<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
COMMISSION FILE NO. 333-35548
SOUTHERN COMMUNITY BANCORP
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(Exact Name of Small Business Issuer as Specified in its Charter)
FLORIDA 59-3619325
------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
250 NORTH ORANGE AVENUE, ORLANDO, FLORIDA 32801
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(Address of Principal Executive Offices)
(407) 649-1844
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(Issuer's telephone number, including area code)
Check whether the issuer: (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 [ ] No [X]
As of September 30, 2000, the issuer had 1,090,408 outstanding shares of common
stock, par value $1.00 per share.
<PAGE> 2
SOUTHERN COMMUNITY BANCORP
FORM 10-QSB
September 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)......................................... 3
Condensed Consolidated Balance Sheets -
September 30, 2000 and 1999 (unaudited) and December 31, 1999........................... 4, 5
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 2000 and 1999.......................................... 6
Nine Months Ended September 30, 2000 and 1999........................................... 7
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2000 and 1999........................................... 8
Condensed Consolidated Statement of Changes in Stockholders'
Equity (unaudited) for the Nine Months Ended September 30, 2000......................... 9
Notes to Condensed Consolidated Financial Statements (Unaudited)........................ 10
Review by Independent Certified Public Accountants...................................... 12
Report on Review by Independent Certified Public Accountants............................ 13
Item 2. Management's Discussion and Analysis............................................................. 14
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................................................... 23
Item 5. Other Information................................................................................. 23
Item 6. Exhibits and Reports on Form 8-K.................................................................. 24
Signatures................................................................................................ 25
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
3
<PAGE> 4
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,746,307 2,785,082
Federal funds sold 10,679,000 9,912,000
------------- -------------
Cash and cash equivalents 16,425,307 12,697,082
Securities available for sale 17,894,625 10,351,356
Loans receivable, net of allowance for loan losses of
$1,460,983 in 2000 and $380,000 in 1999 128,707,874 42,398,493
Accrued interest receivable 953,549 306,961
Federal Home Loan Bank stock, at cost 212,400 --
Premises and equipment, net 7,886,816 4,334,181
Deferred income tax asset 729,096 564,975
Other assets 2,776,976 144,440
------------- -------------
Total assets $ 175,586,643 70,797,488
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits $ 19,478,754 7,354,344
Money-market deposits 19,401,005 17,072,578
Savings and NOW deposits 29,866,616 5,423,918
Time deposits 88,688,636 27,626,535
------------- -------------
Total deposits 157,435,011 57,477,375
Official checks 1,385,520 766,741
Accrued interest payable and other liabilities 1,533,606 283,613
------------- -------------
Total liabilities 160,354,137 58,527,729
------------- -------------
Stockholders' equity:
Common stock, $1 par value, 10,000,000 shares
authorized, 1,090,408 and 884,425 shares
issued and outstanding in 2000 and 1999 1,090,408 884,425
Additional paid-in capital 15,465,712 12,381,950
Accumulated deficit (1,215,875) (1,010,662)
Accumulated other comprehensive income (loss) (107,739) 14,046
------------- -------------
Total stockholders' equity 15,232,506 12,269,759
------------- -------------
Total liabilities and stockholders' equity $ 175,586,643 70,797,488
============= =============
</TABLE>
4
<PAGE> 5
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
--------------------
1999
<S> <C>
ASSETS
Cash and due from banks $ 4,519,649
Federal funds sold --
------------
Cash and cash equivalents 4,519,649
Securities available for sale 11,997,900
Loans receivable, net of allowance for loan losses of $621,000 61,362,573
Accrued interest receivable 554,036
Federal Home Loan Bank stock, at cost 212,400
Premises and equipment, net 4,317,768
Deferred income tax asset 811,146
Other assets 88,696
------------
Total assets $ 83,864,168
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits $ 10,768,768
Money-market deposits 14,051,702
Savings and NOW deposits 5,757,244
Time deposits 34,485,277
------------
Total deposits 65,062,991
Federal funds purchased 6,000,000
Official checks 662,237
Accrued interest payable and other liabilities 300,453
------------
Total liabilities 72,025,681
------------
Stockholders' equity:
Common stock, $1 par value, 10,000,000 shares
authorized, 884,425 shares issued and
outstanding 884,425
Additional paid-in capital 12,381,950
Accumulated deficit (1,225,661)
Accumulated other comprehensive income (loss) (202,227)
------------
Total stockholders' equity 11,838,487
------------
Total liabilities and stockholders' equity $ 83,864,168
============
</TABLE>
5
<PAGE> 6
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Interest income:
Loans receivable $ 3,027,855 768,704
Securities available for sale 320,750 125,291
Other interest-earning assets 50,682 70,519
----------- -----------
Total interest income 3,399,287 964,514
----------- -----------
Interest expense:
Deposits 1,714,407 363,962
Other borrowings 9,177 --
----------- -----------
Total interest expense 1,723,584 363,962
----------- -----------
Net interest income 1,675,703 600,552
Provision for loan losses 418,983 185,000
----------- -----------
Net interest income after provision for loan losses 1,256,720 415,552
----------- -----------
Noninterest income:
Service charges on deposit accounts 76,606 16,404
Other service charges and fees 180,059 29,980
Gain on sale of securities available for sale 9,477 --
----------- -----------
Total noninterest income 266,142 46,384
----------- -----------
Noninterest expense:
Salaries and employee benefits 505,348 355,641
Organizational/preopening expense 541,976 --
Occupancy and equipment expense 244,708 215,714
