**U.S.          Securities and Exchange Commission **

**Form          10-K**

*Commission          file number 000-33227 *

**Southern          Community Financial Corporation **

| North                    Carolina                           |   | 56-2270620                                              |
|-------------------------------------------------------------|--------|---------------------------------------------------------|
| (State                    or other jurisdiction of          |   | (I.R.S.                    Employer Identification No.) |
| incorporation                    or organization)           |   |                                                    |
|                                                        |   |                                                    |
| 4605                    Country Club Road                   |   |                                                    |
| Winston-Salem,                    North Carolina            |   | 27104                                                   |
| (Address                    of principal executive offices) |   | (Zip                    Code)                           |

| Title                    of each class                                                                      |   | Exchange                    on which registered |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|
| Common                    Stock, No Par Value                                                               |   | The                    NASDAQ Stock Market, LLC |
| 7.95%                    Cumulative Trust Preferred Securities                                              |   | The                    NASDAQ Stock Market, LLC |
| 7.95%                    Junior Subordinated Debentures                                                     |   | The                    NASDAQ Stock Market, LLC |
| Guarantee                    with respect to 7.95% Cumulative Trust Preferred                    Securities |   | The                    NASDAQ Stock Market, LLC |

| Document                                                                                                                                                                                                                                         | Where                    Incorporated |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|
| Proxy                    Statement for the Annual Meeting of Shareholders to be held May                    23, 2007                    to be                    mailed to shareholders within 120 days of December 31,                    2006. | Part                    III           |

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| Index                       |                        | PAGE                                                                                                                                                            |
|-----------------------------|-----------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        |                        |                                                                                                                                                            |   |
| PART                    I   |                        |                                                                                                                                                            |
|                        |                        |                                                                                                                                                            |   |
|                        | Item                    1.  | Business                                                                                                                                                        | 3 |
|                        | Item                    1A. | Risk                    Factors                                                                                                                                 | 12 |
|                        | Item                    1B. | Unresolved                    Staff Comments (None)                                                                                                             | 19 |
|                        | Item                    2.  | Properties                                                                                                                                                      | 20 |
|                        | Item                    3.  | Legal                                                                                                                                                           | 22 |
|                        | Item                    4.  | Submission                    of Matters to a Vote of Security Holders                                                                                          | 22 |
|                        |                        |                                                                                                                                                            |   |
| PART                    II  |                        |                                                                                                                                                            |
|                        |                        |                                                                                                                                                            |   |
|                        | Item                    5.  | Market                    for Common Stock and Related Stockholder Matters                    and Issuer Purchases of Equity                    Securities | 22 |
|                        | Item                    6   | Selected                    Financial Data                                                                                                                      | 24 |
|                        | Item                    7.  | Management’s                    Discussion and Analysis of Financial Condition and Results of                    Operations                               | 26 |
|                        | Item                    7A  | Quantitative                    and Qualitative Disclosures About Market Risk                                                                                   | 56 |
|                        | Item                    8.  | Financial                    Statements                                                                                                                         | 56 |
|                        | Item                    9.  | Changes                    in and Disagreements with Accountants on Accounting and Financial                    Disclosure                                      | 96 |
|                        | Item9A.                     | Controls                    and Procedures                                                                                                                      | 96 |
|                        | Item9B.                     | Other                    Information                                                                                                                            | 99 |
|                        |                        |                                                                                                                                                            |   |
| PART                    III |                        |                                                                                                                                                            |
|                        |                        |                                                                                                                                                            |   |
|                        | Item                    10. | Directors                    and Executive Officers of the Registrant                                                                                           | 99 |
|                        | Item                    11. | Executive                    Compensation                                                                                                                       | 99 |
|                        | Item                    12. | Security                    Ownership of Certain Beneficial Owners and Management and RelatedStockholder                    Matters                             | 99 |
|                        | Item                    13. | Certain                    Relationships and Related Transactions                                                                                               | 100 |
|                        | Item                    14. | Principal                    Accountant Fees and Services                                                                                                       | 100 |
|                        |                        |                                                                                                                                                            |   |
| PART                    IV  |                        |                                                                                                                                                            |
|                        |                        |                                                                                                                                                            |   |
|                        | Item                    15. | Exhibits,                    Financial Statement Schedules                                                                                                      | 101 |

----

**PART          I **

**Item          1. Business**

| In                    our ten years of existence we have accomplished the                    following: |
|---------------------------------------------------------------------------------------------------------|
|                                                                                                    |   |
| ·                                                                                                  | Advanced                      into third position in deposit market share in our home base                      of Forsyth                      County and fifth position in the Piedmont Triad; |
| ·                                                                                                  | Acquired                      The Community Bank, Pilot Mountain, North Carolina, in January                      2004,                      raising our assets to over $1.0 billion and increasing the                      number of                      banking offices; |
| ·                                                                                                  | Began                      payment of an annual cash dividend in 2004, which was increased                      and made a                      quarterly dividend in 2005; |
| ·                                                                                                  | Began                      in-house item processing for the Bank in October 2004; |
| ·                                                                                                  | Began                      offering trust services in 2002 including investment management,                      administration and advisory services primarily for individuals,                      partnerships and corporations; |
| ·                                                                                                  | Listed                      our common stock on the NASDAQ National Market System on January                      2, 2002,                      and beginning July 3, 2006, on the NASDAQ Global Select Market; |
| ·                                                                                                  | Maintained                      a strong credit culture. As of December 31, 2006, our non-performing                      assets totaled $3.5 million or 0.25% of total assets and our                      allowance for                      loan losses was $13.0 million or 1.26% of total loans and 495%                      of                      non-performing loans; and |
| ·                                                                                                  | Developed                      a full service financial institution operating in four of the                      fastest                      growing markets in North                      Carolina. |

**Our          Market Area **

----

**Business          Strategy**

|   | · | Small and medium sized businesses, and the                    owners and                    managers of these entities; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|
|   | · | Professional                      and middle managers of locally based                      companies; |
|--------|--------|--------------------------------------------------------------------------------------------------------|

|   | · | Residential                      real estate developers; and |
|--------|--------|--------------------------------------------------------------|

|   | · | Individual                      consumers. |
|--------|--------|--------------------------------------------|

----

|   | ·      | To                      provide community-oriented banking services by delivering a                      broad range of                      financial services to our customers through responsive service                      and                      communication; |
|--------|--------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·      | To                      form a partnership with our customers whereby our decision                      making and                      product offerings are geared toward their best long-term                      interests; |
|--------|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·      | To                      be recognized in our community as a long-term player with employees,                      stockholders and board members committed to that effort;                      and |
|--------|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·      | To                      be progressive in our adoption of new technology so that we                      can provide                      our customers access to products and services that meet their                      needs for                      convenience and efficiency. |
|--------|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Subsidiaries**

----

**Competition          **

**Employees          **

**SUPERVISION          AND REGULATION**

**Southern          Community Financial Corporation **

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*Enforcement          Authority*

*Interstate          Acquisitions*

*Capital          Adequacy*

----

*Source          of Strength for Subsidiaries.*

*Dividends*

*Change          of Control. *

----

**The          Bank **

*Transactions          with Affiliates*

*Loans          to Insiders*

*Regulation          of Lending Activities*

*Branch          Banking*

----

*Reserve          Requirements.*
** **

*Community          Reinvestment. *

*Governmental          Monetary Policies*

*Dividends*

----

*Capital          Adequacy*

*Changes          in Management*

*Enforcement          Authority*

*Prompt          Corrective Action*

----

*Deposit          Insurance.*

**Item          1A. Risk Factors**

*An          investment in our common stock involves risks. Shareholders should carefully          consider the risks described below in conjunction with the other information          in          this Form 10-K and information incorporated by reference in this Form 10-K,          including our consolidated financial statements and related notes. If any          of the          following risks or other risks which have not been identified or which          we may          believe are immaterial or unlikely, actually occur, our business, financial          condition and results of operations could be harmed. This could cause the          price          of our stock to decline, and shareholders could lose part or all of their          investment. This Form 10-K contains forward-looking statements that involve          risks and uncertainties, including statements about our future plans,          objectives, intentions and expectations. Many factors, including those          described          below, could cause actual results to differ materially from those discussed          in          our forward-looking statements. *

**Risks          Related to Holding Southern Community Common Stock**

***Our          business strategy includes the continuation of significant growth plans,          and our          financial condition and results of operations could be negatively affected          if we          fail to grow or fail to manage our growth effectively.***

----

***We          may face risks with respect to future expansion.***

|   | · | the                      time and costs associated with identifying and evaluating potential                      acquisitions and merger partners; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                      accuracy of estimates and judgments used to evaluate credit,                      operations,                      management and market risks with respect to the target                      entity; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                      time and costs of evaluating new markets, hiring experienced                      local                      management and opening new offices, and the time lags between                      these                      activities and the generation of sufficient assets and deposits                      to support                      the costs of the expansion; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | our                      ability to finance an acquisition and possible ownership and                      economic                      dilution to our current                      shareholders; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                      diversion of our management’s attention to the negotiation of a                      transaction, and the integration of the operations and personnel                      of the                      combining businesses; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | entry                      into new markets where we lack experience; |
|--------|--------|-----------------------------------------------------------------------|

|   | · | the                      introduction of new products and services into our                      business; |
|--------|--------|------------------------------------------------------------------------------------------------------------|

|   | · | the                      incurrence and possible impairment of goodwill associated with                      an                      acquisition and possible adverse short-term effects on our                      results of                      operations; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                      risk of loss of key employees and                      customers. |
|--------|--------|--------------------------------------------------------------------------------------------|

***If          the value of real estate in our core market areas were to decline materially,          a          significant portion of our loan portfolio could become under-collateralized,          which could have a material adverse effect on us.***

----

***Interest          rate volatility could significantly harm our          business.***

***Southern          Community may have higher loan losses than it has allowed for.***

*** ***
*** ***

***The          building of market share through our de novo branching strategy could cause          our          expenses to increase faster than our revenues.***

***If          Southern Community***
***loses          key employees with significant business contacts in its market area, its          business may suffer.***

*** ***

***Government          regulations may prevent or impair our ability to pay dividends, engage          in          acquisitions, or operate in other ways.***

----

|   | · | the                      payment of dividends to shareholders; |
|--------|--------|----------------------------------------------------------------|

|   | · | possible                      transactions with or acquisitions by other institutions; |
|--------|--------|----------------------------------------------------------------------------------------|

|   | · | desired                      investments; |
|--------|--------|-------------------------------------------|

|   | · | loans                      and interest rates; |
|--------|--------|------------------------------------------------|

|   | · | interest                      rates paid on deposits; and |
|--------|--------|-----------------------------------------------------------|

|   | · | the                      possible expansion of branch                      offices. |
|--------|--------|-------------------------------------------------------------------------------------|

***Our          trading volume has been low compared with larger bank holding companies          and the          sale of substantial amounts of our common stock in the public market could          depress the price of our common stock.***

***Southern          Community faces strong competition in its market area, which may limit          its asset          growth and profitability.***

***Southern          Community’s Articles of Incorporation include anti-takeover provisions that may          prevent shareholders from receiving a premium for their shares or effecting          a          transaction favored by a majority of shareholders.***

----

***Holders          of our trust preferred securities***
***have          rights that are senior to those of our common          shareholders.***

***The          common stock of Southern Community Financial Corporation is not FDIC          insured.***

**Risks          Related to an Investment in the Preferred Securities**

***If          we do not make interest payments under the debentures, the trust will be unable          to pay distributions and liquidation amounts. The guarantee would not apply          because the guarantee covers payments only if the trust has funds available.***

***We          must rely on dividends from our bank subsidiary to make interest payments          on the          debentures to the trust.***

***Regulatory          authorities may limit dividends paid to us and thereby our          ability***
***to          make interest payments on the debentures to the          trust.***

----

***Our          obligation to make interest payments to the trust on the debentures is          subordinated to existing liabilities or additional debt we may incur.***

***We          have the option to defer interest payments on the debentures for substantial          periods.***

***If          we defer interest payments, holders of the preferred          securities***
***will          still be required to recognize the deferred interest amounts as          income.***

***If          holders of the preferred securities***
***sell          their preferred securities during a deferral period, they will forfeit          the          deferred interest amount and only have a capital          loss.***

----

***Deferrals          of interest payments may increase the volatility of the market price of          the          preferred securities.***

***There          are no financial covenants in the indenture and the trust agreement.***

***We          may redeem some or all of the debentures at any time after December 31,          2008 and          reduce the period during which holders of the preferred          securities***
***will          receive distributions.***

