##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-50252
 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
 þ o
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




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##### 



PagePart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007 (audited)
    
    
    4Consolidated Statements of Income (Loss) (unaudited) for
the Three and Nine Months Ended September 30,2008 and 2007
    
    
    5Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Nine Months Ended September
30, 2008 and 2007
    
    
    6Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2008 and 2007
    
    
    7Notes to Consolidated Financial Statements (unaudited)
    
    
    8-11Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12-19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19Part II. Other InformationItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20-21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22Signatures
    
    
    23EX-10.1 CEASE AND DESIST ORDER DATED OCTOBER 6, 2008EX-10.2 EMPLOYMENT AGREEMENT WITH DAVID COXONEX-10.3 AMENDMENT NO. 1 TO 2001 INCENTIVE STOCK OPTION PLANEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE ACTING CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEOEX-32.2 SECTION 906, CERTIFICATION OF THE ACTING CFO




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A Warning About Forward-Looking Statements
  3




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##### Table of Contents



PART I. Financial Information
 
 ITEM 1.
    
    Consolidated Financial Statements
 
 SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS
as of September 30, 2008 and December 31, 2007
 September 30, 2008
    
    
    December 31, 2007(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    2,351,612
    
    
    $
    4,090,218Interest bearing deposits in banks
    
    
    7,147,000
    
    
    
    3,503,959Federal funds sold
    
    
    44,296,000
    
    
    
    26,039,000Securities available for sale, at fair value
    
    
    68,612,252
    
    
    
    58,196,916Restricted equity securities, at cost
    
    
    2,986,400
    
    
    
    3,282,000Loans
    
    
    248,380,800
    
    
    
    290,796,352Less allowance for loan losses
    
    
    6,819,335
    
    
    
    7,961,406Loans, net
    
    
    241,561,465
    
    
    
    282,834,946Premises and equipment
    
    
    8,764,609
    
    
    
    9,048,748Foreclosed assets
    
    
    31,238,233
    
    
    
    10,470,787Other assets
    
    
    8,651,467
    
    
    
    10,922,882Total assets
    
    $
    415,609,038
    
    
    $
    408,389,456Liabilities and Shareholders EquityDepositsNoninterest-bearing
    
    $
    23,750,350
    
    
    $
    32,220,093Interest-bearing
    
    
    303,916,208
    
    
    
    268,497,389Total deposits
    
    
    327,666,558
    
    
    
    300,717,482Federal Home Loan Bank advances
    
    
    50,000,000
    
    
    
    57,500,000Securities sold under repurchase agreements
    
    
    9,908,835
    
    
    
    14,573,847Subordinated debentures
    
    
    10,929,000
    
    
    
    10,929,000Other liabilities
    
    
    1,744,973
    
    
    
    1,680,798Total liabilities
    
    
    400,249,366
    
    
    
    385,401,127Shareholders equityCapital stock, no par value; 10,000,000 shares authorized;
3,093,874 and 2,593,874 shares issued and outstanding, respectively
    
    
    18,234,788
    
    
    
    16,204,025Retained earnings
    
    
    (2,688,666
    )
    
    
    6,921,331Accumulated other comprehensive loss
    
    
    (186,450
    )
    
    
    (137,027
    )Total shareholders equity
    
    
    15,359,672
    
    
    
    22,988,329Total liabilities and shareholders equity
    
    $
    415,609,038
    
    
    $
    408,389,456
 See Notes to Consolidated Financial Statements.
 4




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest incomeLoans, including fees
    
    $
    3,471,950
    
    
    $
    6,677,023
    
    
    $
    11,624,667
    
    
    $
    19,968,226Taxable securities
    
    
    870,041
    
    
    
    542,929
    
    
    
    2,112,310
    
    
    
    1,583,150Nontaxable securities
    
    
    49,251
    
    
    
    135,607
    
    
    
    250,494
    
    
    
    407,085Federal funds sold
    
    
    136,903
    
    
    
    69,087
    
    
    
    317,163
    
    
    
    218,473Interest bearing deposits in banks
    
    
    27,648
    
    
    