Data processing 79,486 40,438
Printing and office supplies 55,430 29,543
Marketing and advertising 60,616 59,593
Professional fees 61,426 30,909
Telephone 24,509 23,711
Travel and entertainment 32,064 11,471
Other 70,212 94,762
----------- -----------
Total noninterest expense 1,675,775 861,782
----------- -----------
Loss before income tax benefit (152,913) (399,846)
Income tax benefit (46,377) (147,151)
----------- -----------
Net loss $ (106,536) (252,695)
=========== ===========
Basic and diluted loss per share $ (.12) (.29)
=========== ===========
Weighted-average number of common shares outstanding 890,308 860,613
=========== ===========
</TABLE>
6
<PAGE> 7
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Interest income:
Loans receivable $6,929,085 1,510,329
Securities available for sale 826,898 199,629
Other interest-earning assets 319,174 245,575
---------- ----------
Total interest income 8,075,157 1,955,533
---------- ----------
Interest expense:
Deposits 4,046,229 567,915
Other borrowings 52,036 --
---------- ----------
Total interest expense 4,098,265 567,915
---------- ----------
Net interest income 3,976,892 1,387,618
Provision for loan losses 839,983 368,000
---------- ----------
Net interest income after provision for loan losses 3,136,909 1,019,618
---------- ----------
Noninterest income:
Service charges on deposit accounts 188,653 22,525
Other service charges and fees 283,300 40,859
Gain on sale of securities available for sale 9,477 --
---------- ----------
Total noninterest income 481,430 63,384
---------- ----------
Noninterest expense:
Salaries and employee benefits 1,411,040 1,080,059
Organizational/preopening expense 541,976 --
Occupancy and equipment expense 689,176 484,737
Data processing 198,347 74,770
Printing and office supplies 121,725 122,345
Marketing and advertising 150,260 121,389
Professional fees 110,180 90,805
Telephone 64,881 51,368
Travel and entertainment 70,330 31,978
Other 244,766 185,844
---------- ----------
Total noninterest expense 3,602,681 2,243,295
---------- ----------
Earnings (loss) before income tax provision (benefit) 15,658 (1,160,293)
Income tax provision (benefit) 5,872 (433,307)
---------- ----------
Net earnings (loss) $ 9,786 (726,986)
========== ==========
Basic and diluted earnings (loss) per share $ .01 (.85)
========== ==========
Weighted-average number of common shares outstanding 889,975 859,800
========== ==========
</TABLE>
7
<PAGE> 8
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 9,786 (726,986)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Provision for loan losses 839,983 368,000
Depreciation and amortization 142,061 108,237
Gain on sale of securities available for sale (9,477) --
Deferred income taxes 5,872 (433,307)
Accretion of discounts on securities (6,242) (4,866)
Common stock issued as compensation 3,750 --
Increase in accrued interest receivable (399,513) (275,900)
Increase in other assets (2,688,280) (27,699)
Increase (decrease) in official checks 723,283 (268,644)
Increase in accrued interest payable and other liabilities 1,233,153 218,871
------------ ------------
Net cash used in operating activities (145,624) (1,042,294)
------------ ------------
Cash flows from investing activities:
Repayments of securities available for sale 143,692 153,000
Purchases of securities available for sale (8,308,616) (10,469,080)
Sale of securities available for sale 2,454,585 --
Net increase in loans (68,185,284) (41,563,888)
Purchases of premises and equipment (3,711,110) (2,592,346)
------------ ------------
Net cash used in investing activities (77,607,733) (54,472,314)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 92,372,020 54,203,770
Net decrease in Federal funds purchased (6,000,000) --
Proceeds from issuance of common stock 3,385,995 750,000
Common stock offering costs (100,000) --
------------ ------------
Net cash provided by financing activities 89,658,015 54,953,770
------------ ------------
Net increase (decrease) in cash and cash equivalents 11,905,658 (560,838)
Cash and cash equivalents at beginning of period 4,519,649 13,257,920
------------ ------------
Cash and cash equivalents at end of period $ 16,425,307 12,697,082
============ ============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 3,914,500 482,389
============ ============
Income taxes $ -- --
============ ============
Noncash investing activities -
Change in accumulated other comprehensive income
(loss), unrealized loss on securities available for sale, net
of tax $ 94,488 14,046
============ ============
</TABLE>
8
<PAGE> 9
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPRE-
ADDITIONAL HENSIVE TOTAL
COMMON PAID-IN ACCUMULATED INCOME STOCKHOLDERS'
STOCK CAPITAL DEFICIT (LOSS) EQUITY
----- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 884,425 12,381,950 (1,225,661) (202,227) 11,838,487
----------
Comprehensive income (loss):
Net earnings for the period
(unaudited) -- -- 9,786 -- 9,786
Net change in unrealized loss on
securities available for sale, net
of tax (unaudited) -- -- -- 94,488 94,488
----------
Comprehensive income (loss)
(unaudited) 104,274
Stock issued to officer as compensation
(250 shares) (unaudited) 250 3,500 -- -- 3,750
Sale of common stock in connection
with 401(k) Profit Sharing Plan
(4,747 shares) (unaudited) 4,747 66,458 -- -- 71,205
Sale of common stock in connection
with Employee Stock Purchase
Plan (986 shares) (unaudited) 986 13,804 -- -- 14,790
Proceeds from common stock offering
(200,000 shares), net of offering
costs (unaudited) 200,000 3,000,000 -- -- 3,200,000
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2000 $1,090,408 15,465,712 (1,215,875) (107,739) 15,232,506
========== ========== ========== ========== ==========
</TABLE>
9
<PAGE> 10
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL. In the opinion of the management of Southern Community
Bancorp, the accompanying condensed consolidated financial statements
contain all adjustments (consisting principally of normal recurring
accruals) necessary to present fairly the financial position at
September 30, 2000 and 1999, the results of operations for the
three-month and nine-month periods then ended and statement of cash
flows for the nine-month period then ended. The results of operations
and other data for the nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the year
ending December 31, 2000.
