##### Table of Contents



Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT UNDER 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 333-86082
 SOUTHERN COMMUNITY BANCSHARES, INC.
 (Name of Small Business Issuer in Its Charter)
 Georgia
    
    58-2639705(State of Incorporation)
    
    (I.R.S. EmployerIdentification No.)
 525 North Jeff Davis Drive, Fayetteville, Georgia 30214  (Address of principal executive offices)(Zip Code)
 (770) 461-4365  (Issuers telephone number)
 (Title of Class)
 o þ
 þ o
 o
  o o o
 o þ
   o þ
 DOCUMENTS INCORPORATED BY REFERENCE




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##### 



SOUTHERN COMMUNITY BANCSHARES, INC.  Annual Report on Form 10-KSB  For the Fiscal Year Ended December 31, 2005
 Table of Contents
 Item
    
    
    
    PageNumber
    
    
    
    NumberPart I1.
    
    Description of Business
    
    
    32.
    
    Description of Property
    
    
    183.
    
    Legal Proceedings
    
    
    184.
    
    Submission of Matters to a Vote of
Security Holders
    
    
    18Part II5.
    
    Market for Common Equity and
Related Stockholder Matters
    
    
    186.
    
    Managements Discussion and Analysis
or Plan of Operation
    
    
    197.
    
    Financial Statements
    
    
    398.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    408A.
    
    Controls and Procedures
    
    
    408B.
    
    Other Information
    
    
    40Part III9.
    
    Directors, Executive Officers, Promoters and Control
Persons; Compliance with section 16(a) of the Exchange Act
    
    
    4010.
    
    Executive Compensation
    
    
    4011.
    
    Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
    
    
    4112.
    
    Certain Relationships and Related Transactions
    
    
    4113.
    
    Exhibits
    
    
    4114.
    
    Principal Accountant Fees and Services
    
    
    42Signatures
    
    
    43EX-21 SUBSIDIARIES OF THE REGISTRANTEX-23 CONSENT OF MAULDIN & JENKINS, LLCEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEOEX-32.2 SECTION 906, CERTIFICATION OF THE CFO




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PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 Overview
 The Company
 ,
   Employees
  Customers
  3




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Competition
  th
  Types of Loans
  Consumer Loans
   4




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
    
    Home equity loans  open and closed end
    
    Vehicle financing
    
    Loans secured by deposits
    
    Overdraft protection lines
    
    Secured and unsecured personal loans
  Commercial and Industrial Loans
  5




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Commercial Real Estate
   Construction and Development Loans
  Managements Policy for determining the Loan Loss Allowance
  6




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Managements Policy for Investing in Securities
  
    
    Provide an investment medium for funds which are not needed to meet loan demand, or
deposit withdrawal.
    
    Optimize income generated from the investment account consistent with the stated
objectives for liquidity and quality standards.
    
    Meet regulatory standards.
    
    Provide collateral which the financial institution is required to pledge against
public monies.
    
    Provide an investment medium for funds which may be needed for liquidity purposes.
    
    Provide an investment medium which will balance market and credit risk for other
assets and the financial institutions liability structure.
 Supervision and Regulation
 7




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Southern Community Bancshares
  Acquisition of Banks
  
    
    acquiring direct or indirect ownership or control of any voting shares of any
bank if, after the acquisition, the bank holding company will directly or
indirectly own or control more than 5% of the banks voting shares;
    
    acquiring all or substantially all of the assets of any bank; or
    
    merging or consolidating with any other bank holding company.
   8




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Change in Bank Control
  
    
    the bank holding company has registered securities under Section 12 of the
Exchange Act; or
    
    no other person owns a greater percentage of that class of voting securities
immediately after the transaction.
  Permitted Activities
  
    
    banking or managing or controlling banks; and
    
    any activity that the Federal Reserve determines to be so closely related to
banking as to be a proper incident to the business of banking.
  
    
    factoring accounts receivable;
    
    making, acquiring, brokering or servicing loans and usual related activities;
    
    leasing personal or real property;
    
    operating a non-bank depository institution, such as a savings association;
    
    trust company functions;
    
    financial and investment advisory activities;
    
    conducting discount securities brokerage activities;
    
    underwriting and dealing in government obligations and money market instruments;
    
    providing specified management consulting and counseling activities;
 9




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
    
    performing selected data processing services and support services;
    
    acting as agent or broker in selling credit life insurance and other types of
insurance in connection with credit transactions; and
    
    performing selected insurance underwriting activities.
   
    
    lending, trust and other banking activities;
    
    insuring, guaranteeing, or indemnifying against loss or harm, or providing and
issuing annuities, and acting as principal, agent, or broker for these purposes, in
any state;
    
    providing financial, investment, or advisory services;
    
    issuing or selling instruments representing interests in pools of assets
permissible for a bank to hold directly;
    
    underwriting, dealing in or making a market in securities;
    
    other activities that the Federal Reserve may determine to be so closely related
to banking or managing or controlling banks as to be a proper incident to managing
or controlling banks;
    
    foreign activities permitted outside of the United States if the Federal Reserve
has determined them to be usual in connection with banking operations abroad;
    
    merchant banking through securities or insurance affiliates; and
    
    insurance company portfolio investments.
  Support of Subsidiary Institutions
 10




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Southern Community Bank
   Branching
   Prompt Corrective Action
 11




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FDIC Insurance Assessments
   12




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Community Reinvestment Act
  Other Regulations
   
    
    federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
    
    Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine whether
a financial institution is fulfilling its obligation to help meet the housing needs
of the community it serves;
    
    Equal Credit Opportunity Act, prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit;
    
    Fair Credit Reporting Act of 1978, governing the use and provisions of
information to credit reporting agencies;
    
    Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies;
    
    Soldiers and Sailors Civil Relief Act of 1940, governing the repayment terms
of, and property rights underlying, secured obligations of persons in military
service; and
    
    rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws.
 13




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
    
    the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records; and
    
    the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
to implement that act, which govern automatic deposits to and withdrawals from
deposit accounts and customers rights and liabilities arising from the use of
automated teller machines and other electronic banking services.
 Capital Adequacy
    14




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Payment of Dividends
    Restrictions on Transactions with Affiliates
  15




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
    
    a banks loans or extensions of credit to affiliates;
    
    a banks investment in affiliates;
    
    assets a bank may purchase from affiliates, except for real and personal
property exempted by the Federal Reserve;
    
    loans or extensions of credit made by a bank to third parties collateralized by
the securities or obligations of affiliates; and
    
    a banks guarantee, acceptance or letter of credit issued on behalf of an
affiliate.
    Privacy
  Consumer Credit Reporting
   16




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
    
    requirements for financial institutions to develop policies and procedures to
identify potential identity theft and, upon the request of a consumer, place a
fraud alert in the consumers credit file stating that the consumer may be the
victim of identity theft or other fraud.
    
    for entities that furnish information to consumer reporting agencies (which
would include the Bank), requirements to implement procedures and policies
regarding the accuracy and integrity of the furnished information and regarding the
correction of previously furnished information that is later determined to be
inaccurate; and
    
    a requirement for mortgage lenders to disclose credit scores to consumers.
  Anti-Terrorism and Money Laundering Legislation
  Proposed Legislation and Regulatory Action
  17




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##### Table of Contents



ITEM 2. DESCRIPTION OF PROPERTY
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
     18




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Estimated Price Range PerShareHigh
    
