U.S. Securities and Exchange Commission

Form 10-Q

[ X ] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2004

[   ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the transition period ended                                      

Commission File Number 000-33227

Southern Community Financial Corporation

Registrant’s telephone number, including area code (336) 768-8500

Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value

7.95% Cumulative Trust Preferred Securities
7.95% Junior Subordinated Debentures
Guarantee with respect to 7.95% Cumulative Trust Preferred Securities

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [ X ]

As of November 11, 2004, (the most recent practicable date), the registrant had outstanding 17,808,669 shares of Common Stock, no par value.

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Part I. FINANCIAL INFORMATION

Item 1 — Financial Statements

SOUTHERN COMMUNITY FINANCIAL CORPORATION

* Derived from audited consolidated financial statements

See accompanying notes.

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SOUTHERN COMMUNITY FINANCIAL CORPORATION

See accompanying notes.

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SOUTHERN COMMUNITY FINANCIAL CORPORATION

See accompanying notes.

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SOUTHERN COMMUNITY FINANCIAL CORPORATION

See accompanying notes.

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SOUTHERN COMMUNITY FINANCIAL CORPORATION

See accompanying notes.

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SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes.

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SOUTHERN COMMUNITY FINANCIAL CORPORATION

Note 1 — Basis of Presentation

The consolidated financial statements include the accounts of Southern Community Financial Corporation and its wholly-owned subsidiaries, Southern Community Bank and Trust and its wholly-owned subsidiary, VCS Management, L.L.C., the managing general partner for Salem Capital Partners L.P., a Small Business Investment Company, and The Community Bank of Pilot Mountain, North Carolina, which was acquired on January 12, 2004. On October 18, 2004, the two bank subsidiaries were merged into one charter retaining the Southern Community Bank and Trust name. All intercompany transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three-month and nine-month periods ended September 30, 2004 and 2003, in conformity with accounting principles generally accepted in the United States of America.

The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting periods. Actual results could differ from those estimates. Operating results for the three-month and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004.

The organization and business of Southern Community Financial Corporation (the “Company”), accounting policies followed by the Company and other relevant information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2003 annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.

Note 2 — Net Income Per Share

Basic and diluted net income per share are computed based on the weighted average number of shares outstanding during each period. Diluted net income per share reflects the potential dilution that could occur if stock options were exercised or convertible trust-preferred securities were converted, resulting in the issuance of common stock that then shared in the net income of the Company. The convertible trust preferred securities were converted or redeemed during the quarter ended March 31, 2004.

Basic and diluted net income per share have been computed based upon the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:

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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements

Note 2 — Net Income Per Share (Continued)

For the three months ended September 30, 2004 net income for determining diluted earnings per share was $2,106 thousand, with no adjustment for the after tax effect of the expense associated with the dilutive convertible preferred securities which were converted or redeemed during the first quarter of 2004. For the three months ended September 30, 2004 and 2003, there were 288,758 and 241,837 options, respectively, that were antidilutive since the exercise price exceeded the average market price for the period.

For the nine months ended September 30, 2004 net income for determining diluted earnings per share was $5,749 thousand. For the nine months ended September 30, 2004 and 2003, there were 190,225, and 104,355 options, respectively, that were antidilutive since the exercise price exceeded the average market price for the period and were omitted from the calculation of diluted earnings per share for their respective periods.

Note 3 — Business Combinations

On July 30, 2003, the Company entered into an “Agreement and Plan of Reorganization and Merger” with The Community Bank of Pilot Mountain, North Carolina. The acquisition was approved at a special shareholders’ meeting on December 11, 2003 and the transaction occurred effective at 12:01 am on January 12, 2004. The Community Bank shareholders could elect to receive cash, Company stock, or a combination of cash and stock with an overall consideration mix of approximately 85% stock and 15% cash. As a result of the acquisition, the Company paid approximately $15.3 million for shares exchanged for cash and issued 6,426,532 shares of common stock. The acquisition was accounted for using the purchase method of accounting.

The following table reflects the unaudited pro forma combined results of operations for the nine months ended September 30, 2003, assuming the acquisition had occurred at the beginning of fiscal year 2003.

In management’s opinion, these unaudited results are not necessarily indicative of what actual combined results of operations might have been if the acquisition had been effective at the beginning of fiscal year 2003. Pro forma results for the nine months ended September 30, 2004, are not materially different from the actual results reported due to the acquisition occurring near the beginning of the period.

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SOUTHERN COMMUNITY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements

Note 3 — Business Combinations (Continued)

A summary of the total purchase price of The Community Bank transaction is as follows:

A summary of the estimated value of The Community Bank assets acquired and liabilities assumed is as follows (in thousands):

At the end of August 2004, Southern Community Bank and Trust acquired two residential mortgage offices from Davidson Mortgage, one in Cornelius, North Carolina and the other located in Lexington, South Carolina.

A summary of the total purchase price of the Davidson Mortgage transaction is as follows: