U.S. Securities and Exchange Commission
Form 10-Q
[ X ] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004
[ ] 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
incorporation or organization) |
(I.R.S. Employer Identification No.) |
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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 [ ]
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 11, 2004, (the most recent practicable date), the registrant had outstanding 17,808,669 shares of Common Stock, no par value.
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Part I. FINANCIAL INFORMATION
Item 1 — Financial Statements
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. On October 18, 2004, the two
bank subsidiaries were merged into one charter retaining the Southern Community
Bank and Trust name. 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, 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 periods. Actual results could differ from those
estimates. Operating results for the three-month and nine-month periods ended
September 30, 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 — Net Income Per Share
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 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 — Net Income Per Share (Continued)
For the three months ended September 30, 2004 net income for determining
diluted earnings per share was $2,106 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 first quarter
of 2004. For the three months ended September 30, 2004 and 2003, there were
288,758 and 241,837 options, respectively, that were antidilutive since the
exercise price exceeded the average market price for the period.
For the nine months ended September 30, 2004 net income for determining diluted
earnings per share was $5,749 thousand. For the nine months ended September
30, 2004 and 2003, there were 190,225, and 104,355 options, respectively, that
were antidilutive since the exercise price exceeded the average market price
for the period and were omitted from the calculation of diluted earnings per
share for their respective periods.
Note 3 — Business Combinations
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 acquisition was approved at a special shareholders’ meeting on
December 11, 2003 and the transaction occurred effective at 12:01 am on January
12, 2004. The Community Bank shareholders could elect to receive cash, Company
stock, or a combination 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 shares of common 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 nine months ended
September 30, 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. Pro forma
results for the nine months ended September 30, 2004, are not materially
different from the actual results reported due to the acquisition occurring
near the beginning of the period.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 3 — Business Combinations (Continued)
A summary of the total purchase price of The Community Bank transaction is as
follows:
A summary of the estimated value of The Community Bank assets acquired and
liabilities assumed is as follows (in thousands):
At the end of August 2004, Southern Community Bank and Trust acquired two
residential mortgage offices from Davidson Mortgage, one in Cornelius, North
Carolina and the other located in Lexington, South Carolina.
A summary of the total purchase price of the Davidson Mortgage transaction is
as follows:
A summary of the estimated value of the Davidson Mortgage assets acquired and
liabilities assumed is as follows (in thousands):
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 4 — 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 — Stock Compensation Plans (Continued)
Note 5 — Loans
Following is a summary of loans at each of the balance sheet dates presented:
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 5 — Loans (Continued)
An analysis of the allowance for loan losses is as follows:
The following is a summary of nonperforming assets at the periods presented:
Note 6 — Non-Interest Income and Other Non-Interest Expense
The major components of non-interest income are as follows:
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Note 6 — Non-Interest Income and Other Non-Interest Expense (Continued)
The major components of other non-interest expense are as follows:
Note 7 — 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 grantor trusts 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 remaining 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.
Note 8 – Subsequent Events
The Community Bank held an investment in Sidus Financial, LLC (Sidus), a
mortgage banking company that serves community bank and mortgage broker
customers. On October 4, 2004, Sidus was sold for a combination of cash, stock
and future consideration if certain performance targets are met. As a result
of this transaction, the Company has realized a pre-tax gain of $293,000.
On October 18, 2004, Southern Community Bank and Trust merged the two bank
subsidiaries into one charter retaining the Southern Community Bank and Trust
name, converted our core operating system and began in-house core processing
for the consolidated bank.
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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 Third Quarter
The Company ended the period with total assets of $1.2 billion, an increase of
$19.0 million or 1.6% on a linked quarter basis. During the quarter the
Company experienced net loan growth of $37.2 million or 5.1% to end the period
with net loans of $764.7 million. The increased level of earning assets
resulted in net interest income increasing $207,000 from the second quarter
2004 to $8.8 million for the three-month period. However, growth in average
interest-bearing liabilities during the third quarter of 2004 exceeded that of
interest earning assets. This, coupled with an increase in rates paid on
deposits accounts in response to recent increases in the targeted Federal funds
rate, resulted in our net interest margin compressing 4 basis points to 3.28%
from 3.32% for the quarter ended June 30, 2004. While the Company may gain
some benefit in the near-term from an increase in the Prime rate, the
institution attempts to manage its balance sheet to minimize exposure to
interest rate changes.