    Low$
    
    $2005First Quarter
    
    $
    21.00
    
    
    $
    19.50Second Quarter
    
    
    23.00
    
    
    
    20.00Third Quarter
    
    
    23.45
    
    
    
    20.85Fourth Quarter
    
    
    22.00
    
    
    
    18.502004First Quarter
    
    $
    19.69
    
    
    $
    11.25Second Quarter
    
    
    19.69
    
    
    
    13.31Third Quarter
    
    
    21.00
    
    
    
    18.00Fourth Quarter
    
    
    20.99
    
    
    
    19.50
 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  FORWARD-LOOKING STATEMENTS
  19




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OVERVIEW
  CRITICAL ACCOUNTING POLICIES
      20




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21




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FINANCIAL CONDITION AS OF DECEMBER 31, 2005 AND 2004
  December 31,2005
    
    
    2004(Dollars in Thousands)Cash and due from banks
    
    $
    6,061
    
    
    $
    3,644Interest bearing deposits in banks
    
    
    624
    
    
    
    2,038Federal funds sold
    
    
    2,607
    
    
    
    18,378Securities
    
    
    53,391
    
    
    
    50,616Restricted equity securities
    
    
    1,892
    
    
    
    1,471Loans, net
    
    
    250,953
    
    
    
    184,721Premises and equipment
    
    
    9,596
    
    
    
    7,777Other assets
    
    
    8,725
    
    
    
    2,600$
    333,849
    
    
    $
    271,245Total deposits
    
    $
    261,639
    
    
    $
    215,764Other borrowings
    
    
    30,000
    
    
    
    24,000Securities sold under repurchase agreements
    
    
    13,163
    
    
    
    4,753Other liabilities
    
    
    1,733
    
    
    
    698Subordinated debentures
    
    
    5,774
    
    
    
    5,774Shareholders equity
    
    
    21,540
    
    
    
    20,256$
    333,849
    
    
    $
    271,245
   22




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LIQUIDITY AND CAPITAL RESOURCES
  23




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Payments Due After December 31, 20051 Year
    
    
    1 - 3
    
    
    4 - 5
    
    
    After 5Total
    
    
    or Less
    
    
    Years
    
    
    Years
    
    
    YearsShort-term borrowings
    
    $
    13,163
    
    
    $
    13,163
    
    
    $
    
    
    
    $
    
    
    
    $
    Time certificates of deposit
    
    
    173,478
    
    
    
    127,134
    
    
    
    37,279
    
    
    
    9,065
    
    
    
    Federal Home Loan Bank advances
    
    
    30,000
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    10,000Subordinated debentures
    
    
    5,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,774Total contractual cash obligations
    
    $
    222,415
    
    
    $
    140,297
    
    
    $
    57,279
    
    
    $
    9,065
    
    
    $
    15,774
        24




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RegulatoryActual
    
    RequirementsLeverage capital ratio
    
    
    8.06
    %
    
    
    5
    %Risk based capital ratios:Core capital
    
    
    9.02
    %
    
    
    6
    %Total capital
    
    
    10.04
    %
    
    
    10
    %
  EFFECTS OF INFLATION
  RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
  Years Ended December 31,2005
    
    2004(Dollars in Thousands)Interest income
    
    $
    19,176
    
    
    $
    13,570Interest expense
    
    
    7,772
    
    
    
    4,665Net interest income
    
    
    11,404
    
    
    
    8,905Provision for loan losses
    
    
    1,416
    
    
    
    1,031Other income
    
    
    796
    
    
    
    613
 25




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Years Ended December 31,2005
    
    2004(Dollars in Thousands)Other expenses
    
    
    8,102
    
    
    
    6,046Pretax income
    
    
    2,682
    
    
    
    2,441Income taxes
    
    
    815
    
    
    
    761Net income
    
    $
    1,867
    
    
    $
    1,680
      26




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ASSET/LIABILITY MANAGEMENT
   27




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28




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After
    
    
    AfterThree
    
    
    OneMonths
    
    
    Yearbut
    
    
    butWithin
    
    
    Within
    
    
    Within
    
    
    AfterThree
    
    
    One
    
    
    Five
    
    
    FiveMonths
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in Thousands)Interest-earning assetsFederal Funds Sold
    
    
    2,607
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,607Securities
    
    
    552
    
    
    
    189
    
    
    
    10,858
    
    
    
    43,684
    
    
    
    55,283Interest bearing deposits
    
    
    624
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    624Loans
    
    
    160,983
    
    
    
    26,122
    
    
    
    60,256
    
    
    
    7,028
    
    
    
    254,389164,766
    
    
    
    26,311
    
    
    
    71,114
    
    
    
    50,712
    
    
    
    312,903Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    52,746
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,746Savings
    
    
    3,406
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,406Time deposits
    
    
    18,325
    
    
    
    108,809
    
    
    
    46,344
    
    
    
    
    
    
    
    173,478Securities sold under repurchase
agreements
    
    
    13,163
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,163Other Borrowings
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    15,774
    
    
    
    35,77487,640
    
    
    
    108,809
    
    
    
    66,344
    
    
    
    15,774
    
    
    
    278,567Interest rate sensitivity gap
    
    
    77,126
    
    
    
    (82,498
    )
    
    
    4,770
    
    
    
    34,938
    
    
    
    34,336Cumulative interest rate
sensitivity gap
    
    
    77,126
    
    
    
    (5,372
    )
    
    
    (602
    )
    
    
    34,336Cumulative interest rate
sensitivity gap ratio
    
    
    1.88
    
    
    
    .97
    
    
    
    1.00
    
    
    
    1.12
 SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA
    29




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Years Ended December 31,2005
    
    
    2004(Dollars in Thousands)ASSETSCash and due from banks
    
    $
    5,018
    
    
    $
    4,591Interest bearing deposits
    
    
    935
    
    
    
    1,125Taxable securities
    
    
    39,439
    
    
    
    44,231Nontaxable securities
    
    
    12,123
    
    
    
    9,909Securities valuation account
    
    
    (816
    )
    
    
    (656
    )Federal funds sold
    
    
    9,996
    
    
    
    8,682Loans (2)
    
    
    225,007
    
    
    
    160,948Allowance for loan losses
    
    
    (2,441
    )
    
    
    (1,810
    )Other assets
    
    
    11,960
    
    
    
    8,450$
    301,221
    
    
    $
    235,470Total interest-bearing assets
    
    $
    286,684
    
    
    $
    224,239LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Non-interest-bearing demand
    
    $
    27,637
    
    
    $
    21,427Interest-bearing demand and savings
    
    
    54,810
    
    
    
    53,991Time
    
    
    156,146
    
    
    
    108,849Total deposits
    
    
    238,593
    
    
    
    184,267Other liabilities
    
    
    1,029
    
    
    
    689Other borrowings
    
    
    12,865
    
    
    
    7,844Federal Home Loan Bank advances
    
    
    27,441
    
    
    
    23,041Total liabilities
    
    
    279,928
    
    
    
    215,841Shareholders equity
    
    
    21,293
    
    
    
    19,629$
    301,221
    
    
    $
    235,470Total interest-bearing liabilities
    
    $
    251,262
    
    
    $
    193,725
 
 (1)
    
    For each category, average balances were determined using the daily average balances during
the year.(2)
    
    The average balance of non-accrual loans included in average loans for 2005 was $1,720,000
and $1,760,000 in 2004. Interest Income and Interest Expense
 30




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Years Ended December 312005
    
    
    2004Average
    
    
    
    
    
