##### Table of Contents



Securities and Exchange Commission

Washington, D.C. 20549


FORM 10-KSB

[X]
        
        ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2002[   ]
        
        TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For 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 [  ]

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. [X]

Revenues for the Registrants fiscal year ended December 31, 2002 total
$7,324,000.

The aggregate market value of the Registrants outstanding Common Stock
held by nonaffiliates of the Registrant on January 31, 2003 was approximately
$11,736,250. There were 1,450,983 shares of Common Stock outstanding as of
January 31, 2003.

Transitional Small Business Disclosure Format (check one): Yes [  ]  No [X]

DOCUMENTS INCORPORATED BY REFERENCE

None





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TABLE OF CONTENTS



|                                                   |                                                                                              |  |  |  |  |  |  | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | ITEM 1. DESCRIPTION OF BUSINESS                                                             
|                                                   | ITEM 2. DESCRIPTION OF PROPERTY                                                             
|                                                   | ITEM 3. LEGAL PROCEEDINGS                                                                   
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                 
|PART II                                           
|                                                   | ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                        
|                                                   | ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                           
|                                                   | ITEM 7. FINANCIAL STATEMENTS                                                                
|                                                   | ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|PART III                                          
|                                                   | ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                   | ITEM 10. EXECUTIVE COMPENSATION                                                             
|                                                   | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                     
|                                                   | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                     
|                                                   | ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                                   
|                                                   | ITEM 14. CONTROLS AND PROCEDURES                                                            
|SIGNATURES                                        
|EX-21 SUBSIDIARIES OF SOUTHERN COMMUNITY BANCSHARE
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO      
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO      



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SOUTHERN COMMUNITY BANCSHARES, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 2002

Table of Contents

Item
        
        
        
        
        
        PageNumber
        
        
        
        
        
        NumberPart I1.
        
        
        Description of Business
        
        
        12.
        
        
        Description of Property
        
        
        123.
        
        
        Legal Proceedings
        
        
        124.
        
        
        Submission of Matters to a Vote of
Security Holders
        
        
        12Part II5.
        
        
        Market for Common Equity and
Related Stockholder Matters
        
        
        126.
        
        
        Managements Discussion and Analysis
or Plan of Operation
        
        
        137.
        
        
        Financial Statements
        
        
        348.
        
        
        Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
        
        
        35Part III9.
        
        
        Directors and Executive Officers of the
Registrant
        
        
        3510.
        
        
        Executive Compensation
        
        
        3711.
        
        
        Security Ownership of Certain Beneficial Owners
and Management
        
        
        4112.
        
        
        Certain Relationships and Related Transactions
        
        
        4413.
        
        
        Exhibits and Reports on Form 8-K
        
        
        4414.
        
        
        Controls and Procedures
        
        
        45Signatures
        
        
        46






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PART I




ITEM 1. DESCRIPTION OF BUSINESS

Overview

The Company

Southern Community Bancshares, Inc. (the Company) was incorporated
under the laws of the State of Georgia and is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. Its
wholly-owned subsidiary, Southern Community Bank, a Georgia banking
corporation (the Bank), was incorporated on August 16,1999 and
commenced business on June 2, 2000. The Bank reorganized into a holding
company structure effective January 1, 2002.

The primary activity of the Company currently is, and is expected to
remain for the foreseeable future, the ownership and operation of the
Bank. As a bank holding company, the Company is intended to facilitate
the Banks ability to serve its customers requirements for financial
services. The holding company structure also provides flexibility for
expansion through the possible acquisition of other financial
institutions and the provision of additional banking-related services, as
well as certain non-banking services, which a traditional commercial bank
may not provide under present laws. The holding company structure also
affords additional flexibility in terms of capital formation and
financing opportunities.

While the Company may seek in the future to acquire additional banks
or bank holding companies or to engage in other activities appropriate
for bank holding companies under appropriate circumstances as permitted
by law, the Company currently has no plans, understandings or agreements
concerning any other activities other than as described below. The
results of operations and financial condition of the Company for the
foreseeable future, therefore, will be determined primarily by the
results of operations and financial condition of the Bank.

Employees

As of March 1, 2003, the Company and the Bank had 34 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.

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.

Competition

All phases of the Companys banking activities are highly
competitive. The Company competes actively with eleven 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.

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Based on total assets of approximately $121 million at December 31,
2002, the Bank represents approximately 7.11% of the deposit base in the
Fayette County market. Six major regional banks represent approximately
61% 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 branches in the
county. There are several credit unions located in Fayette County.
Since credit unions are not subject to income taxes in the way commercial
banks are taxed, 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.

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.

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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:



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

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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 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:

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| |  |  | 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
| | - |  | ------------------------------------------------------------------------------------



| |  |  | 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:

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| |  |  | 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:



| |  |  | 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
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | 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, 2002, the Bank
could pay out $561,000 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,
2002, the Companys total risk-based capital ratio and its Tier 1 risk-based
capital ratio were 12.39% and 11.25%, respectively.

In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets, of 3.0% for bank holding companies that meet specified
criteria. All other bank holding companies generally are required to maintain a
leverage ratio of at least 3%, plus an additional cushion of 100 to 200 basis
points. The Companys leverage ratio as of December 31, 2002 was 9.18%. The
guidelines also provide

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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,
2002. 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 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.

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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 capitalization categories,
the degree of regulatory scrutiny will increase and the permitted activities of
the institution will decrease.

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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, 2002, 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.

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

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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.

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ITEM 2. DESCRIPTION OF PROPERTY

As of December 31, 2002, 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. 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 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 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,
2002.




PART II




ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Companys Common Stock is not listed, traded or quoted on any
securities exchange or in the over-the-counter market. To the Companys
managements knowledge, the most recent transaction with respect to the
Companys Common Stock was the secondary offering of 640,000 shares at
$12.50 per share. All of the shares were sold by the closing date of
January 31, 2003. The proceeds of the secondary offering funded the
expenses related to that offering and a capital injection of $2,000,000
to the bank. The remaining $5,900,000 will be used primarily to fund the
growth and expansion of the Company and related expenses.

There were approximately 589 holders of record of the common stock
as of December 31, 2002.

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 made. 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.

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The following chart sets forth certain information relating to the
Companys equity compensation plans.

Equity Compensation Plan Information

Number ofsecuritiesremainingavailable forNumber of
        
        
        
        future issuancesecurities to be
        
        Weighted
        
        under equityissued upon
        
        average exercise
        
        compensationexercise of
        
        price of
        
        plans (excludingoutstanding
        
        outstanding
        
        securitiesoptions, warrants
        
        options, warrants
        
        reflected inand rights
        
        and rights
        
        column (a)(a)
        
        (b)
        
        (c)Equity compensation plans approved by security
holders
        
        
        113,833
        
        
        $
        12.25
        
        
        
        26,167Equity compensation plans not approved by security
holders
        
        
        
        
        
        
        
        
        
        
        Total
        
        
        113,833
        
        
        $
        12.25
        
        
        
        26,167





ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following is a discussion of our financial condition at December 31,
2002 and 2001 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

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competition in the banking business from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market
funds and other financial institutions operating in our market area and
elsewhere, including institutions operating through the Internet, changes in
governmental regulation relating to the banking industry, including regulations
relating to branching and acquisitions, failure of assumptions underlying the
establishment of reserves for loan losses, including the value of collateral
underlying delinquent loans, and other factors. We caution that such factors
are not exclusive. We do not undertake to update any forward-looking statement
that may be made from time to time by, or on behalf of, us.

OVERVIEW

The year 2002 was highlighted by reporting net income of $1,058,000. 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.

FINANCIAL CONDITION AS OF DECEMBER 31, 2002 AND 2001

Following is a summary of our balance sheets for the years indicated:

December 31,2002
        
        2001(Dollars in Thousands)Cash and due from banks
        
        $
        3,790
        
        
        $
        1,405Federal funds sold
        
        
        
        
        
        
        2,532Securities
        
        
        22,799
        
        
        
        13,128Restricted equity securities
        
        
        142
        
        
        
        Loans, net
        
        
        89,780
        
        
        
        64,920Premises and equipment
        
        
        3,711
        
        
        
        3,061Other assets
        
        
        855
        
        
        
        700$
        121,077
        
        
        $
        85,746Total deposits
        
        $
        99,509
        
        
        $
        74,695Securities sold under repurchase agreements
        
        
        3,780
        
        
        
        2,210Federal funds purchased
        
        
        719
        
        
        
        Other liabilities
        
        
        437
        
        
        
        480Shareholders equity
        
        
        16,632
        
        
        
        8,361$
        121,077
        
        
        $
        85,746


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FINANCIAL CONDITION AS OF DECEMBER 31, 2002 AND 2001

As of December 31, 2002, we had total assets of $121 million, an increase
of 41.2% over December 31, 2001. Total interest-earning assets were $113.8
million as of December 31, 2002, or 94% of total assets as compared to $81.3
million or 95% of total assets as of December 31, 2001. Our primary
interest-earning assets as of December 31, 2002 were loans, which made up 80%
of total interest-earning assets, as compared to 81% as of December 31, 2001.
Our loan to deposit ratio was 91% as of December 31, 2002, as compared to 88%
as of December 31, 2001. Deposit growth in 2002 of $25 million has been used
to fund loan growth of $25 million. The decrease in federal funds sold of $2.5
million and increase in federal funds purchased of $719,000 was used to fund an
increase in cash and due from banks of $2.4 million and an increase in fixed
assets. Fixed assets increased by $650,000 due to the purchase of land and the
start of construction on our Peachtree City branch.

Our securities portfolio, consisting of U.S. Government and Agency
securities and mortgage-backed securities, amounted to $23 million as of
December 31, 2002. Net unrealized gains on securities amounted to $173,000 as
of December 31, 2002 as compared to $211,000 as of December 31, 2001.
Management has not specifically identified any securities for sale in future
periods that, if so designated, would require a charge to operations if the
market value would not be reasonably expected to recover prior to the time of
sale.

We have 84% of our loan portfolio collateralized by real estate located in
our primary market area of Fayette County, Georgia and surrounding counties.
Our real estate construction portfolio consists of loans primarily
collateralized by one to four family residential properties which comprise 31%
of the loan portfolio. Real estate mortgage loans secured by one to four
family residential properties comprise 18% of the loan portfolio, and
nonresidential real estate mortgage loans consisting primarily of small
business commercial properties total 35% of the loan portfolio. We generally
require that loans collateralized by real estate not exceed 80%-85% of the
collateral value. The remaining 16% of the loan portfolio consists of
commercial, consumer, and other loans. We require collateral commensurate with
the repayment ability and creditworthiness of the borrower.

The specific economic and credit risks associated with our loan portfolio,
especially the real estate portfolio, include, but are not limited to, a
general downturn in the economy that could affect unemployment rates in our
market area, general real estate market deterioration, interest rate
fluctuations, deteriorated or non-existing collateral, title defects,
inaccurate appraisals, financial deterioration of borrowers, fraud and any
violation of banking protection laws. Construction lending can also present
other specific risks to the lender such as whether the builders can obtain
financing for the construction, whether the builders can sell the home to a
buyer and whether the buyer can obtain permanent financing. Currently, real
estate values and employment trends in our market area are stable with no
indications of a significant downturn in the general economy.

We attempt to reduce these economic and credit risks not only by adhering
to loan to 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

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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.

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, 2002, we had loan commitments outstanding of $18
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, 2002, we had arrangements with 2
commercial banks for additional short-term advances of $4 million in aggregate.

As of December 31, 2002, our capital ratios were considered adequate based
on regulatory minimum capital requirements. Our shareholders equity increased
due to the retention of net income in 2002 of $1,058,000 and net proceeds from
our stock offering in 2002 of $7,237,000. The offering was successful as we
sold 100% of the shares offered by the closing date 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 may be paid without prior approval of the
Banks regulatory agency. Currently, the Bank could pay $561,000 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, 2002 are as follows:

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RegulatoryActual
        
        RequirementsLeverage capital ratio
        
        
        9.18
        %
        
        
        5
        %Risk based capital ratios:Core capital
        
        
        11.25
        %
        
        
        6
        %Total capital
        
        
        12.39
        %
        
        
        10
        %


These ratios may decline as asset growth continues, but are expected to
exceed the regulatory minimum requirements. Anticipated future earnings will
assist in keeping these ratios at satisfactory levels.

As of December 31, 2002, we had approximately $575,000 in remaining
construction costs associated with our Peachtree City branch.

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 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 Alliances allowance for loan
losses. Such agencies may require Alliance to recognize additions to the
allowance based on judgments different than those of management.

