Quarterly Report

Quarterly Report

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended June 30, 2006


o		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

(Exact name of registrant as specified in its charter)


North Carolina		56-2270620

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4605 Country Club Road Winston-Salem, North Carolina		27104

(Address of principal executive offices)		(Zip Code)

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

Securities Registered Pursuant to Section 12(b) 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 1, 2006 (the most recent practicable date), the registrant had outstanding 17,618,470 shares of Common Stock, no par value.


		Page No.
Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Consolidated Balance Sheets June 30, 2006 and December 31, 2005		3

	Consolidated Statements of Operations Three Months and Six Months Ended June 30, 2006 and 2005		4

	Consolidated Statements of Comprehensive Income Three Months and Six Months Ended June 30, 2006 and 2005		5

	Consolidated Statement of Stockholders’ Equity Six Months Ended June 30, 2006		6

	Consolidated Statements of Cash Flows Six Months Ended June 30, 2006 and 2005		7

	Notes to Consolidated Financial Statements		8

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk		26

Item 4 -	Controls and Procedures		27

Part II.	Other Information

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		28

Item 4 -	Submission of Matters to a Vote of Security Holders		28

Item 6 -	Exhibits		28

Signatures			29
EX-31.1
EX-31.2
EX-32

Part I. FINANCIAL INFORMATION

Item 1 — Financial Statements

SOUTHERN COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)


	June 30,			December 31,
	2006			2005 *
				Restated
	(Amounts in thousands, except share data)
Assets
Cash and due from banks	$	30,304		$	24,606
Federal funds sold		1,010			648
Investment securities
Available for sale, at fair value		164,386			203,808
Held to maturity, at amortized cost		85,110			88,108

Loans		959,085			868,827
Allowance for loan losses		(12,626	)		(11,785	)

Net Loans		946,459			857,042

Premises and equipment		36,753			31,259
Goodwill		49,792			49,792
Other assets		39,190			32,350

Total Assets	$	1,353,004		$	1,287,613

Liabilities and Stockholders’ Equity
Deposits
Demand	$	106,605		$	111,226
Money market, savings and NOW		326,626			315,112
Time		545,316			515,611

Total Deposits		978,547			941,949

Short-term borrowings		48,367			9,186
Long-term debt		181,846			192,551
Other liabilities		10,120			9,042


Total Liabilities		1,218,880			1,152,728

Stockholders’ Equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued or outstanding at June 30, 2006 and December 31, 2005		—			—
Common stock, no par value, 30,000,000 shares authorized; issued and outstanding 17,615,355 shares at June 30, 2006 and 17,612,472 shares at December 31, 2005, respectively		121,739			122,490
Retained earnings		14,574			15,546
Accumulated other comprehensive loss		(2,189	)		(3,151	)

Total Stockholders’ Equity		134,124			134,885


Commitments and contingencies

Total Liabilities and Stockholders’ Equity	$	1,353,004		$	1,287,613


*		Derived from audited consolidated financial statements

See accompanying notes.

- 3 -

SOUTHERN COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006			2005		2006			2005
				Restated					Restated
	(Amounts in thousands, except per share data)
Interest Income
Loans	$	17,854		$	13,377	$	34,113		$	25,679
Investment securities available for sale		2,140			2,281		4,280			4,527
Investment securities held to maturity		854			884		1,708			1,664
Federal funds sold		14			12		35			24


Total Interest Income		20,862			16,554		40,136			31,894

Interest Expense
Money market, savings, NOW deposits		2,419			999		4,516			1,764
Time deposits		5,582			3,890		10,390			7,396
Borrowings		2,829			2,529		5,149			4,646


Total Interest Expense		10,830			7,418		20,055			13,806


Net Interest Income		10,032			9,136		20,081			18,088

Provision for Loan Losses		705			475		1,180			870


Net Interest Income After Provision for Loan Losses		9,327			8,661		18,901			17,218


Non-Interest Income
Service charges on deposit accounts		1,098			908		2,133			1,747
Gain (loss) on sale of investments		(4,230	)		56		(4,230	)		56
Gain (loss) on economic hedges		(405	)		358		(784	)		(108	)
Net cash settlement on economic hedges		(177	)		31		(284	)		96
Other		1,029			890		1,817			1,797


Total Non-Interest Income		(2,685	)		2,243		(1,348	)		3,588


Non-Interest Expense
Salaries and employee benefits		4,630			3,881		9,114			7,859
Occupancy and equipment		1,680			1,372		3,288			2,714
Other		2,542			2,090		4,882			4,667


Total Non-Interest Expense		8,852			7,343		17,284			15,240


Income (Loss) Before Income Taxes		(2,210	)		3,561		269			5,566

Income Tax Expense (Benefit)		(780	)		1,282		95			1,985


Net Income (Loss)	$	(1,430	)	$	2,279	$	174		$	3,581

Net Income (Loss) Per Share
Basic	$	(0.08	)	$	0.13	$	0.01		$	0.20
Diluted		(0.08	)		0.13		0.01			0.20

Weighted Average Shares Outstanding
Basic		17,640,808			17,907,360		17,632,467			17,887,402
Diluted		17,640,808			18,202,763		17,838,621			18,226,496

See accompanying notes.

- 4 -

SOUTHERN COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
				Restated						Restated
				(Amounts in thousands)
Net income (loss)	$	(1,430	)	$	2,279		$	174		$	3,581


Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses) on available for sale securities		(2,318	)		627			(2,663	)		(2,423	)
Tax effect		893			(242	)		1,026			935
Reclassification of (gains) losses recognized in net income		4,230			(56	)		4,230			(56	)
Tax effect		(1,631	)		22			(1,631	)		22

Net of tax amount		1,174			351			962			(1,522	)

Cash flow hedging activities:
Reclassification of gains recognized in net income		—			(105	)		—			(215	)
Tax effect		—			41			—			83

Net of tax amount		—			(64	)		—			(132	)


Total other comprehensive income (loss)		1,174			287			962			(1,654	)


Comprehensive income (loss)	$	(256	)	$	2,566		$	1,136		$	1,927

See accompanying notes.

- 5 -

SOUTHERN COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)


										Accumulated
	Common Stock									Other			Total
							Retained			Comprehensive			Stockholders’
	Shares			Amount			Earnings			Income (loss)			Equity
				(Amounts in thousands, except share data)
Balance at December 31, 2005, restated		17,612,472		$	122,490		$	15,546		$	(3,151	)	$	134,885
Net income		—			—			174						174
Other comprehensive income, net of tax		—			—			—			962			962
Common shares repurchased		(146,300	)		(1,384	)								(1,384	)
Stock options exercised including income tax benefit of $32		149,183			618			—			—			618
Stock-based compensation		—			15			—			—			15

Cash dividends of $0.065 per share		—			—			(1,146	)		—			(1,146	)

Balance at June 30, 2006		17,615,355		$	121,739		$	14,574		$	(2,189	)	$	134,124

See accompanying notes.

- 6 -

SOUTHERN COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Six Months Ended
	June 30,
	2006			2005
				Restated
	(Amounts in thousands)
Cash Flows from Operating Activities
Net income	$	174		$	3,581
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,727			1,834
Provision for loan losses		1,180			870
Stock options expensed		15			93
Net increase in cash surrender value of life insurance		(243	)		(220	)
Realized (gain) loss on sales of available-for-sale securities, net		4,230			(56	)
Realized loss on sale of premise and equipment		46			12
Loss on economic hedges		784			108
Deferred income taxes		224			(57	)
Realized (gain) loss on sale of foreclosed assets		11			(33	)
Changes in assets and liabilities:
Increase in other assets		(3,513	)		(2,902	)
Increase in other liabilities		207			2,954

Total Adjustments		4,668			2,603


Net Cash Provided by Operating Activities		4,842			6,184

Cash Flows from Investing Activities
Increase in federal funds sold		(362	)		(672	)
Purchase of:
Available-for-sale investment securities		(41,193	)		(31,992	)
Held-to-maturity investment securities		(141	)		(19,500	)
Proceeds from maturities and calls of:
Available-for-sale investment securities		18,324			28,323
Held-to-maturity investment securities		3,124			4,410
Proceeds from sale of available-for-sale investment securities		59,478			126
Net increase in loans		(90,597	)		(50,343	)
Purchases of premises and equipment		(7,119	)		(2,131	)
Proceeds from disposal of premises and equipment		17			19
Proceeds from sale of foreclosed assets		184			862
Purchase of bank-owned life insurance		(5,000	)		—


Net Cash Used by Investing Activities		(63,285	)		(70,898	)


Cash Flows from Financing Activities
Net increase in deposits		36,598			24,763
Net increase in short-term borrowings		39,181			26,943
Net increase (decrease) in long-term borrowings		(9,726	)		29,691
Net proceeds from the issuance of common stock		618			637
Common stock repurchased		(1,384	)		(1,272	)
Cash dividends paid		(1,146	)		(2,677	)


Net Cash Provided by Financing Activities		64,141			78,085


Net Increase in Cash and Due From Banks		5,698			13,371
Cash and Due From Banks, Beginning of Year		24,606			17,758


Cash and Due From Banks, End of Period	$	30,304		$	31,129

See accompanying notes.

