation of a grantor trust that
issued the trust preferred securities reported in our consolidated financial
statements as of December 31, 2003. Effective March 31, 2004, we discontinued
the consolidation of the trust and began reporting the junior subordinated
debentures that the Company had issued in exchange for the proceeds that
resulted from the issuance of the trust preferred securities. The trust
preferred securities that were previously reported and the junior subordinated
debentures that were reported effective March 31, 2004, are classified as
long-term obligations. The impact of this change did not have a material
effect on our consolidated financial statements. Except for the accounting
treatment, the relationship between the Company and Southern Community Capital
Trust II has not changed. Southern Community Capital Trust II continues to be
a wholly-owned finance subsidiary of the Company, and the full and
unconditional guarantee of the Company for the repayment of the trust preferred
securities remains in effect.
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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.
Executive Summary of First Quarter
On January 12, 2004 Southern Community Financial Corporation acquired The
Community Bank (Community) of Pilot Mountain, North Carolina. The Community
Bank operates 10 banking offices, and at the time of acquisition had net loans
of $172 million, $204 million of deposits, $27 million of equity capital, and
$259 million of assets. The Community Bank will initially be maintained as a
separately chartered bank under the holding company, with a plan to merge the
two bank subsidiaries together in the future. The acquisition was completed
under the purchase method of accounting and resulted in the creation of $50.1
million of goodwill which has been pushed down to the books of Community.
In February of 2002, Southern Community Capital Trust I issued 1,725,000
Cumulative Convertible Trust Preferred Securities (“Trust I Securities”),
generating total proceeds of $17.3 million. On January 14, 2004, the Company
announced the redemption of all of the Trust I Securities. The Trust I
Securities were redeemed on March 12, 2004, which resulted in the issuance of
2,059,846 shares of our common stock through the conversions and the retirement
of $61,000 of the convertible trust preferred securities. The Trust I
Securities paid distributions at an annual rate of 7.25%.
In addition, simultaneous with the announcement of the redemption of Trust I
Securities, the Company announced the payment of an $0.11 annual cash dividend
to be paid on March 15, 2004 to shareholders of record on February 20, 2004.
Financial Condition at March 31, 2004 and December 31, 2003
During the three-month period ending March 31, 2004, total assets increased by
$344.5 million, or 43.1%, to $1.1 billion. The acquisition of Community
accounted for the majority of the asset growth during the period. Community
had assets of approximately $259 million prior to acquisition. In addition,
intangibles created by purchase accounting created $52.6 million of the asset
growth. Southern Community Bank and Trust (Southern) total assets increased
$18.6 million during the first quarter of 2004. The investment and loan
portfolios were increased by $10.1 million and $8.0 million, respectively.
Asset growth at Southern was supported primarily by deposit growth coupled
with short-term borrowings. Deposits grew $13.8 million, or 2.4% during the
quarter, with demand and NOW deposits increasing 12.9% and 8.1%, respectively.
At March 31, 2004, loans totaled $704.2 million, an increase of $184.5 million
or 35.5% during the three months. The Community loan portfolio accounted for
$176.5 million of the loan increase and Southern experienced $8 million of loan
growth during the period. Commercial mortgage loans, which total $281.8
million or 40.0% of gross loans, continue to comprise the largest segment of
the portfolio followed by loans secured by residential mortgages and the
commercial and industrial portfolio which represent 29.9% and 15.7% of gross
loans, respectively.
Our total liquid assets, defined as cash and due from banks, federal funds sold
and investment securities, increased by $93.8 million during the three months,
to $347.8 million at March 31, 2004 versus $254.0 million at the beginning of
the period. Liquid assets at Southern increased $3.9 million with increases in
the securities portfolio and federal funds sold. The acquisition of
Community’s liquid assets accounted for the remaining $89.9 million increase in
consolidated liquid assets.
Customer deposits continue to be our primary funding source. At March 31,
2004, deposits totaled $801.3 million, an increase of $226.1 million or 39.3%
from year-end 2003. The addition of Community during the period added $213.6
million of deposits, while Southern experienced $13.8 million or 2.4% deposit
growth in the first quarter. Borrowings during the quarter rose $33.3 million
or 19.7% to $202.9 million, $28.7 million of this increase is the result of the
Community acquisition. Our composition of funding shifted during the period
with the conversion of $17.3 million trust preferred securities issued by
Southern Community Capital Trust I into common stock of the Company. Internal
asset
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growth at Southern was funded by available liquid assets coupled with an
increases in deposits and wholesale borrowings. We will utilize various
funding sources, as necessary, to support balance sheet management and growth.
