##### 



U.S. Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-K/A
 (Amendment No. 1)
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the fiscal year ended December 31, 2005
 o
    
    Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the transition period from  to
 Commission
file number 000-33227
 Southern Community Financial Corporation
  North Carolina
    
    56-2270620(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 4605 Country Club Road
Winston-Salem, North Carolina
    
    27104(Address of principal executive offices)
    
    (Zip Code)
   Title of each class
    
    Exchange on which registeredCommon Stock, No Par Value
    
    The NASDAQ Stock Market, LLC7.95% Cumulative Trust Preferred Securities
    
    The NASDAQ Stock Market, LLC7.95% Junior Subordinated Debentures
    
    The NASDAQ Stock Market, LLCGuarantee with respect to 7.95% Cumulative Trust Preferred Securities
    
    The NASDAQ Stock Market, LLC
 
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
    Document
    
    Where IncorporatedProxy Statement for the Annual Meeting of Shareholders
to be held May 23, 2006 to be mailed to shareholders
within 120 days of December 31, 2005.
    
    Part III




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##### 



Index
 PAGEEXPLANATORY NOTEPART IItem 1.
    
    Business
    
    
    5Item 1A.
    
    Risk Factors
    
    
    15Item 1B.
    
    Unresolved Staff Comments (None)
    
    
    21Item 2.
    
    Properties
    
    
    22Item 3.
    
    Legal
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24PART IIItem 5.
    
    Market for Common Stock and Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    24Item 6.
    
    Selected Financial Data
    
    
    26Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    61Item 8.
    
    Financial Statements
    
    
    61Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    104Item9A.
    
    Controls and Procedures
    
    
    104Item9B.
    
    Other Information
    
    
    108PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    108Item 11.
    
    Executive Compensation
    
    
    108Item 12.
    
    Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
    
    
    108Item 13.
    
    Certain Relationships and Related Transactions
    
    
    109Item 14.
    
    Principal Accountant Fees and Services
    
    
    109PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    110
 Page 2




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Explanatory Note
 Accounting for Derivative
Instruments and Hedging Activities
     Page 3




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##### 



Three Months
    
    
    Year
    
    
    Year
    
    
    YearEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,Total
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Amounts in thousands, except per share data)Interest expense
    
    $
    796
    
    
    $
    (75
    )
    
    $
    167
    
    
    $
    518
    
    
    $
    186Net interest income
    
    
    (796
    )
    
    
    75
    
    
    
    (167
    )
    
    
    (518
    )
    
    
    (186
    )Net interest income after provision for loan
losses
    
    
    (796
    )
    
    
    75
    
    
    
    (167
    )
    
    
    (518
    )
    
    
    (186
    )Gain (loss) and net cash settlement on
economic hedges
    
    
    (559
    )
    
    
    (486
    )
    
    
    (664
    )
    
    
    543
    
    
    
    48Total non-interest income
    
    
    (559
    )
    
    
    (486
    )
    
    
    (664
    )
    
    
    543
    
    
    
    48Income before taxes
    
    
    (1,355
    )
    
    
    (411
    )
    
    
    (831
    )
    
    
    25
    
    
    
    (138
    )Income tax expense
    
    
    (520
    )
    
    
    (158
    )
    
    
    (321
    )
    
    
    12
    
    
    
    (53
    )Net income
    
    $
    (835
    )
    
    $
    (253
    )
    
    $
    (510
    )
    
    $
    13
    
    
    $
    (85
    )Net Income per ShareBasic
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    
    
    
    $
    Diluted
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    
    
    
    $
    (0.01
    )
 Three Months
    
    
    Three Months
    
    
    Three Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,Total
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2005(Amounts in thousands, except per share data)Interest expense
    
    $
    167
    
    
    $
    84
    
    
    $
    50
    
    
    $
    47
    
    
    $
    (14
    )Net interest income
    
    
    (167
    )
    
    
    (84
    )
    
    
    (50
    )
    
    
    (47
    )
    
    
    14Net interest income after provision for loan
losses
    
    
    (167
    )
    
    
    (84
    )
    
    
    (50
    )
    
    
    (47
    )
    
    
    14Gain (loss) and net cash settlement on
economic
hedges
    
    
    (664
    )
    
    
    (401
    )
    
    
    389
    
    
    
    (409
    )
    
    
    (243
    )Total non-interest income
    
    
    (664
    )
    
    
    (401
    )
    
    
    389
    
    
    
    (409
    )
    
    
    (243
    )Income before taxes
    
    
    (831
    )
    
    
    (485
    )
    
    
    339
    
    
    
    (456
    )
    
    
    (229
    )Income tax expense
    
    
    (321
    )
    
    
    (187
    )
    
    
    130
    
    
    
    (176
    )
    
    
    (88
    )Net income
    
    $
    (510
    )
    
    $
    (298
    )
    
    $
    209
    
    
    $
    (280
    )
    
    $
    (141
    )Net Income per ShareBasic
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )
 Page 4




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Three Months
    
    
    Three Months
    
    
    Three Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,Total
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004(Amounts in thousands, except per share data)Interest expense
    
    $
    518
    
    
    $
    92
    
    
    $
    100
    
    
    $
    134
    
    
    $
    192Net interest income
    
    
    (518
    )
    
    
    (92
    )
    
    
    (100
    )
    
    
    (134
    )
    
    
    (192
    )Net interest income after provision for loan
losses
    
    
    (518
    )
    
    
    (92
    )
    
    
    (100
    )
    
    
    (134
    )
    
    
    (192
    )hedges
    
    
    543
    
    
    
    334
    
    
    
    (269
    )
    
    
    451
    
    
    
    27Total non-interest income
    
    
    543
    
    
    
    334
    
    
    
    (269
    )
    
    
    451
    
    
    
    27Income before taxes
    
    
    25
    
    
    
    242
    
    
    
    (369
    )
    
    
    317
    
    
    
    (165
    )Income tax expense
    
    
    12
    
    
    
    94
    
    
    
    (142
    )
    
    
    123
    
    
    
    (63
    )Net income
    
    $
    13
    
    
    $
    148
    
    
    $
    (227
    )
    
    $
    194
    
    
    $
    (102
    )Net Income per ShareBasic
    
    $
    
    
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.01
    )Diluted
    
    $
    
    
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    (0.01
    )
   PART I
 Item 1. Business
     Page 5




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
    
    Registered 26 consecutive quarters of profitability after becoming profitable in our
seventh quarter of operation;
    
    Acquired The Community Bank, Pilot Mountain, North Carolina, in January 2004,
raising our assets to over $1.0 billion and increasing the number of banking offices;
    
    Began payment of an annual cash dividend in 2004, which was increased and made a
quarterly dividend in 2005;
    
    Began in-house item processing for the Bank in October 2004;
    
    Began offering trust services in 2002 including investment management,
administration and advisory services primarily for individuals, partnerships and
corporations;
    
    Listed our common stock on the NASDAQ National Market System on January 2, 2002; and
    
    Maintained a strong credit culture. As of December 31, 2005, our non-performing
assets totaled $1.7 million or 0.13% of total assets and our allowance for loan losses
was $11.8 million or 1.36% of total loans and 837% of non-performing loans.
 www.smallenoughtocare.com
 Our Market Area
     Page 6




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Business Strategy
   
    
    Small and medium sized businesses, and the owners and managers of these entities;
    
    Professional and middle managers of locally based companies;
    
    Residential real estate developers; and
    
    Individual consumers.
    
    
    To provide community-oriented banking services by delivering a broad range of
financial services to our customers through responsive service and communication;
    
    To form a partnership with our customers whereby our decision making and product
offerings are geared toward their best long-term interests;
    
    To be recognized in our Community as a long-term player with employees, stockholders
and board members committed to that effort; and
    
    To be progressive in our adoption of new technology so that we can provide our
customers access to products and services that meet their needs for convenience and
efficiency.
  Subsidiaries
   Page 7




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Competition
   Employees
  Page 8




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SUPERVISION AND REGULATION
  Southern Community Financial Corporation
      Enforcement Authority
 Page 9




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Interstate Acquisitions
 Capital Adequacy
     Page 10




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Source of Strength for Subsidiaries.
 Dividends
 Change of Control.
 The Bank
  Transactions with Affiliates
 Page 11




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Loans to Insiders
 Regulation of Lending Activities
 Branch Banking
  Reserve Requirements.
 Community Reinvestment.
 Governmental Monetary Policies
 Page 12




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Dividends
   Capital Adequacy
 Changes in Management
 Enforcement Authority
 Page 13




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Prompt Corrective Action
     Deposit Insurance.
 Page 14




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Item 1A. Risk Factors
 An investment in our common stock involves risks. Shareholders should carefully consider the risks
described below in conjunction with the other information in this Form 10-K and information
incorporated by reference in this Form 10-K , including our consolidated financial statements and
related notes. If any of the following risks or other risks which have not been identified or which
we may believe are immaterial or unlikely, actually occur, our business, financial condition and
results of operations could be harmed. This could cause the price of our stock to decline, and
shareholders could lose part or all of their investment. This Form 10-K contains forward-looking
statements that involve risks and uncertainties, including statements about our future plans,
objectives, intentions and expectations. Many factors, including those described below, could cause
actual results to differ materially from those discussed in our forward-looking statements.
 Risks Related to Holding Southern Community Common Stock
 Our business strategy includes the continuation of significant growth plans, and our financial
condition and results of operations could be negatively affected if we fail to grow or fail to
manage our growth effectively.
  We may face risks with respect to future expansion.
  
    
    the time and costs associated with identifying and evaluating potential
acquisitions and merger partners;
    
    the accuracy of estimates and judgments used to evaluate credit, operations,
management and market risks with respect to the target entity;
    
    the time and costs of evaluating new markets, hiring experienced local management
and opening new offices, and the time lags between these activities and the
generation of sufficient assets and deposits to support the costs of the expansion;
    
    our ability to finance an acquisition and possible ownership and economic dilution
to our current shareholders;
    
    the diversion of our managements attention to the negotiation of a transaction,
and the integration of the operations and personnel of the combining businesses;
    
    entry into new markets where we lack experience;
 Page 15




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
    
    the introduction of new products and services into our business;
    
    the incurrence and possible impairment of goodwill associated with an acquisition
and possible adverse short-term effects on our results of operations; and
    
    the risk of loss of key employees and customers.
  If the value of real estate in our core market areas were to decline materially, a significant
portion of our loan portfolio could become under-collateralized, which could have a material
adverse effect on us.
  Interest rate volatility could significantly harm our business.
  Southern Community may have higher loan losses than it has allowed for.
  Page 16




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The building of market share through our de novo branching strategy could cause our expenses to
increase faster than our revenues.
  If Southern Community loses key employees with significant business contacts in its market area,
its business may suffer.
  Government regulations may prevent or impair our ability to pay dividends, engage in acquisitions,
or operate in other ways.
  
    
    the payment of dividends to shareholders;
    
    possible transactions with or acquisitions by other institutions;
    
    desired investments;
    
    loans and interest rates;
    
    interest rates paid on deposits; and
    
    the possible expansion of branch offices.
  Our trading volume has been low compared with larger bank holding companies and the sale of
substantial amounts of our common stock in the public market could depress the price of our common
stock.
  Page 17




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Southern Community faces strong competition in its market area, which may limit its asset growth
and profitability.
  Southern Communitys Articles of Incorporation include anti-takeover provisions that may prevent
shareholders from receiving a premium for their shares or effecting a transaction favored by a
majority of shareholders.
  Holders of our trust preferred securities have rights that are senior to those of our common
shareholders.
  The common stock of Southern Community Financial Corporation is not FDIC insured.
  Page 18




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Risks Related to an Investment in the Preferred Securities
 If we do not make interest payments under the debentures, the trust will be unable to pay
distributions and liquidation amounts. The guarantee would not apply because the guarantee covers
payments only if the trust has funds available.
  We must rely on dividends from our bank subsidiary to make interest payments on the debentures to
the trust.
  Regulatory authorities may limit dividends paid to us and thereby our ability to make interest
payments on the debentures to the trust.
  Our obligation to make interest payments to the trust on the debentures is subordinated to existing
liabilities or additional debt we may incur.
  We have the option to defer interest payments on the debentures for substantial periods.
 Page 19




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If we defer interest payments, holders of the preferred securities will still be required to
recognize the deferred interest amounts as income.
  If holders of the preferred securities sell their preferred securities during a deferral period,
they will forfeit the deferred interest amount and only have a capital loss.
  Deferrals of interest payments may increase the volatility of the market price of the preferred
securities.
  There are no financial covenants in the indenture and the trust agreement.
  We may redeem some or all of the debentures at any time after December 31, 2008 and reduce the
period during which holders of the preferred securities will receive distributions.
  We may redeem all of the debentures at any time upon the occurrence of certain events.
 Page 20




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We can distribute the debentures to holders of the preferred securities, which may have adverse tax
consequences for holders of the preferred securities and could also adversely affect the market
price of the preferred securities.
  Holders of the preferred securities must rely on the property trustee to enforce their rights if
there is an event of default under the indenture.
  Holders of preferred securities have limited voting rights to replace the property trustee and the
Delaware trustee.
  The subordinated debentures and the preferred securities do not represent deposit accounts and are
not insured.
  Item 1B. Unresolved Staff Comments
  Page 21




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Item 2. Properties
  Approximate
    
    YearSquare
    
    Established
    
    Owned orFootage
    
    or Acquired
    
    LeasedBanking Offices :Clemmons, North Carolina
6290 Towncenter Drive
    
    
    3,800
    
    
    
    2004
    
    
    OwnedDobson, North Carolina
201 West Kapp Street
    
    
    2,800
    
    
    
    1995
    1
    
    OwnedGreensboro, North Carolina
1505 Highwoods Blvd.
    
    
    9,800
    
    
    
    2005
    
    
    OwnedHigh Point, North Carolina
2541 Eastchester Drive
    
    
    3,000
    
    
    
    2003
    
    
    OwnedJonesville, North Carolina
503 Winston Road
    
    
    2,500
    
    
    
    1995
    1
    
    OwnedKernersville, North Carolina
1207 South Main Street
    
    
    8,300
    
    
    
    2002
    
    
    OwnedKing, North Carolina
105 Post Office Street
    
    
    4,000
    
    
    
    2004
    1
    
    OwnedMadison, North Carolina
619 Ayersville Road
    
    
    2,000
    
    
    
    1990
    1
    
    Owned
 Page 22




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Approximate
    
    YearSquare
    
    Established
    
    Owned orFootage
    
    or Acquired
    
    LeasedBanking Offices :Mount Airy, North Carolina
255 East Independence Blvd.
    
    
    10,345
    
    
    
    1999
    1
    
    Owned2010 Community Drive
    
    
    3,500
    
    
    
    1988
    1
    
    OwnedPilot Mountain, North Carolina
616 South Key Street
    
    
    8,300
    
    
    
    1987
    1
    
    OwnedSandy Ridge, North Carolina
4928 Highway 704 West
    
    
    1,250
    
    
    
    1989
    1
    
    OwnedUnion Grove, North Carolina
1439 W. Memorial Highway
    
    
    2,300
    
    
    
    1990
    1
    
    OwnedWalnut Cove, North Carolina
1072 North Main Street
    
    
    1,700
    
    
    
    1999
    1
    
    LeasedWinston Salem, North Carolina
4701 Country Club Road
    
    
    4,300
    
    
    
    1996
    
    
    Leased225 Hanes Mill Road
    
    
    2,800
    
    
    
    2001
    
    
    Owned3151 Peters Creek Parkway
    
    
    2,500
    
    
    
    1998
    
    
    Leased536 South Stratford Road
    
    
    2,400
    
    
    
    1998
    
    
    LeasedYadkinville, North Carolina
532 East Main Street
    
    
    7,800
    
    
    
    1998
    
    
    OwnedOperations and Administrative Offices :Winston Salem, North Carolina
1600 Hanes Mall Blvd.
    
    
    10,500
    
    
    
    2000
    
    
    Owned112 Cambridge Plaza
    
    
    3,750
    
    
    
    2002
    
    
    Leased4605 Country Club Road  Corporate
    
    
    27,000
    
    
    
    2003
    
    
    OwnedPilot Mountain, North Carolina
615 West Main Street
    
    
    5,600
    
    
    
    1995
    
    
    OwnedLending Offices:Winston Salem, North Carolina
4625 Country Club Road
    
    
    3,200
    
    
    
    1998
    
    
    Owned3400 Healy Drive
    
    
    3,600
    
    
    
    2004
    
    
    LeasedCornelius, North Carolina
19520 West Catawba Ave.
    
    
    1,950
    
    
    
    2004
    
    
    LeasedLexington, South Carolina
4727 D Sunset Blvd.
    
