##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION  FORM 10-QSB [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 [ ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OFTHE 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 November 12, 2004: 2,579,477; no par value Transitional Small Business Disclosure Format Yes [  ] No [X] 1




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY INDEX PagePart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheet as of September 30, 2004
    
    
    3Consolidated Statements of Income for the Three and Nine Months ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the Nine Months Ended September 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 - 14Item 3. Controls and Procedures
    
    
    15Part II. Other InformationItem 6. Exhibits
    
    
    15Signatures
    
    
    16Certifications
    
    
    17 - 22EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
 2




---



##### Table of Contents



PART I. Financial Information 
 ITEM 1. Financial Statements SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEETS September 30, 2004
  AssetsCash and due from banks
    
    $
    6,349,920Federal funds sold
    
    
    4,387,000Securities available-for-sale
    
    
    50,735,316Restricted equity securities
    
    
    1,200,000Loans
    
    
    179,637,707Less allowance for loan losses
    
    
    2,049,347Loans, net
    
    
    177,588,360Premises and equipment
    
    
    7,506,637Other assets
    
    
    2,511,214Total assets
    
    $
    250,278,447Liabilities and Shareholders EquityDepositsNoninterest-bearing
    
    $
    21,345,853Interest-bearing
    
    
    173,751,350Total deposits
    
    
    195,097,203Federal Home Loan Bank advances
    
    
    24,000,000Securities sold under repurchase agreements
    
    
    4,579,209Other liabilities
    
    
    758,062Subordinated debentures
    
    
    5,774,000Total liabilities
    
    
    230,208,474Shareholders equityCapital stock, no par value; 10,000,000 shares authorized;
2,579,477 shares issued and outstanding
    
    
    16,046,371Retained earnings
    
    
    4,155,871Accumulated other comprehensive loss
    
    
    (132,269
    )Total shareholders equity
    
    
    20,069,973Total liabilities and shareholders equity
    
    $
    250,278,447
 See Notes to Consolidated Financial Statements. 3




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF INCOME Three and Nine Months Ended September 30, 2004 and 2003
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest incomeLoans, including fees
    
    $
    2,944,356
    
    
    $
    1,986,917
    
    
    $
    8,116,513
    
    
    $
    5,526,098Taxable securities
    
    
    441,335
    
    
    
    340,132
    
    
    
    1,393,832
    
    
    
    633,917Nontaxable securities
    
    
    94,803
    
    
    
    62,968
    
    
    
    277,134
    
    
    
    148,163Federal funds sold
    
    
    34,384
    
    
    
    15,204
    
    
    
    64,755
    
    
    
    52,010Total interest income
    
    
    3,514,878
    
    
    
    2,405,221
    
    
    
    9,852,234
    
    
    
    6,360,188Interest expenseDeposits
    
    
    983,946
    
    
    
    822,601
    
    
    
    2,734,654
    
    
    
    2,121,308Other borrowings
    
    
    223,039
    
    
    
    37,535
    
    
    
    557,722
    
    
    
    55,195Total interest expense
    
    
    1,206,985
    
    
    
    860,136
    
    
    
    3,292,376
    
    
    
    2,176,503Net interest income
    
    
    2,307,893
    
    
    
    1,545,085
    
    
    
    6,559,858
    
    
    
    4,183,685Provision for loan losses
    
    
    245,000
    
    
    
    155,000
    
    
    
    693,121
    
    
    
    310,000Net interest income after provision for loan losses
    
    
    2,062,893
    
    
    
    1,390,085
    
    
    
    5,866,737
    
    
    
    3,873,685Other incomeService charges on deposit accounts
    
    
    122,851
    
    
    
    99,223
    
    
    
    332,692
    
    
    
    270,329Gain on sale of securities available-for-sale
    
    
    36,231
    
    
    
    15,500
    
    
    
    85,416
    
    
    
    56,301Gain on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,113Other operating income
    
    
    13,199
    
    
    
    27,178
    
    
    
    44,802
    
    
    
    47,100Total other income
    
    
    172,281
    
    
    
    141,901
    
    
    
    462,910
    
    
    
    394,843Other expensesSalaries and employee benefits
    
    
    940,525
    
    
    
    555,037
    
    
    
    2,458,184
    
    
    
