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 remained virtually unchanged from the second quarter decreasing $1.4 million or less than 1% during the third quarter. We experienced increased liquidity as federal funds sold increased $20.3 million while investment securities decreased $9.9 million or 3.0%, loans held for sale decreased $5.5 million or 68.3%, other loans decreased $3.0 million or less than 1% and cash decreased $4.3 million or 15.8%. The decrease in loans outstanding can be attributed to a continued slowdown in loan demand as some of our primary customers are deleveraging and taking a more conservative stance toward borrowing during these difficult economic times. Investment securities decreased $9.9 million or 3.0% due primarily to calls and sales of investment securities that were part of ongoing balance sheet management. Total deposits were $1.29 billion at quarter end, an increase of $40.6 million or 3.2% from the prior quarter-end. The increase in deposits was from non-maturity deposits which increased $72.5 million or 15.4% while time deposits decreased $34.8 million or 5.1%. The decrease in time deposits was primarily attributed to declines in Certificate of Deposit Account Registry Service (CDARS) of $26.7 million and commercial certificates of deposit greater than $100,000 which decreased $9.1 million. Borrowings decreased $41.6 million or 12.6% from the prior quarter end as federal funds purchased decreased $27.0 million and other short term borrowings decreased $15.0 million. This decrease in short term borrowings continued a trend of allowing borrowings to mature without renewal as loan demand has declined and deposit growth has been adequate to fund new loan requests.

Net interest income increased $739 thousand or 5.9% for the third quarter compared to the second quarter. The interest rate environment remained relatively stable in the third quarter as the Federal Reserve maintained the federal funds target rate consistent with the second quarter. Total interest income decreased by $265 thousand or 1.2% while the cost of funds decreased $1.0 million or 10.2% compared to the previous quarter. Effective pricing of loans including the continued incorporating interest rate floors on floating rate loans upon renewal and loan balances decreasing at a slower pace during the quarter minimized the reduction in interest income. Interest expense declined primarily due to reduced levels of higher cost time deposits and borrowings and repricing deposits at lower rates during the quarter. The net interest margin improved 25 basis points to 3.30% compared to 3.05% for the linked quarter and increased 42 basis points when compared to 2.88% for the third quarter of 2008.

The Company's provision for loan losses of $6.0 million matched the second quarter 2009 while it increased from $1.4 million for the third quarter 2008. This level of provision and net charge-offs are the continuation 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 decreased to 1.45% of average loans in third quarter 2009 from 1.85% of average loans for second quarter 2009 and 0.28% of average assets for the third quarter 2008. Nonperforming loans increased to $22.7 million or 1.82% of loans at September 30, 2009 from $17.9 million or 1.43% of loans at June 30, 2009. The addition of two residential construction and development loans aggregating $4.4 million to nonaccrual status was the primary reason for the increase in nonperforming loans during the quarter. Nonperforming assets rose to $40.8 million or 2.36% of total assets at September 30, 2009 from $35.7 million, or 2.07% of total assets, at June 30, 2009 primarily due to the $4.8 million net increase in nonaccrual loans during the quarter. Nonperforming assets were $15.1 million or 0.84% of total assets at September 30, 2008. The activity for this quarter in net charge-offs, nonperforming loans and nonperforming assets continues to be predominately related to residential construction and development lending. The allowance for loan losses of $20.8 million at September 30, 2009 represented 1.67% of total loans and 0.92% coverage of nonperforming loans at current quarter-end compared with 1.55% of total loans and 109% coverage of nonperforming loans at June 30, 2009. We believe the allowance is adequate for losses inherent in the loan portfolio at September 30, 2009.

Non-interest income was $4.2 million during the third quarter of 2009, compared to $2.6 million for the prior quarter and $2.1 million for the third quarter of 2008. Non-interest income increased in all categories during the third quarter compared to the second quarter except for income from mortgage banking activities which decreased $248 thousand and other non-interest income which decreased $42 thousand. During the third quarter, we recovered $408 thousand from the sale and assignment of our creditor claims in the Lehman bankruptcy to a third party. During the second quarter 2009, we recorded $1.0 million write-off in the value of collateral held by Lehman as the counterparty for certain derivative contracts terminated in the third quarter 2008. The receipt of these funds is in full settlement of all claims with Lehman Brothers. The recovery was one of the transactions included in net cash settlement on economic hedges which totaled $316 thousand for the third quarter of 2009 compared to a loss of $912 thousand in the second quarter of 2009. Similar to the changes from the second quarter, increases in non-interest income from continuing operations of $2.1 million were realized in all categories including mortgage banking income compared to the third quarter of 2008.

