10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission file number: 000-50252

SOUTHERN COMMUNITY BANCSHARES, INC.

Georgia
(State or Other Jurisdiction
of Incorporation or Organization) 58-2639705
(I.R.S. Employer Identification Number)

525 North Jeff Davis Drive
P.O. Box 142069
Fayetteville, Georgia 30214
(Address of Principal Executive Offices)

(770) 461-4365
(Issuer’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o     No þ

     Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

     As of June 29, 2007, the aggregate market value of the Common Stock held by persons other than directors and executive officers of the registrant was $25,677,178, as determined by reference to the quoted closing price for the Common Stock in the Over-the-Counter Market on June 29, 2007. The exclusion of all directors and executive officers of the registrant for purposes of this calculation should not be construed as a determination that any particular director or executive officer is an affiliate of the registrant.

     There were 2,593,874 shares of Common Stock outstanding as of March 31, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

     Part III information is incorporated herein by reference, pursuant to Instruction G to Form 10-K, from Southern Community’s Proxy Statement for its 2008 Annual Shareholders’ Meeting.

SOUTHERN COMMUNITY BANCSHARES, INC.

FORM 10-K INDEX

			Page
			Number
		Cautionary Notice Regarding Forward-Looking Statements		3
Part I
	1.	Business		4
	1A.	Risk Factors		18
	1B.	Unresolved Staff Comments		21
	2.	Properties		22
	3.	Legal Proceedings		23
	4.	Submission of Matters to a Vote of Security Holders		23
Part II
	5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		23
	6.	Selected Financial Data		24
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
	7A.	Quantitative and Qualitative Disclosures About Market Risk		46
	8.	Financial Statements and Supplementary Data		47
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		47
	9A.	Controls and Procedures		47
	9B.	Other Information		48
Part III
	10.	Directors, Executive Officers, and Corporate Governance		49
	11.	Executive Compensation		49
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		49
	13.	Certain Relationships and Related Transactions, and Director Independence		49
	14.	Principal Accountant Fees and Services		50
Part IV
	15.	Exhibits and Financial Statement Schedules		50
		Signatures		51
EX-13 CONSOLIDATED FINANCIAL STATEMENTS
EX-21 SUBSIDIARIES OF THE REGISTRANT
EX-23 CONSENT OF MAULDIN & JENKINS, LLC
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE PFO
EX-32.1 SECTION 906, CERTIFICATION OF THE CEO
EX-32.2 SECTION 906, CERTIFICATION OF THE PFO

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Cautionary Notice Regarding Forward-Looking Statements

          Various matters discussed in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements may involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of Southern Community Bancshares, Inc. (“Southern Community” or the “Company”) to be materially different from the results described in such forward-looking statements.

          Actual results may differ materially from the results anticipated in forward-looking statements in our Form 10-K due to a variety of factors including, without limitation:

• The effects of future economic conditions in our market areas and generally in the United States;

• United States governmental and international monetary and fiscal policies;

• Legislative and regulatory changes;

• The effects of changes in interest rates on the level and composition of deposits, loan demand, the value of loan collateral, and interest rate risks; and

• The effects of competition from commercial banks, thrifts, consumer finance companies, and other financial institutions operating in our market area and elsewhere.

          All forward-looking statements attributable to the Company are expressly qualified in their entirety by this cautionary notice. The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

ITEM 1. BUSINESS

Southern Community Bancshares, Inc.

          Southern Community Bancshares, Inc. (“we” or “us” or 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.

Southern Community Bank

          Southern Community Bank is a full service commercial bank headquartered at 525 North Jeff Davis Drive, Fayetteville, Fayette County, Georgia 30214. The Bank’s primary service area is Fayette County, Georgia. However, the Bank also serves the adjacent counties, or parts thereof, of Coweta, Clayton, and Henry Counties.

          The principal business of the Bank is to accept deposits from the public and to make loans and other investments. The principal source of funds for the Bank’s loans and other investments are customer deposit accounts, which include non-interest bearing demand accounts, time deposits, savings and other interest bearing transaction accounts, and amortization and prepayments of loans and investments. Other sources of funds include brokered time deposits issued through a third party, Federal Home Loan Bank borrowings and trust preferred securities. The amount and term of each funding source is dependent on our funding needs for loans and investments. When funding needs are identified, each funding source is evaluated to determine which mix would be the best source for the funding need.

          The principal sources of income for the Bank are interest and fees collected on loans, and interest and dividends collected on other investments. The principal expenses of the Bank are interest paid on interest bearing deposits and other borrowings, employee compensation, office expenses and other overhead expenses.

Types of Loans

          Below is a description of the principal categories of loans made by the Bank and the relative risks involved with each category.

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          Construction and Development Loans

          The Bank makes residential construction and development loans to customers in our market area. Loans are granted for both speculative projects and those being built with end buyers already secured. This type of loan is subject primarily to market and general economic risk caused by inventory build-up in periods of economic prosperity. During times of economic stress, such as the current environment, this type of loan has typically had a greater degree of risk than other loan types. To mitigate that risk, the board of directors and management review the portfolio on a monthly basis and any pertinent changes or issues are brought to the Board’s attention at the monthly Board meeting. The percentage of our portfolio being built on a speculative basis is tracked very closely. On a quarterly basis the portfolio is segmented by market area to allow analysis of exposure and a comparison to current inventory levels in these areas. Loan policy also provides for limits on speculative lending by borrower and by real estate project.

          Commercial and Residential Real Estate

          The Bank grants loans to borrowers secured by commercial and residential real estate located in our market area. In underwriting these types of loans we consider the historic and projected future cash flows of the real estate. We make an assessment of the physical condition and general location of the property and the effect these factors will have on its future desirability from a tenant standpoint. We will generally lend up to a maximum 75% loan to value ratio and require an adequate debt coverage ratio when considered with other compensating factors.

          Commercial real estate offers some risks not found in traditional residential real estate lending. Repayment is dependent upon successful management and marketing of properties and on the level of expense necessary to maintain the property. Repayment of these loans may be adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve relatively large loan balances to single borrowers. To mitigate these risks, we monitor our loan concentration, and loans are audited through in house and external loan reviews as warranted. This type of loan generally has a shorter maturity than other loan types, giving the Bank an opportunity to reprice, restructure or decline to renew the credit. As with other loans, all commercial real estate loans are graded depending upon strength of credit and performance. A higher risk grade will bring increased scrutiny by management and the Board of Directors.

          Commercial and Industrial Loans

          To a lesser degree, the Bank makes loans to small and medium-sized businesses in our primary trade area for purposes such as new or upgrades to plant and equipment, inventory acquisition and various working capital purposes. Commercial loans are granted to borrowers based on cash flow, ability to repay and degree of management expertise. This type of loan may be subject to many different types of risk, which will differ depending on the particular industry a borrower is involved with. General risks to an industry, or segment of an industry, are monitored by senior management on an ongoing basis. When warranted, individual borrowers who may be at risk due to an industry condition may be more closely analyzed and reviewed at a Loan Committee or board of directors level. On a regular basis, commercial and industrial borrowers are required to submit statements of financial condition relative to their business to the Bank for review. These statements are analyzed for trends and the loan is assigned a credit grade accordingly. Based on this grade the loan may receive an increased degree of scrutiny by management up to and including additional loss reserves being required.

          This type of loan will usually be collateralized. Generally, business assets are used and may consist of general intangibles, inventory, equipment or real estate. Collateral is subject to risk relative to conversion to a liquid asset, if necessary, as well as risks associated with degree of specialization, mobility and general collectibility in a default situation. To mitigate this risk to collateral, these types of loans are underwritten to strict standards including valuations and general acceptability based on the Bank’s ability to monitor its ongoing health and value.

          Consumer Loans

          The Bank offers a variety of loans to retail customers in the communities we serve. Consumer loans in general carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate but less risky than commercial loans. Risk of default is generally determined by the well being

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of the national and local economies. During times of economic stress there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt. Risk on consumer type loans is generally managed through policy limitations on debt levels consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral type.

          Various types of consumer loans include the following:

• Home equity loans — open and closed end

• Vehicle financing

• Loans secured by deposits

• Overdraft protection lines

• Secured and unsecured personal loans

          The various types of consumer loans all carry varying degrees of risk for the Bank. Loans secured by deposits carry little or no risk and in our experience have had a zero default rate. Home equity lines carry additional risk because of the increased difficulty of converting real estate to cash in the event of a default. The Bank requires the customer to carry adequate insurance coverage to pay all mortgage debt in full if the collateral is destroyed. Vehicle financing carries additional risks over loans secured by real estate in that the collateral is declining in value over the life of the loan and is mobile. Risks inherent in vehicle financing are managed by matching the loan term with the age and remaining useful life of the collateral to ensure the customer always has an equity position and is never “upside down.” Collateral is protected by requiring the customer to carry insurance showing the bank as loss payee. The Bank also has a blanket policy that covers it in the event of a lapse in the borrower’s coverage and also provides assistance in locating collateral when necessary. Secured personal loans carry additional risks over the previous types in that they are generally smaller and made to borrowers with somewhat limited financial resources and credit histories. These loans are secured by a variety of collateral with varying degrees of marketability in the event of default. Risk on these types of loans is managed primarily at the underwriting level with strict adherence to debt to income ratio limitations and conservative collateral valuations. Overdraft protection lines and other unsecured personal loans carry the greatest degree of risk in the consumer portfolio. Without collateral, the Bank is completely dependent on the commitment of the borrower to repay and the stability of the borrower’s income stream. Again, primary risk management occurs at the underwriting stage with strict adherence to debt to income ratios, time in present job and in industry and policy guidelines relative to loan size as a percentage of net worth and liquid assets.

Loan participations

          During the ordinary course of business, the Bank may buy or sell loan participations. The Bank will sell participations to manage its credit exposure to individual borrowers or related entities and comply with internal loan limits or regulatory guidelines. These loan participations are sold to other financial institutions without recourse with the Bank generally retaining a larger than pro rata share of the interest income as a fee for servicing the debt.

          Conversely, the Bank will purchase loan participations to make better use of its funds and to establish opportunities for future loan growth. Participations are purchased only after the loan is underwritten in accordance with the Bank’s loan policy to ensure participations represent a similar risk profile to similar loans within the Bank’s loan portfolio. Similar to loan participations sold, participations purchased typically do not have any recourse to the selling institution should the borrower default. However, the Bank would have the ability to take normal remedial actions to minimize any loss potential.

          The Bank has minimal activity in the loan participation market. As of December 31, 2007, the Bank had one participation purchased with $354,434 outstanding (representing 0.12% of total loans) and one participation sold totaling $2,500,000.

Management’s policy for determining the loan loss allowance

          In calculating the adequacy of the loan loss allowance, the loan portfolio is sectioned to include the general portfolio, loans specifically identified to have greater weakness and areas of industry concentration and areas presenting higher than normal risk by their nature. The general portfolio includes loans presenting a normal level of risk which are performing and adequately collateralized. Loans specifically identified as having greater weaknesses

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are individually analyzed as to borrower repayment ability and collateral adequacy. A specific reserve amount is allocated to each of these loans based on this analysis. Key considerations in this analysis are potential loss factors and the loan risk grade as set by bank policy and followed by regulatory agencies. Industry concentrations in residential construction and land development lending are closely monitored and additional reserves are allocated as market conditions warrant. Overdrafts are individually reviewed and approved and are maintained at very low levels in relation to the Bank’s loan portfolio and capital base. Overdraft reserves are funded at 10% due to the nominal losses recognized from this activity. Finally, an amount is determined based on factors not directly related to our customers. In calculating the adequacy of the loan loss allowance, management evaluates the following factors:

• The asset quality of individual loans.

• Changes in the national and local economy and business conditions/development, including underwriting standards, collections, charge off and recovery practices.

• Changes in the nature and volume of the loan portfolio.

• Changes in the experience, ability and depth of the lending staff and management.

• Changes in the trend of the volume and severity of past dues and classified loans and trends in the volume of non-accrual loans, troubled debt restructurings and other modifications.

• Possible deterioration in collateral segments or other portfolio concentrations.

• Historical loss experience used for pools of loans (i.e. collateral types, borrowers, purposes, etc.)

• Changes in the quality of the institution’s loan review system and the degree of oversight by the Bank’s Board of Directors.

• The effect of external factors such as competition and the legal and regulatory requirement on the level of estimated credit losses in the Bank’s current loan portfolio.

• Unfunded commitments.

          These factors are evaluated monthly and changes in the asset quality of individual loans are evaluated more frequently as needed.

          All of our loans are assigned individual loan grades when underwritten. The Bank, using guidance established by the FDIC and the State of Georgia Department of Banking and Finance, has established general reserves based on historical loss ratios adjusted for qualitative factors. General reserve factors applied to each rating grade are based upon management’s experience and common industry and regulatory guidelines.

          After a loan is underwritten and booked, loans are monitored or reviewed by the account officer, credit administration, management, and external loan review personnel during the life of the loan. Payment performance is monitored monthly for the entire loan portfolio, account officers contact customers during the course of business and may be able to ascertain if weaknesses are developing with the borrower, external loan review personnel perform an independent review annually, and federal and state banking regulators perform periodic reviews of the loan portfolio. If weaknesses develop in an individual loan relationship and are detected then the loan is downgraded and higher reserves are assigned based upon management’s assessment of the weaknesses in the loan that may affect full collection of the debt. If a loan does not appear to be fully collectible as to principal and interest then the loan is classified as impaired. These loans are monitored closely, and if they become seriously delinquent (over 90 days past due), they are recorded as a non-accruing loan and further accrual of interest is discontinued while previously accrued but uncollected interest is reversed against income. If we believe that a loan will not be collected in full then the allowance for loan and lease losses is increased to reflect management’s estimate of potential exposure of loss.

          Our allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the

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size of the allowance for loan losses in comparison to a group of peer banks identified by the regulators. During their routine examinations of banks, regulatory agencies may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, credit evaluations and allowance for loan loss methodology differ materially from those of management.

          While it is our policy to charge off in the current period loans for which a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise.

Management’s policy for investing in securities

          Funds that are not otherwise needed to meet the loan demand of the Bank may be invested in accordance with the Bank’s investment policy. The purpose of the investment policy is to provide a guideline by which these funds can best be invested to earn the maximum return for the Bank, yet still maintain sufficient liquidity to meet fluctuations in the Bank’s loan demand and deposit structure. The investment policy adheres to the following objectives:

• Provide an investment medium for funds which are not needed to meet loan demand or deposit withdrawal.

• Optimize income generated from the investment account consistent with the stated objectives for liquidity and quality standards.

• Meet regulatory standards.

• Provide collateral which the Bank is required to pledge against public monies or borrowings.

• Provide an investment medium for funds which may be needed for liquidity purposes.

• Provide an investment medium which will balance market and credit risk for other assets and the bank’s liability structure.

Industry and competition

          The Bank currently has seven branch offices, all of which are full-service financial centers. Two of the full-service locations are inside Kroger grocery stores; one in Clayton County and one in Coweta County. The five remaining full—service locations are traditional free standing branches located in Fayette, Henry and Coweta Counties. A loan production office, which was opened in mid 2005 and located in leased office space in Henry County, was closed during the first quarter of 2008. This decision was based on the economic downturn in the market and the volume of non-performing loans in Henry County.

          Based on total deposits of approximately $301 million at December 31, 2007, the Bank represents approximately 14% of the market share in the Fayette County market. Seven major regional banks represent approximately 51% of the deposits in the Fayette County market. The larger financial institutions have greater resources and lending limits than the Bank, and the seven major regional banking institutions have 23 branches in the county. There are several credit unions located within our market area. Since credit unions are not subject to income taxes, credit unions have an advantage in offering competitive rates to potential customers. The Bank also faces competition in certain areas of its business from mortgage banking companies, consumer finance companies, insurance companies, money market mutual funds and investment banking firms, some of which are not subject to the same degree of regulation as the Bank. The FDIC publishes the market share data as of June 30^th of each year. Based on the last reported dates, the Bank has approximately 1.20% market share in its Coweta County location and less than 1% in each of its Henry County and Clayton County locations.

          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

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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.

Employees

          The Bank had 80 full-time employees as of March 15, 2008. Southern Community Bancshares, Inc. does not have any employees who are not also employees 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 over the last two decades. 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 reasonably 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.

Southern Community Bancshares, Inc.

          Southern Community Bancshares, Inc. is a bank holding company registered with the Board of Governors of the Federal Reserve System and the Georgia Department of Banking and Finance under the Bank Holding Company Act of 1956, as amended, and the Georgia Bank Holding Company Act. We are subject to the supervision, examination and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve, and the Georgia Bank Holding Company Act and the regulations of the Georgia Department of Banking and Finance.

          The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

• acquiring 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;

• acquiring all or substantially all of the assets of any bank; or

• merging or consolidating 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

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generally focuses on capital adequacy, and consideration of convenience and needs issues generally focuses on the parties’ performance under the Community Reinvestment Act of 1977.

          The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 facilitates interstate branching and permits the establishment of agency relationships across state lines. The Interstate Banking Act also permits bank holding companies to acquire banks in any state without regard to whether the transaction is prohibited under the laws of such state, subject to certain state provisions, including minimum age requirements of banks that are the target of the acquisition. The minimum age of local banks subject to interstate acquisition is three years.

          In response to the Interstate Banking Act, the Georgia General Assembly adopted the Georgia Interstate Banking Act, which provides that:

• interstate acquisitions by institutions located in Georgia will be permitted in states which also allow interstate acquisitions; and

• interstate acquisitions of institutions located in Georgia will be permitted by institutions located in states which allow interstate acquisitions.

          Additionally, in 1996, the Georgia General Assembly adopted the Georgia Interstate Branching Act, which permits Georgia-based banks and bank holding companies owning banks outside of Georgia and all non-Georgia banks and bank holding companies owning banks in Georgia the right to merge any bank into an interstate branch network. The Georgia Interstate Branching Act also allows banks to establish de novo branches on an unlimited basis throughout Georgia, subject to the prior approval of the Georgia Department of Banking and Finance.

