##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION  FORM 10-QSB [X]
    
    QUARTERLY REPORT PURSUANT TO 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended June 30, 2004 [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission File Number: 333-86082 SOUTHERN COMMUNITY BANCSHARES, INC. 
  Georgia
    
    58  2639705(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 525 North Jeff Davis Drive, Fayetteville, Georgia 30214 
  (770) 461-4365 
  N/A 
  Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [  ] State the number of shares outstanding of each of the issuers classes of
capital stock, as of August 10, 2004: 1,934,777; no par value Transitional Small Business Disclosure Format Yes [  ] No [X] 1




---



SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY INDEX  
 PagePart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheet as of June 30, 2004
    
    
    3Consolidated Statements of Income for the Three and Six Months ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7 - 8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9 - 13Item 3. Controls and Procedures
    
    
    13Part II. Other InformationItem 4. Submission of Matters to a Vote of Security Holders
    
    
    14Item 6. Exhibits and Reports on Form 8-K
    
    
    14Signatures
    
    
    15Certifications
    
    
    16 - 21EX-10.1 AMENDED AND RESTATED TRUST AGREEMENTEX-10.2 GUARANTEE AGREEMENT BETWEEN THE COMPANY AND WILMINGTON TRUST COMPANYEX-10.3 JUNIOR SUBORDINATED INDENTURE BETWEEN THE COMPANY AND WILMINGTON TRUST COMPANYEX-10.4 CHANGE OF CONTROL AGREEMENT BETWEEN THE COMPANY AND LESLYE L. GRINDLEEX-10.5 CHANGE OF CONTROL AGREEMENT BETWEEN THE COMPANY AND G. WAYNE ROBERTSONEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO
  2




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEETS June 30, 2004
 (Unaudited)
 AssetsCash and due from banks
    
    $
    5,244,248Federal funds sold
    
    
    9,848,000Securities available-for-sale
    
    
    50,177,060Restricted equity securities
    
    
    1,200,000Loans
    
    
    159,891,159Less allowance for loan losses
    
    
    1,809,161Loans, net
    
    
    158,081,998Premises and equipment
    
    
    6,479,679Other assets
    
    
    2,838,830Total assets
    
    $
    233,869,815Liabilities and Shareholders EquityDepositsNoninterest-bearing
    
    $
    21,432,984Interest-bearing
    
    
    160,699,843Total deposits
    
    
    182,132,827Securities sold under repurchase agreements
    
    
    2,850,798Federal Home Loan Bank advances
    
    
    24,000,000Other liabilities
    
    
    643,011Subordinated Debentures
    
    
    5,774,000Total liabilities
    
    
    215,400,636Shareholders equityCapital stock, no par value; 10,000,000 shares authorized;
1,934,777 shares issued and outstanding
    
    
    16,050,433Retained earnings
    
    
    3,750,294Accumulated other comprehensive (loss)
    
    
    (1,331,548
    )Total shareholders equity
    
    
    18,469,179Total liabilities and shareholders equity
    
    $
    233,869,815
 See Notes to Consolidated Financial Statements. 3




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF INCOME Three and Six Months Ended June 30, 2004 and 2003
 (Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest incomeLoans, including fees
    
    $
    2,755,564
    
    
    $
    1,836,952
    
    
    $
    5,172,157
    
    
    $
    3,539,181Taxable securities
    
    
    456,170
    
    
    
    154,050
    
    
    
    952,497
    
    
    
    293,785Nontaxable securities
    
    
    91,246
    
    
    
    44,568
    
    
    
    182,331
    
    
    
    85,195Federal funds sold
    
    
    17,315
    
    
    
    24,239
    
    
    
    30,371
    
    
    
    36,806Total interest income
    
    
    3,320,295
    
    
    
    2,059,809
    
    
    
    6,337,356
    
    
    
    3,954,967Interest expenseDeposits
    
    
    918,913
    
    
    
    683,889
    
    
    
    1,750,708
    
    
    
    1,298,707Other borrowings
    
    
    188,282
    
    
    
    8,390
    
    
    
    334,683
    
    
    
    17,660Total interest expense
    
    
    1,107,195
    
    
    
    692,279
    
    
    
    2,085,391
    
    
    
    1,316,367Net interest income
    
    
    2,213,100
    
    
    
    1,367,530
    
    
    
