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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
  o
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 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. Employer
Identification No.)
 525 North Jeff Davis Drive, Fayetteville, Georgia 30214  (Address of principal executive offices)(Zip Code)
 (770) 461-4365(Issuers telephone number) Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value(Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. o Revenues for the Registrants fiscal year ended December 31, 2004 total $14,184,000. The registrants voting stock trades over the counter (OTC) under the symbol SNCB. The
aggregate market value of the Registrants outstanding Common Stock held by nonaffiliates of the
Registrant on March 15, 2005 was approximately $32,073,239. There were 2,581,060 shares of Common
Stock outstanding as of March 15, 2005. Transitional Small Business Disclosure Format (check one): Yes            No þ DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive Proxy Statement for the 2005 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Report.




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SOUTHERN COMMUNITY BANCSHARES, INC.Annual Report on Form 10-KSBFor the Fiscal Year Ended December 31, 2004 Table of Contents Item
    
    
    
    PageNumber
    
    
    
    NumberPart I1.
    
    Description of Business
    
    
    32.
    
    Description of Property
    
    
    173.
    
    Legal Proceedings
    
    
    174.
    
    Submission of Matters to a Vote of
Security Holders
    
    
    17Part II5.
    
    Market for Common Equity,
Related Stockholder Matters and Small Business Issuer Purchases
of Equity Securities
    
    
    176.
    
    Managements Discussion and Analysis
or Plan of Operation
    
    
    197.
    
    Financial Statements
    
    
    408.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    408A.
    
    Controls and Procedures
    
    
    408B.
    
    Other Information
    
    
    40Part III9.
    
    Directors and Executive Officers of the
Registrant
    
    
    4010.
    
    Executive Compensation
    
    
    4111.
    
    Security Ownership of Certain Beneficial Owners
and Management
    
    
    4112.
    
    Certain Relationships and Related Transactions
    
    
    4113.
    
    Exhibits, List and Reports on Form 8-K
    
    
    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 Southern Community Bancshares, Inc. (the Company) was incorporated under the laws of
the State of Georgia and is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended. Its wholly-owned subsidiary, Southern Community Bank, a Georgia
banking corporation (the Bank), was incorporated on August 16,1999 and commenced business
on June 2, 2000. The Bank reorganized into a holding company structure effective January 1,
2002. The primary activity of the Company currently is, and is expected to remain for the
foreseeable future, the ownership and operation of the Bank. As a bank holding company, the
Company is intended to facilitate the Banks ability to serve its customers requirements for
financial services. The holding company structure also provides flexibility for expansion
through the possible acquisition of other financial institutions and the provision of
additional banking-related services, as well as certain non-banking services, which a
traditional commercial bank may not provide under present laws. The holding company
structure also affords additional flexibility in terms of capital formation and financing
opportunities. While the Company may seek in the future to acquire additional banks or bank holding
companies or to engage in other activities appropriate for bank holding companies under
appropriate circumstances as permitted by law, the Company currently has no plans,
understandings or agreements concerning any other activities other than as described below.
The results of operations and financial condition of the Company for the foreseeable future,
therefore, will be determined primarily by the results of operations and financial condition
of the Bank. Employees As of March 15, 2005, the Bank had 75 full-time employees. The employees are not
represented by a collective bargaining unit. The Company and the Bank believe their
relationships with their employees to be good. The Company currently does not have any
employees. Customers It is the opinion of management that there is no single customer or affiliated group of
customers whose deposits, if withdrawn, would have a material adverse effect on the business
of the Company. 3




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Competition All phases of the Companys banking activities are highly competitive. The Company
competes actively with commercial banks, as well as finance companies, credit unions, and
other financial institutions located within its primary market area of Fayette, Coweta, Henry
and Clayton Counties, Georgia. Based on total deposits of approximately $216 million at December 31, 2004, the Bank
represents approximately 12.8% of the market share in the Fayette County market. Seven major
regional banks represent approximately 52% of the deposits in the Fayette County market. The
larger financial institutions have greater resources and lending limits than the Bank, and
the seven major regional banking institutions have twenty-one branches in the county. There
are several credit unions located within our market area. Since credit unions are not
subject to income taxes, credit unions have an advantage in offering competitive rates to
potential customers. The Bank also faces competition in certain areas of its business from
mortgage banking companies, consumer finance companies, insurance
companies, money market mutual funds and investment banking firms, some of which are not
subject to the same degree of regulation as the Bank. The FDIC publishes the market share
data for the period ending June 30th of each year. This information was not
available for our branches located in Henry, Clayton and Coweta counties due to the opening
of these offices after this date in 2004. The Bank competes for deposits principally by offering depositors a variety of deposit
programs with competitive interest rates, quality service and convenient locations and hours.
The Bank will focus its resources to seek out and attract small business relationships and
take advantage of the Banks ability to provide flexible service that meets the needs of this
customer class. Management feels this market niche is the most promising business area for
the future growth of the Bank. Types of Loans Below is a description of the principal categories of loans made by the Bank and the relative
risks involved with each category. Consumer Loans The Bank offers a variety of loans to retail customers in the communities we serve. Consumer
loans in general carry a moderate degree of risk compared to other loans. They are generally more
risky than traditional residential real estate but less risky than commercial loans. Risk of
default is generally determined by the well being of the national and local economies. During
times of economic stress there is usually some level of job loss both nationally and locally, which
directly affects the ability of the consumer to repay debt. Risk on consumer type loans is
generally managed though policy limitations on debt levels consumer borrowers may carry and
limitations on loan terms and amounts depending upon collateral type. Various types of consumer loans include the following: 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 The various types of consumer loans all carry varying degrees of risk for the Bank. Loans
secured by deposits carry little or no risk and in our experience have had a zero default rate.
Home equity lines carry additional risk because of the increased difficulty of converting real
estate to cash in the event of a default. However, underwriting policy provides mitigation to this
risk in the form of a maximum loan to value ratio of 90% on a collateral type that has historically
appreciated in value. The Bank also requires the customer to carry adequate insurance coverage to
pay all mortgage debt in full if the collateral is destroyed. Vehicle financing carries additional
risks over loans secured by real estate in that the collateral is declining in value over the life
of the loan and is mobile. Risks inherent in vehicle financing are managed by matching the loan
term with the age and remaining useful life of the collateral to ensure the customer always has an
equity position and is never upside down. Collateral is protected by requiring the customer to
carry insurance showing the bank as loss payee. The Bank also has a blanket policy that covers the
Bank in the event of a lapse in the borrowers coverage and also provides assistance in locating
collateral when necessary. Secured personal loans carry additional risks over the previous types
in that they are generally smaller and made to borrowers with somewhat limited financial resources
and credit histories. These loans are secured by a variety of collateral with varying degrees of
marketability in the event of default. Risk on these types of loans is managed primarily at the
underwriting level with strict adherence to debt to income ratio limitations and conservative
collateral valuations. Overdraft protection lines and other unsecured personal loans carry the
greatest degree of risk in the consumer portfolio. Without collateral, the Bank is completely dependent on the
commitment of the borrower to repay and the stability of the borrowers income stream. Again,
primary risk management occurs at the underwriting stage with strict adherence to debt to income
ratios, time in present job and in industry and policy guidelines relative to loan size as a
percentage of net worth and liquid assets. Commercial and Industrial Loans The Bank makes loans to small and medium sized businesses in our primary trade area for
purposes such as new or upgrades to plant and equipment, inventory acquisition and various working
capital purposes. Commercial loans are granted to borrowers based on cash flow, ability to repay
and degree of management expertise. This type loan may be subject to many different types of risk,
which will differ depending on the particular industry a borrower is involved with. General risks
to an industry, or segment of an industry, are monitored by senior management on an ongoing basis.
When warranted, individual borrowers who may be at risk due to an industry condition may be more
closely analyzed and reviewed at a Loan Committee or Board of Directors level. On a regular basis,
commercial and industrial borrowers are required to submit statements of financial condition
relative to their business to the Bank for review. These statements are analyzed for trends and
the loan is assigned a credit grade accordingly. Based on this grade the loan may receive an
increased degree of scrutiny by management up to and including additional loss reserves being
required. 5




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This type loan will usually be collateralized. Generally, business assets are used and may
consist of general intangibles, inventory, equipment or real estate. Collateral is subject to risk
relative to conversion to a liquid asset if necessary as well as risks associated with degree of
specialization, mobility and general collectability in a default situation. To mitigate this risk
to collateral, it is underwritten to strict standards including valuations and general
acceptability based on the Banks ability to monitor its ongoing health and value. Commercial Real Estate The Bank grants loans to borrowers secured by commercial real estate located in our market
area. In underwriting these type loans we consider the historic and projected future cash flows of
the real estate. We make an assessment of the physical condition and general location of the
property and the effect these factors will have on its future desirability from a tenant
standpoint. We will generally lend up to a maximum 75% loan to value ratio and require a minimum
debt coverage ratio of 1.25% or other compensating factors. Commercial real estate offers some risks not found in traditional residential real estate
lending. Repayment is dependent upon successful management and marketing of properties and on the
level of expense necessary to maintain the property. Repayment of these loans may be adversely
affected by conditions in the real estate market or the general economy. Also commercial real
estate loans typically involve relatively large loan balances to single borrowers. To mitigate
these risks, we monitor our loan concentration and loans are audited by a third party auditor.
This type loan generally has a shorter maturity than other loan types giving the bank an
opportunity to reprice, restructure or decline to renew the credit. As with other loans, all
commercial real estate loans are graded depending upon strength of credit and performance. A lower
grade will bring increased scrutiny by management and the Board of Directors. Construction and Development Loans The Bank makes residential construction and development loans to customers in our market area.
Loans are granted for both speculative projects and those being built with end buyers already
secured. This type loan is subject primarily to market and general economic risk caused by
inventory build-up in periods of economic prosperity. During times of economic stress this type
loan has typically had a greater degree of risk than other loan types. To mitigate that risk, the
Board of Directors and management reviews the entire
portfolio on a monthly basis. The percentage of our portfolio being built on a speculative basis
is tracked very closely. On a quarterly basis the portfolio is segmented by market area to allow
analysis of exposure and a comparison to current inventory levels in these areas. To further
mitigate risk, this type loan is accorded a larger percentage loan loss allowance than other loan
types. Loan policy also provides for limits on speculative lending by borrower and by real estate
project. Managements Policy for determining the Loan Loss Allowance In calculating the adequacy of the loan loss allowance, the portfolio is sectioned to include
the general portfolio, loans specifically identified to have some weakness, areas of industry
concentration, areas presenting higher than normal risk by their nature and commitments 6




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presently unfunded. The general portfolio includes loans presenting a normal level of risk which are
performing and adequately collateralized. Due to the age of the Bank a reserve percentage is set
based on current peer experience as reported in the FDIC Quarterly Banking Profile. Loans
specifically identified to have some weakness are individually analyzed as to borrower repayment
ability and collateral adequacy and a specific reserve amount is individually assigned based on
this analysis. Also considered in this analysis are loss factors depending on loan grade as set by
bank loan policy and followed by regulatory agencies. Industry concentrations in residential
construction and development lending are accorded a higher level than the general portfolio due to
the increased risk to the bank any asset concentration causes. Areas presenting higher than normal
risk by their nature are then examined. Overdrafts are funded at 100% and accounts receivable
financing are funded at a higher rate than the general portfolio due to the historical record of
higher losses across the banking industry. Finally, an amount is determined based on current
economic trends within our market, current level of expertise within the loan department relative
to our size, level of non performing and delinquent loans and level of recoveries to charge offs.
The amount is calculated through a questionnaire that ranks the relative strength or weakness of
these areas for our bank. Managements Policy for Investing in Securities Funds that are not otherwise needed to meet the loan demand of the Bank may be invested in
accordance with the Banks investment policy. The purpose of the investment policy is to provide a
guideline by which these funds can best be invested to earn the maximum return for the Bank, yet
still maintain sufficient liquidity to meet fluctuations in the Banks loan demand and deposit
structure. The investment policy will adhere to the following objectives:  
    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. 7




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Supervision and Regulation General We are subject to state and federal banking laws and regulations that impose specific
requirements or restrictions and provide for general regulatory oversight over virtually all
aspects of our operations. These laws and regulations generally are intended to protect depositors,
not shareholders. This discussion is only a summary of various statutory and regulatory provisions.
This summary is qualified by reference to the particular statutory and regulatory provisions. Any
change in applicable laws or regulations may have a material effect on our business and prospects. Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989, numerous additional regulatory requirements have been placed on the banking industry
during the past 14 years. On November 12, 1999, the President signed into law a financial services
modernization act which effectively repealed the anti-affiliation provisions of the 1933
Glass-Steagall Act and the 1956 Bank Holding Company Act. Legislative changes and the policies of
various regulatory authorities may affect our operations. We are unable to predict the nature or
the extent of the effect on our business and earnings that fiscal or monetary policies, economic
control or new federal or state legislation may have in the future. The Company The Company is a bank holding company registered with the Board of Governors of the Federal
Reserve System and the Georgia Department of Banking and Finance under the Bank Holding Company Act
of 1956, as amended, and the Georgia Bank Holding Company Act. We are subject to the supervision,
examination and reporting requirements of the Bank Holding Company Act and the regulations of the
Federal Reserve, and the Georgia Bank Holding Company Act and the regulations of the Georgia
Department of Banking and Finance. The Bank Holding Company Act requires every bank holding company to obtain the prior approval
of the Federal Reserve before:  
    it may acquire direct or indirect ownership or control of any voting shares of
any bank if, after such acquisition, the bank holding company will directly or
indirectly own or control more than 5% of the voting shares of the bank;
    it or any of its subsidiaries, other than a bank, may acquire all or
substantially all of the assets of any bank; or
    it may merge or consolidate with any other bank holding company. The Bank Holding Company Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United
States. In addition, the Federal Reserve will not approve a transaction the 8