In the later part of June 2004, The Community Bank subsidiary converted its
primary operating system. In October 2004, Southern Community Bank and Trust
also converted to this same operating system and the two bank subsidiaries were
merged into one charter retaining the Southern Community Bank and Trust name
and began in-house core processing for the consolidated bank.
At the end of August 2004, Southern Community Bank and Trust acquired two
residential mortgage origination offices from Davidson Mortgage, one in
Cornelius, North Carolina and the other located in Lexington, South Carolina.
In
the Company’s third quarter earnings press release dated
October 27, 2004, management reported diluted earnings per share
for the nine months ended September 30, 2004 of $0.33. We have
revised that previously calculated figure and diluted earnings per
share for the nine months ended September 30, 2004 is $0.32.
Financial Condition at September 30, 2004 and December 31, 2003
During the nine-month period ending September 30, 2004, total assets increased
by $397.0 million, or 49.7%, to $1.2 billion. The acquisition of The Community
Bank (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
$52.5 million of the asset growth. Southern Community Bank and Trust
(Southern) total assets increased $86.5 million during the first nine months of
2004. The loan portfolio increased by $86.9 million in the first nine months
of 2004. Asset growth at Southern was supported by wholesale borrowings
coupled with strong deposit growth. Deposits increased $65.7 million, or 11.4%
during the period, with demand deposits increasing $9.6 million or 18.4%.
At September 30, 2004, gross loans totaled $777.4 million, an increase of
$257.6 million or 49.6% during the nine months. The Community loan portfolio
accounted for $170.7 million of the loan increase and Southern experienced
$86.9 million of loan growth during the period. Commercial mortgage loans,
which total $290.2 million or 37.3% of gross loans, continue to comprise the
largest segment of the portfolio followed by loans secured by residential
mortgages and then the commercial and industrial portfolio which represent
30.7% and 15.4% of gross loans, respectively.
Our total liquid assets, defined as cash and due from banks, federal funds sold
and investment securities, increased by $68.6 million during the nine months,
to $322.5 million at September 30, 2004 versus $254.0 million at the beginning
of the period.
Customer deposits continue to be our primary funding source. At September 30,
2004, deposits totaled $838.9 million, an increase of $263.7 million or 45.8%
from year-end 2003. The addition of Community during the period added $213.9
million of deposits, while Southern experienced $49.8 million or 8.6% deposit
growth over the first nine months of 2004. Borrowings during the period rose
$43.0 million or 25.4% to $212.6 million, $13.8 million of this increase
resides on the balance sheet of Community. 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 growth at Southern was funded by available liquid
assets coupled with increases in wholesale borrowings and deposits. We utilize
various funding sources, as necessary, to support balance sheet management and
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growth. However, we believe that as our branch network continues to grow and
mature, 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. On a consolidated basis, demand deposits increased $24.0 million from
year-end and totaled $75.9 million as of September 30, 2004 comprising 9.1% of
total deposits, an increase from $51.9 million or 9.0% of total deposits at
December 31, 2003. Community accounted for $30.3 million of the increase.
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, 2004, our stockholders’ equity totaled $134.8
million, an increase of $83.9 million 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 have increased during the period by $3.8
million which represents the residual of year-to-date net income less the
Company’s first cash dividend paid on common shares outstanding on March 15,
2004 of $1.9 million.
Results of Operations for the Three Months Ended September 30, 2004 and 2003
Net Income.
Our net income for the three months ended September 30, 2004 was
$2.1 million, an increase of $1.1 million from the same three-month period in
2003. Net income per share was $.12 basic and $.12 diluted for the three
months ended September 30, 2004, as compared with $.12 basic and $.11 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 $369.0
million or 52.6% to $1.1 billion from $701.3 million for the third quarter
2003. Our interest rate spread and net yield on average interest-earning
assets increased 4 basis points and 7 basis points, respectively. Our net
interest income grew 55.8%, from $5.7 million for the three-month period ending
September 2003 to $8.8 million for the current quarter. Net income was also
supported by a $591,000 or 47.0% increase in non-interest income. These
improvements were partially offset by a 41.0% increase in non-interest expense.
