This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, technological factors affecting our operations, pricing, products and services, and other factors discussed in our filings with the Securities and Exchange Commission.

Total assets decreased $14.0 million during the first quarter primarily due to the goodwill impairment charge discussed below. Excluding the goodwill impairment charge, total assets grew $35.5 million or 2.0% during the first quarter of 2009 led by investment securities which increased $21.2 million or 6.5% and federal funds sold which grew $15.7 million to end the period at $17.9 million. Investment securities were purchased during the quarter to invest excess funds as deposits continued to grow at a steady pace while loan balances decreased due to a slowdown in loan demand precipitated by a downturn in the economy. The majority of the securities purchased were available for sale government agencies which increased $52.4 million while mortgage-backed securities increased $11.7 million and municipals increased $7.4 million. Total loans declined $17.3 million or 1.3% during the quarter to end the period at $1.30 billion. Commercial mortgage loans, which total $428.2 million or 33.0% of gross loans, continue to comprise the largest segment of the loan portfolio and were the only segment to grow during the quarter increasing $9.0 million or 2.1% for the quarter. Construction loans experienced the largest decrease for the quarter decreasing $17.0 million or 6.5% to $243.6 million or 18.8% of total gross loans, as housing construction has contracted in this economic slowdown. Residential mortgage loans decreased $3.2 million or 0.8% and comprised 30.1% of the total loan portfolio. Of the $3.2 million decrease in the residential mortgage loan segment, land and building lots decreased $1.6 million, 1-4 family residences decreased $1.4 million and home equity loans decreased $254 thousand. Commercial and industrial loans decreased $4.6 million or 2.1% and represent 16.7% of total gross loans while loans to individuals decreased $1.5 million or 7.7%. Total deposits were $1.33 billion at quarter end, an increase of $95.0 million or 7.7% from year-end 2008. Time deposits grew $94.4 million or 14.4% while a small increase in money market, savings and NOW accounts was offset by a decrease in demand deposits. Borrowings decreased $58.8 million or 15.8% with short term borrowings decreasing $43.8 million and long term borrowings decreasing $15.0 million.

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment. The evaluation of goodwill for impairment uses both the income and market approaches to value the Company. The income approach consists of discounting projected long-term future cash flows, which are derived from internal forecasts and economic expectations for the Company. The significant inputs to the income approach include the long-term target tangible equity to tangible assets ratio and the discount rate, which is determined utilizing the Company's cost of capital adjusted for a company-specific risk factor. The company-specific risk factor is used to address the uncertainty of growth estimates and earnings projections of management. Under the market approach, a value is calculated from an analysis of comparable acquisition transactions based on earnings, book value, assets and deposit premium multiples from the sale of similar financial institutions. Another market valuation approach utilizes the current stock price adjusted by an appropriate control premium as an indicator of fair market value. Given the substantial declines in our common stock price, declining operating results, asset quality trends, market comparables and the economic outlook for our industry, the Company's fair value has decreased significantly compared with previous assessments. Our goodwill testing for the first quarter of 2009, which included an analysis by a independent third party, indicated that the Company's fair value does not support the goodwill recorded at the time of the acquisition of The Community Bank in January 2004; therefore, the Company has recorded a $49.5 million goodwill impairment charge to write off the entire amount of goodwill as of March 31, 2009. This non-cash goodwill impairment charge to earnings was the primary reason for the Company's $49.3 million net loss in the first quarter 2009.

Net interest income decreased by $360 thousand or 2.8% for the quarter compared to the fourth quarter of 2008. Interest income declined due to many factors including a shift in the mix of earning assets from higher yielding loans to lower yielding investment securities as outstanding loan balances declined from a slowdown in loan demand. Total interest income decreased by $1.5 million or 6.3% while interest expense decreased $1.2 million or 10.3% compared to the previous quarter. Interest expense also decreased during the quarter as the funding mix shifted with a decrease in borrowings of $58.8 million and strong growth in retail certificates of deposit. The net interest margin decreased 9 basis points to 3.01% compared to 3.10% for the prior quarter and increased 3 basis points when compared to 2.98% for the first quarter of 2008.