    4,251,965
    
    
    
    2,638,600Provision for loan losses
    
    
    295,000
    
    
    
    85,000
    
    
    
    448,121
    
    
    
    155,000Net interest income after provision for loan losses
    
    
    1,918,100
    
    
    
    1,282,530
    
    
    
    3,803,844
    
    
    
    2,483,600Other incomeService charges on deposit accounts
    
    
    114,397
    
    
    
    82,294
    
    
    
    209,841
    
    
    
    171,107Gain on sale of securities available-for-sale
    
    
    0
    
    
    
    40,801
    
    
    
    49,185
    
    
    
    40,801Gain on sale of loans
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    21,113Other operating income
    
    
    17,277
    
    
    
    13,246
    
    
    
    31,603
    
    
    
    19,922Total other income
    
    
    131,674
    
    
    
    136,341
    
    
    
    290,629
    
    
    
    252,943Other expensesSalaries and employee benefits
    
    
    830,951
    
    
    
    483,461
    
    
    
    1,517,659
    
    
    
    924,814Equipment and occupancy expenses
    
    
    176,015
    
    
    
    130,453
    
    
    
    329,934
    
    
    
    244,104Other operating expenses
    
    
    462,858
    
    
    
    299,279
    
    
    
    782,405
    
    
    
    553,688Total other expenses
    
    
    1,469,824
    
    
    
    913,193
    
    
    
    2,629,998
    
    
    
    1,722,606Net income before income taxes
    
    
    579,950
    
    
    
    505,678
    
    
    
    1,464,775
    
    
    
    1,013,937Income tax expense
    
    
    186,276
    
    
    
    159,750
    
    
    
    487,793
    
    
    
    352,888Net income
    
    $
    393,674
    
    
    $
    345,928
    
    
    $
    976,682
    
    
    $
    661,049Basic earnings per share
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.50
    
    
    $
    0.34Diluted earnings per share
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.50
    
    
    $
    0.34Dividends declared per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 See Notes to Consolidated Financial Statements. 4




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three and Six Months Ended June 30, 2004 and 2003
 (Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    393,674
    
    
    $
    345,928
    
    
    $
    976,682
    
    
    $
    661,049Other comprehensive income (loss):Unrealized gains (losses) on securities available-for-sale
arising during period, net of tax
    
    
    (1,645,211
    )
    
    
    61,126
    
    
    
    (962,943)
    )
    
    
    146,571Reclassification adjustment for gains realized in net
income,
net of tax
    
    
    0
    
    
    
    (26,602
    )
    
    
    (30,495
    )
    
    
    (26,602
    )Other comprehensive income (loss)
    
    
    (1,645,211
    )
    
    
    34,524
    
    
    
    (993,438
    )
    
    
    119,969Comprehensive (loss)
    
    $
    (1,251,537
    )
    
    $
    380,452
    
    
    $
    (16,756
    )
    
    $
    781,018
 See Notes to Consolidated Financial Statements. 5




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2004 and 2003
 (Unaudited)
 2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    976,682
    
    
    $
    661,049Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    167,080
    
    
    
    138,364Provision for loan losses
    
    
    448,121
    
    
    
    155,000Gain on sale of securities available-for-sale
    
    
    (49,185
    )
    
    
    (40,801
    )Increase in interest receivable
    
    
    (69,206
    )
    
    
    (58,728
    )Increase in interest payable
    
    
    1,639
    
    
    
    35,656Net other operating activities
    
    
    (518,661
    )
    
    
    (130,102
    )Net cash provided by operating activities
    
    
    956,470
    
    
    
    760,438INVESTING ACTIVITIESPurchase of securities available-for-sale
    
    
    (719,000
    )
    
    
    (19,058,762
    )Proceeds from maturities of securities available-for-sale
    
    
    3,595,923
    
    
    
    5,501,397Proceeds from sales of securities available-for-sale
    
    
    5,192,337
    
    
    
    514,500Purchase of restricted equity securities
    
    
    (450,000
    )
    
    
    (147,100
    )Net increase in federal funds sold
    
    
    (9,232,000
    )
    
    
    (12,366,000
    )Net increase in loans
    
    
    (34,748,476
    )
    
    
    (11,073,611
    )Purchase of premises and equipment
    
    
    (1,436,337
    )
    