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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 8 to the Notes to 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 Alliances assets and liabilities resulted in a net
deferred tax asset. A valuation allowance was established for the net deferred
tax asset, as the realization of these deferred tax assets is dependent on
future taxable income.

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.

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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, 2002 AND 2001

The following is a summary of our operations for the years indicated.

Year Ended December 31,2002
        
        2001(Dollars in Thousands)Interest income
        
        $
        6,930
        
        
        $
        5,860Interest expense
        
        
        2,393
        
        
        
        2,913Net interest income
        
        
        4,537
        
        
        
        2,947Provision for loan losses
        
        
        359
        
        
        
        389Other income
        
        
        394
        
        
        
        451Other expenses
        
        
        2,928
        
        
        
        2,163Pretax income
        
        
        1,644
        
        
        
        846Income taxes
        
        
        586
        
        
        
        48Net income
        
        $
        1,058
        
        
        $
        798


NET INTEREST INCOME

Our results of operations are determined by our ability to manage interest
income and expense effectively, to minimize loan and investment losses, to
generate non-interest income and to control operating expenses. Because
interest rates are determined by market forces and economic conditions beyond
our control, our ability to generate net interest income depends on our ability
to obtain an adequate net interest spread between the rate we pay on
interest-bearing liabilities and the rate we earn on interest-earning assets.

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Our net yield on average interest-earning assets was 4.66% in 2002 as
compared to 4.16% in 2001. Average loans increased by $29 million, while the
remaining average interest earning assets decreased by $2.6 million which
combined, accounted for a $26 million increase in total average
interest-earning assets in 2002. Average interest-bearing liabilities
increased by $21 million with average interest-bearing demand and savings, and
time deposits accounting for $9.5 and $11.3 million of this increase,
respectively. The rate earned on average interest-earning assets decreased to
7.12% in 2002 from 8.26% in 2001. The rate paid on average interest-bearing
liabilities decreased to 3.00% in 2002 from 4.94% in 2001. 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 an
decrease in yield on interest-bearing deposits in comparison to 2001. In 2002,
the yields on interest-earning assets decreased by 114 basis points while the
rate paid on interest-bearing liabilities decreased by 194 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 $359,000 in 2002 as compared to $389,000
in 2001. 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, 2002, we had $341,000
non-accrual loans as compared to $50,000 as of December 31, 2001. The
allowance for loan losses as a percentage of total loans as of December 31,
2002 and 2001 was 1.25% and 1.22%, respectively. Actual loan charge-offs were
$22,000 during 2002, as compared to $5,000 during 2001.

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
decreased to $394,000 in 2002, from $451,000 in 2001. This decrease is due
primarily to a decrease in gain on sales of securities of $184,000. Service
charges on deposit accounts and gain on sales of loans increased by $119,000
and $40,000, respectively. The decrease in other operating income was
primarily due to a decrease of $31,000 in brokerage income.

OTHER EXPENSE

Other expenses were $2,928,000 in 2002, as compared to $2,163,000 in 2001,
an increase of $765,000. Salaries and employee benefits increased by $367,000
due to an increase in the number of full time equivalent employees from 27 to
35 and normal increases in salaries and benefits. Equipment and occupancy
expenses increased by $52,000 and other operating expenses increased by
$346,000 due partially to increased data processing costs of $40,000, and
increased directors fees of $52,500. The increases in all other operating
expenses were directly related to the overall growth of the Company.

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INCOME TAX

We have reported income taxes for 2002 of $586,000 as compared to $48,000
for 2001. The effective tax rate for 2002 and 2001 was 35.7% and 5.6%,
respectively. The Company utilized all remaining net operating loss
carryforwards in 2001 to offset taxable income.

ASSET/LIABILITY MANAGEMENT

Our objective is to manage assets and liabilities to provide a
satisfactory, consistent level of profitability within the framework of
established cash, loan, investment, borrowing and capital policies. Certain
officers are charged with the responsibility for monitoring policies and
procedures designed to ensure acceptable composition of the asset/liability
mix. Our managements overall philosophy is to support asset growth primarily
through growth of core deposits of all categories made by local individuals,
partnerships and corporations.

Our asset/liability mix is monitored on a regular basis with a report
reflecting the interest rate-sensitive assets and interest rate-sensitive
liabilities being prepared and presented to the Board of Directors on a monthly
basis. The objective of this policy is to monitor interest rate-sensitive
assets and liabilities so as to minimize the impact of substantial movements in
interest rates on earnings. An asset or liability is considered to be interest
rate-sensitive if it will reprice or mature within the time period analyzed,
usually one year or less. The interest rate-sensitivity gap is the difference
between the interest-earning assets and interest-bearing liabilities scheduled
to mature or reprice within such time period. A gap is considered positive when
the amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities. A gap is considered negative when the amount of
interest rate-sensitive liabilities exceeds the interest rate-sensitive assets.
During a period of rising interest rates, a negative gap would tend to affect
net interest income adversely, while a positive gap would tend to result in an
increase in net interest income. Conversely, during a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely. If our assets and liabilities were equally flexible and moved
concurrently, the impact of any increase or decrease in interest rates on net
interest income would be minimal.

A simple interest rate gap analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, we also evaluate how the repayment of particular assets and
liabilities is impacted by changes in interest rates. Income associated with
interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the
magnitude and duration of changes in interest rates may have a significant
impact on net interest income. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Interest rates on
certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind
changes in general market rates. In addition, certain assets, such as
adjustable rate mortgage loans, have features (generally referred to as
interest rate caps and

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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, 2002, our cumulative one year interest rate-sensitivity
gap ratio was .87%. 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,
2002, 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.

22



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After
        
        AfterThree
        
        OneMonths
        
        YearWithin
        
        but
        
        but
        
        AfterThree
        
        Within
        
        Within
        
        FiveMonths
        
        One Year
        
        Five Years
        
        Years
        
        Total(Dollars in Thousands)Interest-earning assetsSecurities
        
        
        142
        
        
        
        
        
        
        
        3,053
        
        
        
        19,745
        
        
        
        22,940Loans
        
        
        61,841
        
        
        
        7,695
        
        
        
        20,768
        
        
        
        743
        
        
        
        91,04761,983
        
        
        
        7,695
        
        
        
        23,821
        
        
        
        20,488
        
        
        
        113,987Interest-bearing liabilities:Interest-bearing demand deposits
        
        
        29,818
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        29,818Savings
        
        
        1,032
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,032Time deposits
        
        
        11,985
        
        
        
        33,202
        
        
        
        11,593
        
        
        
        
        
        
        
        56,780Federal funds purchased
        
        
        719
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        719Securities sold under repurchase
agreements
        
        
        3,780
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        3,78047,334
        
        
        
        33,202
        
        
        
        11,593
        
        
        
        
        
        
        
        92,129Interest rate sensitivity gap
        
        
        14,649
        
        
        
        (25,507
        )
        
        
        12,228
        
        
        
        20,488
        
        
        
        21,858Cumulative interest rate
sensitivity gap
        
        
        14,649
        
        
        
        (10,858
        )
        
        
        1,370
        
        
        
        21,858Interest rate sensitivity gap ratio
        
        
        1.31
        
        
        
        .23
        
        
        
        2.05
        
        
        
        Cumulative interest rate
sensitivity gap ratio
        
        
        1.31
        
        
        
        .87
        
        
        
        1.01
        
        
        
        1.24


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.

23



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INTEREST DIFFERENTIALS

Average Balances

The average balance sheet for the years indicated is presented below. (1)

Year Ended December 31,2002
        
        2001(Dollars in Thousands)ASSETSCash and due from banks
        
        $
        3,172
        
        
        $
        1,430Taxable securities
        
        
        13,099
        
        
        
        16,276Nontaxable securities
        
        
        1,457
        
        
        
        Securities valuation account
        
        
        171
        
        
        
        284Federal funds sold
        
        
        4,250
        
        
        
        5,175Loans (2)
        
        
        78,551
        
        
        
        49,476Allowance for loan losses
        
        
        (927
        )
        
        
        (612
        )Other assets
        
        
        4,098
        
        
        
        3,729$
        103,871
        
        
        $
        75,758Total interest-bearing assets
        
        $
        97,357
        
        
        $
        70,927LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Non-interest-bearing demand
        
        $
        14,326
        
        
        $
        8,394Interest-bearing demand and savings
        
        
        27,644
        
        
        
        18,135Time
        
        
        49,087
        
        
        
        37,794Total deposits
        
        
        91,057
        
        
        
        64,323Other liabilities
        
        
        451
        
        
        
        288Other borrowings
        
        
        2,915
        
        
        
        2,987Total liabilities
        
        
        94,423
        
        
        
        67,598Shareholders equity
        
        
        9,448
        
        
        
        8,160$
        103,871
        
        
        $
        75,758Total interest-bearing liabilities
        
        $
        79,646
        
        
        $
        58,916




|(1) |  | For each category, average balances were determined using the daily
average balances during the year.
|--- |  | -----------------------------------------------------------------------------------------------------



|(2) |  | The average balance of non-accrual loans included in average loans for
2002 was $53,000 and $13,000 in 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------

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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 31
|                 |                                   |                                                          |   |       |                       
|                 |                                   |                                                          |   |       | 2002                   |   | 2001
|                 |                                   |                                                          |   |       |                        |   |     
|                 |                                   |                                                          |   |       |                        |   |      |      | Average  |   |      |       |       |  | Average
|                 |                                   |                                                          |   |       | Interest               |   | Rate |      | Interest |   | Rate
|                 |                                   |                                                          |   |       |                        |   |      |      |          |   |     
|                 |                                   |                                                          |   |       | (Dollars in Thousands)
|Interest Income: |                                   |                                                          |   |       |                        |   |      |      |          |   |      |       |       |  |         |     
|                 | Interest and fees on loans (1)    |                                                          | $ | 6,164 |                        |   |      | 7.85 | %        |   | $    | 4,561 |       |  |         | 9.22 | %   
|                 | Interest on taxable securities    |                                                          |   | 630   |                        |   |      | 4.81 |          |   |      | 1,090 |       |  |         | 6.70 |     
|                 | Interest on nontaxable securities |                                                          |   | 65    |                        |   |      | 4.46 |          |   |      |      |       |  |         |     |     
|                 | Interest on federal funds sold    |                                                          |   | 71    |                        |   |      | 1.67 |          |   |      | 209   |       |  |         | 4.04 |     
|                 |                                   |                                                          |   |       |                        |   |      |      |          |   |      |       |       |  |         |     
|                 | Total interest income             |                                                          |   | 6,930 |                        |   |      | 7.12 | %        |   |      | 5,860 |       |  |         | 8.26 | %   
|                 |                                   |                                                          |   |       |                        |   |      |      |          |   |      |       |       |  |         |     
|                 | Interest Expense:                 |                                                          |   |       |                        |   |      |      |          |   |      |       |       |  |         |      |     
|                 |                                   | Interest on interest-bearing
demand and savings deposits |   |       | 492                    |   |      |      | 1.78     | % |      |       | 521   |  |         |      | 2.87 | %
|                 |                                   | Interest on time deposits                                |   |       | 1,867                  |   |      |      | 3.80     |   |      |       | 2,298 |  |         |      | 6.08 |  
|                 |                                   | Other borrowings                                         |   |       | 34                     |   |      |      | 1.17     |   |      |       | 94    |  |         |      | 3.15 |  
|                 |                                   |                                                          |   |       |                        |   |      |      |          |   |      |       |       |  |         |     
|                 |                                   | Total interest expense                                   |   |       | 2,393                  |   |      |      | 3.00     | % |      |       | 2,913 |  |         |      | 4.94 | %
|                 |                                   |                                                          |   |       |                        |   |      |      |          |   |      |       |       |  |         |     
|                 | Net interest income               |                                                          | $ | 4,537 |                        |   |      |      |          |   | $    | 2,947 |       |  |         |      |     
|                 |                                   |                                                          |   |       |                        |   |      |      |          |   |      |       |       |  |         |     
|                 |                                   | Net interest spread                                      |   |       |                        |   |      |      | 4.12     | % |      |       |       |  |         |      | 3.32 | %
|                 |                                   |                                                          |   |       |                        |   |      |      |          |   |      |       |       |  |         |     
|                 |                                   | Net yield on average
interest-earning assets             |   |       | 4.66                   | % |      |      |          |   |      |       |       |  |         |      | 4.16 | %
|                 |                                   |                                                          |   |       |                        |   |      |      |          |   |      |       |       |  |         |     



|(1) |  | Interest and fees on loans includes $655,000 and $499,000 of loan fee
income for the years ended December 31, 2002 and 2001, respectively. The
interest income recognized on non-accrual loans during 2002 and 2001 was
insignificant.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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-