    33,841
    
    
    
    93,032
    
    
    
    69,974Total interest income
    
    
    4,555,793
    
    
    
    7,458,487
    
    
    
    14,397,666
    
    
    
    22,246,908Interest expenseDeposits
    
    
    2,662,962
    
    
    
    2,871,176
    
    
    
    7,812,717
    
    
    
    8,682,855Other borrowings
    
    
    705,529
    
    
    
    1,035,518
    
    
    
    2,269,092
    
    
    
    2,878,525Total interest expense
    
    
    3,368,491
    
    
    
    3,906,694
    
    
    
    10,081,809
    
    
    
    11,561,380Net interest income
    
    
    1,187,302
    
    
    
    3,551,793
    
    
    
    4,315,857
    
    
    
    10,685,528Provision for loan losses
    
    
    1,270,397
    
    
    
    1,060,956
    
    
    
    4,968,947
    
    
    
    2,052,898Net interest income (loss) after provision for
loan losses
    
    
    (83,095
    )
    
    
    2,490,837
    
    
    
    (653,090
    )
    
    
    8,632,630Other incomeService charges on deposit accounts
    
    
    244,671
    
    
    
    238,096
    
    
    
    682,844
    
    
    
    730,569Gain on sale of securities available for sale
    
    
    156,687
    
    
    
    
    
    
    
    488,942
    
    
    
    Other operating income
    
    
    78,835
    
    
    
    50,904
    
    
    
    231,463
    
    
    
    198,769Total other income
    
    
    480,193
    
    
    
    289,000
    
    
    
    1,403,249
    
    
    
    929,338Other expensesSalaries and employee benefits
    
    
    1,273,382
    
    
    
    1,515,112
    
    
    
    4,003,368
    
    
    
    4,586,001Equipment and occupancy expenses
    
    
    330,294
    
    
    
    454,639
    
    
    
    1,295,591
    
    
    
    1,369,315Loss on sale of other assets
    
    
    480,335
    
    
    
    
    
    
    
    645,524
    
    
    
    Other operating expenses
    
    
    998,677
    
    
    
    866,561
    
    
    
    2,757,400
    
    
    
    2,421,335Total other expenses
    
    
    3,082,688
    
    
    
    2,836,312
    
    
    
    8,701,883
    
    
    
    8,376,651Net income (loss) before income taxes
(benefits)
    
    
    (2,685,590
    )
    
    
    (56,475
    )
    
    
    (7,951,724
    )
    
    
    1,185,317Income tax expense (benefits)
    
    
    3,776,563
    
    
    
    (84,563
    )
    
    
    1,658,272
    
    
    
    251,581Net income (loss)
    
    $
    (6,462,153
    )
    
    $
    28,088
    
    
    $
    (9,609,996
    )
    
    $
    933,736Basic earnings (losses) per share
    
    $
    (2.47
    )
    
    
    0.01
    
    
    
    (3.69
    )
    
    
    0.36Diluted earnings (losses) per share
    
    $
    (2.47
    )
    
    
    0.01
    
    
    
    (3.69
    )
    
    
    0.35Dividends declared per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 5




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SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Net income (loss)
    
    $
    (6,462,153
    )
    
    $
    28,088
    
    
    $
    (9,609,996
    )
    
    $
    933,736Other comprehensive income (loss):Unrealized holding gains on securities
available for sale arising during period, net of tax
    
    
    1,195,060
    
    
    
    699,108
    
    
    
    253,720
    
    
    
    134,903Reclassification adjustment for gains realized in net
income, net of tax
    
    
    (97,146
    )
    
    
    
    
    
    
    (303,144
    )
    
    
    Other comprehensive income (loss)
    
    
    1,097,914
    
    
    
    699,108
    
    
    
    (49,424
    )
    
    
    134,903Comprehensive income (loss)
    
    $
    (5,364,239
    )
    
    $
    727,196
    
    
    $
    (9,659,420
    )
    