***We          may redeem all of the debentures at any time upon the occurrence of certain          events.***

***We          can distribute the debentures to holders of the preferred securities, which          may          have adverse tax consequences for holders of the preferred          securities***
***and          could also adversely affect the market price of the preferred securities.***

***Holders          of the preferred securities***
***must          rely on the property trustee to enforce their rights if there is an event          of          default under the indenture.***

----

***Holders          of preferred securities have limited voting rights to replace the property          trustee and the Delaware trustee.***

***The          subordinated debentures and the preferred securities do not represent deposit          accounts and are not insured.***

**Item          1B. Unresolved Staff Comments**

----

**Item          2. Properties **

|                                      |                                                    |   | Approximate |   | Year                             |   | Owned  |
|-------------------------------------------|---------------------------------------------------------|--------|-------------|--------|----------------------------------|--------|--------|
|                                      |                                                    |   | Square      |   | Established                      |   | or     |
|                                      |                                                    |   | Footage     |   | or                      Acquired |   | Leased |
| **Banking                      Offices:** |                                                    |   |        |   |                             |   |
|                                      | **Clemmons,                      North Carolina**       |   |        |   |                             |   |   |
|                                      | 6290                      Towncenter Drive              |   | 3,800       |   | 2004                             |   | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **Dobson,                      North Carolina**         |   |        |   |                             | 1      |   |
|                                      | 201                      West Kapp Street               |   | 2,800       |   | 1995                             | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **Greensboro,                      North Carolina**     |   |        |   |                             |   |   |
|                                      | 1505                      Highwoods Blvd.               |   | 9,800       |   | 2005                             |   | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **High                      Point, North Carolina**     |   |        |   |                             |   |   |
|                                      | 2541                      Eastchester Drive             |   | 3,000       |   | 2003                             |   | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **Jonesville,                      North Carolina**     |   |        |   |                             | 1      |   |
|                                      | 503                      Winston Road                   |   | 2,500       |   | 1995                             | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **Kernersville,                      North Carolina**   |   |        |   |                             |   |   |
|                                      | 1207                      South Main Street             |   | 8,300       |   | 2002                             |   | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **King,                      North Carolina**           |   |        |   |                             | 1      |   |
|                                      | 105                      Post Office Street             |   | 4,000       |   | 2004                             | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **Madison,                      North Carolina**        |   |        |   |                             |   |   |
|                                      | 619                      Ayersville Road                |   | 2,000       |   | 1990                             | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **Mooresville,                      NC**                |   |        |   |                             |   |   |
|                                      | 210                      Knob Hill Road                 |   | 8,800       |   | 2006                             |   | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **Mount                      Airy, North Carolina**     |   |        |   |                             |   |   |
|                                      | 255                      East Independence Blvd.        |   | 10,345      |   | 1999                             | 1      | Owned  |
|                                      | 2010                      Community Drive               |   | 3,500       |   | 1988                             | 1      | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **Pilot                      Mountain, North Carolina** |   |        |   |                             |   |
|                                      | 616                      South Key Street               |   | 8,300       |   | 1987                             | 1      | Owned  |
|                                      |                                                    |   |        |   |                             |   |   |
|                                      | **Raleigh,                      North Carolina**        |   |        |   |                             |   |   |
|                                      | 2626                      Glenwood Avenue               |   | 1,501       |   | 2006                             |   | Leased |

----

|                                                                |                                                    |   |        |   |                             |   |                          |
|---------------------------------------------------------------------|---------------------------------------------------------|--------|-------------|--------|----------------------------------|--------|-------------------------------|
|                                                                |                                                    |   | Approximate |   | Year                             |   |                          |
|                                                                |                                                    |   | Square      |   | Established                      |   | Owned                      or |
|                                                                |                                                    |   | Footage     |   | or                      Acquired |   | Leased                        |
| **Banking                      Offices****:**                       |                                                    |   |        |   |                             |   |
|                                                                | **Sandy                      Ridge, North Carolina**    |   |        |   |                             |   |                          |
|                                                                | 4928                      Highway 704 West              |   | 1,250       |   | 1989                             | 1      | Owned                         |
|                                                                |                                                    |   |        |   |                             |   |                          |
|                                                                | **Union                      Grove, North Carolina**    |   |        |   |                             |   |                          |
|                                                                | 1439                      W. Memorial Highway           |   | 2,300       |   | 1990                             | 1      | Owned                         |
|                                                                |                                                    |   |        |   |                             |   |                          |
|                                                                | **Walnut                      Cove, North Carolina**    |   |        |   |                             |   |                          |
|                                                                | 1072                      North Main Street             |   | 1,700       |   | 1999                             | 1      | Leased                        |
|                                                                |                                                    |   |        |   |                             |   |                          |
|                                                                | **Winston                      Salem, North Carolina**  |   |        |   |                             |   |
|                                                                | 4701                      Country Club Road             |   | 4,300       |   | 1996                             |   | Leased                        |
|                                                                | 225                      Hanes Mill Road                |   | 2,800       |   | 2001                             |   | Owned                         |
|                                                                | 3151                      Peters Creek Parkway          |   | 2,500       |   | 1998                             |   | Leased                        |
|                                                                | 536                      South Stratford Road           |   | 2,400       |   | 1998                             |   | Leased                        |
|                                                                |                                                    |   |        |   |                             |   |                          |
|                                                                | **Yadkinville,                      North Carolina**    |   |        |   |                             |   |                          |
|                                                                | 532                      East Main Street               |   | 7,800       |   | 1998                             |   | Owned                         |
|                                                                |                                                    |   |        |   |                             |   |                          |
| **Operations                      and Administrative Offices****:** |                                                    |   |        |   |                             |   |
|                                                                | **Winston                      Salem, North Carolina**  |   |        |   |                             |   |
|                                                                | 465                      Shepherd Street                |   | 47,114      |   | 2006                             |   | Owned                         |
|                                                                | 100                      Cambridge Plaza                |   | 7,028       |   | 2006                             |   | Owned                         |
|                                                                | 104                      Cambridge Plaza                |   | 7,028       |   | 2006                             |   | Owned                         |
|                                                                | 108                      Cambridge Plaza                |   | 7,028       |   | 2006                             |   | Owned                         |
|                                                                | 112                      Cambridge Plaza                |   | 7,988       |   | 2006                             |   | Owned                         |
|                                                                | 4605                      Country Club Road - Corporate | 27,000 |        | 2003   |                             | Owned  |
|                                                                |                                                    |   |        |   |                             |   |                          |
| **Lending                      Offices:**                           |                                                    |   |        |   |                             |   |
|                                                                | **Winston                      Salem, North Carolina**  |   |        |   |                             |   |
|                                                                | 4625                      Country Club Road             |   | 3,200       |   | 1998                             |   | Owned                         |
|                                                                |                                                    |   |        |   |                             |   |                          |
|                                                                | **Asheville,                      North Carolina**      |   |        |   |                             |   |                          |
|                                                                | 80                      Peachtree Road                  |   | 3,191       |   | 2006                             |   | Leased                        |
|                                                                |                                                    |   |        |   |                             |   |                          |
|                                                                | **Mooresville,                      North Carolina**    |   |        |   |                             |   |                          |
|                                                                | 249                      Williamson Road, Ste. 100      |   | 1,700       |   | 2004                             |   | Leased                        |
|                                                                |                                                    |   |        |   |                             |   |                          |
| **Investment                      Office****:**                     |                                                    |   |        |   |                             |   |
|                                                                | **Winston                      Salem, North Carolina**  |   |        |   |                             |   |
|                                                                | 4505                      Country Club Road             |   | 4,200       |   | 2004                             |   | Leased                        |

----

**.**

**Item          3. Legal**

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

**PART          II**

**Item          5. Market for Common Stock and Related Stockholder Matters and Issuer Purchases          of Equity Securities**

**Price          Range of Common Stock and Dividends**

|     |   |                                    |                                    | **Price** |   | **Declared                    Cash Dividend per share *** |   |
|----------|--------|-----------------------------------------|-----------------------------------------|-----------|--------|-----------------------------------------------------------|--------|
|     |   |                                    |                                    | **SCMF**  |   | **SCMFO**                                                 |   |   |   |
| **Year** |   | **Quarterly                    Period** |                                    | **High**  |   | **Low**                                                   |   | **High** |   | **Low** |   |   |   |
|     |   |                                    |                                    |      |   |                                                      |   |   |   |   |   |   |   |
| 2005     |   |                                    | First                    Quarter        |      | $      | 10.75                                                     |   | $ | 9.04 |   | $ | 11.20 |   | $ | 10.35 |   | $ | 0.12 |   |
|          |   |                                    | Second                    Quarter  |      |   | 10.25                                                     |   |   | 7.97 |   |   | 11.00 |   |   | 10.30 |   |   | 0.03 |   |
|     |   |                                    | Third                    Quarter   |      |   | 9.95                                                      |   |   | 9.17 |   |   | 11.25 |   |   | 10.37 |   |   | 0.03 |   |
|     |   |                                    | Fourth                    Quarter  |      |   | 9.86                                                      |   |   | 8.61 |   |   | 10.85 |   |   | 10.35 |   |   | 0.03 |   |
|     |   |                                    |                                    |      |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2006     |   |                                    | First                    Quarter        |      | $      | 10.37                                                     |   | $ | 8.76 |   | $ | 10.95 |   | $ | 10.31 |   | $ | 0.030 |   |
|     |   |                                    | Second                    Quarter  |      |   | 9.79                                                      |   |   | 9.15 |   |   | 10.55 |   |   | 10.15 |   |   | 0.035 |   |
|     |   |                                    | Third                    Quarter   |      |   | 9.94                                                      |   |   | 9.25 |   |   | 10.95 |   |   | 10.20 |   |   | 0.035 |   |
|     |   |                                    | Fourth                    Quarter  |      |   | 11.09                                                     |   |   | 9.63 |   |   | 10.90 |   |   | 10.17 |   |   | 0.035 |   |

----

**Share          Repurchases**

| Period                                                   |   | Total                    Number of Shares Purchased |   | Average                    Price Paid per Share |   | Total                    Number of Shares Purchased as Part of Publicly Announced                    Programs |   | Maximum                    Number of Shares That May Yet Be Purchased Under the                    Programs |   |
|----------------------------------------------------------|--------|-----------------------------------------------------|--------|-------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|
|                                                     |   |                                                |   |                                            |   |                                                                                                          |   |                                                                                                        |   |
| October                    1, 2006 to October 31, 2006   |   |                                                | 37,700 |                                            | $      | 9.91                                                                                                          |   |                                                                                                        | 37,700 |   |   | 1,121,200 |   |
| November                    1, 2006 to November 30, 2006 |   |                                                | 40,800 |                                            | $      | 10.12                                                                                                         |   |                                                                                                        | 40,800 |   |   | 1,080,400 |   |
| December                    1, 2006 to December 31, 2006 |   |                                                | 18,326 |                                            | $      | 10.24                                                                                                         |   |                                                                                                        | 18,326 |   |   | 1,062,074 |   |