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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.

|                       |                                                          |                        |  |                         |        |        |  |                 |       |  |  |       |       |  
|---------------------- | -------------------------------------------------------- | ---------------------- |  | ----------------------- | ------ | ------ |  | --------------- | ----- |  |  | ----- | ----- | -
|                       |                                                          |                        |  | Year Ended December 31,
|                       |                                                          |                        |  |                        
|                       |                                                          |                        |  |                         |        |        |  | 2002 vs. 2001   |       |  |  |      
|                       |                                                          |                        |  |                         |        |        |  | Changes Due To: |       |  |  |      
|                       |                                                          |                        |  | Rate                    |        | Volume |  | Total          
|                       |                                                          |                        |  |                         |        |        |  |                
|                       |                                                          |                        |  | (Dollars in Thousands) 
|Increase (decrease)in: |                                                          |                        |  |                         |        |        |  |                 |       |  |  |      
|                       | Income from interest-earning assets:                     |                        |  |                         |        |        |  |                 |       |  |  |       |      
|                       | Interest and fees on loans                               |                        |  | (759                    | )      |        |  | 2,362           |       |  |  | 1,603 |      
|                       | Interest on taxable securities                           |                        |  | (272                    | )      |        |  | (188            | )     |  |  | (460  | )    
|                       | Interest on nontaxable securities                        |                        |  |                        |        |        |  | 65              |       |  |  | 65    |      
|                       | Interest on federal funds sold                           |                        |  | (106                    | )      |        |  | (32             | )     |  |  | (138  | )    
|                       |                                                          |                        |  |                         |        |        |  |                 |       |  |  |      
|                       |                                                          | Total interest income  |  |                         | (1,137 | )      |  |                 | 2,207 |  |  |       | 1,070 |  
|                       |                                                          |                        |  |                         |        |        |  |                 |       |  |  |      
|                       | Expense from interest-bearing
liabilities:               |                        |  |                         |        |        |  |                 |       |  |  |       |      
|                       | Interest on interest-bearing demand
and savings deposits |                        |  | (242                    | )      |        |  | 213             |       |  |  | (29   | )    
|                       | Interest on time deposits                                |                        |  | (1,004                  | )      |        |  | 573             |       |  |  | (431  | )    
|                       | Interest on other borrowings                             |                        |  | (58                     | )      |        |  | (2              | )     |  |  | (60   | )    
|                       |                                                          |                        |  |                         |        |        |  |                 |       |  |  |      
|                       |                                                          | Total interest expense |  |                         | (1,304 | )      |  |                 | 784   |  |  |       | (520  | )
|                       |                                                          |                        |  |                         |        |        |  |                 |       |  |  |      
|                       |                                                          | Net interest income    |  |                         | 167    |        |  |                 | 1,423 |  |  |       | 1,590 |  
|                       |                                                          |                        |  |                         |        |        |  |                 |       |  |  |      

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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,          
|                               |  |                       
|                               |  | 2002                   |        | 2001
|                               |  |                        |        |     
|                               |  | (Dollars in Thousands)
|U.S. Government agencies       |  | $                      | 4,167  |      |  | $ | 9,402  | 
|State and municipal securities |  |                        | 3,598  |      |  |   |       | 
|Corporate bonds                |  |                        | 1,000  |      |  |   |       | 
|Mortgage-backed securities     |  |                        | 14,034 |      |  |   | 3,726  | 
|                               |  |                        |        |      |  |   |        | 
|                               |  | $                      | 22,799 |      |  | $ | 13,128 | 
|                               |  |                        |        |      |  |   |        | 

Maturities

The amounts of securities, including the weighted average yield in each
category as of December 31, 2002, are shown in the following table according to
contractual maturity classifications one year or less, after one through five
years, after five through ten years and after ten years.

|                               |  |                        |       |                   |  |        |      |          |  |  |       |  |  |  |      | 
|------------------------------ |  | ---------------------- | ----- | ----------------- |  | ------ | ---- | -------- |  |  | ----- |  |  |  | ---- | 
|                               |  | After one              |       | After five       
|                               |  | through five years     |       | through ten years
|                               |  |                        |       |                  
|                               |  | Amount                 |       | Yield(1)          |  | Amount |      | Yield(1)
|                               |  |                        |       |                   |  |        |      |         
|                               |  | (Dollars in Thousands)
|U.S. Government agencies       |  |                        | 505   |                   |  |        | 3.50 |          |  |  | 3,662 |  |  |  | 6.00 | 
|State and municipal securities |  |                        |      |                   |  |        |     |          |  |  |      |  |  |  |     | 
|Mortgage-backed securities     |  |                        | 2,548 |                   |  |        | 5.00 |          |  |  | 6,604 |  |  |  | 4.98 | 
|Corporate bonds                |  |                        |      |                   |  |        |     |          |  |  | 1,000 |  |  |  | 6.75 | 

|                               |  |                 |       |          |  |        |      |          |  |  |        |  |  |  |      | 
|------------------------------ |  | --------------- | ----- | -------- |  | ------ | ---- | -------- |  |  | ------ |  |  |  | ---- | 
|                               |  | After ten years |       | Total   
|                               |  |                 |       |         
|                               |  | Amount          |       | Yield(1) |  | Amount |      | Yield(1)
|                               |  |                 |       |          |  |        |      |         
|U.S. Government agencies       |  |                 |      |          |  |        |     |          |  |  | 4,167  |  |  |  | 5.70 | 
|State and municipal securities |  |                 | 3,597 |          |  |        | 4.97 |          |  |  | 3,597  |  |  |  | 4.97 | 
|Mortgage-backed securities     |  |                 | 4,882 |          |  |        | 6.45 |          |  |  | 14,034 |  |  |  | 5.49 | 
|Corporate bonds                |  |                 |      |          |  |        |     |          |  |  | 1,000  |  |  |  | 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27



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| |  | The weighted average yield for each maturity range was computed using the
carrying value of each security in that range.
| |  | ------------------------------------------------------------------------------------------------------------------------

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,          
|                               |                           |           |        |                       
|                               |                           |           |        | 2002                   |        | 2001
|                               |                           |           |        |                        |        |     
|                               |                           |           |        | (Dollars in Thousands)
|Commercial                     |                           | $         | 11,332 |                        |        | $    | 12,198 |     
|Real estate-construction       |                           |           | 27,859 |                        |        |      | 19,590 |     
|Real estate-mortgage           |                           |           | 48,522 |                        |        |      | 31,894 |     
|Consumer installment and other |                           |           | 3,334  |                        |        |      | 2,151  |     
|                               |                           |           |        |                        |        |      |        |     
|                               |                           |           | 91,047 |                        |        |      | 65,833 |     
|Less:                          |                           |           |        |                        |        |      |        |     
|                               | Allowance for loan losses |           |        | (1,141                 | )      |      |        | (804 | )     
|                               | Deferred loan fees        |           |        | (125                   | )      |      |        | (109 | )     
|                               |                           |           |        |                        |        |      |        |     
|                               |                           | Net loans |        | $                      | 89,781 |      |        | $    | 64,920 | 
|                               |                           |           |        |                        |        |      |        |     

28



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##### Table of Contents



Maturities and Sensitivities of Loans to Changes in Interest Rates

Total loans as of December 31, 2002 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, 2002     
|             |                              |  |                       
|             |                              |  | (Dollars in Thousands)
|Commercial   |                              |  |                        |       
|             | One year or less             |  |                        | 5,907  | 
|             | After one through five years |  |                        | 4,967  | 
|             | After five years             |  |                        | 458    | 
|             |                              |  |                        |        | 
|             |                              |  | 11,332                 |       
|             |                              |  |                        |        | 
|Construction |                              |  |                        |       
|             | One year or less             |  |                        | 26,201 | 
|             | After one through five years |  |                        | 1,658  | 
|             | After five years             |  |                        | 0      | 
|             |                              |  |                        |        | 
|             |                              |  | 27,859                 |       
|             |                              |  |                        |        | 
|Other        |                              |  |                        |       
|             | One year or less             |  |                        | 23,751 | 
|             | After one through five years |  |                        | 27,818 | 
|             | After five years             |  |                        | 287    | 
|             |                              |  |                        |        | 
|             |                              |  | 51,856                 |       
|             |                              |  |                        |        | 

29



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##### Table of Contents



The following table summarizes loans as of December 31, 2002 with the due
dates after one year that have predetermined and floating or adjustable
interest rates.

|                                      |                              |   |                   |        | 
|------------------------------------- | ---------------------------- | - | ----------------- | ------ | 
|                                      |                              |   | December 31, 2002
|                                      |                              |   |                  
|                                      | Predetermined interest rates |   | $                 | 21,468 | 
|Floating or adjustable interest rates |                              |   | 13,720            |       
|                                      |                              |   |                   |        | 
|                                      |                              | $ | 35,188            |       
|                                      |                              |   |                   |        | 

Risk Elements

Information with respect to non-accrual, past due and restructured loans
as of December 31, 2002 and 2001 is as follows:

|                                                                                                                              |  |                        |     |      |  |   |    | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --- | ---- |  | - | -- | 
|                                                                                                                              |  | December 31,          
|                                                                                                                              |  |                       
|                                                                                                                              |  | 2002                   |     | 2001
|                                                                                                                              |  |                        |     |     
|                                                                                                                              |  | (Dollars in Thousands)
|Non-accrual loans                                                                                                             |  | $                      | 341 |      |  | $ | 50 | 
|Loans contractually past due 90 days or
more as to interest or principal payments
and still accruing                          |  |                        | 22  |      |  |   | 6  | 
|Restructured 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                      |  |                        | 3   |      |  |   | 1  | 
|Interest income that was recorded on
non-accrual and restructured loans                                                       |  |                        |    |      |  |   |   | 

It is our policy to discontinue the accrual of interest income when, in
the opinion of management, collection of interest becomes doubtful. This status
is accorded interest 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.

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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,
|                                                                           |            |   |                        
|                                                                           |            |   | 2002                    |     | 2001
|                                                                           |            |   |                         |     |     
|                                                                           |            |   | (Dollars in Thousands) 
|Average amount of loans outstanding                                        |            |   | 78,551                  |     |      |   | 49,476 |   
|                                                                           |            |   |                         |     |      |   |        |   
|Balance of allowance for loan losses
at beginning of year                  |            |   | 804                     |     |      |   | 420    |   
|                                                                           |            |   |                         |     |      |   |        |   
|Loans charged off:                                                         |            |   |                         |     |      |   |        |   
|                                                                           | Consumer   |   |                         | (21 | )    |   |        | (5 | )
|                                                                           | Commercial |   |                         | (1  | )    |   |        |   |  
|                                                                           |            |   |                         |     |      |   |        |   
|Loans recovered:                                                           |            |   | (22                     | )   |      |   | (5     | ) 
|                                                                           |            |   |                         |     |      |   |        |   
|Net charge-offs                                                            |            |   | (22                     | )   |      |   | (5     | ) 
|                                                                           |            |   |                         |     |      |   |        |   
|Additions to allowance charged to operating
expense during year            |            |   | 359                     |     |      |   | 389    |   
|                                                                           |            |   |                         |     |      |   |        |   
|Balance of allowance for loan losses
at end of year                        |            | $ | 1,141                   |     |      | $ | 804    |   
|                                                                           |            |   |                         |     |      |   |        |   
|Ratio
of net loans charged off during theyear to average loans outstanding |            |   | .03                     | %   |      |   | .01    | % 
|                                                                           |            |   |                         |     |      |   |        |   

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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, 2002 and 2001, 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, 2002 |       | December 31, 2001
|                                     |  |                   |       |                  
|                                     |  |                   |       |                   |  | Percent of             |       |                |  |   |     | Percent of   
|                                     |  |                   |       |                   |  | loans in               |       |                |  |   |     | loans in     
|                                     |  |                   |       |                   |  | each category          |       |                |  |   |     | each category
|                                     |  | Amount            |       | to total loans    |  | Amount                 |       | to total loans
|                                     |  |                   |       |                   |  |                        |       |               
|                                     |  |                   |       |                   |  | (Dollars in Thousands)
|Commercial                           |  |                   | 733   |                   |  |                        | 12.45 | %              |  |   | 271 |               |  |  | 18.53 | %
|Real estate-construction             |  |                   | 82    |                   |  |                        | 30.60 |                |  |   | 280 |               |  |  | 29.76 |  
|Real estate-mortgage                 |  |                   |      |                   |  |                        | 53.29 |                |  |   |    |               |  |  | 48.45 |  
|Consumer installment
loans and other |  |                   | 176   |                   |  |                        | 3.66  |                |  |   | 108 |               |  |  | 3.26  |  
|Unallocated                          |  |                   | 150   |                   |  |                        |      |                |  |   | 145 |               |  |  |      |  
|                                     |  |                   |       |                   |  |                        |       |                |  |   |     |               |  |  |       |  
|                                     |  |                   | 1,141 |                   |  |                        | 100   | %              |  | $ | 804 |               |  |  | 100   | %
|                                     |  |                   |       |                   |  |                        |       |                |  |   |     |               |  |  |       |  