However, we believe that as our branch network continues to grow and matures,
the volume of core deposits will become a relatively larger portion of our
funding mix, which should contribute to a reduction in our overall funding
cost. Demand deposits increased $37.5 million from year-end and totaled $89.3
million as of March 31, 2004 comprising 11.2% of total deposits, an increase
from $51.9 million or 9.0% of total deposits at December 31, 2003. Community
accounted for $32.1 million of the increase, while Southern increased demand
deposits 12.9% to $59.0 million.
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 March 31, 2004, our stockholders’ equity totaled $131.1
million, an increase of $80.2 from the December 31, 2003 balance. The increase
is primarily the result of 6.4 million common shares issued in the Community
transaction and 2.1 million shares issued in the conversion of Trust I
Securities, which increased equity by $62.7 million and $17.0 million,
respectively. Retained earnings were reduced by $216,000 as the cash dividend
paid on common shares outstanding on March 15, 2004 of $1.9 million exceeded
quarterly net income of $1.7 million.
Results of Operations for the Three Months Ended March 31, 2004 and 2003
Net Income.
Our net income for the three months ended March 31, 2004 was $1.7
million, an increase of $739,000 from the same three-month period in 2003. Net
income per share was $.11 basic and $.10 diluted for the three months ended
March 31, 2003, as compared with $.11 basic and $.10 diluted for the same
period in 2003. With strong internal growth at Southern and the addition of
Community, our level of average earning assets has increased $450.0 million or
79.7% to $1.0 billion from $565.0 million for the first quarter 2003. Our
interest rate spread and net yield on average interest-earning assets decreased
6 basis points and 11 basis points, respectively. Our net interest income grew
74.2%, from $4.8 million for the three-month period ending March 2003 to $8.4
million for the current quarter. Net income was also supported by a $359,000
increase in non-interest income. These improvements were partially offset by a
68.0% increase in non-interest expenses. Our expense growth included the costs
of new facilities, additional personnel costs, and other infrastructure
associated with expansion of our business, as well as Community’s operations.
While these expenses represent investments in building our franchise, they
initially hinder our earnings.
Net Interest Income.
During the three months ended March 31, 2004, our net
interest income increased by $3.6 million or 74.2% over the first quarter 2003
results to $8.4 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. Due to strong loan demand at Southern and the
addition of Community, our level of average earning assets has increased $450.0
million or 79.7% to $1.0 billion from $565.0 million for the first quarter
2003. Community contributed $255.0 million of average earning assets during
the first quarter, $179.4 million of loans and $75.6 million of investment
securities. The rates earned on a significant portion of our loan portfolio
adjust immediately when index rates, such as prime, change. As a result,
interest rate reductions generally result in an immediate drop in our interest
income on loans. At the end of June 2003, the Federal Reserve reduced the
targeted Federal funds rate by 25 basis points to 1.00% causing an equal
reduction in the prime rate. In addition, issuers of higher coupon bonds
exercised their call options, reducing the overall yield on the investment
portfolio. However, the strong yield on Community’s loan portfolio coupled
with rate floors on variable rate loans and lower funding costs, in part due to
the conversion of Trust I Securities, resulted in only 11 basis points of
margin compression when comparing the results for the first quarters of 2004
and 2003. Our average yields on total interest-earning assets for the same
periods decreased by 88 basis points from 6.01% to 5.13%. Despite the
redemption of the Trust I Securities, our average total interest-bearing
liabilities increased by $387.9 million, or 75.9% with the addition of
Community, funding the internal growth at Southern, and the November 2003
issuance of $34.5 million, 7.95% fixed rate trust preferred securities, through
Southern Community Capital Trust II. Average interest-bearing liabilities for
the three-month period ending March 31, 2004 for Community were $175.5 million
or 19.5% of consolidated interest-bearing liabilities. Our average cost of
total interest-bearing liabilities decreased by 81 basis points from 2.80% to
1.99%. For the three months ended March 31, 2004, our net interest spread was
3.14% and our net interest margin was 3.37%. For the three months ended March
31, 2003, our net interest spread was 3.21% and our net interest margin was
3.48%.
