##### 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 September 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 
incorporation or organization)
    
    (I.R.S. Employer
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 September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Income
for the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows
for the Nine Months Ended September 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
    
    
    15Part 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 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEOEX-32.2 SECTION 906, CERTIFICATION OF THE CFO
  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 September 30, 2006 and December 31, 2005
 September 30, 2006
    
    
    December 31, 2005(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    7,503,490
    
    
    $
    6,061,522Interest bearing deposits in banks
    
    
    1,030,033
    
    
    
    624,508Federal funds sold
    
    
    3,948,000
    
    
    
    2,607,000Securities available for sale, at fair value
    
    
    59,894,511
    
    
    
    53,390,782Restricted equity securities, at cost
    
    
    1,904,900
    
    
    
    1,891,700Loans
    
    
    293,697,749
    
    
    
    253,954,205Less allowance for loan losses
    
    
    4,245,735
    
    
    
    3,000,956Loans, net
    
    
    289,452,014
    
    
    
    250,953,249Premises and equipment
    
    
    9,364,255
    
    
    
    9,595,753Other assets
    
    
    9,852,185
    
    
    
    8,724,690Total assets
    
    $
    382,949,388
    
    
    $
    333,849,204Liabilities and Shareholders EquityDepositsNoninterest-bearing
    
    $
    35,900,769
    
    
    $
    32,008,840Interest-bearing
    
    
    269,340,455
    
    
    
    229,630,366Total deposits
    
    
    305,241,224
    
    
    
    261,639,206Federal Home Loan Bank advances
    
    
    27,500,000
    
    
    
    30,000,000Securities sold under repurchase agreements
    
    
    13,906,469
    
    
    
    13,163,086Subordinated debentures
    
    
    10,929,000
    
    
    
    5,774,000Other liabilities
    
    
    1,507,000
    
    
    
    1,733,077Total liabilities
    
    
    359,083,693
    
    
    
    312,309,369Shareholders equityCapital stock, no par value; 10,000,000 shares authorized;
2,592,414 and 2,587,081 shares issued and outstanding, respectively
    
    
    16,155,965
    
    
    
    16,073,993Retained earnings
    
    
    8,446,920
    
    
    
    6,320,807Accumulated other comprehensive loss
    
    
    (737,190
    )
    
    
    (854,965
    )Total shareholders equity
    
    
    23,865,695
    
    
    
    21,539,835Total liabilities and shareholders equity
    
    $
    382,949,388
    
    
    $
    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 Nine months ended September 30, 2006 and 2005
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest incomeLoans, including fees
    
    $
    6,251,638
    
    
    $
    4,415,142
    
    
    $
    17,393,750
    
    
    $
    11,720,519Taxable securities
    
    
    584,952
    
    
    
    418,939
    
    
    
    1,635,495
    
    
    
    1,260,849Nontaxable securities
    
    
    138,127
    
    
    
    123,006
    
    
    
    392,402
    
    
    
    346,276Federal funds sold
    
    
    117,593
    
    
    
    118,302
    
    
    
    404,248
    
    
    
    243,913Interest bearing deposits
    
    
    22,396
    
    
    
    5,791
    
    
    
    42,367
    
    
    
    22,400Total interest income
    
    
    7,114,706
    
    
    
    5,081,180
    
    
    
    19,868,262
    
    
    
    13,593,957Interest expenseDeposits
    
    
    2,783,200
    
    
    
    1,715,218
    
    
    
    7,429,171
    
    
    
    4,418,786Other borrowings
    
    
    638,791
    
    
    
    403,358
    
    
    
    1,639,034
    
    
    
    1,026,364Total interest expense
    
    
    3,421,991
    
    
    
    2,118,576
    
    
    
    9,068,205
    
    
    
    5,445,150Net interest income
    
    
    3,692,715
    
    
    
    2,962,604
    
    
    
    10,800,057
    
    
    
    8,148,807Provision for loan losses
    
    
    840,000
    
    
    
    345,000
    
    
    
    1,884,000
    
    
    
    1,068,160Net interest income after provision for loan losses
    
    
    2,852,715
    
    
    
    2,617,604
    
    
    
    8,916,057
    
    
    
    7,080,647Other incomeService charges on deposit accounts
    
    
    211,610
    
    
    
    157,676
    
    
    
    598,261
    
    
    
    440,181Gain on sale of securities available-for-sale
    
    
    
    
    
    
    44,310
    
    
    
    
    
    
    
    106,121Proceeds from life insurance policy
    
    
    260,000
    
    
    
    
    
    
    
    472,053
    
    
    
    Other operating income
    
    
    67,612
    
    
    
    6,722
    
    
    
    204,164
    
    
    
    15,347Total other income
    
    
    539,222
    
    
    
    208,708
    
    
    
    1,274,478
    
    
    
