##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended June 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 333-86082
 SOUTHERN COMMUNITY BANCSHARES, INC.
  Georgia
    
    58  2639705(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 525 North Jeff Davis Drive, Fayetteville, Georgia 30214
  (770) 461-4365
  N/A
  þ o
  o o þ
 o þ




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##### 



PagePart I. Financial InformationItem 1. Consolidated Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7 - 9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9 - 14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    14Part II. Other InformationItem 1. Legal Proceedings
    
    
    15Item 1A. Risk Factors
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3. Defaults Upon Senior Securities
    
    
    15Item 4. Submission of Matters to Vote of Security Holders
    
    
    15Item 5. Other Information
    
    
    15Item 6. Exhibits
    
    
    16Signatures
    
    
    17Certifications
    
    
    18 - 23EX-31.1 CERTIFICATE OF CEO PURSUANT TO SECTION 302EX-31.2 CERTIFICATE OF CFO PURSUANT TO SECTION 302EX-32.1 CERTIFICATE OF CEO PURSUANT TO SECTION 906EX-32.2 CERTIFICATE OF CFO PURSUANT TO SECTION 906
  2




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##### Table of Contents



PART I. Financial Information
 
 ITEM 1. Consolidated Financial Statements
 SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 as of June 30, 2006 and December 31, 2005
 June 30, 2006 (Unaudited)
    
    
    December 31, 2005AssetsCash and due from banks
    
    $
    7,248,145
    
    
    $
    6,061,522Interest bearing deposits in banks
    
    
    1,335,688
    
    
    
    624,508Federal funds sold
    
    
    14,831,667
    
    
    
    2,607,000Securities available for sale, at fair value
    
    
    59,944,355
    
    
    
    53,390,782Restricted equity securities, at cost
    
    
    2,242,400
    
    
    
    1,891,700Loans
    
    
    278,805,929
    
    
    
    253,954,205Less allowance for loan losses
    
    
    3,365,966
    
    
    
    3,000,956Loans, net
    
    
    275,439,963
    
    
    
    250,953,249Premises and equipment
    
    
    9,474,527
    
    
    
    9,595,753Other assets
    
    
    9,056,916
    
    
    
    8,724,690Total assets
    
    $
    379,573,661
    
    
    $
    333,849,204Liabilities and Shareholders EquityDepositsNoninterest-bearing
    
    $
    36,958,862
    
    
    $
    32,008,840Interest-bearing
    
    
    261,191,292
    
    
    
    229,630,366Total deposits
    
    
    298,150,154
    
    
    
    261,639,206Federal Home Loan Bank advances
    
    
    35,000,000
    
    
    
    30,000,000Securities sold under repurchase agreements
    
    
    11,517,834
    
    
    
    13,163,086Subordinated debentures
    
    
    10,907,000
    
    
    
    5,774,000Other liabilities
    
    
    1,372,578
    
    
    
    1,733,077Total liabilities
    
    
    356,947,566
    
    
    
    312,309,369Shareholders equityCapital stock, no par value; 10,000,000
shares authorized; 2,587,081 shares issued
and outstanding, respectively
    
    
    16,102,316
    
    
    
    16,073,993Retained earnings
    
    
    7,774,790
    
    
    
    6,320,807Accumulated other comprehensive loss
    
    
    (1,251,011
    )
    
    
    (854,965
    )Total shareholders equity
    
    
    22,626,095
    
    
    
    21,539,835Total liabilities and shareholders equity
    
    $
    379,573,661
    
    
    $
    333,849,204
 See Notes to Consolidated Financial Statements.
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SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME
 Three and Six months ended June 30, 2006 and 2005
 Three Months Ended
    
    
    Six Months EndedJune
30,(Unaudited)
    
    
    June 30,(Unaudited)2006
    
    
    2005
    
    
    2006
    
    
    2005Interest incomeLoans, including fees
    
    $
    5,913,976
    
    
    $
    3,931,190
    
    
    $
    11,142,112
    
    
    $
    7,305,377Taxable securities
    
    
    561,940
    
    
    
    418,498
    
    
    
