##### Table of Contents



Securities and Exchange Commission  FORM 10-KSB [X]
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 [  ]
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from_____ to_____ Commission file number 333-86082 SOUTHERN COMMUNITY BANCSHARES, INC. (Name of Small Business Issuer in Its Charter)
 Georgia
    
    58-2639705(State of Incorporation)
    
    (I.R.S. EmployerIdentification No.)
 525 North Jeff Davis Drive, Fayetteville, Georgia 30214 
 (Address of principal executive offices)(Zip Code)
 (770) 461-4365 
 (Issuers telephone number)
 Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
None(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 x No
o 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. [  ] Revenues for the Registrants fiscal year ended December 31, 2003 total
$9,818,000. 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, 2004 was
approximately $24,506,540. There were 1,934,777 shares of Common Stock
outstanding as of March 15, 2004. Transitional Small Business
Disclosure Format (check one): Yes [  ] No [X] DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive Proxy Statement for the 2004
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Report.




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 2003 Table of Contents Item
    
    
    
    PageNumber
    
    
    
    NumberPart I1.
    
    Description of Business
    
    32.
    
    Description of Property
    
    143.
    
    Legal Proceedings
    
    144.
    
    Submission of Matters to a Vote of Security Holders
    
    14Part II5.
    
    Market for Common Equity and Related Stockholder Matters
    
    14-156.
    
    Managements Discussion and Analysis or Plan of Operation
    
    167.
    
    Financial Statements
    
    368.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    368A.
    
    Controls and Procedures
    
    37Part III9.
    
    Directors and Executive Officers of the Registrant
    
    3710.
    
    Executive Compensation
    
    3711.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    3712.
    
    Certain Relationships and Related Transactions
    
    3713.
    
    Exhibits and Reports on Form 8-K
    
    3714.
    
    Principal Accountant Fees and Services
    
    38Signatures
    
    39-40EX-21 SUBSIDIARIES OF THE REGISTRANTEX-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




---



##### Table of Contents



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 1, 2004, the Bank had 50 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




---



##### Table of Contents



Competition All phases of the Companys banking activities are highly
competitive. The Company competes actively with ten commercial banks, as
well as finance companies, credit unions, and other financial
institutions located in its service area, which includes Fayette County,
Georgia and its surrounding areas. Based on total assets of approximately $196 million at December 31,
2003, the Bank represents approximately 10.67% of the deposit base in the
Fayette County market. Six major regional banks represent approximately
56% of the deposits in the Fayette County market. The larger financial
institutions have greater resources and lending limits than the Bank, and
the six major regional banking institutions have twenty-one branches in
the county. There are several credit unions located in Fayette County.
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 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. 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. 4




---



##### Table of Contents



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 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: 5




---



##### Table of Contents




    
    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
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. It is too early to
determine what effect, if any, this new law will have on us. 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 6




---



##### Table of Contents



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;
    
    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 7




---



##### Table of Contents




    
    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 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: 8




---



##### Table of Contents




    
    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, 2003, the Bank
could pay out $840,000 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 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,
2003, the Companys total risk-based capital ratio and its Tier 1 risk-based
capital ratio were 14.22% and 13.22%, respectively. 9




---



##### Table of Contents



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, 2003 was 9.93%. 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,
2003. 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 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 10




---



##### Table of Contents



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;
    
    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 11




---



##### Table of Contents



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, 2003, 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 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. 12




---



##### Table of Contents



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 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. 13




---



##### Table of Contents



ITEM 2. DESCRIPTION OF PROPERTY As of December 31, 2003, 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 and 4910 Bill Gardner
Parkway, Locust Grove, Georgia 30248. 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 may, periodically, be involved as a
plaintiff or defendant in various legal actions in the ordinary course of
its business. Management believes that those claims are without merit or
that the ultimate liability, if any, resulting from them will not
materially affect the Company or the Banks financial condition. 
 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,
2003. 
 PART II 
 ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Companys Common Stock is traded over the counter (OTC), under
the symbol SNCB. There were approximately 644 holders of record of the common stock
as of December 31, 2003. 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. All prices have been adjusted to
reflect the four-for-three stock split described below. 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. 14




---



##### Table of Contents



Estimated Price Range Per ShareHigh
    
    Low2003
    
    $
    
    
    
    $First Quarter
    
    
    11.28
    
    
    
    11.28Second Quarter
    
    
    11.28
    
    
    
    11.28Third Quarter
    
    
    11.28
    
    
    
    11.28Fourth Quarter
    
    
    14.25
    
    
    
    11.252002First Quarter
    
    
    9.77
    
    
    
    8.02Second Quarter
    
    
    9.02
    
    
    
    9.02Third Quarter
    
    
    9.40
    
    
    
    8.27Fourth Quarter
    
    
    9.40
    
    
    
    8.27
 The Board of Directors approved a four for three (33 1/3%) stock
split payable on November 21, 2003. The dividend totaled 483,334 shares
paid to shareholders of record on October 21, 2003. Fractional shares
were paid in cash totaling $6,122 and were based on the closing price on
November 21, 2003 of $19.00 per whole share. 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
    
    
    164,667
    
    
    $
    9.26
    
    
    
    22,000Equity compensation plans not approved by security
holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    164,667
    
    
    $
    9.26
    
    
    
    22,000
 15




---



##### Table of Contents



ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following is a discussion of our financial condition at December 31,
2003 and 2002 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 are 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 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 2003 was highlighted by reporting net income of $1,591,603. Our
primary market area of Fayette County, 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. 16




---



##### Table of Contents



FINANCIAL CONDITION AS OF DECEMBER 31, 2003 AND 2002 Following is a summary of our balance sheets for the years indicated: December 31,2003
    
    2002(Dollars in Thousands)Cash and due from banks
    
    $
    3,807
    
    
    $
    3,790Federal funds sold
    
    
    616
    
    
    
    Securities
    
    
    59,799
    
    
    
    22,799Restricted equity securities
    
    
    750
    
    
    
    142Loans, net
    
    
    123,782
    
    
    
    89,780Premises and equipment
    
    
    5,210
    
    
    
    3,711Other assets
    
    
    1,682
    
    
    
    855$
    195,646
    
    
    $
    121,077Total deposits
    
    $
    159,775
    
    
    $
    99,509Other Borrowings
    
    
    15,000
    
    
    
    Securities sold under repurchase agreements
    
    
    1,704
    
    
    
    3,780Federal funds purchased
    
    
    
    
    
    
    719Other liabilities
    
    
    681
    
    
    
    437Shareholders equity
    
    
    18,486
    
    
    
    16,632$
    195,646
    
    
    $
    121,077
 FINANCIAL CONDITION AS OF DECEMBER 31, 2003 AND 2002 As of December 31, 2003, we had total assets of $196 million, an increase
of 61.6% over December 31, 2002. Total interest-earning assets were $186.4
million as of December 31, 2003, or 95% of total assets as compared to $113.8
million or 94% of total assets as of December 31, 2002. Our primary
interest-earning assets as of December 31, 2003 were loans, which made up 67%
of total interest-earning assets, as compared to 80% as of December 31, 2002.
Our loan to deposit ratio was 78% as of December 31, 2003, as compared to 91%
as of December 31, 2002. Loan growth in 2003 of $34 million was funded by
deposit growth in 2003 of $60 million. Securities increased by $37 million in
2003, of which $22 million was funded by the deposit growth. The remaining $15
million was funded by an arbitrage transaction the bank entered into with the
FHLB of Atlanta, which also increased borrowings by $15 million. The security
purchased for the arbitrage has a maturity date of October 17, 2018, and a
rate of 5.70%. The borrowing are at 3.01%, with a maturity date of September
5, 2008, leaving the bank with a spread of 269 basis points. Fixed assets
increased by $1,500,000 due to the purchase of land in Henry County and the
remaining construction costs associated with our Peachtree City facility. Our securities portfolio, consisting of U.S. Government and Agency
securities and mortgage-backed securities, amounted to $60 million as of
December 31, 2003. Net unrealized losses on securities amounted to ($545,000)
as of December 31, 2003 as compared to unrealized 17