- 7 -

Southern Community Financial Corporation

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The consolidated financial statements include the accounts of Southern Community Financial Corporation (the “Company”), and its wholly-owned subsidiary, 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. 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 six-month periods ended June 30, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.

The preparation of the consolidated financial statements and accompanying notes requires management of the Company to make estimates and assumptions relating to reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ significantly from those estimates and assumptions. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. To a lesser extent, significant estimates are also associated with the valuation of securities, intangibles, and derivative instruments, determination of stock-based compensation and income tax assets or liabilities, and accounting for acquisitions. Operating results for the three-month and six-month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006.

The organization and business of Southern Community Financial Corporation, 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 2005 annual report on Form 10-K. This quarterly report should be read in conjunction with the annual report.

Recently issued accounting pronouncements – Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (SFAS No. 123R). See Note 3 for additional information regarding the impact of the adoption of the provisions of SFAS No. 123R.

Restatement – On July 11, 2006, management and the Audit Committee of the Board of Directors of Southern Community Financial Corporation concluded that the Company’s financial statements for the quarter ended March 31, 2006 and the years ended December 31, 2003, 2004 and 2005 and the related quarterly periods should no longer be relied upon, as a result of accounting treatment related to its interest rate swaps associated with brokered certificates of deposits (“CDs”). Southern Community Financial Corporation has amended its Form 10-Q for the quarter ended March 31, 2006, and Form 10-K for the year ended December 31, 2005, to amend and restate financial statements and other financial information filed with the Securities and Exchange Commission (“SEC”). These amendments restate the Consolidated Financial Statements and the other financial information for the three months ended March 31, 2006, for the years ended December 31, 2005, 2004, and 2003 and for each of the quarters in 2005 and 2004 previously reported on Form 10-K and Form 10-Q.

Since 2003, the Company has entered into various interest rate swaps to hedge the interest rate risk inherent in certain of its brokered CDs. From inception of the hedging program, the Company applied the “short-cut method” of fair value hedge accounting under SFAS No. 133 to account for the swaps. The terms of the interest rate swaps and the corresponding debt matched; therefore, the Company assumed no hedge ineffectiveness. As a result, the Company determined that the changes in fair value of the swaps and hedged instruments were the same and no ineffectiveness was recorded in earnings. The Company has determined that these swaps did not qualify for the short-cut method because the related broker fee was determined (in retrospect) to have caused the swap not to have a zero value at inception (which is required under SFAS No. 133 to qualify for the short-cut method), and that documentation regarding these transactions did not meet the requirements of SFAS No. 133. Although these swaps have performed as expected as effective economic hedges of interest rate risk, hedge accounting under SFAS No. 133 is not allowed for the affected periods because the hedge documentation required for the “long-haul” method was not in place or was not complete at the inception of the hedge. Additionally, the Company has determined that documentation for certain interest rate floor agreements entered into during 2005 and previously designated as cash flow hedges did not contain certain required

- 8 -

Note 1 – Basis of Presentation (continued)

information with respect to the initial and on-going assessment of hedge effectiveness. Although the impact is not material to the financial statements or results of operations, the Company is including the impact of not applying hedge accounting to those agreements in the restatement of 2005 and the first quarter of 2006.

Fair value hedge accounting allows a company to record the change in fair value of the hedged item (in this case, brokered CDs) as an adjustment to income as an offset to the fair value adjustment on the related interest rate swap. Eliminating the application of fair value hedge accounting reverses the fair value adjustments that have been made to the brokered CDs. Additionally, the net cash settlement payments received during each of the above periods for these interest rate swaps were reclassified from interest expense on brokered CDs to noninterest income. The broker fee has been recognized as a deferred financing cost and is amortized to interest expense over the life of the related CD. The impact of this reclassification reduced net interest income (and the net interest margin) and increased noninterest income, in each of the periods through September 30, 2005. In the three month periods ended December 31, 2005, and March 31, 2006, the net cash settlement increased net interest income and net interest margin, and decreased noninterest income.

Cash flow hedge accounting allows a company to record the net settlement of interest payments related to the swap contracts in net interest income and the changes in fair value on the related interest rate swaps in shareholders’ equity as part of accumulated other comprehensive income. Eliminating the application of cash flow hedge accounting causes the changes in fair value of the related interest rate swaps to be included in noninterest income (instead of accumulated other comprehensive income in shareholders’ equity). There were no net settlement of interest payments related to the interest rate floor contracts during the affected periods through March 31, 2006, and amortization of the cost of the floors was insignificant during the affected periods.

The effects of the restatement by line item for the periods presented in this Form 10-Q follow.


	Impact on Consolidated Balance Sheets
	December 31, 2005						June 30, 2005
	As						As
	Previously			As			Previously			As
	Reported			Restated			Reported			Restated
				(Amounts in thousands)
Other assets	$	30,261		$	32,350		$	32,976		$	33,672
Total assets		1,285,524			1,287,613			1,305,687			1,306,383
Time deposits		514,263			515,611			509,917			510,253
Total deposits		940,601			941,949			869,830			870,166
Accrued expenses and other liabilities		7,780			9,042			9,973			10,494
Total liabilities		1,150,118			1,152,728			1,169,916			1,170,773
Retained earnings		16,128			15,546			12,686			12,525
Accumulated other comprehensive loss, net of tax		(3,212	)		(3,151	)		(1,641	)		(1,641	)
Total stockholders’ equity		135,406			134,885			135,771			135,610

- 9 -

Note 1 – Basis of Presentation (continued)


	Impact to Consolidated Statements of
	Income
	Three months ended				Six months ended
	June 30,				June 30,
	2005				2005
	As				As
	Previously		As		Previously		As
	Reported		Restated		Reported		Restated
	(Amounts in thousands, except per share data)
Interest expense on time deposits	$	3,840	$	3,890	$	7,262	$	7,396
Interest expense		7,368		7,418		13,672		13,806
Net interest income		9,186		9,136		18,222		18,088

Net interest income after provision for loan losses		8,711		8,661		17,352		17,218

Gain (loss) on economic hedges		—		358		—		(108	)
Net cash settlement on economic hedges		—		31		—		96
Total non-interest income		1,854		2,243		3,600		3,588

Income before income taxes		3,222		3,561		5,712		5,566
Income tax expense		1,152		1,282		2,042		1,985

Net income		2,070		2,279		3,670		3,581

Net Income per Share
Basic	$	0.12	$	0.13	$	0.21	$	0.20
Diluted	$	0.11	$	0.13	$	0.20	$	0.20

- 10 -

Note 1 – Basis of Presentation (continued)


	Impact to Consolidated Statements of Changes In Shareholders’ Equity
	Six months ended June 30, 2005
	As
	Previously		As
	Reported		Restated
	(Amounts in thousands)
Total stockholders’ equity, January 1, 2005	$	136,906	$	136,834
Net income		3,670		3,581
Total stockholders’ equity, June 30, 2005		135,771		135,610


	Impact to Consolidated Statements of Cash Flows
	Six months ended June 30, 2005
	As
	Previously			As
	Reported			Restated
	(Amounts in thousands)
Cash Flows from Operating Activities:
Net income	$	3,670		$	3,581
Loss on economic hedges		—			108
Deferred income taxes		—			(57	)
Change in other assets, net		(2,847	)		(2,902	)

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, resulting in the issuance of common stock that then shared in the net income of the Company.