          Except as amended by the Gramm-Leach-Bliley Act of 1999 discussed below, the Bank Holding Company Act generally prohibits a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries. Bank holding companies are also generally prohibited from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Activities determined by the Federal Reserve to fall within this category include acquiring or servicing loans, leasing personal property, conducting discount securities brokerage activities, performing certain data processing services, acting as agent or broker in selling certain types of credit insurance, and performing certain insurance underwriting activities. The BHC Act does not place territorial limitations on permissible non-banking activities of bank holding companies. The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any non-banking activity when it has reasonable cause to believe that continuation of such activity constitutes a serious risk to the safety and soundness of any bank subsidiary of that bank holding company.

Southern Community Bank

          Southern Community Bank is incorporated under the laws of the State of Georgia and is subject to examination by the Georgia Department of Banking and Finance. The Georgia Department regulates all areas of the Bank’s commercial banking operations, including, without limitation, loans, deposits, reserves, mergers, reorganizations, issuance of securities, payment of dividends, and the establishment of branches.

          The Bank is also a member of the Federal Deposit Insurance Corporation, and as such, the FDIC, to the maximum extent provided by law, insures its deposits. The Bank is also subject to numerous state and federal statutes and regulations that affect its business, activities, and operations. The FDIC and the Georgia Department of Banking and Finance regularly examine the operations of the Bank and have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Gramm-Leach-Bliley Act of 1999

          On November 12, 1999, the President 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 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.

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          The Gramm-Leach-Bliley Act also covers various topics such as insurance, unitary thrifts, privacy protection provisions for customers of financial institutions, the Federal Home Loan Bank system’s modernization, automatic teller machine reform, the Community Reinvestment Act and certain changes related to the securities industry.

          The legislation amends the Bank Holding Company Act to clarify that a bank holding company may hold shares of any company that the Federal Reserve has determined to be engaged in activities that were sufficiently closely related to banking. This act also amends the Bank Holding Company Act to establish a new type of bank holding company — the “financial holding company.” Financial holding companies have the authority to engage in financial activities in which other bank holding companies may not engage. Financial holding companies may also affiliate with companies that are engaged in financial activities. These financial activities include activities that are:

• financial in nature;

• incidental to an activity that is financial in nature; or

• complimentary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system in general.

          The Federal Reserve and the Secretary of the Treasury may determine which activities meet these standards. However, the Gramm-Leach-Bliley Act explicitly lists certain activities as being financial in nature. For example, some of these activities are:

• lending, exchanging, transferring or investing for others;

• safeguarding money or securities;

• insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes in any state;

• providing financial, investment or economic advice;

• issuing or selling interests in pools of assets that a bank could hold directly;

• underwriting, dealing in or making markets in securities; and

• engaging within the United States in any activity that a bank holding company could engage in outside of the United States, if the Federal Reserve has found that the activity was usual in connection with banking or other financial operations internationally.

          The Gramm-Leach-Bliley Act also directs the Federal Reserve to adopt a regulation or order defining certain additional activities as financial in nature, to the extent that they are consistent with that act. These include:

• lending, exchanging, transferring or investing for others or safeguarding financial assets other than money or securities;

• providing any device or other instrumentality for transferring financial assets; and

• arranging, effecting or facilitating financial transactions for third parties.

          Not all bank holding companies may become financial holding companies. A bank holding company must meet three requirements before becoming a financial holding company:

• all of the bank holding company’s depository institution subsidiaries must be well capitalized;

• all of the bank holding company’s depository institution subsidiaries must be well managed; and

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• 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

          Southern Community Bancshares, Inc. 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 Southern Community Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank, as well as by us to our shareholders.

          If, in the opinion of the federal banking regulators, a depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such institution cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. See “Prompt Corrective Action.” Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.

          In addition, the Georgia Financial Institutions Code and the regulations of the Georgia Department of Banking and Finance provide:

• that dividends of cash or property may be paid only out of the retained earnings of the bank;

• that dividends may not be paid if the bank’s paid-in capital and retained earnings which are set aside for dividend payment and other distributions do not, in combination, equal at least 20% of the bank’s capital stock; and

• that dividends may not be paid without prior approval of the Georgia Department of Banking and Finance if:

• the bank’s total classified assets exceed 80% of its equity capital;

• the aggregate amount of dividends to be declared exceeds 50% of the bank’s net profits after taxes but before dividends for the previous calendar year; or

• the ratio of equity capital to total adjusted assets is less than 6%.

                    At December 31, 2007, the Bank could not pay cash dividends without prior regulatory approval due to the Bank’s total classified assets exceeding 80% of its equity capital.

Capital adequacy

          We are required to comply with the capital adequacy standards established by the Federal Reserve, and the Federal Deposit Insurance Corporation in the case of the Bank. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The Bank is also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

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          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%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, non-cumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31, 2007 the Company’s consolidated ratio of total capital to risk-weighted assets was 10.78% and the ratio of Tier 1 Capital to risk-weighted assets was 9.35%.

          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 other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. At December 31, 2007, the Company’s leverage ratio was 7.85%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

          In 2004 we raised $5.6 million through the issuance of trust preferred securities. These securities have a 30-year maturity, are callable without penalty after five years, and pay a floating rate based on the prime rate plus 12.5 basis points. The principal balance of these securities is includable in tier one capital.

          In June 2006 we raised an additional $5 million through the issuance of trust preferred securities. These securities have a 30-year maturity, are callable without penalty after five years, and pay a floating rate based on three-month LIBOR plus 150 basis points. The principal balance of these securities is includable in total capital, and $4 million of this balance is includable in tier one capital.

          The capital ratios required for a well-capitalized status are: (i) Total Capital of 10.0% or greater, (ii) Tier I Capital of 6.0% or greater, and (iii) a Leverage Capital Ratio of 5.0% or greater. The Bank’s total Capital at December 31, 2007 was 9.96%, .04% short of the required ratio. As of March 31, 2008, however, we had injected $500,000 into the Bank as additional capital to exceed this requirement. All other required capital ratios for well-capitalized status were exceeded as of December 31, 2007. The Bank is also subject to risk-based and leverage capital requirements adopted by the Federal Deposit Insurance Corporation, 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, 2007.

          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.

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Support of subsidiary institution

          Under Federal Reserve policy, we are expected to act as a source of financial strength for, and to commit resources to support, the Bank. This support may be required at times when, absent such Federal Reserve policy, we may not be inclined to provide such support. In addition, any capital loans by a bank holding company to its banking subsidiary are subordinate in right of payment to deposits and to certain other indebtedness of such bank. In the event of a bank holding company’s bankruptcy, any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Prompt corrective action

          The Federal Deposit Insurance Corporation Improvement Act of 1991 was enacted in large measure to improve the supervision and examination of insured depository institutions in an effort to reduce the number of bank failures and the resulting demands on the deposit insurance system. This law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and are required to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of such actions depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.

          Under the regulations, an FDIC-insured bank will be:

• “well capitalized” if it has a total capital ratio of 10.0% or greater, a tier 1 capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater and is not subject to any order or written directive by the appropriate regulatory authority to meet and maintain a specific capital level for any capital measure;

• “adequately capitalized” if it has a total capital ratio of 8.0% or greater, a tier 1 capital ratio of 4.0% or greater and a leverage ratio of 4.0% or greater (3.0% in certain circumstances) and is not “well capitalized”;

• “undercapitalized” if it has a total capital ratio of less than 8.0%, a tier 1 capital ratio of less than 4.0% or a leverage ratio of less than 4.0% (3.0% in certain circumstances);

• “significantly undercapitalized” if it has a total capital ratio of less than 6.0%, a tier 1 capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and

• “critically undercapitalized” if its tangible equity is equal to or less than 2.0% of average quarterly tangible assets.

          A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating in any one of four categories. As a depository institution moves downward through the capitalization categories, the degree of regulatory scrutiny will increase and the permitted activities of the institution will decrease.

          An FDIC-insured bank is generally prohibited from making any capital distribution, including dividend payments, or paying any management fee to its holding company if the bank would thereafter be “undercapitalized”. “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. The federal regulators may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the bank’s capital. In addition, for a capital restoration plan to be acceptable, the bank’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent company is limited to the lesser of an amount equal to 5.0% of the bank’s total assets at the time it became “undercapitalized” and the amount necessary to bring the institution into compliance with all applicable capital standards. If a bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized”. “Significantly undercapitalized” institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately

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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, 2007, the Bank had the requisite capital levels to qualify as “adequately capitalized.”

FDIC insurance assessments

          The FDIC merged the Bank Insurance Fund and the Savings Association Insurance Fund to form the Deposit Insurance Fund on March 31, 2006. The Bank is a member of the Deposit Insurance Fund and therefore pays deposit insurance assessments to the Deposit Insurance Fund.

          Pursuant to the Federal Deposit Insurance Corporation Improvement Act, the FDIC established a system for setting deposit insurance premiums based upon the risks a particular bank or savings association posed to its deposit insurance fund. Effective January 1, 2007, the FDIC established a risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of four risk categories, with the first category having two sub-categories based on the institution’s most recent supervisory and capital evaluations, designed to measure risk. Assessment rates currently range from 0.05% of deposits for an institution in the highest sub-category of the highest category to 0.43% of deposits for an institution in the lowest category. The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%.

          In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate of approximately 0.0124% of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2017 through 2019.

          Under the Federal Deposit Insurance Act, the FDIC may terminate the insurance of an institution’s deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Safety and soundness standards

          The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If an institution fails to submit or implement such a plan, the agency must issue an order directing action to correct the deficiency and may require other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions described above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Community Reinvestment Act

          The Community Reinvestment Act requires federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low- and moderate-income borrowers in their local communities. An institution’s size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions will be examined using a performance-based lending, investment and service test. Small institutions will be examined using a streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the bank regulatory agency.

          Community Reinvestment Act regulations provide for certain disclosure obligations. Each institution must post a notice advising the public of its right to comment to the institution and its regulator on the institution’s

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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 Gramm-Leach-Bliley Act made 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.

USA PATRIOT Act

          On October 26, 2001 the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures and controls generally require financial institutions to take reasonable steps:

• to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction; and

• to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions.

          Under the USA PATRIOT Act, financial institutions must establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:

• the development of internal policies, procedures and controls;

• the designation of a compliance officer;

• an ongoing employee training program; and

• an independent audit function to test the programs.

          Under the authority of the USA PATRIOT Act, the Secretary of the Treasury adopted rules on September 26, 2002 increasing the cooperation and information sharing between financial institutions, regulators and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Under the new rules, a financial institution is required to:

• expeditiously search its records to determine whether it maintains or has maintained accounts, or engaged in transactions with individuals or entities, listed in a request submitted by the Financial Crimes Enforcement Network (“FinCEN”);

• notify FinCEN if an account or transaction is identified;

• designate a contact person to receive information requests;

• limit use of information provided by FinCEN to: (1) reporting to FinCEN, (2) determining whether to establish or maintain an account or engage in a transaction and (3) assisting the financial institution in complying with the Bank Secrecy Act; and

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• maintain adequate procedures to protect the security and confidentiality of FinCEN requests.

          Under the new rules, a financial institution may also share information regarding individuals, entities, organizations and countries for purposes of identifying and, where appropriate, reporting activities that it suspects may involve possible terrorist activity or money laundering. Such information-sharing is protected under a safe harbor if the financial institution:

• notifies FinCEN of its intention to share information, even when sharing with an affiliated financial institution;

• takes reasonable steps to verify that, prior to sharing, the financial institution or association of financial institutions with which it intends to share information has submitted a notice to FinCEN;

• limits the use of shared information to identifying and reporting on money laundering or terrorist activities, determining whether to establish or maintain an account or engage in a transaction, or assisting it in complying with the Bank Security Act; and

• maintains adequate procedures to protect the security and confidentiality of the information.

          Any financial institution complying with these rules will not be deemed to have violated the privacy requirements discussed above.

Future Legislation

          New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

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ITEM 1A. RISK FACTORS

Risk Factors

          Our business involves a high degree of risk. The following paragraphs describe some of the material risks that could affect us.

Current and anticipated deterioration in the housing market and the homebuilding industry may lead to increased loss severities and further worsening of delinquencies and nonperforming assets in our loan portfolio. Consequently, our results of operations may be adversely impacted.

          There has been substantial industry concern and national publicity over asset quality among financial institutions due in large part to issues related to subprime mortgage lending, declining real estate values and general economic concerns. As of December 31, 2007, our nonperforming assets increased significantly to $30,086,038 million, or 9.99% of our total loan portfolio plus other real estate owned. Furthermore, the housing and the residential mortgage markets have experienced, and continue to experience, a variety of difficulties and changed economic conditions. If market conditions continue to deteriorate, which we expect to occur in the near-term, this will lead to additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the market value of our loan portfolio, the losses associated with loans in default and the net realizable value of real estate owned. We expect that our level of non-performing assets, provisions for loan losses and loan charge-offs will all be significantly higher than the levels we experienced in 2007, particularly in the first half of 2007. As a result, we will experience increased pressure on our earnings, liquidity and regulatory capital. We project a significant loss in 2008.

          The homebuilding industry has experienced a significant and sustained decline in demand for new homes and an oversupply of new and existing homes available for sale in various markets, including the markets in which we lend. Our customers who are builders and developers face greater difficulty in selling their homes in markets where these trends are more pronounced. Consequently, we are facing a sharp increase in delinquencies and nonperforming assets as these builders and developers are forced to default on their loans with us. We do not anticipate that the housing market will improve in the near-term, and accordingly, additional downgrades, significant provisions for loan losses and charge-offs related to our loan portfolio will likely occur.

We may face liquidity constraints and experience higher costs of funding if we are unable to maintain a “well-capitalized” status.

          During the fourth quarter of 2007 the Bank’s capital ratios declined significantly as a result of the loan losses we sustained and significant additional provisions to our allowance for loan losses. While the Bank’s ratios were still above levels required to be considered “adequately capitalized” at December 31, 2007, we were not considered “well-capitalized”. Since December 31, 2007, the Bank has returned to a “well capitalized” status through an injection of capital by the Company. However, if we sustain further loan losses, which we expect, we may once again lose our “well capitalized” status.

          The impact of not maintaining a “well-capitalized” status is of concern in that it could jeopardize the Bank’s ability to acquire needed funding through sources such as brokered deposits, Federal Home Loan Bank advances or unsecured federal funds credit lines, and could tighten our liquidity through damages to our reputation in our deposit service areas. This could also lead to increased scrutiny by regulatory agencies and possible sanctions. It is imperative that we monitor these ratios closely in order to avoid falling below the minimum regulatory requirements, which could result in increased regulatory sanctions. In response to our declining capital position, we could improve our capital position with additional common stock issuances. We may also limit or postpone future asset growth, or even shrink our assets in order to maintain appropriate regulatory capital levels. These efforts, however, may not be successful.

The markets for our services are highly competitive and we face substantial competition.

          The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms soliciting business from residents of and businesses located in Fayetteville, Georgia and our entire primary service area, many of which have greater resources than we have.

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Many of our competitors enjoy competitive advantages, including greater financial resources, a wider geographic presence or more accessible branch office locations, the ability to offer additional services, more favorable pricing alternatives and lower origination and operating costs. This competition could result in a decrease in loans we originate and could negatively affect our results of operations.

          In attracting deposits, we compete with insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Traditional banking institutions, as well as entities intending to transact business solely online, are increasingly using the Internet to attract deposits without geographic or physical limitations. In addition, many non-bank competitors are not subject to the same extensive regulations that govern us. These competitors may offer higher interest rates than we offer, which could result in either attracting fewer deposits or increasing our interest rates in order to attract deposits. Increased deposit competition could increase our cost of funds and could affect adversely our ability to generate the funds necessary for our lending operations, which would negatively affect our results of operations.

Changes in interest rates have had and could continue to have an adverse effect on our income.

          Our profitability depends to a large extent upon our net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Changes in interest rates also can affect the value of our loans. An increase in interest rates could adversely affect borrowers’ ability to pay the principal or interest on our loans. This may lead to an increase in our non-performing assets and could have a material and negative effect on our results of operations.

          In response to the dramatic deterioration of the subprime, mortgage, credit and liquidity markets, the Federal Reserve has taken action on six occasions to reduce the target federal funds rate by a total of 300 basis points since September 2007. Our loans generally reprice at a faster rate than our deposits. As a result, the effect of the interest rate reductions has been that the rates we earn on our loans have declined more quickly than the rates we pay on our deposits. This has lowered our net interest income and will probably continue to lower our net interest income for the foreseeable future. Furthermore, the reduction in our net interest income will likely be exacerbated by the high level of competition that we face in our markets, which requires us to offer more attractive interest rates to borrowers, both on loans and deposits, and to rely upon out-of-market funding sources. These events have negatively affected our business, financial condition, liquidity, operating results, cash flows and/or the price of our common stock. We expect continued margin pressure throughout 2008 as a result of the recent interest rate reductions.

          Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply and other factors beyond our control may also affect interest rates. Fluctuations in market interest rates are neither predictable nor controllable and may have a material and negative effect on our business, financial condition and results of operations.

We have a significant amount of construction loans, which are subject to additional risks unique to the building industry that could negatively affect our net income.

          Historically, our loan portfolio has included a significant number of construction loans consisting of one-to-four family residential construction loans, commercial construction loans and land loans for residential and commercial development. As of December 31, 2007, 35% of our total loan portfolio was in acquisition and development and construction loans. In addition to the risk of nonpayment by borrowers, construction lending poses additional risks in that:

• land values may decline;

• developers or builders may fail to complete or develop projects;

• municipalities may place moratoriums on building;

• developers may fail to sell the improved real estate;

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• there may be construction delays and cost overruns;

• collateral may prove insufficient; or

• permanent financing may not be obtained in a timely manner.

Many of these conditions exist during the current economic slowdown in our markets, which has had and will likely continue to have a negative effect on our net income and our financial condition.

Because a significant portion of our loan portfolio is secured by real estate, any negative conditions affecting real estate may harm our business.