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 September 30, 2004, our net
interest income increased by $3.2 million or 55.8% over the third quarter 2003
results to $8.8 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 on our investment portfolio as
higher yielding securities have matured or been called and replaced in a lower
market environment. Due to strong loan demand at Southern and the addition of
Community, our level of average earning assets has increased $369.0 million or
52.6% to $1.1 billion from $701.3 million for the third quarter 2003.
Community contributed $246.0 million of average earning assets during the third
quarter, $170.9 million of loans and $75.1 million of investments. 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 increases
generally result in an immediate increase in our interest income on loans. The
Federal Reserve has increased the targeted Federal funds rate by 75 basis
points to 1.75% causing an equal increase in the prime rate since June 2004.
Despite issuers of higher coupon bonds exercising their call options, reducing
the yield on the securities portfolio, the Company overall has benefited from
strong yields 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. This combination of factors resulted in 7 basis points of
margin improvement when comparing the results for the third quarters of 2004
and 2003. Our average yields on total interest-earning assets for the same
periods decreased by 12 basis points from 5.28% to 5.16%. Despite the
redemption of the Trust I Securities in the first quarter of 2004, our average
total interest-bearing liabilities increased by $317.6 million, or 49.3% 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 September 30,
2004 for Community were $198.7 million or 20.7% of consolidated average
interest-bearing liabilities. Our average cost of total interest-bearing
liabilities decreased 16 basis points from 2.25% to 2.09%. For the three
months ended September 30, 2004, our net interest spread was 3.07% and our net
interest margin was 3.28%. For the three months ended September 30, 2003, our
net interest spread was 3.03% and our net interest margin was 3.21%.
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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 September 30, 2004 was $575,000 representing an increase of $110,000 from
the $465,000 provision we made for the three months ended September 30, 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 September
30, 2004 net loan charge-offs totaled $513,000, an increase from $333,000 of
net charge-offs during the three months ended September 30, 2003. On an
annualized basis, our percentage of net loan charge-offs to average loans
outstanding was .27% for the three months ended September 30, 2004 and 2003.
The dollar amount of non-performing assets increased to $3.0 million from $1.0
million at December 31, 2003 and $1.9 million at September 30, 2003, and as a
percentage of total assets the ratio was unchanged at 0.25% of total assets at
September 2003 and September 2004. The allowance for loan losses at September
30, 2004 represented 1.62% of loans outstanding, compared with 1.40% at
December 31, 2003 and September 30, 2003. 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 September 30, 2004,
non-interest income increased by $591,000 or 47.0% to $1.8 million from $1.3
million for the same period in the prior year. The increase for the three
months ended
September 30, 2004 was due solely to the addition of Community, which
contributed $589,000 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 and Davidson Mortgage, mortgage fees
have dropped from $345,000 for the third quarter 2003 to $198,000 for the three
months ending September 30, 2004. Baring another decline in interest rates we
anticipate similar fee income from mortgage originations in the near term. The
Company experienced a $429,000 or 107.5% 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 expense to average
total assets below 3.0%. Because of our growth we have consistently seen
increases in every major component of our non-interest expense. For the three
months ended September 30, 2004, our non-interest expense increased $2.0
million or 41.0% over the same period in 2003. Non-interest expense during the
third quarter of 2004 at Community totaled $1.6 million. On a consolidated
basis, salaries and employee benefit expense increased $924,000 or 36.3%.
While Community comprises 90.0% of this increase, the residual increase
reflects the addition of personnel at Southern, the addition of Davidson
Mortgage staff during the quarter, as well as additions of personnel to expand
our business and, to a lesser degree, normal salary increases. Occupancy and
equipment expense increased $275,000, or 34.7%. Other expenses increased
$805,000 or 51.9% reflecting the impact of outsourcing the servicing of our
consumer finance loan portfolio which occurred in October of 2003, as well as
the 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 September 30, 2004, on an annualized basis, our ratio of
non-interest expense to average total assets decreased to 2.33% as compared
with 2.60% for the same three months in 2003.