    
    AverageInterest
    
    
    Rate
    
    
    Interest
    
    
    Rate(Dollars in Thousands)Interest Income:Interest and fees on loans (1)
    
    $
    16,648
    
    
    
    7.40
    %
    
    $
    11,216
    
    
    
    6.97
    %Interest on taxable securities
    
    
    1,726
    
    
    
    4.38
    
    
    
    1,827
    
    
    
    4.13Interest on nontaxable securities (2)
    
    
    456
    
    
    
    3.76
    
    
    
    379
    
    
    
    3.82Interest on federal funds sold
    
    
    313
    
    
    
    3.13
    
    
    
    130
    
    
    
    1.50Interest bearing deposits
    
    
    33
    
    
    
    3.58
    
    
    
    18
    
    
    
    1.60Total interest income
    
    
    19,176
    
    
    
    6.69
    %
    
    
    13,570
    
    
    
    6.05
    %Interest Expense:Interest on interest-bearing
demand and savings deposits
    
    
    992
    
    
    
    1.81
    %
    
    
    736
    
    
    
    1.36
    %Interest on time deposits
    
    
    5,313
    
    
    
    3.40
    
    
    
    3,114
    
    
    
    2.86Other borrowings (3)
    
    
    549
    
    
    
    4.27
    
    
    
    223
    
    
    
    2.84Federal Home Loan Bank advances
    
    
    918
    
    
    
    3.35
    
    
    
    592
    
    
    
    2.57Total interest expense
    
    
    7,772
    
    
    
    3.18
    %
    
    
    4,665
    
    
    
    2.41
    %Net interest income
    
    $
    11,404
    
    
    
    
    
    
    $
    8,905Net interest spread
    
    
    
    
    
    
    3.51
    %
    
    
    
    
    
    
    3.64
    %Net yield on average
interest-earning assets
    
    
    3.98
    %
    
    
    
    
    
    
    
    
    
    
    3.97
    %
 
 (1)
    
    Interest and fees on loans includes $1,386,000 and $1,170,000 of loan fee income for
the years ended December 31, 2005 and 2004, respectively. The interest income recognized
on non-accrual loans during 2005 was $195,000. For 2004 this amount was insignificant.(2)
    
    Yields on nontaxable securities are not presented on a tax equivalent basis.(3)
    
    Other borrowings include subordinated debentures issued by the Company in 2004. Rate and Volume Analysis
 31




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
    
    change in volume (change in volume multiplied by old rate);
    
    change in rate (change in rate multiplied by old volume); and
    
    a combination of change in rate and change in volume.
  Year Ended December 31,2005 vs. 2004Changes Due To:Rate
    
    
    Volume
    
    
    Total(Dollars in Thousands)Increase (decrease)in:Income from interest-earning assets:Interest and fees on loans
    
    
    729
    
    
    
    4703
    
    
    
    5,432Interest on taxable securities
    
    
    106
    
    
    
    (207
    )
    
    
    (101
    )Interest on nontaxable securities
    
    
    (6
    )
    
    
    83
    
    
    
    77Interest on federal funds sold
    
    
    160
    
    
    
    23
    
    
    
    183Interest on interest bearing deposits
    
    
    18
    
    
    
    (3
    )
    
    
    15Total interest income
    
    
    1,007
    
    
    
    4,599
    
    
    
    5,606Expense from interest-bearing
liabilities:Interest on interest-bearing demand
and savings deposits
    
    
    245
    
    
    
    11
    
    
    
    256Interest on time deposits
    
    
    666
    
    
    
    1,533
    
    
    
    2,199Interest on other borrowings
    
    
    143
    
    
    
    183
    
    
    
    326Interest on FHLB advances
    
    
    200
    
    
    
    126
    
    
    
    326Total interest expense
    
    
    1,254
    
    
    
    1,853
    
    
    
    3,107Net interest income
    
    
    (247
    )
    
    
    2,746
    
    
    
    2,499
 32




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Types of Investments
  December 31,2005
    
    
    2004(Dollars in Thousands)U.S. Government agencies
    
    $
    23,455
    
    
    $
    21,822State and municipal securities
    
    
    12,548
    
    
    
    11,149Corporate bonds
    
    
    1,740
    
    
    
    1,502Mortgage-backed securities
    
    
    15,648
    
    
    
    16,143$
    53,391
    
    
    $
    50,616
 Maturities
  One year
    
    
    After one
    
    
    After fiveor less
    
    
    through five years
    
    
    through ten yearsAmount
    
    Yield(1)
    
    
    Amount
    
    
    Yield(1)
    
    
    Amount
    
    
    Yield(1)(Dollars in Thousands)U.S. Government
agencies
    
    
    
    
    
    
    
    
    
    
    4,323
    
    
    
    3.57
    
    
    
    2,481
    
    
    
    5.34State and municipal
securities
    
    
    189
    
    
    
    2.26
    
    
    
    852
    
    
    
    2.77
    
    
    
    1,573
    
    
    
    3.21Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    2,405
    
    
    
    3.12
    
    
    
    7,254
    
    
    
    3.61Corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,014
    
    
    
    6.75
 33




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##### Table of Contents



After ten years
    
    
    TotalAmount
    
    
    Yield(1)
    
    
    Amount
    
    
    Yield(1)U.S. Government agencies
    
    
    16,651
    
    
    
    5.53
    
    
    
    23,455
    
    
    
    5.15State and municipal securities
    
    
    9,934
    
    
    
    3.92
    
    
    
    12,548
    
    
    
    3.72Mortgage-backed securities
    
    
    5,989
    
    
    
    3.81
    
    
    
    15,648
    
    
    
    3.61Corporate bonds
    
    
    726
    
    
    
    6.84
    
    
    
    1,740
    
    
    
    6.79
 
 (1)
    
    Yields were computed using coupon interest, adding discount accretion or subtracting
premium amortization, as appropriate, on a ratable basis over the life of each security.
The weighted average yield for each maturity range was computed using the carrying value of
each security in that range.(2)
    
    Yields are not presented on a tax equivalent basis.
  Types of Loans
  December 31,2005
    
    
    2004(Dollars in Thousands)Commercial
    
    $
    23,928
    
    
    $
    24,753Real estate-construction
    
    
    134,997
    
    
    
    56,787Real estate-mortgage
    
    
    90,640
    
    
    
    101,151Consumer installment and other
    
    
    4,824
    
    
    
    4,409254,389
    
    
    
    187,100Less:Allowance for loan losses
    
    
    (3,001
    )
    
    
    (2,016
    )Deferred loan fees
    
    
    (435
    )
    
    
    (363
    )Net loans
    
    $
    250,953
    
    
    $
    184,721
 Maturities and Sensitivities of Loans to Changes in Interest Rates
  34




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##### Table of Contents



December 31, 2005(Dollars in Thousands)CommercialOne year or less
    
    
    12,979After one through five years
    
    
    9,549After five years
    
    
    1,40023,928ConstructionOne year or less
    
    
    123,590After one through five years
    
    
    9,872After five years
    
    
    1,535134,997OtherOne year or less
    
    
    45,916After one through five years
    
    
    45,883After five years
    
    
    3,66595,464
  December 31, 2005(Dollars in Thousands)Predetermined interest rates
    
    $
    63,299Floating or adjustable interest rates
    
    
    8,605$
    71,904
 Risk Elements
  35




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##### Table of Contents



December 31,2005
    
    2004(Dollars in Thousands)Non-accrual loans
    
    $
    2,539
    
    
    $
    4,812Loans contractually past due 90 days or
more as to interest or principal
payments
and still accruing
    