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DEPOSITS

Average amount of deposits and average rates paid thereon, classified as
to non-interest-bearing demand deposits, interest-bearing demand deposits,
savings deposits and time deposits is presented below.(1)

|                                             |  |                         |        |         |  |        |      |         |  |   |        |  |  |  |      |  
|-------------------------------------------- |  | ----------------------- | ------ | ------- |  | ------ | ---- | ------- |  | - | ------ |  |  |  | ---- | -
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2002                    |        | 2001   
|                                             |  |                         |        |        
|                                             |  | Amount                  |        | Percent |  | Amount |      | Percent
|                                             |  |                         |        |         |  |        |      |        
|                                             |  | (Dollars in Thousands) 
|Non-interest-bearing demand deposits         |  |                         | 14,326 |         |  |        |     | %       |  | $ | 8,394  |  |  |  |     | %
|Interest-bearing demand and savings
deposits |  |                         | 27,644 |         |  |        | 1.78 |         |  |   | 18,135 |  |  |  | 2.87 |  
|Time deposits                                |  |                         | 49,087 |         |  |        | 3.80 |         |  |   | 37,794 |  |  |  | 6.08 |  
|                                             |  |                         |        |         |  |        |      |         |  |   |        |  |  |  |      |  
|                                             |  | $                       | 91,057 |         |  |        |      |         |  | $ | 64,323 |  |  |  |      |  
|                                             |  |                         |        |         |  |        |      |         |  |   |        |  |  |  |      |  



|(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, 2002 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, 2002     
|                               |       |   |                       
|                               |       |   | (Dollars in Thousands)
|Three months or less           |       | $ | 4,323                  |       
|Over three through six months  |       |   | 4,259                  |       
|Over six through twelve months |       |   | 6,522                  |       
|Over twelve months             |       |   | 4,685                  |       
|                               |       |   |                        |       
|                               | Total |   | $                      | 19,789 | 
|                               |       |   |                        |       

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RETURN ON ASSETS AND SHAREHOLDERS EQUITY

The following rate of return information for the years indicated is presented
below.

|                           |  |                         |       |      |  |  |       |  
|-------------------------- |  | ----------------------- | ----- | ---- |  |  | ----- | -
|                           |  | Year Ended December 31,
|                           |  |                        
|                           |  | 2002                    |       | 2001
|                           |  |                         |       |     
|Return on assets (1)       |  |                         | 1.02  | %    |  |  | 1.05  | %
|Return on equity (2)       |  |                         | 11.20 |      |  |  | 9.78  |  
|Dividend payout ratio (3)  |  |                         | n/a   |      |  |  | n/a   |  
|Equity to assets ratio (4) |  |                         | 9.10  |      |  |  | 10.77 |  



|(1) |  | Net income divided by average total assets.                                  
|--- |  | -----------------------------------------------------------------------------
|   
|(2) |  | Net income divided by average equity.                                        
|   
|(3) |  | Dividends declared per share of common stock divided by net income per
share.
|   
|(4) |  | Average common equity divided by average total assets                        




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 Financial
Statements

|                                                                                                          |  | 
|--------------------------------------------------------------------------------------------------------- |  | 
|Consolidated
Balance Sheets as of December 31, 2002 and 2001                                              |  | 
|Consolidated Statements of Operations for the years ended
December 31, 2002, and 2001                     |  | 
|Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2002 and 2001     |  | 
|Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2002 and 2001 |  | 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2002 and 2001                      |  | 
|Notes to Consolidated Financial Statements                                                                |  | 

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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.




PART III




ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table and text gives certain information about the current
members of the Boards of Directors of the Company and the Bank and the senior
and executive officers of both institutions, including their ages as of
December 31, 2002, the positions they hold, and their principal employment for
the past five years.

|                     |  |     |    |               |  |                                                                                          
|-------------------- |  | --- | -- | ------------- |  | -----------------------------------------------------------------------------------------
|Name                 |  | Age |    | Position held
|                     |  |     |    |              
|Gary D. McGaha       |  |     | 64 |               |  | President and Chief Executive Officer of
both institutions; Director of both
institutions
|Fred L. Faulkner     |  |     | 40 |               |  | Senior Vice President and Senior Lending
Officer of both institutions                    
|Leslye L. Grindle    |  |     | 38 |               |  | Chief Financial Officer of both institutions
and Chief Operating Officer of the bank     
|James S. Cameron     |  |     | 47 |               |  | Director of both institutions                                                            
|George R. Davis, Sr. |  |     | 63 |               |  | Director of both institutions                                                            
|Robert B. Dixon, Jr. |  |     | 59 |               |  | Director of both institutions                                                            
|Richard J. Dumas     |  |     | 62 |               |  | Director of both institutions                                                            
|William Wayne Leslie |  |     | 43 |               |  | Director of both institutions                                                            
|Thomas D. Reese      |  |     | 57 |               |  | Director of both institutions                                                            
|Dan V. Stinchcomb    |  |     | 72 |               |  | Director of both institutions                                                            
|William M. Strain    |  |     | 44 |               |  | Director of both institutions                                                            

Gary D. McGahahas served as President and Chief Executive Officer of the
Company and the Bank since their respective inceptions. He has been a resident
of Fayette County since 1963 and has been a banker since then. He has served
in a senior executive officer capacity at the National Bank of Georgia,
Commercial Bank & Trust in Griffin, Citizens Bank & Trust of Fayette County and
Heritage Bank prior to becoming the organizing President of Southern Community
Bank. From 1991 to 1996, he served as Chief Operations Officer of Citizens
Bank & Trust of Fayette County and on two occasions during that period as
acting Chief Executive Officer. From 1996 to 1999, he served as County
President and as a director at Heritage Bank. He has served as Chairman of the
Fayette County Chamber of Commerce twice and has served as a director of Main
Street  Fayetteville and a member of the Fayetteville Downtown Development
Authority.
He is currently a volunteer member of the board of directors of the

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Joseph Sams
School, and he serves on the state wide board of directors of the Community
Bankers Association of Georgia. Mr. McGaha has been a director of the Bank
since 2000 and a director of the Company since 2001.

Fred L. Faulknerserves as Senior Vice President and Senior Lending
Officer of the Company and the Bank. Mr. Faulkner began working for the Bank
in June of 2000 and has been in banking since 1986. Prior to joining the Bank,
he served as a construction lender for Georgia Federal Bank from 1986 through
1989. He then managed the Southern Metro Atlanta real estate lending operation
for First Union National Bank from 1989 to 1991 before joining Citizens Bank &
Trust. He served as Senior Vice President and Senior Lending Officer at
Citizens through the merger with Newnan Savings Bank and then Branch Bank &
Trust in 1999.

Leslye L. Grindleserves as the Chief Financial Officer of the Company and
the Bank and the Chief Operating Officer of the Bank. Ms. Grindle has been
with the Bank since January 2000. Prior to joining the Bank she worked in
Asset/Liability Management and Operations for the Bankers Bank in Atlanta,
Georgia from April 1997 to February 1999. Before that Ms. Grindle was a Vice
President managing operations and accounting for Citizens Bank and Trust of
Fayette County from July 1991 to January 1997.

James S. Cameronis a resident of Jonesboro, Georgia. Mr. Cameron is a
graduate of the University of Georgia and the University of Georgia School of
Law in Athens, Georgia. Mr. Cameron served as a real estate attorney from 1980
through 1999 with the law firm of McNally, Fox & Cameron, P.C. located in
Fayetteville, Georgia. Since 1994, Mr. Cameron has been a partner and the
President of Cameron Development Corporation, a real estate development
corporation located in Jonesboro, Georgia. Mr. Cameron has been a director of
the Bank since 2000 and a director of the Company since 2001.

George R. Davis, Sr.is a resident of Fayetteville, Georgia. From 1957 to
1961, Mr. Davis was employed in sales at Judson Smith General Merchandise. From
1961 to 1965, Mr. Davis was the owner of Ronald Davis Carpets and since 1965 he
has been the owner of Smith & Davis Fabric & Clothing, Inc., a business which
engages in merchandise sales. Mr. Davis presently serves as President of Smith
& Davis Fabric & Clothing, Inc. Mr. Davis has been a director of the Bank
since 2000 and a director of the Company since 2001.

Robert B. Dixon, Jr.is a resident of Fayetteville, Georgia, and a
graduate of the University of Georgia in Athens, Georgia. Mr. Dixon is a home
builder and developer and holds a 51% interest and serves as President for the
following entities: Chris Dixon & Associates, Inc.; Mike Harrell & Associates,
Inc.; Gary Alford and Associates, Inc.; and Dixon-Alley Builders, Inc. Mr.
Dixon also holds a 26% interest in Steve Alley & Associates, Inc. From 1992 to
1998, Mr. Dixon served as a director of Citizens Bank & Trust of Fayette
County. Mr. Dixon has been a director of the Bank since 2000 and a director of
the Company since 2001.

Richard J. Dumasis a resident of Fayetteville, Georgia. From January 1968
to the present, Mr. Dumas has been the President and Chief Executive Officer of
J&R Clothing, Inc. which owns retail clothing stores. Mr. Dumas has been a
director of the Bank since 2000 and a
director of the Company since 2001.

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##### Table of Contents



William Wayne Leslieis a resident of Griffin, Georgia, and a graduate of
Auburn University in Auburn, Alabama. Since March 1990, Mr. Leslie has been an
owner in Leslie Contracting, Inc., a corporation which engages in general
contracting. He also serves as Chief Executive Officer of Leslie Contracting,
Inc. Since March 1998, Mr. Leslie has been the owner of Leslie Environmental
Inc. and its subsidiaries, which are in the business of specialty contractors
and consultants. Mr. Leslie also serves as Chief Executive Officer of Leslie
Environmental Inc. Mr. Leslie has been a director of the Bank since 2000 and a
director of the Company since 2001.

Thomas D. Reeseserves as Chairman of the Board of the Company and the
Bank. Mr. Reese is a resident of Fayetteville, Georgia and a graduate of
Georgia State University in Atlanta, Georgia. Mr. Reese was licensed in Georgia
as an insurance agent from 1974 to 1991. Since 1990, Mr. Reese has been the
owner of Reese Builders & Developers, Inc. where he serves as President. Since
1986, Mr. Reese has been a partner in Metro South Development (shopping strip
business) and he has been a partner in Hanners & Reese, Partnership since 1990
(office building business). Since 1995, he has been an owner in Tyler
Restaurant Properties, Inc. (restaurant property business) where he serves as
President. Mr. Reese served as a director of Citizens Bank & Trust of Fayette
County from 1990 to 1998. Mr. Reese has been a director of the Bank since 2000
and a director of the Company since 2001.

Dan V. Stinchcombis a resident of Fayetteville, Georgia. Since 1970, Mr.
Stinchcomb has been a builder and developer of real estate. Mr. Stinchcomb has
been a director of the Bank since 2000 and a director of the Company since
2001.

Dr. William M. Strainis a resident of Fayetteville, Georgia. From June 1,
2001 to the present Dr. Strain has worked as a physician for Digestive
Healthcare of Georgia. From June 30, 1989 to June 1, 2001 Dr. Strain practiced
medicine in the field of gastroenterology at the Fayette Medical Clinic of
which he was a partner. Dr. Strain has been a director of the Bank since 2000
and a director of the Company since 2001.

At this time the Companys common stock (its only class of stock) is not
registered under the Securities Exchange Act of 1934 (the Exchange Act), so
its directors and executive officers are not subject to the reporting
requirements of Section 16 of the Exchange Act.




ITEM 10. EXECUTIVE COMPENSATION

The following table provides information with respect to the annual
compensation for services in all capacities for 1999, 2000 and 2001 for our
Chief Executive Officer and our Senior Vice President/Senior Lending Officer.
No other officer earned more than $100,000 in 2001. Because Southern Community
Bank was reorganized into a holding company effective January 1, 2002, the
figures represent compensation received for services rendered to Southern
Community Bank.