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.

- 11 -

Note 2 – Net Income Per Share (continued)


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006			2005		2006		2005
				Restated				Restated
Weighted average number of common shares used in computing basic net income per share		17,640,808			17,907,360		17,632,467		17,887,402

Effect of dilutive stock options		—			295,403		206,154		339,094


Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share		17,640,808			18,202,763		17,838,621		18,226,496


Net income (loss) (in thousands)	$	(1,430	)	$	2,279	$	174	$	3,581
Basic		(0.08	)		0.13		0.01		0.20
Diluted		(0.08	)		0.13		0.01		0.20

For the three and six month periods ending June 30, 2006 and 2005, net income for determining diluted earnings per share was equivalent to net income. Options to purchase shares that have been excluded from the determination of diluted earnings per share because they are antidilutive (the exercise price is higher than the current market price) amount to 502,192 and 495,482 shares for the six months ended June 30, 2006 and 2005, respectively. Options to purchase shares that have been excluded from the determination of diluted earnings per share because they are antidilutive due to the loss in the second quarter of 2006 amount to 172,362 shares.

Note 3 – Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which was issued by the FASB in December 2004. SFAS No. 123R revises SFAS No. 123 “Accounting for Stock Based Compensation,” and supersedes APB No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25) and its related interpretations. SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period). SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95 “Statement of Cash Flows,” to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

The Company adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant.

- 12 -

Note 3 – Stock-Based Compensation (continued)

The Company has adopted share-based compensation plans and an employee stock purchase plan, which are described below. The compensation cost that has been charged against income for those plans was approximately $15 thousand and $93 thousand for the six-month periods ended June 30, 2006 and 2005, respectively. The income tax benefit recognized for share-based compensation arrangements was approximately $32 thousand and $93 thousand for the six-month periods ended June 30, 2006 and 2005, respectively.

Stock Option Plans

During 1997 the Company adopted, with stockholder approval, the 1997 Incentive Stock Option Plan and the 1997 Nonstatutory Stock Option Plan. Both plans were amended in 2000 and in 2001, with stockholder approval, to increase the number of shares available for grant. Each of these plans makes available options to purchase 875,253 shares of the Company’s common stock. During 2002 the Company adopted, with stockholder approval in 2003, the 2002 Incentive Stock Option Plan with 350,000 options available and the 2002 Nonstatutory Stock Option Plan with 150,000 options available. In 2004, in connection with the acquisition of The Community Bank, the Company assumed three stock option plans: the 2001 Stock Option Plan for Directors, with 97,428 options available, The Community Bank Amended And Restated Stock Option Plan For Key Employees, with 26,000 options available, and The Community Bank Stock Option Plan with 267,927 options available. During 2006, the Company adopted, with shareholder approval, the 2006 Nonstatutory Stock Option Plan with 150,000 options available. The exercise price of all options granted to date is the fair value of the Company’s common shares on the date of grant.

All options had an initial vesting period of five years. During the first quarter 2005, the Company vested all unvested stock options. As a result of this decision 623,725 non-vested options were accelerated from their established vesting over a five-year period from date of grant to being fully vested. Stock options granted after December 31, 2005 and stock options granted to advisory board members vest over a five-year period. All unexercised options expire ten years after the date of grant.

Employee Stock Purchase Plan

On December 19, 2002, the Board approved the creation of, and on February 20, 2003 the Board adopted, the 2002 Employee Stock Purchase Plan (the “2002 ESPP”). An aggregate of 1,000,000 shares of common stock of the Company has been reserved for issuance by the Company upon exercise of options to be granted from time to time under the 2002 ESPP. The purpose of the 2002 ESPP is to provide employees of the Company with an opportunity to purchase shares of the common stock of the Company in order to encourage employee participation in the ownership and economic success of the Company.

The 2002 ESPP provides employees of the Company the right to purchase, annually, shares of the Company’s common stock at 85% of fair market value or, for the 2005-2006 plan year and beyond 95% of fair market value. The number of shares that can be purchased in any calendar year by any individual is limited to the lesser of: (1) shares with a fair market value of $25 thousand; or (2) shares with a fair market value of 20% of the individual’s annual compensation. Shares purchased through the 2002 ESPP must be held by the employee for one year, after which time the employee is free to dispose of the stock.

For the Plan years ended May 31, 2006 and 2005, employees of the Company purchased 16,508 and 21,059 shares, respectively, under the ESPP.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the average volatility of the Company based upon the previous four years’ trading history. The expected life and forfeiture assumptions are based on historical data. Dividend yield is based on the yield at the time of the option grant.

- 13 -

Note 3 – Stock-Based Compensation (continued)

The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees for the six months ended June 30, 2006 and 2005.


	June 30,
	2006			2005
Assumptions in estimating average option fair values:
Risk-free interest rate		4.67	%		3.54	%
Dividend yield		1.30	%		1.24	%
Volatility		28.67	%		30.46	%
Expected life	7.5 years			5.66 years

A summary of option activity under the stock option plans as of June 30, 2006 and changes during the six months ended June 30, 2006 is presented below.


						Weighted
				Weighted		Average
				Average		Remaining	Aggregate
				Exercise		Contractual	Intrinsic
	Shares			Price		Term	Value
							(in thousands)
Outstanding December 31, 2005		1,271,917		$	7.51
Granted		45,000			9.27
Exercised		(149,183	)		3.93
Forfeited or expired		(26,760	)		9.53

Outstanding June 30, 2006		1,140,974			8.00	5.4 years	$	2,493

Exercisable June 30, 2006		1,087,972			7.94	5.4 years		2,468

The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 was $3.32 per share. The total intrinsic value of options exercised during the six months ended June 30, 2006 was $769 thousand. There were no shares that vested during the six months ended June 30, 2006.

As of June 30, 2006, there was $168 thousand of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted average period of 3.4 years.

Cash received from option exercises under all share-based payment arrangements for the six months ended June 30, 2006 was $586 thousand. There was $32 thousand of tax benefit realized for tax deductions from option exercise of the share-based payment arrangements during the six months ended June 30, 2006.

The adoption of SFAS No. 123R and its fair value compensation cost recognition provisions are different from the nonrecognition provisions under SFAS No. 123 and the intrinsic value method for compensation cost allowed under APB No. 25. The adoption of the provisions of SFAS No. 123R for the six months ended June 30, 2006 resulted in the recognition of $11 thousand of share-based compensation expense related to employee awards that would have resulted in no expense under the provisions of APB No. 25, and $4 thousand of share-based compensation expense to related to advisory board member awards that would have resulted in a similar expense under the provisions of APB No. 25. The impact on net income and earnings per share of the adoption of the provisions of SFAS No. 123R during the first quarter of 2006 was insignificant.

- 14 -

Note 3 – Stock-Based Compensation (continued)

During the first quarter 2005, the Company vested all unvested stock options. As a result of this decision 623,725 non-vested options were accelerated from their established vesting over a 5 year period from date of grant to being fully vested. At the date the decision was made to accelerate the vesting, some of the options had exercise prices below market value. In accordance with the provisions of APB No. 25, compensation expense of $70,000 ($45,000 net of tax effect) has been recognized in the three months ended March 31, 2005 to reflect the effects of the accelerated vesting. The Company applied certain assumptions in the determination of the expense recognized during the period which were based on historical employee attrition rates.

The decision to accelerate the vesting of these options, which we believe to be in the best interest of our stockholders, was made primarily to reduce non-cash compensation expenses that would have been recorded in future periods following our application of SFAS No. 123R. Because we accelerated these options, we expect to reduce our non-cash compensation expense related to these options by approximately $1.6 million (pre-tax) between the first quarter of 2006 and 2009, based on estimated value calculations using the Black-Scholes methodology.