    1,050,543
    
    
    
    841,910Nontaxable securities
    
    
    134,523
    
    
    
    116,700
    
    
    
    254,275
    
    
    
    223,270Federal funds sold
    
    
    103,418
    
    
    
    79,108
    
    
    
    286,655
    
    
    
    125,611Interest bearing deposits
    
    
    15,298
    
    
    
    6,451
    
    
    
    19,971
    
    
    
    16,609Total interest income
    
    
    6,729,155
    
    
    
    4,551,947
    
    
    
    12,753,556
    
    
    
    8,512,777Interest expenseDeposits
    
    
    2,411,830
    
    
    
    1,486,527
    
    
    
    4,645,971
    
    
    
    2,703,568Other borrowings
    
    
    534,405
    
    
    
    359,015
    
    
    
    1,000,243
    
    
    
    623,006Total interest expense
    
    
    2,946,235
    
    
    
    1,845,542
    
    
    
    5,646,214
    
    
    
    3,326,574Net interest income
    
    
    3,782,920
    
    
    
    2,706,405
    
    
    
    7,107,342
    
    
    
    5,186,203Provision for loan losses
    
    
    679,000
    
    
    
    418,160
    
    
    
    1,044,000
    
    
    
    723,160Net interest income after provision for loan losses
    
    
    3,103,920
    
    
    
    2,288,245
    
    
    
    6,063,342
    
    
    
    4,463,043Other incomeService charges on deposit accounts
    
    
    214,549
    
    
    
    153,522
    
    
    
    386,651
    
    
    
    282,505Gain on sale of securities available-for-sale
    
    
    
    
    
    
    58,511
    
    
    
    
    
    
    
    61,811Proceeds from life insurance policy
    
    
    212,053
    
    
    
    
    
    
    
    212,053
    
    
    
    Other operating income
    
    
    72,400
    
    
    
    (14,009
    )
    
    
    136,552
    
    
    
    8,625Total other income
    
    
    499,002
    
    
    
    198,024
    
    
    
    735,256
    
    
    
    352,941Other expensesSalaries and employee benefits
    
    
    1,351,356
    
    
    
    1,111,525
    
    
    
    2,643,367
    
    
    
    2,159,157Equipment and occupancy expenses
    
    
    419,012
    
    
    
    312,801
    
    
    
    838,538
    
    
    
    583,583Other operating expenses
    
    
    637,168
    
    
    
    627,820
    
    
    
    1,301,225
    
    
    
    1,224,769Total other expenses
    
    
    2,407,536
    
    
    
    2,052,146
    
    
    
    4,783,130
    
    
    
    3,967,509Net income before income taxes
    
    
    1,195,386
    
    
    
    434,123
    
    
    
    2,015,468
    
    
    
    848,475Income tax expense
    
    
    308,496
    
    
    
    120,379
    
    
    
    561,486
    
    
    
    245,917Net income
    
    $
    886,890
    
    
    $
    313,744
    
    
    $
    1,453,982
    
    
    $
    602,558Basic earnings per share
    
    $
    0.34
    
    
    $
    0.12
    
    
    $
    0.56
    
    
    $
    0.23Diluted earnings per share
    
    $
    0.33
    
    
    $
    0.12
    
    
    $
    0.54
    
    
    $
    0.22Dividends declared per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 See Notes to Consolidated Financial Statements.
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SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 Three and Six Months Ended June 30, 2006 and 2005
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    886,890
    
    
    $
    313,744
    
    
    $
    1,453,982
    
    
    $
    602,558Other comprehensive income (loss):Unrealized holding gains (losses) on securities
available-for-sale arising during period,
net of tax
    
    
    (352,121
    )
    
    
    348,808
    
    
    
    (396,046
    )
    
    
    (61,729
    )Reclassification adjustment for gains
realized in net income,
net of tax
    
    
    
    
    
    
    (36,277
    )
    
    
    
    
    
    
    (38,323
    )Other comprehensive income (loss)
    
    
    (352,121
    )
    
    
    312,531
    
    
    
    (396,046
    )
    