    1,479,851Equipment and occupancy expenses
    
    
    239,718
    
    
    
    138,004
    
    
    
    569,652
    
    
    
    382,108Other operating expenses
    
    
    458,412
    
    
    
    346,456
    
    
    
    1,240,817
    
    
    
    900,144Total other expenses
    
    
    1,638,655
    
    
    
    1,039,497
    
    
    
    4,268,653
    
    
    
    2,762,103Net income before income taxes
    
    
    596,519
    
    
    
    492,489
    
    
    
    2,060,994
    
    
    
    1,506,425Income tax expense
    
    
    190,941
    
    
    
    164,441
    
    
    
    678,734
    
    
    
    517,329Net income
    
    $
    405,578
    
    
    $
    328,048
    
    
    $
    1,382,260
    
    
    $
    989,096Basic earnings per share
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.54
    
    
    $
    0.38Diluted earnings per share
    
    $
    0.15
    
    
    $
    0.12
    
    
    $
    0.52
    
    
    $
    0.38Dividends 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 Nine Months Ended September 30, 2004 and 2003
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    405,578
    
    
    $
    328,048
    
    
    $
    1,382,260
    
    
    $
    989,096Other comprehensive income (loss):Unrealized gains (losses) on securities available-for-sale
arising during period, net of tax
    
    
    1,221,742
    
    
    
    (683,384
    )
    
    
    258,800
    
    
    
    (536,814
    )Reclassification adjustment for gains realized in net income,
net of tax
    
    
    (22,463
    )
    
    
    (10,106
    )
    
    
    (52,958
    )
    
    
    (36,708
    )Other comprehensive income (loss)
    
    
    1,199,279
    
    
    
    (693,490
    )
    
    
    205,842
    
    
    
    (573,522
    )Comprehensive income (loss)
    
    $
    1,604,857
    
    
    $
    (365,442
    )
    
    $
    1,588,102
    
    
    $
    415,574
 See Notes to Consolidated Financial Statements. 5




---



##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2004 and 2003
 (Unaudited)
 2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    1,382,260
    
    
    $
    989,096Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    282,412
    
    
    
    217,185Provision for loan losses
    
    
    693,121
    
    
    
    310,000Gain on sale of securities available-for-sale
    
    
    (85,416
    )
    
    
    (56,301
    )Increase in interest receivable
    
    
    (368,742
    )
    
    
    (172,117
    )Increase in interest payable
    
    
    10,038
    
    
    
    118,690Net other operating activities
    
    
    (519,899
    )
    
    
    (296,806
    )Net cash provided by operating activities
    
    
    1,393,774
    
    
    
    1,109,747INVESTING ACTIVITIESPurchase of securities available-for-sale
    
    
    (3,219,955
    )
    
    
    (50,684,115
    )Proceeds from maturities of securities available-for-sale
    
    
    4,396,586
    
    
    
    11,159,257Proceeds from sales of securities available-for-sale
    
    
    8,304,924
    
    
    
    2,314,969Purchase of restricted equity securities
    
    
    (450,000
    )
    
    
    (608,200
    )Net increase in federal funds sold
    
    
    (3,771,000
    )
    
    
    (2,369,000
    )Net increase in loans
    
    
    (54,499,838
    )
    
    
    (18,570,575
    )Purchase of premises and equipment
    
    
    (2,578,627
    )
    
    
    (1,100,420
    )Net cash used in investing activities
    
    
    (51,817,910
    )
    
    
    (59,858,084
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    35,322,136
    
    
    
    44,413,275Proceeds from issuance of capital stock
    
    
    
    
    
    
    705,200Payment for fractional shares
    
    
    (4,062
    )
    
    
    Proceeds from issuance of trust preferred securities
    
    
    5,774,000
    
    
    
    Net decrease in federal funds purchased
    
    
    
    
    
    
    (719,000
    )Net Increase in Federal Home Loan Bank advances
    
    
    9,000,000
    
    
    
    15,000,000Net Increase (decrease) in repurchase agreements
    
    
    2,875,021
    
    
    
    (1,327,241
    )Net cash provided by financing activities
    
    
    52,967,095
    
    
    
    58,072,234Net increase (decrease) in cash and due from banks
    
    
    2,542,959
    
    
    