    
    
    
    
    
    26Restructured loans
    
    
    
    
    
    
    Loans, now current about which there are
serious doubts as to the ability of the
borrower to comply with loan repayment
terms
    
    
    
    
    
    
    Interest income that would have been
recorded on non-accrual and
restructured
loans under original terms
    
    
    49
    
    
    
    116Interest income that was recorded on
non-accrual and restructured loans
    
    
    193
    
    
    
    
     36




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004(Dollars in Thousands)Average amount of loans outstanding
    
    
    225,007
    
    
    
    160,948Balance of allowance for loan losses
at beginning of year
    
    
    2,016
    
    
    
    1,419Loans charged off:Consumer
    
    
    (88
    )
    
    
    (33
    )Real Estate
    
    
    (175
    )
    
    
    (232
    )Commercial
    
    
    (194
    )
    
    
    (169
    )(457
    )
    
    
    (434
    )Loans recovered:
    
    
    26
    
    
    
    Net charge-offs
    
    
    (431
    )
    
    
    (434
    )Additions to allowance charged to operating
expense during year
    
    
    1,416
    
    
    
    1,031Balance of allowance for loan losses
at end of year
    
    $
    3,001
    
    
    $
    2,016Ratio of net loans charged off during the
year to average loans outstanding
    
    
    .19
    %
    
    
    .27
    %
    December 31, 2005
    
    
    December 31, 2004Percent of
    
    
    
    
    
    
    Percent ofloans in
    
    
    
    
    
    
    loans ineach category
    
    
    
    
    
    
    each categoryAmount
    
    
    to total loans
    
    
    Amount
    
    
    to total loans(Dollars in Thousands)Commercial
    
    
    2,229
    
    
    
    9.41
    %
    
    
    1,452
    
    
    
    13.23
    %Real estate-construction
    
    
    396
    
    
    
    53.06
    
    
    
    263
    
    
    
    30.35Real estate-mortgage
    
    
    
    
    
    
    35.63
    
    
    
    
    
    
    
    54.06Consumer installment
loans and other
    
    
    130
    
    
    
    1.90
    
    
    
    117
    
    
    
    2.36Unallocated
    
    
    246
    
    
    
    
    
    
    
    184
    
    
    
    3,001
    
    
    
    100
    %
    
    
    2,016
    
    
    
    100
    %
 37




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in Thousands)Non-interest-bearing demand deposits
    
    
    27,637
    
    
    
    
    %
    
    
    21,427
    
    
    
    
    %Interest-bearing demand and savings
deposits
    
    
    54,810
    
    
    
    1.81
    
    
    
    53,991
    
    
    
    1.36Time deposits
    
    
    156,146
    
    
    
    3.40
    
    
    
    108,849
    
    
    
    2.86$
    238,593
    
    
    
    
    
    
    $
    184,267
 
 (1)
    
    Average balances were determined using the daily average balances.
  December 31, 2005(Dollars in Thousands)Three months or less
    
    $
    7,248Over three through six months
    
    
    15,709Over six through twelve months
    
    
    42,063Over twelve months
    
    
    27,775Total
    
    $
    92,795
  38




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004Return on assets (1)
    
    
    .62
    %
    
    
    .71
    %Return on equity (2)
    
    
    8.77
    
    
    
    8.56Dividend payout ratio (3)
    
    
    n/a
    
    
    
    n/aEquity to assets ratio (4)
    
    
    7.07
    
    
    
    8.34
 
 (1)
    
    Net income divided by average total assets.(2)
    
    Net income divided by average equity.(3)
    
    Dividends declared per share of common stock divided by net income per share.(4)
    
    Average common equity divided by average total assets OFF-BALANCE SHEET ARRANGEMENTS
  
 ITEM 7. FINANCIAL STATEMENTS
       39




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##### Table of Contents



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  
 ITEM 8A. CONTROLS AND PROCEDURES
  
 ITEM 8B. OTHER INFORMATION
  
 PART III
 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a)OF THE EXCHANGE ACT
  
 ITEM 10. EXECUTIVE COMPENSATION
  
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 40




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##### Table of Contents



Equity Compensation Plan Information
 Number ofsecuritiesremainingavailable forfuture issuanceNumber of
    
    
    
    
    
    under equitysecurities to be
    
    Weighted
    
    compensationissued upon
    
    average exercise
    
    plansexercise of
    
    price of
    
    (excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    reflected inand rights
    
    and rights
    
    column (a)(a)
    
    (b)
    
    (c)Equity compensation plans approved
by security holders
    
    
    207,403
    
    
    $
    6.94
    
    
    
    30,206Equity compensation plans not
approved by security
holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    207,403
    
    
    $
    6.94
    
    
    
    30,206
 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 13. EXHIBITS
  Exhibit Number
    
    Description3.1
    
    Articles of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.1 to the Registrants Form SB-2
filed with the Commission on April 12, 2002)3.2
    
    Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrants Form SB-2 filed with the
Commission on April 12, 2002)
 41




---



##### Table of Contents



Exhibit Number
    
    Description10.1
    
    2001 Incentive Stock Option Plan for Key Employees
(incorporated by reference to Exhibit 10.2 to the
Registrants Form SB-2 filed with the Commission on April
12, 2002)*10.2
    
    Employment Agreement between Gary D. McGaha and Southern
Community Bank (incorporated by reference to Exhibit 10.3
to the Registrants Form SB-2 filed with the Commission
on April 12, 2002)*10.3
    
    Employment Agreement between Fred L. Faulkner and
Southern Community Bank (incorporated by reference to
Exhibit 10.4 to the Registrants Form SB-2 filed with the
Commission on April 12, 2002)*21
    
    Subsidiaries of the Registrant23
    
    Consent of Mauldin & Jenkins, LLC31.1
    
    Certificate of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certificate of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.





|  |  |                                                                 
|- |  | ----------------------------------------------------------------
|* |  | Denotes management contract or compensatory plan or arrangement.




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




42



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##### Table of Contents



SIGNATURES
  SOUTHERN COMMUNITY BANCSHARES, INC.(Registrant)Date: March 31, 2006
    
    By:
    
    /s/ Gary D. McGahaPresident and Chief
Executive Officer
  /s/Gary D. McGaha
    
    Date: March 31, 2006Gary D. McGahaChief Executive OfficerAnd Director[Principal Executive Officer]/s/Leslye L. Grindle
    
    Date: March 31, 2006Leslye L. GrindleChief Financial Officer[Principal Financial Officer andPrincipal Accounting Officer]/s/James S. Cameron
    
    Date: March 31, 2006James S. Cameron, DirectorGeorge R. Davis, Sr., Director/s/Robert B. Dixon, Jr.
    