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effect of which may be substantially to lessen competition or to tend to create a monopoly, or that in any other manner
would be in restraint of trade. However, such transactions may be approved in the event the
anti-competitive effects of the proposed transaction are clearly outweighed by the public interest
in meeting the convenience and needs of the communities to be served. The
Federal Reserve is also required to consider the financial and managerial resources and future
prospects of the bank holding companies and banks involved and the convenience and needs of the
communities to be served. Consideration of financial resources generally focuses on capital
adequacy, and consideration of convenience and needs issues generally focuses on the parties
performance under the Community Reinvestment Act of 1977. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 facilitates interstate
branching and permits the establishment of agency relationships across state lines. The Interstate
Banking Act also permits bank holding companies to acquire banks in any state without regard to
whether the transaction is prohibited under the laws of such state, subject to certain state
provisions, including minimum age requirements of banks that are the target of the acquisition. The
minimum age of local banks subject to interstate acquisition is three years. In response to the Interstate Banking Act, the Georgia General Assembly adopted the Georgia
Interstate Banking Act, which provides that:  
    interstate acquisitions by institutions located in Georgia will be permitted in
states which also allow interstate acquisitions; and
    interstate acquisitions of institutions located in Georgia will be permitted by
institutions located in states which allow interstate acquisitions. Additionally, in 1996, the Georgia General Assembly adopted the Georgia Interstate Branching
Act, which permits Georgia-based banks and bank holding companies owning banks outside of Georgia
and all non-Georgia banks and bank holding companies owning banks in Georgia the right to merge any
bank into an interstate branch network. The Georgia Interstate Branching Act also allows banks to
establish de novo branches on an unlimited basis throughout Georgia, subject to the prior approval
of the Georgia Department of Banking and Finance. Except as amended by the Gramm-Leach-Bliley Act of 1999 discussed below, the Bank Holding
Company Act generally prohibits a bank holding company from engaging in activities other than
banking or managing or controlling banks or other permissible subsidiaries. Bank holding companies
are also generally prohibited from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal Reserve to be so
closely related to banking or managing or controlling banks as to be a proper incident thereto.
Activities determined by the Federal Reserve to fall within this category include acquiring or
servicing loans, leasing personal property, conducting discount securities brokerage activities,
performing certain data processing services, acting as agent or broker in selling certain types of
credit insurance, and performing certain insurance underwriting activities. The BHC Act does not
place territorial limitations on permissible non-banking activities of bank holding companies. The
Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any
non-banking activity when it has reasonable cause to believe that 9




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continuation of such activity constitutes a serious risk to the safety and soundness of any bank subsidiary of that bank holding
company. Gramm-Leach-Bliley Act of 1999 On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999,
which breaks down many of the barriers to affiliations among banks and securities firms, insurance
companies, and other financial service providers. This new law provides financial organizations
with the flexibility to structure new affiliations through a holding company structure or a
financial subsidiary. As a result, the number and type of entities competing with us in our markets
could increase. The Gramm-Leach-Bliley Act also covers various topics such as insurance, unitary thrifts,
privacy protection provisions for customers of financial institutions, the Federal Home Loan Bank
systems modernization, automatic teller machine reform, the Community Reinvestment Act and certain
changes related to the securities industry. The legislation amends the Bank Holding Company Act to clarify that a bank holding company may
hold shares of any company that the Federal Reserve has determined to be engaged in activities that
were sufficiently closely related to banking. This act also amends the Bank Holding Company Act to
establish a new type of bank holding company  the financial holding company. Financial holding
companies have the authority to engage in financial activities in which other bank holding
companies may not engage. Financial holding companies may also affiliate with companies that are
engaged in financial activities. These financial activities include activities that are:  
    financial in nature;
    incidental to an activity that is financial in nature; or
    complimentary to a financial activity and does not pose a substantial risk to
the safety and soundness of depository institutions or the financial system in
general. The Federal Reserve and the Secretary of the Treasury may determine which activities meet
these standards. However, the Gramm-Leach-Bliley Act explicitly lists certain activities as being
financial in nature. For example, some of these activities are:  
    lending, exchanging, transferring or investing for others;
    safeguarding money or securities;
    insuring, guaranteeing, or indemnifying against loss, harm, damage, illness,
disability, or death, or providing and issuing annuities, and acting as principal,
agent, or broker for these purposes in any state;
    providing financial, investment or economic advice; 10




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
    issuing or selling interests in pools of assets that a bank could hold directly;
    underwriting, dealing in or making markets in securities; and
    engaging within the United States in any activity that a bank holding company
could engage in outside of the United States, if the Federal Reserve has found that
the activity was usual in connection with banking or other financial operations
internationally. The Gramm-Leach-Bliley Act also directs the Federal Reserve to adopt a regulation or order
defining certain additional activities as financial in nature, to the extent that they are
consistent with that act. These include:  
    lending, exchanging, transferring or investing for others or safeguarding
financial assets other than money or securities;
    providing any device or other instrumentality for transferring financial assets; and
    arranging, effecting or facilitating financial transactions for third parties. Not all bank holding companies may become financial holding companies. A bank holding company
must meet three requirements before becoming a financial holding company:  
    all of the bank holding companys depository institution subsidiaries must be
well capitalized;
    all of the bank holding companys depository institution subsidiaries must be
well managed; and
    the bank holding company must file with the Federal Reserve a declaration of its
election to become a financial holding company, including a certification that its
depository institution subsidiaries meet the prior two criteria. With only a few exceptions, in order to exercise the powers granted to them under the
Gramm-Leach-Bliley Act, a financial holding company or insured depository institution also must
meet the Community Reinvestment Acts requirements. If any insured depository institution did not
receive a Community Reinvestment Act rating of at least satisfactory at its most recent
examination, the regulatory agencies are to prevent the insured depository institution or financial
holding company from exercising the new powers, either directly or through a subsidiary. Payment of Dividends The Company is a legal entity separate and distinct from our banking subsidiary. Our principal
source of cash flow, including cash flow to pay dividends to our shareholders, is 11




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dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank,
as well as by us to our shareholders. If, in the opinion of the federal banking regulators, a depository institution under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending
on the financial condition of the depository institution, could include the payment of dividends),
such authority may require, after notice and hearing, that such institution cease and desist from
such practice. The federal banking agencies have indicated that paying dividends that deplete a
depository institutions capital base to an inadequate level would be an unsafe and unsound banking
practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), a
depository institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See Prompt Corrective Action. Moreover,
the federal agencies have issued policy statements that provide that bank holding companies and
insured banks should generally only pay dividends out of current operating earnings. In addition, the Georgia Financial Institutions Code and the regulations of the Georgia
Department of Banking and Finance provide:  
    that dividends of cash or property may be paid only out of the retained earnings
of the Bank;
    that dividends may not be paid if the Banks paid-in capital and retained
earnings which are set aside for dividend payment and other distributions do not, in
combination, equal at least 20% of the Banks capital stock; and
    that dividends may not be paid without prior approval of the Georgia Department
of Banking and Finance if:  
    the Banks total classified assets exceed 80% of its equity capital;
    the aggregate amount of dividends to be declared exceeds 50% of the Banks
net profits after taxes but before dividends for the previous calendar year;
or
    the ratio of equity capital to total adjusted assets is less than 6%. Applying these dividend restrictions, and without prior approval of the Georgia Department of
Banking and Finance, as of December 31, 2004, the Bank could pay out $953,000 in dividends. Our
ability to pay dividends may also be affected or limited by other factors, such as the requirement
to maintain adequate capital above regulatory guidelines. Capital adequacy We are required to comply with the capital adequacy standards established by the Federal
Reserve. There are two basic measures of capital adequacy for bank holding companies that 12




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have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure. All
applicable capital standards must be satisfied for a bank holding company to be considered in
compliance. The risk-based capital standards are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies, to account for
off-balance sheet exposure, and to minimize disincentives for holding liquid, low-risk assets.
Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate
weights. The resulting capital ratios represent capital as a percentage of total risk-weighted
assets and off-balance sheet items. The minimum guideline for the ratio of total capital to risk-weighted assets is 8.0%. At least
half of total capital must be comprised of Tier 1 Capital, which is common stock, undivided
profits, minority interests in the equity accounts of consolidated subsidiaries and non-cumulative
perpetual preferred stock, less goodwill and certain other intangible assets. The remainder may
consist of Tier 2 Capital, which is subordinated debt, other preferred stock and a limited amount
of loan loss reserves. As of December 31, 2004, the Companys total risk-based capital ratio and
its Tier 1 risk-based capital ratio were 13.67% and 12.69%, respectively. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank
holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average
assets, less goodwill and certain other intangible assets, of 3.0% for bank holding companies that
meet specified criteria. All other bank holding companies generally are required to maintain a
leverage ratio of at least 3%, plus an additional cushion of 100 to 200 basis points. The
Companys leverage ratio as of December 31, 2004 was 9.84%. The guidelines also provide that bank
holding companies experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider
a tangible Tier 1 Capital leverage ratio and other indicia of capital strength in evaluating
proposals for expansion or new activities. The Federal Reserve has not advised the Company of any
specific minimum leverage ratio or tangible Tier 1 leverage ratio applicable to it. The Bank also is subject to risk-based and leverage capital requirements adopted by the
Federal Reserve, which are substantially similar to those adopted by the Federal Reserve for bank
holding companies. The Bank was in compliance with applicable minimum capital requirements as of
December 31, 2004. We have not been advised by any federal banking agency of any specific capital
ratio requirement applicable to the Bank. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies,
including issuance of a capital directive, the termination of deposit insurance by the Federal
Deposit Insurance Corporation, a prohibition on the taking of brokered deposits, and certain other
restrictions on its business. As described below, substantial additional restrictions can be
imposed upon FDIC-insured depository institutions that fail to meet applicable capital
requirements. See Prompt Corrective Action. The federal bank regulators continue to indicate their desire to raise capital requirements 13




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applicable to banking organizations beyond their current levels. In this regard, the Federal
Reserve and the Federal Deposit Insurance Corporation have recently adopted regulations requiring
regulators to consider interest rate risk in the evaluation of a banks capital adequacy. The bank
regulatory agencies have recently established a methodology for evaluating interest rate risk which
sets forth guidelines for banks with excessive interest rate risk exposure to hold additional
amounts of capital against such exposures. In addition to the capital standards imposed by federal banking regulators, the Georgia
Department of Banking and Finance imposed a requirement for the Bank to maintain a leverage ratio
of not less than 8.0% during the first three years of the Banks operation. Following the
expiration of this initial period, the Bank will become subject to a 6.0% primary capital ratio.
Such standard is calculated as the ratio of total equity to total assets, each as adjusted for
unrealized gains and losses on securities and allowance for loan losses. Support of Subsidiary Institution Under Federal Reserve policy, the Company is expected to act as a source of financial strength
for, and to commit resources to support, the Bank. This support may be required at times when,
absent such Federal Reserve policy, we may not be inclined to provide such support. In addition,
any capital loans by a bank holding company to its banking subsidiary are subordinate in right of
payment to deposits and to certain other indebtedness of such bank. In the event of a bank holding
companys bankruptcy, any commitment by a bank holding company to a federal bank regulatory agency
to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and
entitled to a priority of payment. Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 was enacted in large measure
to improve the supervision and examination of insured depository institutions in an effort to
reduce the number of bank failures and the resulting demands on the deposit insurance system. This
law establishes a system of prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the federal banking regulators have established five capital
categories (well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized) and are required to take certain mandatory
supervisory actions, and are authorized to take other discretionary actions, with respect to
institutions in the three undercapitalized categories. The severity of such actions depends upon
the capital category in which the institution is placed. Generally, subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The federal banking agencies have specified by regulation the relevant
capital level for each category. Under the regulations, an FDIC-insured bank will be:  
    well capitalized if it has a total capital ratio of 10.0% or greater, a tier 1
capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater and is not
subject to any order or written directive by the appropriate regulatory authority to
meet and maintain a specific capital level for any capital measure; 14




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
    adequately capitalized if it has a total capital ratio of 8.0% or greater, a tier 1
capital ratio of 4.0% or greater and a leverage ratio of 4.0% or greater (3.0% in
certain circumstances) and is not well capitalized;
    undercapitalized if it has a total capital ratio of less than 8.0%, a tier 1
capital ratio of less than 4.0% or a leverage ratio of less than 4.0% (3.0% in certain
circumstances);
    significantly undercapitalized if it has a total capital ratio of less than 6.0%, a
tier 1 capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and
    critically undercapitalized if its tangible equity is equal to or less than 2.0% of
average quarterly tangible assets. A depository institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory examination rating in
any one of four categories. As a depository institution moves downward through the capitalization
categories, the degree of regulatory scrutiny will increase and the permitted activities of the
institution will decrease. An FDIC-insured bank is generally prohibited from making any capital distribution, including
dividend payments, or paying any management fee to its holding company if the bank would thereafter
be undercapitalized. Undercapitalized banks are subject to growth limitations and are required
to submit a capital restoration plan. The federal regulators may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions and is likely to
succeed in restoring the banks capital. In addition, for a capital restoration plan to be
acceptable, the banks parent holding company must guarantee that the institution will comply with
such capital restoration plan. The aggregate liability of the parent company is limited to the
lesser of an amount equal to 5.0% of the banks total assets at the time it became
undercapitalized and the amount necessary to bring the institution into compliance with all
applicable capital standards. If a bank fails to submit an acceptable plan, it is treated as if it
is significantly undercapitalized. Significantly undercapitalized institutions may be subject
to a number of requirements and restrictions, including orders to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets, and cessation of receipt of
deposits from correspondent banks. Critically undercapitalized institutions are subject to the
appointment of a receiver or conservator. A bank that is not well capitalized is subject to
certain limitations relating to so-called brokered deposits. As of December 31, 2004, the Bank had the requisite capital levels to qualify as well
capitalized. FDIC Insurance Assessments The Federal Deposit Insurance Corporation has adopted a risk-based assessment system for
insured depository institutions that takes into account the risks attributable to different 15




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categories and concentrations of assets and liabilities. The risk-based assessment system assigns
an institution to one of three capital categories: well capitalized, adequately capitalized and
undercapitalized. These three categories are substantially similar to the prompt corrective action
categories described above, with the undercapitalized category including institutions that are
undercapitalized, significantly undercapitalized and critically undercapitalized for prompt
corrective action purposes. The FDIC also assigns an institution to one of three supervisory
subgroups within each capital group. The supervisory subgroup to which an institution is assigned
is based on an evaluation provided to the FDIC by the institutions primary federal regulator and
information which the FDIC determines to be relevant to the risk posed to the deposit insurance
funds. An institutions insurance assessment rate is then determined based on the capital category
and supervisory category to which it is assigned. The combination of capital groups and supervisory
subgroups results in nine assessment risk classifications to which different assessment rates are
applied. The FDIC may terminate the insurance of the deposits of the Bank upon a finding that the Bank
has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, order or condition the FDIC has imposed. Safety and Soundness Standards The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and
soundness standards. The guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general,
the guidelines require, among other things, appropriate systems and practices to identify and
manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by an executive
officer, employee, director, or principal shareholder. In addition, the agencies adopted
regulations that authorize, but do not require, an agency to order an institution that has been
given notice by an agency that it is not satisfying any of such safety and soundness standards to
submit a compliance plan. If an institution fails to submit or implement such a plan, the agency
must issue an order directing action to correct the deficiency and may require other actions of the
types to which an undercapitalized institution is subject under the prompt corrective action
provisions described above. If an institution fails to comply with such an order, the agency may
seek to enforce such order in judicial proceedings and to impose civil money penalties. Community Reinvestment Act The Community Reinvestment Act requires federal bank regulatory agencies to encourage
financial institutions to meet the credit needs of low- and moderate-income borrowers in their
local communities. An institutions size and business strategy determines the type of examination
that it will receive. Large, retail-oriented institutions will be examined using a
performance-based lending, investment and service test. Small institutions will be examined using a 16