    (676,103
    )Cash and due from banks at beginning of year
    
    
    3,806,961
    
    
    
    3,789,657Cash and due from banks at end of period
    
    $
    6,349,920
    
    
    $
    3,113,554
 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 PRESENTATION The 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 nine month periods
ended September 30, 2004 are not necessarily indicative of the
results to be expected for the full year. NOTE 2. STOCK COMPENSATION PLANS At September 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    405,578
    
    
    $
    328,048
    
    
    $
    1,382,260
    
    
    $
    989,096Deduct: Total stock-based employee compensation
expense determined under fair value based
Method for all awards, net of related tax effects
    
    
    
    
    
    
    
    
    
    
    (8,456
    )
    
    
    Pro forma net income
    
    $
    405,578
    
    
    $
    328,048
    
    
    $
    1,373,804
    
    
    $
    989,096Earnings per share:Basic - as reported
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.54
    
    
    $
    0.38Basic - pro forma
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.53
    
    
    $
    0.38Diluted - as reported
    
    $
    0.15
    
    
    $
    0.12
    
    
    $
    0.52
    
    
    $
    0.38Diluted - pro forma
    
    $
    0.15
    
    
    $
    0.12
    
    
    $
    0.51
    
    
    $
    0.38
 7




---



##### Table of Contents



NOTE 3. EARNINGS PER CAPITAL SHARE Presented below is a summary of the components used to calculate
basic and diluted earnings per capital share for the periods ended
September 30, 2004 and 2003. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    405,578
    
    
    $
    328,048
    
    
    
    1,382,260
    
    
    $
    989,096Weighted average capital shares outstanding
    
    
    2,579,477
    
    
    
    2,579,525
    
    
    
    2,579,477
    
    
    
    2,569,936Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market price for the period
    
    
    92,610
    
    
    
    9,353
    
    
    
    71,632
    
    
    
    12,000Total weighted average capital shares and
Capital stock equivalents outstanding
    
    
    2,672,087
    
    
    
    2,588,878
    
    
    
    2,651,109
    
    
    
    2,581,986Diluted earnings per capital share
    
    $
    0.15
    
    
    $
    0.12
    
    
    
    0.52
    
    
    $
    0.38
 NOTE 4. STOCK SPLIT On July 20, 2004, the Company declared a four for three stock
split payable to shareholders of record on September 1, 2004. The
earnings per common share for all periods have been retroactively
adjusted for this split as if it occurred on January 1, 2003. 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 $54.6 million from $195.6 million to $250.3 million, or
28% for the nine months ended September 30, 2004. The increase in total assets
in 2004 is slightly less than the $58.5 million growth for the same period in
2003. This growth continues to be funded primarily by increases in total
deposits, which increased by $35 million, 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 nine
months ended September 30, 2004. In addition, proceeds from securities sold
under repurchase agreements and subordinated debentures provided funding for
loan growth of $2.9 million and $5.8 million, respectively, during the nine
month period. The net increase in total assets for the nine months ended
September 30, 2004 consisted primarily of an increase of $54 million in total
loans. The loan to deposit ratio at September 30, 2004 was 92% compared to 78%
at December 31, 2003. The increase in the loan to deposit ratio as compared to 9




---



##### Table of Contents



December 31, 2003 is due to total loans increasing by $54 million and total
deposits only increasing by $35 million. Shareholders equity increased by $1.6 million for the nine months ended
September 30, 2004. This net increase consists of net income of $1.4 million,
and a decrease in unrealized losses on securities of $206,000. 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 in our income statement if
those securities with unrealized losses are held to maturity. 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 September 30, 2004, the Banks liquidity ratio was 16.46%, which is lower
than the Banks target ratio of 20%. The Bank has an available borrowing
capacity to meet any unexpected liquidity needs. In addition, the Company has
cash available that could be injected into the Bank to meet capital and
liquidity needs. REGULATORY CAPITAL REQUIREMENTS Banking regulations require us to maintain minimum capital levels in relation
to assets. At September 30, 2004, the Bank was considered well capitalized
based on regulatory minimum capital requirements. The minimum capital
requirements and the actual capital ratios for the Company and Bank at
September 30, 2004 are as follows: RegulatoryMinimumConsolidated
    