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|                          |  |                         |      |              |  |       |         |        |  |         |        |        |  |         |        |                    |  |                   |        |  |  |  |   | 
|------------------------- |  | ----------------------- | ---- | ------------ |  | ----- | ------- | ------ |  | ------- | ------ | ------ |  | ------- | ------ | ------------------ |  | ----------------- | ------ |  |  |  | - | 
|                          |  | Annual compensation (1) |      | Long-term   
|                          |  |                         |      | compensation
|                          |  |                         |      |              |  |       |         |        |  |         |        |        |  | Other   |        |                   
|                          |  |                         |      |              |  |       |         |        |  |         |        |        |  | Annual  |        | Securities         | 
|Name and principal        |  |                         |      |              |  |       |         |        |  |         |        |        |  | Compen- |        | Underlying options |  | All other compen-
|position                  |  | Year                    |      | Salary (2)   |  | Bonus |         | sation |  | granted |        | sation
|                          |  |                         |      |              |  |       |         |        |  |         |        |       
|Gary D. McGaha            |  |                         | 2002 |              |  | $     | 130,200 |        |  | $       | 22,279 |        |  | $       | 13,650 | (3)                |  |                   | 0      |  |  |  | 0 | 
|President and Chief       |  |                         | 2001 |              |  | $     | 124,000 |        |  | $       | 2,000  |        |  | $       | 7,300  | (3)                |  |                   | 10,000 |  |  |  | 0 | 
|Executive Officer         |  |                         | 2000 |              |  | $     | 113,000 |        |  |         | 0      |        |  |         | 0      |                    |  |                   | 0      |  |  |  | 0 | 
|Fred L. Faulkner          |  |                         | 2002 |              |  | $     | 100,000 |        |  | $       | 11,700 |        |  | $       | 6,877  | (4)                |  |                   | 0      |  |  |  | 0 | 
|Senior Vice
President and |  |                         | 2001 |              |  | $     | 95,400  |        |  | $       | 1,700  |        |  | $       | 6,000  | (4)                |  |                   | 3,333  |  |  |  | 0 | 
|Senior Lending Officer    |  |                         | 2000 |              |  | $     | 90,300  |        |  |         | 0      |        |  |         | 0      |                    |  |                   | 0      |  |  |  | 0 | 

(1)  In accordance with the rules of the Securities and Exchange
Commission, the compensation set forth in the table does not include medical,
group life insurance or other benefits that are available to all salaried
employees and certain perquisites and other benefits, securities or property
that do not exceed the lesser of $50,000 or 10% of the officers salary and
bonus shown in the table.

(2)  Includes deferred compensation made at the individuals election pursuant
to the Companys 401(k) Plan.

(3)  Includes directors fees an automobile allowance and 401(k) matching
amounts.

(4)  Includes an automobile allowance and 401(k) matching amounts.

There were no options granted to either Mr. McGaha or to Mr. Faulkner
during 2002 and neither individual exercised any options during 2002. The
following table provides information regarding exercisable and unexercisable
stock options held as of December 31, 2002 by Messrs. McGaha and Faulkner.

Aggregate/year-end option values

|                 |  |                           |             |                           |  |   |                  | 
|---------------- |  | ------------------------- | ----------- | ------------------------- |  | - | ---------------- | 
|                 |  | Number of securities      |             |                           |  |  
|                 |  | underlying                |             | Value of unexercised     
|                 |  | unexercised options       |             | in-the-money options     
|                 |  | granted at year-end (1)   |             | at year-end (1)          
|Name             |  | exercisable/unexercisable |             | exercisable/unexercisable
|                 |  |                           |             |                          
|Gary D. McGaha   |  |                           | 3,333/6,667 |                           |  | $ | 833.33/$1,666.75 | 
|Fred L. Faulkner |  |                           | 1,111/2,222 |                           |  | $ | 277.75/$555.50   | 

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##### Table of Contents





|(1) |  | There was no public trading market for the Companys common stock as of
December 31, 2002. Accordingly, these values have been calculated by
determining the difference between the estimated fair market value of the
Companys common stock underlying the option as of December 31, 2002
($12.50 per share) and the exercise price per share payable upon exercise
of such options ($12.25 per share). In determining the fair market value
of our common stock, our Board of Directors used the per share price of
the Companys public offering of common stock, which ended January 31,
2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Compensation of Directors

Directors of the Bank receive $500 monthly for Board meetings, $200
monthly for loan committee, $200 for each executive committee meeting, and $50
for each of the following committees: investment, technology and audit. A
total of 90,000 options were granted to directors, all dated November 20, 2001.
Each option granted the holder the right to purchase one share of the Banks
common stock for $12.25. The options expire in 2011 and were 100% vested upon
issuance. The options were assumed by the Company when the Bank reorganized
into a holding company structure on January 1, 2002.

Employment Contracts and Termination of Employment, and Change in Control
Arrangements

Gary McGaha employment agreement

On January 1, 2001 the Bank entered into an employment agreement with its
President and Chief Executive Officer, Gary D. McGaha. The agreement had an
initial term of three years and is automatically extended for an additional
year on each anniversary unless either party gives the other six months notice.

Mr. McGahas initial annual base salary was $114,000. Mr. McGaha is
entitled to receive annually an increase (but in no event a decrease) in salary
as may be determined by the Banks Board of Directors. In addition to his
salary, Mr. McGaha is eligible for such incentives and discretionary bonuses as
may be authorized by the Board of Directors to the Banks key management
employees. The incentive compensation shall be based on meeting or exceeding
the attainment of certain business goals to be established by the Board of
Directors, including the following:

|            |  |                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|First Year  |  | $10,000 bonus based on attaining $18,000,000 in assets by June
2, 2001 (12 months from the opening of the Bank).                    
|Second Year |  | $10,000 bonus based on attaining $30,000,000 in assets by June
2, 2002 (24 months from opening of the Bank).                        
|Third Year  |  | $15,000 bonus based on growth and earnings performance
conducive to safety and soundness to be determined by the
Board of Directors.

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|            |  |                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|Fourth Year |  | $15,000 bonus based on growth and earnings performance
conducive to safety and soundness to be determined by the
Board of Directors.
|Fifth Year  |  | $15,000 bonus based on growth and earnings performance
conducive to safety and soundness to be determined by the
Board of Directors.

Mr. McGaha is also entitled to receive such additional benefits as the
Banks Board of Directors may determine in its discretion to be commensurate
with a de novo bank in a similar environment.

If the Bank terminates Mr. McGahas employment other than upon death or
disability or for cause then it will pay to Mr. McGaha severance compensation
equal to Mr. McGahas base salary then in effect, which shall be paid over a
one-year period of time. Mr. McGaha will also be entitled to insurance
benefits equal to those being received on the termination date for a 12 month
period of time or until Mr. McGaha becomes employed by another employer,
whichever is shorter.

If the Bank experiences a change in control and as a result of such change
in control Mr. McGaha either:



| |  |  | is terminated (except for cause) during the one year
period after the change in control and before Mr. McGaha reaches
the age of 75; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | resigns after an adverse change in duties or salary
during the one year period after the change in control                             

then Mr. McGaha shall be entitled to receive severance compensation in an
amount equal to 150% of his base salary then in effect in a lump sum within 14
days following the termination or resignation.

The employment agreement also contains restrictions on the ability of Mr.
McGaha to compete with the Bank for a period of one year following the date of
termination for any reason whatsoever. He is also restricted on the disclosure
and use of the Banks confidential information and trade secrets. In addition,
he is restricted in his ability to solicit Bank employees or Bank customers
with whom he had material contact during the one-year period immediately
preceding the termination of his employment.

Fred Faulkner employment agreement

On January 1, 2001 the Bank entered into an employment agreement with its
Senior Vice President and Chief Lending Officer, Fred L. Faulkner. The
agreement had an initial term of two years and is automatically extended for an
additional year on each anniversary unless either party gives the other six
months notice.

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##### Table of Contents



Mr. Faulkners initial annual base salary was $95,400. Mr. Faulkner is
entitled to receive annually an increase (but in no event a decrease) in salary
as may be determined by the Banks President and approved by the Board of
Directors. In addition to his salary, Mr. Faulkner is eligible for such
incentives and discretionary bonuses as may be authorized by the Board of
Directors to the Banks key management employees. The incentive compensation
shall be based on meeting or exceeding the attainment of certain business goals
to be established by the Banks President and its Board of Directors.

Mr. Faulkner is also entitled to receive such additional benefits as the
Banks Board of Directors may determine in its discretion to be commensurate
with a de novo bank in a similar environment.

If the Bank terminates Mr. Faulkners employment other than upon death or
disability or for cause then it will pay to Mr. Faulkner severance compensation
equal to Mr. Faulkners base salary then in effect, which shall be paid over a
one-year period of time. Mr. Faulkner will also be entitled to insurance
benefits equal to those being received on the termination date for a 12 month
period of time or until Mr. Faulkner becomes employed by another employer,
whichever is shorter.

If the Bank experiences a change in control and as a result of such change
in control Mr. Faulkner either:



| |  |  | is terminated (except for cause) during the one year
period after the change in control and before Mr. Faulkner
reaches the age of 72; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | resigns after an adverse change in duties or salary
during the one year period after the change in control                               

then Mr. Faulkner shall be entitled to receive severance compensation in an
amount equal to 150% of his base salary then in effect in a lump sum within 14
days following the termination or resignation.

The employment agreement also contains restrictions on the ability of Mr.
Faulkner to compete with the Bank for a period of one year following the date
of termination for any reason whatsoever. He is also restricted on the
disclosure and use of the Banks confidential information and trade secrets.
In addition, he is restricted in his ability to solicit Bank employees or Bank
customers with whom he had material contact during the one-year period
immediately preceding the termination of his employment.




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of January 31, 2003, the amount and
percentage of the Companys common stock beneficially owned by each person who,
to the best information and

41



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knowledge of the Company, beneficially owned 5% or more of the outstanding
shares of the Company.

|                            |  |                    |         |                           |  |  |      |  
|--------------------------- |  | ------------------ | ------- | ------------------------- |  |  | ---- | -
|Name and Address            |  | Common Stock       |         | Percentage of Outstanding
|of Beneficial Owner         |  | Beneficially Owned |         | Common Stock             
|                            |  |                    |         |                          
|Mark Wurster                |  |                    | 100,006 | (1)                       |  |  | 6.89 | %
|1034 Antioch Road           |  |                    |         |                           |  |  |      |  
|Fayetteville, Georgia 30215 |  |                    |         |                           |  |  |      |  

The following table sets forth the beneficial ownership of our common
stock as of January 1, 2003, by each director, our Chief Executive Officer, and
Senior Vice President, and all of our directors and our Chief Executive
Officer, and Senior Vice President as a group.

|                                                  |  |                        |         |            |  |  |      |  
|------------------------------------------------- |  | ---------------------- | ------- | ---------- |  |  | ---- | -
|                                                  |  | Number of shares of    |         |            |  | 
|Name and address                                  |  | common stock           |         |            |  | 
|of beneficial owner                               |  | beneficially owned (1) |         | Percentage
|                                                  |  |                        |         |           
|Gary D. McGaha                                    |  |                        | 18,513  | (2)        |  |  | 1.27 | %
|130 Brittany Chase
Fayetteville, Georgia 30214    |  |                        |         |            |  |  |      |  
|Fred L. Faulkner                                  |  |                        | 14,321  | (3)        |  |  | 0.99 | %
|135 Park View
Fayetteville, Georgia 30215         |  |                        |         |            |  |  |      |  
|James S. Cameron                                  |  |                        | 53,500  | (4)        |  |  | 3.66 | %
|8666 Shoreline Drive
Jonesboro, Georgia 30236     |  |                        |         |            |  |  |      |  
|George R. Davis, Sr.                              |  |                        | 57,900  | (4)        |  |  | 3.96 | %
|365 Ebenezer Road
Fayetteville, Georgia 30215     |  |                        |         |            |  |  |      |  
|Robert B. Dixon, Jr.                              |  |                        | 86,100  | (4)(5)     |  |  | 5.89 | %
|105 Meetinghouse Road
Fayetteville, Georgia 30215 |  |                        |         |            |  |  |      |  
|Richard J. Dumas                                  |  |                        | 106,000 | (4)(6)     |  |  | 7.26 | %
|390 Birkdale Drive
Fayetteville, Georgia 30215    |  |                        |         |            |  |  |      |  