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streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated
with community input and pre-approved by the bank regulatory agency. Community Reinvestment Act regulations provide for certain disclosure obligations. Each
institution must post a notice advising the public of its right to comment to the institution and
its regulator on the institutions Community Reinvestment Act performance and to review the
institutions Community Reinvestment Act public file. Each lending institution must maintain for
public inspection a public file that includes a listing of branch locations and services, a summary
of lending activity, a map of its communities and any written comments from the public on its
performance in meeting community credit needs. The Community Reinvestment Act requires public
disclosure of a financial institutions written Community Reinvestment Act evaluations. This
promotes enforcement of Community Reinvestment Act requirements by providing the public with the
status of a particular institutions community reinvestment record. The recently enacted Gramm-Leach-Bliley Act makes various changes to the CRA. Among other
changes, CRA agreements with private parties must be disclosed and annual CRA reports must be made
to a banks primary federal regulator. A bank holding company will not be permitted to become a
financial holding company and no new activities authorized under this Act may be commenced by a
holding company if any of its bank subsidiaries received less than a satisfactory CRA rating in
its latest CRA examination. 
 ITEM 2. DESCRIPTION OF PROPERTY As of December 31, 2004, the principal offices of the Company and the Bank were located
at 525 North Jeff Davis Drive, Fayetteville, Georgia 30214. The Bank owns this property and
the property located at 1500 Commerce Drive, Peachtree City, Georgia 30269, 4910 Bill Gardner
Parkway, Locust Grove, Georgia 30248 and the property currently under construction at 2245 E.
Hwy 34, Newnan, Georgia 30265. Neither the Company nor the Bank has any other properties.
Management believes that the physical facilities maintained by the Company and the Bank are
suitable for its current operations. 
 ITEM 3. LEGAL PROCEEDINGS The Company and the Bank are subject to claims and litigation in the ordinary course of
business. We believe that any pending claims and litigation will not have a material adverse
effect on the Companys consolidated position. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders of the Company during the fourth
quarter of the Companys fiscal year ended December 31, 2004. 
 PART II 
 ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED 17




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STOCKHOLDER MATTERS The Companys Common Stock is traded over the counter (OTC), under the symbol SNCB.OB There were approximately 671 holders of record of the common stock as of December 31,
2004. The Company currently intends to retain its earnings for use in the business and does
not foresee paying cash dividends in the near future. The Board of Directors cannot predict
when such dividends, if any, will ever be paid. The payment of dividends, if any, shall at
all times be subject to the payment of the Companys expenses, the maintenance of reasonable
working capital and risk reserves, and minimum capitalization requirements for state banks. Management has reviewed the limited information available as to the ranges at which the
Companys common stock has been sold. The following table sets forth the estimated price
range for sales of common stock for each quarter of the last two years. The following data
regarding the Companys common stock is provided for information purposes only and should not
be viewed as indicative of the actual or market value of the common stock. Estimated Price Range Per ShareHigh
    
    
    Low$
    
    
    $2004First Quarter
    
    $
    19.69
    
    
    $
    11.25Second Quarter
    
    
    19.69
    
    
    
    13.31Third Quarter
    
    
    21.00
    
    
    
    18.00Fourth Quarter
    
    
    20.99
    
    
    
    19.502003First Quarter
    
    $
    8.46
    
    
    $
    8.46Second Quarter
    
    
    8.46
    
    
    
    8.46Third Quarter
    
    
    8.46
    
    
    
    8.46Fourth Quarter
    
    
    10.69
    
    
    
    8.44
 The Board of Directors approved a four for three (33 1/3%) stock split payable on
September 15, 2004. All prices above have been restated to reflect the stock split. The
dividend totaled 644,700 shares paid to shareholders of record on September 1, 2004.
Fractional shares were paid in cash totaling $4,062 and were based on the closing price on
September 15, 2004 of $25.50 per whole share. 18




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##### Table of Contents



The following chart sets forth certain information relating to the Companys equity
compensation plans. 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
    
    
    213,538
    
    
    $
    6.94
    
    
    
    30,206Equity compensation
plans not approved by
security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    213,538
    
    
    $
    6.94
    
    
    
    30,206
 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following is a discussion of our financial condition at December 31, 2004 and 2003 and the
results of operations for the years then ended. The purpose of this discussion is to focus on
information about our financial condition and results of operations that is not otherwise apparent
from our audited consolidated financial statements. Reference should be made to those statements
and the selected financial data presented elsewhere in this report for an understanding of the
following discussion and analysis. FORWARD-LOOKING STATEMENTS We may from time to time make written or oral forward-looking statements, including statements
contained in our filings with the Securities and Exchange Commission and reports to shareholders.
Statements made in the Annual Report, other than those concerning historical information, should be
considered forward-looking and subject to various risks and uncertainties. Such forward-looking
statements are made based upon managements belief as well as assumptions made by, and information
currently available to, management pursuant to safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Our actual results
may differ materially from the results anticipated in forward-looking statements due to a variety
of factors, including governmental monetary and fiscal policies, deposit levels, loan demand, loan
collateral values, securities portfolio values, interest rate risk management, the effects of 19




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competition in the banking business from other commercial banks, thrifts, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance companies, money
market funds and other financial institutions operating in our market area and elsewhere, including
institutions operating through the Internet, changes in governmental regulation relating to the
banking industry, including regulations relating to branching and acquisitions, failure of
assumptions underlying the establishment of reserves for loan losses, including the value of
collateral underlying delinquent loans, and other factors. We caution that such factors are not
exclusive. We do not undertake to update any forward-looking statement that may be made from time
to time by, or on behalf of, us. OVERVIEW The year 2004 was highlighted by reporting net income of $1,680,323. Our primary market area
of Fayette, Coweta, Henry and Clayton Counties, Georgia, continues to grow, and we are
strategically positioned to take advantage of the growth. The areas growth should provide a base
for continued profitability. FINANCIAL CONDITION AS OF DECEMBER 31, 2004 AND 2003 Following is a summary of our balance sheets for the years indicated: December 31,2004
    
    
    2003(Dollars in Thousands)Cash and due from banks
    
    $
    3,644
    
    
    $
    3,723Interest bearing deposits in banks
    
    
    2,038
    
    
    
    84Federal funds sold
    
    
    18,378
    
    
    
    616Securities
    
    
    50,616
    
    
    
    59,799Restricted equity securities
    
    
    1,471
    
    
    
    750Loans, net
    
    
    184,721
    
    
    
    123,782Premises and equipment
    
    
    7,777
    
    
    
    5,210Other assets
    
    
    2,600
    
    
    
    1,682$
    271,245
    
    
    $
    195,646Total deposits
    
    $
    215,764
    
    
    $
    159,775Other borrowings
    
    
    24,000
    
    
    
    15,000Securities sold under repurchase agreements
    
    
    4,753
    
    
    
    1,704Other liabilities
    
    
    698
    
    
    
    681Subordinated debentures
    
    
    5,774
    
    
    
    Shareholders equity
    
    
    20,256
    
    
    
    18,486$
    271,245
    
    
    $
    195,646
 20




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FINANCIAL CONDITION AS OF DECEMBER 31, 2004 AND 2003 As of December 31, 2004, we had total assets of $271 million, an increase of 39% over December
31, 2003. Total interest-earning assets were $259 million as of December 31, 2004, or 96% of total
assets as compared to $186 million or 95% of total assets as of December 31, 2003. Our primary
interest-earning assets as of December 31, 2004 were loans, which made up 72% of total
interest-earning assets, as compared to 67% as of December 31, 2003. Our loan to deposit ratio was
86% as of December 31, 2004, as compared to 78% as of December 31, 2003. Loan growth in 2004 of
$61 million was funded by deposit growth in 2004 of $56 million and additional borrowings from the
FHLB of $9 million. These borrowings from the Federal Home Loan Bank are priced using the Daily
Rate Credit and matured on February 9, 2005. Securities decreased by $9 million in 2004 while
Federal Funds sold increased by $18 million. Fixed assets increased by $2.6 million due to the
purchase of land in Coweta County, the construction costs associated with that location and the
remaining construction costs associated with our Locust Grove facility. Our securities portfolio, consisting of U.S. Government and Agency securities, state and
municipal securities and mortgage-backed securities, amounted to $51 million as of December 31,
2004. Net unrealized losses on securities amounted to ($407,000) as of December 31, 2004 as
compared to ($545,000) as of December 31, 2003. Management has not specifically identified any
securities for sale in future periods that, if so designated, would require a charge to operations
if the market value would not be reasonably expected to recover prior to the time of sale. We have 84% of our loan portfolio collateralized by real estate located in our primary market
area of Fayette, Coweta, Henry and Clayton County, Georgia and surrounding counties. Our real
estate construction portfolio consists of loans primarily collateralized by one to four family
residential properties, which comprise 30% of the loan portfolio. Real estate mortgage loans
secured by one to four family residential properties comprise 21% of the loan portfolio, and
nonresidential real estate mortgage loans consisting primarily of small business commercial
properties total 33% of the loan portfolio. We generally require that loans collateralized by real
estate not exceed 80%-85% of the collateral value. The remaining 16% of the loan portfolio
consists of commercial, consumer, and other loans. We require collateral commensurate with the
repayment ability and creditworthiness of the borrower. The specific economic and credit risks associated with our loan portfolio, especially the real
estate portfolio, include, but are not limited to, a general downturn in the economy that could
affect unemployment rates in our market area, general real estate market deterioration, interest
rate fluctuations, deteriorated or non-existing collateral, title defects, inaccurate appraisals,
financial deterioration of borrowers, fraud and any violation of banking protection laws.
Construction lending can also present other specific risks to the lender such as whether the
builders can obtain financing for the construction, whether the builders can sell the home to a
buyer and whether the buyer can obtain permanent financing. Currently, real estate values and
employment trends in our market area are stable with no indications of a significant downturn in
the general economy. We attempt to reduce these economic and credit risks not only by adhering to loan to 21




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value guidelines, but also by investigating the creditworthiness of the borrower and monitoring the
borrowers financial position. Also, we establish and periodically review our lending policies and
procedures. State banking regulations limit exposure by prohibiting secured loan relationships that
exceed 25% of the Banks statutory capital and unsecured loan relationships that exceed 15% of the
Banks statutory capital. LIQUIDITY AND CAPITAL RESOURCES The purpose of liquidity management is to ensure that there are sufficient cash flows to
satisfy demands for credit, deposit withdrawals and our other needs. Traditional sources of
liquidity include asset maturities and growth in core deposits. We achieve our desired liquidity
objectives from the management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable
instruments and the continuous maturing of other earning assets are sources of liquidity from the
asset perspective. The liability base provides sources of liquidity through deposit growth, the
maturity structure of liabilities and accessibility to market sources of funds. The following table sets forth certain information about contractual cash obligations as of December 31, 2004. Payments Due After December 31, 20041 Year
    
    
    1 - 3
    
    
    4 - 5
    
    
    After 5Total
    
    
    or Less
    
    
    Years
    
    
    Years
    
    
    YearsShort-term borrowings
    
    $
    4,753
    
    
    $
    4,753
    
    
    $
    
    
    
    $
    
    
    
    $
    Time certificates of deposit
    
    
    136,032
    
    
    
    69,548
    
    
    
    62,288
    
    
    
    14,246
    
    
    
    Federal Home Loan Bank advances
    
    
    24,000
    
    
    
    9,000
    
    
    
    
    
    
    
    15,000
    
    
    
    Subordinated debentures
    
    
    5,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,774Total contractual cash obligations
    
    $
    170,559
    
    
    $
    83,301
    
    
    $
    52,238
    
    
    $
    29,246
    
    
    $
    5,774
 Our operating leases represent short-term obligations, normally with maturities of one
year or less. Many of the operating leases have thirty-day cancellation provisions. The total
contractual obligations for operating leases do not require a material amount of our cash funds. At December 31, 2004, we had $512,000 in binding commitments for capital expenditures. Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit
flows fluctuate significantly, being influenced by interest rates and general economic conditions
and competition. We attempt to price deposits to meet asset/liability objectives consistent with
local market conditions. 22




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Our liquidity and capital resources are monitored on a periodic basis by management and State
and Federal regulatory authorities. As determined under guidelines established by regulatory
authorities and internal policy, our liquidity was considered satisfactory. As of December 31, 2004, we had loan commitments outstanding of $35 million. Because these
commitments generally have fixed expiration dates and many will expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash requirements. If needed, we
have the ability on a short-term basis to borrow funds and purchase federal funds from other
financial institutions. As of December 31, 2004, we had arrangements with two commercial banks for
additional short-term advances of $10.4 million in aggregate. The Bank has also executed a blanket
lien agreement with the Federal Home Loan Bank of Atlanta under which the Banks one to four family
residential loans and securities were pledged against borrowings in the amount of $24,000,000. As of December 31, 2004, our capital ratios were considered well capitalized based on
regulatory minimum capital requirements. Our shareholders equity increased in 2004 primerily due
to the retention of net income in 2004 of $1,680,323 and unrealized gains on securities available
to sale of $85,661. In the future, the primary source of funds available to the holding company will be the
payment of dividends by the Bank. Banking regulations limit the amount of the dividends that may be
paid without prior approval of the Banks regulatory agency. Currently, the Bank could pay
$953,000 in dividends without regulatory approval. The minimum capital requirements to be considered well capitalized under prompt corrective
action provisions and the actual capital ratios for the Bank as of December 31, 2004 are as
follows: RegulatoryActual
    
    
    RequirementsLeverage capital ratio
    
    
    7.29
    %
    
    
    5
    %Risk based capital ratios:Core capital
    
    
    9.41
    %
    
    
    6
    %Total capital
    
    
    10.39
    %
    
    
    10
    %
 These ratios may decline as asset growth continues, but are expected to exceed the regulatory
minimum requirements. Anticipated future earnings will assist in keeping these ratios at
satisfactory levels. In addition, the Company has the ability to inject additional capital into
the Bank if considered necessary. During 2004 the Company issued $5,774,000 of trust preferred
securities which were invested in subordinated debentures issued by the bank. See Note 8 to the
Notes to Consolidated Financial Statements for additional details. CRITICAL ACCOUNTING POLICIES 23




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The Companys accounting and financial reporting policies conform to accounting principles
generally accepted in the United States of America and to general practices within the banking
industry. Following is a description of the accounting policies applied by the Company that are
deemed critical. Critical accounting policies are defined as policies that are very important to
the presentation of the Companys financial condition and results of operations, and that require
managements most difficult, subjective or complex judgments. The Companys financial results
could differ significantly if different judgments or estimates are applied in the application of
these policies. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management believes the
collectibility of the principal is unlikely. The allowance represents an amount which, in
managements judgment, will be adequate to absorb probable losses on existing loans that may become
uncollectible. Managements judgment in determining the adequacy of the allowance is based on evaluation of
the collectibility of loans. These evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, current economic conditions that may affect the
borrowers ability to pay, historical experience, estimated value of any underlying collateral,
overall portfolio quality and review of specific problem loans. Management believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Banks allowance for loan
losses. Such agencies may require the Bank to recognize additions to the allowance based on
judgments different than those of management. A loan is considered impaired when, based on current information and events, it is probable
all amounts due according to the contractual terms of the loan agreement will not be collected.
Impaired loans are measured based on the present value of expected future cash flows discounted at
the loans effective interest rate, or at the loans observable market price, or at the fair value
of the collateral if the loan is collateral dependent. Accrual of interest is discontinued when
management believes, after considering economic and business conditions and collection efforts,
that the borrowers financial condition is such that collection of interest is doubtful. Interest
income on nonaccrual loans is subsequently recognized only to the extent cash payments are received
until the loans are returned to accrual status. Income Taxes We use the asset and liability method of accounting for deferred income taxes and provide
deferred income taxes for all significant income tax temporary differences. See Note 11 to the
Notes to Consolidated Financial Statements for additional details. 24