          A significant portion of our loan portfolio consists of commercial loans that are secured by various types of real estate as collateral, as well as real estate loans on commercial properties. Because these loans rely on real estate as collateral, either totally in the case of real estate loans or partially in the case of commercial loans secured by real estate, they are sensitive to economic conditions and interest rates. Real estate lending also presents additional credit related risks, including a borrower’s inability to pay and deterioration in the value of real estate held as collateral.

          The market value of the real estate securing our loans as collateral has been adversely affected by the slowing economy and unfavorable changes in economic conditions in our market areas and may be further adversely affected in the future. Any sustained period of increased payment delinquencies, foreclosures or losses caused by the adverse market and economic conditions, including the downturn in the real estate market in our markets, will adversely affect the value of our assets, our revenues, results or operations and financial condition. Currently, the markets we operate in are experiencing such an economic downturn, and if it continues, our operations will be further adversely affected.

If our allowance for loan losses is not adequate to cover actual losses, our net income may decrease.

          We are exposed to the risk that our customers will be unable to repay their loans in a timely fashion and that collateral securing the payment of loans may be insufficient to assure repayment. This risk is particularly prevalent during times of economic stress such as the current environment. Borrowers’ inability to repay their loans could erode our bank’s earnings and capital. We maintain an allowance for loan losses to cover loan defaults. We base our allowance for loan losses on various assumptions and judgments regarding the collectability of loans, including our prior experience with loan losses, as well as an evaluation of the risks in our loan portfolio. We maintain this allowance at a level we consider adequate to absorb anticipated losses. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control.

          Actual losses may exceed our estimates and we may have to increase the allowance for loan losses. This would cause us to increase our provision for loan losses, which would decrease our net income. Further, state and federal regulatory agencies, as an integral part of their examination process, review our loans and our allowance for loan losses. Regulators, when reviewing our loan portfolio, may require us to increase our allowance for loan losses, which would negatively affect our net income.

If economic conditions in our market areas do not improve, our business may be negatively affected.

          Our success depends on the general economic conditions of the markets we serve. Our operations are concentrated in Fayetteville, Georgia. We also have branches in Peachtree City, Newnan, Jonesboro and Locust Grove, Georgia. Our market areas are currently experiencing adverse economic conditions, which affect the ability of our customers to repay their loans to us and generally negatively affect our financial condition and results of operation. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies and are thus disproportionately impacted.

Losing key personnel will negatively affect us.

          Competition for personnel is stronger in the banking industry than many other industries, and we may not be able to attract or retain the personnel we require to compete successfully. We currently depend heavily on the

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services of our Chief Executive Officer, Gary D. McGaha, and a number of other members of our senior management team. We have employment contracts with all of our executive officers, although nothing in these contracts prevents any executive officer from leaving us. Furthermore, we expect that Mr. McGaha will retire in the near future. Losing Mr. McGaha’s services or those of other members of senior management could affect us in a material and adverse way. Our success will also depend on attracting and retaining additional qualified management personnel.

We do not intend to pay dividends on our common stock.

          We have never declared or paid cash dividends on our common stock. We have no current intentions to pay dividends and cannot assure that we will be able to pay dividends in the future. In addition, our ability to pay dividends is subject to regulatory limitations. Currently the Bank cannot pay dividends to the Company without regulatory approval since its total classified assets exceed 80% of its equity capital.

We encounter technological change continually and have fewer resources than many of our competitors to invest in technological improvements.

          The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to serving customers better, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our success will depend in part on our ability to address our customers’ needs by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers.

We are subject to significant government regulations, including new legislation that affect our operations and may result in higher operating costs or increased competition for us.

          Our success will depend not only on competitive factors, but also on state and federal regulations affecting banks and bank holding companies generally. Regulations now affecting us may change at any time, and these changes may adversely affect our business.

          We are subject to extensive regulation by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation and the Georgia Department of Banking and Finance. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than shareholders. These agencies examine bank holding companies and commercial banks, establish capital and other financial requirements and approve new branches, acquisitions or other changes of control. They are also authorized to take various supervisory actions when a bank’s overall condition, including its capitalization, deteriorates. The Federal Deposit Insurance Corporation Act of 1991 established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Generally, as a bank’s capital deteriorates, the degree of regulatory scrutiny it faces will increase, as will the severity of possible enforcement action.

          We believe that changes in legislation and regulations will continue to have a significant impact on the banking industry. Although some of the legislative and regulatory changes may benefit us and our bank, others will increase our costs of doing business and could assist our competitors, some of which are not subject to similar regulation.

          One of the regulations affecting all publicly traded companies today is the Sarbanes-Oxley Act of 2002. We have spent a considerable amount of hard and soft dollars ensuring our compliance with this Act over the past three years, and it is unknown how much we will need to spend in the future to maintain our compliance. Smaller, privately held banks in our market may not need to spend as much to comply.

ITEM 1B. UNRESOLVED STAFF COMMENTS

          None

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ITEM 2. PROPERTIES

          The following is a brief description of our properties.

Main Office

          The Bank owns its offices located at 525 N. Jeff Davis Drive, Fayetteville, Fayette County, Georgia. This 16,000 square foot location presently houses the main branch, as well as the executive offices of the Bank. This location was constructed at a cost of approximately $2 million. The branch contains five teller stations, three drive up teller lanes, four customer service desks, a vault with safe deposit boxes, and one drive-up ATM machine. The second story houses the accounting and loan processing functions, as well as a large meeting room with audio visual equipment.

West Fayetteville and Operations Center

          A full-service branch opened in January, 2006, while our operations center was opened in December 2005 in Fayetteville (Fayette County), Georgia. This 15,000 square foot location is leased with the branch space consisting of approximately 3,500 square feet. This branch contains three teller stations, two drive up teller lanes, two customer service offices, a vault with safe deposit boxes, and one drive-up ATM machine. It also contains an additional three offices and a small break room. The remaining 11,500 square feet house deposit operations, loan operations, human resources and information technology. Additionally, this location contains a conference room as well as a large training room with state-of-the-art audio visual equipment, computers and “test” bank capabilities.

Peachtree City

          A full-service branch was opened in May, 2003 in Peachtree City (Fayette County), Georgia. The 3,500 square foot branch was constructed at a cost of $869,000. This branch contains three teller stations, three drive up teller lanes, two customer service decks, a vault with safe deposit boxes, and one drive-up ATM machine. It also contains five offices and a conference room.

Locust Grove

          A full-service branch was opened in August, 2004 in Locust Grove (Henry County), Georgia. The 3,250 square foot branch was constructed at a cost of $883,000. This branch contains three teller stations, three drive up teller lanes, two customer service offices, a vault with safe deposit boxes, and one drive-up ATM machine. It also contains an additional four offices.

Newnan

          A full-service branch was opened in April, 2005 in Newnan (Coweta County), Georgia. The 4,250 square foot branch was constructed at a cost of $989,000. This branch contains three teller stations, three drive up teller lanes, two customer service offices, a vault with safe deposit boxes, and one drive-up ATM machine. It also contains an additional four offices and approximately 1,000 square feet of unfinished office space.

Newnan — Kroger

          In July 2004 the Bank entered into an operating lease for office space inside the Kroger grocery store located in Newnan (Coweta County), Georgia for the purpose of operating an in-store branch. This branch opened in August, 2004 and compliments a nearby traditional branch facility with extended hours and ATM services.

Jonesboro — Kroger

          In July 2004 the Bank entered into an operating lease for office space inside the Kroger grocery store located in Jonesboro (Clayton County), Georgia for the purpose of operating an in-store branch. This branch opened in August, 2004 and offers extended hours and ATM services.

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     Griffin

     In October 2005, the Bank purchased two adjacent properties in Griffin (Spalding County) for $581,000 with the intent to open a full service branch. As of December 31, 2007 we had not received re-zoning approval to start construction. The Bank currently has both properties for sale.

     We believe that our properties are in good condition and suitable for our needs.

ITEM 3. LEGAL PROCEEDINGS

     The Company and the Bank are subject to claims and litigation in the ordinary course of business. We believe that any pending claims and litigation will not have a material adverse effect on our consolidated 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 2007.

PART II

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

Market information

     The Company’s common stock is traded over the counter (OTC) under the symbol “SNCB.OB”.

     The Company currently intends to retain its earnings for use in the business and does not foresee paying cash dividends in the near future. The Board of Directors cannot predict when such dividends, if any, will ever be paid. The payment of dividends, if any, shall at all times be subject to the payment of the Company’s expenses, the maintenance of reasonable working capital and risk reserves, and minimum capitalization requirements for state banks. Statutory and regulatory limitations apply to the Bank’s payment of dividends to us, as well as our payment of dividends to our stockholders. For a complete discussion of the restrictions on dividends, see Part I, Item 1, “Supervision and Regulation — Payment of Dividends.”

     Management has reviewed the limited information available as to the ranges at which the Company’s common stock has been sold. The following table sets forth the estimated price range for sales of common stock for each quarter of the last two years. The following data regarding the Company’s common stock is provided for information purposes only and should not be viewed as indicative of the actual or market value of the common stock. Furthermore, such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

	High selling price		Low selling price
2007:
First Quarter	$	18.55	$	18.55
Second Quarter		15.20		15.20
Third Quarter		13.50		13.50
Fourth Quarter		5.60		5.60
2006:
First Quarter	$	20.00	$	17.50
Second Quarter		21.00		18.25
Third Quarter		21.00		19.00
Fourth Quarter		23.95		20.50

     At March 13, 2008 we had 2,593,874 shares of common stock outstanding held by approximately 730 shareholders of record.

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ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated financial data presented below as of and for each of the five years ended December 31, 2007 is unaudited and has been derived from the Consolidated Financial Statements of the Company and its subsidiary, and from records of the Company. The information presented below should be read in conjunction with the Consolidated Financial Statements, the Notes to Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Averages are derived from daily balances. Share and per share amounts for all years are adjusted for all relevant stock splits and stock dividends during the period.

(Dollars in thousands, except share and per share data)	As of December 31,
Balance Sheet Data	2007			2006			2005			2004			2003
Total assets	$	408,389		$	386,334		$	333,849		$	271,245		$	195,646
Investment securities		58,197			55,369			53,391			50,616			59,799
Loans		290,796			293,224			253,954			186,737			125,201
Allowance for loan losses		7,961			3,051			3,001			2,017			1,419
Deposits		300,717			291,790			261,639			215,764			159,775
Federal Home Loan Bank advances		57,500			44,500			30,000			24,000			15,000
Other short-term borrowings		—			—			—			—			—
Securities sold under repurchase agreements		14,574			12,914			13,163			4,753			1,704
Subordinated debentures		10,929			10,929			5,774			5,774			—
Shareholders’ equity		22,988			24,449			21,540			20,256			18,486
	Year Ended December 31,
Statement of Income Data	2007			2006			2005			2004			2003
Interest income	$	28,523		$	27,323		$	19,176		$	13,570		$	9,096
Interest expense		15,513			12,763			7,772			4,665			3,106
Net interest income		13,010			14,560			11,404			8,905			5,990
Provision for loan losses		6,418			2,877			1,416			1,031			420
Net interest income after provision for loan losses		6,592			11,683			9,988			7,874			5,570
Noninterest income		1,161			1,650			796			613			722
Noninterest expense		11,224			10,059			8,103			6,046			3,903
Income tax expense (benefit)		(1,576	)		778			815			761			797
Net income		(1,895	)		2,496			1,866			1,680			1,592
Per Share Data
Book value per share at year end	$	8.86		$	9.43		$	8.33		$	7.85		$	9.55
Basic earnings per share		(0.73	)		0.96			0.72			0.65			0.62
Diluted earnings per share		(0.73	)		0.93			0.70			0.63			0.61
Weighted-average shares outstanding — basic		2,592,897			2,588,952			2,585,687			2,579,526			1,928,764
Weighted-average shares outstanding — diluted		2,592,897			2,676,193			2,677,678			2,668,329			1,940,451
Dividends declared		—			—			—			—			—
Dividends payout ratio		0	%		0	%		0	%		0	%		0	%
Ratios
Return on average assets		-0.48	%		0.68	%		0.62	%		0.71	%		1.02	%
Return on average equity		-7.60	%		10.36	%		8.77	%		8.56	%		8.83	%
Average equity/average assets		6.13	%		6.53	%		7.07	%		8.34	%		11.58	%
Net interest margin		3.51	%		4.19	%		3.98	%		3.97	%		4.06	%
Non-performing assets/total loans and other real estate		9.99	%		0.64	%		2.50	%		2.59	%		0.41	%
Allowance for loan losses/total loans		2.74	%		1.04	%		1.18	%		1.08	%		1.13	%

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

     The following is a discussion of our financial condition and results of operations. The purpose of this discussion is to focus on information about our financial condition and results of operations that is not otherwise apparent from our audited consolidated financial statements. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis.

Overview

     In 2007, the community banking industry was significantly impacted by a downturn in the residential housing market. In the broader financial services industry, financial markets were also impacted by the collapse of subprime lending, an interim period of severe illiquidity in credit markets and declines in market value of a broad range of investment products. Furthermore, given concerns about the slowing national economy, we started to see the easing of interest rates by the Federal Reserve in the latter part of 2007, which has continued into 2008. These market conditions had a significant impact on our results, which showed slower loan growth, an increased provision for loan losses due to our growing level of nonperforming loans (primarily residential real estate acquisition, development and construction loans) as well as compression in our net interest margin given our asset sensitive balance sheet and the added costs of elevated nonperforming assets.

     The following is a summary of our 2007 financial performance:

• Loans, net of unearned income, decreased 1% to approximately $290.8 million, down from approximately $293.2 million at December 31, 2006. Each of our markets saw a significant slowing in loan demand starting in the spring of 2007.

• Provision for loan losses increased $3.5 million, up 123% from 2006.

• Nonperforming assets increased $30.1 million to $30.7 million primarily due to the downturn in the residential real estate market in the metropolitan Atlanta area.

• Net interest income decreased $1.5 million, or 11%. This decrease is primarily due to the movement of loans into non-accrual status and the reversal of interest income on those loans. Additionally, loan volume saw a decrease, the bank’s first decrease since opening its doors in June 2000. Net interest margin, as well, declined 68 basis points to 3.51%, reflecting costs associated with higher levels of nonperforming assets.

• Noninterest income decreased $488,000 to $1.2 million and was due to the payment of a death benefit in 2006 of $495,000, which is non-recurring income. Noninterest expense increased $1.2 million, the largest component of which was increased costs associated with foreclosed properties.

• Total deposits were approximately $301 million, an increase of approximately 3% from $292 million at December 31, 2006. Total assets increased approximately 6% to $408 million, compared to approximately $386 million at December 31, 2006.

• Shareholders’ equity decreased $1.5 million to $23 million compared to December 31, 2006. This decrease is due to a net loss of $1.9 million and changes in other comprehensive income of $400,000.

Given the current changing and challenging operating environment, we have adjusted our strategic objectives. Our strategic objectives include the following:

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• Maintaining our subsidiary bank at a “well-capitalized” level, which could include the sale of common stock through a private placement and subsequent contribution of proceeds to our bank.

• Appointing four directors to a newly formed “Special Assets Committee” which oversees and works with management in dealing aggressively with our nonperforming assets through early identification, with increased reserves and ultimately maximizing recoveries;

• Diversify the loan portfolio through the implementation of the Equipment Finance Department. Increases in loan volume in this area may offset the anticipated decline in overall loan growth.

• Slowing growth by not opening any new branches in the near-term; and

• Controlling and reducing noninterest expenses to help offset margin pressure.

Outlook

     As a result of the slowing in the residential real estate markets that began in the second quarter of 2007, our community bank business model experienced significant stress in our real estate-oriented loan portfolio. Income generation from our residential real estate-related loans as well as cost containment of related expenses will be challenging for 2008.

     For 2008, we believe that the level of nonperforming assets, provisions for loan losses and loan charge-offs will be significantly higher than the levels we experienced in 2007. As a result, we will experience increased pressure on our earnings, liquidity and regulatory capital. We believe we are taking prudent and appropriate steps to ensure that as the residential real estate market remains unsettled, we focus on controlling costs and on actively managing our exposures in a challenging credit environment. We believe that our strategy of focusing on high growth markets, exemplary customer service, expense discipline, and our commitment to strong credit risk management will continue to create value for shareholders over the long term.

     Our outlook for 2008 generally assumes a slowing overall national economy and a steepening yield curve including the effect of declining short-term interest rates. Based on these assumptions, we expect the following for 2008 compared to 2007:

• Net interest income will decline as a result of spread tightening and significant increases in nonperforming assets.

• Loan growth will decline, given slower demand for certain types of loans, including residential real estate, which we will not be able to offset with higher growth in other loan categories.

• A continued rise in credit costs; as we expect charge-offs to significantly increase over 2007 levels.

• Continued expense discipline including reduced director fees, suspension of branching plans, elimination of potential management bonuses, and the reduction of salaries and benefits through the elimination and consolidation of approximately 20 job positions.

Critical Accounting Policies

     Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America as defined by the Public Company Accounting Oversight Board and conform to general practices within the banking industry. Our significant accounting policies are described in the notes to the consolidated financial statements. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and we

26

consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors that management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.

     We believe the following critical accounting policy requires the most significant estimates and assumptions that are particularly susceptible to a significant change in the preparation of our financial statements.

     Allowance for Loan Losses

     The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. The allowance represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans that may become uncollectible.

     Management’s judgment in determining the adequacy of the allowance is based on evaluation of the collectibility of loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, historical experience, estimated value of any underlying collateral, overall portfolio quality and review of specific problem loans.

     Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different than those of management.

     A loan is considered impaired when, based on current information and events, it is probable all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. Accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received until the loans are returned to accrual status.