    
    (1,001,403
    )Net cash used in investing activities
    
    
    (37,797,553
    )
    
    
    (37,630,979
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    22,357,760
    
    
    
    37,753,701Proceeds from issuance of capital stock
    
    
    
    
    
    
    705,200Proceeds from issuance of trust preferred securities
    
    
    
    
    
    
    5,774,000Net decrease in federal funds purchased
    
    
    
    
    
    
    (719,000
    )Net increase in other borrowings
    
    
    9,000,000
    
    
    
    Net increase (decrease) in repurchase agreements
    
    
    1,146,610
    
    
    
    (132,653
    )Net cash provided by financing activities
    
    
    38,278,370
    
    
    
    37,607,248Net increase in cash and due from banks
    
    
    1,437,287
    
    
    
    736,707Cash and due from banks at beginning of period
    
    
    3,806,961
    
    
    
    3,789,657Cash and due from banks at end of period
    
    $
    5,244,248
    
    
    $
    4,526,364
 See Notes to Consolidated Financial Statements. 6




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1.
    
    BASIS OF PRESENTATIONThe consolidated financial information included for Southern
Community Bancshares, Inc. (the Company) and Southern Community
Bank (the Bank) herein is unaudited; however, such information
reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary
for a fair statement of results for the interim periods.The results of operations for the three and six month periods
ended June 30, 2004 are not necessarily indicative of the results
to be expected for the full year.NOTE 2.
    
    STOCK COMPENSATION PLANSAt June 30, 2004, the Company has two stock-based employee
compensation plans. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion No.
25, Accounting for Stock Issued to Employees,and related
Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under these plans
have an exercise price equal to the market value of the underlying
stock on the date of grant. The following table illustrates the
effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    393,674
    
    
    $
    345,928
    
    
    $
    976,682
    
    
    $
    661,049Deduct: Total stock-based employee
Compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (8,456
    )
    
    
    
    
    
    
    (8,456
    )
    
    
    Pro forma net income
    
    $
    385,218
    
    
    $
    345,928
    
    
    $
    968,226
    
    
    $
    661,049Earnings per share:Basic - as reported
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.50
    
    
    $
    0.34Basic - pro forma
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.50
    
    
    $
    0.34Diluted - as reported
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.49
    
    
    $
    0.34Diluted -  pro forma
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.49
    
    
    $
    0.34
 7




---



##### Table of Contents



NOTE 3.
    
    EARNINGS PER CAPITAL SHAREPresented below is a summary of the components used to calculate
basic and diluted earnings per capital share for the periods ended
June 30, 2004 and 2003
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    393,674
    
    
    $
    345,928
    
    
    
    976,681
    
    
    $
    661,049Weighted average capital shares outstanding
    
    
    1,934,777
    
    
    
    1,934,644
    
    
    
    1,934,777
    
    
    
    1,923,381Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market price for the period
    
    
    62,161
    
    
    
    7,015
    
    
    
    54,694
    
    
    
    9,000Total weighted average capital shares and
Capital stock equivalents outstanding
    
    
    1,996,938
    
    
    
    1,941,659
    
    
    
    1,989,471
    
    
    
    1,932,381Diluted earnings per capital share
    
    $
    0.20
    
    
    $
    0.18
    
    
    