---



##### Table of Contents



gains of $173,000 as of December 31, 2002. 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 81% of our loan portfolio collateralized by real estate located in
our primary market area of Fayette County, Georgia and surrounding counties.
Our real estate construction portfolio consists of loans primarily
collateralized by one to four family residential properties, which comprise 28%
of the loan portfolio. Real estate mortgage loans secured by one to four
family residential properties comprise 20% 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 19% 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 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. 18




---



##### Table of Contents



The following table sets forth certain information about contractual cash obligations as of December 31, 2003. Payments Due After December 31, 20031 Year
    
    1 - 3
    
    4 - 5
    
    After 5Total
    
    or Less
    
    Years
    
    Years
    
    YearsShort-term borrowings
    
    $
    1,704
    
    
    $
    1,704
    
    
    $
    
    
    
    $
    
    
    
    $
    Time certificates of deposit
    
    
    91,352
    
    
    
    74,880
    
    
    
    8,937
    
    
    
    7,535
    
    
    
    Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal Home Loan Bank advances
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    Subordinated deferrable interest debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    108,056
    
    
    $
    76,584
    
    
    $
    8,937
    
    
    $
    22,535
    
    
    $
    
 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, 2003, we had $740,000 in binding commitments for capital
expenditures related to our Locust Grove branch. 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. 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, 2003, we had loan commitments outstanding of $28
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, 2003, we had arrangements with two
commercial banks for additional short-term advances of $6.4 million in
aggregate. The bank has also executed a specific collateral agreement with the
Federal Home Loan Bank of Atlanta under which securities were pledged against
borrowings in the amount of $15,000,000. The bank has since converted that to
a blanket lien agreement under which the banks one to four family residential
loans are also pledged and will allow additional funds available to the bank. As of December 31, 2003, our capital ratios were considered well
capitalized based on regulatory minimum capital requirements. Our
shareholders equity increased due to the retention of net income in 2003 of
$1,591,603 and the remaining proceeds of $713,940 from our stock offering,
which concluded in January 2003. 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 19




---



##### Table of Contents



may be paid without prior approval of the Banks regulatory agency. Currently,
the Bank could pay $840,000 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, 2003 are as follows: RegulatoryActual
    
    RequirementsLeverage capital ratio
    
    
    6.83
    %
    
    
    5
    %Risk based capital ratios:Core capital
    
    
    9.09
    %
    
    
    6
    %Total capital
    
    
    10.09
    %
    
    
    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. The Company intends to issue approximately $5.6 million of Trust Preferred
securities in April 2004. These securities will be issued by a
statutory trust that will be established to facilitate the
transaction. The trust will be a 100% owned finance subsidiary of the
Company. The securities are expected to have a 30-year maturity,
callable without penalty after five years, and pay a floating rate
based on Prime plus 12.5 basis points. The Company expects that the
principal balance of these securities will count toward tier one
capital. The Company intends to use the proceeds from this
transaction to fund asset growth. The Company will fully and
unconditionally guarantee the securities. The issuance of these
securities is contingent upon the satisfaction of a number of
conditions. While the Company expects to satisfy these conditions, no
guarantee can be made the Company will be able to successfully
complete this transaction. CRITICAL ACCOUNTING POLICIES 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 20




---



##### Table of Contents



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 Southern Community Banks
allowance for loan losses. Such agencies may require Southern Community 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 SFAS No. 109, Accounting for Income Taxes, requires the asset and
liability approach for financial accounting and reporting for deferred 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 10 to the Notes to Consolidated Financial
Statements for additional details. 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 Southern Community Banks assets and liabilities
resulted in a net deferred tax asset. A valuation allowance was not required
as of December 31, 2003 as the realization of the deferred 21




---



##### Table of Contents



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. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 The following is a summary of our operations for the years indicated. Year Ended December 31,2003
    
    2002(Dollars in Thousands)Interest income
    
    $
    9,095
    
    
    $
    6,930Interest expense
    
    
    3,105
    
    
    
    2,393Net interest income
    
    
    5,990
    
    
    
    4,537Provision for loan losses
    
    
    420
    
    
    
    359Other income
    
    
    722
    
    
    
    394Other expenses
    
    
    3,903
    
    
    
    2,928Pretax income
    
    
    2,389
    
    
    
    1,644Income taxes
    
    
    797
    
    
    
    586Net income
    
    $
    1,592
    
    
    $
    1,058
 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 22




---



##### Table of Contents



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 4.06% in 2003 as
compared to 4.66% in 2002. Average loans increased by $24 million, and the
remaining average interest earning assets increased by $26 million which
combined, accounted for a $50 million increase in total average
interest-earning assets in 2003. Average interest-bearing liabilities
increased by $42 million with average interest-bearing demand and savings, and
time deposits accounting for $10.8 and $25.7 million of this increase,
respectively. The rate earned on average interest-earning assets decreased to
6.16% in 2003 from 7.12% in 2002. The rate paid on average interest-bearing
liabilities decreased to 2.55% in 2003 from 3.00% in 2002. The increase in net
interest income and net yield on average interest-earning assets was due to the
significant increase in volume of interest-earning assets combined with a
decrease in yield on interest-bearing deposits in comparison to 2002. In 2003,
the yields on interest-earning assets decreased by 96 basis points while the
rate paid on interest-bearing liabilities decreased by 45 basis points. These
changes are representative of a liability sensitive position in a declining
rate environment and the fact that many variable rate loans have contractual
floors that limit the interest rate risk. PROVISION FOR LOAN LOSSES The provision for loan losses was $420,000 in 2003 as compared to $359,000
in 2002. The amounts provided were due primarily to the growth of the loan
portfolio and to inherent risk in the loan portfolio. 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, 2003, we had $444,000 in
non-accrual loans as compared to $341,000 as of December 31, 2002. The
allowance for loan losses as a percentage of total loans as of December 31,
2003 and 2002 was 1.13% and 1.25%, respectively. Actual loan charge-offs were
$141,616 during 2003, as compared to $22,045 during 2002. OTHER INCOME Other income consists of service charges on deposit accounts, gain on sale
of securities, gain on sale of loans and other operating income. Other income
increased to $722,000 in 2003, from $394,000 in 2002. This increase is due
primarily to an increase in gain on sales of securities of $218,000. Service
charges on deposit accounts increased by $104,000, while gain on sales of loans
decreased by $19,000. The increase in other operating income was primarily due
to mortgage origination fees of $27,000. OTHER EXPENSE Other expenses were $3,903,000 in 2003, as compared to $2,928,000 in 2002,
an increase of $975,000. Salaries and employee benefits increased by $610,000
due to an increase in the number of full time equivalent employees from 35 to
45 and normal increases in salaries and 23




---



##### Table of Contents



benefits. Equipment and occupancy expenses increased by $96,000 , due to the
opening of our Peachtree City Branch, and other operating expenses increased by
$270,000 due partially to increased data processing costs of $46,000,
accounting fees of $25,000, and increased directors fees of $30,000. The
increases in all other operating expenses were directly related to the overall
growth of the Company. INCOME TAX We have reported income taxes for 2003 of $797,000 as compared to $586,000
for 2002. The effective tax rate for 2003 and 2002 was 33.4% and 35.7%,
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 24




---



##### Table of Contents



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. 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, 2003, our cumulative one year interest rate-sensitivity
gap ratio was .60%. Our targeted ratio is 80% to 120% in this time horizon.
This indicates that our interest-earning assets will reprice during this period
at a rate slower than 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,
2003, the interest rate-sensitivity gap, the cumulative interest
rate-sensitivity gap, the interest rate-sensitivity gap ratio 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
    