Results for the Quarter Ended December 31, 2007

     The supplemental quarterly financial data is as follows:

	Quarters ended
	March 31,		June 30,		September 30,		December 31,
(In thousands)	2007		2007		2007		2007
Interest income	$	7,289	$	7,498	$	7,458	$	6,278
Interest expense		3,748		3,906		3,906		3,953
Net interest income		3,541		3,592		3,552		2,325
Provision for loan losses		373		619		1,061		4,365
Net income		508		398		28		(2,829	)
Net income per share — basic		0.20		0.15		0.01		(1.09	)
Net income per share — diluted		0.19		0.15		0.01		(1.08	)

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	Quarters ended
	March 31,		June 30,		September 30,		December 31,
(In thousands)	2006		2006		2006		2006
Interest income	$	6,024	$	6,729	$	7,115	$	7,455
Interest expense		2,700		2,946		3,422		3,695
Net interest income		3,324		3,783		3,693		3,760
Provision for loan losses		365		679		840		993
Net income		567		887		672		370
Net income per share — basic		0.22		0.34		0.26		0.14
Net income per share — diluted		0.21		0.33		0.25		0.14

     Interest rates decreased during the last half of 2007. While the falling rates impacted our primarily floating rate loan portfolio, thus decreasing interest income, the cost of funds increased during the year as time deposits rolled into the higher rate instruments after maturing. Interest income decreased 16% while interest expense increased 7% in the fourth quarter of 2007 compared to the same period in 2006. Consequently, our net interest margin decreased to 3.51% from 4.19% for the comparable quarters. We anticipate continued pressure on our net interest margin into 2008 as a result of changes in interest rates and higher levels of non-performing loans.

     While maintaining competitive market rates on time deposits to retain existing funds as they matured, the Bank also sought to guard against the rising cost of funds by turning to alternative funding sources in order to fund asset growth over the past year. Federal Home Loan Bank advances have increased 29% to $57.5 million in the fourth quarter over the same period in 2006. Brokered deposits have decreased 11% to $35 million in the fourth quarter over the same period in 2006. At the time they were issued, these funds cost approximately 100-170 basis points less than in-market time deposits. Interest expense on our trust preferred securities decreased in fourth quarter of 2007 to $207,000 compared to $211,000 for the same quarter in 2006. This decrease is due to the drop in interest rates during 2007. The portion of our trust preferred securities that are tied to LIBOR saw no rate movement during 2007. The portion of our trust preferred securities that are tied to prime saw no rate movement during the first three quarters of 2007, and then saw a significant reduction to 7.19% compared to 8.38% during the same period in 2006. Net interest income decreased to $2.3 million from $3.7 million comparing the fourth quarters of 2007 and 2006.

     The loan loss provision increased in the fourth quarter of 2007 to $4.4 million compared to $993,000 in the fourth quarter of 2006. This increase is due to the write down of a large commercial development loan as well as the write down and subsequent charge off of six large residential construction and lot loan relationships. The residential construction and lot loans have been subsequently processed through foreclosure. Noninterest income, at $232,000, was $143,000 lower in fourth quarter 2007 compared to the same period in 2006. This decrease is due to the payment of a death benefit from bank owned life insurance during the fourth quarter 2006 of $235,000.

     Noninterest expenses increased 5% to $2.8 million from $2.7 million comparing the fourth quarters of 2007 and 2006. Salaries and benefits decreased $136,000 for the comparable periods, due to the elimination of accrued incentives and bonuses for 2007. Other noninterest expenses increased 25% in the fourth quarter of 2007 compared to the same period in 2006. The increase included increases in occupancy and equipment of $25,000 related to our growth, data processing fees of $12,000, attorney’s fees of $67,000 and accounting and audit expenses of $76,000. The increase in accounting and audit fees is directly related to the implementation and auditing of procedures related to Section 404 of the Sarbanes-Oxley Act, which requires attestations from management and the outside auditor of internal control over financial reporting. Attorney’s fees increased due to the increased level of nonperforming loans and subsequent collection efforts.

     Diluted earnings (losses) per share for the fourth quarter were $(1.08) and $.14 for 2007 and 2006, respectively.

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Financial Condition as of December 31, 2007 and 2006

          As of December 31, 2007, we had total assets of $408 million, an increase of 6% over December 31, 2006 of $386 million. Total interest-earning assets were $382 million as of December 31, 2007, or 93% of total assets compared to $366 million or 95% of total assets as of December 31, 2006. Our primary interest-earning assets were loans, which made up 76% and 80% of total interest-earning assets as of December 31, 2007 and 2006, respectively. The loan portfolio declined by a net decrease of $2.4 million, or .83%, bringing the loan portfolio to $291 million at December 31, 2007 compared to $293 million at December 31, 2006. Our loan to deposit ratio was 96.7% as of December 31, 2007, compared to 100.5% as of December 31, 2006.

          We have 92% of our loan portfolio collateralized by real estate located in our primary market area of Fayette, Coweta, Henry and Clayton Counties, Georgia and surrounding counties. Our real estate construction and development portfolio, which comprises 56% of our total portfolio outstanding balances, consists primarily of loans collateralized by one to four family residential properties and commercial real estate mortgage loans, consisting primarily of small business commercial properties, totaling 35% of the loan portfolio. We generally require that loans collateralized by real estate not exceed 80%-85% of the collateral value. The remaining 9% of the loan portfolio consists of commercial, consumer installment, consumer lines of credit and other loans. We require collateral commensurate with the repayment ability and creditworthiness of the borrower which has remaining economic life greater than the term of the loan it secures.

          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, employment trends in our market area are relatively stable. However, residential home values are stagnant due in part to the oversupply of residential inventory and the effect of the sub-prime mortgage loan industry. In addition, this has resulted in an over-supply of residential lots. Foreclosures on residential lots and construction loans, as a result, are increasing in our market and throughout the Metro Atlanta area.

          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 on a regular basis. Also, we periodically review our lending policies and procedures, as well as remaining abreast of trends in the real estate market, comparing these trends to a stratification of our loan portfolio so we can direct our loan activity away from down-turning loan types or geographical areas or areas in which we already have a sufficient concentration. The Bank has an experienced Risk Management department that monitors all aspects of the real estate market as it relates to our loan portfolio, which allows us to focus monitoring efforts on any weak areas, geographically or by types of loans, to ensure the integrity of the existing portfolio. We also outsource the loan compliance review to a third party that has a significant amount of experience reviewing loan documentation and that periodically performs this function for us each year. 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. The Bank’s statutory capital as of December 31, 2007 and 2006 was $23 million and $25 million, respectively.

          Our securities portfolio, consisting of government-sponsored agencies, state and municipal securities, mortgage-backed securities and equity securities, totaled $58 million and $55 million as of December 31, 2007 and 2006, respectively. Net unrealized losses on securities totaled $221,000 as of December 31, 2007 compared to net unrealized losses of $869,000 as of December 31, 2006. The change in the net unrealized losses was attributable primarily to changes in interest rates affecting the values of the government-sponsored agencies and mortgage-backed securities. These changes were recognized as an adjustment to stockholder’s equity and were included in other comprehensive loss, net of tax. 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.

          Deposits grew $9 million during the year, or 3%, to a total of $301 million at December 31, 2007. The majority of growth was realized in time deposits. At December 31, 2007 we had $57.5 million outstanding in Federal Home Loan Bank advances. We were in a federal funds sold position with $26 million and had no

29

additional other borrowings at December 31, 2007. Because our market area is so competitive on all types of deposit rates, we will continue to focus our efforts on reducing the cost of funds utilizing alternative funding sources such as the FHLB and brokered funds as necessary to supplement deposit growth.

          Premises and equipment decreased by $324,000 in 2007.

          Stockholders’ equity decreased by $1.5 million in 2007 due to net losses of $1.9 million, decreases of unrealized losses on securities available-for-sale, net of tax, of $402,000, the issuance of common stock of $6,000 and paid-in capital from stock-based compensation of $27,000. The common stock issued was due to gifts of stock to employees during the year.

          As of December 31, 2006, total assets increased 16% over December 31, 2005. Our primary interest-earning assets were loans, which made up 80% and 81% as of December 31, 2006 and 2005, respectively. Our loan to deposit ratio was 100.5% as of December 31, 2006, compared to 97.1% as of December 31, 2005. Deposits grew $30 million in 2006, or 12%, primarily due to increased time deposit balances which grew $27 million comparing December 31, 2006 to December 31, 2005. Since funds were needed to accommodate the strong loan portfolio growth, the Bank supplemented retail growth with brokered deposits during 2006. The costs of the brokered deposits at that time were comparable to the retail business, and could be acquired in much larger blocks, as needed. At December 31, 2006, the Bank had $39.6 million of brokered time deposits.

          During 2006, premises and equipment decreased $223,000. While we opened our seventh branch in 2006, we entered into a lease agreement for this space with minimal capital expenditures.

          Stockholders’ equity increased by $3 million in 2006 due to net income of $2.5 million, decreases of unrealized losses on securities available-for-sale, net of tax, of $316,000, the issuance of common stock of $55,000 and paid-in capital from stock-based compensation of $42,000. The common stock issued was due to option exercises and gifts of stock to employees during the year.

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 consistent with local market conditions and to meet asset/liability objectives.

          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, 2007.

          As of December 31, 2007 and 2006, we had loan commitments outstanding of $43 million and $66 million, respectively. 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, 2007 and 2006, we had arrangements with two commercial banks for additional short-term advances (federal funds) of $11.4 and $10.3 million, respectively, in aggregate. In addition, the Bank can borrow funds from the Federal Home Loan Bank of Atlanta, secured by certain real estate loans and/or investment securities. We can also utilize the brokered deposit market to obtain funds as needed.

          As of December 31, 2007, we were considered adequately capitalized based on our capital ratios and according to regulatory capital requirements. Our stockholders’ equity decreased primarily due to net losses sustained in 2007 and the corresponding reduction of retained earnings.

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          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 not pay dividends without regulatory approval due to the Bank’s total classified assets exceeding 80% of its equity capital.

          The minimum capital requirements to be considered well capitalized under prompt corrective action provisions and the actual capital ratios for the Bank and the Company as of December 31, 2007 are as follows:

							Regulatory
	Actual						Minimum
	Consolidated			Bank			Requirement
Leverage capital ratios		7.85	%		7.29	%		5.00	%
Risk-based capital ratios:
Tier one capital		9.35			8.70			6.00
Total capital		10.78			9.96			10.00

          These ratios may decline if asset growth continues, or if we sustain further loan losses. However, based on known circumstances we expect to exceed the regulatory minimum requirements during 2008. The Company has the ability to inject approximately $1.5 million in additional capital into the Bank if considered necessary.

          The Bank currently has no material commitments for capital expenditures.

Results of Operations for the Years Ended December 31, 2007, 2006 and 2005

          Net Interest Income

          Net interest income, our chief source of revenue, is a function of the yields received on interest-earning assets and the rates paid on interest-bearing liabilities. Interest-earning assets include interest bearing deposits in banks, loans and investments, while interest-bearing liabilities are comprised of deposits and other borrowed funds.

          Changes in net interest income from period to period reflect both the increases or the decreases in average interest-earning assets and average interest-bearing liabilities, as well as the increases or decreases in the interest rate spread, which is the difference between the rates we earn on our assets and the rates we pay on our liabilites. The level of mismatch in the maturity and repricing characteristics of our interest-earning assets and our interest-bearing liabilities has a direct effect on the interest rate spread.

          Average interest-earning assets for 2007 increased $23 million. The yield on these assets, however, decreased to 7.70% in 2007 from 7.86% in 2006. The largest dollar impact to net interest income in 2007 was the repricing of time deposits at higher interest rates during early to mid 2007 and their subsequent failure to reprice in sequence with the decline in the prime rate later in the year. Increases in interest expense on deposits directly related to rising interest rates were $1.8 million. In addition, the Federal Reserve lowered the discount rate causing decreases in the prime rate three times, from 8.25% to a rate of 7.25% where it remained through year-end. The average yield on the loan portfolio in 2007 was 8.32%, which included loan fees, compared to 8.62% last year. Interest income from the investment portfolio decreased $32,000 in 2007 compared to the prior year largely due to maturities and calls during the year for a lower average total of securities. The yield on investment securities in 2007 was 4.69% compared to 4.57% in 2006.

          With growth in the loan portfolio being largely funded with growth in borrowed funds and with the repricing of deposits at higher rates, interest expense increased as well. While average time deposits decreased $4.6 million, or 2%, in 2007 compared to 2006, we still experienced an increase to interest expense of $1.1 million due to the repricing of these deposits at higher rates through the first half of 2007. Brokered deposits made up 17% of total time deposits at December 31, 2007. With the prime rate remaining level through the first half of 2007, maturing time deposits issued at lower rates in 2006 renewed at higher rates. This caused some pressure on our interest rate margin in fourth quarter which we expect to ease in the first quarter 2008. Total interest expense increased $2.7 million in 2007 over 2006.

31

          Net interest income decreased $1.5 million in 2007, compared to a $3.2 million increase in 2006, for a 147% decrease compared to the prior year. The growth in interest-earning assets in a general rising rate environment in 2007 was funded by a growth in interest-bearing liabilities. While the yield on interest-earning assets decreasing by only 6 basis points during the year, the cost of interest-bearing liabilities increased by 53 basis points, resulting in a decrease in the net interest margin. The net interest margin was 3.51% in 2007 and 4.19% in 2006.

          Overall, average interest-earning assets for 2006 increased $61 million compared to 2005. The yield on these assets increased to 7.86% in 2006 from 6.69% in 2005. Loan growth was the primary contributor to the increase in net interest income in 2006. Average loans during 2006 increased 24% over the average balance for 2005. This significant increase in loan volume created an increase in interest income on loans of $7.5 million. In addition, during the first six months of 2006, the Federal Reserve raised the discount rate causing increases in the prime rate four times, from 7.25% to a rate of 8.25% in June 2006, where it remained through year-end. The average yield on the loan portfolio in 2006 was 8.62%, which included loan fees, compared to 7.40% in 2005. Interest income from the investment portfolio increased $553,000 in 2006 compared to the prior year largely due to additional purchases during the year for a higher average total of securities. The yield on investment securities in 2006 was 4.57% compared to 4.23% in 2005.

          With growth in the loan portfolio being largely funded with growth in time deposits and with the rising rate environment early in the year, interest expense increased as well. Average time deposits increased $44 million, or 28%, in 2006 compared to 2005, resulting in an increase to interest expense of $4 million. With the prime rate remaining stable through the second half of 2006, maturing time deposits issued at lower rates in 2005 and early 2006 renewed at higher rates. This caused some pressure on our interest rate margin in fourth quarter. Total interest expense increased $5 million in 2006 over 2005.

          The net interest margin increased to 4.19% in 2006 compared to 3.98% in 2005, as the yield on interest-earning assets increased 117 basis points during the same period while the cost of interest-bearing liabilities increased by only 94 basis points, resulting in an increase in the net interest margin.

          Provision for Loan Losses

          The provision for loan losses was $6.4 million in 2007, an increase of $3.5 million, or 123%, over the provision recorded in 2006. The increase was due primarily to the slowdown of sales in the housing market and its effect on the residential construction and development loan portfolios.

          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, 2007 we had $19.6 million in non-accrual loans as compared to $406,000 as of December 31, 2006. The majority of the increase is attributed to the downturn of the real estate market and is centered in residential and commercial development and construction projects. Approximately $13 million of the increase is represented by 7 residential development and construction projects, while another $4.5 million is in a commercial development project. We expect non-accrual loans to continue to increase during the first two quarters due to continued pressures on the real estate market and residential builders and developers but then to level off during the remaining six months of 2008. The allowance for loan losses as a percentage of total loans as of December 31, 2007 and 2006 was 2.74% and 1.04%, respectively. Actual loan charge offs were $1.6 million during 2007 as compared to $2.9 million during 2006.

          We anticipate approximately $4.6 million in loan charge-offs and approximately $2 million in the loan loss provision to maintain an adequate loan loss reserve during the first quarter of 2008.

          It is our opinion that the current allowance for loan losses of $8 million is adequate to absorb known risks in the loan portfolio. No assurance can be given, however, that increased loan volume, adverse economic conditions, or other circumstances will not result in increased losses in our loan portfolio.

32

          Noninterest Income

          The following table presents the principal components of noninterest income for the years ended December 31, 2007, 2006, and 2005.

(Dollars in Thousands)	2007		2006		2005
Income from bank-owned life insurance	$	185	$	195		32
Proceeds from life insurance policy		0		495		—
Service charge income		963		832		616
Gain on sale of securities		0		40		106
Other		13		88		42
Total noninterest income	$	1,161	$	1,650	$	796

          Noninterest income consists of service charges on deposit accounts and other miscellaneous service charges, fees, and income. Total noninterest income decreased 30% in 2007 to $1.2 million compared to the prior year. The primary reason for the decrease was income recorded in 2006 due to proceeds received from a one-time payment of bank owned life insurance totaling $495,000. Bank owned life insurance was purchased November 2005 to offset current and future employee benefit costs. While minor in dollars, various service charges on customer accounts, including overdraft fees, ATM fees, wire transfer fees, and service charge income, combined, increased 3% in 2007 over the same period in 2006.

          Total noninterest income increased 107% during 2006 to $1.6 million compared to 2005. The primary reason for the increase was income derived from bank owned life insurance totaling $690,000. Of this, $495,000 was proceeds from the death of an executive officer in April 2006. While minor in dollars, various service charges on customer accounts, including overdraft fees, ATM fees, wire transfer fees, and service charge income, combined, increased 35% in 2006 over the same period in 2005.

Noninterest Expense

          The following table presents the principal components of noninterest expenses for the years ended December 31, 2007, 2006, and 2005.

(Dollars in Thousands)	2007		2006		2005
Salaries and employee benefits	$	6,013	$	5,608	$	4,479
Net occupancy and equipment		1,803		1,669		1,247
Attorney’s fees		172		103		137
Data processing		477		414		305
Directors’ fees		163		154		153
Accounting and audit fees		239		140		165
Marketing and community relations		234		244		189
Supplies/printing		164		152		145
Telephone		143		112		80
Dues and memberships		56		40		40
Other		1,761		1,423		1,163
Total Noninterest expense	$	11,225	$	10,059	$	8,103

33

          Noninterest expenses increased 12% to $11 million in 2007 from $10 million in 2006. Salaries and employee benefits increased $405,000. Total full-time equivalent employees increased during the current year to 99 from 96 at December 31, 2006. The majority of the additions to staff were placed as additional support in the credit department of the Bank.

          Net occupancy and equipment expenses increased 8% to $1.8 million in 2007, primarily due to leasehold improvements on the West Fayetteville and operations locations.