    Date: March 31, 2006Robert B. Dixon, Jr., Director
 43




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##### Table of Contents



/s/Richard J. Dumas
    
    Date: March 31, 2006Richard J. Dumas, DirectorWilliam Wayne Leslie, Director/s/Thomas D. Reese
    
    Date: March 31, 2006Thomas D. Reese, Director/s/William M. Strain
    
    Date: March 31, 2006William M. Strain, DirectorJackie L. Mask, Director
 44




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2005
 TABLE OF CONTENTS
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-1CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    F-2Consolidated statements of income
    
    
    F-3Consolidated statements of comprehensive income
    
    
    F-4Consolidated statements of shareholders equity
    
    
    F-5Consolidated statements of cash flows
    
    
    F-6-7Notes to consolidated financial statements
    
    
    F-8-27
 50




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors
Southern Community Bancshares, Inc. and Subsidiary
Fayetteville, Georgia
 Southern Community Bancshares,
Inc. and subsidiary
   
 F-1




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
 2005
    
    
    2004AssetsCash and due from banks
    
    $
    6,061,522
    
    
    $
    3,644,669Interest bearing deposits in banks
    
    
    624,508
    
    
    
    2,038,231Federal funds sold
    
    
    2,607,000
    
    
    
    18,378,000Securities available for sale, at fair value
    
    
    53,390,782
    
    
    
    50,615,684Restricted equity securities, at cost
    
    
    1,891,700
    
    
    
    1,471,300Loans
    
    
    253,954,205
    
    
    
    186,737,227Less allowance for loan losses
    
    
    3,000,956
    
    
    
    2,016,557Loans, net
    
    
    250,953,249
    
    
    
    184,720,670Premises and equipment
    
    
    9,595,753
    
    
    
    7,777,049Other assets
    
    
    8,724,690
    
    
    
    2,599,675Total assets
    
    $
    333,849,204
    
    
    $
    271,245,278Liabilities and Shareholders EquityDepositsNoninterest-bearing
    
    $
    32,008,840
    
    
    $
    21,423,600Interest-bearing
    
    
    229,630,366
    
    
    
    194,340,635Total deposits
    
    
    261,639,206
    
    
    
    215,764,235Federal Home Loan Bank advances
    
    
    30,000,000
    
    
    
    24,000,000Securities sold under repurchase agreements
    
    
    13,163,086
    
    
    
    4,752,914Subordinated debentures
    
    
    5,774,000
    
    
    
    5,774,000Other liabilities
    
    
    1,733,077
    
    
    
    697,849Total liabilities
    
    
    312,309,369
    
    
    
    250,988,998Commitments and contingencies (Note 13)Shareholders equityCapital stock, no par value; 10,000,000 shares authorized;
2,587,081 and 2,580,526 shares issued and outstanding, respectively
    
    
    16,073,993
    
    
    
    16,054,796Retained earnings
    
    
    6,320,807
    
    
    
    4,453,934Accumulated other comprehensive loss
    
    
    (854,965
    )
    
    
    (252,450
    )Total shareholders equity
    
    
    21,539,835
    
    
    
    20,256,280Total liabilities and shareholders equity
    
    $
    333,849,204
    
    
    $
    271,245,278
 See Notes to Consolidated Financial Statements.
 F-2




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004Interest incomeLoans, including fees
    
    $
    16,647,627
    
    
    $
    11,215,484Taxable securities
    
    
    1,726,004
    
    
    
    1,827,419Nontaxable securities
    
    
    456,336
    
    
    
    379,233Federal funds sold
    
    
    313,198
    
    
    
    130,289Interest bearing deposits in banks
    
    
    33,478
    
    
    
    17,633Total interest income
    
    
    19,176,643
    
    
    
    13,570,058Interest expenseDeposits
    
    
    6,305,563
    
    
    
    3,850,358Other borrowings
    
    
    1,466,637
    
    
    
    814,636Total interest expense
    
    
    7,772,200
    
    
    
    4,664,994Net interest income
    
    
    11,404,443
    
    
    
    8,905,064Provision for loan losses
    
    
    1,415,660
    
    
    
    1,031,121Net interest income after provision for loan losses
    
    
    9,988,783
    
    
    
    7,873,943Other incomeService charges on deposit accounts
    
    
    615,705
    
    
    
    461,262Gain on sale of securities available for sale
    
    
    106,121
    
    
    
    85,416Other operating income
    
    
    74,235
    
    
    
    66,766Total other income
    
    
    796,061
    
    
    
    613,444Other expensesSalaries and employee benefits
    
    
    4,479,416
    
    
    
    3,426,141Equipment and occupancy expenses
    
    
    1,247,250
    
    
    
    814,069Other operating expenses
    
    
    2,376,001
    
    
    
    1,805,418Total other expenses
    
    
    8,102,667
    
    
    
    6,045,628Net income before income taxes
    
    
    2,682,177
    
    
    
    2,441,759Income tax expense
    
    
    815,304
    
    
    
    761,436Net income
    
    $
    1,866,873
    
    
    $
    1,680,323Basic earnings per share
    
    $
    0.72
    
    
    $
    0.65Diluted earnings per share
    
    $
    0.70
    
    
    $
    0.63
 See Notes to Consolidated Financial Statements.
 F-3




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004Net income
    
    $
    1,866,873
    
    
    $
    1,680,323Other comprehensive income (loss):Unrealized holding gains (losses) on securities available for sale
arising during period, net of tax (benefits) of $(328,957) and $84,959, respectively
    
    
    (536,720
    )
    
    
    138,619Reclassification adjustment for gains realized in net income,
net of taxes of $40,326 and $32,458, respectively
    
    
    (65,795
    )
    
    
    (52,958
    )Other comprehensive income (loss)
    
    
    (602,515
    )
    
    
    85,661Comprehensive income
    
    $
    1,264,358
    
    
    $
    1,765,984
 See Notes to Consolidated Financial Statements.
 F-4




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
 AccumulatedOther
    
    
    TotalCapital Stock
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Earnings
    
    
    Loss
    
    
    EquityBalance, December 31, 2003
    
    
    1,934,777
    
    
    $
    16,050,433
    
    
    $
    2,773,611
    
    
    $
    (338,111
    )
    
    $
    18,485,933Net income
    
    
    
    
    
    
    
    
    
    
    1,680,323
    
    
    
    
    
    
    
    1,680,323Issuance of common stock
    
    
    1,049
    
    
    
    8,425
    
    
    
    
    
    
    
    
    
    
    
    8,425Four-for-three stock split
    
    
    644,700
    
    
    
    (4,062
    )
    
    
    
    
    
    
    
    
    
    
    (4,062
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,661
    
    
    
    85,661Balance, December 31, 2004
    
    
    2,580,526
    
    
    
    16,054,796
    
    
    
    4,453,934
    
    
    
    (252,450
    )
    
    
    20,256,280Net income
    
    
    
    
    
    
    
    
    
    
    1,866,873
    
    
    
    
    
    
    
    1,866,873Options exercised, net of repurchases
    
    
    6,135
    
    
    
    11,217
    
    
    
    
    
    
    
    
    
    
    
    11,217Issuance of common stock
    
    
    420
    
    
    
    7,980
    
    
    
    
    
    
    
    
    
    
    
    7,980Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (602,515
    )
    
    
    (602,515
    )Balance, December 31, 2005
    
    
    2,587,081
    
    
    $
    16,073,993
    
    
    $
    6,320,807
    
    
    $
    (854,965
    )
    
    $
    21,539,835
 See Notes to Consolidated Financial Statements.
 F-5




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 and 2004
 2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    1,866,873
    
    
    $
    1,680,323Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    580,413
    
    
    
    401,041Provision for loan losses
    
    
    1,415,660
    
    
    
    1,031,121Gain on sale of securities available for sale
    
    
    (106,121
    )
    
    
    (85,416
    )Deferred income taxes
    
    
    (310,663
    )
    
    
    (144,428
    )Increase (decrease) in taxes payable
    
    
    332,351
    
    
    
    (124,244
    )Increase in interest receivable
    
    
    (674,355
    )
    
