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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 September 30, 2003
     
[  ]   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

(Exact name of registrant as specified in its charter)
     
North Carolina   56-2270620
 
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
4605 Country Club Road    
Winston-Salem, North Carolina   27104
 
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (336) 768-8500

Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value

7.25% Cumulative Convertible Trust Preferred Securities

7.25% Convertible Junior Subordinated Debentures

Guarantee with respect to 7.25% Convertible Trust Preferred Securities

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]    No [  ]

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

As of November 10, 2003, (the most recent practicable date), the registrant had outstanding 8,880,800 shares of Common Stock, no par value.

- 1 -

 

               
          Page No.
         
Part I.
  
FINANCIAL INFORMATION
        
Item 1 -
  
Financial Statements (Unaudited)
        
 
    
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
     3  
 
    
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 2003 and 2002
     4  
 
    
Consolidated Statements of Comprehensive Income
Three Months and Nine Months Ended September 30, 2003 and 2002
     5  
 
    
Consolidated Statement of Stockholders’ Equity
Nine Months Ended September 30, 2003
     6  
 
    
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002
     7  
 
    
Notes to Consolidated Financial Statements
     8  
Item 2 -
  
Management’s Discussion and Analysis of Financial Condition and Results
     13  
 
  
of Operations
        
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
     21  

- 2 -

 

Part I. FINANCIAL INFORMATION
Item 1 – Financial Statements (Unaudited)

SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS

                       
          September 30, 2003   December 31,
          (Unaudited)   2002*
         
 
          (Amounts in thousands,
          except share data)
Assets
                
Cash and due from banks
   $ 19,571     $ 16,632  
Federal funds sold
     19,436       11,084  
Investment securities
                
 
Available for sale, at fair value
     139,486       96,930  
 
Held to maturity, at amortized cost
     57,301       44,749  
Loans (Note 4)
     496,810       421,938  
Allowance for loan losses (Note 4)
     (6,948 )     (6,342 )
 
    
     
 
     
Net Loans
     489,862       415,596  
Premises and equipment
     18,033       15,962  
Other assets
     13,171       11,286  
 
    
     
 
     
Total Assets
   $ 756,860     $ 612,239  
 
    
     
 
Liabilities And Stockholders’ Equity
                
Liabilities
                
 
Deposits:
                
   
Demand
   $ 50,019     $ 41,869  
   
Money market and NOW
     159,038       115,981  
   
Time
     334,825       291,366  
 
    
     
 
     
Total Deposits
     543,882       449,216  
Short-term borrowings
     25,000       20,180  
FHLB advances
     116,475       75,526  
Convertible preferred securities
     17,250       17,250  
Other liabilities
     5,022       2,528  
 
    
     
 
     
Total Liabilities
     707,629       564,700  
 
    
     
 
Stockholders’ Equity
                
 
Common stock, no par value, 30,000,000 shares authorized; 8,869,807 shares issued and outstanding
     43,436       43,123  
 
Retained earnings
     4,657       1,830  
 
Accumulated other comprehensive income
     1,138       2,586  
 
    
     
 
     
Total Stockholders’ Equity
     49,231       47,539  
 
    
     
 
     
Total Liabilities and Stockholders’ Equity
   $ 756,860     $ 612,239  
 
    
     
 

* Derived from audited consolidated financial statements.

See accompanying notes.

- 3 -

 

SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

                                     
        Three Months Ended   Nine Months Ended
        September 30,   September 30,
       
 
        2003   2002   2003   2002
       
 
 
 
        (Amounts in thousands, except per share data)
Interest Income
                                
 
Loans
   $ 6,998     $ 6,757     $ 20,177     $ 18,978  
 
Investment securities available for sale
     1,646       1,431       4,495       3,437  
 
Investment securities held to maturity
     685       436       1,804       1,847  
 
Federal funds sold
     9       32       33       102  
 
 
    
     
     
     
 
   
Total Interest Income
     9,338       8,656       26,509       24,364  
 
 
    
     
     
     
 
Interest Expense
                                
 
Money market and NOW deposits
     369       370       875       1,061  
 
Time deposits
     2,022       2,565       6,444       8,349  
 
Short-term borrowings
     118       134       242       285  
 
FHLB advances
     824       561       2,273       1,422  
 
Convertible preferred securities
     324       325       972       807  
 
 
    
     
     
     
 
   
Total Interest Expense
     3,657       3,955       10,806       11,924  
 
 
    
     
     
     
 