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Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases
and the tax bases of the assets and liabilities results in deferred tax assets, an evaluation of
the probability of being able to realize the future benefits indicated by such asset is required.
A valuation allowance is provided for the portion of the deferred tax asset when it is more likely
than not that some portion or all of the deferred tax asset will not be realized. In assessing the
realizability of the deferred tax assets, management considers the scheduled reversals of deferred
tax liabilities, projected future taxable income, and tax planning strategies. The future tax consequences of the differences between the financial reporting and tax basis
of the Banks assets and liabilities resulted in a net deferred tax asset. A valuation allowance
was not required as of December 31, 2004 as the realization of the deferred tax assets was
determined to be probable. We believe that our liquidity and capital resources are adequate and will meet our foreseeable
short and long-term needs. We anticipate that we will have sufficient funds available to meet
current loan commitments and to fund or refinance, on a timely basis, our other material
commitments and liabilities. Management is not aware of any known trends, events or uncertainties, other than those
discussed above, that will have or that are reasonably likely to have a material effect on our
liquidity, capital resources or operations. Management is also not aware of any current
recommendations by the regulatory authorities that, if they were implemented, would have such an
effect. EFFECTS OF INFLATION The impact of inflation on banks differs from its impact on non-financial institutions. Banks,
as financial intermediaries, have assets that are primarily monetary in nature and that tend to
fluctuate in concert with inflation. A bank can reduce the impact of inflation if it can manage its
rate sensitivity gap. This gap represents the difference between rate sensitive assets and rate
sensitive liabilities. We, through our asset-liability committee, attempt to structure the assets
and liabilities and manage the rate sensitivity gap, thereby seeking to minimize the potential
effects of inflation. For information on the management of our interest rate sensitive assets and
liabilities, see Asset/Liability Management. 25




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##### Table of Contents



RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 The following is a summary of our operations for the years indicated. Years Ended December 31,2004
    
    
    2003(Dollars in Thousands)Interest income
    
    $
    13,570
    
    
    $
    9,095Interest expense
    
    
    4,665
    
    
    
    3,105Net interest income
    
    
    8,905
    
    
    
    5,990Provision for loan losses
    
    
    1,031
    
    
    
    420Other income
    
    
    613
    
    
    
    722Other expenses
    
    
    6,046
    
    
    
    3,903Pretax income
    
    
    2,441
    
    
    
    2,389Income taxes
    
    
    761
    
    
    
    797Net income
    
    $
    1,680
    
    
    $
    1,592
 NET INTEREST INCOME Our results of operations are determined by our ability to manage interest income and expense
effectively, to minimize loan and investment losses, to generate non-interest income and to control
operating expenses. Because interest rates are determined by market forces and economic conditions
beyond our control, our ability to generate net interest income depends on our ability to obtain an
adequate net interest spread between the rate we pay on interest-bearing liabilities and the rate
we earn on interest-earning assets. Our net yield on average interest-earning assets was 3.97% in 2004 as compared to 4.06% in
2003. Average loans increased by $58 million, and the remaining average interest earning assets
increased by $19 million which combined accounted for a $77 million increase in total average
interest-earning assets in 2004. Average interest-bearing liabilities increased by $72 million
with average interest-bearing demand and savings, and time deposits accounting for $16 and $34
million of this increase, respectively. The rate earned on average interest-earning assets
decreased to 6.05% in 2004 from 6.16% in 2003. The rate paid on average interest-bearing
liabilities decreased to 2.41% in 2004 from 2.55% in 2003. The increase in net interest income was
due to the significant increase in volume of interest-earning assets in comparison to 2003. In
2004, the yields on interest-earning assets decreased by 11 basis points while the rate paid on
interest-bearing liabilities decreased by 14 basis points, yielding an increase in net interest
spread of 3 basis points in 2004. For the year ended December 31, 2003, the net interest spread
decreased by 51 basis points. The increase in 2004 is consistent with the gradual increase in
interest rates over the past year. PROVISION FOR LOAN LOSSES The provision for loan losses was $1,031,000 in 2004 as compared to $420,000 in 2003. The
amounts provided were due primarily to the growth of the loan portfolio, the inherent risk in 26




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##### Table of Contents



the
loan portfolio, and the increase in non-accrual loans as of
December 31, 2004. Based upon our
evaluation of the loan portfolio, we believe the reserve for loan losses to be adequate to absorb
possible losses on existing loans that may become uncollectible. This evaluation considers past
due and classified loans, past experience, underlying collateral values and current economic
conditions that may affect the borrowers ability to repay. As of December 31, 2004, we had
$4,812,000 in non-accrual loans as compared to $444,000 as of December 31, 2003. This increase in
non-accrual loans is concentrated in three credits totaling $3,918,000. Two of the three credits
are secured by commercial real estate and the third credit is secured by various business assets.
There is no relation between the three credits. Due to the collateral securing these credits, we
estimate our losses related to these credits to not exceed $339,000 based on our evaluation at
December 31, 2004. At December 31, 2004, $339,000 of the allowances for loan losses is allocated
to these credits. Additional losses could possibly be incurred if foreclosure and liquidation
procedures are necessary. We do not anticipate any significant losses related to the remaining
$894,000 in non accrual loans due to adequate collateral values securing the majority of these
loans. The allowance for loan losses as a percentage of total loans as of December 31, 2004 and
2003 was 1.08% and 1.13%, respectively. Actual loan charge-offs were $434,428 during 2004, as
compared to $141,616 during 2003, which included write-downs related to the three credits mentioned
above of $299,809. As of March 28, 2005 the Companys non
accrual loans totaled $2,190,768.
There were no significant losses related to this reduction in non accrual loans. OTHER INCOME Other income consists of service charges on deposit accounts, gain on sale of securities and
other operating income. Other income decreased to $613,000 in 2004, from $722,000 in 2003. This
decrease is due primarily to a decrease in gain on sales of securities of $184,000 and a decrease
in gain on sale of loans of $21,000. Service charges on deposit accounts increased by $90,000,
while other operating income increase by only $6,000. OTHER EXPENSE Other expenses were $6,046,000 in 2004, as compared to $3,903,000 in 2003, an increase of
$2,143,000. Salaries and employee benefits increased by $1,283,000 due to an increase in the
number of full time equivalent employees from 45 to 72, and normal increases in salaries and
benefits. The increase in number of employees and related expenses in 2004 are due primarily to
the opening of our Locust Grove, Jonesboro and Newnan locations. This increase in number of
employees and branches is directly related to the increase of $303,000 in equipment and occupancy
expenses. Other operating expenses increased by $557,000 due partially to increased data processing
costs of $63,000, attorneys fees of $68,000, stationary and supplies of $50,000, and increased
directors fees of $37,000. The increases in all other operating expenses were directly related to
the overall growth of the Company. A significant portion of the increase in attorneys fees was due
to loan collection efforts associated with the increase in non accrual loans. 27




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##### Table of Contents



INCOME TAX We have reported income taxes for 2004 of $761,000 as compared to $797,000 for 2003. The
effective tax rate for 2004 and 2003 was 31.2% and 33.4%, respectively. The decrease in the
effective tax rate is due to the increased amount of nontaxable securities in our portfolio. ASSET/LIABILITY MANAGEMENT Our objective is to manage assets and liabilities to provide a satisfactory, consistent level
of profitability within the framework of established cash, loan, investment, borrowing and capital
policies. Certain officers are charged with the responsibility for monitoring policies and
procedures designed to ensure acceptable composition of the asset/liability mix. Our managements
overall philosophy is to support asset growth primarily through growth of core deposits of all
categories made by local individuals, partnerships and corporations. Our asset/liability mix is monitored on a regular basis with a report reflecting the interest
rate-sensitive assets and interest rate-sensitive liabilities being prepared and presented to the
Board of Directors on a monthly basis. The objective of this policy is to monitor interest
rate-sensitive assets and liabilities so as to minimize the impact of substantial movements in
interest rates on earnings. An asset or liability is considered to be interest rate-sensitive if it
will reprice or mature within the time period analyzed, usually one year or less. The interest
rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing
liabilities scheduled to mature or reprice within such time period. A gap is considered positive
when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive
liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities
exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative
gap would tend to affect net interest income adversely, while a positive gap would tend to result
in an increase in net interest income. Conversely, during a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a positive gap would
tend to affect net interest income adversely. If our assets and liabilities were equally flexible
and moved concurrently, the impact of any increase or decrease in interest rates on net interest
income would be minimal. A simple interest rate gap analysis by itself may not be an accurate indicator of how net
interest income will be affected by changes in interest rates. Accordingly, we also evaluate how
the repayment of particular assets and liabilities is impacted by changes in interest rates. Income
associated with interest-earning assets and costs associated with interest-bearing liabilities may
not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of
changes in interest rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. Interest rates on certain types
of assets and liabilities fluctuate in advance of changes in general market rates, while interest
rates on other types may lag behind changes in general market rates. In addition, certain assets,
such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps
and
floors) that limit changes in interest rates. Prepayment and early withdrawal levels also could
deviate significantly from those assumed in calculating the interest rate gap. The ability of many
borrowers to service their debts also may decrease during periods of rising interest rates. 28




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##### Table of Contents



Changes in interest rates also affect our liquidity position. We currently price deposits in
response to market rates and it is managements intention to continue this policy. If deposits are
not priced in response to market rates, a loss of deposits could occur that would negatively affect
our liquidity position. As of December 31, 2004, our cumulative one year interest rate-sensitivity gap ratio was
(100%). Our targeted ratio is 80% to 120% in this time horizon. This indicates that our
interest-earning assets are evenly matched in the one-year time horizon with our interest-bearing
liabilities. The following table sets forth the distribution of the repricing of our interest-earning
assets and interest-bearing liabilities as of December 31, 2004, the interest rate-sensitivity gap,
the cumulative interest rate-sensitivity gap and the cumulative interest rate-sensitivity gap
ratio. The table also sets forth the time periods in which interest-earning assets and
interest-bearing liabilities will mature or may reprice in accordance with their contractual terms.
However, the table does not necessarily indicate the impact of general interest rate movements on
the net interest margin as the repricing of various categories of assets and liabilities is subject
to competitive pressures and the needs of our customers. In addition, various assets and
liabilities indicated as repricing within the same period may in fact reprice at different times
within this period and at different rates. After
    
    
    AfterThree
    
    
    OneMonths
    
    
    YearWithin
    
    
    but
    
    
    but
    
    
    AfterThree
    
    
    Within
    
    
    Within
    
    
    FiveMonths
    
    
    One Year
    
    
    Five Years
    
    
    Years
    
    
    Total(Dollars in Thousands)Interest-earning assetsFederal Funds Sold
    
    
    18,378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,378Securities
    
    
    
    
    
    
    
    
    
    
    4,294
    
    
    
    52,087
    
    
    
    56,381Interest bearing deposits
    
    
    2,038
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,038Loans
    
    
    68,764
    
    
    
    51,804
    
    
    
    60,070
    
    
    
    6,462
    
    
    
    187,10089,180
    
    
    
    51,804
    
    
    
    64,364
    
    
    
    58,549
    
    
    
    263,897Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    55,812
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,812Savings
    
    
    2,496
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,496Time deposits
    
    
    17,674
    
    
    
    51,874
    
    
    
    66,484
    
    
    
    
    
    
    
    136,032Securities sold under repurchase
agreements
    
    
    4,753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,753Other Borrowings
    
    
    9,000
    
    
    
    
    
    
    
    15,000
    
    
    
    5,774
    
    
    
    29,77489,735
    
    
    
    51,874
    
    
    
    81,484
    
    
    
    5,774
    
    
    
    228,867
 29




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##### Table of Contents



After
    
    
    AfterThree
    
    
    OneMonths
    
    
    YearWithin
    
    
    but
    
    
    but
    
    
    AfterThree
    
    
    Within
    
    
    Within
    
    
    FiveMonths
    
    
    One Year
    
    
    Five Years
    
    
    Years
    
    
    Total(Dollars in Thousands)Interest rate sensitivity gap
    
    
    (555
    )
    
    
    (70
    )
    
    
    (17,120
    )
    
    
    52,775
    
    
    
    35,030Cumulative interest rate
sensitivity gap
    
    
    (555
    )
    
    
    (625
    )
    
    
    (17,745
    )
    
    
    35,030Cumulative interest rate
sensitivity gap ratio
    
    
    .99
    
    
    
    1.00
    
    
    
    .92
    
    
    
    1.15
 SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA The tables and schedules on the following pages set forth certain significant financial
information and statistical data with respect to: the distribution of our assets, liabilities and
shareholders equity; the interest rates we experience; our investment portfolio; our loan
portfolio, including types of loans, maturities and sensitivities of loans to changes in interest
rates and information on non-performing loans; summary of the loan loss experience and reserves for
loan losses; types of deposits and the return on equity and assets. INTEREST DIFFERENTIALS Average Balances The average balance sheet for the years indicated is presented below. (1) Years Ended December 31,2004
    
    
    2003(Dollars in Thousands)ASSETSCash and due from banks
    
    $
    4,591
    
    
    $
    3,620Interest bearing deposits
    
    
    1,125
    
    
    
    Taxable securities
    
    
    44,231
    
    
    
    33,724Nontaxable securities
    
    
    9,909
    
    
    
    5,656Securities valuation account
    
    
    (656
    )
    
    
    (123
    )Federal funds sold
    
    
    8,682
    
    
    
    5,575Loans (2)
    
    
    160,948
    
    
    
    102,648Allowance for loan losses
    
    
    (1,810
    )
    
    
    (1,242
    )Other assets
    
    
    8,450
    
    
    
    5,723$
    235,470
    
    
    $
    155,581Total interest-bearing assets
    
    $
    224,239
    
    
    $
    147,603LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Non-interest-bearing demand
    
    $
    21,427
    
    
    $
    15,340
 30




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##### Table of Contents



Years Ended December 31,2004
    
    
    2003(Dollars in Thousands)Interest-bearing demand and savings
    
    
    53,991
    
    
    

    38,465Time
    
    
    108,849
    
    
    
    74,762Total deposits
    
    
    184,267
    
    
    
    128,567Other liabilities
    
    
    689
    
    
    
    572Other borrowings
    
    
    7,844
    
    
    
    3,569Federal Home Loan Bank advances
    
    
    23,041
    
    
    
    4,849Total liabilities
    
    
    215,841
    
    
    