Southern Community Bancorp (the "Holding Company") owns 100% of the
outstanding common stock of Southern Community Bank (the "Bank"), the
Bank owns 100% of the outstanding common stock of Southern Community
Insurance Agency, Inc. (the "Insurance Agency") (collectively the
"Company"). The Holding Company operates as a one-bank holding
company. On April 15, 1999, the Bank's stockholders approved a plan of
corporate reorganization under which the Bank would become a
wholly-owned subsidiary of the Holding Company. The Holding Company
was formed on July 30, 1999. The Bank's stockholders exchanged their
common shares for shares of the Holding Company. As a result, all of
the previously issued $7.50 par value common shares of the Bank were
exchanged for 834,425 shares of the $1.00 par value common shares of
the Holding Company. The Holding Company's acquisition of the Bank was
accounted for similar to a pooling of interests.
The Holding Company's only business activity is the operation of the
Bank. The Bank is a state (Florida) chartered commercial bank. The
Bank offers a variety of financial services to individual and
corporate customers through its four banking offices located in Orange
and Seminole Counties, Florida. The deposits of the Bank are insured
by the Federal Deposit Insurance Corporation ("FDIC") through the Bank
Insurance Fund ("BIF"). The Insurance Agency was formed in 2000 as a
wholly-owned subsidiary of the Bank. The Insurance Agency refers
customers of the Bank to certain insurance agencies for the purchase
of insurance products.
2. LOAN IMPAIRMENT AND LOSSES. The average net investment in collateral
dependent impaired loans and interest income recognized and received
on these loans is as follows:
Nine Months Ended
September 30,
---------------------
2000 1999
-------- --------
Gross loans with no related allowance, at
end of period $146,000 --
======== ====
Average net investment in impaired loans $ 49,000 --
======== ====
Interest income recognized on impaired loans $ 8,000 --
======== ====
Interest income received on impaired loans $ 8,000 --
======== ====
An analysis of the change in the allowance for loan losses was as
follows:
Nine Months Ended
September 30,
-------------------------
2000 1999
---------- ----------
Balance at beginning of period $ 621,000 12,000
Provision charged to earnings 839,983 368,000
---------- ----------
Balance at end of period $1,460,983 380,000
========== ==========
10
<PAGE> 11
SOUTHERN COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
3. EARNINGS (LOSS) PER SHARE . Earnings (loss) per share of common stock
has been computed on the basis of the weighted-average number of
shares of common stock outstanding. For the three and nine months
ended September 30, 2000 and 1999 outstanding stock options are not
considered dilutive securities for purposes of calculating diluted
earnings (loss) per share.
4. REGULATORY CAPITAL. The Bank is required to maintain certain minimum
regulatory capital requirements. The following is a summary at
September 30, 2000 of the regulatory capital requirements and the
Bank's actual capital on a percentage basis:
<TABLE>
<CAPTION>
REGULATORY
ACTUAL REQUIREMENT
------ -----------
<S> <C> <C>
Total capital to risk-weighted assets 10.79% 8.00%
Tier I capital to risk-weighted assets 9.88% 4.00%
Tier I capital to total assets - leverage ratio 10.36% 4.00%
</TABLE>
5. OTHER EVENTS. The Company purchased two parcels of land for future
branch sites in the Bonita Springs, Florida area for approximately
$1.9 million during the nine months ended September 30, 2000.
In September 2000, the Company entered into a contract for the
purchase of a branch location located in Southwest Florida for a
purchase price of $1,550,000. The transaction is expected to close in
November 2000.
On September 22, 2000, the Holding Company entered into a letter of
intent with Peninsula Bancorp, Inc., ("Peninsula") with respect to the
possible merger of the Holding Company and Peninsula. Peninsula is the
parent company of Peninsula Bank of Central Florida, a state bank with
two offices in Volusia County, Florida. The letter of intent provides
that the Holding Company will issue shares of its common stock to the
shareholders of Peninsula upon the consummation of the merger. On the
effective date of the merger, each share of Peninsula common stock
will be converted into .625 shares of the common stock of the Holding
Company. This transaction is subject to the negotiation and execution
of a definitive merger agreement, due diligence by each party,
regulatory approvals and the approval by the shareholders of
Peninsula. The Holding Company intends to account for this transaction
using the purchase method of accounting.