    $
    1,068,639
 6




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##### Table of Contents



SOUTHERN COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 Nine Months EndedSeptember 30,2008
    
    2007OPERATING ACTIVITIESNet income (loss)
    
    $
    (9,609,996
    )
    
    $
    933,736Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activitiesDepreciation
    
    
    516,475
    
    
    
    555,442Provision for loan losses
    
    
    4,968,947
    
    
    
    2,052,898Gain on sale of securities available for sale
    
    
    (488,942
    )
    
    
    (28,644
    )Loss on sale of other real estate owned
    
    
    647,816
    
    
    
    21,705Increase (decrease) in interest receivable
    
    
    883,230
    
    
    
    (304,060
    )Decrease in interest payable
    
    
    (86,749
    )
    
    
    (69,501
    )Increase in cash surrender value of life insurance
    
    
    (192,049
    )
    
    
    (133,612
    )Stock-based compensation expense
    
    
    30,763
    
    
    
    19,789Net other operating activities
    
    
    473,196
    
    
    
    (1,711,014
    )Net cash provided by (used in) operating activities
    
    
    (2,857,309
    )
    
    
    1,336,739INVESTING ACTIVITIESIncrease in interest-bearing deposits in banks
    
    
    (3,643,041
    )
    
    
    (2,440,454
    )Purchase of securities available for sale
    
    
    (75,532,956
    )
    
    
    (6,641,690
    )Proceeds from maturities of securities available for sale
    
    
    29,563,832
    
    
    
    5,025,668Proceeds from sales of securities available for sale
    
    
    35,963,014
    
    
    
    (Purchase) redemption of restricted equity securities
    
    
    295,600
    
    
    
    (612,100
    )Net decrease in federal funds sold
    
    
    (18,257,000
    )
    
    
    12,948,000Proceeds from sales of other real estate owned
    
    
    5,016,011
    
    
    
    1,473,039Net decrease (increase) in loans
    
    
    11,161,515
    
    
    
    (14,116,874
    )Net purchases of premises and equipment
    
    
    (232,336
    )
    
    
    (368,027
    )Net cash provided by (used in) investing activities
    
    
    (15,665,361
    )
    
    
    (4,732,438
    )FINANCING ACTIVITIESProceeds from stock sale
    
    
    2,000,000
    
    
    
    Net increase (decrease) in deposits
    
    
    26,949,076
    
    
    
    (16,396,886
    )Net (decrease) increase in Federal Home Loan Bank advances
    
    
    (7,500,000
    )
    
    
    13,000,000Net increase (decrease) in repurchase agreements
    
    
    (4,665,012
    )
    
    
    8,124,303Net cash provided by financing activities
    
    
    16,784,064
    
    
    
    4,727,417Net (decrease) increase in cash and due from banks
    
    
    (1,738,606
    )
    
    
    1,331,718Cash and due from banks at beginning of period
    
    
    4,090,218
    
    
    
    5,029,384Cash and due from banks at end of period
    
    $
    2,351,612
    
    
    
    6,361,102NONCASH TRANSACTIONLoans transferred to other real estate owned
    
    $
    25,143,019
    
    
    
    2,103,461
 See Notes to Consolidated Financial Statements.
 7




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##### Table of Contents



NOTE 1.
    
    BASIS OF PRESENTATION
   NOTE 2.
    
    STOCK COMPENSATION PLANS
   Nine months endedSeptember 30, 2008Weighted AverageWeighted
    
    
    RemainingAverage Option
    
    
    Contractual Term
    
    
    AggregateShares
    
    
    Price Per Share
    
    
    (in years)
    
    
    Intrinsic ValueOutstanding, beginning of period
    
    
    211,320
    
    
    $
    7.49Granted during the period
    
    
    133,333
    
    
    
    4.00Forfeited during the period
    
    
    (1,500
    )
    
    
    18.50Exercised during the period
    
    
    
    
    
    
    Outstanding, end of period
    
    
    343,153
    
    
    $
    6.09
    
    
    
    5.91
    
    
    $
    Number of shares exercisable
    
    
    219,987
    
    
    $
    6.52
    
    
    
