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 $63.0 million or 3.5% during the second quarter of 2009 driven by decreases in loans of $46.3 million or 3.6%, federal funds sold of $16.4 million or 91.6% and investment securities of $12.1 million or 3.5% to end the period at $1.73 billion. Commercial mortgage loans, which amount to $428.5 million or 34.2% of gross loans at June 30, 2009, continue to comprise the largest segment of the loan portfolio and grew $265 thousand or 0.1% for the quarter. Residential mortgage loans experienced the most growth during the quarter increasing $1.9 million or 0.5% and comprised 31.3% of the total loan portfolio. Of the $1.9 million increase in the residential mortgage loan segment, financing for 1-4 family residences increased $2.2 million, financing of land and building lots decreased $155 thousand, and home equity loans decreased $159 thousand. Construction loans experienced the largest decrease for the quarter decreasing $24.6 million or 10.1% to $218.9 million or 17.5% of total gross loans as housing construction continued to contract during the economic slowdown. Commercial and industrial loans increased $22.9 million or 10.6% and represent 15.5% of total gross loans while loans to individuals decreased $1.0 million or 1.5%. The decrease in loans outstanding can also be attributed to the transfer of certain nonperforming loans to other real estate owned which increased $7.1 million during the quarter. Investment securities decreased as part of normal balance sheet management and provided liquidity along with loan repayments to fund maturing deposits. Total deposits were $1.25 billion at quarter end, a decrease of $74.3 million or 5.6% from the prior quarter-end. The largest decline in deposits was from time deposits which decreased $68.9 million or 9.2% while non-maturity deposits decreased $5.4 million or 0.9%. The decrease in time deposits was primarily attributed to declines in brokered certificates of deposit and Certificate of Deposit Account Registry Service (CDARS) of $42.1 million and $30.0 million, respectively. Brokered certificates of deposit decreased as maturities were not renewed due to declining loan demand while the decrease in CDARS was seasonal as customers withdrew their funds to use for operations. Borrowings increased $15.8 million or 5.0% from the prior quarter end net of $15.0 million in high cost FHLB advances prepaid during the quarter. This allowed the Company to realize funding cost savings from short term borrowings including federal funds purchased and Federal Reserve borrowings.

Net interest income increased $120 thousand or 1.0% for the second quarter compared to the first quarter. The interest rate environment was relatively stable in the second quarter as the Federal Reserve maintained the fed funds target rate consistent with the first quarter. Total interest income decreased by $293 thousand or 1.3% while the cost of funds decreased $413 thousand or 4.0% compared to the previous quarter. Although outstanding loan balances continued to decrease during the quarter the reduction in interest income was minimized due to effective pricing of loans including incorporating interest rate floors on floating rate loans upon renewal. Interest expense declined primarily due to both deposits and borrowings repricing lower during the quarter. The net interest margin improved four basis points to 3.05% compared to 3.01% for the linked quarter and increased six basis points when compared to 2.99% for the second quarter of 2008.

The Company increased its provision for loan losses to $6.0 million for the quarter compared with $4.0 million for first quarter 2009 and $3.5 million for the second quarter 2008. This significantly higher provision and level of net charge-offs are the result of our proactive efforts to resolve troubled loans. This approach has led to an early identification of potential problem loans and their timely resolution, including the recognition of their loss exposure and liquidation of collateral. Annualized net charge-offs increased to 1.85% of average loans in second quarter 2009 from 1.09% of average loans for first quarter 2009 and 0.28% of average assets for the second quarter 2008. Nonperforming loans decreased to $17.9 million or 1.43% of loans at June 30, 2009 from $20.3 million or 1.56% of loans at March 31, 2009. Nonperforming assets rose to $35.7 million or 2.07% of total assets at June 30, 2009 from $31.0 million, or 1.73% of total assets, at March 31, 2009 due to the influx of foreclosed assets during the quarter. Nonperforming assets were $14.2 million or 0.80% of total assets at June 30, 2008. The activity in net charge-offs, nonperforming loans and nonperforming assets is predominately related to residential construction and development lending. The allowance for loan losses of $19.4 million at June 30, 2009 represented 1.55% of total loans and 109% coverage of nonperforming loans at current quarter-end compared with 1.49% of total loans and 95% coverage of nonperforming loans at March 31, 2009. We believe the allowance is adequate for losses inherent in the loan portfolio at June 30, 2009.