6. ORGANIZATIONAL EXPENSE. In connection with the organization of Southern
Community Bank of Southwest Florida, the Company agreed to reimburse
the organizers for all costs incurred prior to the commencement of
banking operations. Such amounts total $541,976 as of September 30,
2000 and the Company intends to treat the amount, net of income taxes
as a capital contribution to Southern Community Bank of Southwest
Florida when banking operations commence. Total organizational expenses
are not expected to exceed $700,000.
11
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SOUTHERN COMMUNITY BANCORP AND SUBSIDIARY
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Hacker, Johnson & Smith PA, the Company's independent certified public
accountants, have made a limited review of the financial data as of
September 30, 2000 and 1999 and for the three- and nine-month periods
ended September 30, 2000 and 1999 presented in this document, in
accordance with standards established by the American Institute of
Certified Public Accountants.
Their report furnished pursuant to Article 10 of Regulation S-X is
included herein.
12
<PAGE> 13
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Southern Community Bancorp
Orlando, Florida:
We have reviewed the accompanying condensed consolidated balance sheets of
Southern Community Bancorp and Subsidiary (the "Company") as of September 30,
2000 and 1999, and the related condensed consolidated statements of operations
for the three- and nine-month periods ended September 30, 2000 and 1999, the
related condensed consolidated statements of cash flows for the nine-month
periods ended September 30, 2000 and 1999, and the related condensed
consolidated statement of stockholders' equity for the nine-month period ended
September 30, 2000. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquires of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended (not presented herein); and in our report dated
January 26, 2000 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1999, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
HACKER, JOHNSON & SMITH PA
Tampa, Florida
October 6, 2000
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Form 10-QSB contains "forward looking statements" which
represent the Company's expectations and beliefs including, but not limited to,
statements concerning the Company's operations, performance, financial
condition, growth or strategies. For this purpose, any statements contained in
this Form 10-QSB that are not statements of historical fact may be deemed to be
forward looking statements. Without limiting the generality of the foregoing,
words such "may", "will", "expect", "believe", "estimate", "anticipate" or
"continue" or the negative or other variations thereof or comparable
terminology are intended to identify forward looking statements. The statements
by their nature involve substantial risks and uncertainties, certain of which
are beyond the Company's control, and actual results may differ materially
depending on a variety of important factors, including but not limited to the
potential impact of changes in interest rates, competition, credit risks and
collateral, changes in local or regional economic conditions, the ability of
the Company to continue its growth strategy, dependence on management and key
personnel, and regulatory supervision.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30,
1999
The Company's consolidated net loss for the third quarter of 2000 was
$106,536, compared to a net loss of $252,695 for the same period in 1999. Net
loss per common share was $.12 in 2000 and $.29 in 1999.
NET INTEREST INCOME. Net interest income is defined as the total of
interest income on earning assets less interest expense on deposits and other
interest-bearing liabilities. Earning assets, which consist of loans,
investment securities and federal funds sold are financed by a large base of
interest-bearing funds in the form of money market, NOW, savings and time
deposits. Earning assets are also funded by the net amount of non-interest
related funds, which consist of non-interest bearing demand deposits, the
allowance for loan losses and stockholders' equity, reduced by non-interest
bearing assets such as cash and due from banks, and premises and equipment.
Net interest income is primarily affected by changes in the amounts
and types of earning assets, interest-bearing funds and net non-interest
related funds, as well as their relative sensitivity to interest rate
movements.
Net interest income for the third quarter of 2000 was $1,676,000, up
178.9% from $601,000 in 1999. Interest income from earning assets increased
from $965,000 in the third quarter of 1999 to $3,399,000 in the third quarter
of 2000. This increase was due to an increase in the average balance of loans
receivable and investments.
Interest expense on interest bearing liabilities increased from
$364,000 in the third quarter of 1999 to $1,724,000 in the third quarter of
2000. This increase was due to an increase in the average balance of deposits.
14
<PAGE> 15
NONINTEREST INCOME. Noninterest income in the third quarter of 1999
totaled $46,000, compared with $266,000 in 2000. Customer service charges
totaled $77,000 in 2000, up from $16,000 in 1999 due to an increase in the
average number of deposit accounts. Other service charges and fees totaled
$180,000 in 2000 up from $30,000 in 1999. This increase results primarily from
an increase in insurance referral fees as well as overall growth of the
Company.
SECURITIES AVAILABLE FOR SALE. At September 30, 2000, the Company held
investment securities with a market value of $17.9 million, which was $165,753
lower than the amortized cost of the portfolio. This difference consisted of
gross unrealized gains of $37,588 and $203,341 of gross unrealized losses.
PROVISION FOR LOAN LOSSES. The provision for loan losses totaled
$419,000 in the third quarter of 2000 compared to $185,000 in 1999. See
"Allowance and Provision for Loan Losses."
NONINTEREST EXPENSES. Noninterest expenses for the third quarter of
2000 totaled $1,676,000, which was up 94.0% from $862,000 in 1999. Non-interest
expenses are discussed below in more detail.
Salaries and employee benefits represented 30.2% of total non-interest
expenses in 2000. Salaries and employee benefits increased 41.9% to $505,000 in
2000 from $356,000 in 1999. These increases were the result of new employees,
salary increases, higher benefit costs and upgrading of personnel.
Occupancy and equipment expense in 2000 totaled $245,000, up 13.4%
from $216,000 in 1999. The increase was due to the opening of one additional
banking office during 2000.