On October 18, 2004, Southern and Community were merged into a single bank
under the Southern name. In conjunction with this merger, the newly
consolidated bank has successfully brought core processing in-house, something
Community was previously doing, but this function was an outsourced service for
Southern. The Company believes that the synergies we will achieve by taking
these steps will have an immediate and lasting positive impact on our customers
as well as our non-interest expense.
Provision for Income Taxes.
Our provision for income taxes, as a percentage of
income before income taxes, was 34.7% and 35.0%, respectively, for the three
months ended September 30, 2004 and 2003.
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Results of Operations for the Nine Months Ended September 30, 2004 and 2003
Net Income.
Our net income for the nine months ended September 30, 2004 was
$5.7 million, an increase of $2.8 million from the same nine-month period in
2003. Net income per share was $.34 basic and $.32 diluted for the nine months
ended September 30, 2004, as compared with $.32 basic and $.31 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 $411.2 million
or 65.1% to $1.0 billion from $632.0 million for the first nine months of 2003.
Our interest rate spread and net yield on average interest-earning assets
remained flat over the two periods at 3.1% and 3.3%, respectively. Our net
interest income grew 65.1%, from $15.7 million for the nine-month period ending
September 2003 to $25.9 million for the current period. Net income was also
supported by a $1.3 million or 33.9% increase in non-interest income. These
improvements were partially offset by a 50.7% increase in non-interest expense.
Our expense growth includes 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 nine months ended September 30, 2004, our net
interest income increased by $10.2 million or 65.1% over $15.7 million
generated in the same nine-month period in 2003. Net interest income benefited
from strong growth in average earning assets, coupled with a reduction in cost
on interest-bearing liabilities. Due to strong loan demand at Southern and the
addition of Community, our level of average earning assets has increased $411.2
million or 65.1% to $1.0 billion from $632.0 million for the nine-month period
ending September 30, 2003. Community contributed $251.7 million of average
earning assets during the period, $175.0 million of loans and $76.5 million of
investments. 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, recent interest rate increases by the
Federal Reserve, lower funding costs, in part due to the conversion of Trust I
Securities, allowed us to avoid any margin compression when comparing the
results for the first nine months of 2004 and 2003. Our average yields on
total interest-earning assets for the same periods decreased by 49 basis points
from 5.61% to 5.12%. Despite the redemption of the Trust I Securities in the
first quarter of 2004, our average total interest-bearing liabilities increased
by $353.8 million, or 61.4% 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 nine-month period
ending September 30, 2004 for Community were $204.3 million or 22.0% of
consolidated average interest-bearing liabilities. Our average cost of total
interest-bearing liabilities decreased 50 basis points from 2.51% to 2.01%.
For the nine months ended September 30, 2004 and 2003 our net interest spread
was 3.10% and our net interest margin was 3.32%.
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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, 2004 was $1.9 million representing an increase of $199,000
from the $1.7 million provision we made for the nine months ended September 30,
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 nine months ended
September 30, 2004 net loan charge-offs totaled $1.0 million, a slight decrease
from $1.1 million of net charge-offs during the nine months ended September 30,
2003. On an annualized basis, our percentage of net loan charge-offs to
average loans outstanding was .19% and .32% for the nine months ended September
30, 2004 and 2003, respectively. The dollar amount of non-performing assets
increased to $3.0 million from $1.0 million at December 31, 2003 and $1.9
million at September 30, 2003, and as a percentage of total assets the ratio
was unchanged at .25% of total assets at September 2003 and 2004. The
allowance for loan losses at September 30, 2004 represented 1.62% of loans
outstanding, compared with 1.40% at December 31, 2003 and September 30, 2003.