    
    (100,052
    )Comprehensive income
    
    $
    534,769
    
    
    $
    626,275
    
    
    $
    1,057,936
    
    
    $
    502,506
 See Notes to Consolidated Financial Statements.
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SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 30, 2006 and 2005
 (Unaudited)
 2006
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    1,453,982
    
    
    $
    602,558Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    341,021
    
    
    
    280,813Provision for loan losses
    
    
    1,044,000
    
    
    
    723,160Gain on sale of securities available-for-sale
    
    
    
    
    
    
    (61,811
    )Increase in interest receivable
    
    
    (55,683
    )
    
    
    (193,814
    )Increase (decrease) in interest payable
    
    
    (22,424
    )
    
    
    284,466Increase in cash surrender value of life insurance
    
    
    (97,641
    )
    
    
    Proceeds from life insurance policy
    
    
    (212,053
    )
    
    
    Stock based compensation expense
    
    
    (28,323
    )
    
    
    Net other operating activities
    
    
    (42,189
    )
    
    
    (159,182
    )Net cash provided by operating activities
    
    
    2,380,690
    
    
    
    1,476,190INVESTING ACTIVITIESDecrease (increase) in interest-bearing deposits in banks
    
    
    (711,180
    )
    
    
    1,479,278Purchase of securities available-for-sale
    
    
    (9,121,740
    )
    
    
    (3,030,614
    )Proceeds from maturities of securities available-for-sale
    
    
    1,929,383
    
    
    
    2,665,756Proceeds from sales of securities available-for-sale
    
    
    
    
    
    
    1,062,508Purchase of restricted equity securities
    
    
    (350,700
    )
    
    
    (420,400
    )Cash surrender value of life insurance
    
    
    169,650
    
    
    
    Net decrease (increase) in federal funds sold
    
    
    (12,224,667
    )
    
    
    3,371,000Net increase in loans
    
    
    (25,530,714
    )
    
    
    (39,098,364
    )Purchase of premises and equipment
    
    
    (219,795
    )
    
    
    (905,058
    )Net cash used in investing activities
    
    
    (46,059,763
    )
    
    
    (34,875,894
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    36,510,948
    
    
    
    26,925,320Proceeds from issuance of capital stock
    
    
    
    
    
    
    11,217Proceeds from issuance of trust preferred securities
    
    
    5,000,000
    
    
    
    Net increase in Federal Home Loan Bank advances
    
    
    5,000,000
    
    
    
    6,000,000Net increase (decrease) in repurchase agreements
    
    
    (1,645,252
    )
    
    
    1,921,999Net cash provided by financing activities
    
    
    44,865,696
    
    
    
    34,858,536Net increase in cash and due from banks
    
    
    1,186,623
    
    
    
    1,458,832Cash and due from banks at beginning of period
    
    
    6,061,522
    
    
    
    3,644,669Cash and due from banks at end of period
    
    $
    7,248,145
    
    
    $
    5,103,501
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##### Table of Contents



Six months endedJune 30, 2006Weighted AverageWeighted
    
    
    RemainingAverage Option
    
    
    Contractual Term (in
    
    
    AggregateShares
    
    
    Price Per Share
    
    
    years)
    
    
    Intrinsic ValueOutstanding, beginning of period
    
    
    207,403
    
    
    $
    6.94
    
    
    6.0 years
    
    
    $
    2,657,276Granted during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, end of period
    
    
    207,403
    
    
    $
    6.94
    
    
    5.5 years
    
    
    $
    2,863,448Number of shares exercisable
    
    
    207,403
    
    
    $
    6.94
    
    
    5.5 years
    
    
    $
    2,863,448
 7




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30, 2005
    
    
    June 30, 2005Net earnings
    
    As reported
    
    $
    313,744
    
    
    
    602,558Effect of grants
    
    
    13,639
    
    
    
    13,639Proforma
    
    $
    300,105
    
    
    
    588,919Basic earnings per share
    
    As reported
    
    $
    0.12
    
    
    
    0.23Proforma
    
    $
    0.12
    
    
    
    0.23Diluted earnings per share
    
    As reported
    
    $
    0.12
    
    
    