----

**Item          6. Selected Financial Data**

**SELECTED          CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA**

|                                                    |   |                                                             |       |   |   |       |   |   |       |   |   |
|---------------------------------------------------------|--------|------------------------------------------------------------------|------------|--------|--------|------------|--------|--------|------------|--------|--------|
|                                                    |   | For                    the Years Ended December 31,              |       |
|                                                    |   | 2006                                                             |       | 2005   |   | 2004       |   | 2003   |       | 2002   |   |
|                                                    |   | (Dollars                    in thousands, except per share data) |       |
| **Operating                    Data:**                  |   |                                                             |       |   |   |       |   |   |       |   |   |
| Interest                    income                      |   | $                                                                | 85,520     |   | $      | 68,097     |   | $      | 54,656     |   | $      | 36,019 |   | $ | 33,281 |   |
| Interest                    expense                     |   |                                                             | 44,798     |   |   | 31,128     |   |   | 20,175     |   |   | 14,937 |   |   | 15,803 |   |
| Net                    interest income                  |   |                                                             | 40,722     |   |   | 36,969     |   |   | 34,481     |   |   | 21,082 |   |   | 17,478 |   |
| Provision                    for loan losses            |   |                                                             | 2,510      |   |   | 950        |   |   | 2,239      |   |   | 2,285 |   |   | 1,655 |   |
| Net                    interest income after            |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
|  provision                    for loan losses      |   |                                                             | 38,212     |   |   | 36,019     |   |   | 32,242     |   |   | 18,797 |   |   | 15,823 |   |
| Non-interest                    income                  |   |                                                             | 3,678      |   |   | 7,134      |   |   | 7,949      |   |   | 5,033 |   |   | 3,927 |   |
| Non-interest                    expense                 |   |                                                             | 35,802     |   |   | 31,319     |   |   | 27,520     |   |   | 18,333 |   |   | 14,781 |   |
| Income                    before                        |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
|  income                    taxes                   |   |                                                             | 6,088      |   |   | 11,834     |   |   | 12,671     |   |   | 5,497 |   |   | 4,969 |   |
| Provision                    for income taxes           |   |                                                             | 1,890      |   |   | 4,161      |   |   | 4,556      |   |   | 1,919 |   |   | 1,755 |   |
| Net                    income                           |   | $                                                                | 4,198      |   | $      | 7,673      |   | $      | 8,115      |   | $      | 3,578 |   | $ | 3,214 |   |
| Securities                    gains(losses) included in |   |                                                             |       |   |   |       |   |   |       |   |   |   |
| non-interest                    income                  |   | $                                                                | (4,156     | )      | $      | (266       | )      | $      | -          |   | $      | - |   | $ | 70 |   |
|                                                    |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
| **Per                    Share Data:**(8)               |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
| Net                    Income                           |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
| Basic                                                   |   | $                                                                | 0.24       |   | $      | 0.43       |   | $      | 0.47       |   | $      | 0.41 |   | $ | 0.37 |   |
| Diluted                                                 |   |                                                             | 0.24       |   |   | 0.42       |   |   | 0.45       |   |   | 0.39 |   |   | 0.35 |   |
| Cash                    dividends (2)                   |   |                                                             | 0.135      |   |   | 0.210      |   |   | 0.110      |   |   | - |   |   | - |   |
| Book                    value                           |   |                                                             | 7.83       |   |   | 7.66       |   |   | 7.68       |   |   | 5.65 |   |   | 5.41 |   |
| Weighted                    average shares              |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
| Basic                                                   |   |                                                             | 17,566,315 |   |   | 17,825,152 |   |   | 17,298,285 |   |   | 8,826,780 |   |   | 8,788,295 |   |
| Diluted                                                 |   |                                                             | 17,757,436 |   |   | 18,133,859 |   |   | 18,033,333 |   |   | 11,369,429 |   |   | 9,085,853 |   |
|                                                    |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
| **Balance                    Sheet Data:**              |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
| Total                    assets                         |   |                                                             | 1,436,465  |   |   | 1,287,613  |   |   | 1,222,946  |   |   | 798,948 |   |   | 612,239 |   |
| Loans                                                   |   |                                                             | 1,033,411  |   |   | 868,827    |   |   | 796,103    |   |   | 519,746 |   |   | 421,938 |   |
| Allowance                    for loan losses            |   |                                                             | 13,040     |   |   | 11,785     |   |   | 12,537     |   |   | 7,275 |   |   | 6,342 |   |
| Deposits                                                |   |                                                             | 1,024,582  |   |   | 941,949    |   |   | 845,501    |   |   | 575,439 |   |   | 449,216 |   |
| Short-term                    borrowings                |   |                                                             | 92,748     |   |   | 9,186      |   |   | 69,647     |   |   | 51,900 |   |   | 40,706 |   |
| Long-term                    debt                       |   |                                                             | 172,549    |   |   | 192,551    |   |   | 163,494    |   |   | 117,627 |   |   | 72,250 |   |
| Stockholders’                    equity           |   |                                                             | 136,225    |   |   | 134,885    |   |   | 136,834    |   |   | 50,806 |   |   | 47,539 |   |
|                                                    |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
| **Capital                    Ratios:**(6)               |   |                                                             |       |   |   |       |   |   |       |   |   |   |   |   |   |   |
| Total                    risk-based capital             |   |                                                             | 10.87      | %      |   | 11.88      | %      |   | 11.68      | %      |   | 10.65 | % |   | 12.23 | % |
| Tier                    1 risk-based capital            |   |                                                             | 9.76       | %      |   | 10.71      | %      |   | 10.43      | %      |   | 9.45 | % |   | 10.98 | % |
| Leverage                    ratio                       |   |                                                             | 8.36       | %      |   | 8.65       | %      |   | 8.54       | %      |   | 7.49 | % |   | 8.95 | % |
| Equity                    to assets ratio               |   |                                                             | 9.48       | %      |   | 10.48      | %      |   | 11.20      | %      |   | 6.37 | % |   | 7.76 | % |

----

|                                                |   | For                    the Years Ended December 31,              |   |
|-----------------------------------------------------|--------|------------------------------------------------------------------|--------|
|                                                |   | 2006                                                             |   | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
|                                                |   | (Dollars                    in thousands, except per share data) |   |
| **Selected                    Performance Ratios:** |   |                                                             |   |   |   |   |   |   |   |
| Return                    on average assets         |   |                                                             | 0.31   | % |   | 0.60 | % |   | 0.69 | % |   | 0.51 | % |   | 0.58 | % |
| Return                    on average equity         |   |                                                             | 3.11   | % |   | 5.67 | % |   | 6.21 | % |   | 7.31 | % |   | 7.24 | % |
| Net                    interest spread (3)          |   |                                                             | 2.92   | % |   | 2.86 | % |   | 3.03 | % |   | 3.00 | % |   | 3.02 | % |
| Net                    interest margin (1)          |   |                                                             | 3.30   | % |   | 3.20 | % |   | 3.26 | % |   | 3.22 | % |   | 3.34 | % |
| Non-interest                    income as a         |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| percentage                    of total              |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| revenue                    (7)                      |   |                                                             | 8.28   | % |   | 16.18 | % |   | 18.73 | % |   | 19.27 | % |   | 18.35 | % |
| Non-interest                    income as a         |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| percentage                    of average            |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| assets                                              |   |                                                             | 0.27   | % |   | 0.56 | % |   | 0.68 | % |   | 0.72 | % |   | 0.71 | % |
| Non-interest                    expense to          |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| average                    assets                   |   |                                                             | 2.62   | % |   | 2.44 | % |   | 2.36 | % |   | 2.63 | % |   | 2.66 | % |
| Efficiency                    ratio (4)             |   |                                                             | 80.64  | % |   | 71.01 | % |   | 64.86 | % |   | 70.20 | % |   | 69.05 | % |
| Dividend                    payout ratio (2)        |   |                                                             | 56.26  | % |   | 48.84 | % |   | 23.40 | % |   | 0.00 | % |   | 0.00 | % |
|                                                |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Asset                    Quality Ratios:**        |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming                    loans to           |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| period-end                    loans                 |   |                                                             | 0.26   | % |   | 0.16 | % |   | 0.27 | % |   | 0.15 | % |   | 0.43 | % |
| Allowance                    for loan losses        |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                    period-end loans              |   |                                                             | 1.26   | % |   | 1.36 | % |   | 1.57 | % |   | 1.40 | % |   | 1.50 | % |
| Allowance                    for loan losses        |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                    nonperforming loans           |   |                                                             | 495    | % |   | 837 | % |   | 577 | % |   | 946 | % |   | 348 | % |
| Nonperforming                    assets             |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                    total assets (5)              |   |                                                             | 0.25   | % |   | 0.13 | % |   | 0.27 | % |   | 0.13 | % |   | 0.36 | % |
| Net                    loan charge-offs             |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                    average loans outstanding     |   |                                                             | 0.13   | % |   | 0.14 | % |   | 0.19 | % |   | 0.29 | % |   | 0.18 | % |
|                                                |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other                    Data:**                  |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number                    of banking offices        |   |                                                             | 21     |   |   | 19 |   |   | 18 |   |   | 8 |   |   | 8 |   |
| Number                    of full-time              |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| equivalent                    employees             |   |                                                             | 326    |   |   | 299 |   |   | 271 |   |   | 157 |   |   | 141 |   |

| (1) | Net                    interest margin is net interest income divided by average interest-earning                    assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Cash                    dividends and the dividend payout ratios for 2006 reflect a quarterly                    dividend paid March 15, 2006 of $0.03 per share, and quarterly                    dividends                    of $0.035 per share paid on June 1, September 1, and December                    1,                    2006.  2005 represents an annual dividend of $0.12 per share paid on                    March 15, 2005, and quarterly dividends of $0.03 per share paid                    on June 1,                    September 1, and December 1, 2005.  2004 represents an annual                    dividend paid on March 15, 2004. |
| (3) | Net                    interest spread is the difference between the average yield on                    interest-earning assets and the average cost of interest-bearing                    liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (4) | Efficiency                    ratio is non-interest expense divided by the sum of net interest                    income                    and non-interest income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (5) | Nonperforming                    assets consist of non-accrual loans, restructured loans, and                    real estate                    owned, where applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6) | Capital                    ratios are for the Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (7) | Total                    revenue consists of net interest income and non-interest                    income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (8) | All                    per share data has been restated to reflect the dilutive effect                    of 5%                    stock dividends in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

----

**Item          7. Management’s Discussion and Analysis of Financial Condition and Results of          Operations**

**CRITICAL          ACCOUNTING POLICY**

**OVERVIEW**

----

**Financial          Condition at December 31, 2006 and 2005**

** **

----

**NET          INTEREST INCOME**

*Average          Balances and Average Rates Earned and Paid.*

----

|                                                  |   | For                    the Years Ended December 31, |      |
|-------------------------------------------------------|--------|-----------------------------------------------------|-----------|
|                                                  |   | 2006                                                |      | 2005 |   | 2004 |   |
|                                                  |   | Average                    balance                  |      | Interest                    earned/paid |   | Average                    yield/cost |   | Average                    balance |   | Interest                    earned/paid |   | Average                    yield/cost |   | Average                    balance |   | Interest                    earned/paid |   | Average                    yield/cost |   |
|                                                  |   | (Dollars                    in thousands)           |      |
| Interest-earning                    assets:           |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                    Loans                          |   | $                                                   | 958,001   |   | $ | 73,492 |   |   | 7.67 | % | $ | 837,467 |   | $ | 55,848 |   |   | 6.67 | % | $ | 742,433 |   | $ | 42,843 |   |   | 5.77 | % |
| Investment                    securities              |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| available                    for sale                 |   |                                                | 185,713   |   |   | 8,529 |   |   | 4.59 | % |   | 228,601 |   |   | 8,680 |   |   | 3.80 | % |   | 239,306 |   |   | 8,957 |   |   | 3.74 | % |
| Investment                    securities              |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| held                    to maturity                   |   |                                                | 86,328    |   |   | 3,390 |   |   | 3.93 | % |   | 87,037 |   |   | 3,429 |   |   | 3.94 | % |   | 71,336 |   |   | 2,803 |   |   | 3.93 | % |
| Federal                    funds sold                 |   |                                                | 2,263     |   |   | 109 |   |   | 4.82 | % |   | 3,313 |   |   | 140 |   |   | 4.23 | % |   | 3,816 |   |   | 53 |   |   | 1.39 | % |
|                                                  |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    interest-earning assets      |   |                                                | 1,232,305 |   |   | 85,520 |   |   | 6.94 | % |   | 1,156,418 |   |   | 68,097 |   |   | 5.89 | % |   | 1,056,891 |   |   | 54,656 |   |   | 5.17 | % |
| Other                    assets                       |   |                                                | 135,918   |   |   |   |   |   |   |   |   | 124,865 |   |   |   |   |   |   |   |   | 111,361 |   |   |   |   |   |   |   |
| Total                    assets                       |   | $                                                   | 1,368,223 |   |   |   |   |   |   |   | $ | 1,281,283 |   |   |   |   |   |   |   | $ | 1,168,252 |   |   |   |   |   |   |   |
|                                                  |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                    liabilities:      |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                             |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW                    and money market               |   | $                                                   | 348,486   |   |   | 10,552 |   |   | 3.03 | % | $ | 262,058 |   |   | 4,786 |   |   | 1.83 | % | $ | 241,363 |   |   | 2,027 |   |   | .84 | % |
| Time                    deposits greater              |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| than                    $100,000                      |   |                                                | 326,864   |   |   | 14,303 |   |   | 4.38 | % |   | 285,369 |   |   | 9,983 |   |   | 3.50 | % |   | 257,034 |   |   | 7,127 |   |   | 2.77 | % |
| Other                    time deposits                |   |                                                | 208,733   |   |   | 8,564 |   |   | 4.10 | % |   | 221,871 |   |   | 6,526 |   |   | 2.94 | % |   | 229,733 |   |   | 4,590 |   |   | 2.00 | % |
| Borrowings                                            |   |                                                | 231,664   |   |   | 11,379 |   |   | 4.91 | % |   | 259,791 |   |   | 9,833 |   |   | 3.78 | % |   | 213,822 |   |   | 6,431 |   |   | 3.01 | % |
| Total                    interest-bearing             |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                           |   |                                                | 1,115,747 |   |   | 44,798 |   |   | 4.02 | % |   | 1,029,089 |   |   | 31,128 |   |   | 3.02 | % |   | 941,952 |   |   | 20,175 |   |   | 2.14 | % |
|                                                  |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                    deposits                    |   |                                                | 105,755   |   |   |   |   |   |   |   |   | 105,024 |   |   |   |   |   |   |   |   | 85,583 |   |   |   |   |   |   |   |
| Other                    liabilities                  |   |                                                | 11,835    |   |   |   |   |   |   |   |   | 11,828 |   |   |   |   |   |   |   |   | 10,097 |   |   |   |   |   |   |   |
| Stockholders'                    equity               |   |                                                | 134,886   |   |   |   |   |   |   |   |   | 135,342 |   |   |   |   |   |   |   |   | 130,620 |   |   |   |   |   |   |   |
|                                                  |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    liabilities and              |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| stockholders'                    equity               |   | $                                                   | 1,368,223 |   |   |   |   |   |   |   | $ | 1,281,283 |   |   |   |   |   |   |   | $ | 1,168,252 |   |   |   |   |   |   |   |
|                                                  |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    interest income and            |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| net                    interest spread                |   |                                                |      |   | $ | 40,722 |   |   | 2.92 | % |   |   |   | $ | 36,969 |   |   | 2.87 | % |   |   |   | $ | 34,481 |   |   | 3.03 | % |
|                                                  |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    interest margin                |   |                                                |      |   |   |   |   |   | 3.30 | % |   |   |   |   |   |   |   | 3.20 | % |   |   |   |   |   |   |   | 3.26 | % |
|                                                  |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio                    of average interest-earning  |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| assets                    to average interest-bearing |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                           |   |                                                |      |   |   | 110.45 | % |   |   |   |   |   |   |   | 112.37 | % |   |   |   |   |   |   |   | 112.20 | % |   |   |   |