	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2005			2005
	(Amounts in thousands, except per share data, restated)
Net income:	$	2,279		$	3,581
As reported
Add: Total stock-based employee compensation expense included in reported net earnings, net of related tax effects		—			45
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(50	)		(1,565	)


Pro forma	$	2,229		$	2,061


Basic earnings per share:
As reported	$	0.13		$	0.20
Pro forma		0.12			0.12

Diluted earnings per share:
As reported	$	0.13		$	0.20
Pro forma		0.12			0.11

Note 4 – Investment Securities

During June 2006, management decided to implement a plan to reposition the investment portfolio. As part of the plan, $87.8 million (book value) of available-for-sale investment securities were identified to be sold, at a loss of $4.2 million. Through June 30, 2006, securities totaling $62.9 million had been sold at a loss of $3.37 million, with the remainder to be sold in the third quarter. Management has reviewed securities in an unrealized loss position in accordance with the Company’s accounting policies, and as a result, recognized an other-than-temporary impairment of $855 thousand related to securities identified for sale, which is reflected in loss on sale of securities in the statement of operations for the second quarter of 2006.

- 15 -

Note 5 – Loans

Following is a summary of loans at each of the balance sheet dates presented:


	At June 30,						At December 31,
	2006						2005
				Percent						Percent
	Amount			of Total			Amount			of Total
				(Dollars in thousands)
Residential mortgage loans	$	243,072			25.3	%	$	244,177			28.0	%

Commercial mortgage loans		322,706			33.6	%		286,658			33.0	%
Construction loans		195,241			20.4	%		156,900			18.1	%
Commercial and industrial loans		174,803			18.2	%		151,950			17.5	%
Loans to individuals		23,263			2.5	%		29,142			3.4	%


Subtotal		959,085			100.0	%		868,827			100.0	%


Less: Allowance for loan losses		(12,626	)					(11,785	)


Net loans	$	946,459					$	857,042

An analysis of the allowance for loan losses is as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
				(Amounts in thousands)
Balance at beginning of period	$	12,211		$	12,133		$	11,785		$	12,537

Provision for loan losses		705			475			1,180			870


Charge-offs		(405	)		(327	)		(518	)		(648	)
Recoveries		115			84			179			97


Net charge-offs		(290	)		(243	)		(339	)		(551	)


Allowance for loans acquired in purchase transactions, net		—			—			—			(491	)


Balance at end of period	$	12,626		$	12,365		$	12,626		$	12,365

The following is a summary of nonperforming assets at the periods presented:


	June 30,		December 31,		June 30,
	2006		2005		2005
	(Amounts in thousands)
Nonaccrual loans	$	2,148	$	1,408	$	6,969
Foreclosed assets		85		280		315

Total nonperforming assets	$	2,233	$	1,688	$	7,284

- 16 -

Note 5 – Loans (continued)

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions, and other factors. The allowance consists of several components. One component is for loans that are individually classified as impaired and measured under FASB Statement No. 114. The other components are for collective loan impairment measured under FASB Statement No. 5. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

During the first quarter of 2005, management completed an extensive review of the allowance for loan losses related to the loan portfolio acquired in the first quarter of 2004 in connection with The Community Bank acquisition. This review was completed during the one year allocation period, and as a result, management determined the allowance for loan losses as recorded in the preliminary purchase price allocation should be adjusted downward. A purchase price allocation adjustment of $491 thousand was recorded as a reduction of the allowance for loan losses and a reduction of goodwill, net of tax, of $302 thousand.

As of June 30, 2006, the Company had recorded investment in loans considered impaired in accordance with SFAS No. 114 of $3.1 million with a corresponding valuation allowance of $641 thousand.

Note 6 – Non-Interest Income and Other Non-Interest Expense

The major components of other non-interest income are as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
	(Amounts in thousands)
Presold mortgage loan fees and service release premium		368		277		582		527
Investment brokerage and trust fees		259		243		374		451
SBIC management fees		120		95		250		203
Other		282		275		611		616


	$	1,029	$	890	$	1,817	$	1,797

The major components of other non-interest expense are as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
	(Amounts in thousands)
Postage, printing and office supplies	$	176	$	149	$	365	$	414
Telephone and communication		240		179		483		383
Advertising and promotion		235		252		470		454
Data processing and other outsourced services		202		121		369		259
Professional services		373		423		705		877
Other		1,316		966		2,490		2,280


	$	2,542	$	2,090	$	4,882	$	4,667

Note 7 – Common Stock Repurchase Programs

The Company announced a plan to repurchase up to 300,000 shares of its common stock in March 2005, and to repurchase an additional 600,000 shares of its common stock in September 2005. Through June 30, 2006, the Company had repurchased 607,100 shares at an average price of $9.46 per share under the two plans, including 75,900 shares at an average price of $9.55 purchased during the second quarter of 2006. Subsequent to quarter end, on July 26, 2006, the Company announced a plan to repurchase up to an additional 1 million shares of its common stock.

- 17 -

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, and technological factors affecting our operations, pricing, products and services.

On July 11, 2006, management and the Audit Committee of the Board of Directors of Southern Community Financial Corporation concluded that the Company’s financial statements for the quarter ended March 31, 2006 and the years ended December 31, 2003, 2004 and 2005 and the related quarterly periods should no longer be relied upon, as a result of accounting treatment related to its interest rate swaps associated with brokered certificates of deposits (“CDs”). Southern Community Financial Corporation has amended its Form 10-Q for the quarter ended March 31, 2006, and Form 10-K for the year ended December 31, 2005, to amend and restate financial statements and other financial information filed with the Securities and Exchange Commission (“SEC”). These amendments restate the Consolidated Financial Statements and the other financial information for the three months ended March 31, 2006, for the years ended December 31, 2005, 2004, and 2003 and for each of the quarters in 2005 and 2004 previously reported on Form 10-K and Form 10-Q. The effects of the restatement are described more fully in Note 1 to the financial statements in this Form 10-Q. The discussions that follow reflect the effects of the restatement for the affected periods.

Summary of Second Quarter

During the second quarter, the Company made the decision to reposition its investment portfolio to eliminate certain lower-yielding investments, improve net interest margin and net interest income levels, and mitigate overall interest rate risk exposure. As part of the restructuring, the Company is selling $87.8 million of available-for-sale securities, or approximately 30% of the total investment portfolio, with a weighted average yield of 3.70%. The restructuring resulted in a charge of $4.2 million (approximately $2.7 million after-tax, or $0.15 per diluted share), which resulted in the Company’s recording a loss for the second quarter of 2006. The proceeds from the sale of securities are being utilized to reduce the Company’s short-term borrowings by approximately $15.0 million, to reinvest in securities expected to yield at least 5.75%, and to fund loan growth. The Company expects to improve the yield on its investment portfolio, improve its net interest margin, and improve future earnings. The repositioning had a minimal impact on shareholders’ equity as the decline in value of the investments had been reflected in accumulated other comprehensive income.

In core banking operations, the Company achieved record loan growth while maintaining excellent credit quality. For the quarter, total loans grew by $37.9 million or 4.1% to end the period at $959.1 million. Total deposits were $978.5 million at June 30, 2006, a decline in deposits of 2.0% from prior quarter, reflecting in part seasonal fluctuations in deposits by certain large deposit customers, and a decrease of $3.0 million in wholesale certificate of deposits. However, deposits were up $36.6 million, or 3.9% from December 31, 2005, and up $108.4 million or 12.5% compared with June 30, 2005. With an increased level of earning assets coupled with increases in variable interest rates, total interest income increased by $1.6 million, or 8.2% on a linked-quarter basis. Continued strong loan demand and deposit growth contributed to a nine basis point expansion in our net interest margin, to 3.27% from 3.18% compared with the quarter ended June 30, 2005. Competitive pressures have resulted in funding costs increasing at a more rapid pace than asset yields, and the margin compressed 17 basis points from the first quarter in 2006. Compared with the second quarter of 2005, net interest income increased $896 thousand, or 9.8%.

The Company restated earnings for the quarter ended March 31, 2006 and the years ended December 31, 2003, 2004 and 2005 and the related quarterly periods to correct the accounting for certain derivative transactions under Statement of Financial Accounting Standards (“SFAS”) No. 133. As a result of not applying certain hedge accounting to certain interest rate swap transactions the Company recorded a loss of $405 thousand versus a gain of $358 thousand in the second quarter of 2005, and a loss of $784 thousand for the six months ended June 30, 2006 compared to a loss of $108 thousand in the first half of 2005. During the third quarter of 2006, the Company redesignated the interest rate swaps as accounting hedges. The Company believes this will reduce the volatility in earnings related to the transactions, and expects the accumulated net recognized losses on the transactions through June 30, 2006 of $1.66 million will result in reductions to expense over the remaining life of the swaps.