Non-interest expense of $12.6 million in the third quarter of 2009 decreased $1.1 million or 8.0% from the prior quarter, and grew by $2.4 million or 23.7% compared with the $10.2 million reported in the year ago period. The decrease from the second quarter of 2009 is primarily due to the timing of FDIC deposit insurance premiums, reduced advertising expenses, decreased personnel expenses and prepayment penalties on the early extinguishment of FHLB borrowings recognized in the second quarter of 2009. Compared to the third quarter of 2008, significant increases were recognized in FDIC premiums, foreclosed asset related expenses and writedowns, salaries and employee benefits, and the Company's buyer incentive program discussed below.

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 nine month period ending September 30, 2009, total assets decreased by $78.4 million, or 4.4%, 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, increasing liquidity while shifting our funding mix and keeping regulatory capital ratios in excess of the well capitalized threshold. The allowance for loan losses was increased to 1.67% of period end loans compared to 1.55% at the prior quarter end and 1.35% at the prior year end. The allowance was increased with a year to date provision of $16.0 million while net charge-offs totaled $14.0 million. We increased liquidity by growing deposits $61.4 million or 5.0% and through loan repayments which resulted in a $66.5 million or 5.1% decrease in loans outstanding. We shifted our funding mix by increasing non-maturity deposits $70.6 million while decreasing time deposits by $9.3 million and borrowings by $84.6 million. This shift in funding mix contributed to an improvement in net interest margin during the third quarter.

Loans held for investment decreased by $3.0 million or 0.2% from June 30, 2009 to September 30, 2009. While residential mortgage loans grew by $4.6 million or 1.2% during the third quarter, commercial and industrial loans decreased by $7.4 million or 4.0%. The $35.4 million increase in commercial real estate loans and the $36.5 million decrease in construction loans were primarily attributable to a reclassification of $34.9 million in commercial construction loans whose underlying properties are fully constructed (See note 4 to the financial statements). The decrease in loans outstanding during the past nine months can also be attributed to a continued slowdown in loan demand as some of our primary customers are deleveraging and taking a more conservative stance toward borrowing during these difficult economic times.

We utilize various funding sources, as necessary, to support balance sheet management. As mentioned above, we funded our liquidity through a reduction in loan balances during the nine months ended September 30, 2009. However, during the third quarter of 2009, growth in customer deposits was our primary funding source. At September 30, 2009, deposits totaled $1.29 billion, an increase of $61.4 million or 5.0% from year-end 2008. Customer time deposits increased $60.2 million or 16.6% while brokered certificates of deposit, including the CDARS program, decreased $69.5 million or 23.7%. Non-maturity deposits totaled $648.4 million at quarter end, an increase of $70.6 million or 12.2% 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 September 30, 2009, our stockholders' equity totaled $134.1 million, a decrease of $53.6 million compared to December 31, 2008. The decrease is primarily the result of the $49.5 million goodwill impairment charge recorded in first quarter 2009. This goodwill impairment was a non-cash charge to earnings which had no impact on our regulatory capital ratios. Other year to date changes to the Company's capital were dividends totaling $1.8 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, an increase of $870 thousand in other comprehensive income items.

Net Loss. Our net loss from operations for the three months ended September 30, 2009 was $431 thousand, a decrease in net loss of $2.3 million or 84.0%, from the prior quarter and a decrease in net income of $2.1 million for the same three month period in 2008 when net income was $1.6 million. Our net loss after preferred dividends of $1.1 million decreased $2.7 million compared to the prior quarter. Net loss per share available to common shareholders was a $0.06 loss per share for both basic and diluted for the three months ended September 30, 2009 as compared with $0.09 earnings per share for both basic and diluted for the same period in 2008. Net interest income for the third quarter of 2009 was $13.3 million, up $1.5 million or 12.3%, compared with the third quarter 2008, due to improvement in the net interest margin. The net interest margin of 3.30% improved 42 basis points from the year ago period and increased 25 basis points on a linked quarter basis. The Federal Reserve did not change rates during the current quarter, although repricing of 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 third quarter was the continued elevated level of asset quality costs, including a provision for loan losses of $6.0 million for the quarter. Non-interest income was $4.2 million during the third quarter of 2009, which represents an increase of 101.7% from non-interest income of $2.1 million reported in the comparable period in 2008. During the third quarter, we recovered $408 thousand from the sale and assignment of our creditor claims in the Lehman bankruptcy to a third party. During the second quarter 2009, we recorded $1.0 million write-off in the value of collateral held by Lehman as the counterparty for certain derivative contracts terminated in the third quarter 2008. The receipt of these funds is in full settlement of all claims with Lehman Brothers. The recovery was one of the transactions included in net cash settlement on economic hedges which totaled $316 thousand for the third quarter of 2009 compared to a loss of $912 thousand in the second quarter of 2009. Non-interest expense increased $2.4 million, or 23.7% compared with the same quarter a year ago. The largest increase in non-interest expense resulted from an increased FDIC deposit insurance premium of $820 thousand from ongoing deposit insurance premium rate increases.