----

**RATE/VOLUME          ANALYSIS**

|                                               |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |
|----------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                               |   | December                    31, 2006 vs. 2005 |   | December                    31, 2005 vs. 2004 |   |
|                                               |   | Increase                    (Decrease) Due to |   | Increase                    (Decrease) Due to |   |
|                                               |   | Volume                                        |   | Rate                                          |   | Total  |   | Volume |   | Rate   |   | Total  |   |
|                                               |   | (Amounts                    in thousands)     |   |
| Interest                    income:                |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |
| Loans                                              |   | $                                             | 8,642  |                                          | $      | 9,002  |   | $      | 17,644 |   | $      | 5,911  |   | $ | 7,094 |   | $ | 13,005 |   |
| Investment                    securities available |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| for                    sale                        |   |                                          | (1,799 | )                                             |   | 1,648  |   |   | (151   | )      |   | (404   | )      |   | 127 |   |   | (277 | ) |
| Investment                    securities held      |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                    maturity                     |   |                                          | (28    | )                                             |   | (11    | )      |   | (39    | )      |   | 618    |   |   | 8 |   |   | 626 |   |
| Federal                    funds sold              |   |                                          | (47    | )                                             |   | 16     |   |   | (31    | )      |   | (14    | )      |   | 101 |   |   | 87 |   |
|                                               |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    interest income           |   |                                          | 6,768  |                                          |   | 10,655 |   |   | 17,423 |   |   | 6,111  |   |   | 7,330 |   |   | 13,441 |   |
|                                               |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                    expense:               |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                          |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW                    and money market            |   |                                          | 2,098  |                                          |   | 3,668  |   |   | 5,766  |   |   | 276    |   |   | 2,483 |   |   | 2,759 |   |
| Time                    deposits greater           |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| than                    $100,000                   |   |                                          | 1,634  |                                          |   | 2,686  |   |   | 4,320  |   |   | 888    |   |   | 1,968 |   |   | 2,856 |   |
| Other                    time deposits             |   |                                          | (463   | )                                             |   | 2,501  |   |   | 2,038  |   |   | (194   | )      |   | 2,130 |   |   | 1,936 |   |
| Borrowings                                         |   |                                          | (1,223 | )                                             |   | 2,769  |   |   | 1,546  |   |   | 1,561  |   |   | 1,841 |   |   | 3,402 |   |
|                                               |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    interest expense          |   |                                          | 2,046  |                                          |   | 11,624 |   |   | 13,670 |   |   | 2,531  |   |   | 8,422 |   |   | 10,953 |   |
|                                               |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    interest income increase    |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (decrease)                                         |   | $                                             | 4,722  |                                          | $      | (969   | )      | $      | 3,753  |   | $      | 3,579  |   | $ | (1,091 | ) | $ | 2,488 |   |

**RESULTS          OF OPERATIONS**

**Years          Ended December 31, 2006 and 2005**

*Net          Income.*

----

*Net          Interest Income.*

*Provision          for Loan Losses.*

*Non-Interest          Income.*

----

*Non-Interest          Expense*

*Provision          for Income Taxes.*

**RESULTS          OF OPERATIONS**

**Years          Ended December 31, 2005 and 2004**

*Net          Income.*

*Net          Interest Income.*

----

*Provision          for Loan Losses.*

*Non-Interest          Income.*

*Non-Interest          Expense*

----

*Provision          for Income Taxes.*

**LIQUIDITY**

----

----

**CONTRACTUAL          OBLIGATIONS AND COMMITMENTS**

|                                                                                                                                                        |   | Payments                    Due by Period                           |      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|-----------|
|                                                                                                                                                        |   |                                                                |      | On                    Demand |   |   |   |   |   |   |   |
|                                                                                                                                                        |   |                                                                |      | or                    Within |   |   |   |   |   | After |   |
| Contractual                    Obligations                                                                                                                  |   | Total                                                               |      | 1                    Year |   | 2                    -                    3 Years |   | 4                    -                    5 Years |   | 5                    Years |   |
|                                                                                                                                                        |   | (In                    thousands)                                   |      |
|                                                                                                                                                        |   |                                                                |      |   |   |   |   |   |   |   |   |
| Short-term                    borrowings                                                                                                                    |   | $                                                                   | 92,748    |   | $ | 92,748 |   | $ | - |   | $ | - |   | $ | - |   |
| Long-term                    debt                                                                                                                           |   |                                                                | 172,549   |   |   | - |   |   | 70,000 |   |   | 15,000 |   |   | 87,549 |   |
| Operating                    leases                                                                                                                         |   |                                                                | 5,862     |   |   | 1,256 |   |   | 1,755 |   |   | 950 |   |   | 1,901 |   |
| Total                    contractual cash obligations                                                                                                       |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| excluding                    deposits                                                                                                                       |   |                                                                | 271,159   |   |   | 94,004 |   |   | 71,755 |   |   | 15,950 |   |   | 89,450 |   |
|                                                                                                                                                        |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                                                                    |   |                                                                | 1,024,582 |   |   | 910,928 |   |   | 61,013 |   |   | 42,790 |   |   | 9,851 |   |
|                                                                                                                                                             |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    contractual cash obligations                                                                                                       |   | $                                                                   | 1,295,741 |   | $ | 1,004,932 |   | $ | 132,768 |   | $ | 58,740 |   | $ | 99,301 |   |
|                                                                                                                                                        |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                        |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The                    following table reflects other commitments of the Company outstanding                    as                    of December 31, 2006. |
|                                                                                                                                                        |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                        |   | Amount                    of Commitment Expiration Per Period  |
|                                                                                                                                                        |   |                                                                |      |   |   | Within |   |   |   |   |   |   |   |   | After |   |
| Other                    Commitments                                                                                                                        |   |                                                                | Total     |   |   | 1                    Year |   |   | 2                    - 3 Years |   |   | 4                    - 5 Years |   |   | 5                    Years |   |
| (In                    thousands)                                                                                                                           |   |                                                                |
|                                                                                                                                                        |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Undisbursed                    portion of home equity                                                                                                       |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| credit                    lines collateralized primarily                                                                                                    |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| by                    junior liens on 1-4 family properties                                                                                                 |   | $                                                                   | 86,884    |   | $ | 461 |   | $ | 361 |   | $ | 709 |   | $ | 85,353 |   |
| Other                    commitments and credit lines                                                                                                       |   |                                                                | 138,030   |   |   | 106,418 |   |   | 12,757 |   |   | 5,235 |   |   | 13,620 |   |
| Undisbursed                    portion of construction loans                                                                                                |   |                                                                | 103,797   |   |   | 67,975 |   |   | 12,642 |   |   | 12,084 |   |   | 11,096 |   |
| Mortgage                    loan commitments                                                                                                                |   |                                                                | 10,980    |   |   | 10,980 |   |   | - |   |   | - |   |   | - |   |
| Other                    purchase commitments                                                                                                               |   |                                                                | 1,403     |   |   | 250 |   |   | 1,153 |   |   | - |   |   | - |   |
|                                                                                                                                                        |   |                                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    other commitments                                                                                                                  |   | $                                                                   | 341,094   |   | $ | 186,084 |   | $ | 26,913 |   | $ | 18,028 |   | $ | 110,069 |   |

**OFF-BALANCE          SHEET ARRANGEMENTS**

----

**CAPITAL          RESOURCES**

|                                               |   |                                    |   |                                   |   |                                             |   |
|----------------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|--------------------------------------------------|--------|
|                                               |   | At                    December 31, 2006 |   |
|                                               |   | Actual                    Ratio         |   | Minimum                    Requirement |   | Well-Capitalized                    Requirements |   |
|                                               |   |                                    |   |                                   |   |                                             |   |
|                                               |   |                                    |   |                                   |   |                                             |   |
| Total                    risk-based capital ratio  |   |                                    | 11.40  | %                                      |   | 8.00                                             | %      |   | 10.00 | % |
| Tier                    1 risk-based capital ratio |   |                                    | 10.20  | %                                      |   | 4.00                                             | %      |   | 6.00 | % |
| Leverage                    ratio                  |   |                                    | 8.73   | %                                      |   | 4.00                                             | %      |   | 5.00 | % |

----

**ASSET/LIABILITY          MANAGEMENT**

----

|                                                        |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |
|-------------------------------------------------------------|-------------------------------------------|--------|-----------------------------------------|----------|------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|-----------------------------------|----------|--------|--------|
|                                                        |                                      |   | At                    December 31, 2006 |     |
|                                                        |                                      |   | 3                    Months or Less     |     | Over                    3 Months to 12                    Months |   | Total                    Within 12                    Months |   | Over                    12 Months |     | Total  |   |
|                                                        | (Dollars                    in thousands) |   |
|                                                        |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |
| Interest-earning                    assets                  |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| Loans                    and loans held for sale            |                                      |   | $                                       | 550,727  |                                                             | $      | 46,081                                                       |   | $                                 | 596,808  |   | $      | 436,603 |   | $ | 1,033,411 |   |
| Investment                    securities available for sale |                                      |   |                                    | -        |                                                             |   | 9,896                                                        |   |                              | 9,896    |   |   | 159,125 |   |   | 169,021 |   |
| Investment                    securities held to maturity   |                                      |   |                                    | 4,865    |                                                             |   | 12,908                                                       |   |                              | 17,773   |   |   | 68,702 |   |   | 86,475 |   |
| Federal                    funds sold and other interest-   |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
|                      bearing deposits                  |                                      |   |                                    | 783      |                                                             |   | -                                                            |   |                              | 783      |   |   | - |   |   | 783 |   |
|                                                        |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| Total                    interest-earning assets            |                                      |   | $                                       | 556,375  |                                                             | $      | 68,885                                                       |   | $                                 | 625,260  |   | $      | 664,430 |   | $ | 1,289,690 |   |
|                                                        |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| Interest-bearing                    liabilities             |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| Deposits:                                                   |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| Money                    market, NOW and savings deposits   |                                      |   | $                                       | 393,152  |                                                             | $      | -                                                            |   | $                                 | 393,152  |   | $      | - |   | $ | 393,152 |   |
| Time                    deposits greater than $100,000      |                                      |   |                                    | 88,181   |                                                             |   | 124,785                                                      |   |                              | 212,966  |   |   | 101,675 |   |   | 314,641 |   |
| Other                    time deposits                      |                                      |   |                                    | 97,329   |                                                             |   | 98,531                                                       |   |                              | 195,860  |   |   | 11,979 |   |   | 207,839 |   |
| Borrowings                                                  |                                      |   |                                    | 142,748  |                                                             |   | -                                                            |   |                              | 142,748  |   |   | 122,549 |   |   | 265,297 |   |
|                                                        |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| Total                    interest-bearing liabilities       |                                      |   | $                                       | 721,410  |                                                             | $      | 223,316                                                      |   | $                                 | 944,726  |   | $      | 236,203 |   | $ | 1,180,930 |   |
|                                                        |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| Interest                    sensitivity gap per period      |                                      |   | $                                       | (165,035 | )                                                                | $      | (154,431                                                     | )      | $                                 | (319,466 | )      | $      | 428,227 |   | $ | 108,760 |   |
|                                                        |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| Cumulative                    gap                           |                                      |   | $                                       | (165,035 | )                                                                | $      | (319,466                                                     | )      | $                                 | (319,466 | )      | $      | 108,760 |   | $ | 108,760 |   |
|                                                        |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| Cumulative                    ratio of interest-sensitive   |                                      |   |                                    |     |                                                             |   |                                                         |   |                              |     |   |   |   |   |   |   |   |
| assets                    to interest-sensitive liabilities |                                      |   |                                    | 77.12    | %                                                                |   | 66.18                                                        | %      |                              | 66.18    | %      |   | 109.21 | % |   | 109.21 | % |