    Yearbut
    
    butWithin
    
    Within
    
    Within
    
    AfterThree
    
    One
    
    Five
    
    FiveMonths
    
    Year
    
    Years
    
    Years
    
    Total(Dollars in Thousands)Interest-earning assetsFederal Funds Sold
    
    
    616
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    616Securities
    
    
    750
    
    
    
    
    
    
    
    5,640
    
    
    
    54,159
    
    
    
    60,549Loans
    
    
    21,851
    
    
    
    51,124
    
    
    
    48,788
    
    
    
    3,438
    
    
    
    125,20123,217
    
    
    
    51,124
    
    
    
    54,428
    
    
    
    57,597
    
    
    
    186,366Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    44,777
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,777Savings
    
    
    1,536
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,536Time deposits
    
    
    13,099
    
    
    
    61,777
    
    
    
    16,472
    
    
    
    
    
    
    
    91,348Federal funds purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Securities sold under repurchase
agreements
    
    
    1,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,704
 25




---



##### Table of Contents



After
    
    AfterThree
    
    OneMonths
    
    Yearbut
    
    butWithin
    
    Within
    
    Within
    
    AfterThree
    
    One
    
    Five
    
    FiveMonths
    
    Year
    
    Years
    
    Years
    
    Total(Dollars in Thousands)Other Borrowings
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    15,00061,116
    
    
    
    61,777
    
    
    
    31,472
    
    
    
    
    
    
    
    154,365Interest rate sensitivity gap
    
    
    (37,899
    )
    
    
    (10,653
    )
    
    
    22,953
    
    
    
    57,597
    
    
    
    32,001Cumulative interest rate
sensitivity gap
    
    
    (37,899
    )
    
    
    (48,552
    )
    
    
    (25,596
    )
    
    
    32,001Interest rate sensitivity gap ratio
    
    
    .38
    
    
    
    .83
    
    
    
    1.73
    
    
    
    Cumulative interest rate
sensitivity gap ratio
    
    
    .38
    
    
    
    .60
    
    
    
    .83
    
    
    
    1.21
 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) Year Ended December 31,2003
    
    2002(Dollars in Thousands)ASSETSCash and due from banks
    
    $
    3,620
    
    
    $
    3,172Taxable securities
    
    
    33,724
    
    
    
    13,099Nontaxable securities
    
    
    5,656
    
    
    
    1,457Securities valuation account
    
    
    (123
    )
    
    
    171Federal funds sold
    
    
    5,575
    
    
    
    4,250Loans (2)
    
    
    102,648
    
    
    
    78,551Allowance for loan losses
    
    
    (1,242
    )
    
    
    (927
    )Other assets
    
    
    5,723
    
    
    
    4,098$
    155,581
    
    
    $
    103,871Total interest-bearing assets
    
    $
    147,603
    
    
    $
    97,357LIABILITIES AND SHAREHOLDERS EQUITY
 26




---



##### Table of Contents



Year Ended December 31,2003
    
    2002(Dollars in Thousands)Deposits:Non-interest-bearing demand
    
    $
    15,340
    
    
    $
    14,326Interest-bearing demand and savings
    
    
    38,465
    
    
    
    27,644Time
    
    
    74,762
    
    
    
    49,087Total deposits
    
    
    128,567
    
    
    
    91,057Other liabilities
    
    
    572
    
    
    
    451Short-term borrowings
    
    
    3,569
    
    
    
    2,915Federal Home Loan Bank advances
    
    
    4,849
    
    
    
    0Total liabilities
    
    
    137,557
    
    
    
    94,423Shareholders equity
    
    
    18,024
    
    
    
    9,448$
    155,581
    
    
    $
    103,871Total interest-bearing liabilities
    
    $
    121,645
    
    
    $
    79,646
  (1)
    
    For each category, average balances were determined using the daily
average balances during the year.  (2)
    
    The average balance of nonaccrual loans included in average loans for
2003 was $355,000 and $53,000 in 2002. 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. Year Ended December 312003
    
    2002Average
    
    
    
    
    
    AverageInterest
    
    Rate
    
    Interest
    
    Rate(Dollars in Thousands)Interest Income:Interest and fees on loans (1)
    
    $
    7,661
    
    
    
    7.46
    %
    
    $
    6,164
    
    
    
    7.85
    %Interest on taxable securities
    
    
    1,152
    
    
    
    3.42
    
    
    
    630
    
    
    
    4.81Interest on nontaxable securities
    
    
    223
    
    
    
    3.94
    
    
    
    65
    
    
    
    4.46Interest on federal funds sold
    
    
    59
    
    
    
    1.06
    
    
    
    71
    
    
    
    1.67Total interest income
    
    
    9,095
    
    
    
    6.16
    %
    
    
    6,930
    
    
    
    7.12
    %Interest Expense:Interest on interest-bearing
demand and savings deposits
    
    
    567
    
    
    
    1.47
    %
    
    
    492
    
    
    
    1.78
    %
 27




---



##### Table of Contents



Year Ended December 312003
    
    2002Average
    
    
    
    
    
    AverageInterest
    
    Rate
    
    Interest
    
    Rate(Dollars in Thousands)Interest on time deposits
    
    
    2,362
    
    
    
    3.16
    
    
    
    1,867
    
    
    
    3.80Short-term borrowings
    
    
    29
    
    
    
    .81Federal Home Loan Bank advances
    
    
    148
    
    
    
    3.05
    
    
    
    34
    
    
    
    1.17Total interest expense
    
    
    3,106
    
    
    
    2.55
    %
    
    
    2,393
    
    
    
    3.00
    %Net interest income
    
    $
    5,989
    
    
    
    
    
    
    $
    4,537Net interest spread
    
    
    
    
    
    
    3.61
    %
    
    
    
    
    
    
    4.12
    %Net yield on average
interest-earning assets
    
    
    
    
    
    
    4.06
    %
    
    
    
    
    
    
    4.66
    %
  (1)
    
    Interest and fees on loans includes $707,000 and $655,000 of loan
fee income for the years ended December 31, 2003 and 2002,
respectively. The interest income recognized on nonaccrual loans
during 2003 and 2002 was insignificant.(2)
    
    Yields on nontaxable securities are not presented on a tax
equivalent basis. 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. 28




---



##### Table of Contents



Year Ended December 31,2003 vs. 2002Changes DueTo:Rate
    
    Volume
    
    Total(Dollars in Thousands)Increase (decrease)in:Income from interest-earning assets:Interest and fees on loans
    
    
    (318
    )
    
    
    1,815
    
    
    
    1,497Interest on taxable securities
    
    
    (227
    )
    
    
    749
    
    
    
    552Interest on nontaxable securities
    
    
    (9
    )
    
    
    167
    
    
    
    158Interest on federal funds sold
    
    
    (30
    )
    
    
    18
    
    
    
    (12
    )Total interest income
    
    
    (584
    )
    
    
    2,749
    
    
    
    2,165Expense from interest-bearing
liabilities:Interest on interest-bearing demand
and savings deposits
    
    
    (96
    )
    
    
    171
    
    
    
    75Interest on time deposits
    
    
    (355
    )
    
    
    850
    
    
    
    495Interest on short-term borrowings
    
    
    (12
    )
    
    
    7
    
    
    
    (5
    )Interest on FHLB advances
    
    
    0
    
    
    
    148
    
    
    
    148Total interest expense
    
    
    (462
    )
    
    
    1,175
    
    
    
    713Net interest income
    
    
    (122
    )
    
    
    1,574
    
    
    
    1,452
 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 31,2003
    
    2002(Dollars in Thousands)U.S. Government agencies
    
    $
    26,016
    
    
    $
    4,167State and municipal securities
    
    
    9,187
    
    
    