Net Interest Income. During the three months ended September 30, 2009, our net interest income was $13.3 million, an increase of $1.5 million or 12.3% over the third quarter 2008. Interest expense decreased $3.7 million from repricing of deposits and the reduction of borrowings and exceeded the $2.2 million decrease in interest income from declining outstanding balances and yields on interest earning assets.

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 third quarter of 2009, the Federal Reserve maintained the Federal Funds rate at the all time low of 25 basis points with the prime rate unchanged at 3.25% for the quarter. During the third quarter of 2008, the Federal Reserve reduced the Federal Funds rate on three separate occasions for an aggregate decrease of 175 basis points. The average prime rate for the third quarter of 2008 was 4.06%. 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 throughout 2009 such that most of our floating rate loan portfolio now 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 mitigated much of the impact of the steep declines in the prime rate and in LIBOR, limiting the decline in loan yields to only 34 basis points from the third quarter 2008 to the same period in 2009. The average yield on interest-earning assets in the third quarter of 2009 decreased 43 basis points to 5.50% compared to the third 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. 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. Our cost of average interest bearing liabilities for the third quarter of 2009 decreased 88 basis points to 2.39% compared to the third quarter of 2008. For the third quarter 2009, our net interest margin of 3.30% increased 42 basis points from 2.88% for the third quarter of 2008 and increased 25 basis points from the second 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. During the past two quarters, we have seen more rational deposit pricing in our local markets in contrast with the second half of 2008 when some larger banks sought needed liquidity with above market, long term retail certificate offerings.

                          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 September 30, 2009                   Three Months Ended September 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                                       $      1,251,076       $     18,568            5.89 %   $      1,315,983       $     20,597            6.23 %
Investment securities available for sale             325,017              3,458            4.22 %            276,927              3,317            4.77 %
Investment securities held to maturity                14,045                158            4.48 %             41,350                487            4.69 %
Federal funds sold                                    10,841                  2            0.07 %              2,144                 11            1.89 %

            Total interest earning assets          1,600,979             22,186            5.50 %          1,636,404             24,412            5.93 %
Other assets                                         122,245                                                 153,190
Total assets                                $      1,723,224                                        $      1,789,594

Interest-bearing liabilities:
Deposits:
NOW, Money Market, and Savings              $        497,366       $      1,672            1.33 %   $        535,176       $      3,147            2.34 %
Time deposits greater than $100K                     190,060                977            2.04 %            133,701              1,392            4.14 %
Other time deposits                                  478,931              3,492            2.89 %            460,773              4,314            3.72 %
Short-term borrowings                                 84,646                372            1.74 %            150,348                919            2.43 %
Long-term borrowings                                 219,159              2,355            4.26 %            247,317              2,781            4.47 %

       Total interest bearing liabilities          1,470,162              8,868            2.39 %          1,527,315             12,553            3.27 %

Demand deposits                                      109,515                                                 105,556
Other liabilities                                      9,920                                                  14,877
Stockholders' equity                                 133,627                                                 141,846

Total liabilities and stockholders'
equity                                      $      1,723,224                                        $      1,789,594

Net interest income and net interest
spread                                                             $     13,318            3.10 %                          $     11,858            2.66 %
Net interest margin                                                                        3.30 %                                                  2.88 %
Ratio of average interest-earning assets
to average interest-bearing liabilities               108.90 %                                                107.14 %

Provision for Loan Losses. The Company recorded a $6.0 million provision for loan losses for the quarter ended September 30, 2009, representing an increase of $4.6 million from the $1.4 million provision for the third quarter of 2008. The level of provision for the quarter is reflective of the trends in the loan portfolio, including 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 third quarter of 2009 compared with the provision for loan losses for third 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 loans specifically identified as having a greater than normal risk of collecting principal and interest according to the contractual terms of the loan when the fair value of the collateral is less than the outstanding balance of the loan. Additional amounts are also required 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 1.82% at September 30, 2009 compared with 0.91% at September 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 1.45% for the quarter ended September 30, 2009, compared with 0.28% for the quarter ended September 30, 2008.