Organizational and preopening expense for the third quarter of 2000
of $541,976 represents costs incurred in connection with the organization of
Southern Community Bank of Southwest Florida. The Company agreed to reimburse
the organizers of Southern Community Bank of Southwest Florida for costs
incurred prior to the commencement of banking operations.
Other expenses for the third quarter of 2000 totaled $70,000, down
26.3% from $95,000 in 1999.
INCOME TAX BENEFIT. The income tax benefit totaled $46,000 in 2000
compared with a income tax benefit of $147,000 in 1999.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30,
1999
The Company's consolidated net earnings for the first nine months of
2000 was $10,000, compared to a net loss of $727,000 for the same period in
1999. Net earnings (loss) per common share was $.01 in 2000 and $(.85) in 1999.
15
<PAGE> 16
Net interest income for the first nine months of 2000 was $4.0
million, up 185.7% from $1.4 million in 1999. Interest income from earning
assets increased from $2.0 million in the first nine months of 1999 to $8.1
million in the first nine months of 2000. This increase was due to an increase
in average loans receivable and investments.
Interest expense on interest bearing liabilities increased from
$568,000 in the first nine months of 1999 to $4,098,000 in the first nine
months of 2000. This increase was primarily due to an increase in the average
balance of deposits.
NONINTEREST INCOME. Noninterest income in the first nine months of
1999 totaled $63,000, compared with $481,000 in 2000. Customer service charges
totaled $189,000 in 2000, up from $23,000 in 1999 due to an increase in the
number of deposit accounts. Other service charges and fees totaled $283,000 in
2000, up from $41,000 in 1999. This increase results from an increase in
insurance referral fees as well as overall growth of the Company.
PROVISION FOR LOAN LOSSES. The provision for loan losses totaled
$840,000 in the first nine months of 2000 compared to $368,000 in 1999. See
"Allowance and Provision for Loan Losses."
NONINTEREST EXPENSES. Noninterest expenses for the first nine months
of 2000 totaled $3.6 million, which was up 63.6% from $2.2 million in 1999.
Non-interest expenses are discussed below in more detail.
Salaries and employee benefits represented 40.0% of total non-interest
expenses in 2000. Salaries and employee benefits increased 27.3% to $1.4
million in 2000 from $1.1 million in 1999. These increases were the result of
new employees, salary increases, higher benefit costs and upgrading of
personnel.
Occupancy and equipment expense in 2000 totaled $689,000, up 42.1%
from $485,000 in 1999. The increase was due to the opening of one additional
banking office during the first nine months of 2000 as well as the impact of
three banking offices which were opened throughout the first nine months of
1999.
Organizational and preopening expense for the third quarter of 2000 of
$541,976 represents costs incurred in connection with the organization of
Southern Community Bank of Southwest Florida. The Company agreed to reimburse
the organizers of Southern Community Bank of Southwest Florida for costs
incurred prior to the commencement of banking operations.
Other expenses for the first nine months of 2000 totaled $245,000, up
31.7% from $186,000 in 1999. This category of expenses were impacted by the
general growth of the Company.
PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision totaled
$6,000 in 2000 compared with an income tax benefit of $(433,000) in 1999.
CAPITAL EXPENDITURES
The Company's capital expenditures are reviewed by its Board of
Directors. The Company makes capital expenditures in order to improve its
ability to provide quality services to its customers. Capital expenditures for
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<PAGE> 17
the nine months ended September 30, 2000 equaled $3.7 million compared to $2.6
million in 1999, and were principally related to purchase and construction of
new branches.
ASSET QUALITY AND CREDIT RISK
SECURITIES AVAILABLE FOR SALE. The Company maintains a high quality
investment portfolio including securities of U.S. government entities and
mortgage-backed securities. The Company believes that the securities have very
little risk of default. At September 30, 2000, 100% of the securities held in
the Company's investment portfolio were classified available for sale and were
rated "A" or better (with a majority rated triple "A"). A rating of "A" or
better means that the bonds are of "upper medium grade, with strong ability to
repay, possibly with some susceptibility to adverse economic conditions or
changing circumstances." Ratings are assigned by independent rating agencies
and are subject to the accuracy of reported information concerning the issuers
and the subjective judgment and analysis of the rating agencies. They are not a
guarantee of collectibility.
The following table sets forth information regarding the composition
of the investment portfolio for September 30, 2000 and 1999 (amounts in
thousands).
INVESTMENT PORTFOLIO
SEPTEMBER 30,
-----------------------------
2000 1999
---- ----
(AMOUNT IN THOUSANDS)
Securities of other U.S. Government
agencies and corporations $ 17,895 10,351
====== ======
LOANS RECEIVABLE. The Company maintains a high quality portfolio of
real estate, commercial and consumer loans. All loans are reviewed and approved
by the Company's loan committee, which ensures that loans comply with
applicable credit standards. In most cases, the Company requires collateral
from the borrower. The type and amount of collateral varies but may include
residential or commercial real estate, deposits held by financial institutions,
U.S. Treasury securities, other marketable securities and personal property.
Collateral values are monitored to ensure that they are maintained at proper
levels.
As of September 30, 2000, approximately 74.4% of all the Company's
loans were real estate loans secured by real estate in Central Florida. This
level of concentration could present a potential credit risk to the Company
because the ultimate collectibility of these loans is susceptible to adverse
changes in real estate market conditions in this market. The Company has
addressed this risk by limiting most loans to a maximum of 70% of the appraised
value of the underlying real estate and maximum amortization schedules of 20
years.