    
    800
    
    
    
    2005
    
    
    LeasedMooresville, North Carolina
249 Williamson Road, Ste. 100
    
    
    1,700
    
    
    
    2004
    
    
    LeasedInvestment Office:Winston Salem, North Carolina
4505 Country Club Road
    
    
    4,200
    
    
    
    2004
    
    
    Leased
 
 (1)
    
    Acquired as part of The Community Bank acquisition. Page 23




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##### 



.
  Item 3. Legal
  Item 4. Submission of Matters to a Vote of Security Holders
  PART II
 Item 5. Market for Common Stock and Related Stockholder Matters and Issuer Purchases of Equity
Securities
 Price Range of Common Stock and Dividends
  DeclaredPrice
    
    CashSCMF
    
    SCMFO
    
    Dividend perYear
    
    Quarterly Period
    
    High
    
    Low
    
    High
    
    Low
    
    share *2004
    
    First Quarter
    
    $
    13.43
    
    
    $
    11.00
    
    
    $
    11.10
    
    
    $
    10.62
    
    
    $
    0.11Second Quarter
    
    
    12.15
    
    
    
    9.27
    
    
    
    11.07
    
    
    
    9.82
    
    
    
    Third Quarter
    
    
    11.73
    
    
    
    8.71
    
    
    
    11.15
    
    
    
    10.20
    
    
    
    Fourth Quarter
    
    
    11.67
    
    
    
    9.82
    
    
    
    12.10
    
    
    
    10.65
    
    
    
    2005
    
    First Quarter
    
    $
    10.75
    
    
    $
    9.04
    
    
    $
    11.20
    
    
    $
    10.35
    
    
    $
    0.12Second Quarter
    
    
    10.25
    
    
    
    7.97
    
    
    
    11.00
    
    
    
    10.30
    
    
    
    0.03Third Quarter
    
    
    9.95
    
    
    
    9.17
    
    
    
    11.25
    
    
    
    10.37
    
    
    
    0.03Fourth Quarter
    
    
    9.86
    
    
    
    8.61
    
    
    
    10.85
    
    
    
    10.35
    
    
    
    0.03
  Page 24




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##### 



*
    
    The Companys first annual cash dividend of $0.11 per share of its common stock was paid on March
15, 2004. On March 15, 2005, the Company paid its second annual cash dividend of $0.12 per share
of its common stock. The Company paid quarterly dividends of $0.03 per share each on June 1,
September 1 and December 1, 2005. On February 1, 2006 the Company announced the declaration of a
quarterly dividend of $0.03 per share of the common stock, to be paid on March 1, 2006 to
shareholders on record as of the close of business on February 15, 2006.   Share Repurchases
  Total Number of
    
    Maximum NumberShares Purchased
    
    of Shares ThatTotal Number
    
    Average
    
    as Part of Publicly
    
    May Yet Beof Shares
    
    Price Paid
    
    Announced
    
    Purchased UnderPeriod
    
    Purchased
    
    per Share
    
    Programs
    
    the ProgramsOctober 1, 2005 to October 31, 2005
    
    
    15,000
    
    
    $
    9.35
    
    
    
    15,000
    
    
    
    588,000November 1, 2005 to November 30, 2005
    
    
    125,000
    
    
    $
    9.17
    
    
    
    125,000
    
    
    
    463,000December 1, 2005 to December 31, 2005
    
    
    23,800
    
    
    $
    9.52
    
    
    
    23,800
    
    
    
    439,200
 Page 25




---



##### 



Item 6. Selected Financial Data
 SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
  Page 26




---



##### 



For the Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands, except per share data, restated)Operating Data:Interest income
    
    $
    68,097
    
    
    $
    54,656
    
    
    $
    36,019
    
    
    $
    33,281
    
    
    $
    31,366Interest expense
    
    
    31,128
    
    
    
    20,175
    
    
    
    14,937
    
    
    
    15,803
    
    
    
    18,034Net interest income
    
    
    36,969
    
    
    
    34,481
    
    
    
    21,082
    
    
    
    17,478
    
    
    
    13,332Provision for loan losses
    
    
    950
    
    
    
    2,239
    
    
    
    2,285
    
    
    
    1,655
    
    
    
    2,320Net interest income after
provision for loan losses
    
    
    36,019
    
    
    
    32,242
    
    
    
    18,797
    
    
    
    15,823
    
    
    
    11,012Non-interest income
    
    
    7,134
    
    
    
    7,949
    
    
    
    5,033
    
    
    
    3,927
    
    
    
    3,402Non-interest expense
    
    
    31,319
    
    
    
    27,520
    
    
    
    18,333
    
    
    
    14,781
    
    
    
    11,162Income before
income taxes
    
    
    11,834
    
    
    
    12,671
    
    
    
    5,497
    
    
    
    4,969
    
    
    
    3,252Provision for income taxes
    
    
    4,161
    
    
    
    4,556
    
    
    
    1,919
    
    
    
    1,755
    
    
    
    1,147Net income
    
    $
    7,673
    
    
    $
    8,115
    
    
    $
    3,578
    
    
    $
    3,214
    
    
    $
    2,105Per Share Data:(8)Net IncomeBasic
    
    $
    .43
    
    
    $
    .47
    
    
    $
    .41
    
    
    $
    .37
    
    
    $
    .24Diluted
    
    
    .42
    
    
    
    .45
    
    
    
    .39
    
    
    
    .35
    
    
    
    .23Cash dividends (2)
    
    
    .21
    
    
    
    .11
    
    
    
    .00
    
    
    
    .00
    
    
    
    .00Book value
    
    
    7.66
    
    
    
    7.68
    
    
    
    5.65
    
    
    
    5.41
    
    
    
    4.84Weighted average sharesBasic
    
    
    17,825,152
    
    
    
    17,298,285
    
    
    
    8,826,780
    
    
    
    8,788,295
    
    
    
    8,707,678Diluted
    
    
    18,133,859
    
    
    
    18,033,333
    
    
    
    11,369,429
    
    
    
    9,085,853
    
    
    
    9,043,611Balance Sheet Data:Total assets
    
    $
    1,287,613
    
    
    $
    1,222,946
    
    
    $
    798,948
    
    
    $
    612,239
    
    
    $
    481,220Loans
    
    
    868,827
    
    
    
    796,103
    
    
    
    519,746
    
    
    
    421,938
    
    
    
    360,288Allowance for loan losses
    
    
    11,785
    
    
    
    12,537
    
    
    
    7,275
    
    
    
    6,342
    
    
    
    5,400Deposits
    
    
    941,949
    
    
    
    845,501
    
    
    
    575,439
    
    
    
    449,216
    
    
    
    392,851Short-term borrowings
    
    
    9,186
    
    
    
    69,647
    
    
    
    51,900
    
    
    
    40,706
    
    
    
    19,980Long-term debt
    
    
    192,551
    
    
    
    163,494
    
    
    
    117,627
    
    
    
    72,250
    
    
    
    25,000Stockholders equity
    
    
    134,885
    
    
    
    136,834
    
    
    
    50,806
    
    
    
    47,539
    
    
    
    42,451Capital Ratios:(6)Total risk-based capital
    
    
    11.88
    %
    
    
    11.68
    %
    
    
    10.65
    %
    
    
    12.23
    %
    
    
    11.53
    %Tier 1 risk-based capital
    
    
    10.71
    %
    
    
    10.43
    %
    
    
    9.45
    %
    
    
    10.98
    %
    
    
    10.28
    %Leverage ratio
    
    
    8.65
    %
    
    
    8.54
    %
    
    
    7.49
    %
    
    
    8.95
    %
    
    
    9.21
    %Equity to assets ratio
    
    
    10.48
    %
    
    
    11.20
    %
    
    
    6.37
    %
    
    
    7.76
    %
    
    
    8.82
    %Selected Performance Ratios:Return on average assets
    
    
    0.60
    %
    
    
    0.69
    %
    
    
    0.51
    %
    
    
    0.58
    %
    
    
    0.50
    %Return on average equity
    
    
    5.67
    %
    
    
    6.21
    %
    
    
    7.31
    %
    
    
    7.24
    %
    
    
    5.13
    %Net interest spread (3)
    
    
    2.86
    %
    
    
    3.03
    %
    
    
    3.00
    %
    
    
    3.02
    %
    
    
    2.82
    %Net interest margin (1)
    
    
    3.20
    %
    
    
    3.26
    %
    
    
    3.22
    %
    
    
    3.34
    %
    
    
    3.36
    %Non-interest income as a
percentage of total
revenue (7)
    
    
    16.18
    %
    
    
    18.73
    %
    
    
    19.27
    %
    
    
    18.35
    %
    
    
    20.33
    %Non-interest income as a
percentage of average
assets
    
    
    0.56
    %
    
    
    0.68
    %
    
    
    0.72
    %
    
    
    0.71
    %
    
    
    0.80
    %Non-interest expense to
average assets
    
    
    2.44
    %
    
    
    2.36
    %
    
    
    2.63
    %
    
    
    2.66
    %
    
    
    2.63
    %Efficiency ratio (4)
    
    
    71.01
    %
    
    
    64.86
    %
    
    
    70.20
    %
    
    
    69.05
    %
    
    
    66.70
    %Dividend payout ratio (2)
    
    
    48.84
    %
    
    
    23.40
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 Page 27




---



##### 



For the Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(Dollars in thousands, except per share data)Asset Quality Ratios:Nonperforming loans to
period-end loans
    
    
    0.16
    %
    
    
    0.27
    %
    
    
    0.15
    %
    
    
    0.43
    %
    
    
    0.25
    %Allowance for loan losses
to period-end loans
    
    
    1.36
    %
    
    
    1.57
    %
    
    
    1.40
    %
    
    
    1.50
    %
    
    
    1.50
    %Allowance for loan losses
to nonperforming loans
    
    
    837
    %
    
    
    577
    %
    
    
    946
    %
    
    
    348
    %
    
    
    604
    %Nonperforming assets
to total assets (5)
    
    
    0.13
    %
    
    
    0.27
    %
    
    
    0.13
    %
    
    
    0.36
    %
    
    
    0.26
    %Net loan charge-offs
to average loans outstanding
    
    
    0.14
    %
    
    
    0.19
    %
    
    
    0.29
    %
    
    
    0.18
    %
    
    
    0.38
    %Other Data:Number of banking offices
    
    
    19
    
    
    
    18
    
    
    
    8
    
    
    
    8
    
    
    
    7Number of full-time
equivalent employees
    
    
    299
    
    
    
    271
    
    
    
    157
    
    
    
    141
    
    
    
    121
 
 (1)
    
    Net interest margin is net interest income divided by average interest-earning assets.(2)
    
    Cash dividends and the dividend payout ratio for 2005 reflects an annual dividend paid March
15, 2005 of $0.12 per share, and quarterly dividends of $0.03 per share paid on June 1,
September 1, and December 1, 2005.(3)
    
    Net interest spread is the difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities.(4)
    
    Efficiency ratio is non-interest expense divided by the sum of net interest income and
non-interest income.(5)
    
    Nonperforming assets consist of non-accrual loans, restructured loans, and real estate owned,
where applicable.(6)
    
    Capital ratios are for the Bank.(7)
    
    Total revenue consists of net interest income and non-interest income.(8)
    
    All per share data has been restated to reflect the dilutive effect of 5% stock dividends in
2001 and 2002. Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Page 28




---



##### 



Page 29




---



##### 



2005First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth QuarterAs
    
    
    
    
    
    
    As
    
    
    
    
    
    
    As
    
    
    
    
    
    
    AsPreviously
    
    
    As
    
    
    Previously
    
    
    As
    
    
    Previously
    
    
    As
    
    
    Previously
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    Restated(Amounts in thousands, except per share data)Interest Income
    
    $
    15,340
    
    
    $
    15,340
    
    
    $
    16,554
    
    
    $
    16,554
    
    
    $
    17,534
    
    
    $
    17,534
    
    
    $
    18,669
    
    
    $
    18,669Interest Expense
    
    
    6,304
    
    
    
    6,388
    
    
    
    7,368
    
    
    
    7,418
    
    
    
    8,301
    
    
    
    8,348
    
    
    
    8,988
    
    
    
    8,974Net Interest Income
    
    
    9,036
    
    
    
    8,952
    
    
    
    9,186
    
    
    
    9,136
    
    
    
    9,233
    
    
    
    9,186
    
    
    
    9,681
    
    
    
    9,695Provision for Loan Losses
    
    
    395
    
    
    
    395
    
    
    
    475
    
    
    
    475
    
    
    
    (300
    )
    
    
    (300
    )
    
    
    380
    
    
    
    380Net Interest Income after Provision
for Loan Losses
    
    
    8,641
    
    
    
    8,557
    
    
    
    8,711
    
    
    
    8,661
    
    
    
    9,533
    
    
    
    9,486
    
    
    
    9,301
    
    
    
    9,315Non-Interest IncomeService Charges on Deposit Accounts
    
    
    839
    
    
    
    839
    
    
    
    908
    
    
    
    908
    
    
    
    970
    
    
    
    970
    
    
    
    1,038
    
    
    
    1,038Gain (loss) and Net Cash Settlement
on Economic Hedges
    
    
    
    
    
    
    (401
    )
    
    
    
    
    
    
    389
    
    
    
    
    
    
    
    (409
    )
    
    
    
    
    
    
    (243
    )Other Income
    
    
    907
    
    
    
    907
    
    
    
    946
    
    
    
    946
    
    
    
    936
    
    
    
    936
    
    
    
    1,254
    
    
    
    1,254Total Non-Interest Income
    
    
    1,746
    
    
    
    1,345
    
    
    
    1,854
    
    
    
    2,243
    
    
    
    1,906
    
    
    
    1,497
    
    
    
    2,292
    
    
    
    2,049Non-Interest ExpenseSalaries and Employee Benefits
    
    
    3,978
    
    
    
    3,978
    
    
    
    3,881
    
    
    
    3,881
    
    
    
    3,794
    
    
    
    3,794
    
    
    
    4,389
    
    
    
    4,389Occupancy and Equipment
    
    
    1,342
    
    
    
    1,342
    
    
    
    1,372
    
    
    
    1,372
    
    
    
    1,458
    
    
    
    1,458
    
    
    
    1,614
    
    
    
    1,614Other
    
    
    2,577
    
    
    
    2,577
    
    
    
    2,090
    
    
    
    2,090
    
    
    
    2,294
    
    
    
    2,294
    
    
    
    2,530
    
    
    
    2,530Total Non-Interest Expense
    
    
    7,897
    
    
    
    7,897
    
    
    
    7,343
    
    
    
    7,343
    
    
    
    7,546
    
    
    
    7,546
    
    
    
    8,533
    
    
    
    8,533Income Before Taxes
    
    
    2,490
    
    
    
    2,005
    
    
    
    3,222
    
    
    
    3,561
    
    
    
    3,893
    
    
    
    3,437
    
    
    
    3,060
    
    
    
    2,831Provision for Income Taxes
    
    
    890
    
    
    
    703
    
    
    
    1,152
    
    
    
    1,282
    
    
    
    1,421
    
    
    
    1,245
    
    
    
    1,019
    
    
    
    931Net Income
    
    $
    1,600
    
    
    $
    1,302
    
    
    $
    2,070
    
    
    $
    2,279
    
    
    $
    2,472
    
    
    $
    2,192
    
    
    $
    2,041
    
    
    $
    1,900Net Income per ShareBasic
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.11Diluted
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.10
 Page 30




---



##### 



2004First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth QuarterAs
    
    
    
    
    
    
    As
    
    
    
    
    
    
    As
    
    
    
    
    
    
    AsPreviously
    
    
    As
    
    
    Previously
    
    
    As
    
    
    Previously
    
    
    As
    
    
    Previously
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    Restated(Amounts in thousands, except per share data)Interest Income
    
    $
    12,849
    
    
    $
    12,849
    
    
    $
    13,154
    
    
    $
    13,154
    
    
    $
    13,909
    
    
    $
    13,909
    
    
    $
    14,744
    
    
    $
    14,744Interest Expense
    
    
    4,409
    
    
    
    4,501
    
    
    
    4,513
    
    
    
    4,613
    
    
    
    5,061
    
    
    
    5,195
    
    
    
    5,674
    
    
    
    5,866Net Interest Income
    
    
    8,440
    
    
    
    8,348
    
    
    
    8,641
    
    
    
    8,541
    
    
    
    8,848
    
    
    
    8,714
    
    
    
    9,070
    
    
    
    8,878Provision for Loan Losses
    
    
    597
    
    
    
    597
    
    
    
    717
    
    
    
    717
    
    
    
    575
    
    
    
    575
    
    
    
    350
    
    
    
    350Net Interest Income after Provision
for Loan Losses
    
    
    7,843
    
    
    
    7,751
    
    
    
    7,924
    
    
    
    7,824
    
    
    
    8,273
    
    
    
    8,139
    
    
    
    8,720
    
    
    
    8,528Non-Interest IncomeService Charges on Deposit Accounts
    
    
    750
    
    
    
    750
    
    
    
    815
    
    
    
    815
    
    
    
    828
    
    
    
    828
    
    
    
    1,109
    
    
    
    1,109Gain (loss) and Net Cash Settlement
on Economic Hedges
    
    
    
    
    
    
    334
    
    
    
    
    
    
    
    (269
    )
    
    
    
    
    
    
    451
    
    
    
    
    
    
    
    27Other Income
    
    
    779
    
    
    
    779
    
    
    
    965
    
    
    
    965
    
    
    
    1,020
    
    
    
    1,020
    
    
    
    1,140
    
    
    
    1,140Total Non-Interest Income
    
    
    1,529
    
    
    
    1,863
    
    
    
    1,780
    
    
    
    1,511
    
    
    
    1,848
    
    
    
    2,299
    
    
    
    2,249
    
    
    
    2,276Non-Interest ExpenseSalaries and Employee Benefits
    
    
    3,454
    
    
    
    3,454
    
    
    
    3,525
    
    
    
    3,525
    
    
    
    3,473
    
    
    
    3,473
    
    
    
    3,297
    
    
    
    3,297Occupancy and Equipment
    
    
    1,027
    
    
    
    1,027
    
    
    
    1,040
    
    
    
    1,040
    
    
    
    1,068
    
    
    
    1,068
    
    
    
    1,217
    
    
    
    1,217Other
    
    
    2,270
    
    
    
    2,270
    
    
    
    2,161
    
    
    
    2,161
    
    
    