- 18 -

In 2005, the Company announced two plans to repurchase up to a total of 900,000 shares of its common stock. Through June 30, 2006, the Company had repurchased 607,100 shares at an average price of $9.46 per share, including 75,900 shares repurchased during the second quarter of 2006 at an average price of $9.55 per share. Subsequent to quarter end, on July 26, 2006, the Company announced a plan to repurchase up to an additional 1 million shares of its common stock.

On July 27, 2006, Southern Community Financial Corporation announced that its Board of Directors, at their regular meeting on July 19, 2006, declared a quarterly cash dividend of three and one-half cents ($0.035) per share on the Corporation’s common stock. The dividend is payable on September 1, 2006 to shareholders of record as of the close of business on August 15, 2006. This dividend is the sixth consecutive quarterly dividend, following a former practice of annual dividends. The Company’s first cash dividend was paid in March 2004.

Financial Condition at June 30, 2006 and December 31, 2005

During the six-month period ending June 30, 2006, total assets increased by $65.4 million, or 5.1%, to $1.4 billion. The Company’s loan portfolio, net of allowance for loan losses, increased to $946.4 million, an $89.4 million, or 10.4% increase for the six months.

The Company experienced solid loan demand in the second quarter, in our existing markets and from the opening of our Guilford County regional office in Greensboro in December 2005 and our banking office in Raleigh in February 2006. At June 30, 2006, gross loans totaled $959.1 million, an increase of $90.3 million or 10.4% from December 31, 2005. Commercial mortgage loans, which total $322.7 million or 33.6% of gross loans, continue to comprise the largest segment of the portfolio. Loans secured by residential mortgages and the commercial and industrial portfolio represent 25.3% and 18.2% of gross loans, respectively. Construction lending experienced the most growth during the quarter, increasing $12.8 million to end the period at $195.2 million or 20.4% of the total loan portfolio.

During the second quarter, the Company made the decision to reposition its investment portfolio to eliminate certain lower-yielding investments, improve net interest margin and net interest income levels, and mitigate overall interest rate risk exposure. As part of the restructuring, the Company is selling $87.8 million of available-for-sale securities, or approximately 30% of the total investment portfolio, with a weighted average yield of 3.70%. The proceeds from the sales of securities are being utilized to reduce the Company’s short-term borrowings by approximately $15.0 million, to reinvest in securities expected to yield at least 5.75%, and to fund loan growth. As of June 30, 2006, the Company had sold securities with a book value of $62.9 million, and repurchased securities with a cost of $25 million in connection with the restructuring.

We utilize various funding sources, as necessary, to support balance sheet management and growth. Customer deposits continue to be our primary funding source. At June 30, 2006, deposits totaled $978.5 million, an increase of $36.6 million or 3.9% from year-end 2005. Core deposits accounted for the majority of the deposit growth during the period, increasing $67.5 million or 11.9% over the last twelve months and $12.0 million or 1.9% over the last six months. We also utilize other funding sources, such as borrowing from the Federal Home Loan Bank, to supplement funding from deposits.

Our capital position remains strong, with all of our regulatory capital ratios at levels that make us “well capitalized” under federal bank regulatory capital guidelines. At June 30, 2006, our stockholders’ equity totaled $134.1 million, representing 9.91% of total assets. Stockholders’ equity decreased $761 thousand from December 2005, influenced primarily by the repurchase 146,300 shares of the Company’s outstanding common stock at a cost of $1.4 million, and $1.1 million of cash dividends declared and paid during the six-month period.

Results of Operations for the Three Months Ended June 30, 2006 and 2005

Net Income. For the three months ended June 30, 2006, the Company reported a net loss of $1.4 million or $0.08 per diluted share, compared to net income of $2.3 million or $0.13 per diluted share for the same period in 2005. During the second quarter, the Company made the decision to reposition its investment portfolio to eliminate certain lower-yielding investments, improve net interest margin and net interest income levels, and mitigate overall interest rate risk exposure. As part of the restructuring, the Company is selling $87.8 million of available-for-sale securities, or approximately 30% of the total investment portfolio, with a weighted average yield of 3.70%. The restructuring resulted in a charge of $4.2 million (approximately $2.7 million after-tax, or $0.15 per diluted share), which resulted in the Company’s recording a

- 19 -

loss for the second quarter of 2006. The proceeds from the sale of securities are being utilized to reduce the Company’s short-term borrowings by approximately $15.0 million, to reinvest in securities expected to yield at least 5.75%, and to fund loan growth. The Company expects to improve the yield on its investment portfolio, improve its net interest margin, and improve future earnings. The repositioning had a minimal impact on shareholders’ equity as the decline in value of the investments had been reflected in accumulated other comprehensive income.

Since 2003, the Company has entered into various interest rate swaps to hedge the interest rate risk inherent in certain of its brokered CDs and believes these swaps have been effective as economic hedges. Changes in the fair value of swaps reduced non-interest income by $405 thousand for the second quarter 2006, and increased income before taxes by $358 thousand for the second quarter of 2005. The impact relating to these swaps resulted from management’s recent determination that these swaps did not qualify for the “short-cut” method of hedge accounting under SFAS 133. (See Note 1 in Notes to Consolidated Financial Statements.) In July 2006, the Company redesignated its interest rate swaps relating to its brokered CDs utilizing the “long-haul” method of documentation. Accordingly, these swaps will be classified as fair value hedges for future periods.

The rising interest rate environment and the repositioning of our balance sheet contributed to the 9 basis point expansion of our net interest margin to 3.27% for the second quarter of 2006, from 3.18% recorded in June 30, 2005. Non-interest expense increased $1.5 million compared with the same quarter a year ago. The increase in non-interest expense was primarily the result of the continued expansion of our franchise and investment in our infrastructure to support our growth.

Net Interest Income. During the three months ended June 30, 2006, our net interest income was $10.0 million, an increase of $896 thousand or 9.8% over the second quarter 2005. As a result of the balance sheet changes and the positive effects of rising short-term interest rates on our floating rate loan portfolio, our net interest margin expanded by 9 basis points to 3.27% for the second quarter of 2006, compared to 3.18% for the second quarter of 2005. Our efforts in repositioning our balance sheet by reducing our level of investment securities to total assets while increasing our focus on deposit growth are reflected in the mix of interest-earning assets and liabilities and the resulting expansion of our net interest margin. With continued strong loan demand, our average loans increased $111.4 million, or 13.5%, more than offsetting the $33.0 million decrease in average investment securities, when compared with the second quarter 2005. Proceeds from the sale of securities in the second quarter of 2006 are being utilized to reduce the Company’s short-term borrowings by approximately $15.0 million, to reinvest in securities expected to yield at least 5.75%, and to fund loan growth. Rising interest rates have also impacted our funding costs. Our cost on average interest bearing liabilities for the second quarter of 2006 increased 100 basis points to 3.90% compared the restated second quarter of 2005. On a linked-quarter basis, competitive pressures have resulted in funding costs increasing at a more rapid pace than asset yields, and the margin compressed 17 basis points from the first quarter in 2006.

The rates earned on a significant portion of our loan portfolio adjust when index rates, such as prime, change. As a result, interest rate increases generally result in an increase in our interest income on loans. Between June 2005 and June 2006, the Federal Reserve increased the targeted federal funds rate by 200 basis points, to 5.25%, causing a corresponding increase in the prime rate. However, a flattened yield curve has impacted fixed-rate loan and investment portfolio yields, and they have not kept pace with the increase in short-term interest rates. Our average yield on interest-earning assets in the second quarter of 2006 increased by 104 basis points above that of the second quarter 2005 to 6.80%. Our net interest margin in the future will be impacted by actions taken by the Federal Reserve Board with respect to interest rates and competition in our markets. As our balance sheet is slightly asset-sensitive, we would expect to see some compression in our margins if interest rates stop increasing or begin to decline, as some of our lower-rate funding reprices at higher levels. In addition, continued robust loan growth may outpace our ability to attract lower-cost local deposits. As such, we will seek to fund this growth as efficiently as possible through our ready access to correspondents and other wholesale market funds.

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.