    3,598Corporate bonds
    
    
    1,025
    
    
    
    1,000Mortgage-backed securities
    
    
    23,571
    
    
    
    14,034$
    59,799
    
    
    $
    22,799
 29




---



##### Table of Contents



Maturities The amounts of securities, including the weighted average yield in each
category as of December 31, 2003, 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. After one
    
    After fivethrough five years
    
    through ten yearsAmount
    
    Yield(1)
    
    Amount
    
    Yield(1)(Dollars in Thousands)U.S. Government agencies
    
    
    4,440
    
    
    
    3.60
    
    
    
    5,695
    
    
    
    3.67State and municipal securities
    
    
    190
    
    
    
    2.25
    
    
    
    912
    
    
    
    3.17Mortgage-backed securities
    
    
    1,010
    
    
    
    1.64
    
    
    
    13,235
    
    
    
    3.17Corporate bonds
    
    
    
    
    
    
    
    
    
    
    1,025
    
    
    
    6.75
 After ten years
    
    TotalAmount
    
    Yield(1)
    
    Amount
    
    Yield(1)U.S. Government agencies
    
    
    15,881
    
    
    
    5.54
    
    
    
    26,016
    
    
    
    4.80State and municipal securities
    
    
    8,085
    
    
    
    3.97
    
    
    
    9,187
    
    
    
    3.85Mortgage-backed securities
    
    
    9,326
    
    
    
    3.84
    
    
    
    23,571
    
    
    
    3.37Corporate bonds
    
    
    
    
    
    
    
    
    
    
    1,025
    
    
    
    6.75
  (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. 30




---



##### Table of Contents



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 31,2003
    
    2002(Dollars in Thousands)Commercial
    
    $
    19,234
    
    
    $
    11,332Real estate-construction
    
    
    34,848
    
    
    
    27,859Real estate-mortgage
    
    
    66,884
    
    
    
    48,522Consumer installment and other
    
    
    4,455
    
    
    
    3,334125,421
    
    
    
    91,047Less:Allowance for loan losses
    
    
    (1,419
    )
    
    
    (1,141
    )Deferred loan fees
    
    
    (221
    )
    
    
    (125
    )Net loans
    
    $
    123,781
    
    
    $
    89,781
 Maturities and Sensitivities of Loans to Changes in Interest Rates Total loans as of December 31, 2003 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, 2003(Dollars in Thousands)CommercialOne year or less
    
    
    7,714After one through five years
    
    
    10,813After five years
    
    
    70719,234ConstructionOne year or less
    
    
    34,079After one through five years
    
    
    769After five years
    
    
    034,848
 31




---



##### Table of Contents



December 31, 2003(Dollars in Thousands)OtherOne year or less
    
    
    31,444After one through five years
    
    
    37,132After five years
    
    
    2,76371,339
 The following table summarizes loans as of December 31, 2003 with the due
dates after one year that have predetermined and floating or adjustable
interest rates. December 31,2003(Dollars inThousands)Predetermined interest rates
    
    $
    32,527Floating or adjustable interest rates
    
    
    19,657$
    52,184
 Risk Elements Information with respect to non-accrual, past due and restructured loans
as of December 31, 2003 and 2002 is as follows: December 31,2003
    
    2002(Dollars in Thousands)Non-accrual loans
    
    $
    444
    
    
    $
    341Loans contractually past due 90 days or
more as to interest or principal payments
and still accruing
    
    
    67
    
    
    
    22Restructured 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
    
    
    14
    
    
    
    3Interest income that was recorded on
non-accrual and restructured loans
    
    
    
    
    
    
    
 32




---



##### Table of Contents



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 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. Year Ended December 31,2003
    
    2002(Dollars in Thousands)Average amount of loans outstanding
    
    
    102,648
    
    
    
    78,551Balance of allowance for loan losses
at beginning of year
    
    
    1,141
    
    
    
    804Loans charged off:Consumer
    
    
    (142
    )
    
    
    (21
    )Commercial
    
    
    
    
    
    
    (1
    )(142
    )
    
    
    (22
    )Loans recovered:
    
    
    
    
    
    
    Net charge-offs
    
    
    (142
    )
    
    
    (22
    )Additions to allowance charged to operating
expense during year
    
    
    420
    
    
    
    359Balance of allowance for loan losses
at end of year
    
    $
    1,419
    
    
    $
    1,141Ratio of net
loans charged off during the year to average loans outstanding
    
    
    .14
    %
    
    
    .03
    %
 33




---



##### Table of Contents



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, 2003 and 2002, 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: December 31, 2003
    
    December 31, 2002Percent of
    
    
    
    
    
    Percent ofloans in
    
    
    
    
    
    loans ineach category
    
    
    
    
    
    each categoryAmount
    
    to total loans
    
    Amount
    
    to total loans(Dollars in Thousands)Commercial
    
    
    1,009
    
    
    
    15.34
    %
    
    
    733
    
    
    
    12.45
    %Real estate-construction
    
    
    131
    
    
    
    27.78
    
    
    
    82
    
    
    
    30.60Real estate-mortgage
    
    
    
    
    
    
    53.33
    
    
    
    
    
    
    
    53.29Consumer installment
loans and other
    
    
    138
    
    
    
    3.55
    
    
    
    176
    
    
    
    3.66Unallocated
    
    
    141
    
    
    
    
    
    
    
    150
    
    
    
    1,419
    
    
    
    100
    %
    
    $
    1,141
    
    
    
    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) Year Ended December 31,2003
    
    2002Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Non-interest-bearing demand deposits
    
    
    15,340
    
    
    
    
    %
    
    $
    14,326
    
    
    
    
    %
 34




---



##### Table of Contents



Year Ended December 31,2003
    
    2002Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Interest-bearing demand and savings
deposits
    
    
    38,465
    
    
    
    1.47
    
    
    
    27,644
    
    
    
    1.78Time deposits
    
    
    74,762
    
    
    
    3.16
    
    
    
    49,087
    
    
    
    3.80$
    128,567
    
    
    
    
    
    
    $
    91,057
  (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, 2003 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. December 31, 2003(Dollars in Thousands)Three months or less
    
    $
    4,654Over three through six months
    
    
    13,714Over six through twelve months
    
    
    12,427Over twelve months
    
    
    6,091Total
    
    $
    36,886
 RETURN ON ASSETS AND SHAREHOLDERS EQUITY The following rate of return information for the years indicated is presented
below. Year Ended December 31,2003
    
    2002Return on assets (1)
    
    
    1.02
    %
    
    
    1.02
    %Return on equity (2)
    
    
    8.83
    
    
    
    11.20Dividend payout ratio (3)
    
    
    n/a
    
    
    
    n/aEquity to assets ratio (4)
    
    
    11.58
    
    
    
    9.10
  (1)
    
    Net income divided by average total assets. 35




---



##### Table of Contents



(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 12. of the Financial Statements. 
 ITEM 7. FINANCIAL STATEMENTS The following consolidated financial statements of the Company and its
subsidiary, together with the Report of Independent Certified Public
Accountants 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 Certified Public Accountants on the Consolidated
Financial Statements Consolidated Balance Sheets as of December 31, 2003 and 2002 Consolidated Statements of Income for the years ended
December 31, 2003, and 2002 Consolidated Statements of Comprehensive Income
for the years ended December 31, 2003 and 2002 Consolidated Statements of Changes in Shareholders Equity
for the years ended December 31, 2003 and 2002 Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and 2002 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. 36




---



##### Table of Contents



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 2003. 
 PART III 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 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 2004 Proxy Statement)
relating to the annual meeting of shareholders of the Company, scheduled to be
held on May 27, 2004, is incorporated herein by reference. 
 ITEM 10. EXECUTIVE COMPENSATION The information appearing under the heading Compensation of Executive
Officers and Directors in the 2004 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 2004 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 2004 Proxy Statement in incorporated hereby reference. 
 ITEM 13. EXHIBITS 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)
 37