    0.49
    
    
    $
    0.34
 8




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY 
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following is managements discussion and analysis of certain significant
factors which have affected our financial position and operating results during
the periods included in the accompanying consolidated financial statements. Forward-Looking Statements This quarterly report contains certain forward-looking statements which are
based on certain assumptions and describe future plans, strategies, and our
expectations. These forward-looking statements are generally identified by use
of the words believe, expect, intend, anticipate, estimate,
project, or similar expressions. Our ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse effect on our operations include, but are
not limited to, changes in interest rates, general economic conditions,
legislation and regulation, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of our loan and investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
our market area, and accounting principles and guidelines. You should consider
these risks and uncertainties in evaluating forward-looking statements and
should not place undue reliance on such statements. We will not publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. FINANCIAL CONDITION Total assets increased $38 million from $196 million to $234 million, or 19%
for the six months ended June 30, 2004. The growth in total assets of $38
million remained the same for both 2004 and 2003. This growth continues to be
funded primarily by increases in total deposits, which increased by $22 million
and $37 million, respectively, of which $12 million was raised using the
brokered CD market during the second quarter of 2004. These brokered CDs
include certificates of deposit outside our local market area and pay slightly
higher rates than in market certificates of deposit. These deposits are more
likely to move if higher rates are available at maturity. Advances from the
Federal Home Loan Bank were also utilized totaling $9 million for the six
months ended June 30, 2004. The net increase in total assets for the six
months ended June 30, 2004 consisted primarily of an increase of $35 million in
total loans, an increase in Federal funds sold of $9 million and a decrease in
securities available-for-sale of $10 million. The loan to deposit ratio at
June 30, 2004 was 88% compared to 78% at December 31, 2003. The increase in
the loan to deposit ratio as compared to December 31, 2003 is due to total
loans increasing by $35 million and total deposits only increasing by $22
million. Shareholders equity decreased by $16,700 for the six months ended June
30, 2004. This net decrease consists of net income of $977,000, and an
increase in unrealized losses on securities of $1,670,000. The unrealized
losses on securities available for sale is directly related to the improvement
in the bond market. We have not identified any permanent impairment in the
securities portfolio, and no loss will be recognized if those securities with
unrealized losses are held to maturity. 9




---



##### Table of Contents



LIQUIDITY Liquidity management involves the matching of the cash flow requirements of
customer withdrawals of funds and the funding of loan originations, and the
ability of our subsidiary bank to meet those requirements. Management monitors
and maintains appropriate levels of liquidity so that maturities of assets and
deposit growth are such that adequate funds are provided to meet estimated
customer withdrawals and loan requests. At June 30, 2004, the Banks liquidity ratio was 20.79% which is slightly
higher than the Banks target ratio of 20%. REGULATORY CAPITAL REQUIREMENTS Banking regulations require us to maintain minimum capital levels in relation
to assets. At June 30, 2004, the Banks capital ratios were considered well
capitalized based on regulatory minimum capital requirements. The minimum
capital requirements and the actual capital ratios for the Company and Bank at
June 30, 2004 are as follows: RegulatoryMinimumConsolidated
    
    Bank
    
    RequirementLeverage Capital Ratio
    
    
    8.65
    %
    
    
    7.22
    %
    
    
    4.00
    %Risk-Based Capital RatiosCore Capital
    
    
    11.09
    %
    
    
    9.26
    %
    
    
    4.00
    %Total Capital
    
    
    12.99
    %
    
    
    10.27
    %
    
    
    8.00
    %
 During the second quarter of 2004, the bank opened two in-store banking
facilities, one located in Coweta County and the second located in Clayton
County. Additionally, we anticipate opening two traditional branches, one
during the third quarter and one during the fourth quarter of 2004. One branch
is located in the Henry county market of Locust Grove, the second is located in
the Coweta County market of Newnan. The total remaining commitment for these
branches in 2004 is estimated at $2.1 million. The Company issued $5.6 million of Trust Preferred securities in April 2004.
These securities are issued by a statutory trust that has been established to
facilitate the transaction. The trust is a 100% owned finance subsidiary of the
Company. The securities have a 30-year maturity, callable without penalty after
five years, and pay a floating rate based on Prime plus 12.5 basis points. The
principal balance of these securities, or a portion of the securities qualify
as tier one capital. The Company intends to use the proceeds from this
transaction to fund asset growth. The Company has unconditionally guaranteed
the securities. We are not aware of any other recommendations by the regulatory authorities,
events or trends, which, if they were to be implemented, would have a material
effect on our liquidity, capital resources, or operations. 10