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 nine months ended September 30, 2004,
non-interest income increased by $1.3 million or 33.9% to $5.2 million from
$3.9 million for the same period in the prior year. The increase for the nine
months ended September 30, 2004 was due solely to the addition of Community,
which contributed $1.6 million 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 and the recent
acquisition of Davidson Mortgage, mortgage origination fees have dropped from
$1.2 million for the first nine months of 2003 to $555,000 for the nine months
ending September 30, 2004. Baring another decline in interest rates we
anticipate similar fee income from mortgage originations in the near term. The
Company experienced a $1.3 million or 123.9% 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 six-month period, we
have consistently maintained our ratio of non-interest expense to average total
assets below 3.0%. 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, 2004, our non-interest expense increased $6.9 million or
50.7% over the same period in 2003. Non-interest expense during the first nine
months of 2004 at Community totaled $4.5 million. On a consolidated basis,
salaries and employee benefit expense increased $3.4 million or 48.0%. While
Community comprises 77.4% of this increase, the residual increase reflects the
addition of personnel at Southern, the addition of Davidson Mortgage staff
during the third quarter of 2004, as well as additions of personnel to expand
our business and, to a lesser degree, normal salary increases. Occupancy and
equipment expense increased $876,000, or 38.8%. Other expenses increased $2.6
million or 61.8% reflecting the impact of outsourcing the servicing of our
consumer finance loan portfolio as well as the increased volume of business
activity, principally increases in lending and growth in deposit accounts. Due
to our strong asset growth for the nine months ended September 30, 2004, on an
annualized basis, our ratio of non-interest expense to average total assets
decreased to 2.36% as compared with 2.69% for the same nine months in 2003.
On October 18, 2004, Southern and Community were merged into a single bank
under the Southern name. In conjunction with this merger, the newly
consolidated bank has successfully brought core processing in-house, something
Community was previously doing, but this function was an outsourced service for
Southern. The Company believes that the synergies we will achieve by taking
these steps will have an immediate and lasting positive impact on our customers
as well as our non-interest expense.
Provision for Income Taxes.
Our provision for income taxes, as a percentage of
income before income taxes, was 34.9% and 35.0% for the nine months ended
September 30, 2004 and 2003, respectively.
- 22 -
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 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 $302.9 million at September 30, 2004, an increase of $71.9
million from $231.0 million at December 31, 2003. Community added $74.0
million of the increase, while Southern’s balances in these assets were lower
by $2.1 million. Supplementing customer deposits as a source of funding, we
have available lines of credit in the amounts of $53.2 million and $125.0
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 $298.2 million from the Federal Home Loan
Bank of Atlanta, with $140.0 million outstanding at September 30, 2004 and the
ability to borrow up to $154.0 million from the Federal Reserve Bank of
Richmond, with no outstanding balances at September 30, 2004. At September 30,
2004, our outstanding commitments to extend credit consisted of loan
commitments of $94.5 million and amounts available under home equity credit
lines, other credit lines and standby letters of credit of $62.8 million, $54.9
million and $8.7 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 eight-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 61.1% of our total deposits at September
30, 2004, and 59.9% at December 31, 2003. Time deposits of $100,000 or more
totaled $271.3 million or 32.3% of total deposits. The banks also utilize
brokered and out-of-market deposits, which amounted to $204.4 million at
September 30, 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 September 30, 2004, our Tier I capital to average quarterly asset ratio was
10.2%, 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, 2004 was 13.1%.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse changes
in market prices 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
- 23 -
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-15. Based on
their evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective.
Community and Southern underwent a conversion of their core operating systems
in June and October of 2004, respectively, which were considered very
successful based on reviews and tests performed to ensure customer and
financial data were accurately converted. The Company’s management believes
the disclosure controls and procedures at Community are effective, based on the
results of past examinations, reviews, and audits as no significant changes
have been made in those controls and procedures.