          Data processing fees increased $63,000, or 15% compared to 2006. This increase was attributed to the opening of our West Fayetteville office and operations center and the overall growth of the Bank. Telephone expense increased $31,000, or 28% compared to 2006. This increase is mainly due to the upgrade of the Bank’s communications lines for overall efficiency and disaster recovery and business continuity planning. Increases were realized in both the accounting and audit and attorney’s fees during 2007. Accounting and audit fees increased due to the subsequent phase-in of procedures related to the implementation of our testing as required by Section 404 of the Sarbanes-Oxley Act. Attorney’s fees increased due to an increased level of problem loans and other real estate owned that needed legal attention in 2007.

          Noninterest expenses increased 24% to $10 million in 2006 from $8.1 million in 2005. Salaries and employee benefits increased $1.1 million. Total full-time equivalent employees increased during the current year to 96 from 82 at December 31, 2005. The majority of the additions to staff were placed as additional support in the branch and operations areas of the Bank.

          Net occupancy and equipment expenses increased 34% to $1.7 million in 2006, primarily due to branch expansion and leasehold improvements on the West Fayetteville and operations locations.

          Other noninterest expenses, such as data processing and telephone expenses were also higher in 2006 compared to the previous year as a result of the Bank’s growth during the year.

Income Tax

          We reported an income tax benefit of $1,576,000 for 2007, and tax expense of $778,000, and $815,000 for 2006, and 2005, respectively. The effective tax rate for 2007, 2006, and 2005 was - -45.40%, 23.77%, and 30.4%, respectively. There were no loss carryforwards or valuation allowances in 2007, 2006, or 2005.

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.

34

          A simple interest rate “gap” analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, we also evaluate how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) that limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates.

          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, 2007, our cumulative one year interest rate-sensitivity gap ratio was .86. Our targeted ratio is 0.80 to 1.20 in this time horizon. This indicates that our interest-bearing liabilities will reprice during this period at a rate faster than our interest-earning assets. However, on a shorter term basis we have a positive gap. As a result, the recent interest rate reductions by the Federal Reserve have had an adverse effect on our net interest income.

          The following table sets forth the distribution of the repricing of our interest-earning assets and interest-bearing liabilities as of December 31, 2007, 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.

35

			Three			One
			Months			Year
			but			but
	Within		Within			Within			After
	Three		One			Five			Five
	Months		Year			Years			Years		Total
Interest-earning assets
Federal funds sold		26,039		—			—			—		26,039
Interest bearing deposits		3,504		—			—			—		3,504
Securities		3,282		2,480			7,689			48,028		61,479
Loans		193,395		28,543			63,460			5,599		290,997
		226,220		31,023			71,149			53,627		382,019
Interest-bearing liabilities:
Interest-bearing demand deposits		48,515		—			—			—		48,515
Savings		2,859		—			—			—		2,859
Time Deposits		56,006		149,584			11,533			—		217,123
Subordinated debentures		10,929		—			—			—		10,929
Securities sold under repurchase agreements		14,574		—			—			—		14,574
Other Borrowings		7,500		10,000			33,000			7,000		57,500
		140,383		159,584			44,533			7,000		351,500
Interest rate sensitivity gap		85,837		(128,561	)		26,616			46,627		30,519
Cumulative interest rate sensitivity gap		85,837		(42,724	)		(16,108	)		30,519
Interest rate sensitivity gap ratio		1.61		0.19			1.60			7.66
Cumulative interest rate sensitivity gap ratio		1.61		0.86			0.95			1.09

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 stockholders’ 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.

36

      Average balances, interest income, and interest expense

     The following table contains condensed average balance sheets (using daily average balances) for the years indicated. In addition, the amount of our interest income and interest expense for each category of interest-earning assets and interest-bearing liabilities and the related average interest rates, net interest spread and net yield on average interest earning assets are included.

Analysis of Net Interest Income
for the Years Ended December 31, 2007, 2006, and 2005

	2007								2006								2005
	Average			Income/		Yield/			Average			Income/		Yield/			Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate			Balance			Expense		Rate			Balance			Expense		Rate
Assets:
Deposits in banks	$	2,154		$	111		5.15	%	$	1,030		$	59		5.73	%	$	935		$	33		3.58	%
Taxable investment securities		43,770			2,160		4.93	%		45,928			2,206		4.80	%		39,439			1,726		4.38	%
Nontaxable investment securities		13,825			544		3.93	%		13,978			530		3.79	%		12,123			456		3.76	%
Securities valuation account		(993	)		—					(1,579	)		—					(816	)		—
Federal funds sold		6,969			343		4.92	%		8,965			429		4.79	%		9,996			313		3.13	%
Loans (1)		304,880			25,365		8.32	%		279,457			24,099		8.62	%		225,007			16,648		7.40	%
Allowance for loan losses		(3,807	)		—					(3,472	)		—					(2,441	)		—
Cash and due from banks		5,787			—					5,551			—					5,018			—
Other assets		20,538			—					18,922			—					11,960			—
Total Assets	$	393,123			—				$	368,780			—				$	301,221			—
Total interest-earning assets	$	370,605			28,523		7.70	%	$	347,779			27,323		7.86	%	$	286,684			19,176		6.69	%
Liabilities:
Noninterest-bearing demand	$	35,046			—				$	33,259			—				$	27,637			—
Interest bearing demand and savings		56,091			1,670		2.98	%		56,120			1,493		2.66	%		54,810			992		1.81	%
Time		195,561			9,928		5.08	%		200,159			8,852		4.42	%		156,146			5,313		3.40	%
Total deposits		286,698								289,538								238,593
Other borrowings (2)		80,049			3,915		4.89	%		53,586			2,418		4.51	%		40,306			1,467		3.64	%
Other liabilities		1,435			—					1,559			—					1,029			—
Stockholders’ equity		24,942			—					24,097			—					21,293			—
Total liabilities and stockholders’ equity	$	393,124							$	368,780							$	301,221
Total interest-bearing liabilities	$	331,701			15,513		4.68	%	$	309,865			12,763		4.12	%	$	251,262			7,772		3.18	%
Net interest income				$	13,010							$	14,560							$	11,404
Net interest margin (3)							3.51	%							4.19	%							3.98	%
Net interest spread (4)							3.02	%							3.74	%							3.51	%

(1)	Interest income from loans includes total fee income of approximately $1,378,000, $1,471,000, and $1,386,000 for the years ended December 31, 2007, 2006 and 2005, respectively. The average balance of non-accrual loans included in average loans was $10,460,000, $3,055,000, and $1,720,000 in 2007, 2006 and 2005, respectively.
(2)	Other borrowings include subordinated debentures issued by the Company in 2004 and 2006.
(3)	Net interest margin is net interest income divided by average interest-earning assets.
(4)	Interest rate spread is the weighted average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

37

      Rate and Volume Analysis

     The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the year indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to:

• change in rate (change in rate multiplied by old volume);

• change in volume (change in volume multiplied by old rate); 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,									Year Ended December 31,
	2007 vs. 2006									2006 vs. 2005
	Changes Due To:									Changes Due To:
(Dollars in Thousands)	Volume			Rate			Total			Volume			Rate		Total
Increase (decrease) in:
Income from interest-earning assets:
Loans	$	2,128		$	(862	)	$	1,266		$	4,432		$	3,019	$	7,451
Investment securities		(111	)		79			(32	)		373			181		554
Federal funds sold		(98	)		12			(86	)		(35	)		151		116
Deposits with other banks		59			(7	)		52			3			23		26
Total interest income		1,978			(778	)		1,200			4,773			3,374		8,147
Expense from interest-bearing liabilities:
Interest-bearing demand and savings		(1	)		178			177			25			476		501
Time deposits		(209	)		1,285			1,076			1,714			1,825		3,539
Other borrowings		192			10			202			470			201		671
Federal Home Loan Bank advances		968			327			1,295			152			128		280
Total interest expense		950			1,800			2,750			2,361			2,630		4,991
Net interest income	$	1,028		$	(2,578	)	$	(1,550	)	$	2,412		$	744	$	3,156

      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,
(Dollars in Thousands)	2007		2006		2005
Mortgage-backed securities	$	17,574	$	16,489	$	15,648
U.S. Government Sponsored Agencies		25,012		23,564		23,455
State an municipal securities		13,717		13,445		12,548
Corporate bonds		1,894		1,871		1,740
	$	58,197	$	55,369	$	53,391

38

     The mortgage-backed securities consist of government agency mortgage pool securities with stated maturities up to thirty years. However, the portfolio balance reduces monthly as the underlying mortgages are paid down. Most will have an effective life that is much shorter than the stated maturity of the security. Although the exact maturity date is uncertain, the portfolio is predicted to have an effective maturity of less than five years.

      Maturities

     The amounts of available for sale securities, including the weighted average yield in each category are shown in the following table according to contractual maturity classifications one through five years, after five through ten years and after ten years. There were no investment securities classified as held to maturity in 2007, 2006, or 2005.

	December 31,
	2007							2006				2005
					Year-end
					Weighted
	Amortized		Fair		Avg.			Amortized		Fair		Amortized		Fair
(Dollars in Thousands)	Cost		Value		Yield(1)			Cost		Value		Cost		Value
Mortgage-backed securities
Over one year through five years	$	3,417	$	3,377		3.95	%	$	3,575	$	3,474	$	2,527	$	2,405
Over five years through ten years		4,324		4,221		3.73			6,319		6,106		7,537		7,254
Over ten years		10,031		9,976		5.02			7,064		6,909		6,237		5,989
State and municipal securities
One year or less	$	—	$	—		—	%	$	—	$	—	$	190	$	189
Over one year through five years		1,329	$	1,318		3.22			830	$	835		849	$	852
Over five years through ten years		4,068		4,060		3.77			4,887		4,838		1,635		1,573
Over ten years		8,414		8,340		4.16			7,734		7,771		10,090		9,934
Corporate bonds
Over five years through ten years	$	1,000	$	1,011		6.75	%	$	1,000	$	987	$	1,000	$	1,014
Over ten years		880		882		7.61			880		884		726		726
U.S. Government Sponsored Agencies
One year or less	$	2,498	$	2,480		3.50	%	$	498	$	498	$	—	$	—
Over one year through five years		1,995		1,983		3.64			4,488		4,353		4,482		4,323
Over five years through ten years		1,499		1,499		5.00			2,499		2,465		2,500		2,481
Over ten years		18,963		19,050		5.76			16,464		16,249		16,997		16,651
	$	58,418	$	58,197		4.81	%	$	56,238	$	55,369	$	54,770	$	53,391

(1) Yields were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. The weighted average yield for each maturity range was computed using the carrying value of each security in that range and are not calculated on a tax equivalent basis.

39

Loan Portfolio

          Types of Loans

          The amount of loans outstanding at the indicated dates is shown in the following table according to the type of loan.

	December 31,
	2007						2006						2005						2004						2003
				% of						% of						% of						% of						% of
(Dollars in Thousands)	Amount			Loans			Amount			Loans			Amount			Loans			Amount			Loans			Amount			Loans
Commercial	$	22,576			8	%	$	19,569			7	%	$	23,928			9	%	$	24,753			13	%	$	19,234			15	%
Real estate-construction		162,478			56			168,720			58			134,997			53			56,787			31			34,848			28
Real estate-mortgage		101,779			35			101,169			34			90,640			36			101,151			54			66,884			53
Consumer installment and other		4,164			1			4,195			1			4,824			2			4,409			2			4,455			4
		290,997			100	%		293,653			100	%		254,389			100	%		187,100			100	%		125,421			100	%
Less:
Allowance for loan losses		(7,961	)					(3,051	)					(3,001	)					(2,016	)					(1,419	)
Deferred loan fees		(201	)					(430	)					(435	)					(363	)					(220	)
Net loans	$	282,835					$	290,172					$	250,953					$	184,721					$	123,782

          Maturities and Sensitivities of Loans to Changes in Interest Rates

          Total loans as of December 31, 2007 and 2006 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,
(Dollars in Thousands)	2007		2006
Commercial
One year or less	$	14,675	$	8,343
After one through five years		7,901		8,779
After five years		—		2,447
		22,576		19,569
Real Estate — Construction
One year or less		149,876		158,998
After one through five years		12,602		9,344
After five years		—		378
		162,478		168,720
Other
One year or less		56,452		53,233
After one through five years		47,026		49,816
After five years		2,465		2,315
		105,943		105,364
	$	290,997	$	293,653

40

The following table summarizes loans as of December 31, 2007 and 2006 with the due dates after one year that have predetermined and floating or adjustable interest rates.

	December 31,
(Dollars in Thousands)	2007		2006
Predetermined interest rates	$	59,935	$	58,672
Floating or adjustable interest rates		10,059		14,407
	$	69,994	$	73,079

          Risk Elements

          Information with respect to non-accrual, past due and restructured loans as of December 31, 2007, 2006, 2005, 2004 and 2003 is as follows:

	December 31,
(Dollars in Thousands)	2007		2006		2005		2004		2003
Non-accrual loans	$	19,615	$	406	$	2,539	$	4,812	$	444
Loans contractually past due 90 days or more as to interest or principal payments and still accruing		4,899		1,267		0		26		67
Restructured loans		0		0		0		0		0
Loans, now current about which there are serious doubts as to the ability of the borrower to comply with loan repayment terms		0		0		0		0		0
Interest income that would have been recorded on non-accrual and restructured loans under original terms		1,628		102		49		116		14
Interest income that was recorded on non-accrual and restructured loans		724		103		193		0		0

          As of December 31, 2007, the Bank had $19.6 million in non-accrual loans as compared to $406,000 as of December 31, 2006. This majority of the increase is attributed to the downturn in the real estate market and is centered in residential and commercial development and construction projects. Approximately $13 million of the increase is represented by seven (7) residential and construction projects, while $4.5 million is in a commercial development relationship. We expect the level of non-accrual loans to continue to increase during the first two quarters and level off during the remaining six months of 2008. However, continued slowness in the current real estate market could have a negative effect on these levels. Although we believe that adequate reserves have been provided for these loans, management will continue to make additional provisions to the loan loss reserve if conditions warrant.

          As the result of the increase of non-performing assets, the Bank has instituted greater emphasis and oversight by the Board of directors. Action plans and strategies on non-performing and other problematic loans are discussed on a weekly basis in the Directors Loan Committee. The committee has several members that are real estate professionals with numerous years of experience in the industry. This expertise should have a positive effect in establishing strategies that will facilitate the management and disposition of these assets.

          It is our policy to discontinue the accrual of interest income when, in the opinion of management, collection of interest becomes doubtful. A non-accrual status is applied 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.

41

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,
(Dollars in Thousands)	2007			2006			2005			2004			2003
Average amount of loans outstanding	$	304,880		$	279,457		$	225,007		$	160,948		$	102,648
Balance of allowance for loan losses at beginning of year	$	3,051		$	3,001		$	2,016		$	1,419		$	1,141
Loans charged off:
Consumer		(136	)		(61	)		(88	)		(33	)		(142	)
Real estate		(1,344	)		(705	)		(175	)		(232	)		—
Commercial		(118	)		(2,181	)		(194	)		(169	)		—
		(1,598	)		(2,947	)		(457	)		(434	)		(142	)
Loans recovered:		90			120			26			—			—
Net charge-offs		(1,508	)		(2,827	)		(431	)		(434	)		(142	)
Additions to allowance charged to operating expense during year		6,418			2,877			1,416			1,031			420
Balance of allowance for loan losses at end of year	$	7,961		$	3,051		$	3,001		$	2,016		$	1,419
Ratio of net loans charged off during the year to average loans outstanding		.49	%		1.01	%		0.19	%		0.27	%		0.14	%

          Allowance for Loan Losses

          The allowance for loan losses is maintained at a level that is deemed appropriate by management to adequately cover all known and inherent risks in the loan portfolio. Our evaluation of the loan portfolio includes a periodic review of loan loss experience, current economic conditions that may affect the borrower’s ability to pay and the underlying collateral value of the loans.

          The allowance for loan losses represents management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain a level considered adequate to absorb anticipated loan losses. In assessing the adequacy of the allowance, management reviews the size, quality and risk of loans in the portfolio. Management also considers such factors as our loan loss experience, the amount of past due and nonperforming loans, specific known risk, the status and amount of nonperforming assets, underlying collateral values securing the loans, current and anticipated economic conditions and other factors which affect the allowance for potential credit losses.

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          All of our loans are assigned individual loan grades when underwritten. The Bank has established general reserves based on the historical loss ratio adjusted for qualitative factors. These reserves are regularly reviewed by the FDIC and the State of Georgia Department of Banking and Finance. General reserve factors applied to each rating grade are based upon management’s experience and common industry and regulatory guidelines.

          As of December 31, 2007, 2006, 2005, 2004 and 2003, we made no formal 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, 2007					December 31, 2006					December 31, 2005					December 31, 2004					December 31, 2003
			Percent of					Percent of					Percent of					Percent of					Percent of
			loans in					loans in					loans in					loans in					loans in
			each					each					each					each					each
			category					category					category					category					category
(Dollars in			to total					to total					to total					to total					to total
Thousands)	Amount		loans			Amount		loans			Amount		loans			Amount		loans			Amount		loans
Commercial	$	149		1.88	%	$	545		6.66	%	$	2,229		9.41	%	$	1,452		13.23	%	$	1,009		15.34	%
Real estate-construction		5,056		63.50			1,424		57.46			396		53.06			263		30.35			131		27.78
Real estate-mortgage		47		.59			468		34.45			—		35.63			—		54.06			—		53.33
Consumer installment loans		20		.25			122		1.43			130		1.90			117		2.36			138		3.55
Other qualitative factors		2,689		33.78			492		—			246		—			184		—			141		—
	$	7,961		100.00		$	3,051		100.00		$	3,001		100.00		$	2,016		100.00		$	1,419		100.00

          Deposits

          Average amount of deposits (determined using daily average balances) 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.