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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 annualized 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 March 31, 2004 was $597,000 representing an increase of $57,000 from the
$540,000 provision we made for the three months ended March 31, 2003. 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 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. During the three months ended March 31,
2004 net loan charge-offs totaled $249,000, down slightly from $279,000 of net
charge-offs during the three months ended March 31, 2003. On an annualized
basis, our percentage of net loan charge-offs to average loans outstanding was
.14% and .26% for the three months ended March 31, 2004 and 2003, respectively.
Non-performing assets decreased to $1.7 million, or 0.15% of total assets at
March 31, 2004 from $3.6 million, or 0.59% of total assets at March 31, 2003.
The allowance for loan losses at March 31, 2004 represented 1.72% of loans
outstanding, compared with 1.40% at December 31, 2003. During the first
quarter of 2004 an additional $300,000 was added to the valuation allowance for
impaired loans, bringing that allowance to $1.8 million, while the recorded
amount of impaired loans remained unchanged at $5.5 million. Further, during
the first quarter of 2004 the Community acquisition was consummated and the
Company’s loan loss reserving methodologies were applied to the acquired loan
portfolio to establish an appropriate allowance for those loans. We believe
that the Company’s allowance is adequate to absorb probable losses inherent in
our loan portfolio.
Non-Interest Income.
For the three months ended March 31, 2004, non-interest
income increased by $359,000 or 30.68% to $1.5 million from $1.2 million for
the same period in the prior year. The increase for the three months ended
March 31, 2004 was due solely to the addition of Community, which contributed
$486,000 to consolidated non-interest income. Fees generated from mortgage
originations during 2003 were strong as a result of the increased level of home
mortgage refinancings due to the low interest rate environment. However,
despite the addition of Community, mortgage fees have reduced from $380,000
through the first quarter 2003 to $155,000 for the three months ending March
31, 2004. Baring another decline in interest rates we anticipate similar fee
income from mortgage originations in the near term. The Company experienced a
$209 million or 70.4% increase in service charges and fees on deposit accounts
as a result of deposit growth and the Community acquisition. We expect a
continued positive trend, however not to this same degree, in the future as we
grow our branch network and deposit base.
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 growth. 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 March 31, 2004, our non-interest expense increased $2.7 million or
68.0% over the same period in 2003. Non-interest expenses during the first
quarter of 2004 at Community totaled $1.3 million. On a consolidated basis,
salaries and employee benefit expense increased $1.4 million or 64.5%. While
Community comprises 62.9% of this increase, the residual increase reflects the
addition of personnel in Southern’s new banking offices as well as additions of
personnel to expand our business and, to a lesser degree, normal salary
increases. Occupancy and equipment expense increased $337,000, or 48.8%.
Other expenses increased $1.0 million or 84.7% reflecting the impact of
outsourcing the servicing of our consumer finance loan portfolio as well as
increased volume of business activity, principally increases in lending and
growth in deposit accounts. Due to our strong asset growth, for the three
months ended March 31, 2004, on an annualized basis, our ratio of non-interest
expenses to average total assets decreased to 2.45% as compared with 2.71% for
the same three months in 2003.
Provision for Income Taxes.
Our provision for income taxes, as a percentage of
income before income taxes, was 35.7% and 35.0%, respectively, for the three
months ended March 31, 2004 and 2003.
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.
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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 and
customers 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.
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 $328.5 million at March 31, 2004, an increase of $97.5 million
from $231.0 million at December 31, 2003. Community added $82.7 million of the
increase, while Southern generated an increase of $14.8 million. Supplementing
customer deposits as a source of funding, we have available lines of credit in
the amounts of $42.0 million and $110.0 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 $263.3
million from the Federal Home Loan Bank of Atlanta, with $127.9 million
outstanding at March 31, 2004 and the ability to borrow up to $139.7 million
from the Federal Reserve Bank of Richmond, with no outstanding balances at
March 31, 2004. At March 31, 2004, our outstanding commitments to extend
credit consisted of loan commitments of $69.9 million and amounts available
under home equity credit lines, other credit lines and standby letters of
credit of $54.2 million, $48.2 million and $8.3 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 seven-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 59% of our total deposits at March 31,
2004, and 60.0% at December 31, 2003. Time deposits of $100,000 or more
totaled $185.6 million or 39% of total deposits. The banks also utilize
brokered and out-of-market deposits, which amounted to $173.9 million at March
31, 2004. Large time deposits are generally considered rate sensitive;
however, we believe a portion of our large time deposits are
relationship-oriented, and while we will need to pay competitive rates to
retain these deposits at their maturities, there are other subjective factors
that will determine their continued retention.