Non-interest income was $2.7 million during the second quarter of 2009, compared to $2.6 million for the prior quarter and $3.1 million for the second quarter of 2008. Although the total amount of non-interest income from the second quarter increased only $86 thousand compared to the first quarter, the components changed significantly. The most significant transaction of the quarter was the non-recurring $1.0 million write-off of collateral held by Lehman Brothers as the counterparty for certain terminated derivative contracts. Counsel has determined that the Company's claim against Lehman in pending bankruptcy proceedings will be classified as an unsecured creditor with no preferential status. Despite the potential for partial recovery through either insurance coverage or the bankruptcy proceedings, the Company recognized that there is material uncertainty involved in the determination of the collateral's continuing value which could result in little or no recovery of this asset. The $1.0 million in investment securities held as collateral by Lehman was written off in their entirety during the second quarter 2009. A non-recurring transaction was also recognized during the first quarter of 2009 as the Company's $404 thousand equity investment in Silverton Bank was written off due to its closure by federal banking authorities. Increases in non-interest income from continuing operations were realized in mortgage banking income, gains on sale of securities and service charges on deposits while income from our investment in small business investment company (SBIC) activity, investment brokerage income, and increases in the cash surrender value from bank-owned life insurance policies decreased compared to the first quarter. Non-interest income decreased $425 thousand in the second quarter of 2009 compared to the second quarter of 2008. The most significant decrease in income was from non-recurring gains and net cash settlement on economic hedges of $330 thousand compared to a loss of $912 thousand in the current quarter which included the $1.0 million collateral write-off mentioned above. Similar to the changes from the first quarter, increases in non-interest income from continuing operations were realized in mortgage banking income, gains on sale of securities and service charges on deposits while income from our investment in small business investment company (SBIC) activities and investment brokerage income decreased compared to the second quarter of 2008.

Non-interest expense of $13.8 million in the second quarter of 2009 increased $2.7 million or 24.4% from the prior quarter, excluding the $49.5 million goodwill impairment and grew by $3.1 million or 29.2% compared with the $10.7 million reported in the year ago period. The increase from the first quarter of 2009 is primarily due to increased FDIC deposit insurance premiums, loss on the early extinguishment of debt, salaries and employee benefits, write downs of foreclosed property and the Company's buyer incentive program discussed on page 9, in non-interest expense. These same expenses accounted for the increase in non-interest expense compared to the year ago quarter.

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 six month period ending June 30, 2009, total assets decreased by $77.1 million, or 4.3%, to $1.73 billion. The Company's balance sheet management for the quarter and year to date emphasized maintaining an adequate allowance for loan losses, maintaining adequate liquidity and keeping regulatory capital ratios in excess of the well capitalized threshold. The allowance for loan losses was increased to 1.55% of period end loans compared to 1.49% at the prior quarter end and 1.43% at the prior year end. The allowance was increased with a year to date provision of $10.0 million while net charge-offs totaled $9.5 million. Liquidity was maintained by growing deposits $20.8 million or 1.7% and repayment of loans which resulted in a $63.6 million or 4.8% decrease in loans outstanding. These funds were used to repay borrowings, which decreased $43.0 million or 11.5%, and increase the investment portfolio by $9.0 million or 2.8%.