---



##### Table of Contents



Exhibit Number
    
    Description10.1
    
    2001 Incentive Stock Option Plan for Key Employees
(incorporated by reference to Exhibit 10.2 to the
Registrants Form SB-2 filed with the Commission on April
12, 2002)*10.2
    
    Employment Agreement between Gary D. McGaha and Southern
Community Bank (incorporated by reference to Exhibit 10.3
to the Registrants Form SB-2 filed with the Commission
on April 12, 2002)*10.3
    
    Employment Agreement between Fred L. Faulkner and
Southern Community Bank (incorporated by reference to
Exhibit 10.4 to the Registrants Form SB-2 filed with the
Commission on April 12, 2002)*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 Registrant31.1
    
    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 2003. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information appearing under the caption Ratification of Independent
Public Accountants in the 2004 Proxy Statement is incorporated herein by
reference. 38




---



##### 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 29, 2004
    By:
    /s/ Gary D. McGaha/s/ Gary D. McGahaPresident and Chief
Executive 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 29, 2004Gary D. McGahaChief Executive OfficerAnd Director[Principal Executive Officer]/s/ Leslye L. Grindle
    
    Date:
    
    March 29, 2004Leslye L. GrindleChief Financial Officer[Principal Financial Officer andPrincipal Accounting Officer]/s/ James S. Cameron
    
    Date:
    
    March 29, 2004James S. Cameron, Director/s/ George R. Davis, Sr.
    
    Date:
    
    March 29, 2004George R. Davis, Sr., Director/s/ Robert B. Dixon, Jr.
    
    Date:
    
    March 29, 2004Robert B. Dixon, Jr., Director
 39




---



##### Table of Contents



/s/ Richard J. Dumas
    
    Date:
    
    March 29, 2004Richard J. Dumas, Director/s/ William Wayne Leslie
    
    Date:
    
    March 29, 2004William Wayne Leslie, Director/s/ Thomas D. Reese
    
    Date:
    
    March 29, 2004Thomas D. Reese, Director/s/ Dan V. Stinchcomb
    
    Date:
    
    March 29, 2004Dan V. Stinchcomb, Director/s/ William M. Strain
    
    Date:
    
    March 29, 2004William M. Strain, Director
 40




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2003 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-6Notes to consolidated financial statements
    
    
    F-7-25




---



##### Table of Contents



INDEPENDENT AUDITORS REPORT To the Board of DirectorsSouthern Community Bancshares, Inc. and SubsidiaryFayetteville, Georgia We have audited the accompanying consolidated balance sheets of Southern Community Bancshares, Inc. and subsidiaryas of December 31, 2003 and 2002, 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, 2003 and 2002, 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
February 12, 2004 F-1




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002 2003
    
    2002AssetsCash and due from banks
    
    $
    3,806,961
    
    
    $
    3,789,657Federal funds sold
    
    
    616,000
    
    
    
    Securities available for sale
    
    
    59,799,452
    
    
    
    22,798,690Restricted equity securities
    
    
    750,000
    
    
    
    141,800Loans
    
    
    125,201,122
    
    
    
    90,921,579Less allowance for loan losses
    
    
    1,419,479
    
    
    
    1,141,095Loans, net
    
    
    123,781,643
    
    
    
    89,780,484Premises and equipment
    
    
    5,210,422
    
    
    
    3,711,402Other assets
    
    
    1,681,265
    
    
    
    854,827Total assets
    
    $
    195,645,743
    
    
    $
    121,076,860Liabilities and Shareholders EquityDeposits:Noninterest-bearing
    
    $
    22,113,953
    
    
    $
    11,879,110Interest-bearing
    
    
    137,661,115
    
    
    
    87,629,635Total deposits
    
    
    159,775,068
    
    
    
    99,508,745Federal funds purchased
    
    
    
    
    
    
    719,000Federal Home Loan Bank advances
    
    
    15,000,000
    
    
    
    Securities sold under repurchase agreements
    
    
    1,704,188
    
    
    
    3,780,013Other liabilities
    
    
    680,554
    
    
    
    437,099Total liabilities
    
    
    177,159,810
    
    
    
    104,444,857Commitments and contingenciesShareholders equity:Capital stock, no par value; 10,000,000 shares authorized;
1,934,777 and 1,394,567 shares issued and outstanding, respectively
    
    
    16,050,433
    
    
    
    15,342,615Retained earnings
    
    
    2,773,611
    
    
    
    1,182,008Accumulated other comprehensive income (loss)
    
    
    (338,111
    )
    
    
    107,380Total shareholders equity
    
    
    18,485,933
    
    
    
    16,632,003Total liabilities and shareholders equity
    
    $
    195,645,743
    
    
    $
    121,076,860
 See Notes to Consolidated Financial Statements.


F-2



---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003 AND 2002 2003
    
    2002Interest income:Loans, including fees
    
    $
    7,660,995
    
    
    $
    6,163,831Taxable securities
    
    
    1,151,862
    
    
    
    630,261Nontaxable securities
    
    
    223,179
    
    
    
    64,604Federal funds sold
    
    
    59,436
    
    
    
    71,215Total interest income
    
    
    9,095,472
    
    
    
    6,929,911Interest expense:Deposits
    
    
    2,928,728
    
    
    
    2,358,621Other borrowings
    
    
    177,041
    
    
    
    34,330Total interest expense
    
    
    3,105,769
    
    
    
    2,392,951Net interest income
    
    
    5,989,703
    
    
    
    4,536,960Provision for loan losses
    
    
    420,000
    
    
    
    359,285Net interest income after provision for loan losses
    
    
    5,569,703
    
    
    
    4,177,675Other income:Service charges on deposit accounts
    
    
    371,598
    
    
    
    267,864Gain on sale of securities available for sale
    
    
    269,629
    
    
    
    51,239Gain on sale of loans
    
    
    21,113
    
    
    
    39,971Other operating income
    
    
    60,002
    
    
    
    35,013Total other income
    
    
    722,342
    
    
    
    394,087Other expense:Salaries and employee benefits
    
    
    2,143,731
    
    
    
    1,534,289Equipment and occupancy expenses
    
    
    510,735
    
    
    
    414,900Other operating expenses
    
    
    1,249,076
    
    
    
    978,585Total other expense
    
    
    3,903,542
    
    
    
    2,927,774Income before income taxes
    
    
    2,388,503
    
    
    
    1,643,988Income taxes
    
    
    796,900
    
    
    
    586,143Net income
    
    $
    1,591,603
    
    
    $
    1,057,845Basic earnings per share
    
    $
    0.83
    
    
    $
    0.82Diluted earnings per share
    
    $
    0.82
    
    
    $
    0.82
 See Notes to Consolidated Financial Statements.


F-3



---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2003 AND 2002 2003
    
    2002Net income
    
    $
    1,591,603
    
    
    $
    1,057,845Other comprehensive income (loss):Unrealized holding gains (losses) on securities available for sale arising
during period, net of tax (benefits) of $(170,583) and $169,331, respectively
    
    
    (278,321
    )
    
    
    8,606Reclassification adjustment for gains realized in net income,
net of taxes of $102,459 and $89,321, respectively
    
    
    (167,170
    )
    
    
    (31,768
    )Other comprehensive loss
    
    
    (445,491
    )
    
    
    (23,162
    )Comprehensive income
    
    $
    1,146,112
    
    
    $
    1,034,683


F-4



---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002 AccumulatedCapital Stock
    
    
    
    
    
    
    
    
    
    Other
    
    TotalCapital
    
    Retained
    
    Comprehensive
    
    ShareholdersShares
    
    Amount
    
    Surplus
    
    Earnings
    
    Income (Loss)
    
    EquityBalance, December 31, 2001
    
    
    810,983
    
    
    
    4,054,915
    
    
    
    4,050,868
    
    
    
    124,163
    
    
    
    130,542
    
    
    
    8,360,488Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,057,845
    
    
    
    
    
    
    
    1,057,845Issuance of common stock
    
    
    583,584
    
    
    
    7,294,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,294,800Stock issuance costs
    
    
    
    
    
    
    (57,968
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57,968
    )Recapitalization
    
    
    
    
    
    
    4,050,868
    
    
    
    (4,050,868
    )
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,162
    )
    
    
    (23,162
    )Balance, 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
    )
    
    $
    18,485,933
 See Notes to Consolidated Financial Statements.