    
    (170,649
    )Increase in interest payable
    
    
    627,316
    
    
    
    47,340Increase in cash surrender value of life insurance
    
    
    (32,547
    )
    
    
    Gain on sale of other real estate owned
    
    
    (5,825
    )
    
    
    Net other operating activities
    
    
    337,394
    
    
    
    (55,875
    )Net cash provided by operating activities
    
    
    4,030,496
    
    
    
    2,579,273INVESTING ACTIVITIESIncrease (decrease) in interest-bearing deposits in banks
    
    
    1,413,723
    
    
    
    (1,954,357
    )Purchase of securities available for sale
    
    
    (12,862,135
    )
    
    
    (4,028,402
    )Proceeds from maturities of securities available for sale
    
    
    4,539,422
    
    
    
    5,130,824Proceeds from sales of securities available for sale
    
    
    4,681,938
    
    
    
    8,304,924Purchase of restricted equity securities
    
    
    (420,400
    )
    
    
    (721,300
    )Net (increase) decrease in federal funds sold
    
    
    15,771,000
    
    
    
    (17,762,000
    )Net increase in loans
    
    
    (67,923,706
    )
    
    
    (62,168,908
    )Purchase of bank owned life insurance
    
    
    (5,000,000
    )
    
    
    Net purchases of premises and equipment
    
    
    (2,399,117
    )
    
    
    (2,967,728
    )Proceeds from sales of other real estate owned
    
    
    281,292
    
    
    
    Net cash used in investing activities
    
    
    (61,917,983
    )
    
    
    (76,166,947
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    45,874,971
    
    
    
    55,989,167Proceeds from issuance of capital stock
    
    
    19,197
    
    
    
    8,425Payment for fractional shares
    
    
    
    
    
    
    (4,062
    )Proceeds from issuance of subordinated debentures-net
    
    
    
    
    
    
    5,467,000Net increase in Federal Home Loan Bank advances
    
    
    6,000,000
    
    
    
    9,000,000Net increase in repurchase agreements
    
    
    8,410,172
    
    
    
    3,048,726Net cash provided by financing activities
    
    
    60,304,340
    
    
    
    73,509,256Net increase in cash and due from banks
    
    
    2,416,853
    
    
    
    (78,418
    )Cash and due from banks at beginning of period
    
    
    3,644,669
    
    
    
    3,723,087Cash and due from banks at end of period
    
    $
    6,061,522
    
    
    $
    3,644,669
 F-6




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    2004SUPPLEMENTAL DISCLOSURECash paid for interest
    
    $
    7,144,884
    
    
    $
    4,617,654Cash paid for taxes
    
    $
    847,300
    
    
    $
    1,044,013NONCASH TRANSACTIONSForeclosed assets acquired in settlement of loans
    
    $
    275,467
    
    
    $
    225,997
 
 See Notes to Consolidated Financial Statements. F - 7




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
  Basis of Presentation and Accounting Estimates
    Cash, Due From Banks and Cash Flows
  F - 8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Securities
   Loans
    F - 9




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Allowance for Loan Losses
   Premises and Equipment
  Buildings and improvements
    
    15 - 40 yearsFurniture and equipment
    
    3 - 10 years
 Foreclosed Assets
  Income Taxes
 F - 10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Profit-Sharing Plan
  Stock-Based Compensation
   Years Ended December 31,2005
    
    
    2004Net income, as reported
    
    $
    1,866,873
    
    
    $
    1,680,323Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    13,639
    
    
    
    13,175Pro forma net income
    
    $
    1,853,234
    
    
    $
    1,667,148Earnings per share:Basic  as reported
    
    $
    .72
    
    
    $
    .65Basic  pro forma
    
    $
    .72
    
    
    $
    .65Diluted  as reported
    
    $
    .70
    
    
    $
    .63Diluted  pro forma
    
    $
    .69
    
    
    $
    .62
 F - 11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Earnings Per Share
  Comprehensive Income
  Recent Accounting Standards
 Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
   F - 12




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##### Table of Contents



F - 13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2005:U.S. Government and
agency securities
    
    $
    23,978,678
    
    
    $
    625
    
    
    $
    (524,528
    )
    
    $
    23,454,775State and municipal securities
    
    
    12,764,629
    
    
    
    24,346
    
    
    
    (240,806
    )
    
    
    12,548,169Corporate bonds
    
    
    1,725,565
    
    
    
    15,160
    
    
    
    (765
    )
    
    
    1,739,960Mortgage-backed securities
    
    
    16,300,885
    
    
    
    
    
    
    
    (653,007
    )
    
    
    15,647,878$
    54,769,757
    
    
    $
    40,131
    
    
    $
    (1,419,106
    )
    
    $
    53,390,782December 31, 2004:U.S. Government and
agency securities
    
    $
    21,974,664
    
    
    $
    6,941
    
    
    $
    (160,139
    )
    
    $
    21,821,466State and municipal securities
    
    
    11,085,413
    
    
    
    141,225
    
    
    
    (77,304
    )
    
    
    11,149,334Corporate bonds
    
    
    1,474,000
    
    
    
    27,900
    
    
    
    
    
    
    
    1,501,900Mortgage-backed securities
    
    
    16,488,785
    
    
    
    508
    
    
    
    (346,309
    )
    
    
    16,142,984$
    51,022,862
    
    
    $
    176,574
    
    
    $
    (583,752
    )
    
    $
    50,615,684
   Amortized
    
    
    FairCost
    
    
    ValueDue in less than one year
    
    $
    190,152
    
    
    $
    188,871Due from one to five years
    
    
    5,331,512
    
    
    
    5,175,211Due from five to ten years
    
    
    5,134,860
    
    
    
    5,067,570Due after ten years
    
    
    27,812,348
    
    
    
    27,311,252Mortgage-backed securities
    
    
    16,300,885
    
    
    
    15,647,878$
    54,769,757
    
    
    $
    53,390,782
 F - 14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES (continued)
  Years Ended December 31,2005
    
    
    2004Gross gains
    
    $
    116,433
    
    
    $
    88,303Gross losses
    
    
    (10,312
    )
    
    
    (2,887
    )Net realized gains
    
    $
    106,121
    
    
    $
    85,416
  Less Than 12 Months
    
    
    12 Months or MoreDescription of Securities:
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDecember 31, 2005
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Government and agency
securities
    
    $
    1,465,335
    
    
    $
    (30,786
    )
    
    $
    19,988,815
    
    
    $
    (493,742
    )State and municipal securities
    
    
    6,813,710
    
    
    
    (135,527
    )
    
    
    2,545,792
    
    
    
    (105,279
    )Corporate securities
    
    
    250,800
    
    
    
    (765
    )
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    3,167,804
    
    
    
    (64,897
    )
    
    
    12,480,074
    
    
    
    (588,110
    )Total temporarily impaired securities
    
    $
    11,697,649
    
    
    $
    (231,975
    )
    
    $
    35,014,681
    
    
    $
    (1,187,131
    )December 31, 2004U.S. Government and agency
securities
    
    $
    18,358,554
    
    
    $
    (122,673
    )
    
    $
    1,959,219
    
    
    $
    (37,466
    )State and municipal securities
    
    
    3,162,594
    
    
    
    (32,315
    )
    
    
    1,664,104
    
    
    
    (44,989
    )Mortgage-backed securities
    
    
    2,165,701
    
    
    
    (27,328
    )
    
    
    13,155,357
    
    
    