    3.74
    
    
    $
    
 8




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##### Table of Contents



Nine months endedSeptember 30, 2007Weighted AverageWeighted
    
    
    RemainingAverage Option
    
    
    Contractual Term
    
    
    AggregateShares
    
    
    Price Per Share
    
    
    (in years)
    
    
    Intrinsic ValueOutstanding, beginning of period
    
    
    208,570
    
    
    $
    7.30Granted during the period
    
    
    2,750
    
    
    
    22.00Forfeited during the period
    
    
    
    
    
    
    Exercised during the period
    
    
    
    
    
    
    Outstanding, end of period
    
    
    211,320
    
    
    $
    7.49
    
    
    
    4.43
    
    
    $
    1,344,016Number of shares exercisable
    
    
    204,569
    
    
    $
    7.00
    
    
    
    4.28
    
    
    $
    1,344,016
   NOTE 3.
    
    EARNINGS (LOSSES) PER CAPITAL SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (6,462,153
    )
    
    $
    28,088
    
    
    $
    (9,609,996
    )
    
    $
    933,736Weighted average common shares outstanding
    
    
    2,615,613
    
    
    
    2,592,894
    
    
    
    2,601,173
    
    
    
    2,592,894Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market price for the period
    
    
    
    
    
    
    57,508
    
    
    
    
    
    
    
    81,332Total weighted average common shares and
capital stock equivalents outstanding
    
    
    2,615,613
    
    
    
    2,650,402
    
    
    
    2,601,173
    
    
    
    2,674,226Diluted earnings (losses) per common share
    
    $
    (2.47
    )
    
    $
    0.01
    
    
    $
    (3.69
    )
    
    $
    0.35
 9




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NOTE 4.
    
    FAIR VALUE MEASUREMENTS
 Fair
Value Measurements
  
    
    Level 1 Valuations for assets and liabilities traded in active exchange markets,
such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal
agency securities and federal agency mortgage-backed securities, which are traded by
dealers or brokers in active markets. Valuations are obtained from readily available
pricing sources for market transactions involving identical assets or liabilities.
    
    Level 2 Valuations for assets and liabilities traded in less active dealer or
broker markets. Valuations are obtained from third party pricing services for identical
or similar assets or liabilities.
 
    
    Level 3 Valuations for assets and liabilities that are derived from other
valuation methodologies, including option pricing models, discounted cash flow models and
similar techniques, and not based on market exchange, dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and projections in
determining the fair value assigned to such assets or liabilities.
 10




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Assets Measured at Fair Value on a Recurring Basis
  Available for Sale Securities
  Assets Measured at Fair Value on a Nonrecurring Basis
  Impaired Loans
  Foreclosed Assets
  The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115
 11




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Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
  OVERVIEW
 Financial Highlights.
   12




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##### Table of Contents



Entry into Cease & Desist Order.
    
    
    Hiring David R. Coxon, a veteran banking executive with over 30 years
experience in the industry, to serve as the Banks President and CEO;
    
    Appointing a special assets committee comprised of independent Board
members charged with the responsibility of monitoring and disposing of the Banks other
real estate;
    
    Strengthening the Banks lending activities with particular emphasis on
direct and indirect borrowing concentrations and monitoring individual lender/borrower
relationships;
    
    Engaging an outside regulatory consultant to assist the Bank in connection
with the development of a strategic plan and with the Banks overall compliance with the
Order;
 13




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##### Table of Contents




    
    Developing a liquidity and funds management plan to address anticipated
funding needs;
    
    Developing a comprehensive policy for managing potential loan loss
liability and enhancing the Banks loan loss reserve;
    
    Increasing internal controls over loan portfolio review; and
    
    Establishing a communications policy and procedure for reporting progress
in all areas to the FDIC and the Department.
 OUTLOOK
  FINANCIAL CONDITION
   LIQUIDITY
   14