- 20 -


	Three Months Ended June 30, 2006								Three Months Ended June 30, 2005
												Restated
	Average			Interest		Average			Average			Interest		Average
	balance			earned/paid		yield/cost			balance			earned/paid		yield/cost
Interest-earning assets:
Loans	$	938,074		$	17,854		7.63	%	$	826,708		$	13,377		6.49	%
Investment securities available for sale		204,117			2,140		4.21	%		238,218			2,281		3.84	%
Investment securities held to maturity		86,599			854		3.96	%		85,461			884		4.15	%
Federal funds sold		1,365			14		3.97	%		1,420			12		3.36	%


Total interest earning assets		1,230,155			20,862		6.80	%		1,151,807			16,554		5.76	%

Other assets		136,918								119,120

Total assets	$	1,367,073								1,270,927


Interest-bearing liabilities:
Deposits:
NOW, Money Market, and Savings	$	340,326		$	2,419		2.85	%	$	249,077		$	999		1.61	%
Time deposits greater than $100K		332,562			3,525		4.25	%		260,003			2,316		3.57	%
Other time deposits		207,548			2,057		3.98	%		234,163			1,574		2.70	%
Short-term borrowings		66,628			817		4.92	%		105,690			521		1.98	%
Long-term debt		166,344			2,012		4.85	%		176,301			2,008		4.57	%


Total interest bearing liabilities		1,113,408			10,830		3.90	%		1,025,234			7,418		2.90	%


Demand deposits		105,867								100,853
Other liabilities		12,402								9,897
Stockholders’ equity		135,396								134,943


Total liabilities and stockholders’ equity	$	1,367,073							$	1,270,927


Net interest income and net interest spread				$	10,032		2.90	%				$	9,136		2.86	%

Net interest margin							3.27	%							3.18	%

Ratio of average interest-earning assets to average interest-bearing liabilities		110.49	%							112.35	%

Provision for Loan Losses. In evaluating the allowance for loan losses, we consider factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The provision for loan losses at June 30, 2006 totaled $705 thousand, compared to a provision of $475 thousand for the three months ended June 30, 2005. The increase in the provision for loan losses reflected strong loan growth, charge-offs connected with the sale of the remaining consumer finance portfolio, a business line the Company exited in 2003, and management’s evaluation of the loan portfolio and other economic factors. During the three months ended June 30, 2006, net loan charge-offs totaled $290 thousand, a 19% increase from $243 thousand of net charge-offs during the three months ended June 30, 2005. For the June 30, 2006 quarter, over 60% of the charge-offs related to the sale of the remaining consumer finance portfolio. On an annualized basis, our percentage of net loan charge-offs to average loans outstanding for the three months ended June 30, 2006 and 2005 was 0.12%. Non-performing assets at June 30, 2006 increased to $2.2 million or 0.17% of total assets from $1.7 million or 0.13% of total assets at December 31, 2005 but were down significantly from $7.2 million or 0.56% of total assets as of June 30, 2005. The allowance for loan losses at June 30, 2006 represented 1.32% of loans outstanding, compared with 1.36% at December 31, 2005 and 1.46% at June 30, 2005. The allowance for loan losses as a percentage of loans outstanding have declined as a result of trends in the economy and the loan portfolio and continued strong credit quality. We believe that the Company’s allowance is adequate to absorb probable losses inherent in our loan portfolio.

- 21 -

Non-Interest Income. For the three months ended June 30, 2006, the Company reported non-interest income at negative $2.7 million due to the loss reported for the sale of investments of $4.2 million. Service charges on deposit accounts for 2006 increased to $1.1 million, up $190 thousand, or 20.9% over the second quarter of 2005. We expect a continued positive trend in service charge fee income in the future as we continue to expand our branch network and deposit base. Mortgage loan fees and servicing release premiums were up $91 thousand or 32.9%, and investment brokerage and trust fees were up $17 thousand or 7.0% from the year ago period. We have recently hired a mortgage banking veteran to lead our mortgage operations, and reorganized our brokerage and trust services into a wealth management group. We believe the changes made in these areas will have a positive impact on non-interest income in the future. In addition, as Salem Capital Partners’ portfolio matures, we anticipate some fluctuation in our non-interest income as our share of gains and losses on their investments are recognized.

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, we have consistently maintained our ratio of non-interest expense to average total assets below 3.0%. Because of our growth, including recent expansion in Greensboro, Raleigh, and Mooresville, we have consistently seen increases in every major component of our non-interest expense. For the three months ended June 30, 2006, our non-interest expense increased $1.5 million or 20.6% over the same period in 2005. On a consolidated basis, salaries and employee benefit expense increased $749 thousand or 19.3%. Occupancy and equipment expense increased $308 thousand, or 22.4%. Other expenses increased $452 thousand or 21.6% to $2.5 million. Due to our strong asset growth, our annualized ratio of non-interest expenses to average total assets increased slightly to 2.60% as compared with 2.32% for the same three months in 2005. During 2006, we anticipate some variability within our non-interest expense due to the move of our operations and certain other administrative departments into a new facility in the second and third quarters, and the opening of our new Mooresville branch in August 2006.

Provision for Income Taxes. Our provision for income taxes, as a percentage of income before income taxes, was 35.3% for the three months ended June 30, 2006 and 35.7% for June 30, 2005.

Results of Operations for the Six Months Ended June 30, 2006 and 2005

Net Income. Our net income for the six months ended June 30, 2006 was $174 thousand, compared to $3.6 million at June 30, 2005. During the second quarter, the Company made the decision to reposition its investment portfolio to eliminate certain lower-yielding investments, improve net interest margin and net interest income levels, and mitigate overall interest rate risk exposure. As part of the restructuring, the Company is selling $87.8 million of available-for-sale securities, or approximately 30% of the total investment portfolio, with a weighted average yield of 3.70%. The restructuring resulted in a charge of $4.2 million (approximately $2.7 million after-tax, or $0.15 per diluted share), which resulted in the Company’s recording a loss for the second quarter of 2006 and impacted the results of operations for the six months ended June 30, 2006. The proceeds from the sale of securities are being utilized to reduce the Company’s short-term borrowings by approximately $15.0 million, to reinvest in securities expected to yield at least 5.75%, and to fund loan growth. The Company expects to improve the yield on its investment portfolio, improve its net interest margin, and improve future earnings. The repositioning had a minimal impact on shareholders’ equity as the decline in value of the investments had been reflected in accumulated other comprehensive income.

Since 2003, the Company has entered into various interest rate swaps to hedge the interest rate risk inherent in certain of its brokered CDs and believes these swaps have been effective as economic hedges. Changes in the fair value of swaps reduced non-interest income by $784 thousand for the six months ended June 30, 2006, compared with a reduction in non-interest income of $108 thousand for the same period in 2005. The impact relating to these swaps resulted from management’s recent determination that these swaps did not qualify for the “short-cut” method of hedge accounting under SFAS 133. (See Note 1 in Notes to Consolidated Financial Statements.) In July 2006, the Company redesignated

- 22 -

its interest rate swaps relating to its brokered CDs utilizing the “long haul” method of documentation. Accordingly, these swaps will be classified as fair value hedges for future periods.

With strong internal growth our level of average earning assets has increased $71.0 million or 6.3% to $1.2 billion from $1.1 billion for the first six months of 2006. Our interest rate spread and net yield on average interest-earning assets increased 8 basis points and 14 basis points, respectively, compared with the corresponding period in 2005. Our net interest income grew 11.0%, or $2.0 million for the six-month period ended June 30, 2006 to $20.1 million. Our non-interest expense growth included the costs of new infrastructure, facilities and personnel associated with the continued expansion of our business.