In the loan portfolio, commercial mortgage loans, which total $428.5 million or 34.2% of gross loans, continue to comprise the largest segment with year to date growth of $9.3 million or 2.2% and was the only segment that increased during the six month period. The construction segment decreased the most during the period as the portfolio decreased $41.6 million to end the period at $218.9 million, or 17.5% of gross loans. Commercial and industrial lending decreased $27.6 million to $193.7 million at June 30, 2009 or 15.5% of the total loan portfolio. Loans secured by residential mortgages remained relatively stable for the six month period decreasing by $1.2 million or 0.3%. Loans to individuals also decreased slightly by $2.5 million or 12.1% to end the period at $18.0 million or 1.5% of gross loans.

We utilize various funding sources, as necessary, to support balance sheet management. Growth in customer deposits continues to be our primary funding source. At June 30, 2009, deposits totaled $1.25 billion, an increase of $20.8 million or 1.7% from year-end 2008. Customer time deposits increased $76.5 million or 21.1% while brokered certificates of deposit, including the CDARS program, decreased $50.9 million or 17.4%. Non-maturity deposits totaled $5.7 million at quarter end, a decrease of $4.8 million or 0.8% during the period.

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 June 30, 2009, our stockholders' equity totaled $133.7 million, a decrease of $54.0 million compared to December 31, 2008. The decrease is primarily the result of a net loss of $52.0 million which was significantly impacted by the $49.5 million goodwill impairment charge. This goodwill impairment was a non-cash charge to earnings which had no impact on regulatory capital ratios. Other changes to the Company's capital during the first half of 2009 were dividends totaling $1.1 million related to the preferred stock issued to the United States Treasury through the Capital Purchase Program, $664 thousand of cash dividends declared in January 2009 and paid to shareholders in February 2009, a decrease of $417 thousand in other comprehensive income items with small increases from the issuance of restricted stock and stock-based compensation.

Net Loss. Our net loss from operations for the three months ended June 30, 2009 was $2.7 million, a decrease in net loss of $46.6 million, or 94.6%, from the prior quarter and an increase in loss of $3.3 million for the same three month period in 2008 when net income was $603 thousand. Our net loss after preferred dividends increased $2.9 million compared to the prior quarter excluding the $49.5 million goodwill impairment charge. Net loss per share available to common shareholders was a $0.20 loss per share for both basic and diluted for the three months ended June 30, 2009 as compared with $0.03 earnings per share for both basic and diluted for the same period in 2008. Net interest income for the second quarter of 2009 was $12.6 million, up $799 thousand, or 6.8% compared with the second quarter 2008, due to improvement in the net interest margin. The net interest margin of 3.05% improved six basis points from the year ago period and increased four basis points on a linked quarter basis. The Federal Reserve did not change rates during the current quarter, although repricing of longer term interest bearing assets and liabilities continued to have an effect on the current net interest income and margin. The primary factor for the loss in the second quarter was the increased provision for loan losses which was $6.0 million for the quarter. Non-interest income was $2.7 million during the second quarter of 2009, which represents a decrease of 13.7% from non-interest income of $3.1 million reported in the comparable period in 2008. The most significant transaction in this category during the second quarter of 2009 was a non-recurring $1.0 million write-off of collateral held by Lehman Brothers as the counterparty for certain terminated derivative contracts compared to a $330 thousand gain recognized in connection with derivative activity in the second quarter of 2008. We recognized a loss of $43 thousand from our investment in a SBIC affiliate compared to a gain of $82 thousand in the second quarter of 2008. Non-interest expense increased $3.1 million, or 29.2% compared with the same quarter a year ago. The largest increase in non-interest expense resulted from an increased FDIC deposit insurance premium of $1.1 million, part of which was a special assessment while ongoing deposit insurance premium rates also increased. On a linked quarter basis, non-interest expense increased $2.7 million or 24.4%, excluding the goodwill impairment.

Net Interest Income. During the three months ended June 30, 2009, our net interest income was $12.6 million, an increase of $799 thousand or 6.8% over the second quarter 2008. The reduction in interest expense from repricing of deposits of $2.1 million exceeded the $1.3 million decrease in interest income from declining yields on variable rate and fixed rate loans and the partially offsetting impact of higher earning asset balances in 2009.