----

**MARKET          RISK**

|                                                                                   |   | Expected                    Maturities of Market Sensitive Instruments Held |    |    |   |      |   |
|----------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|---------|---------|--------|-----------|--------|
|                                                                                   |   | at                    December 31, 2006 Occurring in the Indicated Year     |    |    |   |      |   |
|                                                                                   |   | (Dollars                    in thousands)                                   |    | Average |   | Estimated |   |
|                                                                                   |   |                                                                        |    |    |   |      |   |   |   |   |   | Beyond |   |   |   | Interest |   | Fair |   |
|                                                                                   |   | 2007                                                                        |    | 2008    |   | 2009      |   | 2010 |   | 2011 |   | Five                    Years |   | Total |   | Rate |   | Value |   |
|                                                                                   |   |                                                                        |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FINANCIAL                    ASSETS                                                    |   |                                                                        |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                    funds sold                                                  |   | $                                                                           | 783     |    | $      | -         |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | 783 |   |   | 5.38 | % | $ | 783 |   |
| Investment                    securities                    (1)                    (2) |   |                                                                        | 27,669  |    |   | 11,816    |   |   | 18,197 |   |   | 30,155 |   |   | 30,056 |   |   | 137,603 |   |   | 255,496 |   |   | 4.48 | % |   | 253,234 |   |
| Loans                    (3)                                                           |   |                                                                        |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed                    rate                                                          |   |                                                                        | 53,544  |    |   | 41,007    |   |   | 53,076 |   |   | 70,600 |   |   | 104,172 |   |   | 120,531 |   |   | 442,930 |   |   | 6.96 | % |   | 435,703 |   |
| Variable                    rate                                                       |   |                                                                        | 301,915 |    |   | 62,922    |   |   | 40,451 |   |   | 22,116 |   |   | 38,054 |   |   | 125,023 |   |   | 590,481 |   |   | 8.50 | % |   | 588,345 |   |
|                                                                                   |   |                                                                        |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                  |   | $                                                                           | 383,911 |    | $      | 115,745   |   | $ | 111,724 |   | $ | 122,871 |   | $ | 172,282 |   | $ | 383,157 |   | $ | 1,289,690 |   |   | 7.88 | % | $ | 1,278,065 |   |
|                                                                                   |   |                                                                        |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FINANCIAL                    LIABILITIES                                               |   |                                                                        |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money                    market, NOW and                                               |   |                                                                        |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| savings                    deposits                                                    |   | $                                                                           | 393,152 |    | $      | -         |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | 393,152 |   |   | 2.57 | % | $ | 393,152 |   |
| Time                    deposits                                                       |   |                                                                        | 408,826 |    |   | 24,059    |   |   | 36,954 |   |   | 28,539 |   |   | 14,251 |   |   | 9,851 |   |   | 522,480 |   |   | 4.64 | % |   | 520,615 |   |
| Short-term                    borrowings                                               |   |                                                                        | 92,748  |    |   | -         |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 92,748 |   |   | 5.38 | % |   | 92,748 |   |
| Long-term                    borrowings                                                |   |                                                                        | -       |    |   | 15,000    |   |   | 55,000 |   |   | 10,000 |   |   | 5,000 |   |   | 87,549 |   |   | 172,549 |   |   | 5.32 | % |   | 174,172 |   |
|                                                                                   |   |                                                                        |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                  |   | $                                                                           | 894,726 |    | $      | 39,059    |   | $ | 91,954 |   | $ | 38,539 |   | $ | 19,251 |   | $ | 97,400 |   | $ | 1,180,929 |   |   | 4.88 | % | $ | 1,180,687 |   |

----

| (1) | Yields                    on tax-exempt investments have been adjusted to a taxable equivalent                    basis                    using federal and state tax rates of 34% and 6.9%, respectively,                    less                    estimated disallowed interest expense. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Callable                    securities and borrowings with favorable market rates at December                    31, 2006                    are assumed to mature at their call dates for purposes of this                    table.                                                         |
| (3) | Includes                    nonaccrual loans but not the allowance for loan                    losses.                                                                                                                                                                                        |

----

**QUARTERLY          FINANCIAL INFORMATION**

|                                         |   | Year                    Ended December 31, 2006                                                    |   | Year                    Ended December 31, 2005 |   |
|----------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                         |   | Fourth                                                                                             |   | Third                                           |   | Second |   | First |   | Fourth |   | Third |   | Second |   | First |   |
|                                         |   | Quarter                                                                                            |   | Quarter                                         |   | Quarter |   | Quarter |   | Quarter |   | Quarter |   | Quarter |   | Quarter |   |
|                                         |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |   | (In                    thousands, except per share data and common stock                    price) |   |
|                                         |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                    income           |   | $                                                                                                  | 23,233 |                                            | $      | 22,151 |   | $ | 20,862 |   | $ | 19,274 |   | $ | 18,669 |   | $ | 17,534 |   | $ | 16,554 |   | $ | 15,340 |   |
| Interest                    expense          |   |                                                                                               | 12,807 |                                            |   | 11,936 |   |   | 10,830 |   |   | 9,225 |   |   | 8,974 |   |   | 8,348 |   |   | 7,418 |   |   | 6,388 |   |
|                                         |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    interest income       |   |                                                                                               | 10,426 |                                            |   | 10,215 |   |   | 10,032 |   |   | 10,049 |   |   | 9,695 |   |   | 9,186 |   |   | 9,136 |   |   | 8,952 |   |
| Provision                    for loan losses |   |                                                                                               | 600    |                                            |   | 730 |   |   | 705 |   |   | 475 |   |   | 380 |   |   | (300 | ) |   | 475 |   |   | 395 |   |
|                                         |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    interest income       |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| after                    provision for       |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| loan                    losses               |   |                                                                                               | 9,826  |                                            |   | 9,485 |   |   | 9,327 |   |   | 9,574 |   |   | 9,315 |   |   | 9,486 |   |   | 8,661 |   |   | 8,557 |   |
| Non-interest                    income       |   |                                                                                               | 2,337  |                                            |   | 2,689 |   |   | (2,685 | ) |   | 1,337 |   |   | 2,049 |   |   | 1,497 |   |   | 2,243 |   |   | 1,345 |   |
| Non-interest                    expense      |   |                                                                                               | 9,589  |                                            |   | 8,929 |   |   | 8,852 |   |   | 8,432 |   |   | 8,533 |   |   | 7,546 |   |   | 7,343 |   |   | 7,897 |   |
|                                         |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                    before income      |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| taxes                                        |   |                                                                                               | 2,574  |                                            |   | 3,245 |   |   | (2,210 | ) |   | 2,479 |   |   | 2,831 |   |   | 3,437 |   |   | 3,561 |   |   | 2,005 |   |
| Income                    taxes              |   |                                                                                               | 632    |                                            |   | 1,163 |   |   | (780 | ) |   | 875 |   |   | 931 |   |   | 1,245 |   |   | 1,282 |   |   | 703 |   |
|                                         |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    income                |   | $                                                                                                  | 1,942  |                                            | $      | 2,082 |   | $ | (1,430 | ) | $ | 1,604 |   | $ | 1,900 |   | $ | 2,192 |   | $ | 2,279 |   | $ | 1,302 |   |
|                                         |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Per                    share data:           |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    income:               |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                        |   | $                                                                                                  | 0.11   |                                            | $      | 0.12 |   | $ | (0.08 | ) | $ | 0.09 |   | $ | 0.11 |   | $ | 0.12 |   | $ | 0.13 |   | $ | 0.07 |   |
| Diluted                                      |   |                                                                                               | 0.11   |                                            |   | 0.12 |   |   | (0.08 | ) |   | 0.09 |   |   | 0.10 |   |   | 0.12 |   |   | 0.13 |   |   | 0.07 |   |
|                                         |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                    stock price:       |   |                                                                                               |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High                                         |   | $                                                                                                  | 11.09  |                                            | $      | 9.94 |   | $ | 9.79 |   | $ | 10.37 |   | $ | 9.86 |   | $ | 9.95 |   | $ | 10.25 |   | $ | 10.75 |   |
| Low                                          |   |                                                                                               | 9.63   |                                            |   | 9.25 |   |   | 9.15 |   |   | 8.76 |   |   | 8.61 |   |   | 9.17 |   |   | 7.97 |   |   | 9.04 |   |

----

**LENDING          ACTIVITIES**

*General*

|                                               |                                      |   | At                    December 31, |      |
|----------------------------------------------------|-------------------------------------------|--------|------------------------------------|-----------|
|                                               |                                      |   | 2006                               |      | 2005 |   | 2004 |   |
|                                               |                                      |   |                               |      | Percent |   |   |   | Percent |   |   |   | Percent |   |
|                                               |                                      |   | Amount                             |      | of                    Total |   | Amount |   | of                    Total |   | Amount |   | of                    Total |   |
|                                               | (Dollars                    in thousands) |   |
| Residential                    mortgage loans      |                                      |   | $                                  | 262,480   |   |   | 25.4 | % | $ | 244,177 |   |   | 28.0 | % | $ | 238,454 |   |   | 30.0 | % |
| Commercial                    mortgage loans       |                                      |   |                               | 359,987   |   |   | 34.8 | % |   | 286,658 |   |   | 33.0 | % |   | 295,130 |   |   | 37.1 | % |
| Construction                    loans              |                                      |   |                               | 211,858   |   |   | 20.5 | % |   | 156,900 |   |   | 18.1 | % |   | 102,282 |   |   | 12.8 | % |
| Commercial                    and industrial loans |                                      |   |                               | 177,706   |   |   | 17.2 | % |   | 151,950 |   |   | 17.5 | % |   | 127,432 |   |   | 16.0 | % |
| Loans                    to individuals            |                                      |   |                               | 21,380    |   |   | 2.1 | % |   | 29,142 |   |   | 3.4 | % |   | 32,805 |   |   | 4.1 | % |
|                                               |                                      |   |                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Subtotal                                           |                                      |   |                               | 1,033,411 |   |   | 100.0 | % |   | 868,827 |   |   | 100.0 | % |   | 796,103 |   |   | 100.0 | % |
|                                               |                                      |   |                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less:                    Allowance for loan losses |                                      |   |                               | (13,040   | ) |   |   |   |   | (11,785 | ) |   |   |   |   | (12,537 | ) |   |   |   |
|                                               |                                      |   |                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    loans                       |                                      |   | $                                  | 1,020,371 |   |   |   |   | $ | 857,042 |   |   |   |   | $ | 783,566 |   |   |   |   |
|                                               |                                      |   |                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                               |                                      |   |                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                                               |   | At                    December 31,        |    |
|----------------------------------------------------|--------|-------------------------------------------|---------|
|                                               |   | 2003                                      |    | 2002 |   |
|                                               |   |                                      |    | Percent |   |   |   | Percent |   |
|                                               |   | Amount                                    |    | of                    Total |   | Amount |   | of                    Total |   |
|                                               |   | (Dollars                    in thousands) |    |
| Residential                    mortgage loans      |   | $                                         | 150,312 |   |   | 28.9 | % | $ | 118,572 |   |   | 28.1 | % |
| Commercial                    mortgage loans       |   |                                      | 186,758 |   |   | 35.9 | % |   | 137,812 |   |   | 32.7 | % |
| Construction                    loans              |   |                                      | 71,908  |   |   | 13.8 | % |   | 64,500 |   |   | 15.3 | % |
| Commercial                    and industrial loans |   |                                      | 87,127  |   |   | 16.8 | % |   | 71,948 |   |   | 17.0 | % |
| Loans                    to individuals            |   |                                      | 23,641  |   |   | 4.6 | % |   | 29,106 |   |   | 6.9 | % |
|                                               |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Subtotal                                           |   |                                      | 519,746 |   |   | 100.0 | % |   | 421,938 |   |   | 100.0 | % |
|                                               |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Less:                    Allowance for loan losses |   |                                      | (7,275  | ) |   |   |   |   | (6,342 | ) |   |   |   |
|                                               |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Net                    loans                       |   | $                                         | 512,471 |   |   |   |   | $ | 415,596 |   |   |   |   |