    (318,981
    )Total temporarily impaired securities
    
    $
    23,686,849
    
    
    $
    (182,316
    )
    
    $
    16,778,680
    
    
    $
    (401,436
    )
   F - 15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2. SECURITIES (continued)
  NOTE 3. LOANS
  December 31,2005
    
    
    2004Commercial
    
    $
    23,928,120
    
    
    $
    24,752,777Real estate  construction
    
    
    134,997,221
    
    
    
    56,787,690Real estate  mortgage
    
    
    90,640,347
    
    
    
    101,150,702Consumer installment and other
    
    
    4,823,684
    
    
    
    4,408,758254,389,372
    
    
    
    187,099,927Deferred loan fees
    
    
    (435,167
    )
    
    
    (362,700
    )Allowance for loan losses
    
    
    (3,000,956
    )
    
    
    (2,016,557
    )Loans, net
    
    $
    250,953,249
    
    
    $
    184,720,670
  Years Ended December 31,2005
    
    
    2004Balance, beginning of year
    
    $
    2,016,557
    
    
    $
    1,419,479Provision for loan losses
    
    
    1,415,660
    
    
    
    1,031,121Loans charged off
    
    
    (456,593
    )
    
    
    (434,428
    )Recoveries of loans previously charged off
    
    
    25,332
    
    
    
    385Balance, end of year
    
    $
    3,000,956
    
    
    $
    2,016,557
  As of and for the Years EndedDecember 31,2005
    
    
    2004Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    6,348,580
    
    
    
    4,811,853Total impaired loans
    
    $
    6,348,580
    
    
    $
    4,811,853Valuation allowance related to impaired loans
    
    $
    1,123,148
    
    
    $
    533,496Average investment in impaired loans
    
    $
    4,687,575
    
    
    $
    1,760,363Interest income recognized on impaired loans
    
    $
    192,925
    
    
    $
    38Non-accrual loans
    
    $
    2,538,834
    
    
    $
    4,811,853Loans past due ninety days or more and still accruing interest
    
    $
    464
    
    
    $
    26,300
 F - 16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3. LOANS (Continued)
  Balance, beginning of year
    
    $
    7,494,944Advances
    
    
    4,147,686Repayments
    
    
    (3,918,638
    )Change in Directors
    
    
    (1,105,448
    )Balance, end of year
    
    $
    6,618,544
 NOTE 4. PREMISES AND EQUIPMENT
  December 312005
    
    
    2004Land and improvements
    
    $
    2,120,748
    
    
    $
    1,804,954Buildings
    
    
    5,831,926
    
    
    
    4,252,366Furniture and equipment
    
    
    3,422,264
    
    
    
    2,505,593Construction in progress
    
    
    
    
    
    
    412,90811,374,938
    
    
    
    8,975,821Accumulated depreciation
    
    
    (1,779,185
    )
    
    
    (1,198,772
    )$
    9,595,753
    
    
    $
    7,777,049
 Leases
    2006
    
    $
    376,2062007
    
    
    374,8192008
    
    
    374,3562009
    
    
    290,3562010
    
    
    275,556$
    1,691,293
 F - 17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 5. BANK OWNED LIFE INSURANCE
  NOTE 6. DEPOSITS
  2006
    
    $
    127,133,5832007
    
    
    29,923,9292008
    
    
    7,355,2492009
    
    
    6,782,3122010
    
    
    2,282,643$
    173,477,716
   NOTE 7. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
  NOTE 8. FEDERAL HOME LOAN BANK ADVANCES
  December 31,2005
    
    
    2004Advance with interest due quarterly at 3.01% and principal due on September 5, 2008.
    
    $
    15,000,000
    
    
    $
    15,000,000Advance with variable interest (2.62% at December 31, 2004) maturing on February 9, 2005.
    
    
    
    
    
    
    9,000,000Advance with interest due quarterly at 3.44% and principal due on March 10, 2015.
    
    
    10,000,000
    
    
    
    Advance with interest due quarterly at 4.44% and principal due on May 5, 2008.
    
    
    5,000,000
    
    
    
    $
    30,000,000
    
    
    $
    24,000,000
 F - 18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 8. FEDERAL HOME LOAN BANK ADVANCES (Continued)
  NOTE 9. SUBORDINATED DEBENTURES
      F - 19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9. SUBORDINATED DEBENTURES (Continued)
  NOTE 10. EMPLOYEE BENEFIT PLAN
  NOTE 11. STOCK OPTIONS
   2005
    
    
    2004Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    213,538
    
    
    $
    6.94
    
    
    
    219,555
    
    
    $
    6.94Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (6,135
    )
    
    
    6.89
    
    
    
    (684
    )
    
    
    7.29Terminated
    
    
    
    
    
    
    
    
    
    
    (5,333
    )
    
    
    6.89Outstanding at end of year
    
    
    207,403
    
    
    $
    6.94
    
    
    
    213,538
    
    
    $
    6.94Options exercisable at end of year
    
    
    201,723
    
    
    $
    6.92
    
    
    
    202,180
    
    
    $
    6.91Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    -
    
    
    
    
    
    
    $
    Weighted average life of
options outstanding
    
    
    
    
    
    6.0 years
    
    
    
    
    
    7.0 yearsRange of exercise prices
    
    $
    6.89-$8.72
    
    
    
    
    
    
    $
    6.89-$8.72
 F - 20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12. INCOME TAXES
  Years Ended December 31,2005
    
    
    2004Current
    
    $
    1,125,967
    
    
    $
    905,864Deferred
    
    
    (310,663
    )
    
    
    (144,428
    )$
    815,304
    
    
    $
    761,436
  Years Ended December 31,2005
    
    
    2004Income tax at statutory federal rate
    
    $
    913,965
    
    
    $
    830,199Tax-exempt interest
    
    
    (154,844
    )
    
    
    (128,550
    )Disallowed interest
    
    
    16,968
    
    
    
    12,857State tax
    
    
    38,514
    
    
    
    32,298Other items
    
    
    701
    
    
    
    14,632Income tax expense
    
    $
    815,304
    
    
    $
    761,436
  December 31,2005
    
    
    2004Deferred tax assets:Loan loss reserves
    
    $
    999,539
    
    
    $
    683,852Preopening and organization expenses
    
    
    12,325
    
    
    
    25,032Deferred loan fees
    
    
    112,301
    
    
    
    136,868Nonaccrual loans
    
    
    30,676
    
    
    
    43,528Securities available for sale
    
    
    524,011
    
    
    
    154,7281,678,852
    
    
    
    1,044,008Deferred tax liabilities:Depreciation
    
    
    339,875
    
    
    
    352,696Cash basis adjustment for income tax reporting purposes
    
    
    32,282
    
    
    
    64,563372,157
    
    
    
    417,259Net deferred tax assets
    
    $
    1,306,695
    
    
    $
    626,749
 F - 21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13. EARNINGS PER SHARE
  Years Ended December 31,2005
    
    
    2004Net income
    
    $
    1,866,873
    
    
    $
    1,680,323Weighted average number of
common shares outstanding
    
    
    2,585,687
    
    
    
    2,579,523Effect of dilutive options
    
    
    91,991
    
    
    
    88,806Weighted average number of common
shares outstanding used to calculate
dilutive earnings per share
    
    
    2,677,678
    
    
    
    2,668,329
 NOTE 14. COMMITMENTS AND CONTINGENCIES
 Loan Commitments
   December 31,2005
    