    Bank
    
    RequirementLeverage Capital Ratio
    
    
    8.20
    %
    
    
    7.30
    %
    
    
    4.00
    %Risk-Based Capital RatiosCore Capital
    
    
    10.32
    %
    
    
    9.19
    %
    
    
    4.00
    %Total Capital
    
    
    12.17
    %
    
    
    10.24
    %
    
    
    8.00
    %
 During 2004, the bank opened three branches, two during the second quarter, of
which both are in-store banking facilities, one located in Coweta county and
the second in Clayton county. The third is a traditional branch which opened
during the third quarter and is located in Locust Grove, which is in Henry
county. In addition, we own a piece of property located within Coweta County
with an expected branch opening during the first quarter of 2005 with a
remaining commitment of approximately $1.1 million. 10




---



##### Table of Contents



The Board of Directors approved a four for three (33 1/3%) stock split payable
on September 15, 2004. As a result of the split, 644,700 shares were paid to
shareholders of record on September 1, 2004.
Fractional shares were paid in cash totaling $4,062.00 and were based on the
closing price on September 15, 2004 of $18.00 per whole share. The stock split
did not affect our overall capital position. Except as described above, we are not aware of any 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. RESULTS OF OPERATIONS Net Interest Income. Net interest income increased by $763,000 and $2,376,000
for the three and nine month periods ended September 30, 2004 compared to the
same period in 2003. The increase in net interest income is attributable to an
increase in earning assets of $64 million as compared to September 30, 2003.
Loans increased during this period by $70 million, which generally provide
greater yields to the Company. During this same period, total deposits
increased by $51 million, which included an increase of $47 million in
interest-bearing deposits and an increase of $4 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 nine months ended
September 30, 2004 was approximately 7.03% as compared to 7.54%, for the same
period in 2003, or a decrease of 51 basis points. The yield on total interest
earning assets for the nine months ended September 30, 2004 was 6.12% compared
to 6.22% for the same period in 2003, or a decrease of 10 basis points. The
rate paid on interest bearing liabilities for the same period decreased by 32
basis points to 2.34% from 2.66%. 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 recent increase in interest rates and increased volume of loans and
deposits at their respective current yields, the net interest margin increased
to 4.13% at September 30, 2004 as compared to 4.09% at September 30, 2003. 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.
Provisions of $693,000 and $245,000 were made during the three and nine month
periods ending September 30, 2004, respectively, based upon this evaluation
process as compared to $155,000 and $310,000 for the same periods in 2003. The
allowance for loan loss as a percentage of total loans was 1.14% at September
30, 2004 and 1.13% at December 31, 2003. Even with the increase in nonaccrual
loans discussed below, management believes the allowance for loan loss at
September 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
nine month period ended September 30, 2003 is primarily related to the
significant growth in our loan portfolio combined with increases in
nonperforming loans. At September 30, 2004 and 2003, nonaccrual, past due, and restructured loans
were as follows: 11




---



##### Table of Contents



September 30,
    
    September 30,2004
    
    2003(Dollars in thousands)Total nonaccruing loans
    
    $
    4,629
    
    
    $
    348Loans contractually past due ninety days
or more as to interest or principal
payments and still accruing
    
    
    70
    
    
    
    Restructured 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
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
$4,281,000 and $70,000, respectively, compared to the same period in 2003.
This increase in nonaccrual loans is concentrated in three credits totaling
$3,965,000. Two of the three credits are secured by commercial real estate and
the third credit is secured by various business assets. There is no relation
between the three credits. Due to the collateral securing these credits, we
estimate our losses related to these credits to not exceed $384,000 based on
our evaluation at September 30, 2004. At September 30, 2004, $384,000 of the
allowances for loan losses is allocated to these credits. Additional losses
could possibly be incurred if foreclosure and liquidation procedures are
necessary. We do not anticipate any significant losses related to remaining
$664,000 in nonaccrual loans due to adequate collateral values securing the
majority of these loans. Information regarding certain loans and allowance for loan loss data for the
nine months ended September 30, 2004 and 2003 is as follows: Nine Months EndedSeptember 30,2004
    