    2,355
    
    
    
    2,355
    
    
    
    2,633
    
    
    
    2,633Total Non-Interest Expense
    
    
    6,751
    
    
    
    6,751
    
    
    
    6,726
    
    
    
    6,726
    
    
    
    6,896
    
    
    
    6,896
    
    
    
    7,147
    
    
    
    7,147Income Before Taxes
    
    
    2,621
    
    
    
    2,863
    
    
    
    2,978
    
    
    
    2,609
    
    
    
    3,225
    
    
    
    3,542
    
    
    
    3,822
    
    
    
    3,657Provision for Income Taxes
    
    
    935
    
    
    
    1,029
    
    
    
    1,021
    
    
    
    879
    
    
    
    1,119
    
    
    
    1,242
    
    
    
    1,469
    
    
    
    1,406Net Income
    
    $
    1,686
    
    
    $
    1,834
    
    
    $
    1,957
    
    
    $
    1,730
    
    
    $
    2,106
    
    
    $
    2,300
    
    
    $
    2,353
    
    
    $
    2,251Net Income per ShareBasic
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.13
    
    
    $
    0.12Diluted
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.13
    
    
    $
    0.12
  CRITICAL ACCOUNTING POLICY
  Page 31




---



##### 



OVERVIEW
     Page 32




---



##### 



Financial Condition at December 31, 2005 and 2004
       Page 33




---



##### 



NET INTEREST INCOME
   Average Balances and Average Rates Earned and Paid.
 Page 34




---



##### 



For the Years Ended December 31,2005
    
    
    2004

    2003Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Averagebalance
    
    
    earned/paid
    
    
    yield/cost
    
    
    balance
    
    

earned/paid
    
    

yield/cost
    
    
    balance
    
    
    earned/paid
    
    
    yield/cost(Dollars in thousands, restated)Interest-earning assets:(1) Loans
    
    $
    837,467
    
    
    $
    55,848
    
    
    
    6.67
    %
    
    $
    742,433
    
    
    $
    42,843
    
    
    
    5.77
    %
    
    $
    471,808
    
    
    $
    27,478
    
    
    
    5.82
    %Investment securities
available for sale
    
    
    228,601
    
    
    
    8,680
    
    
    
    3.80
    %
    
    
    239,306
    
    
    
    8,957
    
    
    
    3.74
    %
    
    
    118,194
    
    
    
    6,022
    
    
    
    5.10
    %Investment securities
held to maturity
    
    
    87,037
    
    
    
    3,429
    
    
    
    3.94
    %
    
    
    71,336
    
    
    
    2,803
    
    
    
    3.93
    %
    
    
    61,215
    
    
    
    2,469
    
    
    
    4.03
    %Federal funds sold
    
    
    3,313
    
    
    
    140
    
    
    
    4.23
    %
    
    
    3,816
    
    
    
    53
    
    
    
    1.39
    %
    
    
    4,122
    
    
    
    50
    
    
    
    1.21
    %Total interest-earning assets
    
    
    1,156,418
    
    
    
    68,097
    
    
    
    5.89
    %
    
    
    1,056,891
    
    
    
    54,656
    
    
    
    5.17
    %
    
    
    655,339
    
    
    
    36,019
    
    
    
    5.50
    %Other assets
    
    
    124,865
    
    
    
    
    
    
    
    
    
    
    
    111,361
    
    
    
    
    
    
    
    
    
    
    
    41,332Total assets
    
    $
    1,281,283
    
    
    
    
    
    
    
    
    
    
    $
    1,168,252
    
    
    
    
    
    
    
    
    
    
    $
    696,671Interest-bearing liabilities:Deposits:NOW and money market
    
    $
    262,058
    
    
    
    4,786
    
    
    
    1.83
    %
    
    $
    241,363
    
    
    
    2,027
    
    
    
    .84
    %
    
    $
    138,926
    
    
    
    1,346
    
    
    
    .97
    %Time deposits greater
than $100,000
    
    
    285,369
    
    
    
    9,983
    
    
    
    3.50
    %
    
    
    257,034
    
    
    
    7,127
    
    
    
    2.77
    %
    
    
    154,026
    
    
    
    4,486
    
    
    
    2.91
    %Other time deposits
    
    
    221,871
    
    
    
    6,526
    
    
    
    2.94
    %
    
    
    229,733
    
    
    
    4,590
    
    
    
    2.00
    %
    
    
    163,993
    
    
    
    4,244
    
    
    
    2.59
    %Borrowings
    
    
    259,791
    
    
    
    9,833
    
    
    
    3.78
    %
    
    
    213,822
    
    
    
    6,431
    
    
    
    3.01
    %
    
    
    141,019
    
    
    
    4,861
    
    
    
    3.45
    %Total interest-bearing
liabilities
    
    
    1,029,089
    
    
    
    31,128
    
    
    
    3.02
    %
    
    
    941,952
    
    
    
    20,175
    
    
    
    2.14
    %
    
    
    597,964
    
    
    
    14,937
    
    
    
    2.50
    %Demand deposits
    
    
    105,024
    
    
    
    
    
    
    
    
    
    
    
    85,583
    
    
    
    
    
    
    
    
    
    
    
    45,101Other liabilities
    
    
    11,828
    
    
    
    
    
    
    
    
    
    
    
    10,097
    
    
    
    
    
    
    
    
    
    
    
    4,637Stockholders equity
    
    
    135,342
    
    
    
    
    
    
    
    
    
    
    
    130,620
    
    
    
    
    
    
    
    
    
    
    
    48,969Total liabilities and
stockholders equity
    
    $
    1,281,283
    
    
    
    
    
    
    
    
    
    
    $
    1,168,252
    
    
    
    
    
    
    
    
    
    
    $
    696,671Net interest income and
net interest spread
    
    
    
    
    
    $
    36,969
    
    
    
    2.87
    %
    
    
    
    
    
    $
    34,481
    
    
    
    3.03
    %
    
    
    
    
    
    $
    21,082
    
    
    
    3.00
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.20
    %
    
    
    
    
    
    
    
    
    
    
    3.26
    %
    
    
    
    
    
    
    
    
    
    
    3.22
    %Ratio of average interest-earning
assets to average interest-bearing
liabilities
    
    
    
    
    
    
    112.37
    %
    
    
    
    
    
    
    
    
    
    
    112.20
    %
    
    
    
    
    
    
    
    
    
    
    109.60
    %
 
 (1)
    
    Nonaccrual notes are included in the loan amounts. Page 35




---



##### 



RATE/VOLUME ANALYSIS
  December 31, 2005 vs. 2004
    
    
    December 31, 2004 vs. 2003Increase (Decrease) Due to
    
    
    Increase (Decrease) Due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(Amounts in thousands, restated)Interest income:Loans
    
    $
    5,911
    
    
    $
    7,094
    
    
    $
    13,005
    
    
    $
    15,689
    
    
    $
    (324
    )
    
    $
    15,365Investment securities available
for sale
    
    
    (404
    )
    
    
    127
    
    
    
    (277
    )
    
    
    5,352
    
    
    
    (2,417
    )
    
    
    2,935Investment securities held
to maturity
    
    
    618
    
    
    
    8
    
    
    
    626
    
    
    
    403
    
    
    
    (69
    )
    
    
    334Federal funds sold
    
    
    (14
    )
    
    
    101
    
    
    
    87
    
    
    
    (4
    )
    
    
    7
    
    
    
    3Total interest income
    
    
    6,111
    
    
    
    7,330
    
    
    
    13,441
    
    
    
    21,440
    
    
    
    (2,803
    )
    
    
    18,637Interest expense:Deposits:NOW and money market
    
    
    276
    
    
    
    2,483
    
    
    
    2,759
    
    
    
    926
    
    
    
    (245
    )
    
    
    681Time deposits greater
than $100,000
    
    
    888
    
    
    
    1,968
    
    
    
    2,856
    
    
    
    2,928
    
    
    
    (287
    )
    
    
    2,641Other time deposits
    
    
    (194
    )
    
    
    2,130
    
    
    
    1,936
    
    
    
    1,507
    
    
    
    (1,161
    )
    
    
    346Borrowings
    
    
    1,561
    
    
    
    1,841
    
    
    
    3,402
    
    
    
    2,350
    
    
    
    (780
    )
    
    
    1,570Total interest expense
    
    
    2,531
    
    
    
    8,422
    
    
    
    10,953
    
    
    
    7,711
    
    
    
    (2,473
    )
    
    
    5,238Net interest income increase
(decrease)
    
    $
    3,579
    
    
    $
    (1,091
    )
    
    $
    2,488
    
    
    $
    13,729
    
    
    $
    (330
    )
    
    $
    13,399
 RESULTS OF OPERATIONS
Years Ended December 31, 2005 and 2004
 Net Income.
 Page 36




---



##### 



Net Interest Income.
   Provision for Loan Losses.
 Non-Interest Income.
 Page 37




---



##### 



Non-Interest Expense.
 Provision for Income Taxes.
 RESULTS OF OPERATIONS
Years Ended December 31, 2004 and 2003
 Net Income.
 Page 38




---



##### 



Net Interest Income.
 Provision for Loan Losses.
 Non-Interest Income.
 Page 39




---



##### 



Non-Interest Expense.
 Provision for Income Taxes.
 LIQUIDITY
   Page 40




---



##### 



Page 41




---



##### 



CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Payments Due by PeriodOn Demandor Within
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 Year
    
    
    2 - 3 Years
    
    
    4 - 5 Years
    
    
    5 Years(In thousands, restated)Short-term borrowings
    
    $
    9,186
    
    
    $
    9,186
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    192,551
    
    
    
    
    
    
    
    45,000
    
    
    
    45,000
    
    
    
    102,551Operating leases
    
    
    10,340
    
    
    
    1,463
    
    
    
    3,034
    
    
    
    1,648
    
    
    
    4,195Total contractual cash obligations
excluding deposits
    
    
    212,077
    
    
    
    10,649
    
    
    
    48,034
    
    
    
    46,648
    
    
    
    106,746Deposits
    
    
    941,949
    
    
    
    786,782
    
    
    
    84,137
    
    
    
    61,030
    
    
    
    10,000Total contractual cash obligations
    
    $
    1,154,026
    
    
    $
    797,431
    
    
    $
    132,171
    
    
    $
    107,678
    
    
    $
    116,746
  Amount of Commitment Expiration Per PeriodWithin
    
    
    
    
    
    
    
    
    
    
    AfterOther Commitments
    
    Total
    
    
    1 Year
    
    
    2 - 3 Years
    
    
    4 - 5 Years
    
    
    5 Years(In thousands)Undisbursed portion of home equity
credit lines collateralized primarily
by junior liens on 1-4 family properties
    
    $
    75,020
    
    
    $
    666
    
    
    $
    88
    
    
    $
    361
    
    
    $
    73,905Other commitments and credit lines
    
    
    134,946
    
    
    
    84,353
    
    
    
    24,368
    
    
    
    2,883
    
    
    
    23,342Undisbursed portion of construction
loans
    
    
    92,412
    
    
    
    60,043
    
    
    
    26,164
    
    
    
    574
    
    
    
    5,631Mortgage loan commitments
    
    
    8,737
    
    
    
    8,737
    
    
    
    
    
    
    
    
    
    
    
    Other purchase commitments
    
    
    250
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    Total other commitments
    
    $
    311,365
    
    
    $
    154,049
    
    
    $
    50,620
    
    
    $
    3,818
    
    
    $
    102,878
 OFF-BALANCE SHEET ARRANGEMENTS
  Page 42




---



##### 



CAPITAL RESOURCES
   At December 31, 2005Actual RatioRestated
    
    Minimum Requirement
    
    Well Capitalized RequirementsTotal risk-based capital ratio
    
    
    13.21
    %
    
    
    8.00
    %
    
    
    10.00
    %Tier 1 risk-based capital ratio
    
    
    11.94
    %
    
    
    4.00
    %
    
    
    6.00
    %Leverage ratio
    
    
    9.60
    %
    
    
    4.00
    %
    
    
    5.00
    %
     Page 43




---



##### 



ASSET/LIABILITY MANAGEMENT
      Page 44




---



##### 



At December 31, 20053 Months or
    
    
    Over 3 Months to
    
    
    Total WithinLess
    
    
    12 Months
    
    
    12 Months
    
    
    Over 12 Months
    
    
    Total(Dollars in thousands, restated)Interest-earning assetsLoans and loans held for sale
    
    $
    512,137
    
    
    $
    27,277
    
    
    $
    539,414
    
    
    $
    329,413
    
    
    $
    868,827Investment securities available for sale
    
    
    
    
    
    
    5,880
    
    
    
    5,880
    
    
    
    197,928
    
    
    
    203,808Investment securities held to maturity
    
    
    705
    
    
    
    2,051
    
    
    
    2,756
    
    
    
    85,352
    
    
    
    88,108Federal funds sold
    
    
    648
    
    
    
    
    
    
    
    648
    
    
    
    
    
    
    
    648Total interest-earning assets
    
    $
    513,490
    
    
    $
    35,208
    
    
    $
    548,698
    
    
    $
    612,693
    
    
    $
    1,161,391Interest-bearing liabilitiesDeposits:Money market, NOW and savings deposits
    
    $
    315,112
    
    
    $
    
    
    
    $
    315,112
    
    
    $
    
    
    
    $
    315,112Time deposits greater than $100,000
    
    
    48,516
    
    
    
    123,309
    
    
    
    171,825
    
    
    
    132,442
    
    
    
    304,267Other time deposits
    
    
    57,296
    
    
    
    131,322
    
    
    
    188,618
    
    
    
    22,726
    
    
    
    211,344Borrowings
    
    
    9,186
    
    
    
    
    
    
    
    9,186
    
    
    
    192,551
    
    
    
    201,737Total interest-bearing liabilities
    
    $
    430,110
    
    
    $
    254,631
    
    
    $
    684,741
    
    
    $
    347,719
    
    
    $
    1,032,460Interest sensitivity gap per period
    
    $
    83,380
    
    
    $
    (219,423
    )
    
    $
    (136,043
    )
    
    $
    264,974
    
    
    $
    128,931Cumulative gap
    
    $
    83,380
    
    
    $
    (136,043
    )
    
    $
    (136,043
    )
    
    $
    128,931
    
    
    $
    128,931Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities
    
    
    119.39
    %
    
    
    13.83
    %
    
    
    80.13
    %
    
    
    176.20
    %
    
    
    112.49
    %
 Page 45




---



##### 



MARKET RISK
  Expected Maturities of Market Sensitive Instruments Heldat December 31, 2005 Occurring in the Indicated Year(Dollars in thousands, restated)
    
    
    Average
    
    
    EstimatedBeyond
    
    
    
    
    
    
    Interest
    
    
    Fair2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Five Years
    
    
    Total
    
    
    Rate
    
    
    ValueFINANCIAL ASSETSFederal funds sold
    
    $
    648
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    648
    
    
    
    4.38
    %
    
    $
    648Investment securities(1) (2)
    
    
    8,694
    
    
    
    43,409
    
    
    
    24,852
    
    
    
    20,295
    
    
    
    50,624
    
    
    
    149,169
    
    
    
    297,043
    
    
    
    4.22
    %
    
    
    289,582Loans (3)Fixed rate
    
    
    36,614
    
    
    
    53,269
    
    
    
    37,018
    
    
    
    80,129
    
    
    
    55,683
    
    
    
    102,290
    
    
    
    365,003
    
    
    
    6.53
    %
    
    
    356,658Variable rate
    
    
    228,432
    
    
    
    55,038
    
    
    
    38,246
    
    
    
    36,131
    
    
    
    25,108
    
    
    
    120,869
    
    
    
    503,824
    
    
    
    7.57
    %
    
    
    503,286Total
    
    $
    274,388
    
    
    $
    151,716
    
    
    $
    100,116
    
    
    $
    136,555
    
    
    $
    131,415
    
    
    $
    372,328
    
    
    $
    1,166,518
    
    
    
    7.08
    %
    
    $
    1,150,174FINANCIAL LIABILITIESMoney market, NOW and
savings deposits
    
    $
    315,112
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    315,112
    
    
    
    1.82
    %
    
    $
    315,112Time deposits
    
    
    360,443
    
    
    
    66,435
    
    
    
    17,703
    
    
    
    37,491
    
    
    
    23,539
    
    
    
    10,000
    
    
    
    515,611
    
    
    
    3.57
    %
    
    
    508,033Short-term borrowings
    
    
    9,186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,186
    
    
    
    4.38
    %
    
    
    9,178Long-term borrowings
    
    
    
    
    
    
    40,000
    
    
    
    5,000
    
    
    
    10,000
    
    
    
    35,000
    
    
    
    102,551
    
    
    
    192,551
    
    
    
    4.12
    %
    
    
    194,052Total
    
    $
    684,741
    
    
    $
    106,435
    
    
    $
    22,703
    
    
    $
    47,491
    
    
    $
    58,539
    
    
    $
    112,551
    
    
    $
    1,032,460
    
    
    
    4.55
    %
    
    $
    1,026,375
 
 (1)
    
    Yields on tax-exempt investments have been adjusted to a taxable equivalent
basis using federal and state tax rates of 34% and 6.9%, respectively.(2)
    
    Callable securities and borrowings with favorable market rates at December 31, 2005
are assumed to mature at their call dates for purposes of this table.(3)
    
    Includes nonaccrual loans but not the allowance for loan losses. Page 46




---



##### 



LENDING ACTIVITIES
 General
 At December 31,2005
    
    
    2004
    
    
    2003Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total
    
    
    Amount
    
    
    of Total(Dollars in thousands)Residential mortgage loans
    
    $
    244,177
    
    
    