F-5



---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002 2003
    
    2002OPERATING ACTIVITIESNet income
    
    $
    1,591,603
    
    
    $
    1,057,845Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    292,659
    
    
    
    236,354Provision for loan losses
    
    
    420,000
    
    
    
    359,285Gain on sale of securities available for sale
    
    
    (269,629
    )
    
    
    (51,239
    )Loss on disposal of equipment
    
    
    
    
    
    
    33,506Deferred income taxes
    
    
    (112,765
    )
    
    
    (154,389
    )Decrease in taxes payable
    
    
    (86,727
    )
    
    
    (52,028
    )Increase in interest receivable
    
    
    (348,784
    )
    
    
    (41,505
    )Increase in interest payable
    
    
    142,090
    
    
    
    18,192Net other operating activities
    
    
    96,246
    
    
    
    45,820Net cash provided by operating activities
    
    
    1,724,693
    
    
    
    1,451,841INVESTING ACTIVITIESPurchase of securities available for sale
    
    
    (67,770,612
    )
    
    
    (23,141,976
    )Proceeds from maturities of securities available for sale
    
    
    12,887,333
    
    
    
    6,296,285Proceeds from sales of securities available for sale
    
    
    17,433,612
    
    
    
    7,189,260Purchase of restricted equity securities
    
    
    (608,200
    )
    
    
    (141,800
    )Net (increase) decrease in federal funds sold
    
    
    (616,000
    )
    
    
    2,532,000Net increase in loans
    
    
    (34,421,159
    )
    
    
    (25,220,238
    )Purchase of premises and equipment
    
    
    (1,791,679
    )
    
    
    (919,760
    )Net cash used in investing activities
    
    
    (74,886,705
    )
    
    
    (33,406,229
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    60,266,323
    
    
    
    24,813,765Proceeds from issuance of capital stock
    
    
    713,940
    
    
    
    7,294,800Stock issuance costs
    
    
    
    
    
    
    (57,968
    )Payment for fractional shares
    
    
    (6,122
    )
    
    
    Net (decrease) increase in federal funds purchased
    
    
    (719,000
    )
    
    
    719,000Net increase in Federal Home Loan Bank advances
    
    
    15,000,000
    
    
    
    Net increase (decrease) in repurchase agreements
    
    
    (2,075,825
    )
    
    
    1,569,774Net cash provided by financing activities
    
    
    73,179,316
    
    
    
    34,339,371Net increase in cash and due from banks
    
    
    17,304
    
    
    
    2,384,983Cash and due from banks at beginning of year
    
    
    3,789,657
    
    
    
    1,404,674Cash and due from banks at end of year
    
    $
    3,806,961
    
    
    $
    3,789,657SUPPLEMENTAL DISCLOSURECash paid for interest
    
    $
    2,963,679
    
    
    $
    2,374,759Cash paid for taxes
    
    $
    996,392
    
    
    $
    792,560
 See Notes to Consolidated Financial Statements. F-6




---



##### 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
and one branch located in Peachtree City, 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
change relate 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
$384,000 and $329,000 at December 31, 2003 and 2002, 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 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. F-7




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities (Continued) 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 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 F-8




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses (Continued) 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, 2003 and 2002, 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. Stock-Based Compensation At December 31, 2003, 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 F-9




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock-Based Compensation (Continued) 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 31,2003
    
    2002Net income, as reported
    
    $
    1,591,603
    
    
    $
    1,057,845Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    25,571
    
    
    
    25,563Pro forma net income
    
    $
    1,566,032
    
    
    $
    1,032,282Earnings per share:Basic - as reported
    
    $
    .83
    
    
    $
    .82Basic - pro forma
    
    $
    .81
    
    
    $
    .80Diluted - as reported
    
    $
    .82
    
    
    $
    .81Diluted - pro forma
    
    $
    .81
    
    
    $
    .80
 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. Recent Accounting Standards In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5,
57, and 107 and a rescission of FASB Interpretation No. 34. The
interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under guarantees issued. It also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing
a guarantee. The initial recognition and initial measurement
provisions of the interpretation are applicable to guarantees issued
or modified after December 31, 2002. The disclosure requirements in
the interpretation are effective for financial statements of interim
or annual periods ending after December 15, 2002. The adoption of
the interpretation did not have a material effect on the Companys
financial condition or results of operations. F-10




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Standards (Continued) In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment
of FASB Statement No. 123. The Statement amends Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In
addition, the statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for
stock-based compensation and the effect on reported results of
operations. The disclosure requirements of the statement are
required for fiscal years ending after December 15, 2002 and interim
periods beginning after December 15, 2002. The Company has not
adopted Statement No. 123 for accounting for stock-based
compensation as of December 31, 2003; however all required
disclosures of Statement No. 148 are included above under the
heading Stock-Based Compensation. In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51, and on December 24, 2003, the FASB issued FASB
Interpretation No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities which replaced FIN 46. The
interpretation addresses consolidation by business enterprises of
variable interest entities. A variable interest entity is defined
as an entity subject to consolidation according to the provisions of
the interpretation. The revised interpretation provided for
special effective dates for entities that had fully or partially
applied the original interpretation as of December 24, 2003.
Otherwise, application of the interpretation is required in
financial statements of public entities that have interests in
special-purpose entities, or SPEs, for periods ending after December
15, 2003. Application by public entities, other than small business
issuers, for all other types of variable interest entities (i.e.,
non-SPEs) is required in financial statements for periods ending
after March 15, 2004. Application by small business issuers to
variable interest entities other than SPEs is required at various
dates in 2004 and 2005. The interpretations have not had a material
effect on the Companys financial condition or results of
operations. In May 2003, the FASB issued Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. The statement establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The statement
requires that an issuer classify a financial instrument that is
within its scope as a liability. Many of those instruments were
previously classified as equity. The statement is effective for
financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of the statement
did not have a material effect on the Companys financial condition
or results of operations. F-11




---



##### 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, 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
    )
    
    $
    59,799,452December 31, 2002:U.S. Government and
agency securities
    
    $
    4,067,342
    
    
    $
    99,942
    
    
    $
    
    
    
    $
    4,167,284State and municipal securities
    
    
    3,609,477
    
    
    
    24,375
    
    
    
    (36,429
    )
    
    
    3,597,423Corporate bonds
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Mortgage-backed securities
    
    
    13,948,678
    
    
    
    107,325
    
    
    
    (22,020
    )
    
    
    14,033,983$
    22,625,497
    
    
    $
    231,642
    
    
    $
    (58,449
    )
    
    $
    22,798,690
 Securities with a carrying value of $22,091,393 and $4,368,807 at
December 31, 2003 and 2002, respectively, were pledged to secure
public deposits and for other purposes as required or permitted by
law. F-12




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. SECURITIES (Continued) The amortized cost and fair value of securities as of December 31,
2003 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
    
    $
    4,624,421
    
    
    $
    4,629,639Due from five to ten years
    
    
    7,655,642
    
    
    
    7,633,116Due after ten years
    
    
    24,143,256
    
    
    
    23,965,922Mortgage-backed securities
    
    
    23,921,473
    
    
    