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 second 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 and 56% with variable rates which will reprice as the applicable index rate changes. At quarter end, approximately 71% of the variable rate loans were tied to prime while 29% were tied to LIBOR or another index. The loans tied to prime were generally repriced at the time of the change while the loans tied to LIBOR reprice based on terms of the loan. During the first half of 2008, we began to incorporate interest rate floors on most of our floating rate loans upon renewal. We have continued this practice into 2009 such that most of our floating rate loan portfolio has interest rate floors. Additionally, we have reinforced loan pricing discipline so we are adequately compensated for the risk of each loan. These practices have allowed us to increase our loan yields during the second quarter of 2009 by four basis points compared to first quarter 2009. Deposits, such as money market and NOW accounts, are repriced at the discretion of management while time deposits can only be repriced as they mature. The average yield on interest-earning assets in the second quarter of 2009 decreased 57 basis points to 5.45% compared to the second quarter 2008 due to the decline in yields for investment securities and the shift in mix from loans to lower yielding securities. The lower interest rate environment has also impacted our funding costs. Our cost of average interest bearing liabilities for the second quarter of 2009 decreased 65 basis points to 2.61% compared to the second quarter of 2008. For the second quarter 2009, our net interest margin of 3.05% increased six basis points from 2.99% for the second quarter of 2008 and increased four basis points from the first quarter. The interest rate environment has been relatively constant throughout 2009 with no rate changes by the Federal Reserve while market interest rates such as LIBOR drifted lower throughout 2009. This has strengthened the Company's net interest margin through the improvement in our cost of funds via continued downward repricing of time deposits and borrowings at current market rates. However, we expect that competition for deposits and the rates paid to acquire them will intensify.

                          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 June 30, 2009                         Three Months Ended June 30, 2008
                                                                           (Amounts in thousands)
                                    Average             Interest          Average            Average             Interest          Average
                                    balance            earned/paid       yield/cost          balance            earned/paid       yield/cost
Interest-earning assets:
Loans                           $     1,281,309       $      18,673             5.85 %   $     1,257,886       $      19,876             6.36 %
Investment securities
available for sale                      345,258               3,540             4.11 %           279,766               3,311             4.76 %
Investment securities held to
maturity                                 19,896                 237             4.77 %            44,882                 519             4.65 %
Federal funds sold                        5,960                   1             0.08 %             3,534                  21             2.37 %

Total interest earning assets         1,652,423              22,451             5.45 %         1,586,068              23,727             6.02 %
Other assets                            114,130                                                  150,452
Total assets                    $     1,766,553                                          $     1,736,520

Interest-bearing liabilities:
Deposits:
NOW, Money Market, and
Savings                         $       478,781       $       1,516             1.27 %   $       546,801       $       3,021             2.22 %
Time deposits greater than
$100K                                   212,100               1,550             2.93 %           133,943               1,728             5.19 %
Other time deposits                     506,633               3,957             3.13 %           408,954               3,953             3.89 %
Short-term borrowings                    98,732                 316             1.28 %           192,601                 855             1.79 %
Long-term borrowings                    218,960               2,534             4.64 %           191,887               2,390             5.01 %

Total interest bearing
liabilities                           1,515,206               9,873             2.61 %         1,474,186              11,947             3.26 %

Demand deposits                         103,050                                                  106,047
Other liabilities                        11,278                                                   11,913
Stockholders' equity                    137,019                                                  144,374

Total liabilities and
stockholders' equity            $     1,766,553                                          $     1,736,520

Net interest income and net
interest spread                                       $      12,578             2.84 %                         $      11,780             2.76 %
Net interest margin                                                             3.05 %                                                   2.99 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities                              109.06 %                                                 107.59 %