    28.0
    %
    
    $
    238,454
    
    
    
    30.0
    %
    
    $
    150,312
    
    
    
    28.9
    %Commercial mortgage loans
    
    
    286,658
    
    
    
    33.0
    %
    
    
    295,130
    
    
    
    37.1
    %
    
    
    186,758
    
    
    
    35.9
    %Construction loans
    
    
    156,900
    
    
    
    18.1
    %
    
    
    102,282
    
    
    
    12.8
    %
    
    
    71,908
    
    
    
    13.8
    %Commercial and industrial loans
    
    
    151,950
    
    
    
    17.5
    %
    
    
    127,432
    
    
    
    16.0
    %
    
    
    87,127
    
    
    
    16.8
    %Loans to individuals
    
    
    29,142
    
    
    
    3.4
    %
    
    
    32,805
    
    
    
    4.1
    %
    
    
    23,641
    
    
    
    4.6
    %Subtotal
    
    
    868,827
    
    
    
    100.0
    %
    
    
    796,103
    
    
    
    100.0
    %
    
    
    519,746
    
    
    
    100.0
    %Less: Allowance for loan losses
    
    
    (11,785
    )
    
    
    
    
    
    
    (12,537
    )
    
    
    
    
    
    
    (7,275
    )Net loans
    
    $
    857,042
    
    
    
    
    
    
    $
    783,566
    
    
    
    
    
    
    $
    512,471
 At December 31,2002
    
    
    2001Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total(Dollars in thousands)Residential mortgage loans
    
    $
    118,572
    
    
    
    28.1
    %
    
    $
    105,357
    
    
    
    29.2
    %Commercial mortgage loans
    
    
    137,812
    
    
    
    32.7
    %
    
    
    89,354
    
    
    
    24.8
    %Construction loans
    
    
    64,500
    
    
    
    15.3
    %
    
    
    61,558
    
    
    
    17.1
    %Commercial and industrial loans
    
    
    71,948
    
    
    
    17.0
    %
    
    
    77,820
    
    
    
    21.6
    %Loans to individuals
    
    
    29,106
    
    
    
    6.9
    %
    
    
    26,199
    
    
    
    7.3
    %Subtotal
    
    
    421,938
    
    
    
    100.0
    %
    
    
    360,288
    
    
    
    100.0
    %Less: Allowance for loan losses
    
    
    (6,342
    )
    
    
    
    
    
    
    (5,400
    )Net loans
    
    $
    415,596
    
    
    
    
    
    
    $
    354,888
 Page 47




---



##### 



At December 31, 2005Due within
    
    
    Due after one year
    
    
    Due afterone year
    
    
    but within five years
    
    
    five years
    
    
    TotalAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield(Dollars in thousands)Residential mortgage loans
    
    $
    30,767
    
    
    
    7.85
    %
    
    $
    72,310
    
    
    
    7.01
    %
    
    $
    140,087
    
    
    
    6.94
    %
    
    $
    243,164
    
    
    
    7.07
    %Commercial mortgage loans
    
    
    32,249
    
    
    
    6.99
    %
    
    
    196,907
    
    
    
    6.61
    %
    
    
    57,498
    
    
    
    6.36
    %
    
    
    286,654
    
    
    
    6.60
    %Construction loans
    
    
    103,671
    
    
    
    7.72
    %
    
    
    46,958
    
    
    
    6.86
    %
    
    
    6,271
    
    
    
    6.48
    %
    
    
    156,900
    
    
    
    7.41
    %Commercial and
industrial loans
    
    
    82,838
    
    
    
    7.87
    %
    
    
    51,983
    
    
    
    8.21
    %
    
    
    16,900
    
    
    
    6.40
    %
    
    
    151,721
    
    
    
    7.82
    %Loans to individuals
    
    
    15,133
    
    
    
    8.25
    %
    
    
    11,959
    
    
    
    8.33
    %
    
    
    1,888
    
    
    
    3.74
    %
    
    
    28,980
    
    
    
    7.99
    %Total
    
    
    264,658
    
    
    
    7.72
    %
    
    
    380,117
    
    
    
    6.99
    %
    
    
    222,644
    
    
    
    6.71
    %
    
    
    867,419
    
    
    
    7.14
    %Nonaccrual loans
    
    
    388
    
    
    
    
    
    
    
    505
    
    
    
    
    
    
    
    515
    
    
    
    
    
    
    
    1,408Loans, gross
    
    $
    265,046
    
    
    
    
    
    
    $
    380,622
    
    
    
    
    
    
    $
    223,159
    
    
    
    
    
    
    $
    868,827
  Real Estate Loans.
  Residential Mortgage Loans.
  Page 48




---



##### 



Commercial Mortgage Loans.
 Construction Loans.
 Commercial Loans.
  Loans to Individuals.
 Loan Approvals.
 Page 49




---



##### 



ASSET QUALITY
   Page 50




---



##### 



Nonperforming Assets
  At December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Nonaccrual loans
    
    $
    1,408
    
    
    $
    2,174
    
    
    $
    769
    
    
    $
    1,823
    
    
    $
    894Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    1,408
    
    
    
    2,174
    
    
    
    769
    
    
    
    1,823
    
    
    
    894Foreclosed assets
    
    
    280
    
    
    
    1,085
    
    
    
    272
    
    
    
    383
    
    
    
    347Total nonperforming assets
    
    $
    1,688
    
    
    $
    3,259
    
    
    $
    1,041
    
    
    $
    2,206
    
    
    $
    1,241Accruing loans past due
90 days or more
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Allowance for loan losses
    
    
    11,785
    
    
    
    12,537
    
    
    
    7,275
    
    
    
    6,342
    
    
    
    5,400Nonperforming loans to period end loans
    
    
    .16
    %
    
    
    .27
    %
    
    
    .15
    %
    
    
    .43
    %
    
    
    .25
    %Allowance for loan losses to period end loans
    
    
    1.36
    %
    
    
    1.57
    %
    
    
    1.40
    %
    
    
    1.50
    %
    
    
    1.50
    %Allowance for loan losses to
nonperforming loans
    
    
    837
    %
    
    
    577
    %
    
    
    946
    %
    
    
    348
    %
    
    
    604
    %Nonperforming assets to total assets
    
    
    .13
    %
    
    
    .27
    %
    
    
    .13
    %
    
    
    .36
    %
    
    
    .26
    %
    Page 51




---



##### 



Analysis of Allowance for Loan Losses
      Page 52




---



##### 



Page 53




---



##### 



At December 31,2005
    
    
    2004
    
    
    2003% of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of TotalAmount
    
    

Loans (1)
    
    
    Amount
    
    
    Loans (1)
    
    
    Amount
    
    
    Loans (1)(Dollars in thousands)Residential mortgage loans
    
    $
    1,394
    
    
    
    28.0
    %
    
    $
    1,419
    
    
    
    30.0
    %
    
    $
    475
    
    
    
    28.9
    %Commercial mortgage loans
    
    
    3,151
    
    
    
    33.0
    %
    
    
    3,500
    
    
    
    37.1
    %
    
    
    2,200
    
    
    
    35.9
    %Construction loans
    
    
    2,454
    
    
    
    18.1
    %
    
    
    1,924
    
    
    
    12.8
    %
    
    
    1,100
    
    
    
    13.8
    %Commercial and
industrial loans
    
    
    1,784
    
    
    
    17.5
    %
    
    
    1,815
    
    
    
    16.0
    %
    
    
    1,200
    
    
    
    16.8
    %Loans to individuals
    
    
    956
    
    
    
    3.4
    %
    
    
    1,304
    
    
    
    4.1
    %
    
    
    1,050
    
    
    
    4.6
    %Unallocated
    
    
    2,046
    
    
    
    
    %
    
    
    2,575
    
    
    
    
    %
    
    
    1,250
    
    
    
    
    %Total
    
    $
    11,785
    
    
    
    100.0
    %
    
    $
    12,537
    
    
    
    100.0
    %
    
    $
    7,275
    
    
    
    100.0
    %
 At December 31,2002
    
    
    2001% of Total
    
    
    
    
    
    
    % of TotalAmount
    
    
    Loans (1)
    
    
    Amount
    
    
    Loans (1)(Dollars in thousands)Residential mortgage loans
    
    $
    350
    
    
    
    28.1
    %
    
    $
    550
    
    
    
    29.2
    %Commercial mortgage loans
    
    
    1,500
    
    
    
    32.7
    %
    
    
    825
    
    
    
    24.8
    %Construction loans
    
    
    1,100
    
    
    
    15.3
    %
    
    
    1,000
    
    
    
    17.1
    %Commercial and
industrial loans
    
    
    1,000
    
    
    
    17.0
    %
    
    
    1,100
    
    
    
    21.6
    %Loans to individuals
    
    
    1,225
    
    
    
    6.9
    %
    
    
    925
    
    
    
    7.3
    %Unallocated
    
    
    1,167
    
    
    
    
    %
    
    
    1,000
    
    
    
    
    %Total
    
    $
    6,342
    
    
    
    100.0
    %
    
    $
    5,400
    
    
    
    100.0
    %
 
 (1)
    
    Represents total of all outstanding loans in each category as a percentage of total loans
outstanding. Page 54




---



##### 



As of or for the Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Balance at beginning of period
    
    $
    12,537
    
    
    $
    7,275
    
    
    $
    6,342
    
    
    $
    5,400
    
    
    $
    4,283Charge-offs:Residential mortgage loans
    
    
    566
    
    
    
    210
    
    
    
    78
    
    
    
    82
    
    
    
    115Commercial mortgage loans
    
    
    
    
    
    
    43
    
    
    
    72
    
    
    
    
    
    
    
    53Construction loans
    
    
    4
    
    
    
    312
    
    
    
    307
    
    
    
    113
    
    
    
    Commercial and industrial loans
    
    
    349
    
    
    
    120
    
    
    
    91
    
    
    
    90
    
    
    
    416Loans to individuals
    
    
    443
    
    
    
    889
    
    
    
    872
    
    
    
    473
    
    
    
    663Total charge-offs
    
    
    1,362
    
    
    
    1,574
    
    
    
    1,420
    
    
    
    758
    
    
    
    1,247Recoveries:Residential mortgage loans
    
    
    41
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    Construction loans
    
    
    3
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    Commercial and industrial loans
    
    
    35
    
    
    
    7
    
    
    
    27
    
    
    
    15
    
    
    
    29Loans to individuals
    
    
    72
    
    
    
    114
    
    
    
    37
    
    
    
    30
    
    
    
    15Total recoveries
    
    
    151
    
    
    
    150
    
    
    
    68
    
    
    
    45
    
    
    
    44Net charge-offs
    
    
    (1,211
    )
    
    
    (1,424
    )
    
    
    (1,352
    )
    
    
    (713
    )
    
    
    (1,203
    )Provision for loan losses
    
    
    950
    
    
    
    2,239
    
    
    
    2,285
    
    
    
    1,655
    
    
    
    2,320Allowance for loans acquired in
purchase transactions, net
    
    
    (491
    )
    
    
    4,447
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of period
    
    $
    11,785
    
    
    $
    12,537
    
    
    $
    7,275
    
    
    $
    6,342
    
    
    $
    5,400Total loans outstanding
    
    $
    868,827
    
    
    $
    796,103
    
    
    $
    519,746
    
    
    $
    421,938
    
    
    $
    360,288Average loans outstanding
    
    $
    837,467
    
    
    $
    742,433
    
    
    $
    471,808
    
    
    $
    395,745
    
    
    $
    318,696Allowance for loan losses to
loans outstanding
    
    
    1.36
    %
    
    
    1.57
    %
    
    
    1.40
    %
    
    
    1.50
    %
    
    
    1.50
    %Ratio of net loan charge-offs to
average loans outstanding
    
    
    .14
    %
    
    
    .19
    %
    
    
    .29
    %
    
    
    .18
    %
    
    
    .38
    %
 Page 55




---



##### 



INVESTMENT ACTIVITIES
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Market Value(Amounts in thousands)December 31, 2005Securities available for sale:U. S. government agencies
    
    $
    66,426
    
    
    $
    
    
    
    $
    1,147
    
    
    $
    65,279Mortgage-backed securities
    
    
    124,212
    
    
    
    156
    
    
    
    3,870
    
    
    
    120,498Municipals
    
    
    1,000
    
    
    
    1
    
    
    
    4
    
    
    
    997Other
    
    
    17,297
    
    
    
    62
    
    
    
    325
    
    
    
    17,034$
    208,935
    
    
    $
    219
    
    
    $
    5,346
    
    
    $
    203,808Securities held to maturity:U. S. government agencies
    
    $
    75,046
    
    
    $
    
    
    
    $
    2,395
    
    
    $
    72,651Mortgage-backed securities
    
    
    3,228
    
    
    
    11
    
    
    
    67
    
    
    
    3,172Municipals
    
    
    9,834
    
    
    
    171
    
    
    
    54
    
    
    
    9,951Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    88,108
    
    
    $
    182
    
    
    $
    2,516
    
    
    $
    85,774December 31, 2004Securities available for sale:U. S. government agencies
    
    $
    69,038
    
    
    $
    106
    
    
    $
    274
    
    
    $
    68,870Mortgage-backed securities
    
    
    150,282
    
    
    
    833
    
    
    
    947
    
    
    
    150,168Municipals
    
    
    1,000
    
    
    
    1
    
    
    
    2
    
    
    
    999Other
    
    
    17,635
    
    
    
    92
    
    
    
    
    
    
    
    17,727$
    237,955
    
    
    $
    1,032
    
    
    $
    1,223
    
    
    $
    237,764Securities held to maturity:U. S. government agencies
    
    $
    59,692
    
    
    $
    22
    
    
    $
    851
    
    
    $
    58,863Mortgage-backed securities
    
    
    3,971
    
    
    
    46
    
    
    
    4
    
    
    
    4,013Municipals
    
    
    10,481
    
    
    
    341
    
    
    
    9
    
    
    
    10,813Other
    
    
    1,001
    
    
    
    15
    
    
    
    
    
    
    
    1,016$
    75,145
    
    
    $
    424
    
    
    $
    864
    
    
    $
    74,705December 31, 2003Securities available for sale:U. S. government agencies
    
    $
    33,567
    
    
    $
    685
    
    
    $
    7
    
    
    $
    34,245Mortgage-backed securities
    
    
    127,678
    
    
    
    1,058
    
    
    
    884
    
    
    
    127,852Municipals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    6,403
    
    
    
    
    
    
    
    
    
    
    
    6,403$
    167,648
    
    
    $
    1,743
    
    
    $
    891
    
    
    $
    168,500Securities held to maturity:U. S. government agencies
    
    $
    61,291
    
    
    $
    56
    
    
    $
    1,276
    
    
    $
    60,071Mortgage-backed securities
    
    
    640
    
    
    
    11
    
    
    
    13
    
    
    
    638Municipals
    
    
    326
    
    
    
    9
    
    
    
    
    
    
    
    335Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    62,257
    
    
    $
    76
    
    
    $
    1,289
    
    
    $
    61,044
 Page 56




---



##### 



2005WeightedAverageAmortized Cost
    
    
    Fair Value
    
    
    Yield (1)(Amount in thousands)Securities Available for sale:U. S. government agenciesDue within one year
    
    $
    5,938
    
    
    $
    5,880
    
    
    
    2.62
    %Due after one but within five years
    
    
    52,522
    
    
    
    51,577
    
    
    
    3.97
    %Due after five but within ten years
    
    
    7,966
    
    
    
    7,822
    
    
    
    4.61
    %66,426
    
    
    
    65,279
    
    
    
    3.92
    %Mortgage-backed securitiesDue after one but within five years
    
    
    26,811
    
    
    
    25,795
    
    
    
    3.66
    %Due after five but within ten years
    
    
    59,038
    
    
    
    56,922
    
    
    
    3.85
    %Due after ten years
    
    
    38,363
    
    
    
    37,781
    
    
    
    4.42
    %124,212
    
    
    
    120,498
    
    
    
    3.99
    %MunicipalsDue after ten years
    
    
    1,000
    
    
    
    997
    
    
    
    6.90
    %1,000
    
    
    
    997
    
    
    
    6.90
    %OtherDue after one but within five years
    
    
    1,618
    
    
    
    1,292
    
    
    
    2.88
    %Due after five but within ten years
    
    
    325
    
    
    
    325
    
    
    
    2.00
    %Due after ten years
    
    
    15,354
    
    
    
    15,417
    
    
    
    5.97
    %17,297
    
    
    
    17,034
    
    
    
    5.61
    %Total securities available for saleDue within one year
    
    
    5,938
    
    
    
    5,880
    
    
    
    2.62
    %Due after one but within five years
    
    
    80,951
    
    
    
    78,664
    
    
    
    3.85
    %Due after five but within ten years
    
    
    67,329
    
    
    
    65,069
    
    
    
    3.93
    %Due after ten years
    
    
    54,717
    
    
    
    54,195
    
    
    
    4.90
    %$
    208,935
    
    
    $
    203,808
    
    
    
    4.10
    %Securities held to maturity:U. S. government agenciesDue after one but within five years
    
    $
    53,678
    
    
    $
    52,032
    
    
    
    3.91
    %Due after five but within ten years
    
    
    1,300
    
    
    
    1,275
    
    
    
    5.26
    %Due after ten years
    
    
    20,068
    
    
    
    19,344
    
    
    
    5.38
    %75,046
    
    
    
    72,651
    
    
    
    4.33
    %Mortgage-backed securitiesDue after one but within five years
    
    
    53
    
    
    