Non-Interest Income. For the three months ended September 30, 2009, non-interest income increased $2.1 million or 101.7% to $4.2 million from $2.1 million for the same period in the prior year primarily resulting from a $756 thousand increase in gains related to derivative activity. During the third quarter, we recovered $408 thousand from the sale and assignment of our creditor claims in the Lehman bankruptcy to a third party. During the second quarter 2009, we recorded $1.0 million write-off in the value of collateral held by Lehman as the counterparty for certain derivative contracts terminated in the third quarter 2008. The receipt of these funds is in full settlement of all claims with Lehman Brothers. The recovery was one of the transactions included in net cash settlement on economic hedges which totaled $316 thousand for the third quarter of 2009 compared to a loss of $912 thousand in the second quarter of 2009. The sales of investment securities during the third quarter 2009 as part of ongoing portfolio management resulted in an aggregate gain of $735 thousand with no comparable sales in the third quarter of 2008. Mortgage banking income increased $293 thousand or 133.8% from increased customer transaction volume including refinance activity. The Company recognized $171 thousand income from its investment in Small Business Investment Company (SBIC) during the third quarter 2009 compared to $39 thousand in the same period prior year. During 2009, the level of fund assets managed by the SBIC increased and income returned to a more normal level as no individual investments were harvested or written off during the quarter. Service charges on deposits and NSF charges remained virtually unchanged compared to the 2008 quarter as debit card income increased $96 thousand. Investment brokerage income increased $74 thousand compared to the third quarter of 2008 and $147 thousand compared to the third quarter 2008 due to increased customer transaction volumes.

Non-Interest Expense. For the three months ended September 30, 2009, our non-interest expense increased $2.4 million or 23.7% over the same period in 2008. The Company's FDIC deposit insurance premium increased $604 thousand as the FDIC increased the ongoing deposit insurance premium rates from 7 basis points for third quarter 2008 to 21 basis points for the third quarter 2009. The increased premiums are considered necessary by the FDIC to maintain adequate balances in the Deposit Insurance Fund to protect depositors during this time of unusually high number of bank failures. On September 29, 2009, the FDIC announced its proposal to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for the following three years. This announcement had no impact on our financial results for the quarter ended September 30, 2009, and if the prepaid assessment is charged as announced, the cost will be recognized as expense ratably over the three year assessment period. Foreclosed asset writedowns and other OREO expenses were $738 thousand for the current quarter compared to $98 thousand in the third quarter last year due to the $15.0 million increase in the balances of foreclosed assets, the increased cost of acquiring, holding and maintaining foreclosed properties and the continued devaluation of properties held. Losses on sales of OREO property were minimal in the third quarter of 2009 and 2008 compared to a loss of $63 thousand in the second quarter of 2009. Legal expense also increased $100 thousand mostly related to the resolution of problem loans. 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 totaled $480 thousand to incent home buyers to purchase 48 homes during the third quarter of 2009. Salaries and employee benefits increased $155 thousand year over year due to increased commissions on mortgage activity and changes in the Company's employee medical insurance coverage. On a linked quarter basis, non-interest expense decreased $1.1 million due to non-recurring expenses including the special FDIC assessment and the early extinguishment of debt incurred during the second quarter. Also during the third quarter, management implemented cost reduction measures including a reduction in the 401(K) match, a company-wide salary freeze and reductions in executive salaries which along with lower mortgage commissions resulted in $207 thousand decrease in personnel expense compared to the second quarter of 2009.

Provision for Income Taxes. The Company recorded an income tax benefit of $683 thousand for the third quarter 2009 due to our operating loss and the effect of tax-exempt income (including an increase in cash surrender value on bank-owned life insurance and interest on municipal bonds) on our income tax calculation. Net operating loss for Federal income tax purposes can be carried back two years and forward 20 years. The Company has paid sufficient income taxes in prior years to be able to fully realize the $683 thousand benefit.

Net Income (Loss). Our net loss from operations for the nine months ended September 30, 2009 was $52.4 million, compared to $4.3 million net income for . . .