---



##### Table of Contents



RESULTS OF OPERATIONS Net Interest Income. Net interest income increased by $846,000 and $1,613,000
for the three and six month periods ended June 30, 2004 compared to the same
period in 2003. The increase in net interest income is attributable to an
increase in earning assets of $70 million as compared to June 2003. Loans
increased during this period by $58 million, which generally provide greater
yields to the Company. During this same period, total deposits increased by
$45 million, which included an increase of $40 million in interest-bearing
deposits and an increase of $5 million in non-interest bearing deposits. The
change in net interest income is also based on the spread between rates earned
on interest earning assets and rates paid on interest bearing liabilities. The
yield on total loans for the six months ended June 30, 2004 is approximately
7.14% as compared to 7.55%, or a decrease of 41 basis points, for the same
period in 2003. The yield on total interest earning assets for the six months
ended June 30, 2004 was 6.16% compared to 6.39% for the same period in 2003, or
a decrease of 23 basis points. The rate paid on interest bearing liabilities
for the same period decreased by only 35 basis points to 2.36% from 2.71%.
These decreases in yields are directly related to the continued adjustment of
interest rates which tend to lag behind the actual interest rate decline in
past years. Due to the continued decrease in interest rates and increased volume of loans
and deposits at their respective current yields, the net interest margin
decreased to 4.17% at June 30, 2004 as compared to 4.26% at June 30, 2003. We
utilize floors on many of our adjustable rate loans to minimize the impact of
changing rates. Provision for Loan Losses. The provision for loan losses is based on
managements evaluation of the economic environment, the history of charged off
loans and recoveries, size and composition of the loan portfolio, nonperforming
and past due loans, and other aspects of the loan portfolio. We review the
allowance for loan loss on a monthly basis and make provisions as necessary. A
provision of $448,000 was made during the six month period ending June 30, 2004
based upon this evaluation process as compared to $155,000 for the same period
in 2003. The allowance for loan loss as a percentage of total loans was 1.13%
at June 30, 2004, 1.13% at December 31, 2003, and 1.20% at June 30, 2003.
Management believes the allowance for loan loss at June 30, 2004 is adequate to
meet any foreseeable losses in the loan portfolio. The increase in the
provision for loan losses as compared to the six month period ended June 30,
2003 is primarily related to the significant growth in our loan portfolio. At June 30, 2004 and 2003, nonaccrual, past due, and restructured loans were as
follows: June 30,
    
    June 30,2004
    
    2003(Dollars in thousands)Total nonaccruing loans
    
    $
    644
    
    
    $
    454Loans contractually past due ninety days
or more as to interest or principal
payments and still accruing
    
    
    165
    
    
    
    97Restructured loans
    
    
    

    
    
    
    
 It is our policy to discontinue the accrual of interest income when, in the
opinion of management, collection of such interest becomes doubtful. This
status is accorded such interest when (1) there is a significant deterioration
in the financial condition of the borrower and full repayment of principal and 11




---



##### Table of Contents



interest is not expected or (2) the principal or interest is more than ninety
days past due, unless the loan is both well-
secured and in the process of collection. Accrual of interest on such loans is
resumed when, in managements judgment, the collection of interest and
principal becomes probable. Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been included in the table above do not represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital resources.
These classified loans do not represent material credits about which management
is aware of any information which causes management to have serious doubts as
to the ability of such borrowers to comply with the loan repayment terms. Nonaccrual loans and past due loans greater than 90 days increased by $190,000
and $68,000, respectively, compared to the same period in 2003. We do not
anticipate any significant losses related to these loans due to adequate
collateral values securing the majority of these loans. Information regarding certain loans and allowance for loan loss data for the
six months ended June 30, 2004 and 2003 is as follows: Six Months EndedJune 30,2004
    
    2003(Dollars in thousands)Average amount of loans outstanding
    
    $
    145,486
    
    
    $
    94,478Balance of allowance for loan losses at beginning of period
    
    $
    1,420
    
    
    $
    1,141Loans charged offCommercial and financial
    
    
    (39
    )
    
    
    Real estate
    
    
    
    
    
    
    (50
    )Installment
    
    
    (20
    )
    
    
    (25
    )(59
    )
    
    
    (75
    )Loans recoveredCommercial and financial
    
    
    
    
    
    
    Real estate
    
    
    
    
    
    
    Installment
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    (59
    )
    
    
    (75
    )Additions to allowance charged to operating expense during period
    
    
    448
    
    
    
    155Balance of allowance for loan losses at end of period
    
    
    1,809
    
    
    
    1,221Ratio of net loans charged-off during the
period to average loans outstanding
    