At March 31, 2004, our Tier I capital to average quarterly asset ratio was
9.63%, 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 March 31, 2004 was 10.97%.
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.
Other than the effects of the Community acquisition, which proportionately
inflated the balance sheet with market risk sensitivity similar to that of
Southern, management believes 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
the difference between estimated fair values and book values, since the
analysis prepared and presented in conjunction with the Form 10-K Annual Report
for the fiscal year ended December 31, 2003.
Item 4. Controls and Procedures
As of the end of the period covered by the report, the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, 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. Other
than the acquisition of Community, 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. The
Company’s management believes the disclosure controls and procedures at Community are effective,
-20-
based on the results of past
examinations, reviews, and audits as no significant changes have been made in
those controls and procedures.
-21-
CONSOLIDATED BALANCE SHEETS
March 31, 2004
December 31,
(Unaudited)
2003*
(Amounts in thousands,
except share data)
$
19,297
$
22,929
6,014
271
247,560
168,500
74,911
62,257
704,237
519,746
(12,125
)
(7,275
)
692,112
512,471
24,730
17,337
50,071
—
28,295
14,737
$
1,142,990
$
798,502
$
89,327
$
51,868
241,459
179,076
470,487
344,274
801,273
575,218
58,744
51,900
144,123
117,627
7,775
2,866
1,011,915
747,611
—
—
124,027
44,377
5,277
5,493
1,771
1,021
131,075
50,891
$
1,142,990
$
798,502
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
March 31,
2004
2003
(Amounts in thousands,
except per share data)
$
9,848
$
6,461
2,229
1,292
762
603
10
14
12,849
8,370
554
211
2,443
2,264
1,412
1,049
4,409
3,524
8,440
4,846
597
540
7,843
4,306
1,529
1,170
3,454
2,100
1,027
690
2,270
1,229
6,751
4,019
2,621
1,457
935
510
$
1,686
$
947
$
.11
$
.11
.10
.10
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended
March 31,
2004
2003
(Amounts in thousands)
$
1,686
$
947
1,367
(300
)
(469
)
105
871
(195
)
(57
)
26
21
(10
)
(138
)
(29
)
53
11
(121
)
(2
)
750
(197
)
$
2,436
$
750
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
Accumulated
Common Stock
Other
Total
Retained
Comprehensive
Stockholders'
Shares
Amount
Earnings
Income
Equity
(Amounts in thousands, except share and per share data)
8,986,796
$
44,377
$
5,493
$
1,021
$
50,891
—
—
1,686
—
1,686
—
—
—
750
750
150,710
620
—
—
620
—
234
—
—
234
2,059,846
15,788
—
—
15,788
6,426,532
62,659
—
—
62,659
349
—
—
349
—
—
(1,902
)
—
(1,902
)
17,623,884
$
124,027
$
5,277
$
1,771
$
131,075
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31,
2004
2003
(Amounts in thousands)
$
1,686
$
947
860
364
597
540
(66
)
(36
)
—
8
—
(4
)
(2,802
)
(78
)
1,768
532
2,043
2,273
(5,743
)
10,479
(55,416
)
—
(2,034
)
(13,98
)
29,283
14,168
7,118
9,114
(7,757
)
(21,452
)
(2,221
)
(1,002
)
—
388
(7,000
)
(36
)
(8,307
)
—
(52,077
)
(2,279
)
23,173
12,778
24,511
(12,270
)
620
—
(1,902
)
—
46,402
508
(3,632
)
538
22,929
16,632
$
19,297
$
17,170
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31,
2004
2003
(Amounts in thousands)
$
(51,859
)
$
—
(17,796
)
—
(172,493
)
—
(5,706
)
—
(692
)