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|                                                                       |  |                        |         |            |  |  |       |  
|---------------------------------------------------------------------- |  | ---------------------- | ------- | ---------- |  |  | ----- | -
|                                                                       |  | Number of shares of    |         |            |  | 
|Name and address                                                       |  | common stock           |         |            |  | 
|of beneficial owner                                                    |  | beneficially owned (1) |         | Percentage
|                                                                       |  |                        |         |           
|William Wayne Leslie                                                   |  |                        | 55,900  | (4)(7)     |  |  | 3.83  | %
|5451 W. McIntosh Road
Griffin, Georgia 30223                           |  |                        |         |            |  |  |       |  
|Thomas D. Reese                                                        |  |                        | 95,205  | (4)(8)     |  |  | 6.31  | %
|152 Hampton Road
Fayetteville, Georgia 30215                           |  |                        |         |            |  |  |       |  
|Dan V. Stinchcomb                                                      |  |                        | 60,750  | (4)        |  |  | 4.16  | %
|218 Ebenezer Road
Fayetteville, Georgia 30215                          |  |                        |         |            |  |  |       |  
|William M. Strain                                                      |  |                        | 46,000  | (4)(9)     |  |  | 3.15  | %
|190 Old Highway 85
Fayetteville, Georgia 30215                         |  |                        |         |            |  |  |       |  
|All directors and named
executive officers as a whole
(10 individuals) |  |                        | 594,189 |            |  |  | 38.45 | %



|(1) |  | On a fully-diluted basis, except as otherwise indicated, the persons
named in the table have sole voting and investment power with respect to
all shares shown as beneficially owned by them. The information shown
above is based upon information furnished by the named persons and based
upon beneficial ownership concepts set forth in rules promulgated under
the Exchange Act. Under such rules, a person is deemed to be a beneficial
owner of a security if that person has or shares voting power, which
includes the power to vote or to direct the voting of such security, or
investment power, which includes the power to dispose or to direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any security of which that person has the right to acquire
beneficial ownership within 60 days. In accordance with SEC rules,
percentages were calculated based on the amount of outstanding shares
plus, for each such person or group, any shares that person or group has
the right to acquire within 60 days through stock options.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | With respect to Mr. McGaha, beneficial ownership as reported in the table
includes 3,333 incentive stock options that are exercisable and 7,000
shares of the Companys Common Stock held in Mr. McGahas IRA account.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(3) |  | Includes 6,000 shares of our common stock held by Mr. Faulkners wife and
1,111 incentive stock options that are currently exercisable. Mr.
Faulkner disclaims ownership of the shares held by his wife.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(4) |  | Includes options to purchase 10,000 shares of common stock issued
pursuant to the Banks 2001 Directors Stock Option Plan and assumed by the
Company when the Bank reorganized into a holding company structure
effective January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(5) |  | With respect to Mr. Dixon, beneficial ownership as reported in the table
includes 29,824                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

43



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|    |  | shares of the Companys Common Stock held in Mr. Dixons
IRA account, 14,400 shares of the Companys Common Stock held in the name of Chris Dixon &
Associates, Inc. Profit Sharing Plan, and 4,528 shares held in an IRA
account by Mr. Dixons wife. Mr. Dixon disclaims ownership of shares
held by his wife.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(6) |  | With respect to Mr. Dumas, beneficial ownership as reported in the table
includes 16,000 shares of the Companys Common Stock held in the name of
J&R Clothing, Inc. Profit Sharing Plan.                                                                                                                       
|   
|(7) |  | With respect to Mr. Leslie, beneficial ownership as reported in the table
includes 2,500 shares of the Companys Common Stock held in Mr. Leslies
IRA account and 6,000 shares of the Companys Common Stock held in the
name of Leslie Contracting, Inc.                                                      
|   
|(8) |  | With respect to Mr. Reese, beneficial ownership as reported in the table
includes 31,600 shares of the Companys Common Stock held in Mr. Reeses
IRA account.                                                                                                                                                  
|   
|(9) |  | With respect to Mr. Strain, beneficial ownership as reported in the table
includes 5,000 shares of the Companys Common Stock held in Mr. Strains
IRA account.                                                                                                                                                 




ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain of the directors and executive officers of the Company, members of
their families and companies or firms with which they are associated, were
customers of and had banking transactions with Southern Community Bank in the
ordinary course of business during fiscal year 2001, and such transactions are
expected to continue in the future. All loans and commitments to loan included
in these transactions were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and, in the opinion of management, did not
involve more than a nominal risk of collectibility or present other unfavorable
features. None of the loans outstanding to directors or officers of the
Company, members of their families or companies or firms with which they are
associated were non-performing as of December 31, 2001. Total loans
outstanding to all directors and executive officers of the Company and Southern
Community Bank, or affiliates of such persons (including members of the
immediate families of such persons or companies in which such persons had a 10%
or more beneficial interest), amounted to an aggregate of $6,025,080 at
December 31, 2002.




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 |  | Description                                                                                                                                                     
|               |  |                                                                                                                                                                 
|3.1            |  | 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)

44



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|               |  |                                                                                                                                                                                                                                             
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                 
|               |  |                                                                                                                                                                                                                                             
|3.2            |  | Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrants Form SB-2 filed with the
Commission on April 12, 2002)                                                                                               
|10.1           |  | 2001 Incentive Stock Option Plan for Key Employees
(incorporated by reference to Exhibit 10.2 to the
Registrants Form SB-2 filed with the Commission on April
12, 2002)*                                                                   
|10.2           |  | Employment Agreement between Gary D. McGaha and Southern
Community Bank (incorporated by reference to Exhibit 10.3
to the Registrants Form SB-2 filed with the Commission
on April 12, 2002)*                                              
|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 Registrant                                                                                                                                                                                                              
|99.1           |  | Certificate of the CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                                                                                                                                            
|99.2           |  | Certificate of the CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                                                                                                                                            
|*              |  | Denotes a 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 2002.




ITEM 14. CONTROLS AND PROCEDURES



|(a) |  | Evaluation of disclosure controls and procedures                                                                                                                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Companys Chief Executive Officer and Chief Financial Officer believe
that the Companys disclosure controls and procedures, as defined in
Securities Exchange Act Rules 13a-14(c) and 15d-14(c), are effective.
This conclusion was reached after an evaluation of these controls and
procedures within 90 days of the filing of this Report.
|   
|(b) |  | Changes in internal controls                                                                                                                                                                                                                                                                                                                      
|   
|    |  | We are not aware of any significant changes in the Companys internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses, or in other factors that could
significantly affect these controls after December 31, 2002.                                                                     

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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 27, 2003 |  | By:                                              |  | /s/ Gary D. McGaha                                      
|                     |  |                                                  |  |                                                         
|                     |  |                                                  |  | /s/ Gary D. McGaha
President 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. McGahaGary D. McGaha
Chief Executive Officer
And Director
[Principal Executive Officer]                           |  | Date: March 27, 2003 
|                                                                                                                             
|/s/ Leslye L. GrindleLeslye L. Grindle
Chief Financial Officer
[Principal Financial Officer and
Principal Accounting Officer] |  | Date: March 27, 2003 
|                                                                                                                             
|James S. Cameron, Director                                                                                                    |  | Date: March    , 2003
|                                                                                                                             
|/s/ George R. DavisGeorge R. Davis, Sr., Director                                                                             |  | Date: March 27, 2003 
|                                                                                                                             
|/s/ Robert B. Dixon, Jr.Robert B. Dixon, Jr., Director                                                                        |  | Date: March 27, 2003 

46



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|                                                       |  |                         
|------------------------------------------------------ |  | ------------------------
|                                                      
|Richard J. Dumas, Director                             |  | Date:  March      , 2003
|                                                      
|/s/ William Wayne LeslieWilliam Wayne Leslie, Director |  | Date:  March 27, 2003   
|                                                      
|Thomas D. Reese, Director                              |  | Date:  March      , 2003
|                                                      
|/s/ Dan V. StinchcombDan V. Stinchcomb, Director       |  | Date:  March 27, 2003   
|                                                      
|William M. Strain, Director                            |  | Date:  March      , 2003

47



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CERTIFICATION

I, Gary D. McGaha, certify that:

1.     I have reviewed this annual report on Form 10-KSB of Southern
Community Bancshares, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designated such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                                     
|-------------------- |  | ----------------------------------------------------
|Date: March 27, 2003 |  |                                                     
|                     |  |                                                     
|                     |  | /s/ Gary D. McGaha                                  
|                     |  | Gary D. McGaha
President and Chief Executive Officer

48



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CERTIFICATION

I, Leslye L. Grindle, certify that:

1.     I have reviewed this annual report on Form 10-KSB of Southern
Community Bancshares, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designated such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                              
|-------------------- |  | ---------------------------------------------
|Date: March 27, 2003 |  |                                              
|                     |  |                                              
|                     |  | /s/ Leslye L. Grindle                        
|                     |  | Leslye L. Grindle
Principal Financial Officer

49



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SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(d) OF THE
EXCHANGE ACT BY NON-REPORTING ISSUERS

A copy of Registrants proxy materials for its 2003 accompany this report.

50



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SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2002

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-7-21






---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors
Southern Community Bancshares, Inc. and Subsidiary
Fayetteville, Georgia

We have audited the accompanying consolidated balance sheets of Southern
Community Bancshares, Inc. and subsidiaryas of December 31, 2002 and 2001, 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, 2002 and 2001, 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
January 31, 2003

F-1



---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001

2002
        
        2001AssetsCash and due from banks
        
        $
        3,789,657
        
        
        $
        1,404,674Federal funds sold
        
        
        
        
        
        
        2,532,000Securities available-for-sale
        
        
        22,798,690
        
        
        
        13,128,377Restricted equity securities
        
        
        141,800
        
        
        
        Loans
        
        
        90,921,579
        
        
        
        65,723,386Less allowance for loan losses
        
        
        1,141,095
        
        
        
        803,855Loans, net
        
        
        89,780,484
        
        
        
        64,919,531Premises and equipment
        
        
        3,711,402
        
        
        
        3,061,502Other assets
        
        
        854,827
        
        
        
        699,746Total assets
        
        $
        121,076,860
        
        
        $
        85,745,830Liabilities and Shareholders EquityDepositsNoninterest-bearing
        
        $
        11,879,110
        
        
        $
        10,648,677Interest-bearing
        
        
        87,629,635
        
        
        
        64,046,303Total deposits
        
        
        99,508,745
        
        
        
        74,694,980Federal funds purchased
        
        
        719,000
        
        
        
        Securities sold under repurchase agreements
        
        
        3,780,013
        
        
        
        2,210,239Other liabilities
        
        
        437,099
        
        
        
        480,123Total liabilities
        
        
        104,444,857
        
        
        
        77,385,342Commitments and contingenciesShareholders equityCapital stock, no par value; 10,000,000 shares authorized;
1,394,567 shares issued and outstanding
        
        
        15,342,615
        
        
        
        Common stock, $5 par value; 5,000,000 shares authorized;
810,983 shares issued and outstanding
        
        
        
        
        
        
        4,054,915Capital surplus
        
        
        
        
        
        
        4,050,868Retained earnings
        
        
        1,182,008
        
        
        
        124,163Accumulated other comprehensive income
        
        
        107,380
        
        
        
        130,542Total shareholders equity
        
        
        16,632,003
        
        
        
        8,360,488Total liabilities and shareholders equity
        
        $
        121,076,860
        
        
        $
        85,745,830


See Notes to Consolidated Financial Statements.

F-2



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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001

2002
        
        2001Interest incomeLoans, including fees
        
        $
        6,163,831
        
        
        $
        4,561,010Taxable securities
        
        
        630,261
        
        
        
        1,090,711Nontaxable securities
        
        
        64,604
        
        
        
        Federal funds sold
        
        
        71,215
        
        
        
        208,716Total interest income
        
        
        6,929,911
        
        
        
        5,860,437Interest expenseDeposits
        
        
        2,358,621
        
        
        
        2,819,354Other borrowings
        
        
        34,330
        
        
        
        94,342Total interest expense
        
        
        2,392,951
        
        
        
        2,913,696Net interest income
        
        
        4,536,960
        
        
        
        2,946,741Provision for loan losses
        
        
        359,285
        
        
        
        389,000Net interest income after provision for loan losses
        
        
        4,177,675
        
        
        
        2,557,741Other incomeService charges on deposit accounts
        
        
        267,864
        
        
        
        148,616Gain on sale of securities available-for-sale
        
        
        51,239
        
        
        
        235,055Gain on sale of loans
        
        
        39,971
        
        
        
        Other operating income
        
        
        35,013
        
        
        
        67,049Total other income
        
        
        394,087
        
        
        
        450,720Other expenseSalaries and employee benefits
        
        
        1,534,289
        
        
        
        1,166,831Equipment and occupancy expenses
        
        
        414,900
        
        
        
        363,179Other operating expenses
        
        
        978,585
        
        
        
        632,818Total other expense
        
        
        2,927,774
        
        
        
        2,162,828Income before income taxes
        
        
        1,643,988
        
        
        
        845,633Income taxes
        
        
        586,143
        
        
        
        47,607Net income
        
        $
        1,057,845
        
        
        $
        798,026Basic earnings per share
        
        $
        1.09
        
        
        $
        0.98Diluted earnings per share
        
        $
        1.08
        
        
        $
        0.98


See Notes to Consolidated Financial Statements.