- 24 -
September 30, 2004
December 31,
(Unaudited)
2003*
(Amounts in thousands)
$
19,544
$
22,929
1,231
271
235,277
168,500
66,459
62,257
777,368
519,746
(12,629
)
(7,275
)
764,739
512,471
26,755
17,337
50,351
—
31,104
14,737
$
1,195,460
$
798,502
$
75,903
$
51,868
236,333
179,076
14,073
—
512,584
344,274
838,893
575,218
53,933
51,900
158,624
117,627
9,228
2,866
1,060,678
747,611
—
—
125,128
44,377
9,340
5,493
314
1,021
134,782
50,891
$
1,195,460
$
798,502
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
(Amounts in thousands, except per share data)
$
11,018
$
6,998
$
31,064
$
20,177
2,546
1,646
6,974
4,495
335
685
1,839
1,804
10
9
35
33
13,909
9,338
39,912
26,509
442
369
1,386
875
2,966
2,022
7,952
6,444
1,653
1,266
4,645
3,487
5,061
3,657
13,983
10,806
8,848
5,681
25,929
15,703
575
465
1,889
1,690
8,273
5,216
24,040
14,013
1,848
1,257
5,157
3,851
3,473
2,549
10,452
7,062
1,068
793
3,135
2,259
2,355
1,550
6,786
4,194
6,896
4,892
20,373
13,515
3,225
1,581
8,824
4,349
1,119
553
3,075
1,522
$
2,106
$
1,028
$
5,749
$
2,827
$
.12
$
.12
$
.34
$
.32
.12
.11
.32
.31
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
(Amounts in thousands)
$
2,106
$
1,028
$
5,749
$
2,827
4,922
(1,670
)
(658
)
(1,921
)
(1,853
)
643
251
740
3,069
(1,027
)
(407
)
(1,181
)
—
(8
)
(111
)
(196
)
—
3
43
95
(110
)
(137
)
(372
)
(267
)
39
52
140
101
(71
)
(90
)
(300
)
(267
)
2,998
(1,117
)
(707
)
(1,448
)
$
5,104
$
(89
)
$
5,042
$
1,379
Common Stock
Accumulated
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
—
—
5,749
—
5,749
—
—
—
(707
)
(707
)
335,495
1,563
—
—
1,563
—
392
—
—
392
2,059,846
15,788
—
—
15,788
6,426,532
62,659
—
—
62,659
—
349
—
—
349
—
—
(1,902
)
—
(1,902
)
17,808,669
$
125,128
$
9,340
$
314
$
134,782
Nine Months Ended
September 30,
2004
2003
(Amounts in thousands)
$
5,749
$
2,827
3,415
1,362
1,889
1,690
(268
)
(108
)
57
38
(58
)
49
(4,567
)
(837
)
3,221
1,497
9,438
6,518
(960
)
(8,352
)
(113,146
)
(84,431
)
(2,245
)
(59,469
)
96,203
39,589
15,624
46,925
(83,384
)
(76,964
)
—
951
(5,784
)
(3,273
)
—
13
1,322
684
(7,000
)
—
(8,761
)
—
(108,131
)
(144,327
)
61,004
94,666
(15,347
)
4,820
49,990
40,949
1,563
313
(1,902
)
—
95,308
140,748
(3,385
)
2,939
22,929
16,632
$
19,544
$
19,571
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30,
2004
2003
(Amounts in thousands)
$
(51,859
)
$
—
(17,796
)
—
(172,493
)
—
(5,730
)
—
(692
)
—
(50,351
)
—
(2,177
)
—
(1,693
)
—
202,595
—
25,286
—
3,141
—
349
—
62,659
—
$
(8,761
)
$
—
Notes to Consolidated Financial Statements
Nine Months Ended
September 30, 2003
(Amounts in thousands)
$
23,897
5,991
$
.39
.35
Notes to Consolidated Financial Statements
(In thousands)
$
62,659
15,257
349
878
$
79,143
$
24
288
150
$
462
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
(Amounts in thousands, except per share data)
$
2,106
$
1,028
$
5,749
$
2,827
243
67
555
227
$
1,863
$
961
$
5,194
$
2,600
$
.12
$
.12
$
.34
$
.32
.11
.11
.30
.30
$
.12
$
.11
$
.32
$
.31
.10
.10
.29
.29
September 30, 2004
December 31, 2003
Percent
Percent
Amount
of Total
Amount
of Total
(Amounts in thousands)
$
238,561
30.69
%
$
150,312
28.92
%
290,235
37.33
%
186,758
35.93
%
95,277
12.26
%
71,908
13.84
%
119,401
15.36
%
87,127
16.76
%
33,894
4.36
%
23,641
4.55
%
777,368
100.0
%
519,746
100.0
%
12,629
7,275
$
764,739
$
512,471