    23,570,775$
    60,344,792
    
    
    $
    59,799,452
 Gains and losses on sales of securities consist of the following: Years Ended December 31,2003
    
    2002Gross gains
    
    $
    269,629
    
    
    $
    51,239Gross losses
    
    
    
    
    
    
    Net realized gains
    
    $
    269,629
    
    
    $
    51,239
 In 2003, the FASB Emerging Issues Task Force released Issue 03-01,
The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The issue requires disclosure of certain
information about other than temporary impairments in the market
value of securities. The market value of securities is based on
quoted market values and is significantly affected by the interest
rate environment. At December 31, 2003, all unrealized losses in the
securities portfolio were for debt securities. At December 31, 2003,
the total number of securities in a continuous loss position for less
than 12 months and 12 months or more was 38 and 2, respectively, in a
portfolio of 74 securities. These securities accounted for 74% of
the total portfolio fair value at December 31, 2003. Only 2
securities, or 2% of the fair value of the portfolio had continuous
losses for more than 12 months. These unrealized losses are
considered temporary because of acceptable investment grades on each
security and the repayment sources of principal and interest are
government backed. The Company has never recognized a loss due to a
permanent impairment. 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, 2003. Less Than 12 Months
    
    12 Months or More
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedDescription of Securities:
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesU.S. Government and agency securities
    
    $
    21,275,200
    
    
    $
    (193,380
    )
    
    $
    
    
    
    $
    
    
    
    $
    21,275,200
    
    
    $
    (193,380
    )State and municipal securities
    
    
    3,994,654
    
    
    
    (137,737
    )
    
    
    607,460
    
    
    
    (6,489
    )
    
    
    4,602,114
    
    
    
    (144,226
    )Mortgage-backed securities
    
    
    17,689,131
    
    
    
    (417,396
    )
    
    
    513,948
    
    
    
    (2,275
    )
    
    
    18,203,079
    
    
    
    (419,671
    )Total temporarily impaired securities
    
    $
    42,958,985
    
    
    $
    (748,513
    )
    
    $
    1,121,408
    
    
    $
    (8,764
    )
    
    $
    44,080,393
    
    
    $
    (757,277
    )
 F-13




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. LOANS The composition of loans is summarized as follows: December 31,2003
    
    2002Commercial
    
    $
    19,233,927
    
    
    $
    11,332,000Real estate  construction
    
    
    34,847,650
    
    
    
    27,859,000Real estate  mortgage
    
    
    66,883,975
    
    
    
    48,522,000Consumer installment and other
    
    
    4,455,438
    
    
    
    3,334,023125,420,990
    
    
    
    91,047,023Deferred loan fees
    
    
    (219,868
    )
    
    
    (125,444
    )Allowance for loan losses
    
    
    (1,419,479
    )
    
    
    (1,141,095
    )Loans, net
    
    $
    123,781,643
    
    
    $
    89,780,484
 Changes in the allowance for loan losses are as follows: Years Ended December 31,2003
    
    2002Balance, beginning of year
    
    $
    1,141,095
    
    
    $
    803,855Provision for loan losses
    
    
    420,000
    
    
    
    359,285Loans charged off
    
    
    (141,616
    )
    
    
    (22,045
    )Recoveries of loans previously charged off
    
    
    
    
    
    
    Balance, end of year
    
    $
    1,419,479
    
    
    $
    1,141,095
 The following is a summary of information pertaining to impaired
loans: As of and for the Years EndedDecember 31,2003
    
    2002Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    464,724
    
    
    
    341,052Total impaired loans
    
    $
    464,724
    
    
    $
    341,052Valuation allowance related to impaired loans
    
    $
    139,063
    
    
    $
    68,268Average investment in impaired loans
    
    $
    355,434
    
    
    $
    53,152Interest income recognized on impaired loans
    
    $
    303
    
    
    $
    50Nonaccrual loans
    
    $
    443,558
    
    
    $
    341,052Loans past due ninety days or more and still accruing interest
    
    $
    67,000
    
    
    $
    22,000
 F-14




---



##### 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, 2003
are as follows: Balance, beginning of year
    
    $
    6,025,080Advances
    
    
    3,228,853Repayments
    
    
    (1,722,571
    )Balance, end of year
    
    $
    7,531,362
 NOTE 4. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 312003
    
    2002Land and improvements
    
    $
    1,358,544
    
    
    $
    851,096Buildings
    
    
    3,064,715
    
    
    
    2,136,975Furniture and equipment
    
    
    1,527,266
    
    
    
    1,083,018Construction in process (estimated additional
costs to complete $740,000)
    
    
    57,568
    
    
    
    145,3256,008,093
    
    
    
    4,216,414Accumulated depreciation
    
    
    (797,671
    )
    
    
    (505,012
    )$
    5,210,422
    
    
    $
    3,711,402
 NOTE 5. DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or
more at December 31, 2003 and 2002 was $36,886,120 and $19,788,504,
respectively. The scheduled maturities of time deposits at December
31, 2003 are as follows: 2004
    
    $
    74,876,2252005
    
    
    6,080,7142006
    
    
    2,856,6312007
    
    
    1,153,2612008
    
    
    6,381,554$
    91,348,385
 At December 31, 2003 and 2002, overdraft demand deposits and savings
accounts reclassified to loans totaled $23,507 and $39,421,
respectively. F-15




---



##### 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, 2003 and 2002 were $1,704,188 and $3,780,013, respectively. NOTE 7. FEDERAL HOME LOAN BANK ADVANCES At December 31, 2003, Federal Home Loan Bank advances totaled
$15,000,000. The advance bears interest at 3.01% and requires
interest to be paid quarterly. The advance matures on September 5,
2008. The advances from the Federal Home Loan Bank are secured by a
specific pledge of securities. NOTE 8. 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 $33,129 and $10,951
for the years ended December 31, 2003 and 2002, respectively. NOTE 9. STOCK OPTIONS The Company has a stock option plan reserving 66,667 shares of capital stock for the granting
of options to key employees. The Company also has a stock option plan reserving 120,000 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-16




---



##### Table of Contents

\

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. STOCK OPTIONS (Continued) Other pertinent information related to the options as of December 31,
2003 and 2002 is as follows: 2003
    
    2002Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    151,777
    
    
    $
    9.19
    
    
    
    151,777
    
    
    $
    9.19Granted
    
    
    12,889
    
    
    
    10.07
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    164,667
    
    
    $
    9.26
    
    
    
    151,777
    
    
    $
    9.19Options exercisable at end of year
    
    
    141,183
    
    
    $
    9.19
    
    
    
    130,591
    
    
    $
    9.19Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    3.07
    
    
    
    
    
    
    $
    N/AWeighted
average life of options outstanding
    
    
    
    
    
    
    8.0
    years
    
    
    
    
    
    
    8.9
    years
 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: Year EndedDecember 31, 2003Dividend yield
    
    
    0.00
    %Expected life
    
    
10
    yearsExpected volatility
    
    
    9.20
    %Risk-free interest rate
    
    
    4.55
    %
 F-17




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. INCOME TAXES The components of income tax expense are as follows: Years Ended December 31,2003
    
    2002Current
    
    $
    909,665
    
    
    $
    740,532Deferred
    
    
    (112,765
    )
    
    
    (154,389
    )$
    796,900
    
    
    $
    586,143
 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 31,2003
    
    2002Income tax at statutory federal rate
    
    $
    812,091
    
    
    $
    558,956Tax-exempt interest
    
    
    (75,881
    )
    
    
    (21,965
    )Disallowed interest
    
    
    10,160
    
    
    
    4,873State tax
    
    
    61,709
    
    
    
    44,721Other items
    
    
    (11,179
    )
    
    
    (442
    )Income tax expense
    
    $
    796,900
    
    
    $
    586,143
 The components of deferred income taxes are as follows: December 31,2003
    