Net Interest Income. During the six months ended June 30, 2006, our net interest income totaled $20.1 million, an increase of $2.0 million or 11.0% over the $18.1 million for the same six-month period in 2005. Net interest income benefited from strong growth in average earning assets, coupled with increased yields on the loan portfolio due to interest rate hikes by the Federal Reserve. Due to strong loan demand our level of average earning assets has increased $71.0 million or 6.3% to $1.2 billion from $1.1 billion for the six-months ended June 2005. The rates earned on a significant portion of our loan portfolio adjust immediately when index rates, such as prime, change. As a result, interest rate increases generally result in an immediate increase in our interest income on loans. Between June 2005 and June 2006 the Federal Reserve increased the targeted Federal funds rate by 200 basis points causing an equal increase in the prime rate. However, the flattening of the yield curve has hampered fixed rate loan and investment portfolio yields from keeping pace with the increase in short-term interest rates. Our average yield on interest-earning assets in the first six months of 2006 increased 104 basis points above that of the first half of 2005 to 6.70%. Rising rates have also impacted our funding costs, and for the first six months of 2006, funding costs increased 96 basis points to 3.72% from 2.76% for the comparable period a year ago. Average interest bearing liabilities increased $75.3 million or 7.5% to $1.1 billion from $1.0 million for the six-month period ending June 2005. For the six months ended June 30, 2006, our net interest spread was 2.98% and our net interest margin was 3.35%. For the six months ended June 30, 2005, our net interest spread was 2.90% and our net interest margin was 3.21%.

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 income or expense by the average balances of assets or liabilities, respectively, for the periods presented. The average loan portfolio balances include non-accrual loans.

- 23 -


	Six Months Ended June 30, 2006								Six Months Ended June 30, 2005
												Restated
	Average			Interest		Average			Average			Interest		Average
	balance			earned/paid		yield/cost			balance			earned/paid		yield/cost
Interest-earning assets:
Loans	$	913,028		$	34,113		7.53	%	$	816,161		$	25,679		6.34	%
Investment securities available for sale		205,476			4,280		4.20	%		231,318			4,527		3.95	%
Investment securities held to maturity		87,063			1,708		3.96	%		87,347			1,664		3.84	%
Federal funds sold		1,642			35		4.25	%		1,424			24		3.40	%


Total interest earning assets		1,207,209			40,136		6.70	%		1,136,250			31,894		5.66	%

Other assets		131,099								118,361

Total assets	$	1,338,308							$	1,254,611


Interest-bearing liabilities:
Deposits:
NOW, Money Market, and Savings	$	332,991		$	4,516		2.73	%	$	243,961		$	1,764		1.46	%
Time deposits greater than $100K		321,738			6,522		4.09	%		269,603			4,420		3.31	%
Other time deposits		208,788			3,868		3.74	%		227,385			2,976		2.64	%
Short-term borrowings		55,006			1,275		4.67	%		89,402			956		2.16	%
Long-term debt		166,284			3,874		4.70	%		179,122			3,690		4.15	%


Total interest bearing liabilities		1,084,807			20,055		3.72	%		1,009,473			13,806		2.76	%


Demand deposits		106,972								99,662
Other liabilities		11,470								10,452
Stockholders’ equity		135,059								135,024


Total liabilities and stockholders’ equity	$	1,338,308							$	1,254,611


Net interest income and net interest spread				$	20,081		2.98	%				$	18,088		2.90	%

Net interest margin							3.35	%							3.21	%

Ratio of average interest-earning assets to average interest-bearing liabilities		111.28	%							112.56	%

Provision for Loan Losses. Our provision for loan losses for the six months ended June 30, 2006 was $1.2 million representing an increase of $310 thousand from the $870 thousand provision we made for the six months ended June 30, 2005. In evaluating the allowance for loan losses, we consider factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The increase in the provision for loan losses reflected strong loan growth, charge-offs connected with the sale of the remaining consumer finance portfolio, a business line the Company exited in 2003, and management’s evaluation of the loan portfolio and other economic factors. During the six months ended June 30, 2006 net loan charge-offs totaled $339 thousand, down from $551 thousand of net charge-offs during the six months ended June 30, 2005. Approximately 58% of the charge-offs for the first six months related to the consumer finance portfolio. On an annualized basis, our percentage of net loan charge-offs to average loans outstanding was .07% for the six months ended June 30, 2006, down from the 0.14% in the year ago period. The amount of non-performing assets decreased to $2.2 million from $7.3 million at June 30, 2006 and June 30, 2005, and as a percentage of total assets the ratio decreased from 0.17% of total assets at June 2006 from 0.56% at June 2005. The allowance for loan losses at June 30, 2006 represented 1.32% of loans outstanding, compared with 1.36% at December 31, 2005 and 1.46% at June 30, 2005. The provision for loan losses and the allowance as a percentage of loans outstanding have declined as a result of trends in the economy and the loan portfolio, and continued strong credit quality. We believe that the Company’s allowance is adequate to absorb probable losses inherent in our loan portfolio.

- 24 -

Non-Interest Income. For the six months ended June 30, 2006, the Company reported non-interest income at negative $1.3 million due to the loss reported for the sale of investments of $4.2 million. Service charges on deposit accounts for 2006 increased to $2.1 million, up $386 thousand, or 22.1% over the same period a year ago. We expect a continued positive trend in service charge fee income in the future as we continue to expand our branch network and deposit base. Mortgage loan fees and servicing release premiums were up $55 thousand or 10.4%, and investment brokerage and trust fees were down $77 thousand or 17.1% from the year ago period. We have recently hired a mortgage banking veteran to lead our mortgage operations, and reorganized our brokerage and trust services into a wealth management group. We believe the changes made in these areas will have a positive impact on non-interest income in the future. In addition, as Salem Capital Partners’ portfolio matures, we anticipate some fluctuation in our non-interest income as our share of gains and losses on their investments are recognized.

Since 2003, the Company has entered into various interest rate swaps to hedge the interest rate risk inherent in certain of its brokered CDs and believes these swaps have been effective as economic hedges. Changes in the fair value of swaps reduced non-interest income by $784 thousand for the first six months of 2006, compared with a reduction in non-interest income by $108 thousand for the comparable period of 2005. The impact relating to these swaps resulted from management’s recent determination that these swaps did not qualify for the “short-cut” method of hedge accounting under SFAS 133. (See Note 1 in Notes to Consolidated Financial Statements.) In July 2006, the Company redesignated its interest rate swaps relating to its brokered CDs utilizing the “long-haul” method of documentation. Accordingly, these swaps will be classified as fair value hedges for future periods.

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. From 1998 forward through the current six-month period, we have consistently maintained our ratio of non-interest expenses to average total assets below 3.0%. Because of our growth, including recent expansion in Greensboro, Raleigh, and Mooresville, we have consistently seen increases in every major component of our non-interest expenses. For the six months ended June 30, 2006, our non-interest expense increased $2.0 million or 13.4% over the same period in 2005. Salaries and employee benefit expense increased $1.3 million or 16.0%. Occupancy and equipment expense increased $574 thousand or 21.1% reflecting the costs of new infrastructure and facilities. Other expenses increased $215 thousand or 4.6%, primarily in communications and technology costs. For the six months ended June 30, 2006, on an annualized basis, our ratio of non-interest expenses to average total assets increased slightly to 2.6% as compared with 2.5% for the same six months in 2005. During 2006, we anticipate some variability within our non-interest expense due to the move of our operations and certain other administrative departments into a new facility in the second and third quarters, and the opening of our new Mooresville branch in August 2006.

Provision for Income Taxes. Our provision for income taxes, as a percentage of income before income taxes, was 35.3% and 35.7% for the six months ended June 30, 2006 and 2005, respectively.

Liquidity and Capital Resources

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 interest rate-sensitive deposits, the Company’s primary demand for liquidity is anticipated fundings under credit commitments to customers.

Federal funds sold and investment securities aggregated $250.5 million at June 30, 2006, a decrease of $42.1 million from $292.6 million at December 31, 2005. At June 30, 2006, we were in the process of restructuring our investment portfolio to eliminate certain lower-yielding investments, improve net interest margin and net interest income levels,

- 25 -

and mitigate overall interest rate risk exposure. As part of the restructuring, the Company is selling $87.8 million of available-for-sale securities, or approximately 30% of the total investment portfolio, with a weighted average yield of 3.70%. The proceeds from the sales of securities are being utilized to reduce the Company’s short-term borrowings by approximately $15.0 million, to reinvest in securities expected to yield at least 5.75%, and to fund loan growth. As of June 30, 2006, the Company had sold securities with a book value of $62.9 million, and repurchased securities with a cost of $25 million in connection with the restructuring. As we complete the restructuring, we expect our investment portfolio levels will increase, but to levels that, as a percentage of assets, are below those of recent periods as we utilize these funds for loan growth. 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 $48.4 million. We also have the credit capacity to borrow up to $337.4 million, as of June 30, 2006, from the Federal Home Loan Bank of Atlanta (FHLB), with $152.8 million outstanding as of that date. At June 30, 2005, we had FHLB borrowings outstanding of $184.8 million. We also had repurchase agreements with total outstanding balances of $32.4 million at June 30, 2006. Of this balance, $12.4 million represented accommodations for our deposit customers and $20.0 million was with our correspondent banks. Securities sold under agreements to repurchase generally mature within ninety days from the transaction date and are collateralized by U.S. Government Agency obligations. We have repurchase lines of credit aggregating $130 million from various institutions. The repurchases must be adequately collateralized. At June 30, 2006, our outstanding commitments to extend credit consisted of loan commitments of $337.8 million and amounts available under home equity credit lines, other credit lines and letters of credit of $80.0 million, $12.4 million and $15.0 million, respectively. We believe that our combined aggregate liquidity position from all sources is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.