F-3



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SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001

2002
        
        2001Net income
        
        $
        1,057,845
        
        
        $
        798,026Other comprehensive income (loss):Unrealized holding gains on securities available-for-sale
arising during period, net of tax of $5,274 and $169,331, respectively
        
        
        8,606
        
        
        
        50,538Reclassification adjustment for gains realized in net income,
net of taxes of $19,471 and $89,321, respectively
        
        
        (31,768
        )
        
        
        (145,734
        )Other comprehensive loss
        
        
        (23,162
        )
        
        
        (95,196
        )Comprehensive income
        
        $
        1,034,683
        
        
        $
        702,830


See Notes to Consolidated Financial Statements.

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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001

Retained
        
        AccumulatedCapital Stock
        
        
        
        Earnings
        
        Other
        
        TotalCapital
        
        (Accumulated
        
        Comprehensive
        
        Shareholders'Shares
        
        Amount
        
        Surplus
        
        Deficit)
        
        Income
        
        EquityBalance, December 31, 2000
        
        
        810,983
        
        
        $
        4,054,915
        
        
        $
        4,050,868
        
        
        $
        (673,863
        )
        
        $
        225,738
        
        
        $
        7,657,658Net income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        798,026
        
        
        
        
        
        
        
        798,026Other comprehensive loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (95,196
        )
        
        
        (95,196
        )Balance, 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
        
        
        $
        16,632,003


See Notes to Consolidated Financial Statements.

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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001

2002
        
        2001OPERATING ACTIVITIESNet income
        
        $
        1,057,845
        
        
        $
        798,026Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
        
        
        236,354
        
        
        
        208,794Provision for loan losses
        
        
        359,285
        
        
        
        389,000Gain on sale of securities available-for-sale
        
        
        (51,239
        )
        
        
        (235,055
        )Loss on disposal of equipment
        
        
        33,506
        
        
        
        Deferred income taxes
        
        
        (154,389
        )
        
        
        (125,783
        )Increase (decrease) in taxes payable
        
        
        (52,028
        )
        
        
        119,446(Increase) decrease in interest receivable
        
        
        (41,505
        )
        
        
        47,544Increase in interest payable
        
        
        18,192
        
        
        
        22,750Net other operating activities
        
        
        45,820
        
        
        
        34,651Net cash provided by operating activities
        
        
        1,451,841
        
        
        
        1,259,373INVESTING ACTIVITIESPurchase of securities available-for-sale
        
        
        (23,141,976
        )
        
        
        (15,846,351
        )Proceeds from maturities of securities available-for-sale
        
        
        6,296,285
        
        
        
        7,140,434Proceeds from sales of securities available-for-sale
        
        
        7,189,260
        
        
        
        17,008,256Purchase of restricted equity securities
        
        
        (141,800
        )
        
        
        Net decrease in federal funds sold
        
        
        2,532,000
        
        
        
        118,000Net increase in loans
        
        
        (25,220,238
        )
        
        
        (34,235,358
        )Purchase of premises and equipment
        
        
        (919,760
        )
        
        
        (203,367
        )Net cash used in investing activities
        
        
        (33,406,229
        )
        
        
        (26,018,386
        )FINANCING ACTIVITIESNet increase in deposits
        
        
        24,813,765
        
        
        
        26,814,475Proceeds from issuance of capital stock
        
        
        7,294,800
        
        
        
        Stock issuance costs
        
        
        (57,968
        )
        
        
        Net increase in federal funds purchased
        
        
        719,000
        
        
        
        Net increase (decrease) in repurchase agreements
        
        
        1,569,774
        
        
        
        (2,603,855
        )Net cash provided by financing activities
        
        
        34,339,371
        
        
        
        24,210,620Net increase (decrease) in cash and due from banks
        
        
        2,384,983
        
        
        
        (548,393
        )Cash and due from banks at beginning of year
        
        
        1,404,674
        
        
        
        1,953,067Cash and due from banks at end of year
        
        $
        3,789,657
        
        
        $
        1,404,674SUPPLEMENTAL DISCLOSURECash paid for interest
        
        $
        2,374,759
        
        
        $
        2,890,946Cash paid for taxes
        
        $
        792,560
        
        
        $
        


See Notes to Consolidated Financial Statements.

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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.
        
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of BusinessSouthern 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) located in Fayetteville,
Fayette County, 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 EstimatesThe consolidated financial statements include the
accounts of the Company and its subsidiary.
Significant intercompany transactions and balances
have been eliminated in consolidation.In preparing financial statements in conformity 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 in the near term relate to the
determination of the allowance for loan losses and
deferred taxes.Cash, Due From Banks and Cash FlowsFor 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 $329,000 at
December 31, 2002.SecuritiesDebt 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 other
comprehensive income, net of the related deferred tax
effect. Equity securities, including restricted
equity securities without a readily determinable fair
value, are recorded at cost.Purchase premiums and discounts are recognized in
interest income using the interest method over the
terms of the securities. Gains and losses on the sale
of securities are determined using the specific
identification method. 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.LoansLoans are reported at their outstanding principal
balances less deferred loan fees and the allowance
for loan losses. Interest income is accrued on the
unpaid 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.


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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.
        
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Loans (Continued)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.
Interest income on nonaccrual loans is subsequently
recognized only to the extent cash payments are
received, until the loans are returned to accrual
status.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 in the
loan portfolio. The allowance for loan losses is
evaluated on a regular basis by management and is
based upon managements periodic review of the
collectibility of the loans in light of historical
experience, the nature and volume of the loan
portfolio, adverse situations that may affect the
borrowers ability to repay, estimated value of any
underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective
as it requires estimates that are susceptible to
significant revision as more information becomes
available. 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
Companys allowance for loan losses, and may require
the Company to make additions to the allowance based
on their judgment about information available to them
at the time of their examinations.A loan is considered impaired when it is probable 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.Premises and EquipmentLand is carried at cost. Premises and equipment are
carried at cost less accumulated depreciation
computed principally on the straight-line method over
the estimated useful lives of the assets.Income TaxesDeferred 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 PlanProfit-sharing plan costs are based on a percentage
of individual employees salary, not to exceed the
amount that can be deducted for federal income tax
purposes.


F-8



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.
        
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Stock Compensation PlansAt December 31, 2002, the Company has two stock-based
employee compensation plans, which are described more
fully in Note 8. The Company accounts for those plans
under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No
stock-based employee compensation cost is reflected
in net income, as all options granted under these
plans have an exercise price equal to the market
value of the underlying stock on the date of grant.
The following table illustrates the effect on net
income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS
Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.


Years Ended December 31,2002
        
        2001Net income, as reported
        
        $
        1,057,845
        
        
        $
        798,026Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
        
        
        25,563
        
        
        
        315,195Pro forma net income
        
        $
        1,032,282
        
        
        $
        482,831Earnings per share:Basic  as reported
        
        $
        1.09
        
        
        $
        0.98Basic  pro forma
        
        $
        1.06
        
        
        $
        0.60Diluted  as reported
        
        $
        1.08
        
        
        $
        0.98Diluted  pro forma
        
        $
        1.06
        
        
        $
        0.60


Earnings Per ShareBasic earnings per share are computed by dividing net
income by the weighted-average number of shares of
common stock outstanding. Diluted earnings per share
are computed by dividing net income by the sum of the
weighted-average number of shares of common stock
outstanding and dilutive potential common shares.
Potential common shares consist of options to
purchase capital stock. The weighted average number
of shares outstanding for the years ended December
31, 2002 and 2001 was 969,285 and 810,983,
respectively.Comprehensive IncomeAccounting 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.


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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.
        
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Accounting StandardsIn December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation-Transition
and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that
voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It
also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects on
reported net income of an entitys accounting policy
decisions with respect to stock-based employee
compensation. The Company has not elected to adopt
the recognition provisions of this Statement for
stock-based employee compensation and has elected to
continue with accounting methodology in Opinion No.
25 as permitted by SFAS No. 123.NOTE 2.
        
        SECURITIESThe amortized cost and fair value of securities
available-for-sale are summarized as follows:


Gross
        
        GrossAmortized
        
        Unrealized
        
        Unrealized
        
        FairCost
        
        Gains
        
        Losses
        
        ValueDecember 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
        )
        
        $
        22,798,690December 31, 2001:U. S. Government and
agency securities
        
        $
        9,208,051
        
        
        $
        209,068
        
        
        $
        (15,225
        )
        
        $
        9,401,894Mortgage-backed securities
        
        
        3,709,774
        
        
        
        16,722
        
        
        
        (13
        )
        
        
        3,726,483$
        12,917,825
        
        
        $
        225,790
        
        
        $
        (15,238
        )
        
        $
        13,128,377


Securities with a carrying value of $4,368,807 and $5,057,829
at December 31, 2002 and 2001, respectively, were pledged to
secure public deposits and for other purposes as required or
permitted by law.


F-10



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.
        
        SECURITIES (Continued)The amortized cost and fair value of securities as of December
31, 2002 by contractual maturity are shown below. 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 Fair
        
        Cost ValueDue from one to five years
        
        $
        500,000
        
        
        $
        504,655Due from five to ten years
        
        
        4,567,342
        
        
        
        4,662,629Due after ten years
        
        
        3,609,477
        
        
        
        3,597,423Mortgage-backed securities
        
        
        13,948,678
        
        
        
        14,033,983$
        22,625,497
        
        
        $
        22,798,690


Gains and losses on sales of securities available-for-sale
consist of the following:


Years Ended December 31,2002
        
        2001Gross gains
        
        $
        51,239
        
        
        $
        246,441Gross losses
        
        
        
        
        
        
        (11,386
        )Net realized gains
        
        $
        51,239
        
        
        $
        235,055


NOTE 3.
        
        LOANSThe composition of loans is summarized as follows:


December 31,2002
        
        2001Commercial
        
        $
        11,332,000
        
        
        $
        12,198,000Real estate  construction
        
        
        27,859,000
        
        
        
        19,590,000Real estate  mortgage
        
        
        48,522,000
        
        
        
        31,894,000Consumer installment and other
        
        
        3,334,023
        
        
        
        2,151,36691,047,023
        
        
        
        65,833,366Deferred loan fees
        
        
        (125,444
        )
        
        
        (109,980
        )Allowance for loan losses
        
        
        (1,141,095
        )
        
        
        (803,855
        )Loans, net
        
        $
        89,780,484
        
        
        $
        64,919,531


F-11



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.
        
        LOANS (Continued)Changes in the allowance for loan losses are as follows:


Years Ended December 31,2002
        
        2001Balance, beginning of year
        
        $
        803,855
        
        
        $
        420,000Provision for loan losses
        
        
        359,285
        
        
        
        389,000Loans charged off
        
        
        (22,045
        )
        
        
        (5,145
        )Recoveries of loans previously charged off
        
        
        
        
        
        
        Balance, end of year
        
        $
        1,141,095
        
        
        $
        803,855


The following is a summary of information pertaining to
impaired loans:


As of and for the Years EndedDecember 31,2002
        
        2001Impaired loans without a valuation allowance
        
        $
        
        
        
        $
        Impaired loans with a valuation allowance
        
        
        341,052
        
        
        
        49,546Total impaired loans
        
        $
        341,052
        
        
        $
        49,546Valuation allowance related to impaired loans
        
        $
        68,268
        
        
        $
        18,517Average investment in impaired loans
        
        $
        53,152
        
        
        $
        12,620Interest income recognized on impaired loans
        
        $
        50
        
        
        $
        Nonaccrual loans
        
        $
        341,052
        
        
        $
        49,546Loans past due ninety days or more and still accruing interest
        
        $
        22,000
        
        
        $
        6,000


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, 2002 are as follows:


Balance, beginning of year
        
        $
        7,671,549Advances
        
        
        2,788,815Repayments
        
        
        (4,435,284
        )Balance, end of year
        
        $
        6,025,080


F-12



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.
        