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<PAGE> 18
The following table divides the Company's loan portfolio into four
categories. Most of the loans are short-term and may be renewed or rolled over
at maturity. At that time, the Company undertakes a complete review of the
borrower's credit worthiness and the value of any collateral. If these items
are satisfactory, the Company will generally renew the loan at prevailing
interest rates.
TYPES OF LOANS
SEPTEMBER 30,
---------------------------
2000 1999
---- ----
(AMOUNTS IN THOUSANDS)
Commercial, financial and agriculture $ 28,996 12,374
Real estate - construction 43,835 7,730
Residential real estate - mortgage 9,419 4,238
Commercial real estate - mortgage 44,040 17,539
Installment loans 4,622 908
Overdrafts 2 11
--------- ---------
Gross loans 130,914 42,800
Less:
Allowance for loan losses (1,461) (380)
Deferred fees and other discounts (745) (22)
--------- ---------
Total loans $ 128,708 42,398
========= =========
COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS. The Company makes
commercial, financial and agricultural loans to businesses located in Central
Florida. The credit risk associated with business lending is influenced by
general economic conditions, the deterioration in a borrower's capital position
resulting in increasing debt to equity ratios, deterioration in a borrower's
cash position resulting in a liquidity problem, and decreasing revenues due to
inefficient operations of the borrower. These loans are generally secured by
corporate assets, marketable securities or other liquid financial instruments.
These loans totaled approximately $29.0 million at September 30, 2000, and
$12.4 million at September 30, 1999.
REAL ESTATE CONSTRUCTION LOANS. The Company makes real estate
construction loans from time to time for real estate projects located in
Central Florida. The Company generally requires security in the form of a
mortgage on the underlying real property and the improvements constructed
thereon and personal guarantees. It attempts to limit its credit exposure to
75% of the appraised value
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<PAGE> 19
of the underlying real property. On September 30, 2000 and 1999, construction
loans totaled $43.8 million and $7.7 million, respectively. Risks associated
with construction loans include variations from vacancy projections, delays in
construction, environmental factors, reliability of subcontractors and timing
and reliability of inspections, and costs overruns.
COMMERCIAL REAL ESTATE MORTGAGE LOANS. The Company makes real estate
loans secured by commercial real estate, including loans to acquire or
refinance office buildings, warehouses and apartments. These loans generally
require a loan to value of not more than 75%. Most of these loans have a
maturity of five years or less. Almost all of these loans are secured by real
property located in Central Florida. These loans totaled $44 million, or 33.8%
of total loans at September 30, 2000 compared with $17.5 million or 40.1% of
total loans at September 30, 1999. Risks associated with commercial real estate
mortgage loans include reliability of appraisals, deterioration of market
values, environmental contamination, and accelerated depreciation of property
due to deferred maintenance.
RESIDENTIAL REAL ESTATE MORTGAGE LOANS. Residential real estate
mortgage loans totaled $9.4 million, or 7.2% of total loans at September 30,
2000, compared with $4.2 million, or 9.8% at September 30, 1999. Residential
real estate mortgage loans are predominately adjustable rate home mortgages
which generally require a loan-to-collateral value of not more than 90% and
equity credit lines which generally limit the loan-to-collateral value to not
more than 90%. Most loans have a maximum term of five to seven years. Almost
all of the residential real estate mortgage loans are secured by homes in
Central Florida. Risks associated with residential real estate mortgage loans
include reliability of appraisals, deterioration of market values,
environmental contamination, and accelerated depreciation of property due to
deferred maintenance.
INSTALLMENT LOANS. The Company offers consumer loans and personal and
secured loans. The security for these loans ordinarily consists of automobiles,
consumer goods, marketable securities, certificates of deposit and similar
items. These loans totaled approximately $4.6 million, or 3.5% of total loans,
on September 30, 2000, compared with $0.9 million, or 2.1% of total loans, on
September 30, 1999. Risks associated with installment loans include loss of
employment of borrowers, declines in the financial condition of borrowers
resulting in delinquencies, and rapid depreciation of loan collateral.
COMMITMENTS. Legally binding commitments to extend credit and letters
of credit totaled $56,163,000 at September 30, 2000.
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets consist of non-accrual loans and residential and
commercial properties acquired in partial or total satisfaction of problem
loans which are known as "other real estate owned" or "OREO." Past due loans
are loans that are delinquent 30 days or more which are still accruing
interest.
Maintaining a low level of non-performing assets is important to the
ongoing success of any financial institution. The Company's credit review and
approval process is critical to the Company's ability to minimize
non-performing assets on a long term basis. In addition to the negative impact
on interest income, non-performing assets also increase operating costs due to
the expense of collection efforts. It is the Company's policy to place all
loans which are past due 90 days or more on non-accrual status, subject to
exceptions made on a case by case basis.
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<PAGE> 20
The following table presents the Company's non-performing assets and
past due loans for 2000 and 1999.