    
    2004Commercial letters of credit
    
    $
    1,683,174
    
    
    $
    1,620,569Commitments to extend credit
    
    
    50,917,218
    
    
    
    33,064,785$
    52,600,392
    
    
    $
    34,685,354
  F - 22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
 Loan Commitments (Continued)
  Contingencies
  NOTE 15. CONCENTRATIONS OF CREDIT
   NOTE 16. REGULATORY MATTERS
    F - 23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 16. REGULATORY MATTERS (Continued)
   To Be WellFor Capital
    
    
    Capitalized UnderAdequacy
    
    
    Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in Thousands)December 31, 2005:Total Capital to Risk Weighted AssetsConsolidated
    
    $
    31,169
    
    
    
    10.75
    %
    
    $
    23,185
    
    
    
    8
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    29,557
    
    
    
    10.04
    %
    
    $
    23,554
    
    
    
    8
    %
    
    $
    29,431
    
    
    
    10
    %Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    28,168
    
    
    
    9.72
    %
    
    $
    11,593
    
    
    
    4
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    26,556
    
    
    
    9.02
    %
    
    $
    11,772
    
    
    
    4
    %
    
    $
    17,658
    
    
    
    6
    %Tier I Capital to Average AssetsConsolidated
    
    $
    28,168
    
    
    
    8.55
    %
    
    $
    13,173
    
    
    
    4
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    26,556
    
    
    
    8.06
    %
    
    $
    13,173
    
    
    
    4
    %
    
    $
    16,467
    
    
    
    5
    %December 31, 2004:Total Capital to Risk Weighted AssetsConsolidated
    
    $
    28,125
    
    
    
    13.67
    %
    
    $
    16,465
    
    
    
    8
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    21,363
    
    
    
    10.39
    %
    
    $
    16,443
    
    
    
    8
    %
    
    $
    20,554
    
    
    
    10
    %Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    26,108
    
    
    
    12.69
    %
    
    $
    8,232
    
    
    
    4
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    19,346
    
    
    
    9.41
    %
    
    $
    8,222
    
    
    
    4
    %
    
    $
    12,332
    
    
    
    6
    %Tier I Capital to Average AssetsConsolidated
    
    $
    26,108
    
    
    
    9.84
    %
    
    $
    10,612
    
    
    
    4
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    19,346
    
    
    
    7.29
    %
    
    $
    10,612
    
    
    
    4
    %
    
    $
    13,266
    
    
    
    5
    %
 F - 24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosures about Fair Value of Financial
Instruments,
  Cash, Due From Banks, Interest-bearing Deposits in Banks, and Federal Funds Sold:
 Securities:
 Loans:
 Deposits:
 Federal Funds Purchased, Repurchase Agreements and Federal Home Loan Bank Advances:
 Subordinated Debentures:
 Accrued Interest:
 F - 25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
  December 31, 2005
    
    
    December 31, 2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks, interest bearing deposits
in banks, and federal funds sold
    
    $
    9,293,030
    
    
    $
    9,293,030
    
    
    $
    24,060,900
    
    
    $
    24,060,900Securities
    
    
    55,282,482
    
    
    
    55,282,482
    
    
    
    52,086,984
    
    
    
    52,086,984Loans
    
    
    250,953,249
    
    
    
    248,776,768
    
    
    
    184,720,670
    
    
    
    183,870,856Accrued interest received
    
    
    1,773,821
    
    
    
    1,773,821
    
    
    
    1,099,466
    
    
    
    1,099,466Financial liabilities:Deposits
    
    
    261,639,206
    
    
    
    259,895,955
    
    
    
    215,764,233
    
    
    
    216,385,341Securities sold under
repurchase agreements
    
    
    13,163,086
    
    
    
    13,163,086
    
    
    
    4,752,914
    
    
    
    4,752,914Federal Home Loan Bank advances
    
    
    30,000,000
    
    
    
    30,009,894
    
    
    
    24,000,000
    
    
    
    23,719,143Subordinated debentures
    
    
    5,774,000
    
    
    
    5,774,000
    
    
    
    5,774,000
    
    
    
    5,774,000Accrued interest payable
    
    
    1,118,579
    
    
    
    1,118,579
    
    
    
    491,263
    
    
    
    491,263
 NOTE 18. SUPPLEMENTAL FINANCIAL DATA
  Years Ended December 31,2005
    
    
    2004Professional fees
    
    $
    302,290
    
    
    $
    195,695Data processing expense
    
    
    305,331
    
    
    
    249,176
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 19. PARENT COMPANY FINANCIAL INFORMATION
  CONDENSED BALANCE SHEET
 2005
    
    
    2004AssetsCash
    
    $
    1,139,583
    
    
    $
    6,515,940Investment in subsidiary
    
    
    25,701,253
    
    
    
    19,094,195Securities available for sale
    
    
    174,000
    
    
    
    174,000Other assets
    
    
    324,533
    
    
    
    270,773Total assets
    
    $
    27,339,369
    
    
    $
    26,054,908Subordinated debentures
    
    
    5,774,000
    
    
    $
    5,774,000Other liabilities
    
    
    25,534
    
    
    
    24,628Total liabilities
    
    
    5,799,534
    
    
    
    5,798,628Shareholders equity
    
    
    21,539,835
    
    
    
    20,256,280Total liabilities and shareholders equity
    
    $
    27,339,369
    
    
    $
    26,054,908
 CONDENSED STATEMENT OF INCOME
 2005
    
    
    2004IncomeInterest income
    
    $
    10,549
    
    
    $
    5,171Total income
    
    
    10,549
    
    
    
    5,171Interest expense
    
    
    350,049
    
    
    
    171,596Expenses, other
    
    
    213,242
    
    
    
    197,815Total expenses
    
    
    563,291
    
    
    
    369,411Loss before income tax benefits and equity
in undistributed income of subsidiary
    
    
    (552,742
    )
    
    
    (364,240
    )Income tax benefits
    
    
    (210,042
    )
    
    
    (138,411
    )Loss before equity in undistributed income
of subsidiary
    
    
    (342,700
    )
    
    
    (225,829
    )Equity in undistributed income of subsidiary
    
    
    2,209,573
    
    
    
    1,906,152Net income
    
    $
    1,866,873
    
    
    $
    1,680,323
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE
19. PARENT COMPANY FINANCIAL INFORMATION (Continued)
 CONDENSED STATEMENT OF CASH FLOWS
 2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    1,866,873
    
    
    $
    1,680,323Adjustments to reconcile net income to net
cash used in operating activities:Undistributed income of subsidiary
    
    
    (2,209,573
    )
    
    
    (1,906,152
    )Other operating activities
    
    
    (52,854
    )
    
    
    (35,198
    )Net cash used in operating activities
    
    
    (395,554
    )
    
    
    (261,027
    )INVESTING ACTIVITIESCapital infusion in subsidiary
    
    
    (5,000,000
    )
    
    
    (4,500,000
    )FINANCING ACTIVITIESProceeds from issuance of subordinated debentures
    
    
    
    
    
    
    5,467,000Proceeds from issuance of capital stock
    
    
    19,197
    
    
    
    8,425Payment for fractional shares
    
    
    
    
    
    
    (4,062
    )Net cash provided by financing activities
    
    
    19,197
    
    
    
    5,471,363Net increase (decrease) in cash
    
    
    (5,376,357
    )
    
    
    710,336Cash at beginning of year
    
    
    6,515,940
    
    
    
    5,805,604Cash at end of year
    
    $
    1,139,583
    
    
    $
    6,515,940
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