    
    0.04
    %
    
    
    0.08
    %
 12




---



##### Table of Contents



Other Income.Other income decreased by $8,000 for the three months ended June
30, 2004, and increased $35,000 for the six months ended June 30, 2004 compared
to the same periods in 2003. Mortgage origination fees increase $8,000 and
$14,000 for the three and six months ended June 30, 2004. Gains on sales of
securities available-for-sale affected both periods with a decrease of $41,000
for the three months ended June 30, 2004 and an increase of $8,000 for the six
months ended June 30, 2004 compared to the same periods in 2003. Deposit
service charges increased $32,000 and $38,000 for the three and six months
ended June 30, 2004 compared to the same periods in 2003 which is directly
related to the growth in deposit accounts. Gains on sale of loans decreased
by $18,000 for the six months ended June 30, 2004 compared to the same period
in 2003. Other Expenses.Other expenses increased by $554,000 and $904,000 for the
three and six months ended June 30, 2004 compared to the same periods in 2003.
The most significant increases in 2004 are increases of $347,000 and $593,000
in salaries and employee benefits and other operating expenses of $161,000 and
$226,000 for the three and six months ended June 30, 2004. The increase in
salaries and employee benefits represent normal increases in salaries and an
increase in the number of employees. At June 30, 2004, the number of full-time
equivalent employees was 60 compared to 40 at June 30, 2003. The increase in
the number of full-time equivalent employees is directly related to the growth
of the Company and the hiring for both in-store banking facilities which opened
during the second quarter of 2004. The increases in other operating expenses
are not attributable to any one particular item, but represent normal
increases. Equipment and occupancy expenses increased $45,000 and $86,000 for
the three and six months ended June 30, 2004. This increase is directly
related to equipment purchases for new employees and occupancy expenses related
to the opening of our two new locations. Income Taxes.Income tax expense increased by $27,000 and $135,000 for the
three and six months ended June 30, 2004 as compared to the same period in
2003. The increase in income tax expense is directly related to the increase
in income before taxes of $74,000 and $451,000 for the three and six months
ended June 30, 2004 as compared to the same periods in 2003. The effective tax
rate for 2004 and 2003 was 33.3% and 34.8%, respectively. The decrease in
our effective tax rate is due to the increase in nontaxable securities. Net Income. Net income increased by $48,000 and $316,000 for the three and six
months ended June 30, 2004 as compared to the same periods in 2003. The
primary reason for the increase in net income for the three and six months
ended June 30, 2004 as compared to the same period in 2003 is the increase in
net interest income. 
 Item 3.
    
    CONTROLS AND PROCEDURES
 Our Chief Executive Officer and Chief Financial Officer have evaluated the
Companys disclosure controls and procedures as of the end of the quarterly
period covered by this Form 10-QSB and have concluded that the Companys
disclosure controls and procedures are effective. During the second quarter of
2004 there were no changes in the Companys internal control over financial
reporting that have materially affected, or that are reasonably likely to
materially affect, the Companys internal control over financial reporting. 13




---



##### Table of Contents



PART II - Other Information 
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
 The annual meeting of the shareholders of Southern Community Bancshares, Inc. was held on May 27, 2004.
A total of 1,104,220 of the shares issued and outstanding registered for the meeting either in person or by proxy.
The results of the meeting were as follows:(a) The following class III directors were elected:
 Directors
    
    For
    
    Against
    
    AbstainGeorge R. Davis, Sr.
    
    
    1,104,220
    
    
    
    
    Robert B. Dixon, Jr.
    
    
    1,104,220
    
    
    
    
    Gary D. McGaha
    
    
    1,104,220
    
    
    
    
    William M. Strain
    
    
    1,104,220
    
    
    
    
    
 
 Item 6.
    
    Exhibits and Reports on Form 8-K
 (a)
    
    Exhibits10.1
    
    
    Amended and Restated Trust Agreement among the Company, Wilmington Trust
Company, and the Trust Administrator, dated as of April 28, 2004.10.2
    
    
    Guarantee Agreement between the Company and Wilmington Trust company,
dated as of April 28, 2004.10.3
    
    
    Junior Subordinated indenture between the Company and Wilmington Trust
company, dated as of April 28, 2004.10.4
    
    
    Change of Control Agreement between the Company and Leslye L. Grindle10.5
    
    
    Change of Control Agreement between the Company and G. Wayne Robertson.31.1
    
    
    Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certificate of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certificate of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certificate of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(b)
    
    Reports on Form 8-K.None.
 14




---



##### Table of Contents



SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. SOUTHERN COMMUNITY
BANCSHARES, INC.Date: August 16, 2004
    /s/ Gary McGahaGary McGahaPresident and Director Date August 16, 2004
    /s/ Leslye GrindleLeslye GrindleSr. Vice President and
Chief Financial Officer 15