        PREMISES AND EQUIPMENTPremises and equipment are summarized as follows:


December 312002
        
        2001Land and improvements
        
        $
        851,096
        
        
        $
        389,466Buildings
        
        
        2,136,975
        
        
        
        2,091,669Furniture and equipment
        
        
        1,083,018
        
        
        
        877,460Construction in process (estimated additional
costs to complete $575,000)
        
        
        145,325
        
        
        
        4,216,414
        
        
        
        3,358,595Accumulated depreciation
        
        
        (505,012
        )
        
        
        (297,093
        )$
        3,711,402
        
        
        $
        3,061,502


NOTE 5.
        
        DEPOSITSThe aggregate amount of time deposits in denominations of
$100,000 or more at December 31, 2002 and 2001 was $19,788,504
and $14,478,321, respectively. The scheduled maturities of
time deposits at December 31, 2002 are as follows:


2003
        
        $
        45,868,8452004
        
        
        7,870,1522005
        
        
        1,088,5362006
        
        
        175,9202007
        
        
        1,989,483$
        56,992,936


NOTE 6.
        
        SECURITIES SOLD UNDER REPURCHASE AGREEMENTSSecurities 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, 2002 and 2001 were
$3,780,013 and $2,210,239, respectively.NOTE 7.
        
        EMPLOYEE BENEFIT PLANThe 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 $10,951 for the
year ended December 31, 2002. There were no contributions for
the year ended December 31, 2001.


F-13



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.
        
        STOCK OPTIONSThe Company has a 2001 stock option plan reserving 50,000
shares of capital stock for the granting of options to key
employees. These options expire ten years from the grant date
and vest in accordance with vesting schedules determined by
the Board of Directors.The Company has a 2001 stock option plan reserving 90,000
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.Other pertinent information related to the options as of
December 31, 2002 and 2001 is as follows:


2002
        
        2001Weighted-
        
        
        
        Weighted-Average
        
        
        
        AverageExercise
        
        
        
        ExerciseShares
        
        Price
        
        Shares
        
        PriceOutstanding at beginning of year
        
        
        113,833
        
        
        $
        12.25
        
        
        
        
        
        
        $
        Granted
        
        
        
        
        
        
        
        
        
        
        113,833
        
        
        
        12.25Exercised
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Outstanding at end of year
        
        
        113,833
        
        
        $
        12.25
        
        
        
        113,833
        
        
        $
        12.25Options exercisable at end of year
        
        
        97,944
        
        
        $
        12.25
        
        
        
        90,000
        
        
        $
        12.25Weighted average fair value of
options granted during the year
        
        
        
        
        
        $
        N/A
        
        
        
        
        
        
        $
        5.19Weighted average life of
options outstanding
        
        
        
        
        
        8.9 years
        
        
        
        
        
        9.9 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, 2001Dividend yield
        
        
        0.00
        %Expected life
        
        10 yearsExpected volatility
        
        
        0.01
        %Risk-free interest rate
        
        
        5.59
        %


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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.
        
        INCOME TAXESThe components of income tax expense are as follows:


Years Ended December 31,2002
        
        2001Current
        
        $
        740,532
        
        
        $
        119,446Deferred
        
        
        (154,389
        )
        
        
        182,217Change in valuation allowance
        
        
        
        
        
        
        (254,056
        )$
        586,143
        
        
        $
        47,607


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 31,2002
        
        2001Income tax at statutory rate
        
        $
        558,956
        
        
        $
        287,515Tax-exempt interest
        
        
        (21,965
        )
        
        
        Disallowed interest
        
        
        4,873
        
        
        
        State tax
        
        
        44,721
        
        
        
        15,793Change in valuation allowance
        
        
        
        
        
        
        (254,056
        )Other items
        
        
        (442
        )
        
        
        (1,645
        )Income tax expense
        
        $
        586,143
        
        
        $
        47,607


The components of deferred income taxes are as follows:


December 31,2002
        
        2001Deferred tax assets:Loan loss reserves
        
        $
        317,412
        
        
        $
        122,691Preopening and organization expenses
        
        
        78,768
        
        
        
        79,195Loan fees
        
        
        50,587
        
        
        
        446,767
        
        
        
        201,886Deferred tax liabilities:Depreciation
        
        
        82,547
        
        
        
        40,077Cash basis adjustment for income tax reporting purposes
        
        
        137,992
        
        
        
        89,970Securities available-for-sale
        
        
        65,814
        
        
        
        80,010286,353
        
        
        
        210,057Net deferred tax assets (liabilities)
        
        $
        160,414
        
        
        $
        (8,171
        )


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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10.
        
        COMMITMENTS AND CONTINGENCIESLoan CommitmentsThe 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 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 as of December
31, 2002 and 2001 is as follows:


2002
        
        2001Commercial letters of credit
        
        $
        773,004
        
        
        $
        864,864Commitments to extend credit
        
        
        17,510,685
        
        
        
        16,784,817$
        18,283,689
        
        
        $
        17,649,681


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. Since many of
the commitments are expected to expire without being
drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.Commercial letters of credit are conditional
commitments issued by the Company to guarantee the
performance of a customer to a third party. Those
letters of credit 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 would be required in
instances which the Company deems necessary.ContingenciesIn 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 11
        
        CONCENTRATIONS OF CREDITThe Company originates primarily commercial, residential, real
estate, and consumer loans to customers in Fayette County and
surrounding counties. The ability of the majority of the
Companys customers to honor their contractual loan
obligations is dependent on the economy in these areas.
Eighty-four percent of the Companys loan portfolio is
concentrated in loans secured by real estate, of which a
substantial portion is secured by real estate in the Companys
market area. The other significant concentrations of credit by
type of loan are set forth in Note 3.The Company, as a matter of policy, does not generally extend
credit to any single borrower or group of related borrowers in
excess of 25% of the statutory capital, as defined, or
approximately $2,526,000.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12.
        
        REGULATORY MATTERSThe Bank is subject to certain restrictions on the amount of
dividends that may be declared without prior regulatory
approval. At December 31, 2002 approximately $561,000 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 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 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. Prompt corrective action
provisions are not applicable to bank holding companies.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, 2002 and 2001, the Company and Bank met all
capital adequacy requirements to which they are subject.As of December 31, 2002, 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.


To Be WellFor Capital
        
        Capitalized UnderAdequacy
        
        Prompt CorrectiveActual
        
        Purposes
        
        Action ProvisionsAmount
        
        Ratio
        
        Amount
        
        Ratio
        
        Amount
        
        Ratio(Dollars in Thousands)December 31, 2002: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
        %December 31, 2001:Total Capital to Risk Weighted Assets
        
        $
        9,034
        
        
        
        12.82
        %
        
        $
        5,637
        
        
        
        8
        %
        
        $
        7,047
        
        
        
        10
        %Tier I Capital to Risk Weighted Assets
        
        $
        8,230
        
        
        
        11.68
        %
        
        $
        2,818
        
        
        
        4
        %
        
        $
        4,228
        
        
        
        6
        %Tier I Capital to Average Assets
        
        $
        8,230
        
        
        
        9.20
        %
        
        $
        3,578
        
        
        
        4
        %
        
        $
        4,473
        
        
        
        5
        %


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13.
        
        FAIR VALUE OF FINANCIAL INSTRUMENTSThe 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 values are based on estimates using present
value or other valuation techniques. Those 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 its fair value disclosures for financial
instruments.Cash, Due From Banks and Federal Funds Sold: The carrying
amounts of cash, due from banks, and federal funds sold
approximate fair values.Securities:Fair values for securities are based on available
quoted market prices. The carrying values of equity securities
with no readily determinable fair value approximate fair
values.Loans:For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are
based on carrying values. For other loans, the fair values are
estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to
borrowers with similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.Deposits:The carrying amounts of demand deposits, savings
deposits, and variable-rate certificates of deposit
approximate their fair values. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.Federal Funds Purchased and Repurchase Agreements:The
carrying amounts of federal funds purchased and securities
sold under repurchase agreements approximate their fair
values.Accrued Interest:The carrying amounts of accrued interest
approximate their fair values.Off-Balance Sheet Instruments:Fair values of the Companys
off-balance sheet financial instruments are based on fees
currently charged to enter into similar agreements. Since the
majority of the Companys off-balance sheet instruments
consist of nonfee-producing, variable-rate commitments, the
Company has determined they do not have a distinguishable fair
value.


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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13.
        
        FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)The carrying amounts and estimated fair value of the Companys
financial instruments were as follows:


December 31, 2002
        
        
        
        
        
        December 31, 2001Carrying
        
        Fair
        
        
        
        
        
        Carrying
        
        FairAmount
        
        Value
        
        
        
        
        
        Amount
        
        ValueFinancial assets:Cash, due from banks,
and federal funds sold
        
        $
        
        
        
        
        3,789,657
        
        
        $
        3,789,657
        
        
        $
        
        
        
        
        3,936,674
        
        
        $
        3,936,674Securities
        
        
        
        
        
        
        22,940,490
        
        
        
        22,940,490
        
        
        
        
        
        
        
        13,128,377
        
        
        
        13,128,377Loans
        
        
        
        
        
        
        89,780,484
        
        
        
        91,232,961
        
        
        
        
        
        
        
        64,919,531
        
        
        
        66,177,091Accrued interest receivable
        
        
        
        
        
        
        580,033
        
        
        
        580,033
        
        
        
        
        
        
        
        538,528
        
        
        
        538,528Financial liabilities:Deposits
        
        
        
        
        
        
        99,508,745
        
        
        
        100,491,666
        
        
        
        
        
        
        
        74,694,980
        
        
        
        75,761,908Federal funds purchased
        
        
        
        
        
        
        719,000
        
        
        
        719,000
        
        
        
        
        
        
        
        
        
        
        
        Securities sold under
repurchase agreements
        
        
        
        
        
        
        3,780,013
        
        
        
        3,780,013
        
        
        
        
        
        
        
        2,210,239
        
        
        
        2,210,239Accrued interest payable
        
        
        
        
        
        
        301,833
        
        
        
        301,833
        
        
        
        
        
        
        
        283,641
        
        
        
        283,641


NOTE 14.
        
        SUPPLEMENTAL FINANCIAL DATAComponents of other operating expenses in excess of 1% of
total revenue are as follows:


Years Ended December 31,2002
        
        
        
        
        
        2001Professional fees
        
        
        
        
        
        $
        91,513
        
        
        
        
        
        
        $
        66,677Data processing expense
        
        
        
        
        
        
        139,588
        
        
        
        
        
        
        
        100,080Stationery and supplies
        
        
        
        
        
        
        67,607
        
        
        
        
        
        
        
        66,761


NOTE 15.
        
        BUSINESS COMBINATIONOn January 1, 2002, Southern Community Bancshares, Inc.
acquired all of the outstanding common stock of Southern
Community Bank in exchange for 810,983 shares of no par value
capital stock.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16.
        
        PARENT COMPANY FINANCIAL INFORMATIONThe following information presents the condensed balance
sheet, statements of income, and cash flows of Southern
Community Bancshares, Inc. as of and for the year ended
December 31, 2002:





CONDENSED BALANCE SHEET

AssetsCash
        
        $
        5,232,725Investment in subsidiary
        
        
        11,367,365Other assets
        
        
        39,913Total assets
        
        $
        16,640,003Liabilities
        
        $
        8,000Shareholders equity
        
        
        16,632,003Total liabilities and shareholders equity
        
        $
        16,640,003


CONDENSED STATEMENT OF INCOME

IncomeDividends from subsidiary
        
        $
        92,927Expenses, other
        
        
        105,034Loss before income tax benefits and equity
in undistributed income of subsidiary
        
        
        (12,107
        )Income tax benefits
        
        
        (39,913
        )Income before equity in undistributed income
of subsidiary
        
        
        27,806Equity in undistributed income of subsidiary
        
        
        1,030,039Net income
        
        $
        1,057,845


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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16.
        
        PARENT COMPANY FINANCIAL INFORMATION (Continued)


CONDENSED STATEMENT OF CASH FLOWS

OPERATING ACTIVITIESNet income
        
        $
        1,057,845Adjustments to reconcile net income to net
cash provided by operating activities:Undistributed income of subsidiary
        
        
        (1,030,039
        )Other operating activities
        
        
        (31,913
        )Net cash used in operating activities
        
        
        (4,107
        )INVESTING ACTIVITIESCapital infusion in subsidiary
        
        
        (2,000,000
        )FINANCING ACTIVITIESProceeds from issuance of capital stock
        
        
        7,294,800Stock issuance costs
        
        
        (57,968
        )Net cash provided by financing activities
        
        
        7,236,832Net increase in cash
        
        
        5,232,725Cash at beginning of year
        
        
        Cash at end of year
        
        $
        5,232,725


F-21