Throughout our nine-year history, our loan demand has exceeded our growth in core deposits. We have therefore relied heavily on certificates of deposits as a source of funds. While the majority of these funds are from our local market area, the bank has utilized brokered and out-of-market certificates of deposits to diversify and supplement our deposit base. During 2005, the bank began initiatives to increase demand and other non-interest bearing deposit accounts to improve our funding mix. As a result of those initiatives, non-maturity deposits at June 30, 2006 increased $73.3 million or 11.9%, compared to June 30, 2005, and have had a positive impact on our net interest margin. Certificates of deposits represented 55.7% of our total deposits at June 30, 2006, a decrease from 58.6% at June 30, 2005. Brokered and out-of-market deposits decreased by 1.2% at the end of the second quarter 2006. Time deposits of $100,000 or more totaled $340.5 million and $276.9 million at June 30, 2006 and June 30, 2005, respectively. Large certificates of deposits are generally considered rate sensitive. While we will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. At June 30, 2006, our Tier I capital to average quarterly asset ratio was 9.06% and all of our capital ratios exceeded the minimums established for a well-capitalized bank by regulatory measures. Our Tier I risk-based capital ratio at June 30, 2006 was 12.04%.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.

The Company’s market risk arises primarily from interest rate risk inherent in its lending, deposit-taking and borrowing activities. The structure of the Company’s loan and liability portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Company does not maintain a trading account nor is the Company subject to currency exchange risk or commodity price risk.

Our asset and liability committee is responsible for reviewing our liquidity requirements and managing our sensitivity to changes in interest rates. Interest rate risk arises because the interest-earning assets and interest-bearing liabilities of the bank have different maturities and characteristics. In order to measure this interest rate risk, we use a simulation process quarterly that measures the impact of changing interest rates on net interest income. The results of the most recent analysis indicated that the Company continues to be slightly asset sensitive, and that if interest rates increased or decreased by two percentage points, our net interest income over a one-year time frame could decrease by 0.6% or decrease by 6.1%, respectively.

- 26 -

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. At December 31, 2005, March 31, 2006, and June 30, 2006, Southern Community Financial Corporation’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the company’s disclosure controls and procedures. As a result of the restatement described in Note 1 to the financial statements, management has concluded that, as of December 31, 2005, March 31, 2006, and June 30, 2006, the Company did not maintain effective controls to ensure the appropriate classification of interest rate swaps and the related valuation of the hedged brokered certificates of deposit. Specifically, the Company failed to correctly document, measure and record hedge ineffectiveness on certain interest rate swaps or to correct that error subsequently. This control deficiency resulted in the restatement of the Company’s financial statements for the first quarter of 2006, and the years ended December 31, 2005, 2004 and 2003. Solely because of this material weakness, management has concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2005, March 31, 2006 and June 30, 2006. The Company is in the process of implementing and testing enhanced controls and procedures, including those described below, which the Company believes will position management to conclude that its disclosure controls and procedures are effective by the period ending September 30, 2006.

Changes in Internal Controls over Financial Reporting

The Company assesses the adequacy of its internal control over financial reporting quarterly and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. We have recently implemented several important changes in our internal control over financial reporting related to our accounting for derivatives. These actions include:

	•		Enhancing risk management policies and procedures related to reviewing derivative transactions;

	•		Reviewing policies and procedures related to the initiation and subsequent review of hedge strategies;

	•		Engaging a third-party consultant to provide ongoing expertise related to hedge documentation at inception and ongoing monitoring and to assist management in evaluating the appropriateness of the accounting for these transactions in accordance with Generally Accepted Accounting Principles;

	•		Changing policies and procedures to limit the Company’s use of the “short-cut” method.

- 27 -

Part II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 29, 2005, the Company announced a plan to repurchase up to 300,000 shares of its common stock. On September 23, 2005, the Company announced a plan to repurchase up to 600,000 additional shares of its common stock. Subsequent to the end of the second quarter, on July 26, 2006, the Company announced a plan to repurchase up to 1 million shares of its common stock. The table below sets forth information with respect to shares of common stock repurchased by the Company during the three months ended June 30, 2006. See Note 7 to the Consolidated Financial Statements for additional information regarding our share repurchase program.


					Total Number of
					Shares Purchased		Maximum Number of
	Total Number		Average		as Part of Publicly		Shares That May Yet
	of Shares		Price Paid		Announced		Be Purchased Under the
Period	Purchased		per Share		Programs		Programs
April 1, 2006 to April 30, 2006		14,000	$	9.30		14,000		354,800
May 1, 2006 to May 31, 2006		45,600	$	9.58		45,600		309,200
June 1, 2006 to June 30, 2006		16,300	$	9.69		16,300		292,900

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of the Shareholders was held on May 23, 2006. Of 17,673,077 shares entitled to vote at the meeting, 13,411,956 shares voted. The following matters were voted on at the meeting:


Proposal 1:		Election of directors. In the election of directors under Proposal 1, the five nominees receiving the highest number of votes were elected. Elections were as follows:


Nominee	For		Withheld		Abstain
F. Scott Bauer		13,126,602		—		285,354
Edward T. Brown		13,269,277		—		142,679
James G. Chrysson		13,202,939		—		209,017
W. Samuel Smoak		13,322,570		—		89,386
Durward A. Smith, Jr.		13,144,809		—		267,147

The following directors continue in office after the meeting: Don G. Angell, Zack W. Blackmon, Sr., James O. Frye, Matthew G. Gallins, Lynn L. Lane, H. Lee Merritt, Jr., Dr. William G. Ward, Sr.


Proposal 2:		Approval of the 2006 Nonstatutory Stock Option Plan.


For	Withheld		Abstain
7,201,210		2,302,188		303,819

Item 6. Exhibits


(a)	Exhibits.

	Exhibit 31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)

	Exhibit 31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)

	Exhibit 32	Section 1350 Certification

- 28 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	SOUTHERN COMMUNITY FINANCIAL CORPORATION

Date: August 9, 2006	By:	/s/ F. Scott Bauer

		F. Scott Bauer
		Chairman and Chief Executive Officer

Date: August 9, 2006	By:	/s/ David W Hinshaw

		David W. Hinshaw
		Executive Vice President and Chief Financial Officer

- 29 -

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Rule 13a-14(a)

I, F. Scott Bauer, certify that:

(1)

I have reviewed this quarterly report on Form 10-Q of Southern Community Financial Corporation, a North Carolina holding company (the “registrant”);

(2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Rule 13a-14(a)

I, David W. Hinshaw, certify that:

(1)

I have reviewed this quarterly report on Form 10-Q of Southern Community Financial Corporation, a North Carolina holding company (the “registrant”);

(2)

(3)

(4)

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Exhibit 32

Section 1350 Certification

The undersigned hereby certifies that, to his knowledge, (i) the Form 10-Q filed by Southern Community Financial Corporation (the “Issuer”) for the quarter ended June 30, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.



	SOUTHERN COMMUNITY FINANCIAL CORPORATION

Date: August 9, 2006	By:	/s/ F. Scott Bauer

		F. Scott Bauer
		Chairman and Chief Executive Officer

Date: August 9, 2006	By:	/s/ David W Hinshaw

		David W. Hinshaw
		Executive Vice President and Chief Financial Officer

Date: August 9, 2006

/s/ F. Scott Bauer

F. Scott Bauer

Chairman and Chief Executive Officer