—
(50,071
)
—
(2,177
)
—
(1,543
)
—
202,595
—
25,286
—
3,141
—
349
—
62,659
—
$
(8,307
)
$
—
Three Months Ended
March 31,
2004
2003
15,843,585
8,791,683
593,788
380,877
818,861
2,088,975
17,256,234
11,261,535
Notes to Consolidated Financial Statements
Three Months Ended
March 31,
2004
2003
(Amounts in thousands)
$
8,996
$
7,480
1,950
1,872
$
.12
$
.12
.11
.12
(In thousands)
$
62,659
Notes to Consolidated Financial Statements
15,249
349
878
$
79,135
Notes to Consolidated Financial Statements
$
6,942
51,859
17,796
172,493
5,706
692
50,071
2,177
1,543
(202,595
)
(25,286
)
(3,141
)
78,257
878
$
79,135
Three Months Ended
March 31,
2004
2003
(Amounts in thousands,
except per share data)
$
1,686
$
947
71
95
$
1,615
$
852
$
.11
$
.11
.10
.10
Notes to Consolidated Financial Statements
$
.10
$
.10
.10
.09
March 31, 2004
December 31, 2003
Percent
Percent
Amount
of Total
Amount
of Total
(Amounts in thousands)
$
210,641
29.91
%
$
150,312
28.92
%
281,802
40.02
%
186,758
35.93
%
66,180
9.40
%
71,908
13.84
%
110,229
15.65
%
87,127
16.76
%
35,385
5.02
%
23,641
4.55
%
704,237
100.0
%
519,746
100.0
%
12,125
7,275
$
692,112
$
512,471
Three Months Ended
March 31,
2004
2003
(Amounts in thousands)
$
7,275
$
6,342
597
540
(327
)
(303
)
78
24
(249
)
(279
)
4,502
—
$
12,125
$
6,603
March 31,
December 31,
2004
2003
$
1,035
$
769
553
272
Notes to Consolidated Financial Statements
$
1,588
$
1,041
Notes to Consolidated Financial Statements
Three Months Ended
March 31,
2004
2003
(Amounts in thousands)
$
750
$
297
164
380
162
203
138
123
315
167
$
1,529
$
1,170
Three Months Ended
March 31,
2004
2003
(Amounts in thousands)
$
184
$
73
80
159
442
333
417
118
1,147
546
$
2,270
$
1,229
Quarter Ended March 31, 2004
Quarter Ended March 31, 2003
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(Dollars in thousands)
$
700,927
$
9,848
5.70
%
$
429,892
$
6,461
6.10
%
231,782
2,229
3.90
%
89,709
1,292
5.84
%
77,753
762
3.97
%
41,254
603
5.93
%
4,565
10
0.89
%
4,137
14
1.37
%
12,849
5.13
%
564,992
8,370
6.01
%
102,494
36,276
$
1,117,521
$
601,268
$
234,809
554
0.96
%
$
110,460
211
0.77
%
234,419
1,152
1.99
%
133,824
1,027
3.11
%
226,438
1,291
2.31
%
165,995
1,237
3.02
%
64,383
365
2.30
%
28,714
216
3.05
%
139,128
1,047
3.05
%
72,250
833
4.68
%
899,177
4,409
1.99
%
511,243
3,524
2.80
%
82,290
38,724
14,141
3,295
121,913
48,006
$
1,117,521
$
601,268
$
8,440
3.14
%
$
4,846
3.21
%
3.37
%
3.48
%
112.88
%
110.51
%
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-22-
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.
-23-
SOUTHERN COMMUNITY FINANCIAL CORPORATION
Date: May 17, 2004
By:
/s/ F. Scott Bauer
F. Scott Bauer
Chairman, President and Chief Executive Officer
Date: May 17, 2004
By:
/s/ Richard M. Cobb
Richard M. Cobb
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
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: May 17, 2004
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: May 17, 2004
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 March 31, 2004, 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.
SOUTHERN COMMUNITY FINANCIAL CORPORATION
Date: May 17, 2004
By:
/s/ F. Scott Bauer
F. Scott Bauer
Chairman, President and Chief Executive Officer
Date: May 17, 2004
By:
/s/ Richard M. Cobb
Richard M. Cobb
Executive Vice President, Chief Operating Officer
and Chief Financial Officer