    137,557Shareholders equity
    
    
    19,629
    
    
    
    18,024$
    235,470
    
    
    $
    155,581Total interest-bearing liabilities
    
    $
    193,725
    
    
    $
    121,645
   (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 2004 was $1,760,000
and $355,000 in 2003. Interest Income and Interest Expense The following tables set forth the amount of our interest income and interest expense for each
category of interest-earning assets and interest-bearing liabilities and the average interest rate
for total interest-earning assets and total interest-bearing liabilities, net interest spread and
net yield on average interest-earning assets. Years Ended December 312004
    
    
    2003Average
    
    
    
    
    
    
    AverageInterest
    
    
    Rate
    
    
    Interest
    
    
    Rate(Dollars in Thousands)Interest Income:Interest and fees on loans (1)
    
    $
    11,216
    
    
    
    6.97
    %
    
    $
    7,661
    
    
    
    7.46
    %Interest on taxable securities
    
    
    1,827
    
    
    
    4.13
    
    
    
    1,152
    
    
    
    3.42Interest on nontaxable securities (2)
    
    
    379
    
    
    
    3.82
    
    
    
    223
    
    
    
    3.94Interest on federal funds sold
    
    
    130
    
    
    
    1.50
    
    
    
    59
    
    
    
    1.06Interest bearing deposits
    
    
    18
    
    
    
    1.60
    
    
    
    
    
    
    
    Total interest income
    
    
    13,570
    
    
    
    6.05
    %
    
    
    9,095
    
    
    
    6.16
    %Interest Expense:Interest on interest-bearing
demand and savings deposits
    
    
    736
    
    
    
    1.36
    %
    
    
    567
    
    
    
    1.47
    %Interest on time deposits
    
    
    3,114
    
    
    
    2.86
    
    
    
    2,362
    
    
    
    3.16
 31




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##### Table of Contents



Years Ended December 312004
    
    
    2003Average
    
    
    
    
    
    
    AverageInterest
    
    
    Rate
    
    
    Interest
    
    
    Rate(Dollars in Thousands)Other borrowings (3)
    
    
    223
    
    
    
    2.84
    
    
    
    29
    
    
    
    .81Federal Home Loan Bank advances
    
    
    592
    
    
    
    2.57
    
    
    
    148
    
    
    
    3.05Total interest expense
    
    
    4,665
    
    
    
    2.41
    %
    
    
    3,106
    
    
    
    2.55
    %Net interest income
    
    $
    8,905
    
    
    
    
    
    
    $
    5,989Net interest spread
    
    
    
    
    
    
    3.64
    %
    
    
    
    
    
    
    3.61
    %Net yield on average
interest-earning assets
    
    
    3.97
    %
    
    
    
    
    
    
    
    
    
    
    4.06
    %
   (1)
    
    Interest and fees on loans includes $1,170,000 and $707,000 of loan fee income for the
years ended December 31, 2004 and 2003, respectively. The interest income recognized on
non accrual loans during 2004 and 2003 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 The following table describes the extent to which changes in interest rates and changes in
volume of interest-earning assets and interest-bearing liabilities have affected our interest
income and expense during the year indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to:  -
    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. The changes in interest income and interest expense attributable to both volume and rate have been
allocated proportionately on a consistent basis to the change due to volume and the change due to
rate. 32




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##### Table of Contents



Year Ended December 31,2004 vs. 2003Changes DueTo:Rate
    
    
    Volume
    
    
    Total(Dollars in Thousands)Increase (decrease)in:Income from interest-earning assets:Interest and fees on loans
    
    
    (535
    )
    
    
    4,090
    
    
    
    3,555Interest on taxable securities
    
    
    270
    
    
    
    405
    
    
    
    675Interest on nontaxable securities
    
    
    (7
    )
    
    
    163
    
    
    
    156Interest on federal funds sold
    
    
    31
    
    
    
    40
    
    
    
    71Interest on interest bearing deposits
    
    
    9
    
    
    
    9
    
    
    
    18Total interest income
    
    
    (232
    )
    
    
    4,707
    
    
    
    4,475Expense from interest-bearing
liabilities:Interest on interest-bearing demand
and savings deposits
    
    
    (45
    )
    
    
    214
    
    
    
    169Interest on time deposits
    
    
    (241
    )
    
    
    993
    
    
    
    752Interest on other borrowings
    
    
    131
    
    
    
    63
    
    
    
    194Interest on FHLB advances
    
    
    (27
    )
    
    
    471
    
    
    
    444Total interest expense
    
    
    (182
    )
    
    
    1,741
    
    
    
    1,559Net interest income
    
    
    (50
    )
    
    
    2,966
    
    
    
    2,916
 INVESTMENT PORTFOLIO Types of Investments The carrying amounts of securities at the dates indicated, which are all classified as
available for sale, are summarized as follows: December 31,2004
    
    
    2003(Dollars in Thousands)U.S. Government agencies
    
    $
    21,822
    
    
    $
    26,016State and municipal securities
    
    
    11,149
    
    
    
    9,187Corporate bonds
    
    
    1,502
    
    
    
    1,025Mortgage-backed securities
    
    
    16,143
    
    
    
    23,571$
    50,616
    
    
    $
    59,799
 Maturities The amounts of securities, including the weighted average yield in each category as of
December 31, 2004, are shown in the following table according to contractual maturity
classifications after one through five years, after five through ten years and after ten years. 33




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##### Table of Contents



After one
    
    
    After fivethrough five years
    
    
    through ten yearsAmount
    
    
    Yield(1)
    
    
    Amount
    
    
    Yield(1)(Dollars in Thousands)U.S. Government agencies
    
    
    3,452
    
    
    
    3.42
    
    
    
    2,485
    
    
    
    3.93State and municipal
securities
    
    
    515
    
    
    
    1.98
    
    
    
    1,232
    
    
    
    3.13Mortgage-backed securities
    
    
    327
    
    
    
    3.52
    
    
    
    9,860
    
    
    
    3.23Corporate bonds
    
    
    
    
    
    
    
    
    
    
    1,028
    
    
    
    6.75
 After ten years
    
    
    TotalAmount
    
    
    Yield(1)
    
    
    Amount
    
    
    Yield(1)U.S. Government agencies
    
    
    15,885
    
    
    
    5.54
    
    
    
    21,822
    
    
    
    5.02State and municipal securities
    
    
    9,402
    
    
    
    3.96
    
    
    
    11,149
    
    
    
    3.78Mortgage-backed securities
    
    
    5,956
    
    
    
    3.72
    
    
    
    16,143
    
    
    
    3.42Corporate bonds
    
    
    474
    
    
    
    5.53
    
    
    
    1,502
    
    
    
    6.47
   (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. LOAN PORTFOLIO Types of Loans The amount of loans outstanding at the indicated dates are shown in the following table
according to the type of loan. December 31,2004
    
    
    2003(Dollars in Thousands)Commercial
    
    $
    24,753
    
    
    $
    19,234Real estate-construction
    
    
    56,787
    
    
    
    34,848Real estate-mortgage
    
    
    101,151
    
    
    
    66,884Consumer installment and other
    
    
    4,409
    
    
    
    4,455187,100
    
    
    
    125,421Less:Allowance for loan losses
    
    
    (2,016
    )
    
    
    (1,419
    )Deferred loan fees
    
    
    (363
    )
    
    
    (221
    )Net loans
    
    $
    184,721
    
    
    $
    123,781
 34




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##### Table of Contents



Maturities and Sensitivities of Loans to Changes in Interest Rates Total loans as of December 31, 2004 are shown in the following table according to contractual
maturity classifications one year or less, after one year through five years and after five years. December 31, 2004(Dollars in Thousands)CommercialOne year or less
    
    
    10,311After one through five years
    
    
    13,069After five years
    
    
    1,37324,753ConstructionOne year or less
    
    
    55,612After one through five years
    
    
    1,176After five years
    
    
    056,788OtherOne year or less
    
    
    54,646After one through five years
    
    
    45,825After five years
    
    
    5,089105,560
 The following table summarizes loans as of December 31, 2004 with the due dates after one year
that have predetermined and floating or adjustable interest rates. 35




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##### Table of Contents



December 31,2004(Dollars in Thousands)Predetermined interest rates
    
    $
    59,556Floating or adjustable interest rates
    
    
    6,976$
    66,532
 Risk Elements Information with respect to non-accrual, past due and restructured loans as of December 31,
2004 and 2003 is as follows: December 31,2004
    
    
    2003(Dollars in Thousands)Non-accrual loans
    
    $
    4,812
    
    
    $
    444Loans contractually past due 90 days or
more as to interest or principal payments
and still accruing
    
    
    26
    
    
    
    67Restructured 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
    
    
    116
    
    
    
    14Interest income that was recorded on
non-accrual and restructured loans
    
    
    
    
    
    
    
 It is our policy to discontinue the accrual of interest income when, in the opinion of
management,
collection of interest becomes doubtful. This status is accorded when there is a significant
deterioration in the financial condition of the borrower and full repayment of principal and
interest is not expected, and the principal or interest is more than 90 days past due, unless the
loan is both well-secured and in the process of collection. Loans classified for regulatory purposes as loss, doubtful, substandard or special mention
that have not been included in the table above do not represent or result from trends or
uncertainties that management reasonably expects will materially impact future operating results,
liquidity or capital resources. These classified loans do not represent material credits about
which management is aware of any information that causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms. SUMMARY OF LOAN LOSS EXPERIENCE 36




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##### Table of Contents



The following table summarizes average loan balances for the year determined using the daily
average balances during the year; changes in the allowance for loan losses arising from loans
charged off and recoveries on loans previously charged off; additions to the allowance which have
been charged to operating expense; and the ratio of net charge-offs during the year to average
loans. Years Ended December 31,2004
    
    
    2003(Dollars in Thousands)Average amount of loans outstanding
    
    
    160,948
    
    
    
    102,648Balance of allowance for loan losses
at beginning of year
    
    
    1,419
    
    
    
    1,141Loans charged off:Consumer
    
    
    (33
    )
    
    
    (142
    )Real Estate
    
    
    
    
    
    
    (232
    )Commercial
    
    
    (169
    )
    
    
    (434
    )
    
    
    (142
    )Loans recovered:
    
    
    
    
    
    
    Net charge-offs
    
    
    (434
    )
    
    
    (142
    )Additions to allowance charged to operating
expense during year
    
    
    1,031
    

    
    
    420Balance of allowance for loan losses
at end of year
    
    $
    2,016
    
    
    $
    1,419Ratio of net loans charged off during the
year to average loans outstanding
    
    
    .27
    %
    
    
    .14
    %
 ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level that is deemed appropriate by
management to adequately cover all known and inherent risks in the loan portfolio. Our evaluation
of the loan portfolio
includes a periodic review of loan loss experience, current economic conditions that may affect the
borrowers ability to pay and the underlying collateral value of the loans. As of December 31, 2004 and 2003, we made no allocations of our allowance for loan losses to
specific categories of loans. Based on our best estimate, the allocation of the allowance for loan
losses to types of loans, as of the indicated dates, is as follows: 37




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##### Table of Contents



December 31, 2004
    
    
    December 31, 2003Percent of
    
    
    
    
    
    
    Percent ofloans in
    
    
    
    
    
    
    loans ineach category
    
    
    
    
    
    
    each categoryAmount
    
    
    to total loans
    
    
    Amount
    
    
    to total loans(Dollars in Thousands)Commercial
    
    
    1,452
    
    
    
    13.23
    %
    
    
    1,009
    
    
    
    15.34
    %Real estate-construction
    
    

    263
    
    
    
    30.35
    
    
    
    131
    
    
    
    27.78Real estate-mortgage
    
    
    
    
    
    
    54.06
    
    
    
    
    
    
    
    53.33Consumer installment
loans and other
    
    
    117
    
    
    
    2.36
    
    
    
    138
    
    
    
    3.55Unallocated
    
    
    184
    
    
    
    
    
    
    
    141
    
    
    
    2,016
    
    
    
    100
    %
    
    
    1,149
    
    
    
    100
    %
 DEPOSITS Average amount of deposits and average rates paid thereon, classified as to
non-interest-bearing demand deposits, interest-bearing demand, savings deposits and time deposits
is presented below.(1) Years Ended December 31,2004
    
    
    2003Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Non-interest-bearing demand deposits
    
    
    21,427
    
    
    
    
    %
    
    $
    15,340
    
    
    
    
    %Interest-bearing demand and savings
deposits
    
    
    53,991
    
    
    
    1.36
    
    
    
    38,465
    
    
    
    1.47Time deposits
    
    
    108,849
    
    
    
    2.86
    
    
    
    74,762
    
    
    
    3.16$
    184,267
    
    
    
    
    
    
    $
    128,567
   (1)
    Average balances were determined using the daily average balances. The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December
31, 2004 are shown below by category, which is based on time remaining until maturity of three
months or less, over three through six months, over six through twelve months and over twelve
months. 38




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##### Table of Contents



December 31, 2004(Dollars in Thousands)Three months or less
    
    $
    7,316Over three through six months
    
    
    5,502Over six through twelve months
    
    
    15,781Over twelve months
    
    
    42,071Total
    
    $
    70,670
 RETURN ON ASSETS AND SHAREHOLDERS EQUITY The following rate of return information for the years indicated is presented below. Years Ended December 31,2004
    
    
    2003Return on assets (1)
    
    
    .71
    %
    
    
    1.02
    %Return on equity (2)
    
    
    8.56
    
    
    
    8.83Dividend payout ratio (3)
    
    
    n/a
    
    
    
    n/aEquity to assets ratio (4)
    
    
    8.34
    
    
    
    11.58
   (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 The Companys only material off-balance sheet arrangements consist of commitments to extend
credit and standby letters of credit issued in the ordinary course of business. For a complete
description of these obligations please refer to Note 13. of the Financial Statements. 39




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##### Table of Contents



ITEM 7. FINANCIAL STATEMENTS The following consolidated financial statements of the Company and its subsidiary, together
with the Report of Independent Registered Public Accounting Firm thereon, are included on pages F-1
through F-35 and made a part of this Annual Report on Form 10-KSB: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated
Statements of Income for the years ended December 31, 2004, and 2003 Consolidated Statements of Comprehensive Income
for the years ended December 31, 2004 and 2003 Consolidated Statements of Changes in Shareholders Equity
for the years ended December 31, 2004 and 2003 Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 Notes to Consolidated Financial Statements 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE Neither the Company nor the Bank had any change in accountants or disagreements with
accountants on accounting and financial disclosure during the two most recent fiscal years or
subsequently. 
 ITEM 8A. CONTROLS AND PROCEDURES The Companys principal executive and principal financial officers believe that the Companys
disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) or
15(d)-15(e), are effective. This conclusion was based on an evaluation of these controls and
procedures as of the end of the fourth quarter of 2004. 
 ITEM 8B. OTHER INFORMATION None 
 PART III 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a)OF THE EXCHANGE ACT 40