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##### Table of Contents



REGULATORY CAPITAL REQUIREMENTS
  Regulatory MinimumRegulatory
    
    Requirement forMinimum
    
    Well CapitalizedCompany
    
    Bank
    
    Requirement
    
    StatusLeverage Capital Ratio
    
    
    3.89
    %
    
    
    6.49
    %
    
    
    4.00
    %
    
    
    5.00
    %Risk-Based Capital RatiosCore Capital
    
    
    5.15
    %
    
    
    8.59
    %
    
    
    4.00
    %
    
    
    6.00
    %Total Capital
    
    
    6.41
    %
    
    
    9.85
    %
    
    
    8.00
    %
    
    
    10.00
    %
   15




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##### Table of Contents



RESULTS OF OPERATIONS
 Net Interest Income
  Provision for Loan Losses
 16




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##### Table of Contents



September 30,
    
    September 30,2008
    
    2007(Dollars in thousands)Total nonaccruing loans
    
    $
    37,616
    
    
    $
    15,527Loans contractually past due ninety days
or more as to interest or principal
payments and still accruing
    
    
    
    
    
    
    42Restructured loans
    
    
    4,364
    
    
    
    
 st
   17




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##### Table of Contents



Nine      Months EndedSeptember 30,2008
    
    
    2007(Dollars in thousands)Average amount of loans outstanding
    
    $
    263,720
    
    
    $
    303,370Balance of allowance for loan losses at beginning of period
    
    $
    7,961
    
    
    $
    3,052Loans charged offCommercial and financial
    
    
    ( 166
    )
    
    
    (118
    )Real estate
    
    
    (5,926
    )
    
    
    (274
    )Installment
    
    
    (56
    )
    
    
    (117
    )(6,148
    )
    
    
    (509
    )Loans recoveredCommercial and financial
    
    
    7
    
    
    
    38Real estate
    
    
    
    
    
    
    2Installment
    
    
    30
    
    
    
    3437
    
    
    
    74Net charge-offs
    
    
    (6,111
    )
    
    
    (435
    )Additions to allowance charged to operating expense during period
    
    
    4,969
    
    
    
    2,053Balance of allowance for loan losses at end of period
    
    $
    6,819
    
    
    $
    4,670Ratio of net loans charged-off during the
period to average loans outstanding
    
    
    2.32
    %
    
    
    0.14
    %
 Other Income.
 18




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##### Table of Contents



Other Expenses.
 Income Taxes.
 Net Income
 
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4.
    
    CONTROLS AND PROCEDURES
  19




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.
    
    LEGAL PROCEEDINGS
   
 Item 1A. RISK FACTORS
  The Companys bank subsidiary is currently operating under a cease and desist order and may be
unable to meet all of the steps required to be taken under the order. The failure to do so could
result in further regulatory action and operating restrictions and could threaten the viability of
the Bank.
   Restrictions imposed by the Order could limit the Banks ability to acquire needed funding.
  20




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##### Table of Contents



The Company needs to obtain sources of capital to fund its working capital requirements and
bolster the capital position of the Bank, and may be unable to obtain such capital.
  Our chief financial officer position is currently vacant and we may not be able to find a qualified
candidate to fill this role.
  21




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##### Table of Contents



Item 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 Item 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5.
    
    OTHER INFORMATION
  
 Item 6.
 EXHIBITS
 (a)
    
    Exhibits
 10.1
    
    Cease and Desist Order dated October 6, 200810.2
    
    Employment Agreement with David Coxon dated August 14, 200810.3
    
    Amendment No. 1 to 2001 Incentive Stock Option Plan for Key Employees31.1
    
    Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Acting 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 Acting CFO pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 22




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##### Table of Contents



SIGNATURES
  SOUTHERN COMMUNITY
BANCSHARES, INC.Date: November 14, 2008
    /s/ David R. CoxonDavid R. CoxonChief Executive OfficerDate November 14, 2008
    /s/ David R. CoxonDavid R. CoxonActing Chief Financial Officer* 
 *Mr. Coxon, who serves as the Companys CEO, is performing the functions of the Companys principal
financial officer until such time as a permanent replacement for the Companys CFO is identified
and approved. 23