    561,649Other expensesSalaries and employee benefits
    
    
    1,402,604
    
    
    
    1,139,478
    
    
    
    4,045,971
    
    
    
    3,298,635Equipment and occupancy expenses
    
    
    421,157
    
    
    
    313,120
    
    
    
    1,259,695
    
    
    
    896,703Other operating expenses
    
    
    752,415
    
    
    
    589,118
    
    
    
    2,053,640
    
    
    
    1,813,887Total other expenses
    
    
    2,576,176
    
    
    
    2,041,716
    
    
    
    7,359,306
    
    
    
    6,009,225Net income before income taxes
    
    
    815,761
    
    
    
    784,596
    
    
    
    2,831,229
    
    
    
    1,633,071Income tax expense
    
    
    143,630
    
    
    
    250,506
    
    
    
    705,116
    
    
    
    496,423Net income
    
    $
    672,131
    
    
    $
    534,090
    
    
    $
    2,126,113
    
    
    $
    1,136,648Basic earnings per share
    
    $
    0.26
    
    
    $
    0.21
    
    
    $
    0.82
    
    
    $
    0.40Diluted earnings per share
    
    $
    0.25
    
    
    $
    0.20
    
    
    $
    0.79
    
    
    $
    0.42Dividends 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 Nine Months Ended September 30, 2006 and 2005
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    672,131
    
    
    $
    534,090
    
    
    $
    2,126,113
    
    
    $
    1,136,648Other comprehensive income (loss):Unrealized holding gains (losses) on securities available-for-sale
arising during period, net of tax
    
    
    513,821
    
    
    
    (40,145
    )
    
    
    117,775
    
    
    
    (101,874
    )Reclassification adjustment for gains realized in net income,
net of tax
    
    
    
    
    
    
    (27,472
    )
    
    
    
    
    
    
    (65,795
    )Other comprehensive income (loss)
    
    
    513,821
    
    
    
    (67,617
    )
    
    
    117,775
    
    
    
    (167,669
    )Comprehensive income
    
    $
    1,185,952
    
    
    $
    466,473
    
    
    $
    2,243,888
    
    
    $
    968,979
 See Notes to Consolidated Financial Statements.
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SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2006 and 2005
(Unaudited)
 2006
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    2,126,113
    
    
    $
    1,136,648Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    513,002
    
    
    
    427,369Provision for loan losses
    
    
    1,884,000
    
    
    
    1,068,160Gain on sale of securities available-for-sale
    
    
    
    
    
    
    (106,121
    )Increase in interest receivable
    
    
    (539,841
    )
    
    
    (600,708
    )Increase in interest payable
    
    
    121,497
    
    
    
    289,882Increase in cash surrender value of life insurance
    
    
    (146,462
    )
    
    
    Proceeds from life insurance policy
    
    
    (472,053
    )
    
    
    Stock based compensation expense
    
    
    (36,962
    )
    
    
    Net other operating activities
    
    
    (329,623
    )
    
    
    353,228Net cash provided by operating activities
    
    
    3,119,671
    
    
    
    2,568,458INVESTING ACTIVITIESDecrease (increase) in interest-bearing deposits in banks
    
    
    (405,525
    )
    
    
    1,289,174Purchase of securities available-for-sale
    
    
    (9,121,740
    )
    
    
    (9,669,614
    )Proceeds from maturities of securities available-for-sale
    
    
    2,807,970
    
    
    
    3,649,427Proceeds from sales of securities available-for-sale
    
    
    
    
    
    
    4,681,938Purchase of restricted equity securities
    
    
    (13,200
    )
    
    
    (420,400
    )Cash surrender value of life insurance
    
    
    169,650
    
    
    
    Net decrease (increase) in federal funds sold
    
    
    (1,341,000
    )
    
    
    6,501,000Net increase in loans
    
    
    (40,382,765
    )
    
    
    (53,374,718
    )Purchase of premises and equipment
    
    
    (281,504
    )
    
    
    (1,006,057
    )Net cash used in investing activities
    
    
    (48,568,114
    )
    
    
    (48,349,250
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    43,602,018
    
    
    
    39,366,999Proceeds from issuance of capital stock
    
    
    45,010
    
    
    
    11,217Proceeds from issuance of trust preferred securities
    
    
    5,000,000
    
    
    
    Net increase (decrease) in Federal Home Loan Bank advances
    
    
    (2,500,000
    )
    
    
    6,000,000Net increase in repurchase agreements
    
    
    743,383
    
    
    
    2,517,425Net cash provided by financing activities
    
    
    46,890,411
    
    
    
    47,895,641Net increase in cash and due from banks
    
    
    1,441,968
    
    
    
    2,114,849Cash and due from banks at beginning of period
    
    
    6,061,522
    
    
    