----

|                                          |   | At                    December 31, 2006   |    |
|-----------------------------------------------|--------|-------------------------------------------|---------|
|                                          |   | Due                    within             |    | Due                    after one year |   | Due                    after |   |   |   |   |   |
|                                          |   | one                    year               |    | but                    within five years |   | five                    years |   | Total |   |
|                                          |   | Amount                                    |    | Yield |   | Amount |   | Yield |   | Amount |   | Yield |   | Amount |   | Yield |   |
|                                          |   | (Dollars                    in thousands) |    |
| Residential                    mortgage loans |   | $                                         | 140,539 |   |   | 8.24 | % | $ | 60,909 |   |   | 7.18 | % | $ | 60,529 |   |   | 6.24 | % | $ | 261,977 |   |   | 7.53 | % |
| Commercial                    mortgage loans  |   |                                      | 120,351 |   |   | 8.27 | % |   | 185,862 |   |   | 6.97 | % |   | 52,421 |   |   | 6.70 | % |   | 358,634 |   |   | 7.37 | % |
| Construction                    loans         |   |                                      | 193,198 |   |   | 8.41 | % |   | 11,022 |   |   | 6.95 | % |   | 6,995 |   |   | 6.51 | % |   | 211,215 |   |   | 8.27 | % |
| Commercial                    and             |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| industrial                    loans           |   |                                      | 131,188 |   |   | 8.36 | % |   | 37,760 |   |   | 6.83 | % |   | 8,633 |   |   | 6.59 | % |   | 177,581 |   |   | 7.95 | % |
| Loans                    to individuals       |   |                                      | 10,066  |   |   | 10.10 | % |   | 9,275 |   |   | 9.03 | % |   | 2,026 |   |   | 4.37 | % |   | 21,368 |   |   | 9.09 | % |
|                                          |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                         |   |                                      | 595,343 |   |   | 8.36 | % |   | 304,828 |   |   | 7.06 | % |   | 130,604 |   |   | 6.43 | % |   | 1,030,775 |   |   | 7.73 | % |
|                                          |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonaccrual                    loans           |   |                                      | 1,464   |   |   |   |   |   | 290 |   |   |   |   |   | 882 |   |   |   |   |   | 2,636 |   |   |   |   |
|                                          |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans,                    gross               |   | $                                         | 596,807 |   |   |   |   | $ | 305,118 |   |   |   |   | $ | 131,486 |   |   |   |   | $ | 1,033,411 |   |   |   |   |

*Real          Estate Loans.*

*Residential          Mortgage Loans.*

----

*Commercial          Mortgage Loans.*

*Construction          Loans.*

*Commercial          Loans.*

*Loans          to Individuals. *

*Loan          Approvals. *

----

**ASSET          QUALITY**

----

**Nonperforming          Assets**

|                                                             |   | At                    December 31,        |   |
|------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                             |   | 2006                                      |   | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
|                                                             |   | (Dollars                    in thousands) |   |
|                                                             |   |                                      |   |   |   |   |   |   |   |   |   |
| Nonaccrual                    loans                              |   | $                                         | 2,636  |   | $ | 1,408 |   | $ | 2,174 |   | $ | 769 |   | $ | 1,823 |   |
| Restructured                    loans                            |   |                                      | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |
|                                                             |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    nonperforming loans                     |   |                                      | 2,636  |   |   | 1,408 |   |   | 2,174 |   |   | 769 |   |   | 1,823 |   |
|                                                             |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreclosed                    assets                             |   |                                      | 895    |   |   | 280 |   |   | 1,085 |   |   | 272 |   |   | 383 |   |
|                                                             |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    nonperforming assets                    |   | $                                         | 3,531  |   | $ | 1,688 |   | $ | 3,259 |   | $ | 1,041 |   | $ | 2,206 |   |
|                                                             |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                             |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accruing                    loans past due                       |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 90                    days or more                               |   | $                                         | -      |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   |
| Allowance                    for loan losses                     |   |                                      | 13,040 |   |   | 11,785 |   |   | 12,537 |   |   | 7,275 |   |   | 6,342 |   |
| Nonperforming                    loans to period end loans       |   |                                      | .26    | % |   | .16 | % |   | .27 | % |   | .15 | % |   | .43 | % |
| Allowance                    for loan losses to period end loans |   |                                      | 1.26   | % |   | 1.36 | % |   | 1.57 | % |   | 1.40 | % |   | 1.50 | % |
| Allowance                    for loan losses to                  |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| nonperforming                    loans                           |   |                                      | 495    | % |   | 837 | % |   | 577 | % |   | 946 | % |   | 348 | % |
| Nonperforming                    assets to total assets          |   |                                      | .25    | % |   | .13 | % |   | .27 | % |   | .13 | % |   | .36 | % |

----

**Analysis          of Allowance for Loan Losses**

----

----

|                                            |   | At                      December 31,        |   |
|-------------------------------------------------|--------|---------------------------------------------|--------|
|                                            |   | 2006                                        |   | 2005 |   | 2004 |   |
|                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
|                                            |   | Amount                                      |   | %                      of Total Loans (1) |   | Amount |   | %                      of Total Loans (1) |   | Amount |   | %                      of Total Loans (1) |   |
|                                            |   | (Dollars                      in thousands) |   |
|                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| Residential                      mortgage loans |   | $                                           | 1,771  |   |   | 25.4 | % | $ | 1,394 |   |   | 28.0 | % | $ | 1,419 |   |   | 30.0 | % |
| Commercial                      mortgage loans  |   |                                        | 4,173  |   |   | 34.8 | % |   | 3,151 |   |   | 33.0 | % |   | 3,500 |   |   | 37.1 | % |
| Construction                      loans         |   |                                        | 3,240  |   |   | 20.5 | % |   | 2,454 |   |   | 18.1 | % |   | 1,924 |   |   | 12.8 | % |
| Commercial                      and             |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| industrial                      loans           |   |                                        | 2,099  |   |   | 17.2 | % |   | 1,784 |   |   | 17.5 | % |   | 1,815 |   |   | 16.0 | % |
| Loans                      to individuals       |   |                                        | 553    |   |   | 2.1 | % |   | 956 |   |   | 3.4 | % |   | 1,304 |   |   | 4.1 | % |
| Unallocated                                     |   |                                        | 1,204  |   |   | - | % |   | 2,046 |   |   | - | % |   | 2,575 |   |   | - | % |
|                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                           |   | $                                           | 13,040 |   |   | 100.0 | % | $ | 11,785 |   |   | 100.0 | % | $ | 12,537 |   |   | 100.0 | % |

|                                              |   | At                        December 31,        |   |
|---------------------------------------------------|--------|-----------------------------------------------|--------|
|                                              |   | 2003                                          |   | 2002 |   |
|                                              |   |                                          |   |   |   |   |   |   |   |
|                                              |   | Amount                                        |   | %                        of Total Loans (1) |   | Amount |   | %                        of Total Loans (1) |   |
|                                              |   | (Dollars                        in thousands) |   |
|                                              |   |                                          |   |   |   |   |   |   |   |
| Residential                        mortgage loans |   | $                                             | 475    |   |   | 28.9 | % | $ | 350 |   |   | 28.1 | % |
| Commercial                        mortgage loans  |   |                                          | 2,200  |   |   | 35.9 | % |   | 1,500 |   |   | 32.7 | % |
| Construction                        loans         |   |                                          | 1,100  |   |   | 13.8 | % |   | 1,100 |   |   | 15.3 | % |
| Commercial                        and             |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| industrial                        loans           |   |                                          | 1,200  |   |   | 16.8 | % |   | 1,000 |   |   | 17.0 | % |
| Loans                        to individuals       |   |                                          | 1,050  |   |   | 4.6 | % |   | 1,225 |   |   | 6.9 | % |
| Unallocated                                       |   |                                          | 1,250  |   |   | - | % |   | 1,167 |   |   | - | % |
|                                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| Total                                             |   | $                                             | 7,275  |   |   | 100.0 | % | $ | 6,342 |   |   | 100.0 | % |

----

|                                                |   | As                    of or for the Years Ended December 31, |      |
|-----------------------------------------------------|--------|--------------------------------------------------------------|-----------|
|                                                |   | 2006                                                         |      | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
|                                                |   | (Dollars                    in thousands)                    |      |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |
| Balance                    at beginning of period   |   | $                                                            | 11,785    |   | $ | 12,537 |   | $ | 7,275 |   | $ | 6,342 |   | $ | 5,400 |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Charge-offs:                                        |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                    mortgage loans       |   |                                                         | 248       |   |   | 566 |   |   | 210 |   |   | 78 |   |   | 82 |   |
| Commercial                    mortgage loans        |   |                                                         | 68        |   |   | - |   |   | 43 |   |   | 72 |   |   | - |   |
| Construction                    loans               |   |                                                         | 130       |   |   | 4 |   |   | 312 |   |   | 307 |   |   | 113 |   |
| Commercial                    and industrial loans  |   |                                                         | 508       |   |   | 349 |   |   | 120 |   |   | 91 |   |   | 90 |   |
| Loans                    to individuals             |   |                                                         | 600       |   |   | 443 |   |   | 889 |   |   | 872 |   |   | 473 |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    charge-offs                |   |                                                         | 1,554     |   |   | 1,362 |   |   | 1,574 |   |   | 1,420 |   |   | 758 |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Recoveries:                                         |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                    mortgage loans       |   |                                                         | 142       |   |   | 41 |   |   | 29 |   |   | - |   |   | - |   |
| Construction                    loans               |   |                                                         | -         |   |   | 3 |   |   | - |   |   | 4 |   |   | - |   |
| Commercial                    and industrial loans  |   |                                                         | 36        |   |   | 35 |   |   | 7 |   |   | 27 |   |   | 15 |   |
| Loans                    to individuals             |   |                                                         | 121       |   |   | 72 |   |   | 114 |   |   | 37 |   |   | 30 |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    recoveries                 |   |                                                         | 299       |   |   | 151 |   |   | 150 |   |   | 68 |   |   | 45 |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    charge-offs                  |   |                                                         | (1,255    | ) |   | (1,211 | ) |   | (1,424 | ) |   | (1,352 | ) |   | (713 | ) |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision                    for loan losses        |   |                                                         | 2,510     |   |   | 950 |   |   | 2,239 |   |   | 2,285 |   |   | 1,655 |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                    for loans acquired in  |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| purchase                    transactions, net       |   |                                                         | -         |   |   | (491 | ) |   | 4,447 |   |   | - |   |   | - |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                    at end of period         |   | $                                                            | 13,040    |   | $ | 11,785 |   | $ | 12,537 |   | $ | 7,275 |   | $ | 6,342 |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    loans outstanding          |   | $                                                            | 1,033,411 |   | $ | 868,827 |   | $ | 796,103 |   | $ | 519,746 |   | $ | 421,938 |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                    loans outstanding        |   | $                                                            | 958,001   |   | $ | 837,467 |   | $ | 742,433 |   | $ | 471,808 |   | $ | 395,745 |   |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                    for loan losses to     |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| loans                    outstanding                |   |                                                         | 1.26      | % |   | 1.36 | % |   | 1.57 | % |   | 1.40 | % |   | 1.50 | % |
|                                                |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio                    of net loan charge-offs to |   |                                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| average                    loans outstanding        |   |                                                         | .13       | % |   | .14 | % |   | .19 | % |   | .29 | % |   | .18 | % |