The Company increased its provision for loan losses to $4.0 million for the quarter compared with $2.4 million for the fourth quarter of 2008 and $925 thousand for the first quarter of 2008. This higher provision level resulted as more loans were identified as nonperforming during the first quarter. Based on the challenges we are seeing in residential construction and development, we continued our proactive approach to credit risk management. Nonperforming loans increased to $20.3 million or 1.56% of loans at March 31, 2009 from $14.4 million or 1.10% of loans at December 31, 2008 compared to $7.0 million or 0.57% of loans at March 31, 2008. Nonperforming assets increased to $31.0 million or 1.73% of total assets at March 31, 2009 compared to $20.2 million or 1.12% of total assets at December 31, 2008. Net charge-offs during the first quarter of 2009 increased to 1.09% (annualized) of average loans compared to 0.43% in the prior quarter. The increases in net charge-offs, nonperforming loans and nonperforming assets continue to be predominately related to residential construction and development lending. The allowance for loan losses of $19.3 million at March 31, 2009 represented 1.49% of total loans and 0.95 times nonperforming loans at current quarter-end compared with 1.43% of total loans and 1.31 times nonperforming loans at December 31, 2008. We believe the allowance is adequate for losses inherent in the loan portfolio at March 31, 2009.

Non-interest income was $2.6 million during the first quarter of 2009, compared to $2.5 million for the prior quarter and $3.6 million for the first quarter of 2008. The increase in the non-interest income in the current quarter compared to the prior quarter was attributable to increases in mortgage banking income from increased refinance activity, in wealth management income from increased transaction volume in sales of annuities and life insurance products and in SBIC income. These increases were offset by a $404 thousand loss as the Company's equity investment in Silverton Bank was determined to be worthless based on their closure by banking regulators on May 1, 2009. Income from SBIC activities increased to $238 thousand in the current quarter compared to an $89 thousand gain reported in the fourth quarter of 2008 and a $150 thousand loss in the first quarter of 2008. Income from SBIC activities will vary as the gains and losses from investments are recognized. Non-interest income from mortgage banking and investment brokerage activities increased in the current quarter although they declined compared to the first quarter of 2008.

Total non-interest expense was $60.6 million for the first quarter primarily due to the $49.5 million goodwill impairment charge discussed above. Excluding the goodwill impairment charge, non-interest expense of $11.1 million in the first quarter of 2009 increased $430 thousand or 4.0% from the prior quarter and grew by $523 thousand or 5.0% compared with the $10.6 million reported in the year ago period. The increase from the prior quarter was primarily due to increases in health insurance benefit costs, commissions on increased mortgage and wealth management activity and increased marketing efforts. This increase from the first quarter of 2008 reflects increased expenses associated with problem loan workout efforts, buyer incentives paid to purchasers of bank-financed builder housing inventory, FDIC insurance costs, professional services and occupancy costs.

Nonperforming loans and nonperforming assets rose from the prior quarter by $5.8 million and $10.9 million respectively, due to the continued effects of the current economic conditions in our market area and throughout the country. For the current quarter, net charge-offs of $3.5 million or 1.09% of average loans were 66 basis points higher than the 0.43% from the previous quarter and 98 basis points higher than the 0.11% from the first quarter of 2008.

On March 24, 2009, Southern Community Financial Corporation announced that its Board of Directors voted to suspend payment of a quarterly cash dividend to common shareholders. The Board will continue to evaluate the payment of a quarterly cash dividend on a periodic basis.

During the three month period ending March 31, 2009, total assets decreased by $14.0 million, or 0.8%, to $1.79 billion as a $49.5 million goodwill impairment charge was recorded as of quarter-end. The Company's balance sheet management for the quarter emphasized investing funds generated by inflows from deposit growth, investment securities maturities, calls and prepayments and net loan repayments as well as reducing borrowings, maintaining an adequate allowance for loan losses and keeping regulatory capital ratios in excess of the well capitalized threshold. The investment of funds was achieved by growing the investment portfolio by $21.2 million or 6.5% over year-end levels in the face of a slowdown in overall loan demand; while short term borrowings were reduced $43.8 million and long term borrowings were reduced $15.0 million.