Provision for Loan Losses. The Company recorded a $6.0 million provision for loan losses for the quarter ended June 30, 2009, representing an increase of $2.5 million from the $3.5 million provision for the second quarter of 2008. The level of provision for the quarter is reflective of the trends in the loan portfolio, including loan growth, levels of nonperforming loans and other loan portfolio quality measures, and analyses of impaired loans as well as the level of net charge-offs during the period. The substantial increase in the provision for the second quarter of 2009 compared with the provision for loan losses for second quarter 2008 was based on certain loans identified as impaired and other specific loans currently identified with a greater than normal risk based on the current economic conditions. Additional amounts are required to be added to the allowance for specific loans that are within the guidelines of SFAS 114 as well as additional amounts to properly recognize the loss potential inherent in riskier segments of the loan portfolio, particularly the residential construction and development loan segment. Nonperforming loans as a percentage of total loans increased to 1.43% at June 30, 2009 compared with 1.00% at June 30, 2008. 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 1.85% for the quarter ended June 30, 2009, compared with 0.28% for the quarter ended June 30, 2008.

Non-Interest Income. For the three months ended June 30, 2009, non-interest income decreased $425 thousand or 13.7% to $2.7 million from $3.1 million for the same period in the prior year. The $425 thousand decrease included a non-recurring $1.0 million write-off of collateral held by Lehman Brothers as the counterparty on certain terminated derivative contracts as previously mentioned. In addition to the $1.0 million write-off, a gain of $88 thousand was recognized during the current quarter from normal changes in values recorded in non-interest income resulting in a net loss from derivative activity of $912 thousand for the quarter compared to a gain of $330 thousand in the second quarter of 2008. During the second quarter of 2008, several of the remaining interest rate swaps which served as a hedge to some of our brokered certificates of deposit were called by the counterparties due to the declining interest rate environment which increased the value of the derivatives. This had a favorable impact on the results of operations as the charge which was taken in the second quarter of 2006 to more properly comply with SFAS 133 was being amortized as a reduction of interest expense on deposits over the assumed remaining life of the swaps. When these swaps were called and the hedged deposits were called by the Bank, the remaining unamortized balance was recognized immediately as a gain from derivative activity in non-interest income and accounted for virtually all of the $330 thousand gain. Mortgage banking income increased $402 thousand or 112.3% from increased refinance activity during the quarter. The sale of securities during the second quarter 2009 resulted in a gain of $501 thousand; however, this gain was offset by an early extinguishment of debt charge of $472 thousand which is included in non-interest expense. The coordinated transactions to sell $15.0 million of investment securities and prepay FHLB advances of $15.0 million was part of the Company's balance sheet management during the quarter which is expected to increase the net interest margin in future periods. Increases of $58 thousand for service charges on deposits and $57 thousand on debit card income were also recognized in the current quarter compared to the second quarter of 2008. The Company recognized a loss of $43 thousand in its investment in a SBIC during the second quarter 2009 compared to a gain of $82 thousand in the prior year. The loss in the current quarter resulted from the write down of the investment in one company while operating earnings from SBIC activities otherwise remained solid. Investment brokerage income decreased $117 thousand during the quarter on lower brokerage transaction volumes and NSF charges decreased $47 thousand on lower overdraft activity in second quarter 2009.

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 necessary to support and service our growth. The ratio of non-interest expense to average total assets for the current quarter was 3.05% which slightly exceeded our target of 3.0%; however, the current quarter included several out of the ordinary expenses. For the three months ended June 30, 2009, our non-interest expense increased $3.1 million or 29.2% over the same period in 2008. The Company's FDIC deposit insurance premium increased $1.1 million as a 5% special assessment (estimated to be $800 thousand) was accrued and the ongoing deposit insurance premium rates also increased. The increased premiums are considered necessary by the FDIC to maintain adequate balances in the Bank Insurance Fund to protect depositors during this time of unusually high number of bank failures. The rates for ongoing deposit insurance coverage are expected to continue to increase in the near term and moderate during 2010. The Company started a new program during 2009 to help builders sell their bank-financed inventory of houses that had been on the market for 12 months or more. The cost for this program has totaled $470 thousand for the second quarter of 2009. In addition, OREO write downs and other OREO expenses were $474 thousand for the current quarter compared to $45 . . .