	Year Ended December 31,
	2007					2006					2005
(Dollars in Thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Non-interest-bearing demand deposits	$	35,046		—	%	$	33,259		—	%	$	27,637		—	%
Interest-bearing demand and savings deposits		56,091		2.98			56,120		2.66			54,810		1.81
Time deposits		195,561		5.08			200,159		4.42			156,146		3.40
Total	$	286,698				$	289,538				$	238,593

          The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2007 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.

(Dollars in Thousands)	December 31, 2007
Three months or less	$	30,853
Over three through six months		20,382
Over six through twelve months		53,959
Over twelve months		5,402
Total	$	110,596

          The Bank had approximately $105 million in jumbo CD’s maturing in one year or less at December 31, 2007. We believe the large percentage, 57%, of jumbo CD’s in relation to total CD’s is attributable to our affluent

43

customer base. It is our experience that a large portion of these deposits are retained by the Bank as they mature because our deposit interest rates are comparable to other rates in our market.

          The Bank also obtains brokered funds in order to supplement retail deposits for funding loan growth during the year. The rates paid on these funds, including fees, were comparable to or slightly lower than retail time deposits issued at the same time. The total in brokered funds was $35,094,000 and $39,607,000 at December 31, 2007 and 2006, respectively.

           Return on Assets and Stockholders’ Equity

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

	Year Ended December 31,
	2007			2006			2005
Return on assets (1)		-.48	%		.68	%		.62	%
Return on equity (2)		-7.60			10.36			8.77
Dividend payout ratio (3)		n/a			n/a			n/a
Equity to assets ratio (4)		6.13			6.53			7.07

(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

Contract Maturities Disclosure

          The following table reflects a summary of the Company’s commitments to extend credit, commitments under contractual leases, as well as the Company’s contractual obligations, consisting of deposits, FHLB Advances and borrowed funds, as of December 31, 2007 by contractual maturity date.

			Less						More
			than						than five
(Dollars in Thousands)	Total		One year		1-3 years		3-5 years		years
Demand and Savings	$	83,594	$	83,594	$	—	$	—	$	—
Time Deposits		217,123		205,590		10,343		1,190		—
FHLB Advances		57,500		17,500		—		33,000		7,000
Securities sold under repurchase agreements		14,574		14,574		—		—		—
Long-term debentures		10,929		—		—		—		10,929
Commitments to customers under lines of credit		43,289		43,289		—		—		—
Commitments under lease agreements		1,890		338		472		432		648
	$	428,899	$	364,885	$	10,815	$	34,622	$	18,577

Off-Balance Sheet Arrangements

          Our only material off-balance sheet arrangements consist of commitments to extend credit and standby letters of credit issued in the ordinary course of business. For a complete description of these obligations please refer to footnote number 14 to our financial statements included herein.

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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.”

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either diminished current market values or reduced potential net interest income in future periods. The Company’s primary market risk exposure is currently the interest rate risk inherent in its lending and deposit taking activities. The structure of the Company’s loan and deposit portfolios is such that a significant decline in the prime rate may adversely impact net market values and interest income. The Company manages its interest rate risk through the use of various tools, including managing the composition and size of the investment portfolio so as to reduce the interest rate risk in the deposit and loan portfolios, at the same time maximizing the yield generated by the portfolio.

          The table below presents the contractual balances and the estimated fair value of the Company’s financial instruments at their expected maturity dates as of December 31, 2007. The expected maturity categories for investment securities take into consideration historical prepayment experience, as well as Management’s expectations based on the interest rate environment as of December 31, 2007. For core deposits without contractual maturity (i.e., interest-bearing checking, savings, and money market accounts), the table presents principal cash flows based on Management’s judgment concerning their most likely runoff or repricing behaviors. Weighted average variable rates are based on implied forward rates in the yield curve as of December 31, 2007.

							Expected Maturity Date
(Dollars in thousands)	2008			2009			2010			2011			2012			Thereafter			Total			Fair Value
Assets
Investment Securities
Fixed rate	$	2,498		$	1,661		$	2,573		$	1,277		$	2,230		$	46,366		$	56,605		$	56,417
Average interest rate		3.50	%		3.35	%		3.64	%		4.60	%		4.91	%		4.99	%		4.81	%
Variable rate		3,282			—			—			—			—			1,813			5,095			5,062
Average interest rate		6.00	%		—	%		—	%		—	%		—	%		4.59	%		5.81	%
Loans
Fixed rate		40,066			24,736			24,144			2,058			2,463			1,678			95,145			95,565
Average interest rate		7.43	%		7.81	%		8.00	%		8.10	%		7.92	%		6.48	%		7.50	%
Variable rate		185,592			4,836			5,223			—			—			—			195,651			197,651
Average interest rate		6.98	%		8.70	%		8.30	%		—			—			—			7.06	%
Interest-bearing deposits with other banks
Variable rate		3,504			—			—			—			—			—			3,504			3,504
Average interest rate		5.15	%		—			—			—			—			—			5.15	%
Liabilities
Interest-bearing deposits and savings
Variable rate		51,374			—			—			—			—			—			51,374			51,374
Average interest rate		2.98	%		—			—			—			—			—			2.98	%
Time deposits		205,590			7,977			2,366			1,118			72			—			217,123			221,727
Average interest rate		5.02	%		4.66	%		4.61	%		5.37	%		4.38	%		—			5.01	%
Fixed rate short-term borrowings		10,000			—			—			—			33,000			7,000			50,000			54,207
Average interest rate		4.44	%		—			—			—			4.51	%		4.10	%		4.44	%
Variable rate short-term borrowings		14,574			7,500			—			—			—			—			22,074			22,074
Average interest rate		3.71	%		4.86	%		—			—			—			—			4.10	%
Variable rate long-term borrowings		—			—			—			—			—			10,929			10,929			10,929
Average interest rate		—			—			—			—			—			7.70	%		7.70	%

46

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

     The following consolidated financial statements of the Company and its subsidiary, together with the Report of Independent Registered Public Accounting Firm thereon, are included as exhibit 13 to this report on 10-K and incorporated into this Item 8 by reference.

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2007 and 2006

Consolidated Statements of Income (Loss) for the years ended
December 31, 2007, 2006 and 2005

Consolidated Statements of Comprehensive Income (Loss)
for the years ended December 31, 2007, 2006 and 2005

Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2007, 2006 and 2005

Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005

Notes to Consolidated Financial Statements

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     We have not had any change in accountants or disagreements with accountants on accounting and financial disclosure during the two most recent fiscal years.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     The Company’s principal executive and principal financial officers believe that the Company’s disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) or 15(d)-15(e), are effective. This conclusion was based on an evaluation of these controls and procedures as of the end of the fourth quarter of 2007.

Changes in Internal Control Over Financial Reporting

     There have been no changes over financial reporting in our internal control over financial reporting that occurred during the fourth quarter of 2007 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

Evaluation of Internal Control Over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system has been designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of our published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

     Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of December 31, 2007, our internal controls over financial reporting were effective.

47

     As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures are effective.

     This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

ITEM 9B. OTHER INFORMATION

     None.

48

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

     We have adopted a code of ethics applicable to all of our officers and employees, which was last revised in November, 2004. The revised code of ethics satisfies the criteria set forth in Item 406(b) of the SEC’s Regulation S-K. We believe that it promotes ethical conduct and prevents conflicts of interest. If we make an amendment to, or a waiver from, a provision of our code of ethics that applies to our principal executive officer, principal financial officer or persons performing similar functions and that relates to any element of the code of ethics definition enumerated in paragraph (b) to Item 406 of the SEC’s Regulation S-K we will post such information on our website. We will provide to any person, without charge, a copy of such code of ethics upon request. Requests should be sent to Southern Community Bancshares, 525 North Jeff Davis Drive, Fayetteville, Georgia, 30214, Attention: Corporate Secretary.

     Additional information regarding the Company’s directors and executive officers is incorporated by reference to the section entitled “Directors and Executive Officers” in the Company’s Definitive Proxy Statement for its 2008 Annual Shareholders’ Meeting.

ITEM 11. EXECUTIVE COMPENSATION

     Incorporated by reference to the section entitled “Executive Compensation” in the Company’s Definitive Proxy Statement for its 2008 Annual Shareholders’ Meeting.

ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The following chart sets forth certain information relating to the Company’s equity compensation plans as of December 31, 2007.

Equity Compensation Plan Table

					(c)
					Number of
					securities
		(a)			remaining available
	Number of				for future issuance
	securities to be			(b)	under equity
	issued upon		Weighted-average		compensation plans
	exercise of		exercise price of		(excluding
	outstanding		outstanding		securities
	options, warrants		options, warrants		reflected in column
Plan category	and rights		and rights		(a))
Equity compensation plans approved by security holders		211,320	$	7.49		25,417
Equity compensation plans not approved by security holders		—		—		—
Total		211,320	$	7.49		25,417

     Additional disclosure is incorporated by reference to the section entitled “Outstanding Voting Securities of the Company and Principal Holders Thereof” in the Company’s Definitive Proxy Statement for its 2008 Annual Shareholders’ Meeting.

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     Incorporated by reference to the section entitled “Certain Relationships and Related Transactions” in the Company’s Definitive Proxy Statement for its 2008 Annual Shareholders’ Meeting.

49

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

     Incorporated by reference to the section entitled “Proposal No. 2 — Ratification of Independent Auditors” in the Company’s Definitive Proxy Statement for its 2008 Annual Shareholders’ Meeting.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     The following exhibits, which include all financial statements filed as a part of this report, 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 Form SB-2 filed by the Registrant on April 12, 2002)
3.2	Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Form SB-2 filed by the Registrant 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)*
13	Consolidated Financial Statements of Southern Community Bancshares, Inc.
21	Subsidiaries of the Registrant
23	Consent of Mauldin & Jenkins, LLC
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Denotes management contract or compensatory plan or arrangement.

50

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)
By:	/s/ Gary D. McGaha
	Gary D. McGaha
	President and Chief Executive Officer Date: April 28, 2008

     In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Gary D. McGaha Gary D. McGaha, President, Chief Executive Officer and Director [Principal Executive Officer]	Date: April 28, 2008
/s/ Leslye L. Grindle Leslye L. Grindle, Senior Vice-President Chief Financial Officer [Principal Financial Officer and Principal Accounting Officer]	Date: April 28, 2008
/s/ James S. Cameron James S. Cameron, Director	Date: April 28, 2008
/s/ George R. Davis, Sr. George R. Davis, Sr. , Director	Date: April 28, 2008
/s/ Robert B. Dixon, Jr. Robert B. Dixon, Jr. , Director	Date: April 28, 2008
/s/ Richard J. Dumas Richard J. Dumas, Director	Date: April 28, 2008
/s/ William Wayne Leslie. William Wayne Leslie, Director	Date: April 28, 2008
/s/ Thomas D. Reese Thomas D. Reese, Director	Date: April 28, 2008
/s/ William M. Strain	Date: April 28, 2008
William M. Strain, Director
/s/ Jackie L. Mask Jackie L. Mask, Director	Date: April 28, 2008

51

EX-13

EXHIBIT 13

SOUTHERN COMMUNITY
BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED FINANCIAL REPORT

DECEMBER 31, 2007

SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2007

TABLE OF CONTENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets		2
Consolidated statements of income (loss)		3
Consolidated statements of comprehensive income (loss)		4
Consolidated statements of shareholders’ equity		5
Consolidated statements of cash flows		6-7
Notes to consolidated financial statements		8-32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 subsidiary as of December 31, 2007 and 2006, and the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated 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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

/s/ Mauldin & Jenkins, LLC  

Atlanta, Georgia 

April 16, 2008 

1

SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2007			2006
Assets
Cash and due from banks	$	4,090,218		$	5,029,384
Interest bearing deposits in banks		3,503,959			741,012
Federal funds sold		26,039,000			13,747,000
Securities available for sale, at fair value		58,196,916			55,368,977
Restricted equity securities, at cost		3,282,000			2,669,900
Loans		290,796,352			293,223,692
Less allowance for loan losses		7,961,406			3,051,229
Loans, net		282,834,946			290,172,463
Premises and equipment		9,048,748			9,372,877
Foreclosed assets		10,470,787			196,134
Other assets		10,922,882			9,036,508
Total assets	$	408,389,456		$	386,334,255
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	32,220,093		$	36,833,998
Interest-bearing		268,497,389			254,955,724
Total deposits		300,717,482			291,789,722
Federal Home Loan Bank advances		57,500,000			44,500,000
Securities sold under repurchase agreements		14,573,847			12,913,674
Subordinated debentures		10,929,000			10,929,000
Other liabilities		1,680,798			1,753,246
Total liabilities		385,401,127			361,885,642
Commitments and contingencies (Note 14)
Shareholders’ equity
Capital stock, no par value; 10,000,000 shares authorized; 2,593,874 and 2,592,894 shares issued and outstanding, respectively		16,204,025			16,171,236
Retained earnings		6,921,331			8,816,424
Accumulated other comprehensive loss		(137,027	)		(539,047	)
Total shareholders’ equity		22,988,329			24,448,613
Total liabilities and shareholders’ equity	$	408,389,456		$	386,334,255

See Notes to Consolidated Financial Statements.

2

SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

	Years Ended December 31,
	2007			2006		2005
Interest income
Loans, including fees	$	25,364,884		$	24,098,725	$	16,647,627
Taxable securities		2,160,226			2,206,331		1,726,004
Nontaxable securities		543,580			529,776		456,336
Federal funds sold		343,329			429,142		313,198
Interest bearing deposits in banks		110,920			59,115		33,478
Total interest income		28,522,939			27,323,089		19,176,643
Interest expense
Deposits		11,597,948			10,345,029		6,305,563
Other borrowings		3,914,659			2,417,843		1,466,637
Total interest expense		15,512,607			12,762,872		7,772,200
Net interest income		13,010,332			14,560,217		11,404,443
Provision for loan losses		6,417,895			2,877,000		1,415,660
Net interest income after provision for loan losses		6,592,437			11,683,217		9,988,783
Other income
Service charges on deposit accounts		962,584			831,947		615,705
Gain on sale of securities available for sale		—			39,614		106,121
Income from life insurance policy		—			495,088		—
Other operating income		198,795			282,808		74,235
Total other income		1,161,379			1,649,457		796,061
Other expenses
Salaries and employee benefits		6,012,610			5,607,920		4,479,416
Equipment and occupancy expenses		1,802,696			1,669,284		1,247,250
Other operating expenses		3,409,258			2,781,488		2,376,001
Total other expenses		11,224,564			10,058,692		8,102,667
Net income before income taxes (benefit)		(3,470,748	)		3,273,982		2,682,177
Income tax expense		(1,575,655	)		778,365		815,304
Net income	$	(1,895,093	)	$	2,495,617	$	1,866,873
Basic earnings (losses) per share	$	(0.73	)	$	0.96	$	0.72
Diluted earnings (losses) per share	$	(0.73	)	$	0.93	$	0.70
Dividends declared per share	$	—		$	—	$	—

See Notes to Consolidated Financial Statements.

3

SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Years Ended December 31,
	2007			2006			2005
Net income (loss)	$	(1,895,093	)	$	2,495,617		$	1,866,873
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale arising during period, net of tax (benefits) of $246,399, $208,679 and $(328,957), respectively		402,020			340,479			(536,720	)
Reclassification adjustment for gains realized in net income, net of taxes of $0, $15,053 and 40,326, respectively		—			(24,561	)		(65,795	)
Other comprehensive income (loss)		402,020			315,918			(602,515	)
Comprehensive income (loss)	$	(1,493,073	)	$	2,811,535		$	1,264,358

See Notes to Consolidated Financial Statements.

4

SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

								Accumulated
								Other			Total
	Capital Stock				Retained			Comprehensive			Shareholders’
	Shares		Amount		Earnings			Loss			Equity
Balance, December 31, 2004		2,580,526	$	16,054,796	$	4,453,934		$	(252,450	)	$	20,256,280
Net income		—		—		1,866,873			—		$	1,866,873
Options exercised, net of repurchases		6,135		11,217		—			—		$	11,217
Issuance of common stock		420		7,980		—			—		$	7,980
Other comprehensive loss		—		—		—			(602,515	)	$	(602,515	)
Balance, December 31, 2005		2,587,081		16,073,993		6,320,807			(854,965	)		21,539,835
Net income		—		—		2,495,617			—			2,495,617
Stock-based compensation		—		42,273		—			—			42,273
Options exercised		5,333		45,010		—			—			45,010
Issuance of common stock		480		9,960		—			—			9,960
Other comprehensive income		—		—		—			315,918			315,918
Balance, December 31, 2006		2,592,894		16,171,236		8,816,424			(539,047	)		24,448,613
Net loss		—		—		(1,895,093	)		—			(1,895,093	)
Stock-based compensation		—		26,468		—			—			26,468
Issuance of common stock		980		6,321		—			—			6,321
Other comprehensive income		—		—		—			402,020			402,020
Balance, December 31, 2007		2,593,874	$	16,204,025	$	6,921,331		$	(137,027	)	$	22,988,329

See Notes to Consolidated Financial Statements.