    56
    
    
    
    8.13
    %Due after five but within ten years
    
    
    2,308
    
    
    
    2,271
    
    
    
    4.39
    %Due after ten years
    
    
    867
    
    
    
    845
    
    
    
    5.01
    %3,228
    
    
    
    3,172
    
    
    
    4.62
    %MunicipalsDue within one year
    
    
    2,756
    
    
    
    2,759
    
    
    
    5.33
    %Due after one but within five years
    
    
    4,498
    
    
    
    4,525
    
    
    
    5.58
    %Due after five but within ten years
    
    
    2,078
    
    
    
    2,144
    
    
    
    7.10
    %Due after ten years
    
    
    502
    
    
    
    523
    
    
    
    7.24
    %9,834
    
    
    
    9,951
    
    
    
    5.92
    %Total securities held to maturityDue within one year
    
    
    2,756
    
    
    
    2,759
    
    
    
    5.33
    %Due after one but within five years
    
    
    58,229
    
    
    
    56,613
    
    
    
    4.04
    %Due after five but within ten years
    
    
    5,686
    
    
    
    5,690
    
    
    
    5.58
    %Due after ten years
    
    
    21,437
    
    
    
    20,712
    
    
    
    5.41
    %$
    88,108
    
    
    $
    85,774
    
    
    
    4.51
    %
 
 (1)
    
    Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using
federal and state tax rates of 34% and 6.9%, respectively.  Page 57




---



##### 



Derivative Financial Instruments
    Form 10-K/A.
 Sources of Funds
 Deposit Activities
  Page 58




---



##### 



For the Year Ended December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in thousands, restated)Interest-bearing NOW and money
market accounts
    
    $
    262,058
    
    
    
    1.83
    %
    
    $
    241,363
    
    
    
    0.84
    %
    
    $
    138,926
    
    
    
    0.97
    %Time deposits $100,000 or more
    
    
    285,369
    
    
    
    3.50
    %
    
    
    257,034
    
    
    
    2.77
    %
    
    
    154,026
    
    
    
    2.91
    %Other time deposits
    
    
    221,871
    
    
    
    2.94
    %
    
    
    229,733
    
    
    
    2.00
    %
    
    
    163,993
    
    
    
    2.59
    %Total interest-bearing deposits
    
    
    769,298
    
    
    
    2.77
    %
    
    
    728,130
    
    
    
    1.89
    %
    
    
    456,945
    
    
    
    2.21
    %Demand and other
non-interest-bearing deposits
    
    
    105,024
    
    
    
    
    
    
    
    85,583
    
    
    
    
    
    
    
    45,101Total average deposits
    
    $
    874,322
    
    
    
    2.44
    %
    
    $
    813,713
    
    
    
    1.69
    %
    
    $
    502,046
    
    
    
    2.01
    %
  At December 31, 2005(In thousands)Remaining MaturityLess than three months
    
    $
    48,516Three to six months
    
    
    42,064Six to twelve months
    
    
    81,245Over twelve months
    
    
    132,442Total
    
    $
    304,267
 Page 59




---



##### 



Borrowings
  Years of Maturity
    
    Interest Rate
    
    
    Amount(In thousands)2006
    
    
    
    
    
    $
    2007
    
    
    3.92
    %
    
    
    40,0002008
    
    
    3.76
    %
    
    
    5,0002009
    
    
    2.15
    %
    
    
    10,0002010
    
    
    3.87
    %
    
    
    35,000Thereafter
    
    
    3.45
    %
    
    
    67,478$
    157,478
     Page 60




---



##### 



Other Recent Developments
  RECENT ACCOUNTING PRONOUNCEMENTS
  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  Item 8. Financial Statements
  Page 61




---



##### 



Report of Independent Registered Public Accounting Firm
 
     Internal
Control  Integrated Framework
 /s/ Dixon Hughes PLLC
 Page 62




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY  CONSOLIDATED BALANCE SHEETS  December 31, 2005 and 2004
 2005
    
    
    2004(Amounts in thousands, exceptshare data, restated)AssetsCash and due from banks
    
    $
    24,606
    
    
    $
    17,758Federal funds sold and other interest-bearing deposits
    
    
    648
    
    
    
    80Investment securities (Note 4)Available for sale, at fair value
    
    
    203,808
    
    
    
    237,764Held to maturity, (fair value of $85,774 and $74,705
at December 31, 2005 and 2004, respectively)
    
    
    88,108
    
    
    
    75,145Loans (Note 5)
    
    
    868,827
    
    
    
    796,103Allowance for loan losses (Note 6)
    
    
    (11,785
    )
    
    
    (12,537
    )Net Loans
    
    
    857,042
    
    
    
    783,566Premises and equipment (Note 7)
    
    
    31,259
    
    
    
    28,325Goodwill (Note 8)
    
    
    49,792
    
    
    
    50,135Other assets (Notes 8 and 14)
    
    
    32,350
    
    
    
    30,173Total Assets
    
    $
    1,287,613
    
    
    $
    1,222,946Liabilities and Stockholders EquityDepositsDemand
    
    $
    111,226
    
    
    $
    98,520Money market and NOW
    
    
    301,185
    
    
    
    221,025Savings
    
    
    13,927
    
    
    
    15,096Time (Note 9)
    
    
    515,611
    
    
    
    510,860Total Deposits
    
    
    941,949
    
    
    
    845,501Short-term borrowings (Note 10)
    
    
    9,186
    
    
    
    69,647Long-term debt (Notes 10 and 11)
    
    
    192,551
    
    
    
    163,493Other liabilities (Note 12)
    
    
    9,042
    
    
    
    7,471Total Liabilities
    
    
    1,152,728
    
    
    
    1,086,112Stockholders Equity (Notes 11 and 16)Preferred stock, no par value, 1,000,000 shares authorized; none
issued or outstanding at December 31, 2005 and
December 31, 2004
    
    
    
    
    
    
    Common stock, no par value, 30,000,000 shares authorized;
issued and outstanding 17,612,472 shares at December 31, 2005
and 17,819,234 shares at December 31, 2004, respectively
    
    
    122,490
    
    
    
    125,200Retained earnings
    
    
    15,546
    
    
    
    11,621Accumulated other comprehensive income (loss)
    
    
    (3,151
    )
    
    
    13Total Stockholders Equity
    
    
    134,885
    
    
    
    136,834Commitments and contingencies (Notes 13 and 18)Total Liabilities and
Stockholders Equity
    
    $
    1,287,613
    
    
    $
    1,222,946
 See accompanying notes.
 Page 63




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003(Amounts in thousands, exceptshare and per share data, restated)Interest IncomeLoans
    
    $
    55,848
    
    
    $
    42,843
    
    
    $
    27,478Investment securities available for sale
    
    
    8,680
    
    
    
    8,957
    
    
    
    6,022Investment securities held to maturity
    
    
    3,429
    
    
    
    2,803
    
    
    
    2,469Federal funds sold and other interest-bearing deposits
    
    
    140
    
    
    
    53
    
    
    
    50Total Interest Income
    
    
    68,097
    
    
    
    54,656
    
    
    
    36,019Interest ExpenseMoney market, savings, and NOW deposits
    
    
    4,786
    
    
    
    2,027
    
    
    
    1,346Time deposits
    
    
    16,509
    
    
    
    11,717
    
    
    
    8,730Short-term borrowings
    
    
    2,188
    
    
    
    1,614
    
    
    
    695Long-term debt
    
    
    7,645
    
    
    
    4,817
    
    
    
    4,166Total Interest Expense
    
    
    31,128
    
    
    
    20,175
    
    
    
    14,937Net Interest Income
    
    
    36,969
    
    
    
    34,481
    
    
    
    21,082Provision for Loan Losses (Note 6)
    
    
    950
    
    
    
    2,239
    
    
    
    2,285Net Interest Income After
Provision for Loan Losses
    
    
    36,019
    
    
    
    32,242
    
    
    
    18,797Non-Interest Income (Note 15)
    
    
    7,134
    
    
    
    7,949
    
    
    
    5,033Non-Interest ExpenseSalaries and employee benefits
    
    
    16,042
    
    
    
    13,749
    
    
    
    9,603Occupancy and equipment
    
    
    5,786
    
    
    
    4,352
    
    
    
    3,045Other (Note 15)
    
    
    9,491
    
    
    
    9,419
    
    
    
    5,685Total Non-Interest Expense
    
    
    31,319
    
    
    
    27,520
    
    
    
    18,333Income Before Income Taxes
    
    
    11,834
    
    
    
    12,671
    
    
    
    5,497Income Tax Expense (Note 14)
    
    
    4,161
    
    
    
    4,556
    
    
    
    1,919Net Income
    
    $
    7,673
    
    
    $
    8,115
    
    
    $
    3,578Net Income Per ShareBasic
    
    $
    .43
    
    
    $
    .47
    
    
    $
    .41Diluted
    
    
    .42
    
    
    
    .45
    
    
    
    .39Weighted Average Shares OutstandingBasic
    
    
    17,825,152
    
    
    
    17,298,285
    
    
    
    8,826,780Diluted
    
    
    18,133,859
    
    
    
    18,033,333
    
    
    
    11,369,429
 See accompanying notes.
 Page 64




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003(Amounts in thousands, restated)Net income
    
    $
    7,673
    
    
    $
    8,115
    
    
    $
    3,578Other comprehensive income (loss):Securities available for sale:Unrealized holding gains (losses) on available for sale securities
    
    
    (5,203
    )
    
    
    (1,043
    )
    
    
    (1,851
    )Tax effect
    
    
    2,007
    
    
    
    403
    
    
    
    713Reclassification of losses recognized in net income
    
    
    266
    
    
    
    
    
    
    
    Tax effect
    
    
    (103
    )
    
    
    
    
    
    
    Net of tax amount
    
    
    (3,033
    )
    
    
    (640
    )
    
    
    (1,138
    )Cash flow hedging activities:Unrealized holding losses on cash flow hedging activities
    
    
    
    
    
    
    (111
    )
    
    
    (250
    )Tax effect
    
    
    
    
    
    
    43
    
    
    
    73Reclassification of gains recognized in net income, net
    
    
    (214
    )
    
    
    (482
    )
    
    
    (406
    )Tax effect
    
    
    83
    
    
    
    182
    
    
    
    156Net of tax amount
    
    
    (131
    )
    
    
    (368
    )
    
    
    (427
    )Total other comprehensive income (loss)
    
    
    (3,164
    )
    
    
    (1,008
    )
    
    
    (1,565
    )Comprehensive income
    
    $
    4,509
    
    
    $
    7,107
    
    
    $
    2,013
 See accompanying notes.
 Page 65




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31, 2005, 2004 and 2003
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Equity(Amounts in thousands, except share data, restated)Balance at December 31, 2002
    
    
    8,791,683
    
    
    $
    43,123
    
    
    $
    1,830
    
    
    $
    2,586
    
    
    $
    47,539Net income
    
    
    
    
    
    
    
    
    
    
    3,578
    
    
    
    
    
    
    
    3,578Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,565
    )
    
    
    (1,565
    )Common stock issued pursuant to:Conversion of trust preferred securities
    
    
    21,187
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    175Issuance costs
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    (13
    )Stock options exercised including
income tax benefit of $322
    
    
    173,926
    
    
    
    1,092
    
    
    
    
    
    
    
    
    
    
    
    1,092Balance at December 31, 2003
    
    
    8,986,796
    
    
    
    44,377
    
    
    
    5,408
    
    
    
    1,021
    
    
    
    50,806Net income
    
    
    
    
    
    
    
    
    
    
    8,115
    
    
    
    
    
    
    
    8,115Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,008
    )
    
    
    (1,008
    )Common stock issued pursuant to:Conversion of trust preferred securities
    
    
    2,059,846
    
    
    
    15,788
    
    
    
    
    
    
    
    
    
    
    
    15,788Business combination
    
    
    6,426,532
    
    
    
    62,659
    
    
    
    
    
    
    
    
    
    
    
    62,659Fair value of stock options issued
in connection with a business combination
    
    
    
    
    
    
    349
    
    
    
    
    
    
    
    
    
    
    
    349Stock options exercised including
income tax benefit of $411
    
    
    323,710
    
    
    
    1,856
    
    
    
    
    
    
    
    
    
    
    
    1,856Employee stock purchase plan
    
    
    22,350
    
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    171Cash dividends of $.11 per share
    
    
    
    
    
    
    
    
    
    
    (1,902
    )
    
    
    
    
    
    
    (1,902
    )Balance at December 31, 2004
    
    
    17,819,234
    
    
    
    125,200
    
    
    
    11,621
    
    
    
    13
    
    
    
    136,834Net income
    
    
    
    
    
    
    
    
    
    
    7,673
    
    
    
    
    
    
    
    7,673Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,164
    )
    
    
    (3,164
    )Shares repurchased
    
    
    (460,800
    )
    
    
    (4,271
    )
    
    
    
    
    
    
    
    
    
    
    (4,271
    )Common stock issued pursuant to:Employee stock purchase plan
    
    
    21,059
    
    
    
    164
    
    
    
    
    
    
    
    
    
    
    
    164Stock options exercised including
income tax benefit of $323
    
    
    232,979
    
    
    
    1,301
    
    
    
    
    
    
    
    
    
    
    
    1,301Expense recognized in
connection with stock options
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    96Cash dividends of $.21 per share
    
    
    
    
    
    
    
    
    
    
    (3,748
    )
    
    
    
    
    
    
    (3,748
    )Balance at December 31, 2005
    
    
    17,612,472
    
    
    $
    122,490
    
    
    $
    15,546
    
    
    $
    (3,151
    )
    
    $
    134,885
 See accompanying notes.
 Page 66




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003(Amounts in thousands, restated)Cash Flows from Operating ActivitiesNet income
    
    $
    7,673
    
    
    $
    8,115
    
    
    $
    3,578Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    4,245
    
    
    
    4,087
    
    
    
    2,041Provision for loan losses
    
    
    950
    
    
    
    2,239
    
    
    
    2,285Stock options expensed
    
    
    96
    
    
    
    
    
    
    
    Net increase in cash surrender value of life insurance
    
    
    (364
    )
    
    
    (368
    )
    
    
    (144
    )Realized loss on sales of available for sale securities, net
    
    
    266
    
    
    
    
    
    
    
    Realized (gain) loss on sale of premises and equipment
    
    
    40
    
    
    
    (20
    )
    
    
    (98
    )Gain (loss) on economic hedges
    
    
    743
    
    
    
    (127
    )
    
    
    116Deferred income taxes
    
    
    (523
    )
    
    
    832
    
    
    
    (410
    )Realized (gain) loss on sale of foreclosed assets
    
    
    53
    
    
    
    (75
    )
    
    
    76Change in assets and liabilities:Increase in other assets
    
    
    (958
    )
    
    
    (3,879
    )
    
    
    (2,131
    )Increase in other liabilities
    
    
    734
    
    
    
    1,606
    
    
    
    338Total Adjustments
    
    
    5,282
    
    
    
    4,295
    
    
    
    2,073Net Cash Provided by Operating Activities
    
    
    12,955
    
    
    
    12,410
    
    
    
    5,651Cash Flows from Investing Activities(Increase) decrease in federal funds sold
    
    
    (568
    )
    
    
    191
    
    
    
    10,813Purchases of:Available for sale investment securities
    
    
    (32,940
    )
    
    
    (141,996
    )
    
    
    (127,391
    )Held to maturity investment securities
    
    
    (19,940
    )
    
    
    (15,915
    )
    
    
    (66,463
    )Proceeds from maturities and calls of:Available for sale investment securities
    
    
    49,114
    
    
    
    122,073
    
    
    
    53,326Held to maturity investment securities
    
    
    6,751
    
    
    
    20,572
    
    
    
    48,962Proceeds from sale of:Available for sale investment securities
    
    
    11,503
    
    
    
    
    
    
    
    Net increase in loans
    
    
    (74,408
    )
    
    
    (102,762
    )
    
    
    (100,229
    )Proceeds from termination of interest rate swaps
    
    
    
    
    
    
    
    
    
    
    951Purchases of premises and equipment
    
    
    (6,003
    )
    
    
    (7,626
    )
    
    
    (3,543
    )Proceeds from disposal of premises and equipment
    
    
    43
    
    
    
    169
    
    
    
    657Proceeds from sale of foreclosed assets
    
    
    1,179
    
    
    
    1,444
    
    
    
    1,109Purchase of bank-owned life insurance
    
    
    
    
    
    
    (7,000
    )
    
    
    Net cash used in business combination
    
    
    
    
    
    
    (9,393
    )
    
    
    Net Cash Used in Investing Activities
    
    
    (65,269
    )
    
    
    (140,243
    )
    
    
    (181,808
    )Cash Flows from Financing ActivitiesNet increase in deposits
    
    
    96,546
    
    
    
    67,578
    
    
    
    126,223Net increase (decrease) in short-term borrowings
    
    
    (60,461
    )
    
    
    17,747
    
    
    
    11,194Proceeds from long-term borrowings
    
    
    39,881
    
    
    
    37,623
    
    
    
    10,975Repayment of long-term borrowings
    
    
    (10,250
    )
    
    
    
    
    
    
    Proceeds from issuance of trust preferred securities, net
of debt issuance costs
    
    
    
    
    
    
    
    
    
    
    33,292Net proceeds from issuance of common stock
    
    
    1,465
    
    
    
    1,616
    
    
    
    770Cost of shares repurchased
    
    
    (4,271
    )
    
    
    
    
    
    
    Cash dividends paid
    
    
    (3,748
    )
    