   
Net Interest Income
     5,681       4,701       15,703       12,440  
Provision for Loan Losses (Note 4)
     465       400       1,690       1,180  
 
 
    
     
     
     
 
   
Net Interest Income After Provision for Loan Losses
     5,216       4,301       14,013       11,260  
 
 
    
     
     
     
 
Non-Interest Income (Note 5)
     1,257       1,009       3,851       2,654  
 
 
    
     
     
     
 
Non-Interest Expense
                                
 
Salaries and employee benefits
     2,549       2,102       7,062       5,469  
 
Occupancy and equipment
     793       636       2,259       1,842  
 
Other (Note 5)
     1,550       1,133       4,194       3,278  
 
 
    
     
     
     
 
   
Total Non-Interest Expense
     4,892       3,871       13,515       10,589  
 
 
    
     
     
     
 
   
Income Before Income Taxes
     1,581       1,439       4,349       3,325  
Income Tax Expense
     553       503       1,522       1,161  
 
 
    
     
     
     
 
   
Net Income
   $ 1,028     $ 936     $ 2,827     $ 2,164  
 
 
    
     
     
     
 
Net Income Per Share (Note 2)
                                
 
Basic
   $ .12     $ .11     $ .32     $ .25  
 
Diluted
     .11       .10       .31       .24  

See accompanying notes.

- 4 -

 

SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                         
            Three Months Ended   Nine Months Ended
            September 30,   September 30,
           
 
            2003   2002   2003   2002
           
 
 
 
                    (Amounts in thousands)        
Net income
   $ 1,028     $ 936     $ 2,827     $ 2,164  
 
    
     
     
     
 
Other comprehensive income:
                                
 
Securities available for sale:
                                
   
Unrealized holding gains (losses) on available for sale securities
     (1,670 )     1,258       (1,921 )     1,760  
       
Tax effect
     643       (484 )     740       (685 )
   
Reclassification of (gains) losses recognized in net income
     —       —       —       (69 )
       
Tax effect
     —       —       —       26  
 
    
     
     
     
 
   
Net of tax amount
     (1,027 )     774       (1,181 )     1,032  
 
    
     
     
     
 
 
Cash flow hedging activities:
                                
   
Unrealized holding gains (losses) on cash flow hedging activities
     (8 )     1,085       (196 )     1,311  
       
Tax effect
     3       (348 )     95       (435 )
   
Reclassification of (gains) losses recognized in net income
     (137 )     (19 )     (267 )     (19 )
       
Tax effect
     52       7       101       7  
 
    
     
     
     
 
   
Net of tax amount
     (90 )     725       (267 )     864  
 
    
     
     
     
 
     
Total other comprehensive income (loss)
     (1,117 )     1,499       (1,448 )     1,896  
 
    
     
     
     
 
Comprehensive income (loss)
   $ (89 )   $ 2,435     $ 1,379     $ 4,060  
 
    
     
     
     
 

See accompanying notes.

- 5 -

 

SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

                                           
                              Accumulated    
      Common Stock           Other   Total
     
  Retained   Comprehensive   Stockholders'
      Shares   Amount   Earnings   Income   Equity
     
 
 
 
 
      (Amounts in thousands, except share data)
Balance at December 31, 2002
     8,791,683     $ 43,123     $ 1,830     $ 2,586     $ 47,539  
 
Net income
     —       —       2,827       —       2,827  
 
Other comprehensive loss, net of tax
     —       —       —       (1,448 )     (1,448 )
 
Stock options exercised
     78,124       313       —       —       313  
 
    
     
     
     
     
 
Balance at September 30, 2003
     8,869,807     $ 43,436     $ 4,657     $ 1,138     $ 49,231  
 
    
     
     
     
     
 

See accompanying notes.

- 6 -

 

SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

                         
            Nine Months Ended
            September 30,
           
            2003   2002
           
 
            (Amounts in thousands)
Cash Flows from Operating Activities
                
 
Net income
   $ 2,827     $ 2,164  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                
   
Depreciation and amortization
     1,362       956  
   
Provision for loan losses
     1,690       1,180  
   
Realized gain on sales of available for sale securities, net
     —       (69 )
   
Realized gain on sale of equipment
     38       (3 )
   
Realized (gain) loss on sale of foreclosed assets
     49       (19 )
   
Changes in assets and liabilities:
                
     
Increase in other assets
     (837 )     (3,452 )
     
Increase in other liabilities
     1,497       2,089  
 
    
     
 
       
Net Cash Provided by Operating Activities
     6,626       2,846  
 
    
  &n