In the loan portfolio, commercial mortgage loans, which total $428.2 million or 33.0% of gross loans, continue to comprise the largest segment and was the only segment to grow during the first quarter increasing by $9.0 million or 2.1%. The construction segment of the portfolio decreased $17.0 million to end the period at $243.6 million, or 18.8% of gross loans as the residential construction and development loans continue to be impacted by decreased sales activity in the housing market. Loans secured by residential mortgages experienced a decrease of $3.2 million or 0.8% and commercial and industrial lending declined $4.6 million to $216.6 million at March 31, 2009 or 16.7% of the total loan portfolio.

We utilize various funding sources, as necessary, to support balance sheet management and growth. Customer deposits continued to be our primary funding source for asset growth during the first quarter due to substantial increases in certificates of deposit. At March 31, 2009, deposits totaled $1.33 billion, an increase of $95.0 million or 7.7% from year-end 2008. Time deposits increased $94.4 million or 14.4% during the quarter; while non-maturity deposits increased $595 thousand or less than 1% during the period as customers moved to time deposits for increased yield. Of the $94.4 million or 14.4% increase in time deposits, local retail certificates increased $106.3 million as brokered and out-of-market certificates decreased by $11.9 million during the quarter.

Our capital position remains strong, with all of our regulatory capital ratios at levels that categorize us "well capitalized" under federal bank regulatory capital guidelines. At March 31, 2009, our stockholders' equity totaled $138.2 million, a decrease of $49.5 million compared to December 31, 2008. The decrease is the result of a net loss of $49.3 million, offset by a net increase of $1.2 million in the market value of available for sale securities, $671 thousand of cash dividends declared in January 2009 and paid to shareholders during the period and dividends totaling $627 thousand related to the preferred stock issued to the United States Treasury through the Capital Purchase Program.

Net Loss. Our net loss for the three months ended March 31, 2009 was $49.3 million compared with net income of $2.07 million for the same three month period in 2008. Net income (loss) per share available to common shareholders was ($2.98) for both basic and diluted for the three months ended March 31, 2009 as compared with $0.12 for both basic and diluted for the same period in 2008. Net interest income for the first quarter of 2009 was $12.5 million, up $1.5 million, or 13.2% compared with the first quarter 2008, due in part to strong loan growth in the second and third quarters of 2008 and strong time deposit growth year-over-year. The net interest margin of 3.01% increased three basis points from the year ago period. Non-interest income was $2.6 million during the first quarter of 2009, which represents an decrease of 27.9% from non-interest income of $3.6 million reported in the comparable period in 2008, primarily the result of a nonrecurring $1.0 million gain being recognized in connection with economic hedges in the first quarter of 2008 compared to a net loss from derivative activity of $22 thousand in the first quarter of 2009. These increases were offset by a $404 thousand loss as the Company's equity investment in Silverton Bank was determined to be worthless based on their closure by banking regulators on May 1, 2009. In contrast, Salem Capital Partners, our small business investment company (SBIC) affiliate, recognized a gain of $238 thousand for first quarter 2009 compared to a loss of $150 thousand in the first quarter of 2008. Non-interest expense increased $50.0 million principally due to the $49.5 million goodwill impairment charge mentioned above. Excluding this goodwill impairment charge, non-interest expenses for the first quarter 2009 increased $523 thousand or 5% over the comparable 2008 quarter. This increase from the first quarter of 2008 reflects increased expenses associated with problem loan workout efforts including OREO costs, the buyer incentives to purchasers of bank-financed builder housing inventory, FDIC insurance cost, professional services and occupancy costs.

Net Interest Income. During the three months ended March 31, 2009, our net interest income was $12.5 million, an increase of $1.5 million or 13.2% over the first quarter 2008. Continued strong loan demand during the second and third quarters of 2008 contributed to the 13% year-over-year increase in the average balance of interest earning assets. Despite the competitive pressure on rates paid on deposits, our cost of funds decreased at a slightly faster rate than the overall yield on our earning assets resulting in a minimal change in the net interest margin which increased three basis points from the first quarter of 2008.