----

**INVESTMENT          ACTIVITIES**

|                                              |   | Amortized                    Cost         |    | Gross                    Unrealized Gains |   | Gross                    Unrealized Losses |   | Market                    Value |   |
|---------------------------------------------------|--------|-------------------------------------------|---------|-------------------------------------------|--------|--------------------------------------------|--------|---------------------------------|--------|
|                                              |   | (Amounts                    in thousands) |    |
| **December                    31, 2006**          |   |                                      |    |                                      |   |                                       |   |                            |   |
| Securities                    available for sale: |   |                                      |    |                                      |   |                                       |   |                            |   |
| U.                    S. government agencies      |   | $                                         | 77,942  |                                      | $      | 592                                        |   | $                               | 431    |   | $ | 78,103 |   |
| Mortgage-backed                    securities     |   |                                      | 72,258  |                                      |   | 234                                        |   |                            | 1,249  |   |   | 71,243 |   |
| Municipals                                        |   |                                      | 1,303   |                                      |   | 9                                          |   |                            | -      |   |   | 1,312 |   |
| Other                                             |   |                                      | 18,703  |                                      |   | -                                          |   |                            | 340    |   |   | 18,363 |   |
|                                              |   | $                                         | 170,206 |                                      | $      | 835                                        |   | $                               | 2,020  |   | $ | 169,021 |   |
|                                              |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| Securities                    held to maturity:   |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                         | 74,793  |                                      | $      | 5                                          |   | $                               | 2,235  |   | $ | 72,563 |   |
| Mortgage-backed                    securities     |   |                                      | 2,795   |                                      |   | 5                                          |   |                            | 61     |   |   | 2,739 |   |
| Municipals                                        |   |                                      | 8,887   |                                      |   | 128                                        |   |                            | 104    |   |   | 8,911 |   |
|                                              |   | $                                         | 86,475  |                                      | $      | 138                                        |   | $                               | 2,400  |   | $ | 84,213 |   |
|                                              |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| **December                    31, 2005**          |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| Securities                    available for sale: |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                         | 66,426  |                                      | $      | -                                          |   | $                               | 1,147  |   | $ | 65,279 |   |
| Mortgage-backed                    securities     |   |                                      | 124,212 |                                      |   | 156                                        |   |                            | 3,870  |   |   | 120,498 |   |
| Municipals                                        |   |                                      | 1,000   |                                      |   | 1                                          |   |                            | 4      |   |   | 997 |   |
| Other                                             |   |                                      | 17,297  |                                      |   | 62                                         |   |                            | 325    |   |   | 17,034 |   |
|                                              |   | $                                         | 208,935 |                                      | $      | 219                                        |   | $                               | 5,346  |   | $ | 203,808 |   |
|                                              |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| Securities                    held to maturity:   |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                         | 75,046  |                                      | $      | -                                          |   | $                               | 2,395  |   | $ | 72,651 |   |
| Mortgage-backed                    securities     |   |                                      | 3,228   |                                      |   | 11                                         |   |                            | 67     |   |   | 3,172 |   |
| Municipals                                        |   |                                      | 9,834   |                                      |   | 171                                        |   |                            | 54     |   |   | 9,951 |   |
|                                              |   | $                                         | 88,108  |                                      | $      | 182                                        |   | $                               | 2,516  |   | $ | 85,774 |   |
|                                              |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| **December                    31, 2004**          |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| Securities                    available for sale: |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                         | 69,038  |                                      | $      | 106                                        |   | $                               | 274    |   | $ | 68,870 |   |
| Mortgage-backed                    securities     |   |                                      | 150,282 |                                      |   | 833                                        |   |                            | 947    |   |   | 150,168 |   |
| Municipals                                        |   |                                      | 1,000   |                                      |   | 1                                          |   |                            | 2      |   |   | 999 |   |
| Other                                             |   |                                      | 17,635  |                                      |   | 92                                         |   |                            | -      |   |   | 17,727 |   |
|                                              |   | $                                         | 237,955 |                                      | $      | 1,032                                      |   | $                               | 1,223  |   | $ | 237,764 |   |
|                                              |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| Securities                    held to maturity:   |   |                                      |    |                                      |   |                                       |   |                            |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                         | 59,692  |                                      | $      | 22                                         |   | $                               | 851    |   | $ | 58,863 |   |
| Mortgage-backed                    securities     |   |                                      | 3,971   |                                      |   | 46                                         |   |                            | 4      |   |   | 4,013 |   |
| Municipals                                        |   |                                      | 10,481  |                                      |   | 341                                        |   |                            | 9      |   |   | 10,813 |   |
| Other                                             |   |                                      | 1,001   |                                      |   | 15                                         |   |                            | -      |   |   | 1,016 |   |
|                                              |   | $                                         | 75,145  |                                      | $      | 424                                        |   | $                               | 864    |   | $ | 74,705 |   |

----

|                                                   |   | Amortized                    Cost        |    | Fair                    Value |   | Weighted                    Average Yield |
|--------------------------------------------------------|--------|------------------------------------------|---------|-------------------------------|--------|-------------------------------------------|
|                                                   |   | (Amount                    in thousands) |    | (1)                           |   |
| **Securities                    Available for sale:**  |   |                                     |    |                          |   |                                      |   |
| U.                    S. government agencies           |   |                                     |    |                          |   |                                      |   |
| Due                    within one year                 |   | $                                        | 9,991   |                          | $      | 9,896                                     |   |   | 4.23 | % |
| Due                    after one but within five years |   |                                     | 35,951  |                          |   | 35,685                                    |   |   | 4.99 | % |
| Due                    after five but within ten years |   |                                     | 32,000  |                          |   | 32,522                                    |   |   | 6.08 | % |
|                                                   |   |                                     | 77,942  |                          |   | 78,103                                    |   |   | 5.34 | % |
| Mortgage-backed                    securities          |   |                                     |    |                          |   |                                      |   |   |   |   |
| Due                    after one but within five years |   |                                     | 13,747  |                          |   | 13,354                                    |   |   | 4.20 | % |
| Due                    after five but within ten years |   |                                     | 20,815  |                          |   | 20,602                                    |   |   | 4.90 | % |
| Due                    after ten years                 |   |                                     | 37,696  |                          |   | 37,287                                    |   |   | 5.12 | % |
|                                                   |   |                                     | 72,258  |                          |   | 71,243                                    |   |   | 4.88 | % |
| Municipals                                             |   |                                     |    |                          |   |                                      |   |   |   |   |
| Due                    after ten years                 |   |                                     | 1,303   |                          |   | 1,312                                     |   |   | 6.39 | % |
|                                                   |   |                                     | 1,303   |                          |   | 1,312                                     |   |   | 6.39 | % |
| Other                                                  |   |                                     |    |                          |   |                                      |   |   |   |   |
| Due                    after one but within five years |   |                                     | 1,000   |                          |   | 710                                       |   |   | 2.35 | % |
| Due                    after five but within ten years |   |                                     | 2,054   |                          |   | 2,054                                     |   |   | 4.21 | % |
| Due                    after ten years                 |   |                                     | 15,649  |                          |   | 15,599                                    |   |   | 6.19 | % |
|                                                   |   |                                     | 18,703  |                          |   | 18,363                                    |   |   | 5.76 | % |
| Total                    securities available for sale |   |                                     |    |                          |   |                                      |   |   |   |   |
| Due                    within one year                 |   |                                     | 9,991   |                          |   | 9,896                                     |   |   | 4.23 | % |
| Due                    after one but within five years |   |                                     | 50,698  |                          |   | 49,749                                    |   |   | 4.74 | % |
| Due                    after five but within ten years |   |                                     | 54,869  |                          |   | 55,178                                    |   |   | 5.57 | % |
| Due                    after ten years                 |   |                                     | 54,648  |                          |   | 54,198                                    |   |   | 5.46 | % |
|                                                   |   | $                                        | 170,206 |                          | $      | 169,021                                   |   |   | 5.20 | % |
| **Securities                    held to maturity:**    |   |                                     |    |                          |   |                                      |   |   |   |   |
| U.                    S. government agencies           |   |                                     |    |                          |   |                                      |   |   |   |   |
| Due                    within one year                 |   | $                                        | 15,999  |                          | $      | 15,864                                    |   |   | 3.92 | % |
| Due                    after one but within five years |   |                                     | 37,499  |                          |   | 36,248                                    |   |   | 3.90 | % |
| Due                    after five but within ten years |   |                                     | 1,295   |                          |   | 1,270                                     |   |   | 5.26 | % |
| Due                    after ten years                 |   |                                     | 20,000  |                          |   | 19,181                                    |   |   | 5.38 | % |
|                                                   |   |                                     | 74,793  |                          |   | 72,563                                    |   |   | 3.64 | % |
| Mortgage-backed                    securities          |   |                                     |    |                          |   |                                      |   |   |   |   |
| Due                    after one but within five years |   |                                     | 67      |                          |   | 68                                        |   |   | 6.97 | % |
| Due                    after five but within ten years |   |                                     | 1,770   |                          |   | 1,734                                     |   |   | 4.39 | % |
| Due                    after ten years                 |   |                                     | 958     |                          |   | 937                                       |   |   | 5.21 | % |
|                                                   |   |                                     | 2,795   |                          |   | 2,739                                     |   |   | 4.73 | % |
| Municipals                                             |   |                                     |    |                          |   |                                      |   |   |   |   |
| Due                    within one year                 |   |                                     | 1,774   |                          |   | 1,772                                     |   |   | 3.79 | % |
| Due                    after one but within five years |   |                                     | 2,911   |                          |   | 2,931                                     |   |   | 6.13 | % |
| Due                    after five but within ten years |   |                                     | 2,472   |                          |   | 2,554                                     |   |   | 6.66 | % |
| Due                    after ten years                 |   |                                     | 1,730   |                          |   | 1,654                                     |   |   | 5.64 | % |
|                                                   |   |                                     | 8,887   |                          |   | 8,911                                     |   |   | 5.72 | % |
| Total                    securities held to maturity   |   |                                     |    |                          |   |                                      |   |   |   |   |
| Due                    within one year                 |   |                                     | 17,773  |                          |   | 17,636                                    |   |   | 3.91 | % |
| Due                    after one but within five years |   |                                     | 40,477  |                          |   | 39,247                                    |   |   | 4.07 | % |
| Due                    after five but within ten years |   |                                     | 5,537   |                          |   | 5,558                                     |   |   | 5.63 | % |
| Due                    after ten years                 |   |                                     | 22,688  |                          |   | 21,772                                    |   |   | 5.39 | % |
|                                                   |   | $                                        | 86,475  |                          | $      | 84,213                                    |   |   | 3.90 | % |

----

**Derivative          Financial Instruments**

**Sources          of Funds **

*Deposit          Activities*

----

|                                                              |   | For                    the Years Ended December 31, |    |
|-------------------------------------------------------------------|--------|-----------------------------------------------------|---------|
|                                                              |   | 2006                                                |    | 2005 |   | 2004 |   |
|                                                              |   | Average                                             |    | Average |   | Average |   | Average |   | Average |   | Average |   |
|                                                              |   | Amount                                              |    | Rate |   | Amount |   | Rate |   | Amount |   | Rate |   |
|                                                              |   | (Dollars                    in thousands)           |    |
|                                                              |   |                                                |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                    NOW and money market accounts |   | $                                                   | 348,486 |   |   | 3.03 | % | $ | 262,058 |   |   | 1.83 | % | $ | 241,363 |   |   | 0.84 | % |
| Time                    deposits $100,000 or more                 |   |                                                | 326,864 |   |   | 4.38 | % |   | 285,369 |   |   | 3.50 | % |   | 257,034 |   |   | 2.77 | % |
| Other                    time deposits                            |   |                                                | 208,733 |   |   | 4.10 | % |   | 221,871 |   |   | 2.94 | % |   | 229,733 |   |   | 2.00 | % |
|                                                              |   |                                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    interest-bearing deposits                |   |                                                | 884,083 |   |   | 3.78 | % |   | 769,298 |   |   | 2.77 | % |   | 728,130 |   |   | 1.89 | % |
|                                                              |   |                                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                    and other non-interest-bearing deposits |   |                                                | 105,755 |   |   |   |   |   | 105,024 |   |   |   |   |   | 85,583 |   |   |   |   |
|                                                              |   |                                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    average deposits                         |   | $                                                   | 989,838 |   |   | 3.38 | % | $ | 874,322 |   |   | 2.44 | % | $ | 813,713 |   |   | 1.69 | % |

|                                      |   | At                    December 31, 2006 |    |
|-------------------------------------------|--------|-----------------------------------------|---------|
|                                      |   | (In                    thousands)       |    |
| Remaining                    Maturity     |   |                                    |    |
| Less                    than three months |   | $                                       | 88,181  |   |
| Three                    to six months    |   |                                    | 71,145  |   |
| Six                    to twelve months   |   |                                    | 53,640  |   |
| Over                    twelve months     |   |                                    | 101,675 |   |
|                                      |   |                                    |    |   |
| Total                                     |   | $                                       | 314,641 |   |