    
    (1,902
    )
    
    
    Net Cash Provided by Financing Activities
    
    
    59,162
    
    
    
    122,662
    
    
    
    182,454Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    6,848
    
    
    
    (5,171
    )
    
    
    6,297Cash and Cash Equivalents, Beginning of Year
    
    
    17,758
    
    
    
    22,929
    
    
    
    16,632Cash and Cash Equivalents, End of Year
    
    $
    24,606
    
    
    $
    17,758
    
    
    $
    22,929 See accompanying notes.
 Page 67




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003(Amounts in thousands, restated)Supplemental Disclosures of Cash Flow InformationInterest paid on deposits and borrowed funds
    
    $
    29,636
    
    
    $
    19,506
    
    
    $
    14,610Income taxes paid
    
    
    4,489
    
    
    
    2,135
    
    
    
    2,879Supplemental Schedule of Noncash Investing and Financing ActivitiesTransfer of loans to foreclosed assets
    
    $
    425
    
    
    $
    1,923
    
    
    $
    1,069Increase (decrease) in fair value of securities available for sale, net of tax
    
    
    (3,033
    )
    
    
    (640
    )
    
    
    (1,138
    )Increase (decrease) in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    (111
    )
    
    
    (191
    )Unrealized gain (loss) on fair value hedges
    
    
    (573
    )
    
    
    4
    
    
    
    81Convertible trust preferred securities converted to common stock
    
    
    
    
    
    
    15,788
    
    
    
    175
 See accompanying notes.
 Page 68




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (1) RESTATEMENT
 Accounting for Derivative
Instruments and Hedging Activities
      Page 69




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (1) RESTATEMENT (Continued)
 Impact to Consolidated Balance SheetsDecember 31, 2005
    
    December 31, 2004As
    
    
    
    
    
    AsPreviously
    
    As
    
    Previously
    
    AsReported
    
    Restated
    
    Reported
    
    Restated(Amounts in thousands)Other assets
    
    $
    30,261
    
    
    $
    32,350
    
    
    $
    29,588
    
    
    $
    30,173Total assets
    
    
    1,285,524
    
    
    
    1,287,613
    
    
    
    1,222,361
    
    
    
    1,222,946Time deposits
    
    
    514,263
    
    
    
    515,611
    
    
    
    510,587
    
    
    
    510,860Total deposits
    
    
    940,601
    
    
    
    941,949
    
    
    
    845,228
    
    
    
    845,501Accrued expenses and other liabilities
    
    
    7,780
    
    
    
    9,042
    
    
    
    7,087
    
    
    
    7,471Total liabilities
    
    
    1,150,118
    
    
    
    1,152,728
    
    
    
    1,085,455
    
    
    
    1,086,112Retained earnings
    
    
    16,128
    
    
    
    15,546
    
    
    
    11,693
    
    
    
    11,621Accumulated other comprehensive income (loss), net
of tax
    
    
    (3,212
    )
    
    
    (3,151
    )
    
    
    13
    
    
    
    13Total stockholders equity
    
    
    135,406
    
    
    
    134,885
    
    
    
    136,906
    
    
    
    136,834
 Impact to Consolidated Statements ofIncome2005
    
    2004
    
    2003As
    
    
    
    
    
    As
    
    
    
    
    
    AsPreviously
    
    As
    
    Previously
    
    As
    
    Previously
    
    AsReported
    
    Restated
    
    Reported
    
    Restated
    
    Reported
    
    Restated(Amounts in thousands, except per share data)Interest expense on time deposits
    
    $
    16,342
    
    
    $
    16,509
    
    
    $
    11,199
    
    
    $
    11,717
    
    
    $
    8,544
    
    
    $
    8,730Interest expense
    
    
    30,961
    
    
    
    31,128
    
    
    
    19,657
    
    
    
    20,175
    
    
    
    14,751
    
    
    
    14,937Net interest income
    
    
    37,136
    
    
    
    36,969
    
    
    
    34,999
    
    
    
    34,481
    
    
    
    21,268
    
    
    
    21,082Net interest income after provision for loan losses
    
    
    36,186
    
    
    
    36,019
    
    
    
    32,760
    
    
    
    32,242
    
    
    
    18,983
    
    
    
    18,797Gains (loss) on economic hedges
    
    
    
    
    
    
    (664
    )
    
    
    
    
    
    
    543
    
    
    
    
    
    
    
    48Total non-interest income
    
    
    7,798
    
    
    
    7,134
    
    
    
    7,406
    
    
    
    7,949
    
    
    
    4,985
    
    
    
    5,033Income before income taxes
    
    
    12,665
    
    
    
    11,834
    
    
    
    12,646
    
    
    
    12,671
    
    
    
    5,635
    
    
    
    5,497Income tax expense
    
    
    4,482
    
    
    
    4,161
    
    
    
    4,544
    
    
    
    4,556
    
    
    
    1,972
    
    
    
    1,919Net income
    
    
    8,183
    
    
    
    7,673
    
    
    
    8,102
    
    
    
    8,115
    
    
    
    3,663
    
    
    
    3,578Net Income per ShareBasic
    
    $
    0.46
    
    
    $
    0.43
    
    
    $
    0.47
    
    
    $
    0.47
    
    
    $
    0.41
    
    
    $
    0.41Diluted
    
    $
    0.45
    
    
    $
    0.42
    
    
    $
    0.45
    
    
    $
    0.45
    
    
    $
    0.40
    
    
    $
    0.39
 Page 70




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (1) RESTATEMENT (Continued)
 Impact to Consolidated
Statements of Changes In Stockholders Equityand Comprehensive Income (Loss)2005
    
    2004
    
    2003As
    
    
    
    
    
    As
    
    
    
    
    
    AsPreviously
    
    As
    
    Previously
    
    As
    
    Previously
    
    AsReported
    
    Restated
    
    Reported
    
    Restated
    
    Reported
    
    Restated(Amounts in thousands, except per share data)Total stockholders equity, January 1,
    
    $
    136,906
    
    
    $
    136,834
    
    
    $
    50,891
    
    
    $
    50,806
    
    
    $
    47,539
    
    
    $
    47,539Net income
    
    
    8,183
    
    
    
    7,673
    
    
    
    8,102
    
    
    
    8,115
    
    
    
    3,663
    
    
    
    3,578Other
comprehensive loss, net of tax
    
    
    (3,225
    )
    
    
    (3,164
    )
    
    
    (1,008
    )
    
    
    (1,008
    )
    
    
    (1,565
    )
    
    
    (1,565
    )Total stockholders equity, December 31
    
    
    135,406
    
    
    
    134,885
    
    
    
    136,906
    
    
    
    136,834
    
    
    
    50,891
    
    
    
    50,806
 Impact to Consolidated Statements of Cash Flows2005
    
    2004
    
    2003As
    
    
    
    
    
    As
    
    
    
    
    
    AsPreviously
    
    As
    
    Previously
    
    As
    
    Previously
    
    AsReported
    
    Restated
    
    Reported
    
    Restated
    
    Reported
    
    Restated(Amounts in thousands, except per share data)Cash Flows from Operating Activities:Net income
    
    $
    8,183
    
    
    $
    7,673
    
    
    $
    8,102
    
    
    $
    8,115
    
    
    $
    3,663
    
    
    $
    3,578Gain (loss) on economic hedges
    
    
    
    
    
    
    743
    
    
    
    
    
    
    
    (127
    )
    
    
    
    
    
    
    116Deferred income taxes
    
    
    (202
    )
    
    
    (523
    )
    
    
    820
    
    
    
    832
    
    
    
    (357
    )
    
    
    (410
    )Change in other assets, net
    
    
    (1,046
    )
    
    
    (958
    )
    
    
    (3,981
    )
    
    
    (3,879
    )
    
    
    (2,153
    )
    
    
    (2,131
    )
 (2) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   Use of Estimates
  Page 71




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Cash and Cash Equivalents
 
  Investment Securities
   Loans Held for Sale
  Loans
  Page 72




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Allowance for Loan Losses
  Premises and Equipment
  Foreclosed Assets
  Goodwill and Other Intangibles
  Income Taxes
  Page 73




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Derivative Instruments
      Page 74




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Per Share Data
   2005
    
    
    2004
    
    
    2003Weighted average number of common shares used in
computing basic net income per share
    
    
    17,825,152
    
    
    
    17,298,285
    
    
    
    8,826,780Effect of dilutive stock options
    
    
    308,707
    
    
    
    219,624
    
    
    
    2,088,975Effect of dilutive convertible preferred securities
    
    
    
    
    
    
    515,424
    
    
    
    453,674Weighted average number of common shares and dilutive
potential common shares used in computing diluted net
income per share
    
    
    18,133,859
    
    
    
    18,033,333
    
    
    
    11,369,429
  Stock-Based Compensation
 Accounting for Stock Issued to Employees, Accounting for Stock-Based
Compensation
 Page 75




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Stock-Based Compensation (Continued)
   2005
    
    
    2004
    
    
    2003(Amounts in thousands, except per share data,restated)Net income:As reported
    
    $
    7,673
    
    
    $
    8,115
    
    
    $
    3,578Add: Total stock-based employee compensation expense
determined under fair value method for all awards
net of related tax effects
    
    
    45
    
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards
net of related tax effects
    
    
    (1,594
    )
    
    
    (861
    )
    
    
    (257
    )Pro forma
    
    $
    6,124
    
    
    $
    7,254
    
    
    $
    3,321Basic earnings per share:As reported
    
    $
    .43
    
    
    $
    .47
    
    
    $
    .41Pro forma
    
    
    .34
    
    
    
    .42
    
    
    
    .38Diluted earnings per share:As reported
    
    $
    .42
    
    
    $
    .45
    
    
    $
    .39Pro forma
    
    
    .34
    
    
    
    .40
    
    
    
    .37
 Page 76




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Comprehensive Income
   2005
    
    
    2004(In thousands, restated)Unrealized holding loss  investment securities available for sale
    
    $
    (5,127
    )
    
    $
    (191
    )Deferred income taxes
    
    
    1,976
    
    
    
    74Net unrealized holding loss  investment securities available for sale
    
    
    (3,151
    )
    
    
    (117
    )Unrealized holding loss  cash flow hedge instruments
    
    
    
    
    
    
    219Deferred income taxes
    
    
    
    
    
    
    (89
    )Net unrealized holding loss  cash flow hedge instruments
    
    
    
    
    
    
    130Total accumulated other comprehensive income (loss)
    
    $
    (3,151
    )
    
    $
    13
 Segment Reporting
 Disclosures about Segments of an Enterprise and Related Information,
 Risk and Uncertainties
   Reclassifications
  Page 77




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Pronouncements
 Share-Based Payment
 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
 3) BUSINESS COMBINATIONS
    Twelve Months EndedDecember 31, 2003(Amounts in thousands, restated)Net interest income
    
    $
    32,218Net income
    
    
    7,900Net income per shareBasic
    
    $
    0.52Diluted
    
    $
    0.49
 Page 78




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 3)
BUSINESS COMBINATIONS (Continued)
  Purchase Price Allocations
   (In thousands)Fair value of common stock issued
    
    $
    62,659Cash paid for shares
    
    
    15,257Fair value of stock options exchanged
    
    
    349Transaction costs
    
    
    878Total purchase price
    
    $
    79,143
  (In thousands)Cash and cash equivalents
    
    $
    6,942Investment securities available for sale
    
    
    51,875Investment securities held to maturity
    
    
    17,796Loans receivable, net
    
    
    172,986Premises and equipment
    
    
    5,706Deferred tax asset
    
    
    692Goodwill
    
    
    49,501Core deposit intangible
    
    
    2,177Other assets
    
    
    1,229Deposits
    
    
    (202,595
    )Borrowings
    
    
    (25,286
    )Other liabilities
    
    
    (2,758
    )Net assets acquired
    
    
    78,265Transaction costs
    
    
    878Total purchase price
    
    $
    79,143
  (In thousands)Cash paid
    
    $
    388Transaction costs
    
    
    77Total purchase price
    
    $
    465
 Page 79




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 3) BUSINESS COMBINATIONS (Continued)
 Purchase Price Allocations (Continued)
 
 (In thousands)Premises and equipment
    
    $
    24Goodwill
    
    
    291Other identifiable intangible asset
    
    
    150Net assets acquired
    
    $
    465
 (4) INVESTMENT SECURITIES
  2005Gross Unrealized
    
    
    Gross UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Amount in thousands)Securities available for sale:U. S. government agencies
    
    $
    66,426
    
    
    $
    
    
    
    $
    1,147
    
    
    $
    65,279Mortgage-backed securities
    
    
    124,212
    
    
    
    156
    
    
    
    3,870
    
    
    
    120,498Municipals
    
    
    1,000
    
    
    
    1
    
    
    
    4
    
    
    
    997Other
    
    
    17,297
    
    
    
    62
    
    
    
    325
    
    
    
    17,034$
    208,935
    
    
    $
    219
    
    
    $
    5,346
    
    
    $
    203,808Securities held to maturity:U. S. government agencies
    
    $
    75,046
    
    
    $
    
    
    
    $
    2,395
    
    
    $
    72,651Mortgage-backed securities
    
    
    3,228
    
    
    
    11
    
    
    
    67
    
    
    
    3,172Municipals
    
    
    9,834
    
    
    
    171
    
    
    
    54
    
    
    
    9,951$
    88,108
    
    
    $
    182
    
    
    $
    2,516
    
    
    $
    85,774
 2004Gross Unrealized
    
    
    Gross UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Amount in thousands)Securities available for sale:U. S. government agencies
    
    $
    69,038
    
    
    $
    106
    
    
    $
    274
    
    
    $
    68,870Mortgage-backed securities
    
    
    150,282
    
    
    
    833
    
    
    
    947
    
    
    
    150,168Municipals
    
    
    1,000
    
    
    
    1
    
    
    
    2
    
    
    
    999Other
    
    
    17,635
    
    
    
    92
    
    
    
    
    
    
    
    17,727$
    237,955
    
    
    $
    1,032
    
    
    $
    1,223
    
    
    $
    237,764Securities held to maturity:U. S. government agencies
    
    $
    59,692
    
    
    $
    22
    
    
    $
    851
    
    
    $
    58,863Mortgage-backed securities
    
    
    3,971
    
    
    
    46
    
    
    
    4
    
    
    
    4,013Municipals
    
    
    10,481
    
    
    
    341
    
    
    
    9
    
    
    
    10,813Other
    
    
    1,001
    
    
    
    15
    
    
    
    
    
    
    
    1,016$
    75,145
    
    
    $
    424
    
    
    $
    864
    
    
    $
    74,705
 Page 80




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (4) INVESTMENT SECURITIES (Continued)
  2005Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    losses
    
    
    Fair Value
    
    
    losses
    
    
    Fair Value
    
    
    losses(Amount in thousands)Securities available for sale:U. S. government agencies
    
    $
    28,024
    
    
    $
    356
    
    
    $
    37,255
    
    
    $
    791
    
    
    $
    65,279
    
    
    $
    1,147Mortgage-backed securities
    
    
    27,628
    
    
    
    807
    
    
    
    79,160
    
    
    
    3,063
    
    
    
    106,788
    
    
    
    3,870Municipals
    
    
    749
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    749
    
    
    
    4Other
    
    
    675
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    675
    
    
    
    325Total temporarily impaired
securities
    
    $
    57,076
    
    
    $
    1,492
    
    
    $
    116,415
    
    
    $
    3,854
    
    
    $
    173,491
    
    
    $
    5,346Securities held to maturity:U. S. government agencies
    
    $
    19,231
    
    
    $
    268
    
    
    $
    53,166
    
    
    $
    2,127
    
    
    $
    72,397
    
    
    $
    2,395Mortgage-backed securities
    
    
    2,025
    
    
    
    55
    
    
    
    305
    
    
    
    12
    
    
    
    2,330
    
    
    
    67Municipals
    
    
    2,875
    
    
    
    37
    
    
    
    963
    
    
    
    17
    
    
    
    3,838
    
    
    
    54Total temporarily impaired
securities
    
    $
    24,131
    
    
    $
    360
    
    
    $
    54,434
    
    
    $
    2,156
    
    
    $
    78,565
    
    
    $
    2,516
 Page 81




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (4) INVESTMENT SECURITIES (Continued)
 2004Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    losses
    
    
    Fair Value
    
    
    losses
    
    
    Fair Value
    
    
    losses(Amount in thousands)Securities available for sale:U. S. government agencies
    
    $
    36,720
    
    
    $
    274
    
    
    $
    
    
    
    $
    
    
    
    $
    36,720
    
    
    $
    274Mortgage-backed securities
    
    
    92,348
    
    
    
    947
    
    
    
    
    
    
    
    
    
    
    
    92,348
    
    
    
    947Municipals
    
    
    505
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    505
    
    
    
    2Total temporarily impaired
securities
    
    $
    129,573
    
    
    $
    1,223
    
    
    $
    
    
    
    $
    
    
    
    $
    129,573
    
    
    $
    1,223Securities held to maturity:U. S. government agencies
    
    $
    52,293
    
    
    $
    851
    
    
    $
    
    
    
    $
    
    
    
    $
    52,293
    
    
    $
    851Mortgage-backed securities
    
    
    322
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    322
    
    
    
    4Municipals
    
    
    870
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    870
    
    
    
    9Total temporarily impaired
securities
    
    $
    53,485
    
    
    $
    864
    
    
    $
    
    
    
    $
    
    
    
    $
    53,485
    
    
    $
    864
   Securities Available for Sale
    
    
    Securities Held to MaturityAmortized
    
    
    