Our net interest margin has been impacted and will continue to be impacted in the near term by actions taken by the Federal Reserve Board with respect to interest rates and by competition in our markets. During the first quarter of 2009, the Federal Reserve maintained the Federal Funds rate at the all time low of 25 basis points. The Federal Funds rate was reduced seven times throughout 2008 for a total of 325 basis points resulting in a comparable reduction in the prime rate. The loan portfolio is structured with approximately 44% of loans with fixed rates, which will not be immediately affected by the change, and 56% with variable rates which will reprice as the applicable rate changes. At quarter end, approximately 73% of the variable rate loans were tied to prime; while 27% of the variable rate loans were tied to LIBOR or another index. The loans tied to prime were generally repriced at the time of the change in the prime rate index; while the loans tied to LIBOR reprice based on terms of the loan. Deposits, such as money market and NOW accounts, are repriced at the discretion of management. The average yield on interest-earning assets in the first quarter of 2009 decreased 110 basis points to 5.49% compared to the first quarter 2008 as management exercised improved loan pricing by instituting floors on the majority of variable rate loans and exercising pricing power on new loans and renewals. The lower interest rate environment has also impacted our funding costs. Our cost of average interest bearing liabilities for the first quarter of 2009 decreased 120 basis points to 2.72% compared to the first quarter of 2008. For the first quarter 2009, our net interest margin of 3.01%, decreased from 3.10% for the fourth quarter of 2008 and increased from 2.98% in the first quarter of 2008. The effect of any future market interest rate changes and the applicable repricing of loans, deposits, and borrowings will continue to be reflected in the net interest income in future quarters. Although the Company believes our margins are stabilizing, we may see some continued compression in our margins as loan customers will request to refinance their loans at a lower rate; however competitive rates must still be paid for our funding sources.

                          Average Yield/Cost Analysis

The following table contains information relating to the Company's average
balance sheet and reflects the average yield on assets and cost of liabilities
for the periods indicated. Such annualized yields and costs are derived by
dividing annualized income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. The average loan portfolio
balances include nonaccrual loans.
                                         Three Months Ended March 31, 2009                        Three Months Ended March 31, 2008

                                    Average             Interest          Average            Average             Interest          Average
                                    balance            earned/paid       yield/cost          balance            earned/paid       yield/cost
Interest-earning assets:
Loans                           $     1,310,679       $      18,762             5.81 %   $     1,219,800       $      21,183             6.98 %
Investment securities
available for sale                      315,765               3,642             4.68 %           195,565               2,410             4.96 %
Investment securities held to
maturity                                 27,864                 332             4.83 %            67,756                 720             4.27 %
Federal funds sold                       24,985                   8             0.13 %             1,916                  12             2.52 %

Total interest earning assets         1,679,293              22,744             5.49 %         1,485,037              24,325             6.59 %
Other assets                            105,781                                                  140,127
Total assets                    $     1,785,074                                          $     1,625,164

Interest-bearing liabilities:
Deposits:
NOW, Money Market, and
Savings                         $       469,447       $       1,627             1.41 %   $       478,407       $       3,255             2.74 %
Time deposits greater than
$100K                                   181,416               1,425             3.19 %           310,923               3,963             5.13 %
Other time deposits                     519,969               4,251             3.32 %           167,738               1,891             4.53 %
Short-term borrowings                   101,425                 565             2.26 %           115,301               1,320             4.60 %
Long-term borrowings                    263,699               2,416             3.72 %           295,899               2,894             3.93 %

       Total interest bearing
                  liabilities         1,535,956              10,284             2.72 %         1,368,268              13,323             3.92 %

Demand deposits                         101,747                                                  102,753
Other Liabilities                         9,360                                                   11,953
Stockholders' equity                    138,011                                                  142,190

Total liabilities and
stockholders' equity            $     1,785,074                                          $     1,625,164

Net interest income and net
interest spread                                       $      12,460             2.78 %                         $      11,002             2.67 %
Net interest margin                                                             3.01 %                                                   2.98 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities                              109.33 %                                                 108.51 %

Provision for Loan Losses. The Company recorded a $4.0 million provision for loan losses for the quarter ended March 31, 2009, representing an increase of $3.1 million from the $925 thousand provision from the first quarter of 2008. The level of provision for the quarter is reflective of the trends in the loan portfolio, including loan balances, levels of nonperforming loans and other loan portfolio quality measures, and analyses of impaired loans. Provisions for loan losses are charged to income to bring our allowance for loan losses to a level deemed appropriate by management based on the factors discussed under "Asset Quality." On an annualized basis, our percentage of net loan charge-offs to average loans outstanding was 1.09% for the quarter ended March 31, 2009, compared with 0.11% for the quarter ended March 31, 2008.