Notes to Consolidated Financial Statements
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
(Amounts in thousands)
$
12,567
$
6,816
$
7,275
$
6,342
575
465
1,889
1,690
(542
)
(349
)
(1,165
)
(1,133
)
29
16
128
49
(513
)
(333
)
(1,037
)
(1,084
)
—
—
4,502
—
$
12,629
$
6,948
$
12,629
$
6,948
September 30,
December 31,
September 30,
2004
2003
2003
$
1,942
$
769
$
1,201
1,030
272
662
$
2,972
$
1,041
$
1,863
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
(Amounts in thousands)
$
828
$
399
$
2,393
$
1,069
198
345
555
1,151
205
230
604
770
138
138
414
424
479
145
1,191
437
$
1,848
$
1,257
$
5,157
$
3,851
Notes to Consolidated Financial Statements
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
(Amounts in thousands)
$
190
$
113
$
609
$
312
275
235
594
624
457
367
1,443
998
344
90
1,103
346
1,089
745
3,037
1,914
$
2,355
$
1,550
$
6,786
$
4,194
Three Months Ended
Three Months Ended
September 30, 2004
September 30, 2003
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(Dollars in thousands)
$
760,488
$
11,018
5.75
%
$
489,226
$
6,998
5.67
%
250,520
2,546
4.03
%
126,188
1,646
5.18
%
57,100
335
2.33
%
83,588
685
3.26
%
2,217
10
1.79
%
2,320
9
1.37
%
1,070,325
13,909
5.16
%
701,322
9,338
5.28
%
113,432
44,022
$
1,183,757
$
745,344
$
244,432
442
0.72
%
$
149,241
369
0.98
%
300,055
2,319
3.07
%
157,945
1,068
2.68
%
196,631
647
1.31
%
161,329
954
2.35
%
86,360
330
1.52
%
37,469
118
1.24
%
133,934
1,323
3.92
%
137,861
1,148
3.33
%
961,412
5,061
2.09
%
643,845
3,657
2.25
%
81,405
47,053
7,109
5,038
133,831
49,408
$
1,183,757
$
745,344
$
8,848
3.07
%
$
5,681
3.03
%
3.28
%
3.21
%
111.33
%
108.93
%
Three Months Ended
Three Months Ended
September 30, 2004
September 30, 2003
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(Dollars in thousands)
$
726,647
$
31,064
5.72
%
$
458,328
$
20,177
5.89
%
240,722
6,974
3.87
%
113,841
4,495
5.28
%
71,759
1,839
3.43
%
56,863
1,804
4.24
%
4,057
35
1.15
%
2,955
33
1.49
%
1,043,185
39,912
5.12
%
631,987
26,509
5.61
%
109,426
39,660
$
1,152,611
$
671,647
$
239,671
1,386
0.77
%
$
128,489
875
0.91
%
245,415
4,693
2.56
%
139,961
3,168
3.03
%
229,980
3,259
1.89
%
169,598
3,276
2.58
%
69,175
956
1.85
%
24,256
242
1.33
%
145,347
3,689
3.39
%
113,505
3,245
3.81
%
929,588
13,983
2.02
%
575,809
10,806
2.51
%
84,165
43,057
9,888
4,105
128,970
48,676
$
1,152,611
$
671,647
$
25,929
3.10
%
$
15,703
3.10
%
3.32
%
3.32
%
112.22
%
109.76
%
Part II. OTHER INFORMATION
Item 6. Exhibits
- 25 -
(a)
Exhibits.
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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 12, 2004
|
By: |
/s/ F. Scott Bauer
|
||
|
|
F. Scott Bauer | |||
|
|
Chairman, President and Chief Executive Officer | |||
|
|
||||
|
Date: November 12, 2004
|
By: |
/s/ Richard M. Cobb
|
||
|
|
Richard M. Cobb | |||
|
|
Executive Vice President, Chief Operating Officer | |||
|
|
and Chief Financial Officer | |||
- 26 -
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.
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.
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, 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
By:
/s/ F. Scott Bauer
F. Scott Bauer
Chairman, President and Chief Executive Officer
By:
/s/ Richard M. Cobb
Richard M. Cobb
Executive Vice President, Chief Operating Officer
and Chief Financial Officer