    
    
    
    AmortizedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value(Amount in thousands)Due within one year
    
    $
    5,938
    
    
    $
    5,880
    
    
    $
    2,756
    
    
    $
    2,759Due after one but through five years
    
    
    54,140
    
    
    
    52,869
    
    
    
    58,176
    
    
    
    56,557Due after five but through ten years
    
    
    8,291
    
    
    
    8,147
    
    
    
    3,378
    
    
    
    3,419Due after ten years
    
    
    16,354
    
    
    
    16,414
    
    
    
    20,570
    
    
    
    19,867Mortgage-backed securities
    
    
    124,212
    
    
    
    120,498
    
    
    
    3,228
    
    
    
    3,172$
    208,935
    
    
    $
    203,808
    
    
    $
    88,108
    
    
    $
    85,774
  Page 82




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (4) INVESTMENT SECURITIES (Continued)
 Investments in Equity Securities
  (5) LOANS
  2005
    
    
    2004(Amounts in thousands)Residential mortgage loans
    
    $
    244,177
    
    
    $
    238,454Commercial mortgage loans
    
    
    286,658
    
    
    
    295,130Construction loans
    
    
    156,900
    
    
    
    102,282Commercial and industrial loans
    
    
    151,950
    
    
    
    127,432Loans to individuals
    
    
    29,142
    
    
    
    32,805Total
    
    $
    868,827
    
    
    $
    796,103
   2005
    
    
    2004(Amounts in thousands)Nonaccrual loans
    
    $
    1,408
    
    
    $
    2,174Foreclosure assets
    
    
    280
    
    
    
    1,085Total
    
    $
    1,688
    
    
    $
    3,259
   Page 83




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (5) LOANS (Continued)
  Loans to directors and officers as a group (12) at December 31, 2004
    
    $
    19,606Less exposure to directors no longer on board at December 31, 2005
    
    
    (5,112
    )Disbursements during year ended December 31, 2005
    
    
    6,447Amounts collected during year ended December 31, 2005
    
    
    (8,723
    )Loans to directors and officers as a group (15) at December 31, 2005
    
    $
    12,218
  (6) ALLOWANCE FOR LOAN LOSSES
  2005
    
    
    2004
    
    
    2003(Amounts in thousands)Balance at beginning of year
    
    $
    12,537
    
    
    $
    7,275
    
    
    $
    6,342Provision charged to operations
    
    
    950
    
    
    
    2,239
    
    
    
    2,285Charge-offs
    
    
    (1,362
    )
    
    
    (1,574
    )
    
    
    (1,420
    )Recoveries
    
    
    151
    
    
    
    150
    
    
    
    68Net charge-offs
    
    
    (1,211
    )
    
    
    (1,424
    )
    
    
    (1,352
    )Allowance for loans acquired in
purchase transactions, net
    
    
    (491
    )
    
    
    4,447
    
    
    
    Balance at end of year
    
    $
    11,785
    
    
    $
    12,537
    
    
    $
    7,275
 (7) PREMISES AND EQUIPMENT
  2005
    
    
    2004(Amounts in thousands)Land
    
    $
    7,182
    
    
    $
    5,356Buildings and leasehold improvements
    
    
    20,702
    
    
    
    18,457Furniture and equipment
    
    
    14,342
    
    
    
    13,74042,226
    
    
    
    37,553Less accumulated depreciation
    
    
    (10,967
    )
    
    
    (9,228
    )Total
    
    $
    31,259
    
    
    $
    28,325
  Page 84




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (8) GOODWILL AND OTHER INTANGIBLES
  2005
    
    
    2004(Amounts in thousands)Goodwill, beginning of year
    
    $
    50,135
    
    
    $
    Goodwill acquired during year
    
    
    
    
    
    
    50,135Adjustments to preliminary purchase price allocation
    
    
    (343
    )
    
    
    Goodwill, end of year
    
    $
    49,792
    
    
    $
    50,135Other intangibles  gross
    
    
    2,562
    
    
    
    2,627Less accumulated amortization
    
    
    479
    
    
    
    208Other intangibles  net
    
    $
    2,083
    
    
    $
    2,419
   Estimated Amortization Expense(Amounts in thousands)For the Year Ended December 31:2006
    
    $
    3302007
    
    
    3132008
    
    
    2782009
    
    
    2732010
    
    
    218Thereafter
    
    
    671$
    2,083
 Page 85




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (9) DEPOSITS
  $100,000
    
    
    Underand Over
    
    
    $100,00
    
    
    Total(Amounts in thousands, restated)2006
    
    $
    171,825
    
    
    $
    188,618
    
    
    $
    360,4432007
    
    
    50,431
    
    
    
    16,004
    
    
    
    66,4352008
    
    
    13,058
    
    
    
    4,644
    
    
    
    17,7022009
    
    
    36,360
    
    
    
    1,131
    
    
    
    37,4912010
    
    
    22,593
    
    
    
    947
    
    
    
    23,540Thereafter
    
    
    10,000
    
    
    
    
    
    
    
    10,000Total
    
    $
    304,267
    
    
    $
    211,344
    
    
    $
    515,611
 (10) BORROWINGS
    2005(Amounts in thousands)Due in 2006
    
    $
    Due in 2007
    
    
    40,000Due in 2008
    
    
    5,000Due in 2009
    
    
    10,000Due in 2010
    
    
    35,000Thereafter
    
    
    67,478$
    157,478
    Page 86




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (10) BORROWINGS (Continued)
  2005
    
    
    2004(Amounts in thousands)Short-term borrowingsFHLB
    
    $
    
    
    
    $
    20,000Federal funds purchased
    
    
    4,000
    
    
    
    19,001Repurchase agreements
    
    
    5,186
    
    
    
    30,646$
    9,186
    
    
    $
    69,647Long-term borrowingsFHLB
    
    $
    157,478
    
    
    $
    127,840Jr. subordinated debentures
    
    
    35,073
    
    
    
    35,653$
    192,551
    
    
    $
    163,493
 (11) JUNIOR SUBORDINATED DEBENTURES
    Carrying value atShares
    
    
    Interest
    
    
    Maturity
    
    
    December 31,Issuing Entity
    
    outstanding
    
    
    Rate
    
    
    date
    
    
    2005
    
    
    2004Southern Community Capital Trust I
    
    
    1,707,500
    
    
    
    7.25
    %
    
    
    3/31/32
    
    
    $
    
    
    
    $
    Southern Community Capital Trust II
    
    
    3,450,000
    
    
    
    7.95
    %
    
    
    12/31/33
    
    
    
    35,073
    
    
    
    35,653$
    35,073
    
    
    $
    35,653
 Page 87




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (12) EMPLOYEE AND DIRECTOR BENEFIT PLANS
 401(k) Retirement Plan
  Employment Agreements
  Termination Agreements
  Defined Benefit Pension Plan
  Page 88




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (12) EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
 Defined Benefit Pension Plan (Continued)
 2005
    
    
    2004(Amounts in thousands)Change in Benefit ObligationBeginning of year
    
    $
    775
    
    
    $
    920Actuarial loss
    
    
    25
    
    
    
    72Service cost
    
    
    
    
    
    
    101Interest cost
    
    
    51
    
    
    
    73Settlement
    
    
    
    
    
    
    (381
    )Benefits paid
    
    
    (28
    )
    
    
    (10
    )End of year
    
    $
    823
    
    
    $
    775Change in Plan Assets Fair ValueBeginning of year
    
    $
    1,034
    
    
    $
    1,014Benefits paid
    
    
    (28
    )
    
    
    (10
    )Contributions
    
    
    
    
    
    
    Return on assets
    
    
    103
    
    
    
    30End of year
    
    $
    1,109
    
    
    $
    1,034Funded status
    
    $
    286
    
    
    $
    259Unrecognized (gain)/loss
    
    
    2
    
    
    
    Unrecognized prior service cost
    
    
    
    
    
    
    Prepaid pension cost recognized
    
    $
    288
    
    
    $
    259Actuarial assumptions used in accounting for net periodic pension cost were:Weighted average discount rate
    
    
    6.50
    %
    
    
    6.50
    %Weighted average rate of increase in
compensation level
    
    
    N/A
    
    
    
    5.00
    %Weighted average expected long-term
rate of return on plan assets
    
    
    7.50
    %
    
    
    7.50
    %Components of Net Periodic Pension Cost (Benefit)Service cost
    
    $
    
    
    
    $
    101Interest cost
    
    
    51
    
    
    
    73Expected return on plan assets
    
    
    (79
    )
    
    
    (76
    )Loss
    
    
    
    
    
    
    5Amortization of prior service cost
    
    
    
    
    
    
    7Net periodic pension cost (benefit)
    
    $
    (28
    )
    
    $
    110
 Page 89




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (12) EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
 Defined Benefit Pension Plan (Continued)
      2005Asset category:U.S. equity
    
    
    58
    %International equity
    
    
    5Fixed income and cash equivalents
    
    
    37
  Year
    
    
    
    
    
    Pension Benefits2006
    
    
    
    
    
    $
    342007
    
    
    
    
    
    
    362008
    
    
    
    
    
    
    382009
    
    
    
    
    
    
    382010
    
    
    
    
    
    
    372011 - 2015
    
    
    
    
    
    
    229
 Page 90




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (12) EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
 Supplemental Retirement
   Employee Stock Purchase Plan
    Stock Option Plans
   Page 91




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (12) EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
 Stock Option Plans (Continued)
  Outstanding Options
    
    
    Exercisable OptionsWeighted
    
    
    
    
    
    
    WeightedShares
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageAvailable for
    
    
    Number
    
    
    Exercise
    
    
    Number
    
    
    ExerciseFuture Grants
    
    
    Outstanding
    
    
    Price
    
    
    Outstanding
    
    
    PriceAt December 31, 2002
    
    
    123,315
    
    
    
    1,435,129
    
    
    $
    4.88
    
    
    
    1,259,229
    
    
    $
    4.59Options authorized
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted/vested
    
    
    (150,000
    )
    
    
    150,000
    
    
    
    8.45
    
    
    
    104,187
    
    
    
    7.85Options exercised
    
    
    
    
    
    
    (173,926
    )
    
    
    5.32
    
    
    
    (173,926
    )
    
    
    5.32Options forfeited
    
    
    39,192
    
    
    
    (39,192
    )
    
    
    8.55
    
    
    
    (39,192
    )
    
    
    8.55At December 31, 2003
    
    
    512,507
    
    
    
    1,372,011
    
    
    
    5.35
    
    
    
    1,150,298
    
    
    
    4.79Options authorized
    
    
    297,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted/vested
    
    
    (454,536
    )
    
    
    454,536
    
    
    
    10.15
    
    
    
    203,593
    
    
    
    8.13Options exercised
    
    
    
    
    
    
    (323,710
    )
    
    
    4.47
    
    
    
    (323,710
    )
    
    
    4.47Options forfeited
    
    
    24,543
    
    
    
    (24,543
    )
    
    
    8.99
    
    
    
    (24,543
    )
    
    
    8.99At December 31, 2004
    
    
    379,514
    
    
    
    1,478,294
    
    
    
    7.25
    
    
    
    1,005,638
    
    
    
    5.37Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted/vested
    
    
    (78,500
    )
    
    
    78,500
    
    
    
    9.41
    
    
    
    543,156
    
    
    
    4.79Options exercised
    
    
    
    
    
    
    (232,979
    )
    
    
    4.21
    
    
    
    (232,979
    )
    
    
    4.21Options forfeited
    
    
    51,898
    
    
    
    (51,898
    )
    
    
    9.55
    
    
    
    (51,898
    )
    
    
    9.55At December 31, 2005
    
    
    352,912
    
    
    
    1,271,917
    
    
    $
    7.51
    
    
    
    1,263,917
    
    
    $
    7.50
  Number of
    
    
    Number ofRange of Exercise Prices
    
    
    
    
    
    Options Outstanding
    
    
    Options Exercisable$3.05 - $6.66
    
    
    
    
    
    
    588,146
    
    
    
    588,146$6.67 - $8.90
    
    
    
    
    
    
    117,963
    
    
    
    117,963$8.91 - $14.64
    
    
    
    
    
    
    565,808
    
    
    
    557,808Outstanding at end of year
    
    
    
    
    
    
    1,271,917
    
    
    
    1,263,917
 Page 92




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (12) EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
 Stock Option Plans (Continued)
  2005
    
    
    2004
    
    
    2003Estimated fair value of options granted
    
    $
    2.85
    
    
    $
    4.64
    
    
    $
    4.54Assumptions in estimating average option values:Risk-free interest rate
    
    
    3.50
    %
    
    
    3.48
    %
    
    
    3.00
    %Dividend yield
    
    
    1.25
    %
    
    
    1.00
    %
    
    
    0.00
    %Volatility
    
    
    30.00
    %
    
    
    33.00
    %
    
    
    39.00
    %Expected life
    
    6 years
    
    7 years
    
    7 years
 (13) LEASES
  2006
    
    $
    9952007
    
    
    8562008
    
    
    7812009
    
    
    6472010
    
    
    652Thereafter
    
    
    4,194Total
    
    $
    8,125
  Page 93




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (14) INCOME TAXES
  2005
    
    
    2004
    
    
    2003(Amounts in thousands, restated)Current tax provisionFederal
    
    $
    4,040
    
    
    $
    3,163
    
    
    $
    1,952State
    
    
    644
    
    
    
    561
    
    
    
    3774,684
    
    
    
    3,724
    
    
    
    2,329Deferred tax provisionFederal
    
    
    (428
    )
    
    
    675
    
    
    
    (273
    )State
    
    
    (95
    )
    
    
    157
    
    
    
    (137
    )(523
    )
    
    
    832
    
    
    
    (410
    )Net provision for income taxes
    
    $
    4,161
    
    
    $
    4,556
    
    
    $
    1,919
  2005
    
    
    2004
    
    
    2003(Amounts in thousands, restated)Tax computed at the statutory federal rate
    
    $
    4,023
    
    
    $
    4,310
    
    
    $
    1,868Increase (decrease) resulting from:State income taxes, net of federal benefit
    
    
    387
    
    
    
    475
    
    
    
    160Tax exempt income
    
    
    (360
    )
    
    
    (520
    )
    
    
    (77
    )Valuation allowance
    
    
    131
    
    
    
    227
    
    
    
    Other permanent differences
    
    
    (20
    )
    
    
    64
    
    
    
    (32
    )138
    
    
    
    246
    
    
    
    51Provision for income taxes
    
    $
    4,161
    
    
    $
    4,556
    
    
    $
    1,919
 Page 94




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (14) INCOME TAXES (Continued)
  2005
    
    
    2004(Amounts in thousands,restated)Deferred tax assets relating to:Allowance for loan losses
    
    $
    4,349
    
    
    $
    4,513Deferred compensation
    
    
    1,041
    
    
    
    1,001Accumulated other comprehensive income
    
    
    1,976
    
    
    
    Derivative financial instrument
    
    
    363
    
    
    
    27NEL carryforward
    
    
    358
    
    
    
    227Other
    
    
    416
    
    
    
    760Total deferred tax assets
    
    
    8,503
    
    
    
    6,528Less: valuation allowance
    
    
    358
    
    
    
    227Total deferred tax assets net of valuation allowance
    
    
    8,145
    
    
    
    6,301Deferred tax liabilities relating to:Property and equipment
    
    
    (1,312
    )
    
    
    (1,542
    )Loan fees and costs
    
    
    (570
    )
    
    
    (473
    )Core deposit intangible
    
    
    (679
    )
    
    
    (762
    )Accumulated other comprehensive income
    
    
    
    
    
    
    (15
    )Prepaid expenses
    
    
    (223
    )
    
    
    (249
    )Other
    
    
    (423
    )
    
    
    (700
    )Total deferred tax liabilities
    
    
    (3,207
    )
    
    
    (3,741
    )Net recorded deferred tax asset
    
    $
    4,938
    
    
    $
    2,560
  Page 95




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (15) NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE
  2005
    
    
    2004
    
    
    2003(Amounts in thousands, restated)Service charges and fees on deposit accounts
    
    $
    3,755
    
    
    $
    3,502
    
    
    $
    1,442Presold mortgage loan fees
    
    
    1,106
    
    
    
    750
    
    
    
    1,350Investment brokerage fees
    
    
    743
    
    
    
    712
    
    
    
    947SBIC management fees
    
    
    423
    
    
    
    552
    
    
    
    562Gain (loss) on economic hedges
    
    
    (743
    )
    
    
    127
    
    
    
    (116
    )Net cash settlement on economic hedges
    
    
    79
    
    
    
    416
    
    
    
    164Earnings from equity method investment in SBIC
    
    
    788
    
    
    
    107
    
    
    
    Loss on sale of investment securities
    
    
    (266
    )
    
    
    
    
    
    
    Other
    
    
    1,249
    
    
    
    1,783
    
    
    
    684Total
    
    $
    7,134
    
    
    $
    7,949
    
    
    $
    5,033
   2005
    
    
    2004
    
    
    2003(Amounts in thousands)Postage, printing and office supplies
    
    $
    859
    
    
    $
    875
    
    
    $
    383Telephone and communication
    
    
    851
    
    
    
    799
    
    
    
    491Advertising and promotion
    
    
    896
    
    
    
    776
    
    
    
    862Data processing and other outsourced services
    
    
    571
    
    
    
    1,503
    
    
    
    1,317Professional services
    
    
    1,745
    
    
    
    1,723
    
    
    
    706Other
    
    
    4,569
    
    
    
    3,743
    
    
    