    2003(Dollars in thousands)Average amount of loans outstanding
    
    $
    153,088
    
    
    $
    98,005Balance of allowance for loan losses at beginning of period
    
    $
    1,420
    
    
    $
    1,141Loans charged offCommercial and financial
    
    
    (42
    )
    
    
    Real estate
    
    
    
    
    
    
    (116
    )Installment
    
    
    (22
    )
    
    
    (25
    )
 12




---



##### Table of Contents



Nine Months EndedSeptember 30,2004
    
    2003(Dollars in thousands)(64
    )
    
    
    (141
    )Loans recoveredCommercial and financial
    
    
    
    
    
    
    Real estate
    
    
    
    
    
    
    Installment
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    (64
    )
    
    
    (141
    )Additions to allowance charged to operating expense during period
    
    
    693
    
    
    
    310Balance of allowance for loan losses at end of period
    
    
    2,049
    
    
    
    1,310Ratio of net loans charged-off during the
period to average loans outstanding
    
    
    0.04
    %
    
    
    0.14
    %
 Other Income.Other income increased by $30,000 and $68,000 for the three and
nine months ended September 30, 2004 compared to the same periods in 2003.
Mortgage origination fees, which are included in other operating income,
decreased $10,000 for the three months ended September 30, 2004, and increased
$4,000 for the nine months ended September 30, 2004 compared to the same
periods in 2003. Gains on sales of securities available-for-sale affected both
periods with an increase of $21,000 and $29,000 for the three and nine months
ended September 30, 2004 compared to the same periods in 2003. Deposit
service charges increased $24,000 and $62,000 for the three and nine months
ended September 30, 2004 compared to the same periods in 2003, which is
directly related to the growth in deposit accounts. Brokerage fees, also
included in other operating income, decreased by $5,000 and $6,000 for the
three and nine months ended September 30, 2004 compared to the same periods in
2003. Gains on sale of SBA loans decreased by $21,000 for the nine months
ended September 30, 2004 compared to the same period in 2003. Other Expenses.Other expenses increased by $599,000 and $1,507,000 for the
three and nine months ended September 30, 2004 compared to the same periods in
2003. The most significant increases in 2004 are increases of $385,000 and
$978,000 in salaries and employee benefits and other operating expenses of
$112,000 and $341,000 for the three and nine months ended September 30, 2004.
The increase in salaries and employee benefits represent normal increases in
salaries and an increase in the number of employees. At September 30, 2004,
the number of full-time equivalent employees was 68 compared to 41 at September
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 and one
traditional branch which opened during the third quarter of 2004. The most
significant increases in the other operating expense category were Data
Processing expenses, which increased by $54,000 and $70,000 for the three and
nine months ended September 30, 2004, and Stationary and Supplies which
increased by $21,000 and $34,000 for the three and nine months ended September
30, 2004, both of which are directly related to the additional branches and the
growth of the company. Equipment and occupancy expenses increased $102,000 and
$188,000 for the three and nine months ended September 30, 2004. This increase
is directly related to equipment purchases for new employees and occupancy
expenses related to the opening of our three new locations. 13




---



##### Table of Contents



Income Taxes.Income tax expense increased by $27,000 and $161,000 for the
three and nine months ended September 30, 2004 as compared to the same periods
in 2003. The increase in income tax expense is directly related to the
increase in income before taxes of $104,000 and $555,000 for the three and nine
months ended September 30, 2004 as compared to the same periods in 2003. The
effective tax rate for the nine month periods in 2004 and 2003 was 32.9% and
34.3%, respectively. The decrease in our effective tax rate is due to the
increase in nontaxable securities. Net Income. Net income increased by $78,000 and $393,000 for the three and
nine months ended September 30, 2004 as compared to the same periods in 2003.
The primary reason for the increase in net income for the three and nine months
ended September 30, 2004 as compared to the same period in 2003, is the
continued growth of the Company. The details of the items of income and
expenses are described above. 14




---



##### Table of Contents



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 third 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. 
 PART II  OTHER INFORMATION 
 Item 6. Exhibits (a) Exhibits 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
 15




---



##### 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 COMMUNITYBANCSHARES, INC.Date: November 12, 2004
    
    /s/ Gary McGahaGary McGahaPresident and CEODate November 12, 2004
    
    /s/ Leslye GrindleLeslye GrindleSr. Vice President andChief Financial Officer
 16