NON-PERFORMING ASSETS AND 90 DAY PAST DUE LOANS
SEPTEMBER 30,
----------------------
2000 1999
---- ----
(AMOUNTS IN THOUSANDS)
Nonaccrual loans $146,000 --
OREO, net -- --
-------- -----
Total nonperforming assets $146,000 --
======== =====
Accruing loans past due
90 days $308,000
======== =====
Of the total loan portfolio of $128.7 million at September 30, 2000,
$454,000 or .35%, was non-performing or past due 90 days, or an increase of
$454,000 from September 30, 1999. Nonperforming loans at September 30, 2000
consisted of commercial and residential real estate loans.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The Company evaluates the adequacy of its allowance for loan losses
as part of its ongoing credit review and approval process. The review process
is intended to identify, as early as possible, customers who may be facing
financial difficulties. Once identified, the extent of the client's financial
difficulty is carefully monitored by the Company's loan review officer, who
recommends to the directors loan committee the portion of any credit that needs
a specific reserve allocation or should be charged off. Other factors
considered by the loan committee in evaluating the adequacy of the allowance
include overall loan volume, historical net loan loss experience, the level and
composition of non-accrual and past due loans, local economic conditions, and
value of any collateral. From time to time, specific amounts of the reserve are
designated for certain loans in connection with the loan committee's review
officer's analysis of the adequacy of the allowance for loan losses.
While the largest portion of this allowance is typically intended to
cover specific loan losses, it is considered a general reserve which is
available for all credit-related purposes. The allowance is not a precise
amount, but is derived based upon the above factors and represents management's
best estimate of the amount necessary to adequately cover probable losses from
current credit exposures. The provision for loan losses is a charge against
current earnings and is determined by management as the amount needed to
maintain an adequate allowance.
The overall credit quality of the loan portfolio is good as evidenced
by the Company's relatively low level of non-performing loans. Management
relied on these factors, as well as its assessment of the financial condition
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<PAGE> 21
of specific clients facing financial difficulties, in deciding to increase the
allowance for loan losses to $1,461,000 at September 30, 2000, from $621,000 at
December 31, 1999 and $380,000 at September 30, 1999.
FINANCIAL CONDITION
The Company's goal is to maintain a high quality and liquid balance
sheet. The Company seeks to achieve this objective through increases in
collateralized loans, a strong portfolio of real estate loans and a stable
portfolio of investment securities of high quality.
SECURITIES AVAILABLE FOR SALE. On September 30, 2000, securities
available for sale were $17.9 million or 11.36% of total earning assets. The
Company's management strategy for its investment account is to maintain a very
high quality portfolio. The investment portfolio, all of which has been
classified as available for sale, increased 72.1% from $10.4 million in the
third quarter of 1999 to $17.9 million in the third quarter of 2000.
LOANS RECEIVABLE. Loans receivable were $128.7 million as of September
30, 2000, compared to $42.4 million as of September 30, 1999. See "Asset
Quality and Credit Risk -- Loans,"
above.
INTEREST-BEARING LIABILITIES. Total interest-bearing liabilities were
$138.0 million at September 30, 2000, up from $50.1 million in 1999. Money
market deposits increased $2.3 million or 14.0% to $19.4 million. Savings and
NOW deposits increased $24.4 million or 451% compared to 1999. There was a
significant increase in time deposits of $61.0 million or 221% compared to
1999. The increase in time deposits was due to loan demand and growth.
LIQUIDITY AND RATE SENSITIVITY
The principal functions of asset and liability management are to
provide for adequate liquidity, to manage interest rate exposure by maintaining
a prudent relationship between rate sensitive assets and liabilities and to
manage the size and composition of the balance sheet so as to maximize net
interest income.
Liquidity is the ability to provide funds at minimal cost to meet
fluctuating deposit withdrawals or loan demand. These demands are met by
maturing assets and the capacity to raise funds from internal and external
sources. The Company primarily utilizes cash, federal funds sold and securities
available for sale to meet its liquidity needs. Although not utilized in
managing daily liquidity needs, the sale of investment securities provides a
secondary source of liquidity.
Fluctuating interest rates, increased competition and changes in the
regulatory environment continue to significantly affect the importance of
interest-rate sensitivity management. Rate sensitivity arises when interest
rates on assets change in a different period of time or a different proportion
than that of interest rates on liabilities. The primary objective of
interest-rate sensitivity management is to prudently structure the balance
sheet so that movements of interest rates on assets and liabilities are highly
correlated and produce a reasonable net interest margin even in periods of
volatile interest rates.
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<PAGE> 22
Regular monitoring of assets and liabilities that are rate sensitive
within 30 days, 90 days, 180 days and one year is an integral part of the
Company's rate-sensitivity management process. It is the Company's policy to
maintain a reasonable balance of rate-sensitive assets and liabilities on a
cumulative one year basis, thus minimizing net interest income exposure to
changes in interest rates. The Company's sensitivity position at September 30,
2000 was such that net interest income would decline modestly if there were an
increase in short-term interest rates.
The Company monitors the interest rate risk sensitivity with
traditional gap measurements. The gap table has certain limitations in its
ability to accurately portray interest sensitivity; however, it does provide a
static reading of the Company's interest rate risk exposure.
As of September 30, 2000, the Company was liability sensitive
(interest sensitive liabilities subject to repricing exceeded interest
sensitive assets subject to repricing) on a 365-day basis to the extent of
$31.8 million. This negative gap at September 30, 2000 was 18.20% of total
assets compared with 23.9% at September 30, 1999.
While the absolute level of gap is a measurement of interest rate
risk, the quality of the assets and liabilities in the balance sheet must be
analyzed in order to understand the degree of interest rate risk taken by the
Company. The Company does not invest in any derivative products in order to
manage or hedge its interest rate risk.