    1,926Total
    
    $
    9,491
    
    
    $
    9,419
    
    
    $
    5,685
 (16) REGULATORY MATTERS
   Page 96




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (16) REGULATORY MATTERS (Continued)
  Minimum To Be WellMinimum For Capital
    
    Capitalized UnderActual
    
    Adequacy Purposes
    
    Prompt CorrectiveAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Amounts in thousands, restated)As of December 31, 2005Total Capital (to Risk-Weighted Assets)
    
    $
    119,693
    
    
    
    11.88
    %
    
    $
    80,600
    
    
    
    8.00
    %
    
    $
    100,800
    
    
    
    10.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    107,908
    
    
    
    10.71
    %
    
    
    40,300
    
    
    
    4.00
    %
    
    
    60,500
    
    
    
    6.00
    %Tier I Capital (to Average Assets)
    
    
    107,908
    
    
    
    8.65
    %
    
    
    49,900
    
    
    
    4.00
    %
    
    
    62,400
    
    
    
    5.00
    %As of December 31, 2004Total Capital (to Risk-Weighted Assets)
    
    $
    110,634
    
    
    
    11.68
    %
    
    $
    75,800
    
    
    
    8.00
    %
    
    $
    94,700
    
    
    
    10.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    98,788
    
    
    
    10.43
    %
    
    
    37,850
    
    
    
    4.00
    %
    
    
    56,810
    
    
    
    6.00
    %Tier I Capital (to Average Assets)
    
    
    98,788
    
    
    
    8.54
    %
    
    
    46,300
    
    
    
    4.00
    %
    
    
    57,800
    
    
    
    5.00
    %
  At December 31, 2005
    
    At December 31, 2004Actual
    
    ActualAmount
    
    Ratio
    
    Amount
    
    Ratio(Amounts in thousands, restated)Total risk-based capital ratio
    
    $
    133,513
    
    
    
    13.21
    %
    
    $
    131,769
    
    
    
    13.81
    %Tier 1 risk-based capital ratio
    
    
    120,661
    
    
    
    11.94
    %
    
    
    112,379
    
    
    
    11.78
    %Leverage ratio
    
    
    120,661
    
    
    
    9.60
    %
    
    
    112,379
    
    
    
    9.67
    %
 (17) DERIVATIVES
 Derivative Financial Instruments
   Page 97




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (17) DERIVATIVES
 Risk Management Policies  Hedging Instruments
   December 31, 2005
    
    
    December 31, 2004Notional
    
    
    
    
    
    
    NotionalFair Value
    
    
    Amount
    
    
    Fair Value
    
    
    Amount(Amounts in thousands, restated)Fair value hedgesInterest rate swaps associated
with borrowing activities
    
    $
    (488
    )
    
    $
    20,000
    
    
    $
    85
    
    
    $
    20,000Derivatives not designated as accounting hedgesInterest rate options associated
with lending activities
    
    
    42
    
    
    
    50,000
    
    
    
    
    
    
    
    Interest rate swaps associated
with deposit taking activities
    
    
    (1,262
    )
    
    
    58,500
    
    
    
    (384
    )
    
    
    38,500$
    (1,708
    )
    
    $
    128,500
    
    
    $
    (299
    )
    
    $
    58,500
    Interest Rate Risk Management  Cash Flow Hedging Instruments
  Page 98




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (17) DERIVATIVES (Continued)
 Interest Rate Risk Management  Fair Value Hedging Instruments
  (18) OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES
    2005
    
    2004Financial instruments whose contract amounts represent credit risk:Loan commitments and undisbursed lines of credit
    
    $
    206,691
    
    
    $
    174,970Undisbursed standby letters of credit
    
    
    12,012
    
    
    
    500Undisbursed portion of construction loans
    
    
    92,412
    
    
    
    48,938
   Page 99




---



##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (19) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
   Cash and due from banks, federal funds sold, and other interest-bearing deposits
  Investment securities
  Loans
  Investment in bank-owned life insurance
  Deposits
  Borrowings
  Accrued interest
  Derivative financial instruments
  Page 100




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (19) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
 Financial instruments with off-balance sheet risk
   2005
    
    
    2004Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    Estimatedamount
    
    
    fair value
    
    
    amount
    
    
    fair value(Amounts in thousands, restated)Financial assets:Cash and due from banks
    
    $
    24,606
    
    
    $
    24,606
    
    
    $
    17,758
    
    
    $
    17,758Federal funds sold and other interest-bearing deposits
    
    
    648
    
    
    
    648
    
    
    
    80
    
    
    
    80Investment securities available for sale
    
    
    203,808
    
    
    
    203,808
    
    
    
    237,764
    
    
    
    237,764Investment securities held to maturity
    
    
    88,108
    
    
    
    85,774
    
    
    
    75,145
    
    
    
    74,705Loans, net
    
    
    857,042
    
    
    
    848,159
    
    
    
    783,566
    
    
    
    801,075Investment in life insurance
    
    
    10,617
    
    
    
    10,617
    
    
    
    10,263
    
    
    
    10,263Accrued interest receivable
    
    
    6,065
    
    
    
    6,065
    
    
    
    4,928
    
    
    
    4,928Financial liabilities:Deposits
    
    
    941,949
    
    
    
    934,371
    
    
    
    845,501
    
    
    
    831,200Short-term borrowings
    
    
    9,186
    
    
    
    9,178
    
    
    
    69,647
    
    
    
    69,607Long-term borrowings
    
    
    192,551
    
    
    
    194,052
    
    
    
    163,493
    
    
    
    167,328Accrued interest payable
    
    
    3,664
    
    
    
    3,664
    
    
    
    2,260
    
    
    
    2,260On-balance sheet derivative financial instruments:Interest rate swap and option agreements:Liabilities, net
    
    
    (1,708
    )
    
    
    (1,708
    )
    
    
    (299
    )
    
    
    (299
    )
 Page 101




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (20) PARENT COMPANY FINANCIAL DATA
  Condensed Balance Sheets
December 31, 2005 and 2004
 2005
    
    
    2004Assets:Cash and due from banks
    
    $
    10,562
    
    
    $
    14,612Investment in subsidiary
    
    
    157,693
    
    
    
    150,776Investment securities available for sale
    
    
    278
    
    
    
    298Other assets
    
    
    1,431
    
    
    
    6,810Total assets
    
    $
    169,964
    
    
    $
    172,496Liabilities:Junior subordinated debentures
    
    $
    35,073
    
    
    $
    35,654Other liabilities
    
    
    6
    
    
    
    8Total liabilities
    
    
    35,079
    
    
    
    35,662Stockholders equityCommon stock
    
    
    122,490
    
    
    
    125,200Retained earnings
    
    
    15,546
    
    
    
    11,621Accumulated other comprehensive income (loss)
    
    
    (3,151
    )
    
    
    13Total stockholders equity
    
    
    134,885
    
    
    
    136,834Total
liabilities and stockholders equity
    
    $
    169,964
    
    
    $
    172,496
 Condensed Statements of Operations
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Equity in income of subsidiaries
    
    $
    9,615
    
    
    $
    9,675
    
    
    $
    4,549Interest income
    
    
    144
    
    
    
    542
    
    
    
    232Other income
    
    
    64
    
    
    
    
    
    
    
    4Interest expense
    
    
    (2,376
    )
    
    
    (1,999
    )
    
    
    (1,543
    )Other expense
    
    
    (747
    )
    
    
    (890
    )
    
    
    (312
    )Income tax benefit
    
    
    973
    
    
    
    787
    
    
    
    648Net income
    
    $
    7,673
    
    
    $
    8,115
    
    
    $
    3,578
 Page 102




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##### 



SOUTHERN COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
 (20) PARENT COMPANY FINANCIAL DATA (Continued)
 Condensed Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Operating activities:Net income
    
    $
    7,673
    
    
    $
    8,115
    
    
    $
    3,578Equity in income of subsidiaries
    
    
    (9,615
    )
    
    
    (9,675
    )
    
    
    (4,549
    )Amortization of debt issuance costs
    
    
    51
    
    
    
    61
    
    
    
    44(Increase) decrease in receivable from subsidiaries
    
    
    
    
    
    
    39,000
    
    
    
    (31,350
    )(Increase) decrease in other assets
    
    
    4,309
    
    
    
    (774
    )
    
    
    (1,468
    )2,418
    
    
    
    36,727
    
    
    
    (33,745
    )Investment activities:Investment in subsidiaries
    
    
    86
    
    
    
    (21,985
    )
    
    
    Purchase of investments
    
    
    
    
    
    
    (228
    )
    
    
    86
    
    
    
    (22,213
    )
    
    
    Financing activities:Proceeds from junior subordinated debentures,
net of debt issuance costs
    
    
    
    
    
    
    
    
    
    
    33,292Proceeds from exercise of stock options
    
    
    1,465
    
    
    
    1,616
    
    
    
    770Cost of shares repurchased
    
    
    (4,271
    )
    
    
    
    
    
    
    Cash dividend paid
    
    
    (3,748
    )
    
    
    (1,902
    )
    
    
    (6,554
    )
    
    
    (286
    )
    
    
    34,062Net increase in cash
    
    
    (4,050
    )
    
    
    14,228
    
    
    
    317Cash, beginning of year
    
    
    14,612
    
    
    
    384
    
    
    
    67Cash, end of year
    
    $
    10,562
    
    
    $
    14,612
    
    
    $
    384
  (21) SUBSEQUENT EVENTS (unaudited)
  Page 103




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##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Managements Report On Internal Control Over Financial Reporting (as restated)
  Internal Control 
Integrated Framework
  Internal
ControlIntegrated Framework
   Page 104




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##### 



Changes in Internal Controls over Financial Reporting
  
    
    Enhancing risk management policies and procedures related to reviewing derivative transactions;
    
    Reviewing policies and procedures related to the initiation and subsequent review of hedge strategies;
    
    Engaging a third-party consultant to provide ongoing expertise related to hedge
documentation at inception and ongoing monitoring and to assist management in evaluating
the appropriateness of the accounting for these transactions in accordance with Generally
Accepted Accounting Principles;
    
    Changing policies and procedures to limit the Companys use of the short-cut method.
  /s/ F. Scott Bauer

F. Scott Bauer
    
    
    
    /s/ David W. Hinshaw

David W. HinshawChairman and Chief Executive Officer
    
    
    
    Executive Vice President and Chief Financial Officer
 Page 105




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##### 



Report Of Independent Registered Public Accounting Firm
 
 Internal ControlIntegrated Framework
     Page 106




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##### 



Internal
ControlIntegrated Framework Internal ControlIntegrated Framework
  /s/ Dixon Hughes PLLC
   Page 107




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##### 



Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
   Equity Compensation Plan Information
 Number of securitiesremaining available forNumber of securities
    
    
    
    
    
    
    future issuance underto be issued
    
    
    Weighted-average
    
    
    equity compensationupon exercise of
    
    
    exercise price of
    
    
    plansoutstanding options,
    
    
    outstanding options,
    
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column(a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
Stock Option Plans
    
    
    1,271,917
    
    
    $
    7.51
    
    
    
    420,082Employee Stock Purchase Plan
    
    
    19,061
    
    
    $
    8.79
    
    
    
    937,530Equity compensation
plans not approved
by security holders
    
    NA
    
    NA
    
    NATotal
    
    
    1,290,978
    
    
    $
    7.53
    
    
    
    1,357,612
 Page 108




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##### 



PART III (Continued)
 
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  Page 109




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##### 



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules
 (a)(1) Financial Statements. The following financial statements and supplementary data are included
in Item 8 of this report.
 Financial Statements
    

Form
10-K/A PageReport of Independent Registered Public Accounting Firm
    
    
    62Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    63Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003
    
    
    64Consolidated Statements of Comprehensive Income for the years ended
December 31, 2005, 2004 and 2003
    
    
    65Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2005, 2004 and 2003
    
    
    66Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
    
    
    67-68Notes to Consolidated Financial Statements
    
    
    69-103
 (a)(2) Financial Statement Schedules. All applicable financial statement schedules required under
Regulation S-X have been included in the Notes to the
Consolidated Financial Statements.
 (a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.
 Page 110




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##### 



Exhibit No.
    
    DescriptionExhibit 3.1:
    
    Articles of Incorporation (incorporated by reference to Exhibit 3(i) to the Current
Report on Form 8-K dated October 1, 2001)Exhibit 3.2:
    
    Bylaws (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K dated November 21, 2005)Exhibit 3.3:
    
    Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.3 to the Annual Report on Form
10-K for the year ended December 31, 2001 (2001 Annual Report))Exhibit 4.1:
    
    Specimen certificate for Common Stock of Southern Community Financial Corporation (incorporated by reference
to Exhibit 4 to the Current Report on Form 8-K dated October 1, 2001)Exhibit 4.2:
    
    Form of 7.95% Convertible Junior Subordinated Debenture (incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-3 dated September 26, 2003, Registration No. 333-109167 (the S-3
Registration Statement))Exhibit 4.3:
    
    Form of Certificate for 7.95% Trust Preferred Security of Southern Community Capital Trust II (incorporated by
reference to Exhibit 4.6 to the S-3 Registration Statement)Exhibit 10.1:
    
    1997 Incentive Stock Option Plan of Southern Community Financial
Corporation (incorporated by reference to Exhibit 10.1 to Amendment Number One to the Registration Statement
on Form S-2 dated January 10, 2002, Registration Number 333-74084 (the Amended S-2 Registration Statement))Exhibit 10.2:
    
    1997 Non-Statutory Stock Option Plan of Southern Community Financial Corporation (incorporated by reference to
Exhibit 10.2 to the Amended S-2 Registration Statement)Exhibit 10.3:
    
    2002 Incentive Stock Option Plan of Southern Community Financial Corporation (incorporated by reference to
Exhibit 10.7 to the Annual Report on Form 10-K for the year ended December 31, 2003 (2003 Annual Report))Exhibit 10.4:
    
    2002 Non-Statutory Stock Option Plan of Southern Community Financial Corporation (incorporated by reference to
Exhibit 10.8 to the 2003 Annual Report)Exhibit 10.5:
    
    Indenture with respect to the Companys 7.95% Convertible Junior Subordinated Debentures (incorporated by
reference to Exhibit 10.9 to the 2003 Annual Report)Exhibit 10.6:
    
    Amended and Restated Trust Agreement of Southern Community Capital Trust II (incorporated by reference to
Exhibit 10.10 to the 2003 Annual Report)Exhibit 10.7:
    
    Guarantee Agreement for Southern Community Capital Trust II (incorporated by reference to Exhibit 10.11 to the
2003 Annual Report)Exhibit 10.8:
    
    Agreement as to Expenses and Liabilities with respect to Southern Community Capital Trust II (incorporated by
reference to Exhibit 10.12 to the 2003 Annual Report)Exhibit 10.9:
    
    2002 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.13 to the 2003 Annual Report)Exhibit 10.10
    
    The Community Bank Amended and Restated Stock Option Plan for Key Employees (incorporated by reference to
Exhibit 4.2 to the Registration Statement on Form S-8 dated April 29, 2004, Registration Number 333-114997)Exhibit 10.11:
    
    2001 Incentive Stock Option Plan of Southern Community Financial Corporation (incorporated by reference to
Exhibit 4.2 to the Registration Statement on Form S-8 dated April 29, 2004, Registration Number 333-114993)Exhibit 10.12:
    
    2001 Stock Option Plan for Directors of Southern Community Financial Corporation (incorporated by reference to
Exhibit 4.2 to the Registration Statement on Form S-8 dated April 29, 2004, Registration Number 333-114991)Exhibit 21:
    
    Subsidiaries of the RegistrantExhibit 23:
    
    Consent of Dixon Hughes PLLCExhibit 31.1:
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Executive OfficerExhibit 31.2:
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Financial OfficerExhibit 32:
    
    Section 1350 Certifications
 Page 111




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##### 



SIGNATURES
  SOUTHERN COMMUNITYFINANCIAL CORPORATIONDate: August 9, 2006
    
    By:
    
    /s/ F. Scott BauerF. Scott BauerChairman and Chief Executive Officer
  SIGNATURE
    
    TITLE
    
    DATE/s/ F. Scott Bauer

F. Scott Bauer
    
    Chairman of the Board and Chief
Executive Officer
    
    August 9, 2006/s/ David W. Hinshaw

David W. Hinshaw
    
    Executive Vice President and Chief
Financial Officer
(principal financial
and accounting officer)
    
    August 9, 2006/s/ Durward A. Smith, Jr.

Durward A. Smith, Jr.
    
    Vice Chairman of the Board
    
    August 9, 2006/s/ Don Gray Angell

Don Gray Angell
    
    Director
    
    August 9, 2006/s/ Zack W. Blackmon, Sr.

Zack W. Blackmon, Sr.
    
    Director
    
    August 9, 2006/s/ James G. Chrysson

James G. Chrysson
    
    Director
    
    August 9, 2006
 Page 112




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##### 



SIGNATURE
    
    TITLE
    
    DATE/s/ James O. Frye

James O. Frye
    
    Director
    
    August 9, 2006/s/ Matthew G. Gallins

Matthew G. Gallins
    
    Director
    
    August 9, 2006/s/ Lynn L. Lane

Lynn L. Lane
    
    Director
    
    August 9, 2006/s/ H. Lee Merritt, Jr.

H. Lee Merritt, Jr.
    
    Director
    
    August 9, 2006/s/ W. Samuel Smoak

W. Samuel Smoak
    
    Director
    
    August 9, 2006/s/ William G. Ward, Sr., M.D.

William G. Ward, Sr., M.D.
    
    Director
    
    August 9, 2006
 Page 113