Non-Interest Income. For the three months ended March 31, 2009, non-interest income of $2.6 million decreased by $1.0 million or 27.9% from $3.6 million for the same period in the prior year. The decrease was primarily the result of a nonrecurring $1.0 million gain being recognized in the first quarter of 2008 in connection with economic hedges compared to a loss of $22 thousand in the first quarter of 2009. These increases were offset by a $404 thousand loss as the Company's equity investment in Silverton Bank was determined to be worthless based on their closure by banking regulators on May 1, 2009. Salem Capital Partners, our small business investment company (SBIC) affiliate established seven years ago, recognized a gain of $238 thousand compared to a loss of $150 thousand in the first quarter of 2008. Income from SBIC activities will vary as the gains and losses from these investments are recognized. Income from mortgage banking activities of $416 thousand was down $68 thousand, or 14.1% compared to the first quarter of 2008, as first quarter 2008 refinance activity was more robust than in 2009. Investment brokerage and trust fees decreased to $296 thousand, down 20.2% from the year ago period due to the impact of the economic downturn on investor activity as sales volume is lower and the revenue mix has shifted from equities and mutual funds to sales of annuities and life insurance.

Non-Interest Expense. We strive to maintain non-interest expenses at levels that we believe are appropriate given the nature of our operations and the investments in personnel and facilities that have been necessary to support and service our growth. From 1998 forward through the current three month period, with the exception of the current period goodwill impairment charge, we have consistently maintained our ratio of non-interest expense to average assets below 3.0%. Excluding the $49.5 million goodwill impairment charge incurred during the first quarter of 2009, our non-interest expense increased $523 thousand or 5.0% over the same period in 2008. This increase was primarily related to expenses associated with problem loan workout efforts and OREO expense which increased $184 thousand. A buyer's incentive program was established to encourage customers to purchase homes from bank-financed builder inventory, which cost $100 thousand during the current quarter. Expenses for professional services including attorneys fees increased $201 thousand compared to the year ago quarter due to processing foreclosed loans and pursuing legal remedies related to losses reported in previous quarters with derivative instruments.

Provision for Income Taxes. Income taxes were a benefit of $214 thousand as tax-exempt income including an increase in cash surrender value on bank-owned life insurance and interest on municipal bonds exceeded taxable income.

Market and public confidence in our financial strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital resources.

Liquidity is defined as our ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. Management measures our liquidity position by giving consideration to both on- and off-balance sheet sources of funds and demands for funds on a daily and weekly basis.

Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities, investment securities eligible for pledging to secure borrowings from dealers and customers pursuant to securities sold under repurchase agreements, investments available for sale, loan repayments, loan sales, deposits, and borrowings from the Federal Home Loan Bank and from correspondent banks under overnight federal funds credit lines. In addition to deposit and borrowing withdrawals and maturities, the Company's primary demand for liquidity is anticipated funding under credit commitments to customers.

Investment securities totaled $345.9 million at March 31, 2009, an increase of $21.2 million from $324.7 million at December 31, 2008. We believe our liquidity is adequate to fund expected loan demand and current deposit and borrowing maturities. Supplementing customer deposits as a source of funding, we have available lines of credit from various correspondent banks to purchase federal funds on a short-term basis of approximately $130.0 million. We also have the credit capacity from the Federal Home Loan Bank of Atlanta (FHLB) to borrow up to $446.5 million, as of March 31, 2009, with lendable collateral value of $313.0 million. Borrowings with the FHLB were $137.1 million at March 31, 2009. Under the Federal Reserve's Term Auction Facility, we had borrowings outstanding of $20 million as of March 31, 2009. Given the flexibility in the . . .