CAPITAL
One of management's primary objectives is to maintain a strong capital
position to merit the confidence of customers, bank regulators and
stockholders. A strong capital position helps the Company withstand unforeseen
adverse developments and take advantage of attractive lending and investment
opportunities when they arise. During the third quarter of 2000, stockholders'
equity increased by $2.9 million, or 24.1% as a result of the Company's sale
of 200,000 shares.
The Company's tier one capital was 9.88% and the total capital was
10.79% of risk-based assets at September 30, 2000. These risk-based capital
ratios are well in excess of the minimum requirements of 4% for tier one and 8%
for total risk-based capital ratios. All of these capital ratios decreased
during the third quarter of 2000 compared to the third quarter of 1999 as
equity capital increased by 24.1% and assets increased by 148.0%. The Company's
leverage ratio (tier one capital to total average quarterly assets) of 10.36%
at September 30, 2000, is also in excess of the minimum 4% requirement.
The Company expects to increase its capital as a result of the
offering of its common stock, which commenced in July 2000. See Part II - Item
2 for additional information on this offering.
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<PAGE> 23
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 17, 2000, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form SB-2 (File No.
333-35548). This Registration Statement covers the the Company's offering of up
to 1,050,000 shares of the Company's common stock at a price of $16.50 per
share, or a total of $17,325,000. The Offering was commenced in July 2000 and
suspended in September 2000.
Prior to the suspension of the offering, the Company had received and
accepted subscriptions for a total of $11,125,851 from subscribers in the
offering. The Company deposited all amounts received from subscribers into one
of two escrow accounts, as designated by each subscriber. The Company
established the first escrow account for the purpose of capitalizing its
proposed new bank, Southern Community Bank of Southwest Florida. The Company
established its second escrow account for the principal purpose of providing
additional working capital for its existing bank, Southern Community Bank.
In August 2000, the escrow agent released to the Company $3,300,000
from the second escrow account. As a result, the Company issued 200,000 shares
of common stock to subscribers whose funds were released. The Company
contributed $3,200,000 of this amount to Southern Community Bank and retained
$100,000 to cover anticipated expenses of the offering. The net proceeds
received by Southern Community Bank were utilized to purchase marketable
securities, which were then used to fund loans and operating expenses.
In September 2000, the Company suspended the offering as a result of
the possible merger of the Company with Peninsula Bancorp Inc., which is
described in Item 5 below. The Company intends to amend the Registration
Statement in order to include appropriate information regarding the possible
merger with Peninsula and to update the information contained in the
Registration Statement. The Company intends to recommence the offering following
the amendment of the Registration Statement. As part of the amendment, the
Company intends to offer all subscribers whose funds are still held in escrow
the opportunity to rescind their subscriptions. At the present time, the escrow
agent for the offering is holding $7,825,851 in subscription proceeds in the
first escrow account. The Company has closed the second escrow account.
Through September 30, 2000, the amount of expenses paid for the
Company's account in connection with the issuance and distribution of the
common stock was $30,943. The Company expects the actual expenses incurred to
be approximately $100,000. No portion of such expenses represented direct or
indirect payments to directors or officers of the Company or their associates
or to persons owning ten percent (10%) or more of any class of the equity
securities of the Company or any affiliates of the Company. The net proceeds
received by the Company after the payment of such expenses equaled $3,269,057.
ITEM 5. OTHER INFORMATION.
On September 22, 2000, the Company entered into a letter of intent
with Peninsula Bancorp, Inc. ("Peninsula"), with respect to the possible merger
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<PAGE> 24
of the Company and Peninsula. Peninsula is the parent company of Peninsula Bank
of Central Florida, a state bank with offices in Volusia County, Florida. The
letter of intent provides that the Company will issue shares of its common
stock to the shareholders of Peninsula upon the consummation of the merger. On
the effective date of the merger, each share of Peninsula common stock will be
converted into .625 shares of the common stock of the Company. This transaction
is subject to the negotiation and execution of a definitive merger agreement,
due diligence investigators by each party, regulatory approvals and the
approval by the shareholders of Peninsula. This matter is also discussed in the
Company's report on Form 8-K filed on October 2, 2000.
ITEM 6. EXHIBITS.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
10 Purchase and Sale Agreement dated as of
September 25, 2000 by and between Bank
of America, N.A. and Southern Community
Bank
27 Financial Data Schedule for the period
ended September 30, 2000
(b) REPORTS ON FORM 8-K.
The Company filed a Form 8-K on October 2, 2000 with respect
to its proposed merger with Peninsula Bancorp, Inc. (Item 5).
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<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN COMMUNITY BANCORP
--------------------------------------
(Registrant)
Date: October 18, 2000 /s/ CHARLIE W. BRINKLEY, JR.
--------------------------------------
Charlie W. Brinkley, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: October 18, 2000 /s/ STEPHEN R. JEUCK
--------------------------------------
Stephen R. Jeuck
Chief Financial Officer and Secretary
(Principal Financial and Principal
Accounting Officer)
25
<PAGE> 26
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10 Purchase and Sale Agreement dated as of
September 25, 2000 by and among Bank
of America, N.A. and Southern Community
Bank
27 Financial Data Schedule for the period
ended September 30, 2000