    3,644,669Cash and due from banks at end of period
    
    $
    7,503,490
    
    
    $
    5,759,518
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Nine months endedSeptember 30, 2006Weighted AverageWeighted Average
    
    
    RemainingOption Price Per
    
    
    Contractual Term
    
    
    Aggregate IntrinsicShares
    
    
    Share
    
    
    (in years)
    
    
    ValueOutstanding, beginning of
period
    
    
    209,403
    
    
    $
    7.08
    
    
    6.0 years
    
    
    $
    2,653,136Granted during the period
    
    
    4,500
    
    
    
    19.00
    
    
    10.0 years
    
    
    
    Forfeited during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised during the period
    
    
    (5,333
    )
    
    
    8.44
    
    
    
    
    
    
    
    57,650Outstanding, end of period
    
    
    208,570
    
    
    $
    7.30
    
    
    5.36 years
    
    
    $
    2,857,409Number of shares exercisable
    
    
    198,785
    
    
    $
    6.94
    
    
    5.21 years
    
    
    $
    2,794,917
   Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Net earnings
    
    As reported
    
    $
    534,090
    
    
    
    1,136,648Effect of grants
    
    
    
    
    
    
    (13,639
    )Proforma
    
    $
    534,090
    
    
    
    1,123,009Basic earnings per
share
    
    As reported
    
    $
    0.21
    
    
    
    0.44Proforma
    
    $
    0.21
    
    
    
    0.43Diluted earnings
per share
    
    As reported
    
    $
    0.20
    
    
    
    0.42Proforma
    
    $
    0.20
    
    
    
    0.42
 8




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    672,131
    
    
    $
    534,090
    
    
    $
    2,126,113
    
    
    $
    1,136,648Weighted average capital shares outstanding
    
    
    2,588,994
    
    
    
    2,586,661
    
    
    
    2,587,726
    
    
    
    2,585,332Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market price for the period
    
    
    95,858
    
    
    
    95,181
    
    
    
    95,858
    
    
    
    95,181Total weighted average capital shares and
capital stock equivalents outstanding
    
    
    2,684,852
    
    
    
    2,681,842
    
    
    
    2,683,584
    
    
    
    2,680,513Diluted earnings per capital share
    
    $
    0.25
    
    
    $
    0.20
    
    
    
    0.79
    
    
    $
    0.42
 
 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
   10




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REGULATORY CAPITAL REQUIREMENTS
  RegulatoryMinimumCompany
    Bank
    RequirementLeverage Capital Ratio
    
    
    8.45
    %
    
    
    8.37
    %
    
    
    4.00
    %Risk-Based Capital RatiosCore Capital
    
    
    10.43
    %
    
    
    9.39
    %
    
    
    4.00
    %Total Capital
    
    
    13.21
    %
    
    
    10.64
    %
    
    
    8.00
    %
   RESULTS OF OPERATIONS
 Net Interest Income
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Provision for Loan Losses
  September 30,
    
    September 30,2006
    
    2005(Dollars in thousands)Total nonaccruing loans
    
    $
    4,754
    
    
    $
    1,118Loans contractually past due ninety days
or more as to interest or principal
payments and still accruing
    
    
    966
    
    
    
    Restructured loans
    
    
    
    
    
    
    
   12




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Nine Months EndedSeptember 30,2006
    
    
    2005(Dollars in thousands)Average amount of loans outstanding
    
    $
    272,711
    
    
    $
    216,554Balance of allowance for loan losses at beginning of period
    
    $
    3,001
    
    
    $
    2,017Loans charged offCommercial and financial
    
    
    (393
    )
    
    
    (190
    )Real estate
    
    
    (320
    )
    
    
    (174
    )Installment
    
    
    (36
    )
    
    
    (69
    )(749
    )
    
    
    (433
    )Loans recoveredCommercial and financial
    
    
    90
    
    
    
    10Real estate
    
    
    
    
    
    
    Installment
    
    
    20
    
    
    
    110
    
    
    
    10Net charge-offs
    
    
    (639
    )
    
    
    (423
    )Additions to allowance charged to operating expense during period
    
    
    1,884
    
    
    
    1,068Balance of allowance for loan losses at end of period
    
    $
    4,246
    
    
    $
    2,662Ratio of net loans charged-off during the
period to average loans outstanding
    
    
    0.23
    %
    
    
    0.20
    %
 Other Income.
 13




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Other Expenses.
 Income Taxes.
 Net Income
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  14




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Item 4. CONTROLS AND PROCEDURES
  
 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
  
 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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SIGNATURES
  SOUTHERN COMMUNITY
BANCSHARES, INC.Date:  November 14, 2006
    /s/ Gary McGahaGary McGahaPresident and CEODate    November 14, 2006
    /s/ Leslye GrindleLeslye GrindleSr. Vice President and
Chief Financial Officer 17