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The information appearing under the heading Election of Directors and the subheadings
Executive Officer and Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy
Statement (the 2005 Proxy Statement) relating to the annual meeting of shareholders of the
Company, scheduled to be held on May 26, 2005, is incorporated herein by reference. 
 ITEM 10. EXECUTIVE COMPENSATION The information appearing under the heading Compensation of Executive Officers and Directors
in the 2005 Proxy Statement is incorporated herein by reference. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing under the heading Outstanding Voting Securities of the Company and
Principal Holders Thereof in the 2005 Proxy Statement is incorporated herein by reference. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under the caption Certain Relationships and Transactions in the
2005 Proxy Statement is incorporated hereby reference. 
 ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) The following exhibits are filed as a part of or incorporated by reference in this report. 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)10.1
    
    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)*
 41




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##### Table of Contents



Exhibit Number
    
    Description10.3
    
    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)*10.4
    
    Agreement for the Sale and Purchase of Real Estate
between Southern Community Bank and Peachtree City
Holdings, L.L.C. (incorporated by reference to Exhibit
10.5 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. (b) There were no reports on Form 8-K filed by the Company during the fourth quarter of 2004. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information appearing under the caption Ratification of Independent Public Accountants
in the 2005 Proxy Statement is incorporated herein by reference. 42




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHERN COMMUNITY BANCSHARES, INC.(Registrant)Date: March 31, 2005
    
    By:
    
    /s/ Gary D. McGahaPresident and ChiefExecutive Officer
 In accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Gary D. McGaha
    
    Date: March 31, 2005Gary D. McGahaChief Executive OfficerAnd Director[Principal Executive Officer]/s/ Leslye L. Grindle
    
    Date: March 31, 2005Leslye L. GrindleChief Financial Officer[Principal Financial Officer andPrincipal Accounting Officer]Date: March 31, 2005/s/ James S. CameronJames S. Cameron, DirectorDate: March 31, 2005/s/
George R. Davis, Sr.George R. Davis, Sr., DirectorDate: March 31, 2005/s/
Robert B. Dixon, Jr.Robert B. Dixon, Jr., Director
 43




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##### Table of Contents



Date: March 31, 2005/s/
Richard J. DumasRichard J. Dumas, DirectorWilliam Wayne Leslie, DirectorDate: March 31, 2005/s/
Thomas D. ReeseThomas D. Reese, DirectorDan V. Stinchcomb, DirectorDate: March 31, 2005/s/ William M. StrainWilliam 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, 2004 TABLE OF CONTENTS PageINDEPENDENT AUDITORS REPORT
    
    
    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-7Notes to consolidated financial statements
    
    
    F-8-27




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##### Table of Contents



INDEPENDENT AUDITORS REPORT To the Board of Directors
Southern Community Bancshares, Inc. and Subsidiary
Fayetteville, Georgia We have audited the accompanying consolidated balance sheets of Southern Community Bancshares, Inc. and subsidiaryas of December 31, 2004 and 2003, and the related consolidated statements of income,
comprehensive income, shareholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southern Community Bancshares, Inc. and subsidiary as of December 31, 2004 and
2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Mauldin & Jenkins, LLC
Atlanta, Georgia
March 19, 2005 F-1




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003 2004
    
    
    2003AssetsCash and due from banks
    
    $
    3,644,669
    
    
    
    3,806,961Interest bearing deposits in banks
    
    
    2,038,231
    
    
    $
    Federal funds sold
    
    
    18,378,000
    
    
    
    616,000Securities available for sale, at fair value
    
    
    50,615,684
    
    
    
    59,799,452Restricted equity securities, at cost
    
    
    1,471,300
    
    
    
    750,000Loans
    
    
    186,737,227
    
    
    
    125,201,122Less allowance for loan losses
    
    
    2,016,557
    
    
    
    1,419,479Loans, net
    
    
    184,720,670
    
    
    
    123,781,643Premises and equipment
    
    
    7,777,049
    
    
    
    5,210,422Other assets
    
    
    2,599,675
    
    
    
    1,681,265Total assets
    
    $
    271,245,278
    
    
    $
    195,645,743Liabilities and Shareholders EquityDeposits:Noninterest-bearing
    
    $
    21,423,600
    
    
    $
    22,113,953Interest-bearing
    
    
    194,340,635
    
    
    
    137,661,115Total deposits
    
    
    215,764,235
    
    
    
    159,775,068Federal Home Loan Bank advances
    
    
    24,000,000
    
    
    
    15,000,000Securities sold under repurchase agreements
    
    
    4,752,914
    
    
    
    1,704,188Subordinated debentures
    
    
    5,774,000
    
    
    
    680,554Other liabilities
    
    
    697,849
    
    
    
    Total liabilities
    
    
    250,988,998
    
    
    
    177,159,810Commitments and contingencies (Note 13)Shareholders equity:Capital stock, no par value; 10,000,000 shares authorized;
2,580,526 and 1,934,777 shares issued and outstanding, respectively
    
    
    16,054,796
    
    
    
    16,050,433Retained earnings
    
    
    4,453,934
    
    
    
    2,773,611Accumulated other comprehensive income (loss)
    
    
    (252,450
    )
    
    
    (338,111
    )Total shareholders equity
    
    
    20,256,280
    
    
    
    18,485,933Total liabilities and shareholders equity
    
    $
    271,245,278
    
    
    $
    195,645,743
 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, 2004 AND 2003 2004
    
    
    2003Interest income:Loans, including fees
    
    $
    11,215,484
    
    
    $
    7,660,995Taxable securities
    
    
    1,827,419
    
    
    
    1,151,862Nontaxable securities
    
    
    379,233
    
    
    
    223,179Federal funds sold
    
    
    130,289
    
    
    
    59,436Interest bearing deposits
    
    
    17,633
    
    
    
    Total interest income
    
    
    13,570,058
    
    
    
    9,095,472Interest expense:Deposits
    
    
    3,850,358
    
    
    
    2,928,728Other borrowings
    
    
    814,636
    
    
    
    177,041Total interest expense
    
    
    4,664,994
    
    
    
    3,105,769Net interest income
    
    
    8,905,064
    
    
    
    5,989,703Provision for loan losses
    
    
    1,031,121
    
    
    
    420,000Net interest income after provision for loan losses
    
    
    7,873,943
    
    
    
    5,569,703Other income:Service charges on deposit accounts
    
    
    461,262
    
    
    
    371,598Gain on sale of securities available for sale
    
    
    85,416
    
    
    
    269,629Gain on sale of loans
    
    
    
    
    
    
    21,113Other operating income
    
    
    66,766
    
    
    
    60,002Total other income
    
    
    613,444
    
    
    
    722,342Other expense:Salaries and employee benefits
    
    
    3,426,141
    
    
    
    2,143,731Equipment and occupancy expenses
    
    
    814,069
    
    
    
    510,735Other operating expenses
    
    
    1,805,418
    
    
    
    1,249,076Total other expense
    
    
    6,045,628
    
    
    
    3,903,542Income before income taxes
    
    
    2,441,759
    
    
    
    2,388,503Income taxes
    
    
    761,436
    
    
    
    796,900Net income
    
    $
    1,680,323
    
    
    $
    1,591,603Basic earnings per share
    
    $
    0.65
    
    
    $
    0.62Diluted earnings per share
    
    $
    0.63
    
    
    $
    0.61
 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, 2004 AND 2003 2004
    
    
    2003Net income
    
    $
    1,680,323
    
    
    $
    1,591,603Other comprehensive income (loss):Unrealized holding gains (losses) on securities available for sale arising
during period, net of tax (benefits) of $84,959 and $(170,583), respectively
    
    
    138,619
    
    
    
    (278,321
    )Reclassification adjustment for gains realized in net income,
net of taxes of $32,458 and $102,459, respectively
    
    
    (52,958
    )
    
    
    (167,170
    )Other comprehensive loss
    
    
    85,661
    
    
    
    (445,491
    )Comprehensive income
    
    $
    1,765,984
    
    
    $
    1,146,112
 F-4




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
 AccumulatedOther
    
    
    TotalCapital Stock
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance, December 31, 2002
    
    
    1,394,567
    
    
    
    15,342,615
    
    

    
    1,182,008
    
    
    
    107,380
    
    
    
    16,632,003Net income
    
    
    
    
    
    
    
    
    
    
    1,591,603
    
    
    
    
    
    
    
    1,591,603Issuance of common stock
    
    
    56,876
    
    
    
    713,940
    
    
    
    
    
    
    
    
    
    
    
    713,940Four-for- three stock split
    
    
    483,334
    
    
    
    (6,122
    )
    
    
    
    
    
    
    
    
    
    
    (6,122
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445,491
    )
    
    
    (445,491
    )Balance, 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 loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,661
    
    
    
    85,661Balance, December 31, 2004
    
    
    2,580,526
    
    
    
    16,054,796
    
    
    
    4,453,934
    
    
    
    (252,450
    )
    
    
    20,256,280
 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, 2004 AND 2003 2004
    
    
    2003OPERATING ACTIVITIESNet income
    
    $
    1,680,323
    
    
    $
    1,591,603Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    401,041
    
    
    
    292,659Provision for loan losses
    
    
    1,031,121
    
    
    
    420,000Gain on sale of securities available-for-sale
    
    
    (85,416
    )
    
    
    (269,629
    )Deferred income taxes
    
    
    (144,428
    )
    
    
    (112,765
    )Decrease in taxes payable
    
    
    (124,244
    )
    
    
    (86,727
    )Increase in interest receivable
    
    
    (170,649
    )
    
    
    (348,784
    )Increase in interest payable
    
    
    47,340
    
    
    
    142,090Net other operating activities
    
    
    (55,875
    )
    
    
    96,246Net cash provided by operating activities
    
    
    2,579,273
    
    
    
    1,724,693INVESTING ACTIVITIESIncrease in interest-bearing deposits in banks
    
    
    (1,954,357
    )
    
    
    (83,874
    )Purchase of securities available-for-sale
    
    
    (3,854,402
    )
    
    
    (67,770,612
    )Proceeds from maturities of securities available-for-sale
    
    
    4,956,824
    
    
    
    12,887,333Proceeds from sales of securities available-for-sale
    
    
    8,304,924
    
    
    
    17,433,612Purchase of restricted equity securities
    
    
    (721,300
    )
    
    
    (608,200
    )Net increase in federal funds sold
    
    
    (17,762,000
    )
    
    
    (616,000
    )Net increase in loans
    
    
    (61,970,148
    )
    
    
    (34,421,159
    )Purchase of premises and equipment
    
    
    (2,566,627
    )
    
    
    (1,791,679
    )Net cash used in investing activities
    
    
    (76,166,947
    )
    
    
    (74,970,579
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    55,989,167
    
    
    
    60,266,323Proceeds from issuance of capital stock
    
    
    8,425
    
    
    
    713,940Payment for fractional shares
    
    
    (4,062
    )
    
    
    (6,122
    )Proceeds from issuance of trust preferred securities
    
    
    5,467,000
    
    
    
    Net decrease in federal funds purchased
    
    
    
    
    
    
    (719,000
    )Net Increase in Federal Home Loan Bank advances
    
    
    9,000,000
    
    
    
    15,000,000Net Increase (decrease) in repurchase agreements
    
    
    3,048,726
    
    
    
    (2,075,825
    )Net cash provided by financing activities
    
    
    73,509,256
    
    
    
    73,179,316Net increase (decrease) in cash and due from banks
    
    
    (78,418
    )
    
    
    (66,570
    )Cash and due from banks at beginning of year
    
    
    3,723,087
    
    
    
    3,789,657Cash and due from banks at end of period
    
    $
    3,644,669
    
    
    $
    3,723,087
 F-6




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended December 31, 2004 and 2003 2004
    
    
    2003SUPPLEMENTAL DISCLOSURECash paid for interest
    
    $
    4,617,654
    
    
    $
    2,963,679Cash paid for taxes
    
    $
    1,044,013
    
    
    $
    996,392NONCASH TRANSACTIONSForeclosed assets acquired in settlement of loans
    
    $
    198,760
    
    
    $
    
 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 Southern Community Bancshares, Inc. (the Company) is a bank holding company whose
business is conducted by its wholly-owned commercial bank, Southern Community Bank
(the Bank). Southern Community Bank is located in Fayetteville, Fayette County,
Georgia with branches located in Peachtree City, Newnan, Jonesboro and Locust Grove,
Georgia. The Bank provides a full range of banking services in its primary market
area of Fayette County and the surrounding counties.  Basis of Presentation and Accounting Estimates The consolidated financial statements include the accounts of the Company and its
subsidiary. Significant intercompany transactions and balances have been eliminated
in consolidation. In preparing the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes related
to the determination of the allowance for loan losses, the valuation of foreclosed
real estate and contingent assets and liabilities. The determination of the
adequacy of the allowance for loan losses is based on estimates that are susceptible
to significant changes in the economic environment and market conditions. In
connection with the determination of the estimated losses on loans and the valuation
of foreclosed real estate, management obtains independent appraisals for significant
collateral.  Cash, Due From Banks and Cash Flows For purposes of reporting cash flows, cash and due from banks includes cash on hand,
cash items in process of collection and amounts due from banks. Cash flows from
loans, federal funds sold, federal funds purchased, securities sold under repurchase
agreements and deposits are reported net. The Bank is required to maintain reserve balances in cash or on deposit with the
Federal Reserve Bank, based on a percentage of deposits. The total of those reserve
balances was approximately $1,119,000 and $775,000 at December 31, 2004 and 2003,
respectively.  Securities Debt securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as F-8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  Securities (Continued) available for sale and recorded at fair value with unrealized gains and losses
excluded from earnings and reported in accumulated other
comprehensive income (loss), net of the related
deferred tax effect. Equity securities, including restricted equity securities
without a readily determinable fair value, are classified as
available for sale and recorded at cost. Purchase premiums and discounts are
recognized in interest income using the interest method over the terms of the
securities. Gains and losses on the sale of securities are determined using the
specific identification method and included in earnings on the settlement date.
Declines in the fair value of securities below their cost that are deemed to be
other than temporary are reflected in earnings as realized losses.  Loans Loans are reported at their outstanding principal balances less deferred loan fees
and the allowance for loan losses. Interest income is accrued on the outstanding
principal balance. Loan origination fees, net of direct loan origination costs, are
deferred and recognized as an adjustment of the yield over the life of the loans
using a method which approximates a level yield. The accrual of interest on loans is discontinued when, in managements opinion, the
borrower may be unable to meet payments as they become due, unless the loan is
well-secured. All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income, unless management
believes that the accrued interest is recoverable through the liquidation of
collateral. Interest income on nonaccrual loans is recognized on the cash-basis or
cost-recovery method, until the loans are returned to accrual status. Loans are
returned to accrual status when all the principal and interest amounts are brought
current and future payments are reasonably assured. A loan is considered impaired when it is probable, based on current information and
events, the Company will be unable to collect all principal and interest payments
due in accordance with the contractual terms of the loan agreement. Impaired loans
are measured by either the present value of expected future cash flows discounted at
the loans effective interest rate, the loans obtainable market price, or the fair
value of the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the allowance for
loan losses. Interest on accruing impaired loans is recognized as long as such
loans do not meet the criteria for nonaccrual status.  Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses
charged to expense. Loan losses are charged against the allowance when management
believes the collectibility of the principal is unlikely. Subsequent recoveries are
credited to the allowance. The allowance is an amount that management believes will be adequate to absorb
estimated losses relating to specifically identified loans, as well as probable
credit losses inherent in the F-9