5

SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2007			2006			2005
OPERATING ACTIVITIES
Net income (loss)	$	(1,895,093	)	$	2,495,617		$	1,866,873
Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation		730,511			688,850			580,413
Provision for loan losses		6,417,895			2,877,000			1,415,660
Gain on sale of securities available for sale		—			(39,614	)		(106,121	)
Deferred income taxes		(2,051,848	)		240,221			(310,663	)
Increase (decrease) in taxes payable		(223,381	)		(612,165	)		332,351
Increase in interest receivable		278,630			(556,109	)		(674,355	)
Increase in interest payable		120,446			361,546			627,316
Increase in cash surrender value of life insurance		(184,848	)		(195,171	)		(32,547	)
Income from life insurance policy		—			(495,088	)		—
Stock-based compensation		26,468			42,273			—
(Gain) loss on sale of other real estate owned		37,026			—			(5,825	)
Net other operating activities		(141,234	)		547,558			337,394
Net cash provided by operating activities		3,114,572			5,354,918			4,030,496
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits in banks		(2,762,947	)		(116,504	)		1,413,723
Purchase of securities available for sale		(8,041,321	)		(9,121,740	)		(12,862,135	)
Proceeds from maturities of securities available for sale		5,861,801			5,694,479			4,539,422
Proceeds from sales of securities available for sale		—			1,998,225			4,681,938
Purchase of restricted equity securities		(612,100	)		(778,200	)		(420,400	)
Decrease in cash surrender value of life insurance		—			378,932			—
Net decrease (increase) in federal funds sold		(12,292,000	)		(11,140,000	)		15,771,000
Net increase in loans		(11,829,816	)		(42,292,348	)		(67,923,706	)
Purchase of bank owned life insurance		—			—			(5,000,000	)
Net purchases of premises and equipment		(409,368	)		(465,974	)		(2,399,117	)
Proceeds from sales of other real estate owned		2,437,759			—			281,292
Net cash used in investing activities		(27,647,992	)		(55,843,130	)		(61,917,983	)
FINANCING ACTIVITIES
Net increase in deposits		8,927,760			30,150,516			45,874,971
Proceeds from issuance of capital stock		6,321			54,970			19,197
Proceeds from issuance of subordinated debentures-net		—			5,000,000			—
Net increase (decrease) in Federal Home Loan Bank advances		13,000,000			14,500,000			6,000,000
Net (decrease) increase in repurchase agreements		1,660,173			(249,412	)		8,410,172
Net cash provided by financing activities		23,594,254			49,456,074			60,304,340
Net increase (decrease) in cash and due from banks		(939,166	)		(1,032,138	)		2,416,853
Cash and due from banks at beginning of period		5,029,384			6,061,522			3,644,669
Cash and due from banks at end of period	$	4,090,218		$	5,029,384		$	6,061,522

See Notes to Consolidated Financial Statements.

6

SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2007		2006		2005
SUPPLEMENTAL DISCLOSURE
Cash paid for interest	$	15,392,161	$	12,401,326	$	7,144,884
Cash paid for taxes	$	699,574	$	1,150,308	$	847,300
NONCASH TRANSACTIONS
Foreclosed assets acquired in settlement of loans	$	13,309,438	$	196,134	$	275,467
Financed sales of foreclosed assets	$	560,000	$	—	$	—

See Notes to Consolidated Financial Statements.

7

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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Business

Southern Community Bancshares, Inc. (the “Company”) is a bank holding company whose business is conducted by its wholly-owned commercial bank, Southern Community Bank (the “Bank”). Southern Community Bank is located in Fayetteville, Fayette County, Georgia with branches located in Fayetteville, Peachtree City, Newnan, Jonesboro and Locust Grove, Georgia. The Bank provides a full range of banking services in its primary market area of Fayette County and the surrounding counties.

     Basis of Presentation and Accounting Estimates

The consolidated financial statements include the accounts of the Company and its subsidiary. Significant intercompany transactions and balances have been eliminated in consolidation.

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, deferred taxes and contingent assets and liabilities. The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and the valuation of foreclosed real estate, management obtains independent appraisals for significant collateral.

     Cash, Due From Banks and Cash Flows

For purposes of reporting cash flows, cash and due from banks includes cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, interest bearing deposits in banks, federal funds sold, FHLB advances, securities sold under repurchase agreements and deposits are reported net.

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $1,092,000 and $1,060,000 at December 31, 2007 and 2006, respectively.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive loss, net of the related deferred tax effect. Equity securities, including restricted equity securities without a readily determinable fair value, are classified as available for sale and recorded at cost. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are determined using the specific identification method and included in earnings on the settlement date. Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

     Loans

Loans are reported at their outstanding principal balances less deferred loan fees and the allowance for loan losses. Interest income is accrued on the outstanding principal balance. Loan origination fees, net of direct loan origination costs, are deferred and recognized as an adjustment of the yield over the life of the loans.

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, unless management believes that the accrued interest is recoverable through the liquidation of collateral. Interest income on nonaccrual loans is recognized on the cash-basis or cost-recovery method, until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts are brought current and future payments are reasonably assured.

A loan is considered impaired when it is probable, based on current information and events, that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentrations and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

     Premises and Equipment

Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation computed principally on the straight-line method over the following estimated useful lives.

Buildings and improvements	15-40 years
Furniture and equipment	3-10 years

     Foreclosed Assets

Foreclosed assets acquired through or in lieu of loan foreclosure are held for sale and are initially recorded at fair value. Any write-down to fair value at the time of transfer to foreclosed assets is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs of improvements are capitalized, whereas costs relating to holding foreclosed assets and subsequent adjustments to the value are expensed. The carrying amount of foreclosed assets at December 31, 2007 and 2006 was $10,470,787 and $196,134, respectively.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

With the increasing number of foreclosures, especially during the latter half of 2007, the bank formed a “Special Assets Group”. This group reports directly to a newly formed Board Committee, the Special Assets Committee. This committee consists of four (4) outside directors experienced in the real estate industry and three (3) senior level managers. Special Asset Group is in charge with the management, strategies, and disposal of “Other Real Estate Owned” (foreclosed properties) and other specific problem assets. Progress and strategies on these assets are reported periodically to the Board by the Chairman of the Special Assets Committee.

During 2007, foreclosed properties increased from $162,150 at December 31, 2006 to $10.4 million at December 31, 2007. The properties encompassed twenty-one relationships. The majority (13 relationships) of the foreclosed properties consisted of residential lot loans, residential construction loans, and residential development loans. Six (6) single family residences and two (2) commercial properties were also taken into foreclosure. The bank sold one (1) commercial property totaling $1.325 million and three (3) single family residential properties totaling approximately $1.2 million during 2007. Projections for the first half of 2008 indicate that foreclosures on residential construction and development loans will likely rise. Approximately $10 million in foreclosures is expected for the first quarter, and an additional $2 million for the second quarter. While we cannot foresee higher foreclosures in our loan portfolio past mid-year 2008, continued economic pressures on residential builders and developers may continue if the current environment persists.

     Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

     Profit-Sharing Plan

Profit-sharing plan costs are based on a percentage of individual employee’s salary, not to exceed the amount that can be deducted for federal income tax purposes.

     Stock Compensation Plans

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), on January 1, 2006 using the “modified prospective” method. Under this method, awards that are granted, modified, or settled after December 31, 2005, are measured and accounted for in accordance with SFAS No. 123(R). Also under this method, expense is recognized for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Stock Compensation Plans (Continued)

No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). The Company recognized compensation expense for employee stock options of $26,488 and $42,273 for the years ended December 31, 2007 and 2006. The Company did not recognize any tax benefit on compensation expense from employee stock options in 2007 and 2006. As of December 31, 2007, there was $35,154 of total unrecognized compensation cost related to nonvested employee stock options, which is expected to be recognized over a two year period. The Company granted 2,750 and 4,500 options during the years ended December 31, 2007 and 2006.

As a result of adopting SFAS 123R on January 1, 2006, the Company’s income before income taxes and net income for the year ended December 31, 2007 and 2006, was $26,488 and $42,273 lower than if it had continued to account for share-based compensation under the provisions of APB Opinion No. 25. Basic and diluted earnings per share for the year ended December 31, 2007 and 2006 would have been $(0.72) and $(0.72), and $0.97 and $0.94, respectively, if the Company had not adopted SFAS 123R, compared to reported basic and diluted earnings per share of $(0.73) and $(0.73), and $0.96 and $0.93, respectively.

Prior to the adoption of SFAS No. 123(R), the Company accounted for stock compensation under Accounting Principles Board Opinion No. 25 and related interpretations. Accordingly, the Company previously recognized no compensation cost for employee stock options. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 as of December 31, 2005:

		December 31, 2005
Net earnings	As reported	$	1,866,873
	Effect of grants		(13,639	)
	Proforma	$	1,853,234
Basic earnings per share	As reported	$	0.72
	Proforma	$	0.72
Diluted earnings per share	As reported	$	0.70
	Proforma	$	0.69

     Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted-average number of shares of capital stock outstanding. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares of capitalstock outstanding and dilutive potential capital shares. Potential capital shares consist of

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Comprehensive Income (Loss)

outstanding options to purchase capital stock, and are determined using the Treasury Stock method.

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). 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 (loss), are components of comprehensive income (loss).

     Recent Accounting Standards

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. The Statement provides guidance for using fair value to measure assets and liabilities. It defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurement. Under the Statement, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the Statement establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the Statement, fair value measurements would be separately disclosed by level within the fair value hierarchy. Statement No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is not expected to have a material impact on the Company’s financial condition or results of operations.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. The Statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument (with a few exceptions), is irrevocable (unless a new election date occurs) and is applied only to entire instruments and not to portions of instruments. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Statement No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007 and is not expected to have a material impact on the Company’s financial condition or results of operations.

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Recent Accounting Standards (Continued)

In December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations. The Statement will significantly change the accounting for business combinations, as an acquiring entity will be required to recognize all the assets and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. The Statement changes the accounting treatment for several specific items, such as acquisition costs, noncontrolling interests (formerly referred to as minority interests), contingent liabilities, restructuring costs and changes in deferred tax asset valuation allowances. The Statement also includes a substantial number of new disclosure requirements. Statement No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact the adoption of this statement will have on the accounting for future acquisitions and business combinations.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51. The Statement establishes new accounting and reporting standards for the noncontrolling interest (formerly referred to as minority interests) in a subsidiary and for the deconsolidation of a subsidiary. Statement No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The Company currently does not have any noncontrolling interests and is evaluating the impact the adoption of this statement will have on the accounting for future business combinations.

NOTE 2. SECURITIES

The amortized cost and fair value of securities are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2007:
U.S. Government sponsored agencies	$	24,954,899	$	90,183	$	(32,862	)	$	25,012,220
State and municipal securities		13,810,849		56,991		(150,624	)		13,717,216
Corporate bonds		1,879,670		13,820		—			1,893,490
Mortgage-backed securities		17,772,510		68,052		(266,572	)		17,573,990
	$	58,417,928	$	229,046	$	(450,058	)	$	58,196,916
December 31, 2006:
U.S. Government sponsored agencies	$	23,948,923	$	—	$	(384,790	)	$	23,564,133
State and municipal securities		13,450,877		87,748		(94,025	)		13,444,600
Corporate bonds		1,880,118		3,612		(12,630	)		1,871,100
Mortgage-backed securities		16,958,490		18,575		(487,921	)		16,489,144
	$	56,238,408	$	109,935	$	(979,366	)	$	55,368,977

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. SECURITIES (Continued)

Securities with a carrying value of $46,856,145 and $47,375,157 at December 31, 2007 and 2006, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

The amortized cost and fair value of securities as of December 31, 2007 by contractual maturity are shown below. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not included in the maturity categories in the following summary.

	Amortized		Fair
	Cost		Value
Due in less than one year	$	2,497,490	$	2,479,700
Due from one to five years		4,323,845		4,312,082
Due from five to ten years		5,567,538		5,559,050
Due after ten years		28,256,545		28,272,094
Mortgage-backed securities		17,772,510		17,573,990
	$	58,417,928	$	58,196,916

Gains and losses on sales of securities consist of the following:

	Years Ended December 31,
	2007		2006		2005
Gross gains	$	—	$	39,614	$	116,433
Gross losses		—		—		(10,312	)
Net realized gains	$	—	$	39,614	$	106,121

The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2007 and 2006.

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. SECURITIES (Continued)

	Less Than 12 Months					12 Months or More
Description of Securities:	Fair		Unrealized			Fair		Unrealized
December 31, 2007	Value		Losses			Value		Losses
U.S. Government sponsored agencies	$	—	$	—		$	4,461,375	$	(32,862	)
State and municipal securities		2,554,473		(47,794	)		4,922,202		(102,830	)
Mortgage-backed securities		—		—			10,812,210		(266,572	)
Corporate bonds		—		—			—		-
Total temporarily impaired securities	$	2,554,473	$	(47,794	)	$	20,195,787	$	(402,264	)
December 31, 2006
U.S. Government sponsored agencies	$	2,955,387	$	(8,007	)	$	20,608,746	$	(376,783	)
State and municipal securities		3,768,478		(11,405	)		3,688,303		(82,620	)
Mortgage-backed securities		897,897		(7,964	)		12,768,165		(479,957	)
Corporate bonds		987,370		(12,630	)		—		—
Total temporarily impaired securities	$	8,609,132	$	(40,006	)	$	37,065,214	$	(939,360	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.

The market value of securities is based on quoted market values and is significantly affected by the interest rate environment. At December 31, 2007, all unrealized losses in the securities portfolio were from debt securities. At December 31, 2007, the total number of securities in a continuous loss position for less than 12 months and 12 months or more was 8 and 40 respectively, in a portfolio of 89 securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies whether downgrades by bond rating agencies have occurred, and industry analyst’s reports. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.

16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. LOANS

     The composition of loans is summarized as follows:

	December 31,
	2007			2006
Commercial	$	22,576,161		$	19,569,280
Real estate — construction		162,477,693			168,719,930
Real estate — mortgage		101,779,185			101,169,298
Consumer installment and other		4,163,703			4,194,848
		290,996,742			293,653,356
Deferred loan fees		(200,390	)		(429,664	)
Allowance for loan losses		(7,961,406	)		(3,051,229	)
Loans, net	$	282,834,946		$	290,172,463

     Changes in the allowance for loan losses are as follows:

	Years Ended December 31,
	2007			2006			2005
Balance, beginning of year	$	3,051,229		$	3,000,956		$	2,016,557
Provision for loan losses		6,417,895			2,877,000			1,415,660
Loans charged off		(1,597,796	)		(2,946,914	)		(456,593	)
Recoveries of loans previously charged off		90,078			120,187			25,332
Balance, end of year	$	7,961,406		$	3,051,229		$	3,000,956

17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. LOANS (Continued)

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

	As of and for the Years Ended
	December 31,
	2007		2006		2005
Impaired loans without a valuation allowance	$	25,632,936	$	—	$	—
Impaired loans with a valuation allowance		14,635,048		1,034,310		6,348,580
Total impaired loans	$	40,267,984	$	1,034,310	$	6,348,580
Valuation allowance related to impaired loans	$	4,662,340	$	223,034	$	1,123,148
Average investment in impaired loans	$	10,839,795	$	4,485,068	$	4,687,575
Interest income recognized on impaired loans	$	1,627,758	$	102,546	$	192,925
Nonaccrual loans	$	19,615,251	$	406,341	$	2,538,834
Loans past due ninety days or more and still accruing interest	$	4,898,584	$	1,266,803	$	464

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, 2007 are as follows:

Balance, beginning of year	$	11,062,678
Advances		6,516,759
Repayments		(5,969,204	)
Balance, end of year	$	11,610,233

NOTE 4. PREMISES AND EQUIPMENT

     Premises and equipment are summarized as follows:

	December 31,
	2007			2006
Land and improvements	$	2,418,527		$	2,120,748
Buildings		5,704,754			5,923,758
Furniture and equipment		4,100,737			3,796,406
		12,224,018			11,840,912
Accumulated depreciation		(3,175,270	)		(2,468,035	)
	$	9,048,748		$	9,372,877

18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. PREMISES AND EQUIPMENT (Continued)

Leases

The Company leases various banking facilities under noncancelable operating lease agreements. The lease agreements have varying terms through 2015.

Rental expense amounted to $365,949 and $324,967 for the years ended December 31, 2007 and 2006, respectively.

Future minimum lease commitments on noncancelable operating leases, excluding any renewal options, are summarized as follows:

2008	$	337,759
2009		256,012
2010		216,012
2011		216,012
2012		216,012
Thereafter		648,036
	$	1,889,843

NOTE 5. BANK OWNED LIFE INSURANCE

The Company has purchased and is the beneficiary of life insurance policies. The carrying values of these policies included in other assets at December 31, 2007 and 2006 were $5,033,580 and $4,848,786, respectively.

NOTE 6. DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2007 and 2006 was $110,596,353 and $105,512,741, respectively. The scheduled maturities of time deposits at December 31, 2007 are as follows:

2008	$	205,589,988
2009		7,977,203
2010		2,365,542
2011		1,118,257
2012		71,861
	$	217,122,851

The Company had brokered time deposits at December 31, 2007 and 2006 of $35,094,000 and $39,607,000, respectively.

At December 31, 2007 and 2006, overdraft demand deposits and savings accounts reclassified to loans totaled $48,307 and $76,891, respectively.

19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at December 31, 2007 and 2006 were $14,573,847 and $12,913,674, respectively.

NOTE 8. FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank advances consist of the following:

	2007		2006
Advance with interest due quarterly at 3.44% and principal due on March 10, 2015.	$	—	$	10,000,000
Advance with interest due quarterly at 5.06% and principal due on December 21, 2007.		—		10,000,000
Advance with interest due quarterly at 4.44% and principal due on May 5, 2008.		5,000,000		5,000,000
Advance with interest due quarterly at 4.44% and principal due on May 5, 2008.		5,000,000		5,000,000
Advance with variable interest (4.86% at December 31, 2007) maturing on March 27, 2008.		7,500,000		7,500,000
Advance with interest due quarterly at 4.10% and principal due on November 8, 2016.		7,000,000		7,000,000
Advance with interest due quarterly at 4.49% and principal due on May 18, 2012.		8,000,000		—
Advance with interest due quarterly at 4.69% and principal due on June 21, 2012.		10,000,000		—
Advance with interest due quarterly at 4.40% and principal due on March 12, 2012.		15,000,000		—
	$	57,500,000	$	44,500,000

The advances from the Federal Home Loan Bank are secured by certain qualifying loans of approximately $60,009,042, Federal Home Loan Bank stock of $3,282,000, securities of $20,335,046 and cash pledges of $2,535,000.

NOTE 9. SUBORDINATED DEBENTURES

In 2004, the Company formed a wholly-owned grantor trust to issue floating rate cumulative trust preferred securities in a private placement offering. The grantor trust has invested the proceeds of the trust securities in subordinated debentures of the Company. The trust preferred securities can be redeemed, in whole or in part, from time to time, prior to maturity at the option of the Company on or after June 30, 2009. The sole assets of the guarantor trust are the floating rate Subordinated Debentures of the Company (the Debentures). The Company has the right to defer interest payments on the Debentures up to ten consecutive semi-annual periods (five years), so long as the Company is not in default under the subordinated debentures. No deferral period may extend beyond the maturity date.