    2002Deferred tax assets:Loan loss reserves
    
    $
    428,700
    
    
    $
    317,412Preopening and organization expenses
    
    
    60,302
    
    
    
    78,768Loan fees
    
    
    82,969
    
    
    
    50,587Securities available for sale
    
    
    207,228
    
    
    
    779,199
    
    
    
    446,767Deferred tax liabilities:Depreciation
    
    
    136,133
    
    
    
    82,547Cash basis adjustment for income tax reporting purposes
    
    
    96,845
    
    
    
    137,992Securities available for sale
    
    
    
    
    
    
    65,814232,978
    
    
    
    286,353Net deferred tax assets
    
    $
    546,221
    
    
    $
    160,414
 F-18




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. EARNINGS PER SHARE Presented below is a summary of the components used to calculate
basic and diluted earnings per share: Years Ended December 31,2003
    
    2002Net income
    
    $
    1,591,603
    
    
    $
    1,057,845Weighted average number of
common shares outstanding
    
    
    1,928,764
    
    
    
    1,292,380Effect of dilutive options
    
    
    11,692
    
    
    
    9,609Weighted average number of common
shares outstanding used to calculate
dilutive earnings per share
    
    
    1,940,456
    
    
    
    1,301,989
 NOTE 12. 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 31,2003
    
    2002Commercial letters of credit
    
    $
    1,228,119
    
    
    $
    773,004Commitments to extend credit
    
    
    26,593,668
    
    
    
    17,510,685$
    27,821,787
    
    
    $
    18,283,689
 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-19




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. 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 13. 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-one 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 $2,776,000. NOTE 14. 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, 2003 approximately $840,000 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
Bank must meet specific capital guidelines that involve quantitative
measures of the Companys and 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 of December 31, 2003, the Company and Bank
met all capital adequacy requirements to which they are subject. F-20




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. REGULATORY MATTERS (Continued) As of December 31, 2003, 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, 2003:Total Capital to Risk Weighted AssetsConsolidated
    
    $
    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 AssetsConsolidated
    
    $
    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 AssetsConsolidated
    
    $
    18,824
    
    
    
    9.93
    %
    
    $
    7,583
    
    
    
    4
    %
    
    $
    N/A
    
    
    
    N/ASouthern Community Bank
    
    $
    12,940
    
    
    
    6.83
    %
    
    $
    7,581
    
    
    
    4
    %
    
    $
    9,477
    
    
    
    5
    %December 31, 2002: (Bank only)Total Capital to Risk Weighted Assets
    
    $
    12,401
    
    
    
    12.39
    %
    
    $
    8,008
    
    
    
    8
    %
    
    $
    10,010
    
    
    
    10
    %Tier I Capital to Risk Weighted Assets
    
    $
    11,260
    
    
    
    11.25
    %
    
    $
    4,004
    
    
    
    4
    %
    
    $
    6,006
    
    
    
    6
    %Tier I Capital to Average Assets
    
    $
    11,260
    
    
    
    9.18
    %
    
    $
    4,905
    
    
    
    4
    %
    
    $
    6,131
    
    
    
    5
    %
 F-21




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. 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, and Federal Funds Sold:The carrying amount of
cash, due from 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. Accrued Interest:The carrying amount of accrued interest
approximates their fair value. 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-22




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The carrying amount and estimated fair value of the Companys
financial instruments were as follows: December 31, 2003
    
    December 31, 2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash, due from banks,
and federal funds sold
    
    $
    4,422,961
    
    
    $
    4,422,961
    
    
    $
    3,789,657
    
    
    $
    3,789,657Securities
    
    
    60,549,452
    
    
    
    60,549,452
    
    
    
    22,940,490
    
    
    
    22,940,490Loans
    
    
    123,781,643
    
    
    
    125,234,706
    
    
    
    89,780,484
    
    
    
    91,232,961Accrued interest receivable
    
    
    928,817
    
    
    
    928,817
    
    
    
    580,033
    
    
    
    580,033Financial liabilities:Deposits
    
    
    159,775,068
    
    
    
    161,191,427
    
    
    
    99,508,745
    
    
    
    100,491,666Federal funds purchased
    
    
    
    
    
    
    
    
    
    
    719,000
    
    
    
    719,000Securities sold under
repurchase agreements
    
    
    1,704,188
    
    
    
    1,704,188
    
    
    
    3,780,013
    
    
    
    3,780,013Federal Home Loan Bank advances
    
    
    15,000,000
    
    
    
    15,106,564
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    443,923
    
    
    
    443,923
    
    
    
    301,833
    
    
    
    301,833
 NOTE 16. SUPPLEMENTAL FINANCIAL DATA Components of other operating expenses in excess of 1% of total
revenue are as follows: Years Ended December 31,2003
    
    2002Professional fees
    
    $
    102,121
    
    
    $
    91,513Data processing expense
    
    
    185,690
    
    
    
    139,588
 F-23




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. 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, 2003 and
2002: CONDENSED BALANCE SHEET 2003
    
    2002AssetsCash
    
    $
    5,805,604
    
    
    $
    5,232,725Investment in subsidiary
    
    
    12,602,382
    
    
    
    11,367,365Other assets
    
    
    94,402
    
    
    
    39,913Total assets
    
    $
    18,502,388
    
    
    $
    16,640,003Liabilities
    
    $
    16,455
    
    
    $
    8,000Shareholders equity
    
    
    18,485,933
    
    
    
    16,632,003Total liabilities and shareholders equity
    
    $
    18,502,388
    
    
    $
    16,640,003
 CONDENSED STATEMENT OF INCOME 2003
    
    2002IncomeDividends from subsidiary
    
    $
    
    
    
    $
    92,927Expenses, other
    
    
    143,394
    
    
    
    105,034Loss before income tax benefits and equity
in undistributed income of subsidiary
    
    
    (143,394
    )
    
    
    (12,107
    )Income tax benefits
    
    
    (54,489
    )
    
    
    (39,913
    )Income (loss) before equity in undistributed income
of subsidiary
    
    
    88,905
    
    
    
    27,806Equity in undistributed income of subsidiary
    
    
    1,680,508
    
    
    
    1,030,039Net income
    
    $
    1,591,603
    
    
    $
    1,057,845
 F-24




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. PARENT COMPANY FINANCIAL INFORMATION (Continued) CONDENSED STATEMENT OF CASH FLOWS 2003
    
    2002OPERATING ACTIVITIESNet income
    
    $
    1,591,603
    
    
    $
    1,057,845Adjustments to reconcile net income to net
cash used in operating activities:Undistributed income of subsidiary
    
    
    (1,680,508
    )
    
    
    (1,030,039
    )Other operating activities
    
    
    (46,034
    )
    
    
    (31,913
    )Net cash used in operating activities
    
    
    (134,939
    )
    
    
    (4,107
    )INVESTING ACTIVITIESCapital infusion in subsidiary
    
    
    
    
    
    
    (2,000,000
    )FINANCING ACTIVITIESProceeds from issuance of capital stock
    
    
    713,940
    
    
    
    7,294,800Payment for fractional shares
    
    
    (6,122
    )
    
    
    Stock issuance costs
    
    
    
    
    
    
    (57,968
    )Net cash provided by financing activities
    
    
    707,818
    
    
    
    7,236,832Net increase in cash
    
    
    572,879
    
    
    
    5,232,725Cash at beginning of year
    
    
    5,232,725
    
    
    
    Cash at end of year
    
    $
    5,805,604
    
    
    $
    5,232,725
 NOTE 18. STOCK SPLIT On
October 21, 2003, the Company declared a four-for-three stock split
payable to shareholders of record on November 21, 2003. The earnings
per common share for the year ended December 31, 2003 and 2002 have
been retroactively adjusted for this split as if it occurred on
January 1, 2002. F-25