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans (Continued) balance of the loan portfolio, based on an evaluation of the collectibility of
existing loans and prior loss experience. This evaluation also takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans,
concentrations and current economic conditions that may affect the borrowers
ability to pay. This evaluation does not include the effects of expected losses on
specific loans or groups of loans that are related to future events or expected
changes in economic conditions. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination process, periodically
review the Banks allowance for loan losses, and may require the Bank to make
additions to the allowance based on their judgment about information available to
them at the time of their examinations.  Premises and Equipment Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation computed principally on the straight-line method over the
following estimated useful lives. Buildings and improvements
    
    15-40 yearsFurniture and equipment
    
    3-10 years
  Other Real Estate Owned Other real estate owned represents properties acquired through or in lieu of loan
foreclosure and is initially recorded at the lower of cost or fair value less
estimated costs to sell. Any write-down to fair value at the time of transfer to
other real estate owned is charged to the allowance for loan losses. Costs of
improvements are capitalized, whereas costs relating to holding other real estate
owned and subsequent adjustments to the value are expensed. At December 31, 2004
and 2003, the Company did not have any other real estate owned.  Income Taxes Deferred income tax assets and liabilities are determined using the balance sheet
method. Under this method, the net deferred tax asset or liability is determined
based on the tax effects of the temporary differences between the book and tax bases
of the various balance sheet assets and liabilities and gives current recognition to
changes in tax rates and laws.  Profit-Sharing Plan Profit-sharing plan costs are based on a percentage of individual employees salary,
not to exceed the amount that can be deducted for federal income tax purposes. F-10




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  Stock-Based Compensation At December 31, 2004, the Company has two stock-based compensation plans, which are
described more fully in Note 9. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under these
plans have an exercise price equal to the market value of the underlying stock on
the date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition provisions
of SFAS Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation. Years Ended December 31,2004
    
    
    2003Net income, as reported
    
    $
    1,680,323
    
    
    $
    1,591,603Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    13,175
    
    
    
    25,571Pro forma net income
    
    $
    1,667,148
    
    
    $
    1,566,032Earnings per share:Basic - as reported
    
    $
    .65
    
    
    $
    .62Basic - pro forma
    
    $
    .65
    
    
    $
    .61Diluted - as reported
    
    $
    .63
    
    
    $
    .61Diluted - pro forma
    
    $
    .62
    
    
    $
    .61
  Earnings Per Share Basic earnings per share are computed by dividing net income by the weighted-average
number of shares of capital stock outstanding. Diluted earnings per share are
computed by dividing net income by the sum of the weighted-average number of shares
of capital stock outstanding and dilutive potential capital shares. Potential
capital shares consist of outstanding options to purchase capital stock.  Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale securities,
are reported as a separate component of the equity section of the balance sheet,
such items, along with net income, are components of comprehensive income. F-11




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  Recent Accounting Standards In December 2004, the Financial Accounting Standards Board (FASB) published FASB
Statement No. 123 (revised 2004), Share-Based Payment (FAS 123® or the
Statement). FAS 123® requires that the compensation cost relating to
share-based payment transactions, including grants of employee stock options, be
recognized in financial statements. That cost will be measured based on the fair
value of the equity of liability instrument issued. FAS 123® covers a wide range
of share-based compensation arrangements including stock options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. FAS 123® is a replacement of FASB Statement No. 123, Accounting
for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related interpretive guidance. The effect of the Statement will be to require entities to measure the cost of
employee services received in exchange for stock options based on the grant-date
fair value of the award, and to recognize the cost over a period the employee is
required to provide services for the award. FAS 123® permits entities to use any
option-pricing model that meets the fair value objective in the Statement. The Company will be required to apply FAS 123® as of the beginning of its first
interim period that begins after December 15, 2005.
The Company has not yes completed its study of the transition methods or made any
decisions about how it will adopt FAS 123®. The impact of this Statement on the
Company in fiscal 2005 and beyond will depend upon various factors, among them
being our future compensation strategy. The pro forma compensation costs
presented in the table above and in prior filings for the Company have been
calculated using a Black-Scholes option pricing model and may not be indicative of
amounts which should be expected in future years. No decisions have been made as
to which option-pricing model is most appropriate for the Company for future
awards. F-12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. SECURITIES The amortized cost and fair value of securities are summarized as follows: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 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
    )
    
    $
    50,615,684December 31, 2003:U.S. Government and
agency securities
    
    $
    26,171,525
    
    
    $
    38,228
    
    
    $
    (193,380
    )
    
    $
    26,016,373State and municipal securities
    
    
    9,251,794
    
    
    
    79,356
    
    
    
    (144,226
    )
    
    
    9,186,924Corporate bonds
    
    
    1,000,000
    
    
    
    25,380
    
    
    
    
    
    
    
    1,025,380Mortgage-backed securities
    
    
    23,921,473
    
    
    
    68,973
    
    
    
    (419,671
    )
    
    
    23,570,775$
    60,344,792
    
    
    $
    211,937
    
    
    $
    (757,277
    )
    
    $
    59,799,452
 Securities with a carrying value of $32,366,496 and $22,091,393 at December 31,
2004 and 2003, respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law. The amortized cost and fair value of securities as of December 31, 2004 by contractual
maturity are shown below. Actual maturities may differ from contractual maturities in
mortgage-backed securities because the mortgages underlying the securities may be
called or repaid without penalty. Therefore, these securities are not included in the
maturity categories in the following summary. Amortized
    
    
    FairCost
    
    
    ValueDue from one to five years
    
    $
    3,993,375
    
    
    $
    3,967,604Due from five to ten years
    
    
    4,748,279
    
    
    
    4,744,302Due after ten years
    
    
    25,792,423
    
    
    
    25,760,794Mortgage-backed securities
    
    
    16,488,785
    
    
    
    16,142,984$
    51,022,862
    
    
    $
    50,615,684
 F-13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. SECURITIES (continued) Gains and losses on sales of securities consist of the following: Years Ended December 31,2004
    
    
    2003Gross gains
    
    $
    88,303
    
    
    $
    269,629Gross losses
    
    
    (2,887
    )
    
    
    Net realized gains
    
    $
    85,416
    
    
    $
    269,629
 The following table shows the gross unrealized losses and fair value of
securities, aggregated by category and length of time that securities have been in a
continuous unrealized loss position at December 31, 2004 and 2003. Less Than 12 Months
    
    
    12 Months or MoreDescription of Securities:
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDecember 31, 2004
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.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
    )December 31,2003U.S. Government and agency securities
    
    $
    21,275,200
    
    
    $
    (193,380
    )
    
    $
    
    
    
    $
    State and municipal securities
    
    
    3,994,654
    
    
    
    (137,737
    )
    
    
    607,460
    
    
    
    (6,489
    )Mortgage-backed securities
    
    
    17,689,131
    
    
    
    (417,396
    )
    
    
    513,948
    
    
    
    (2,275
    )Total temporarily impaired securities
    
    $
    42,958,985
    
    
    $
    (748,513
    )
    
    $
    1,121,408
    
    
    $
    (8,764
    )
 Management evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market conditions warrant such evaluation. The market value of securities is based on quoted market values and is significantly affected by
the interest rate environment. At December 31, 2004, all unrealized losses in the securities
portfolio were fro debt securities. At December 31, 2004, the total number of securities in a
continuous loss position for less than 12 months and 12 months or more was 16 and 21 respectively,
in a portfolio of 71 securities. In analyzing an issuers financial condition, management considers
whether the securities are issued by the federal government or its agencies whether downgrades by
bond rating agencies have occurred, and industry analysts reports. As management has the ability
to hold debt securities until maturity, or for the foreseeable future if classified as available
for sale, no declines to be other than temporary. F-14




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. LOANS The composition of loans is summarized as follows: December 31,2004
    
    
    2003Commercial
    
    $
    24,752,777
    
    
    $
    19,233,9270Real estate  construction
    
    
    56,787,690
    
    
    
    34,847,650Real estate  mortgage
    
    
    101,150,702
    
    
    
    66,883,9750Consumer installment and other
    
    
    4,408,758
    
    
    
    4,455,438187,099,927
    
    
    
    125,420,990Deferred loan fees
    
    
    (362,700
    )
    
    
    (219,868
    )Allowance for loan losses
    
    
    (2,016,557
    )
    
    
    (1,419,479
    )Loans, net
    
    $
    184,720,670
    
    
    $
    123,781,643
 Changes in the allowance for loan losses are as follows: Years Ended December 31,2004
    
    
    2003Balance, beginning of year
    
    $
    1,419,479
    
    
    $
    1,141,095Provision for loan losses
    
    
    1,031,121
    
    
    
    420,000Loans charged off
    
    
    (434,428
    )
    
    
    (141,616
    )Recoveries of loans previously charged off
    
    
    385
    
    
    
    Balance, end of year
    
    $
    2,016,557
    
    
    $
    1,419,479
 The following is a summary of information pertaining to impaired loans: As of and for the Years EndedDecember 31,2004
    
    
    2003Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    4,811,853
    
    
    
    464,724Total impaired loans
    
    $
    4,811,853
    
    
    $
    464,724Valuation allowance related to impaired loans
    
    $
    533,496
    
    
    $
    139,063Average investment in impaired loans
    
    $
    1,760,363
    
    
    $
    355,434Interest income recognized on impaired loans
    
    $
    38
    
    
    $
    303Nonaccrual loans
    
    $
    4,811,853
    
    
    $
    443,558Loans past due ninety days or more and still accruing interest
    
    $
    26,300
    
    
    $
    67,000
 F-15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. LOANS (Continued) In the ordinary course of business, the Company has granted loans to certain related
parties, including directors, executive officers, and their affiliates. The interest
rates on these loans were substantially the same as rates prevailing at the time of
the transaction and repayment terms are customary for the type of loan. Changes in
related party loans for the year ended December 31, 2004 are as follows: Balance, beginning of year
    
    $
    7,531,362Advances
    
    
    3,304,625Repayments
    
    
    (1,827,351
    )Balance, end of year
    
    $
    9,008,636
 NOTE 4. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 312004
    
    
    2003Land and improvements
    
    $
    1,804,954
    
    
    $
    1,358,544Buildings
    
    
    4,252,366
    
    
    
    3,064,715Furniture and equipment
    
    
    2,505,593
    
    
    
    1,527,266Construction in progress (estimated
costs to complete $512,000)
    
    
    412,908
    
    
    
    57,5688,975,821
    
    
    
    6,008,093Accumulated depreciation
    
    
    (1,198,772
    )
    
    
    (797,671
    )$
    7,777,049
    
    
    $
    5,210,422
 NOTE 5. DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2004 and 2003 was $70,670,219 and $36,886,120, respectively. The
scheduled maturities of time deposits at December 31, 2004 are as follows: 2005
    
    
    
    
    
    $
    69,548,0492006
    
    
    
    
    
    
    40,148,4302007
    
    
    
    
    
    
    12,089,3552008
    
    
    
    
    
    
    6,731,0022009
    
    
    
    
    
    
    7,514,861$
    136,031,697
 The Company had brokered time deposits at December 31, 2004 of $26,932,000. At December 31, 2004 and 2003, overdraft demand deposits and savings accounts
reclassified to loans totaled $9,098 and $23,507, respectively. F-16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements, which are secured borrowings, generally
mature within one to four days from the transaction date. Securities sold under
repurchase agreements are reflected at the amount of cash received in connection with
the transactions. The Company may be required to provide additional collateral based
on the fair value of the underlying securities. The Company monitors the fair value
of the underlying securities on a daily basis. Securities sold under repurchase
agreements at December 31, 2004 and 2003 were $4,752,914 and $1,704,188, respectively. NOTE 7. FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank advances consist of the following: December 31,2004
    
    
    2003Advance 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.
    
    
    9,000,000
    
    
    
    $
    24,000,000
    
    
    $
    15,000,000
 The advances from the Federal Home Loan Bank are secured by certain qualifying loans of
approximately $17,708,000, Federal Home Loan Bank stock of $1,471,300, and securities of
$23,215,473. NOTE 8. SUBORDINATED DEBENTURES In 2004, the Company formed a wholly-owned grantor trust to issue floating rate cumulative trust
preferred securities in a private placement offering. The grantor trust has invested the proceeds
of the trust securities in subordinated debentures of the Company. The trust preferred securities
can be redeemed, in whole or in part, from time to time, prior to maturity at the option of the
Company on or after June 30, 2009. The sole assets of the guarantor trust are the floating rate
Subordinated Debentures of the Company (the Debentures) The Company has the right to defer interest
payments on the Debentures up to ten consecutive semi-annual periods (five years), so long as the
Company is not in default under the subordinated debentures. No deferral period may extend beyond
the maturity date. The preferred securities are subject to redemption, in whole or in part, upon repayment of the
subordinated debentures at maturity on June 30, 2034 or their earlier redemption.
Company has the right to redeem the debentures, in whole or in part, from time to time,
on or after June 30,
2009, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued
and unpaid interest. F-17




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##### Table of Contents



The Company has guaranteed the payment of all distributions the Trust is obligated to make,
but only to the extent the Trust has sufficient funds to satisfy those
payments. The Company and the Trust believe that, taken together, the
obligations of the Company under the Guarantee Agreement,
the Trust Agreement, the Subordinated Debentures, and the indenture provide, in the
aggregate, a full, irrevocable and unconditional guarantee of all of the obligations of the
trust under the Preferred Securities on a subordinated basis. NOTE 8. SUBORDINATED DEBENTURES (Continued) The Company is required by the Federal Reserve Board to maintain certain levels of capital for bank
regulatory purposes. The Federal Reserve Board has determined that certain cumulative preferred
securities having the characteristics of trust preferred securities qualify as minority interest,
which is included in Tier 1 capital for bank and financial holding companies. In calculating the
amount of Tier 1 qualifying capital, the trust preferred securities can only be included up to the
amount constituting 25% of total Tier 1 capital elements (including trust preferred securities).
Such Tier 1 capital treatment provides the Company with a more cost-effective means of obtaining
capital for bank regulatory purposes than if the Company were to issue preferred stock. The trust preferred securities and the related Debentures were issued on April 28, 2004. Both
financial instruments bear an identical annual rate of interest of 4.875 at December 31, 2004.
Distributions on the trust preferred securities are paid quarterly on March 31, June 30, September
30 and December 31 of each year, beginning June 30, 2004. Interest on the Debentures is paid on the
corresponding dates. The aggregate principal amount of trust preferred certificates outstanding at
December 31.2004 was $5,600,000. The aggregate principal amount of Debentures outstanding at
December 31, 2004 was $5,774,000. NOTE 9. EMPLOYEE BENEFIT PLAN The Company has a 401(k) Profit Sharing Plan available to all eligible employees,
subject to certain minimum age and service requirements. The contributions expensed
were $99,702 and $33,129 for the years ended December 31, 2004 and 2003, respectively. NOTE 10. STOCK OPTIONS The Company has a stock option plan reserving 88,889 shares of capital stock for the
granting of options to key employees. The Company also has a stock option plan
reserving 160,000 shares of capital stock for the granting of options to directors.
Option prices reflect the fair market value of the Companys capital stock on the
dates the options are granted. The options may be exercised over a period of ten
years in accordance with vesting schedules determined by the Board of Directors. F-18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. STOCK OPTIONS (Continued) Other pertinent information related to the options as of December 31, 2004 and 2003 is
as follows: 2004
    