The preferred securities are subject to redemption, in whole or in part, upon repayment of the subordinated debentures at maturity on June 30, 2034 or their earlier redemption. The Company has the right to redeem the debentures, in whole or in part, from time to time, on or after June 30, 2009, at a redemption price equal to 100% of the principal amount to be

20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. SUBORDINATED DEBENTURES (Continued)

redeemed plus any accrued and unpaid interest.

In 2006, the Company formed a second wholly-owned grantor trust to issue floating rate cumulative trust preferred securities in a private placement offering. The grantor trust has invested the proceeds of the trust securities in subordinated debentures of the Company. The trust preferred securities can be redeemed, in whole or in part, from time to time, prior to maturity at the option of the Company on or after September 15, 2011. The sole assets of the guarantor trust are the floating rate Subordinated Debentures of the Company (the Debentures). The Company has the right to defer interest payments on the Debentures up to ten consecutive semi-annual periods (five years), so long as the Company is not in default on the subordinated debentures. No deferral period may extend beyond the maturity date.

The preferred securities are subject to redemption, in whole or in part, upon repayment of the subordinated debentures at maturity on September 15, 2036 or their earlier redemption. The Company has the right to redeem the debentures, in whole or in part, from time to time, on or after September 15, 2011, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest.

The Company has guaranteed the payment of all distributions the Trusts are obligated to make, but only to the extent the Trusts have sufficient funds to satisfy those payments. The Company and the Trusts believe that, taken together, the obligations of the Company under the Guarantee Agreements, the Trust Agreements, the Subordinated Debentures, and the indentures provide, in the aggregate, a full, irrevocable and unconditional guarantee of all of the obligations of the trusts under the Preferred Securities on a subordinated basis.

The Company is required by the Federal Reserve Board to maintain certain levels of capital for bank regulatory purposes. The Federal Reserve Board has determined that certain cumulative preferred securities having the characteristics of trust preferred securities qualify as minority interest, which is included in Tier 1 capital for bank and financial holding companies. In calculating the amount of Tier 1 qualifying capital, the trust preferred securities can only be included up to the amount constituting 25% of total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital treatment provides the Company with a more cost-effective means of obtaining capital for bank regulatory purposes than if the Company were to issue preferred stock.

The trust preferred securities and the related Debentures were issued on April 28, 2004 and June 20, 2006. The financial instruments of the 2004 Trust bear an identical annual rate of interest of 7.875% at December 31, 2007. Distributions on the trust preferred securities are paid quarterly on March 31, June 30, September 30 and December 31 of each year, beginning June 30, 2004. Interest on the Debentures is paid on the corresponding dates.

The financial instruments of the 2006 Trust bear an identical annual rate of interest of 7.19% at December 31, 2007. Distributions on the trust preferred securities are paid

21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. SUBORDINATED DEBENTURES (Continued)

quarterly on March 15, June 15, September 15 and December 15 of each year, beginning September 15, 2006. Interest on the Debentures is paid on the corresponding dates. The aggregate principal amount of trust preferred certificates outstanding at December 31, 2007 and 2006 was $10,600,000. The aggregate principal amount of Debentures outstanding at December 31, 2007 and 2006 was $10,929,000.

NOTE 10. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Profit Sharing Plan available to all eligible employees, subject to certain minimum age and service requirements. The contributions expensed were $176,244, $156,182 and $129,867 for the years ended December 31, 2007, 2006 and 2005, respectively.

NOTE 11. STOCK COMPENSATION PLAN

The Company has a stock option plan reserving 88,889 shares of capital stock for the granting of options to key employees. At December 31, 2007, there were 25,417 shares available for grant under the plan. The Company also has a stock option plan reserving 160,000 shares of capital stock for the granting of options to directors. Option prices reflect the fair market value of the Company’s capital stock on the dates the options are granted. The options may be exercised over a period of ten years in accordance with vesting schedules determined by the Board of Directors.

A summary of the activity for the plan is presented below:

22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. STOCK COMPENSATION PLAN (Continued)

	Stock option activity for the years ended
	December 31, 2007, 2006, and 2005
						Weighted Average
				Weighted Average		Remaining		Aggregate
				Option Price Per		Contractual Term		Intrinsic
	Shares			Share		(in years)		Value
Outstanding, December 31, 2004		213,538		$	6.94
Granted during the period		2,000			21.38
Forfeited during the period		—			—
Exercised during the period		(6,135	)		6.89
Outstanding, December 31, 2005		209,403			7.08
Granted during the period		4,500			19.00
Forfeited during the period		—			—
Exercised during the period		(5,333	)		8.44
Outstanding, December 31, 2006		208,570			7.30
Granted during the period		2,750			22.00
Forfeited during the period		—			—
Exercised during the period		—			—
Outstanding, December 31, 2007		211,320		$	7.49		3.92	$	—
Number of shares exercisable		206,319		$	7.08		3.78	$	—

At December 31, 2007, 202,069 shares are exercisable at prices ranging from $6.89 to $7.03 and 4,250 shares at prices ranging from $18.50 to $22.75.

The Company granted options to purchase 2,750 and 4,500 shares during the years ended December 31, 2007 and 2006, respectively. The total intrinsic value (amount by which the fair market value of the underlying stock exceeds the exercise price of an option on exercise date) of options exercised during the years ended December 31, 2007, 2006 and 2005 was $0, $56,583 and $60,000, respectively. The company had 3,083, 6,397 and 5,728 options that vested during the years ended December 31, 2007, 2006 and 2005.

Cash received from option exercises for the years ended December 31, 2007, 2006 and 2005 was $0, $45,010 and $11,000, respectively. The tax benefit for the tax deductions from option exercises was $4,500, for the year ended December 31, 2005. The weighted average grant date fair value of options granted in 2007 and 2006 was $5.92 and $9.45. The fair value of each option is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2007 and 2006.

23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. STOCK COMPENSATION PLAN (Continued)

	2007			2006
Dividend yield		0.00	%		0.00	%
Expected volatility		15.00	%		28.00	%
Risk free interest rate		4.67	%		4.77	%
Expected term	6 years			10 years

NOTE 12. INCOME TAXES (BENEFITS)

The components of income tax expense (benefit) are as follows:

	Years Ended December 31,
	2007			2006		2005
Current	$	476,193		$	538,144	$	1,125,967
Deferred		(2,051,848	)		240,221		(310,663	)
	$	(1,575,655	)	$	778,365	$	815,304

The Company’s income tax differs from the amounts computed by applying the federal income tax statutory rates to income (loss) before income taxes (benefits). A reconciliation of the differences is as follows:

	Years Ended December 31,
	2007			2006			2005
Income tax (benefit) at statutory federal rate	$	(1,180,055	)	$	1,113,154		$	913,965
Tax-exempt interest		(184,355	)		(179,727	)		(154,844	)
Disallowed interest		34,999			31,355			16,968
Life insurance income		(62,848	)		(245,754	)		—
State tax		(199,435	)		34,857			38,514
Other items		16,039			24,480			701
Income tax expense (benefit)	$	(1,575,655	)	$	778,365		$	815,304

24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12. INCOME TAXES (BENEFITS) (Continued)

	Years Ended December 31,
	2007		2006		2005
Deferred tax assets:
Loan loss reserves	$	2,541,722	$	724,932	$	999,539
Preopening and organization expenses		—		2,783		12,325
Deferred loan fees		75,619		162,137		112,301
Nonaccrual loans		327,145		8,453		30,676
Other real estate owned		5,603		—		—
Securities available for sale		83,985		330,384		524,011
	$	3,034,074	$	1,228,689	$	1,678,852
Deferred tax liabilities:
Depreciation		355,779		355,843		339,875
Cash basis adjustment for income tax reporting purposes		—		—		32,282
	$	355,779	$	355,843	$	372,157
Net deferred tax assets	$	2,678,295	$	872,846	$	1,306,695

NOTE 13. EARNINGS (LOSSES) PER SHARE

Presented below is a summary of the components used to calculate basic and diluted earnings (losses) per share:

	Years Ended December 31,
	2007			2006		2005
Net income (loss)	$	(1,895,093	)	$	2,495,617	$	1,866,873
Weighted average number of common shares outstanding		2,592,897			2,588,952		2,585,687
Effect of dilutive options		—			87,241		91,991
Weighted average number of common shares outstanding used to calculate dilutive earnings (losses) per share		2,592,897			2,676,193		2,677,678

25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS AND CONTINGENCIES

     Loan Commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The majority of all commitments to extend credit and standby letters of credit are variable rate instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and commercial letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. A summary of the Company’s commitments is as follows:

	December 31,
	2007		2006
Commercial letters of credit	$	1,104,165	$	1,196,305
Commitments to extend credit		42,184,532		64,853,280
	$	43,288,697	$	66,049,585

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which the Company deems necessary.

     Contingencies

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company’s financial statements.

NOTE 15. CONCENTRATIONS OF CREDIT

The Company originates primarily commercial, real estate, and consumer loans to customers in Fayette County and surrounding counties. The ability of the majority of the

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. CONCENTRATIONS OF CREDIT (Continued)

Company’s customers to honor their contractual loan obligations is dependent on the economy in these areas. Ninety-two 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 $5,776,000.

NOTE 16. REGULATORY MATTERS

The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2007 there were no retained earnings available for dividend declaration.

The Company and Bank are also subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. They are also authorized to take various supervisory actions when a bank’s overall condition, including its capitalization deteriorates. The Federal Deposit Insurance Corporation Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Generally, as a bank’s capital deteriorates, the degree of regulatory scrutiny it faces will increase, as will the severity of possible enforcement action. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, as defined, and of Tier I capital to average assets, as defined. Management believes, as of December 31, 2007, the Company and Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2007, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as adequately capitalized and not 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

27

leverage ratios as set forth in the following table. As of March 31, 2008, the Company injected capital of $500,000 into the Bank to exceed the Total risk-based ratio requirements. The requirements for both the Tier I and leverage ratios were exceeded at December 31, 2007. Prompt corrective action provisions are not applicable to bank holding companies.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. REGULATORY MATTERS (Continued)

											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in Thousands)
December 31, 2007:
Total Capital to Risk Weighted Assets
Consolidated	$	36,344		10.78	%	$	26,971		8	%	$	N/A		N/A
Southern Community Bank	$	33,535		9.96	%	$	26,932		8	%	$	33,666		10	%
Tier I Capital to Risk Weighted Assets
Consolidated	$	31,533		9.35	%	$	13,490		4	%	$	N/A		N/A
Southern Community Bank	$	29,281		8.70	%	$	13,463		4	%	$	20,194		6	%
Tier I Capital to Average Assets
Consolidated	$	31,533		7.85	%	$	16,068		4	%	$	N/A		N/A
Southern Community Bank	$	29,281		7.29	%	$	16,066		4	%	$	20,083		5	%
December 31, 2006:
Total Capital to Risk Weighted Assets
Consolidated	$	38,968		11.62	%	$	26,832		8	%	$	N/A		N/A
Southern Community Bank	$	35,171		10.51	%	$	26,782		8	%	$	33,478		10	%
Tier I Capital to Risk Weighted Assets
Consolidated	$	33,288		9.92	%	$	13,391		4	%	$	N/A		N/A
Southern Community Bank	$	32,120		9.59	%	$	13,391		4	%	$	20,087		6	%
Tier I Capital to Average Assets
Consolidated	$	33,288		8.67	%	$	15,365		4	%	$	N/A		N/A
Southern Community Bank	$	32,120		8.36	%	$	15,365		4	%	$	19,207		5	%

28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS No. 107, Disclosures about Fair Value of Financial Instruments, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash, Due From Banks, Interest-bearing Deposits in Banks and Federal Funds Sold: The carrying amount of cash, due from banks, interest-bearing deposits in banks and federal funds sold approximates fair value.

Securities: Fair value of securities is based on available quoted market prices. The carrying amount of equity securities and restricted equity securities with no readily determinable fair value approximates fair value.

Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. The fair value of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable.

Deposits: The carrying amount of demand deposits, savings deposits, and variable-rate certificates of deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities.

Repurchase Agreements and Federal Home Loan Bank Advances: The carrying amount of variable rate borrowings and securities sold under repurchase agreements approximates fair value. The fair value of fixed rate Federal Home Loan Bank advances is estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar type borrowing arrangements.

29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Subordinated Debentures: The fair value of the Company’s variable rate subordinated debentures approximates the carrying value.

Accrued Interest: The carrying amount of accrued interest approximates fair value.

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

The carrying amount and estimated fair value of the Company’s financial instruments were as follows:

	December 31, 2007				December 31, 2006
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash, due from banks, interest-bearing deposits in banks, and federal funds sold	$	33,633,177	$	33,633,177	$	19,517,396	$	19,517,396
Securities		61,478,916		61,478,916		58,038,877		58,038,877
Loans, net		282,834,946		284,956,779		290,172,463		288,681,615
Accrued interest receivable		2,051,301		2,051,301		2,329,931		2,329,931
Financial liabilities:
Deposits		300,717,482		307,713,852		291,789,722		291,691,853
Securities sold under repurchase agreements		14,573,847		14,573,847		12,913,674		12,913,674
Federal Home Loan Bank advances		57,500,000		61,707,270		44,500,000		43,068,286
Subordinated debentures		10,929,000		10,929,000		10,929,000		10,929,000
Accrued interest payable		1,600,571		1,600,571		1,480,125		1,480,125

NOTE 18. SUPPLEMENTAL FINANCIAL DATA

     Components of other operating expenses in excess of 1% of total revenue are as follows:

	Years Ended December 31,
	2007		2006		2005
Professional fees	$	547,722	$	242,731	$	302,290
Data processing expense		476,874		414,287		305,331

30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19. PARENT COMPANY FINANCIAL INFORMATION

The following information presents the condensed balance sheets as of December 31, 2007 and 2006 and the statements of income (loss) and cash flows of Southern Community Bancshares, Inc. for each year in the three year period ended December 31, 2007:

CONDENSED BALANCE SHEETS

	As of December 31,
	2007		2006
Assets
Cash	$	2,392,394	$	3,107,996
Investment in subsidiary		30,786,216		31,580,895
Securities available for sale		329,000		329,000
Other assets		454,170		400,174
Total assets	$	33,961,780	$	35,418,065
Subordinated debentures	$	10,929,000	$	10,929,000
Other liabilities		44,451		40,452
Total liabilities		10,973,451		10,969,452
Shareholders’ equity		22,988,329		24,448,613
Total liabilities and shareholders’ equity	$	33,961,780	$	35,418,065

CONDENSED STATEMENTS OF INCOME

	Year Ended December 31,
	2007			2006			2005
Income
Interest income	$	25,324		$	19,209		$	10,549
Total income		25,324			19,209			10,549
Expenses
Interest expense		841,154			637,832			350,049
Expenses, other		298,484			271,767			213,242
Total expenses		1,139,638			909,599			563,291
Loss before income tax benefits and equity in undistributed income (loss) of subsidiary		(1,114,314	)		(890,390	)		(552,742	)
Income tax benefits		(415,920	)		(322,283	)		(210,042	)
Loss before equity in undistributed income of subsidiary		(698,394	)		(568,107	)		(342,700	)
Equity in undistributed income (loss) of subsidiary		(1,196,699	)		3,063,724			2,209,573
Net income (loss)	$	(1,895,093	)	$	2,495,617		$	1,866,873

31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19. PARENT COMPANY FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2007			2006			2005
OPERATING ACTIVITIES
Net income (loss)	$	(1,895,093	)	$	2,495,617		$	1,866,873
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Undistributed (income) of subsidiary		1,196,699			(3,063,724	)		(2,209,573	)
Other operating activities		(23,528	)		(18,450	)		(52,854	)
Net cash used in operating activities		(721,922	)		(586,557	)		(395,554	)
INVESTING ACTIVITIES
Capital infusion in subsidiary		—			(2,500,000	)		(5,000,000	)
Net cash used in investing activities		—			(2,500,000	)		(5,000,000	)
FINANCING ACTIVITIES
Proceeds from issuance of subordinated debentures		—			5,000,000			—
Proceeds from issuance of capital stock		6,321			54,970			19,197
Net cash provided by financing activities		6,321			5,054,970			19,197
Net increase (decrease) in cash		(715,601	)		1,968,413			(5,376,357	)
Cash at beginning of year		3,107,996			1,139,583			6,515,940
Cash at end of year	$	2,392,395		$	3,107,996		$	1,139,583

32

EX-21

EXHIBIT 21

Southern Community Bank, a Georgia bank.
SCBI Capital Trust I, a Delaware statutory trust

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in Registration Statements (File Numbers 333-120123, 333-120124 and 333-125545) on Form S-8 of Southern Community Bancshares, Inc. of our report dated April 16, 2008 relating to our audit of the consolidated financial statements, which appears in this Annual Report on Form 10-K of Southern Community Bancshares, Inc for the year ended December 31, 2007.

/s/ MAULDIN & JENKINS, LLC

Atlanta, Georgia
April 16, 2008

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Gary D. McGaha, certify that:

     1. I have reviewed this annual report on Form 10-K 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designated such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 28, 2008

/s/ Gary D. McGaha  

Gary D. McGaha 

Principal Executive Officer 

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Leslye L. Grindle, certify that:

     1. I have reviewed this annual report on Form 10-K 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designated such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 28, 2008

/s/ Leslye L. Grindle  

Leslye L. Grindle 

Chief Financial Officer 

EX-32.1

EXHIBIT 32.1

CERTIFICATE OF CEO

     I, Gary D. McGaha, Chief Executive Officer of Southern Community Bancshares, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

(1)	the annual report on Form 10-K of the Registrant, to which this certificate is attached as an exhibit (the “Report”), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)); and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated: April 28, 2008	/s/ Gary D. McGaha
	Gary D. McGaha, Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATE OF CFO

     I, Leslye L. Grindle, Chief Financial Officer of Southern Community Bancshares, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

(3)	the annual report on Form 10-K of the Registrant, to which this certificate is attached as an exhibit (the “Report”), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)); and
(4)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated: April 28, 2008	/s/ Leslye L. Grindle
	Leslye L. Grindle, Chief Financial Officer