    0.22Proforma
    
    $
    0.11
    
    
    
    0.22
   8




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    886,890
    
    
    $
    313,744
    
    
    
    1,453,982
    
    
    $
    602,558Weighted average capital shares outstanding
    
    
    2,587,081
    
    
    
    2,586,287
    
    
    
    2,587,081
    
    
    
    2,584,657Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market price for the period
    
    
    89,436
    
    
    
    93,215
    
    
    
    89,436
    
    
    
    93,215Total weighted average capital shares and
capital stock equivalents outstanding
    
    
    2,676,517
    
    
    
    2,679,502
    
    
    
    2,676,517
    
    
    
    2,677,872Diluted earnings per capital share
    
    $
    0.33
    
    
    $
    0.12
    
    
    
    0.54
    
    
    $
    0.23
 
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking Statements
  9




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FINANCIAL CONDITION
   LIQUIDITY
   REGULATORY CAPITAL REQUIREMENTS
  10




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##### Table of Contents



RegulatoryMinimumCompany
    
    Bank
    
    RequirementLeverage Capital Ratio
    
    
    8.91
    %
    
    
    8.39
    %
    
    
    4.00
    %Risk-Based Capital RatiosCore Capital
    
    
    9.85
    %
    
    
    9.52
    %
    
    
    4.00
    %Total Capital
    
    
    11.80
    %
    
    
    10.56
    %
    
    
    8.00
    %
   RESULTS OF OPERATIONS
 Net Interest Income
  Provision for Loan Losses
 11




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##### Table of Contents



June 30,
    
    June 30,2006
    
    2005(Dollars in thousands)Total nonaccruing loans
    
    $
    1,241
    
    
    $
    430Loans contractually past due ninety days
or more as to interest or principal
payments and still accruing
    
    
    1,642
    
    
    
    Restructured loans
    
    
    
    
    
    
    
     Six Months EndedJune 30,2006
    
    
    2005(Dollars in thousands)Average amount of loans outstanding
    
    $
    266,768
    
    
    $
    206,721Balance of allowance for loan losses at beginning of period
    
    $
    3,001
    
    
    $
    2,017Loans charged offCommercial and financial
    
    
    (393
    )
    
    
    (178
    )Real estate
    
    
    (276
    )
    
    
    (165
    )Installment
    
    
    (23
    )
    
    
    (48
    )
 12




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##### Table of Contents



Six Months EndedJune 30,2006
    
    
    2005(Dollars in thousands)(692
    )
    
    
    (391
    )Loans recoveredCommercial and financial
    
    
    
    
    
    
    9Real estate
    
    
    
    
    
    
    Installment
    
    
    13
    
    
    
    13
    
    
    
    9Net charge-offs
    
    
    (679
    )
    
    
    (382
    )Additions to allowance charged to operating expense during period
    
    
    1,044
    
    
    
    723Balance of allowance for loan losses at end of period
    
    $
    3,366
    
    
    $
    2,358Ratio of net loans charged-off during the
period to average loans outstanding
    
    
    0.25
    %
    
    
    0.18
    %
 Other Income.
 Other Expenses.
 13




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Income Taxes.
 Net Income
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 Item 4. CONTROLS AND PROCEDURES
  14




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PART II  OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Directors
    
    For
    
    Against
    
    AbstainJames S. Cameron
    
    
    1,745,035
    
    
    
    11,729
    
    
    
    Thomas D. Reese
    
    
    1,738,302
    
    
    
    18,462
    
    
    
    
 
 Item 5. OTHER INFORMATION
  15




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Item 6. EXHIBITS
 (a)
    
    Exhibits
 31.1
    
    Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley
Act of 200231.2
    
    Certificate of CFO pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1
    
    Certificate of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certificate of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 16




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##### Table of Contents



SIGNATURES
  SOUTHERN COMMUNITY
BANCSHARES, INC.Date: August 14, 2006
    /s/ Gary McGahaGary McGahaPresident and CEO Date August 14, 2006
    /s/ Leslye GrindleLeslye GrindleSr. Vice President and
Chief Financial Officer 17