    
    2003Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    219,555
    
    
    $
    6.94
    
    
    
    203,370
    
    
    $
    6.89Granted
    
    
    
    
    
    
    
    
    
    
    17,185
    
    
    
    7.55Exercised
    
    
    (684
    )
    
    
    7.29
    
    
    
    
    
    
    
    Terminated
    
    
    (5,333
    )
    
    
    6.89
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    213,538
    
    
    $
    6.94
    
    
    
    219,555
    
    
    $
    6.94Options exercisable at end of year
    
    
    202,180
    
    
    $
    6.91
    
    
    
    188,244
    
    
    $
    6.89Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    2.30Weighted average life of
options outstanding
    
    
    
    
    
    7.0  years
    
    
    
    
    
    8.0 years
 Range of exercise prices $6.89- $8.72 The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions: 2003Dividend yield
    
    
    0.00
    %Expected life
    
    10 yearsExpected volatility
    
    
    9.20
    %Risk-free interest rate
    
    
    4.55
    %
 F-19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. INCOME TAXES The components of income tax expense are as follows: Years Ended December 31,2004
    
    
    2003Current
    
    $
    905,864
    
    
    $
    909,665Deferred
    
    
    (144,428
    )
    
    
    (112,765
    )$
    761,436
    
    
    $
    796,900
 The Companys income tax differs from the amounts computed by applying the
federal income tax statutory rates to income before income taxes. A reconciliation of
the differences is as follows: Years Ended December 31,2004
    
    
    2003Income tax at statutory federal rate
    
    $
    830,199
    
    
    $
    812,091Tax-exempt interest
    
    
    (128,550
    )
    
    
    (75,881
    )Disallowed interest
    
    
    12,857
    
    
    
    10,160State tax
    
    
    32,298
    
    
    
    61,709Other items
    
    
    14,632
    
    
    
    (11,179
    )Income tax expense
    
    $
    761,436
    
    
    $
    796,900
 The components of deferred income taxes are as follows: December 31,2004
    
    
    2003Deferred tax assets:Loan loss reserves
    
    $
    683,852
    
    
    $
    428,700Preopening and organization expenses
    
    
    25,032
    
    
    
    60,302Deferred loan fees
    
    
    136,868
    
    
    
    82,969Nonaccrual loans
    
    
    43,528
    
    
    
    Securities available for sale
    
    
    154,728
    
    
    
    207,228779,199
    
    
    
    779,199Deferred tax liabilities:Depreciation
    
    
    352,696
    
    
    
    147,533Cash basis adjustment for income tax reporting purposes
    
    
    64,563
    
    
    
    96,845232,978
    
    
    
    232,978Net deferred tax assets
    
    $
    546,221
    
    
    $
    546,221
 F-20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. EARNINGS PER SHARE Presented below is a summary of the components used to calculate basic and diluted
earnings per share: Years Ended December 31,2004
    
    
    2003Net income
    
    $
    1,680,323
    
    
    $
    1,591,603Weighted average number of
common shares outstanding
    
    
    2,579,523
    
    
    
    2,571,685Effect of dilutive options
    
    
    88,806
    
    
    
    15,589Weighted average number of common
shares outstanding used to calculate
dilutive earnings per share
    
    
    2,668,329
    
    
    
    2,587,274
 NOTE 13. COMMITMENTS AND CONTINGENCIES  Loan Commitments The Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments may include commitments to extend credit and commercial
letters of credit. Such commitments involve, to varying degrees, elements of credit
risk and interest rate risk in excess of the amount recognized in the balance
sheets. The majority of all commitments to extend credit and standby letters of
credit are variable rate instruments. The Companys exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and commercial
letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments as it does for
on-balance sheet instruments. A summary of the Companys commitments is as follows: December 31,2004
    
    
    2003Commercial letters of credit
    
    $
    1,620,569
    
    
    $
    1,228,119Commitments to extend credit
    
    
    33,064,785
    
    
    
    26,593,668$
    34,685,354
    
    
    $
    27,821,787
 Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. F-21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued)  Loan Commitments (Continued) Commercial letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. Collateral is required in instances which the
Company deems necessary.  Contingencies In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material effect on the Companys financial statements. NOTE 14. CONCENTRATIONS OF CREDIT The Company originates primarily commercial, real estate, and consumer loans to
customers in Fayette County and surrounding counties. The ability of the majority of
the Companys customers to honor their contractual loan obligations is dependent on
the economy in these areas. Eighty-four percent of the Companys loan portfolio is
concentrated in loans secured by real estate, of which a substantial portion is
secured by real estate in the Companys market area. The other significant
concentrations of credit by type of loan are set forth in Note 3. The Company, as a matter of policy, does not generally extend credit to any single
borrower or group of related borrowers in excess of 25% of the statutory capital, as
defined, or approximately $3,901,000. NOTE 15. REGULATORY MATTERS The Bank is subject to certain restrictions on the amount of dividends that may be
declared without prior regulatory approval. At December 31, 2004 approximately
$953,000 of retained earnings were available for dividend declaration. The Company and Bank are also subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect on the
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the Companys and
the Banks assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. Capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings
and other factors. Quantitative measures established by regulation to ensure capital adequacy require the
Company and Bank to maintain minimum amounts and ratios of Total and Tier I capital to
risk-weighted assets, as defined, and of Tier I capital to average assets, as defined.
Management believes, as F-22




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##### Table of Contents



of December 31, 2004, the Company and Bank met all capital
adequacy requirements to which they are subject. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. REGULATORY MATTERS (Continued) As of December 31, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the Banks category. Prompt
corrective action provisions are not applicable to bank holding companies. To Be WellFor Capital
    
    
    Capitalized UnderAdequacy
    
    
    Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in Thousands)December 31, 2004:Total Capital to Risk Weighted Assets
Consolidated
    
    $
    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 Assets
Consolidated
    
    $
    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 Assets
Consolidated
    
    $
    26,108
    
    
    
    9.84
    %
    
    $
    10,612
    
    
    
    4
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    19,346
    
    
    
    7.29
    %
    
    $
    10,612
    
    
    
    4
    %
    
    $
    13,266
    
    
    
    5
    %December 31, 2003:Total Capital to Risk Weighted Assets
Consolidated
    
    $
    20,243
    
    
    
    14.22
    %
    
    $
    11,391
    
    
    
    8
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    14,359
    
    
    
    10.09
    %
    
    $
    11,383
    
    
    
    8
    %
    
    $
    14,229
    
    
    
    10
    %Tier I Capital to Risk Weighted Assets
Consolidated
    
    $
    18,824
    
    
    
    13.22
    %
    
    $
    5,695
    
    
    
    4
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    12,940
    
    
    
    9.09
    %
    
    $
    5,692
    
    
    
    4
    %
    
    $
    8,537
    
    
    
    6
    %Tier I Capital to Average Assets
Consolidated
    
    $
    18,824
    
    
    
    9.93
    %
    
    $
    7,583
    
    
    
    4
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    12,940
    
    
    
    6.83
    %
    
    $
    7,581
    
    
    
    4
    %
    
    $
    9,477
    
    
    
    5
    %
 F-23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances, there are no
quoted market prices for the Companys various financial instruments. In cases where
quoted market prices are not available, fair value is based on discounted cash flows
or other valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an immediate settlement
of the instrument. SFAS No. 107, Disclosures about Fair Value of Financial
Instruments,excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating the fair
value of its financial instruments: Cash, Due From Banks,Interest-bearing Deposits in Banks and Federal Funds Sold:The
carrying amount of cash, due from banks, interest-bearing deposits in banks and
federal funds sold approximates fair value. Securities:Fair value of securities is based on available quoted market prices. The
carrying amount of equity securities and restricted equity securities with no readily
determinable fair value approximates fair value. Loans:The carrying amount of variable-rate loans that reprice frequently and have no
significant change in credit risk approximates fair value. The fair value of
fixed-rate loans is estimated based on discounted contractual cash flows, using
interest rates currently being offered for loans with similar terms to borrowers with
similar credit quality. The fair value of impaired loans is estimated based on
discounted contractual cash flows or underlying collateral values, where applicable. Deposits:The carrying amount of demand deposits, savings deposits, and variable-rate
certificates of deposit approximates fair value. The fair value of fixed-rate
certificates of deposit is estimated based on discounted contractual cash flows using
interest rates currently being offered for certificates of similar maturities. Federal Funds Purchased, Repurchase Agreements and Federal Home Loan Bank Advances:
The carrying amount of variable rate borrowings, federal funds purchased, and
securities sold under repurchase agreements approximate fair value. The fair value of
fixed rate Federal Home Loan Bank advances are estimated based on discounted
contractual cash flows using the current incremental borrowing rates for similar type
borrowing arrangements. Subordinated Debentures:The fair value of the Companys variable rate
subordinated debentures approximates the carrying value. Accrued Interest:The carrying amount of accrued interest approximates their fair
value. F-24




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##### Table of Contents



Off-Balance Sheet Instruments:The carrying amount of commitments to extend credit
and standby letters of credit approximates fair value. The carrying amount of the
off-balance sheet financial instruments is based on fees charged to enter into such
agreements. F-25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The carrying amount and estimated fair value of the Companys financial instruments
were as follows: December 31, 2004
    
    
    December 31, 2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks,
and federal funds sold
    
    $
    24,060,900
    
    
    $
    24,060,900
    
    
    $
    4,422,961
    
    
    $
    4,422,961Securities
    
    
    52,086,984
    
    
    
    52,086,984
    
    
    
    60,549,452
    
    
    
    60,549,452Loans
    
    
    184,720,670
    
    
    
    183,870,856
    
    
    
    123,781,643
    
    
    
    123,815,227Accrued interest received
    
    
    1,099,466
    
    
    
    1,099,466
    
    
    
    928,817
    
    
    
    928,817Financial liabilities:Deposits
    
    
    215,764,233
    
    
    
    216,385,341
    
    
    
    159,775,068
    
    
    
    161,191,427Securities sold under
Repurchase agreements
    
    
    4,752,914
    
    
    
    4,752,914
    
    
    
    1,704,188
    
    
    
    1,704,188Federal Home Loan Bank advances
    
    
    24,000,000

    
    
    
    15,106,564
    
    
    
    15,000,000
    
    
    
    15,106,564Subordinated debentures
    
    
    5,774,000
    
    
    
    5,774,000
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    491,263
    
    
    
    491,263
    
    
    
    443,923
    
    
    
    443,923
 NOTE 17. SUPPLEMENTAL FINANCIAL DATA Components of other operating expenses in excess of 1% of total revenue are as
follows: Years Ended December 31,2004
    
    
    2003Professional fees
    
    $
    195,695
    
    
    $
    102,121Data processing expense
    
    
    249,176
    
    
    
    185,690
 F-26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. PARENT COMPANY FINANCIAL INFORMATION The following information presents the condensed balance sheet, statements of income,
and cash flows of Southern Community Bancshares, Inc. as of and for the years ended
December 31, 2004 and 2003: CONDENSED BALANCE SHEET 2004
    
    
    2003AssetsCash
    
    $
    6,515,940
    
    
    $
    5,805,604Investment in subsidiary
    
    
    19,094,195
    
    
    
    12,602,382Securities available for sale
    
    
    174,000
    
    
    
    Other assets
    
    
    270,773
    
    
    
    94,402Total assets
    
    $
    26,054,908
    
    
    $
    18,502,388Subordinated Debentures
    
    $
    5,774,000
    
    
    $
    Other liabilities
    
    
    24,628
    
    
    
    16,455Total liabilities
    
    $
    5,798,628
    
    
    $
    16,455Shareholders equity
    
    
    20,256,280
    
    
    
    18,485,933Total liabilities and shareholders equity
    
    $
    26,054,908
    
    
    $
    18,502,388
 CONDENSED STATEMENT OF INCOME 2004
    
    
    2003IncomeInterest income
    
    
    5,171
    
    
    
    Dividends from subsidiary
    
    
    
    
    
    
    Total income
    
    
    5,171
    
    
    
    Interest expense
    
    
    171,596
    
    
    
    Expenses, other
    
    
    197,815
    
    
    
    143,394Total expenses
    
    
    369,411
    
    
    
    143,394Loss before income tax benefits and equity
in undistributed income of subsidiary
    
    
    (364,240
    )
    
    
    (143,394
    )Income tax benefits
    
    
    (138,411
    )
    
    
    (54,489
    )Income (loss) before equity in undistributed income
of subsidiary
    
    
    (225,829
    )
    
    
    (88,905
    )Equity in undistributed income of subsidiary
    
    
    1,906,152
    
    
    
    1,680,508Net income
    
    
    1,680,323
    
    
    
    1,591,603
 F-27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. PARENT COMPANY FINANCIAL INFORMATION (Continued) CONDENSED STATEMENT OF CASH FLOWS 2004
    
    
    2003OPERATING ACTIVITIESNet income
    
    $
    1,680,323
    
    
    $
    1,591,603Adjustments to reconcile net income to net
cash used in operating activities:Undistributed income of subsidiary
    
    
    (1,906,152
    )
    
    
    (1,680,508
    )Other operating activities
    
    
    (35,198
    )
    
    
    (46,034
    )Net cash used in operating activities
    
    
    (261,027
    )
    
    
    (134,939
    )INVESTING ACTIVITIESCapital infusion in subsidiary
    
    
    (4,500,000
    )
    
    
    FINANCING ACTIVITIESProceeds from issuance of long term debt
    
    
    5,467,000
    
    
    
    Proceeds from issuance of capital stock
    
    
    8,425
    
    
    
    713,940Payment for fractional shares
    
    
    (4,062
    )
    
    
    (6,122
    )Stock issuance costs
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    5,471,363
    
    
    
    707,818Net increase in cash
    
    
    710,336
    
    
    
    572,879Cash at beginning of year
    
    
    5,805,604
    
    
    
    5,232,725Cash at end of year
    
    $
    6,515,940
    
    
    $
    5,805,604
 NOTE 19. STOCK SPLIT On August 17, 2004, the Company declared a four-for-three stock split payable to
shareholders of record on September 1, 2004. The earnings per common share for the
year ended December 31, 2004 have been retroactively adjusted for the split as if it
occurred on January 1, 2003. F-28