----

*Borrowings*

|                                 |   | At                    December 31, 2006 |   |
|--------------------------------------|--------|-----------------------------------------|--------|
|                                 |   | FHLB                                    |   | Term                    Repo |   |
| Years                    of Maturity |   | Interest                    Rate        |   | Amount |   | Interest                    Rate |   | Amount |   |
|                                 |   |                                    |   | (In                    thousands) |   |   |   | (In                    thousands) |   |
|                                 |   |                                    |   |   |   |   |   |   |   |
| 2007                                 |   |                                    | 4.32   | % | $ | 55,000 |   |   | - |   | $ | - |   |
| 2008                                 |   |                                    | 4.80   | % |   | 15,000 |   |   | - |   |   | - |   |
| 2009                                 |   |                                    | 5.34   | % |   | 45,000 |   |   | 5.64 | % |   | 10,000 |   |
| 2010                                 |   |                                    | 4.72   | % |   | 10,000 |   |   | - |   |   | - |   |
| 2011                                 |   |                                    | -      |   |   | - |   |   | 4.82 | % |   | 5,000 |   |
| Thereafter                           |   |                                    | 3.56   | % |   | 52,676 |   |   | - |   |   | - |   |
|                                 |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                    |   |   | $ | 177,676 |   |   |   |   | $ | 15,000 |   |

----

**Other          Recent Developments **

**RECENT          ACCOUNTING PRONOUNCEMENTS**

**SPECIAL          NOTE REGARDING FORWARD-LOOKING STATEMENTS**

** **

**Item          7A. Quantitative and Qualitative Disclosures About Market Risk**

**Item          8. Financial Statements**

----

**Report          of Independent Registered Public Accounting Firm**

*Internal          Control - Integrated Framework*

***/s/          Dixon Hughes PLLC***

*Raleigh,          North Carolina*

*March          15, 2007*

----

***SOUTHERN          COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**CONSOLIDATED          **
**BALANCE          SHEETS**

**December          31, 2006 and 2005**

----

|                                                                                |                                                |   | 2006                                                         |      | 2005   |   |
|-------------------------------------------------------------------------------------|-----------------------------------------------------|--------|--------------------------------------------------------------|-----------|--------|--------|
|                                                                                |                                                |   | (Amounts                    in thousands, except share data) |      |
| **Assets**                                                                          |                                                |   |                                                         |      |   |   |
|                                                                                |                                                |   |                                                         |      |   |   |
| Cash                    and due from banks                                          |                                                |   | $                                                            | 29,160    |   | $      | 24,606 |   |
| Federal                    funds sold and other interest-bearing deposits           |                                                |   |                                                         | 783       |   |   | 648 |   |
| Investment                    securities (Note 4)                                   |                                                |   |                                                         |      |   |   |   |   |
| Available                    for sale, at fair value                                |                                                |   |                                                         | 169,021   |   |   | 203,808 |   |
| Held                    to maturity, (fair value of $84,213 and $85,774             |                                                |   |                                                         |      |   |   |   |   |
| at                    December 31, 2006 and 2005, respectively)                     |                                                |   |                                                         | 86,475    |   |   | 88,108 |   |
|                                                                                |                                                |   |                                                         |      |   |   |   |   |
| Loans                    (Note 5)                                                   |                                                |   |                                                         | 1,033,411 |   |   | 868,827 |   |
| Allowance                    for loan losses (Note 6)                               |                                                |   |                                                         | (13,040   | )      |   | (11,785 | ) |
|                                                                                |  Net                    Loans                  |   |                                                         | 1,020,371 |   |   | 857,042 |   |
|                                                                                |                                                |   |                                                         |      |   |   |   |   |
| Premises                    and equipment (Note 7)                                  |                                                |   |                                                         | 40,492    |   |   | 31,259 |   |
| Goodwill                    (Note 8)                                                |                                                |   |                                                         | 49,792    |   |   | 49,792 |   |
| Other                    assets (Notes 8 and 14)                                    |                                                |   |                                                         | 40,371    |   |   | 32,350 |   |
|                                                                                | Total                    Assets                     |   | $                                                            | 1,436,465 |   | $      | 1,287,613 |   |
|                                                                                |                                                |   |                                                         |      |   |   |   |   |
| **Liabilities                    and Stockholders’ Equity**                   |                                                |   |                                                         |      |   |   |   |   |
| Deposits                                                                            |                                                |   |                                                         |      |   |   |   |   |
| Demand                                                                              |                                                |   | $                                                            | 108,950   |   | $      | 111,226 |   |
| Money                    market and NOW                                             |                                                |   |                                                         | 380,864   |   |   | 301,185 |   |
| Savings                                                                             |                                                |   |                                                         | 12,288    |   |   | 13,927 |   |
| Time                    (Note 9)                                                    |                                                |   |                                                         | 522,480   |   |   | 515,611 |   |
|                                                                                | Total                    Deposits                   |   |                                                         | 1,024,582 |   |   | 941,949 |   |
|                                                                                |                                                |   |                                                         |      |   |   |   |   |
| Short-term                    borrowings (Note 10)                                  |                                                |   |                                                         | 92,748    |   |   | 9,186 |   |
| Long-term                    debt (Notes 10 and 11)                                 |                                                |   |                                                         | 172,549   |   |   | 192,551 |   |
| Other                    liabilities (Note 12)                                      |                                                |   |                                                         | 10,361    |   |   | 9,042 |   |
|                                                                                |                                                |   |                                                         |      |   |   |   |   |
|                                                                                | Total                    Liabilities                |   |                                                         | 1,300,240 |   |   | 1,152,728 |   |
| Stockholders’                    Equity (Notes 11 and 16)                     |                                                |   |                                                         |      |   |   |   |   |
| Preferred                    stock, no par value, 1,000,000 shares authorized; none |                                                |   |                                                         |      |   |   |   |   |
| issued                    or outstanding at December 31, 2006 and                   |                                                |   |                                                         |      |   |   |   |   |
| December                    31, 2005, respectively                                  |                                                |   |                                                         | -         |   |   | - |   |
| Common                    stock, no par value, 30,000,000 shares authorized;        |                                                |   |                                                         |      |   |   |   |   |
| issued                    and outstanding 17,405,940 shares at December 31, 2006    |                                                |   |                                                         |      |   |   |   |   |
| and                    17,612,472 shares at December 31, 2005, respectively         |                                                |   |                                                         | 119,616   |   |   | 122,490 |   |
| Retained                    earnings                                                |                                                |   |                                                         | 17,368    |   |   | 15,546 |   |
| Accumulated                    other comprehensive income (loss)                    |                                                |   |                                                         | (759      | )      |   | (3,151 | ) |
|                                                                                | Total                    Stockholders’ Equity |   |                                                         | 136,225   |   |   | 134,885 |   |
|                                                                                |                                                |   |                                                         |      |   |   |   |   |
| Commitments                    and contingencies (Notes 13 and 18)                  |                                                |   |                                                         |      |   |   |   |   |
|                                                                                |                                                |   |                                                         |      |   |   |   |   |
|                                                                                     | Total                    Liabilities and            |   |                                                         |      |   |   |   |   |
|                                                                                | Stockholders’                    Equity       |   | $                                                            | 1,436,465 |   | $      | 1,287,613 |   |
|                                                                                |                                                |   |                                                         |      |   |   |   |   |
| *See                    accompanying notes.*                                        |                                                |   |                                                         |      |   |   |   |   |

----

***SOUTHERN          COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**CONSOLIDATED**
**          STATEMENTS OF OPERATIONS**

**Years          Ended December 31, 2006, 2005 and 2004 **

----

|                                                                      |                                          |   | 2006                                             |       | 2005   |   | 2004       |   |
|---------------------------------------------------------------------------|-----------------------------------------------|--------|--------------------------------------------------|------------|--------|--------|------------|--------|
|                                                                      |                                          |   | (Amounts                    in thousands, except |       |
|                                                                      |                                          |   | share                    and per share data)     |       |
| Interest                    Income                                        |                                          |   |                                             |       |   |   |       |   |
| Loans                                                                     |                                          |   | $                                                | 73,492     |   | $      | 55,848     |   | $ | 42,843 |   |
| Investment                    securities available for sale               |                                          |   |                                             | 8,529      |   |   | 8,680      |   |   | 8,957 |   |
| Investment                    securities held to maturity                 |                                          |   |                                             | 3,390      |   |   | 3,429      |   |   | 2,803 |   |
| Federal                    funds sold and other interest-bearing deposits |                                          |   |                                             | 109        |   |   | 140        |   |   | 53 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
|                                                                      | Total                    Interest Income      |   |                                             | 85,520     |   |   | 68,097     |   |   | 54,656 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Interest                    Expense                                       |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Money                    market, savings, and NOW deposits                |                                          |   |                                             | 10,552     |   |   | 4,786      |   |   | 2,027 |   |
| Time                    deposits                                          |                                          |   |                                             | 22,867     |   |   | 16,509     |   |   | 11,717 |   |
| Short-term                    borrowings                                  |                                          |   |                                             | 2,897      |   |   | 2,188      |   |   | 1,614 |   |
| Long-term                    debt                                         |                                          |   |                                             | 8,482      |   |   | 7,645      |   |   | 4,817 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
|                                                                      | Total                    Interest Expense     |   |                                             | 44,798     |   |   | 31,128     |   |   | 20,175 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
|                                                                      | Net                    Interest Income        |   |                                             | 40,722     |   |   | 36,969     |   |   | 34,481 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Provision                    for Loan Losses (Note 6)                     |                                          |   |                                             | 2,510      |   |   | 950        |   |   | 2,239 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
|                                                                      | Net                    Interest Income After  |   |                                             |       |   |   |       |   |   |   |   |
|                                                                      | Provision                    for Loan Losses  |   |                                             | 38,212     |   |   | 36,019     |   |   | 32,242 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Non-Interest                    Income (Note 15)                          |                                          |   |                                             | 3,678      |   |   | 7,134      |   |   | 7,949 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Non-Interest                    Expense                                   |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Salaries                    and employee benefits                         |                                          |   |                                             | 18,826     |   |   | 16,042     |   |   | 13,749 |   |
| Occupancy                    and equipment                                |                                          |   |                                             | 6,835      |   |   | 5,786      |   |   | 4,352 |   |
| Other                    (Note 15)                                        |                                          |   |                                             | 10,141     |   |   | 9,491      |   |   | 9,419 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
|                                                                      | Total                    Non-Interest Expense |   |                                             | 35,802     |   |   | 31,319     |   |   | 27,520 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
|                                                                      | Income                    Before Income Taxes |   |                                             | 6,088      |   |   | 11,834     |   |   | 12,671 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Income                    Tax Expense (Note 14)                           |                                          |   |                                             | 1,890      |   |   | 4,161      |   |   | 4,556 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
|                                                                      | Net                    Income                 |   | $                                                | 4,198      |   | $      | 7,673      |   | $ | 8,115 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Net                    Income Per Common Share                            |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Basic                                                                     |                                          |   | $                                                | .24        |   | $      | .43        |   | $ | .47 |   |
| Diluted                                                                   |                                          |   |                                             | .24        |   |   | .42        |   |   | .45 |   |
|                                                                      |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Weighted                    Average Common Shares Outstanding             |                                          |   |                                             |       |   |   |       |   |   |   |   |
| Basic                                                                     |                                          |   |                                             | 17,566,315 |   |   | 17,825,152 |   |   | 17,298,285 |   |
| Diluted                                                                   |                                          |   |                                             | 17,757,436 |   |   | 18,133,859 |   |   | 18,033,333 |   |

*See          accompanying notes.*

----

***SOUTHERN          COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**CONSOLIDATED**
**          STATEMENTS OF COMPREHENSIVE INCOME**

**Years          Ended December 31, 2006, 2005 and 2004 **

----

|                                                                                  |   | 2006                                      |   | 2005   |   | 2004   |   |
|---------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|--------|--------|--------|--------|
|                                                                                  |   | (Amounts                    in thousands) |   |
|                                                                                  |   |                                      |   |   |   |   |   |
| Net                    income                                                         |   | $                                         | 4,198  |   | $      | 7,673  |   | $ | 8,115 |   |
|                                                                                  |   |                                      |   |   |   |   |   |   |   |   |
| Other                    comprehensive income (loss):                                 |   |                                      |   |   |   |   |   |   |   |   |
|                                                                                  |   |                                      |   |   |   |   |   |   |   |   |
| Securities                    available for sale:                                     |   |                                      |   |   |   |   |   |   |   |   |
| Unrealized                    holding gains (losses) on available for sale securities |   |                                      | (213   | )      |   | (5,203 | )      |   | (1,043 | ) |
| Tax                    effect                                                         |   |                                      | 81     |   |   | 2,007  |   |   | 403 |   |
| Reclassification                    of losses recognized in net income                |   |                                      | 4,156  |   |   | 266    |   |   | - |   |
| Tax                    effect                                                         |   |                                      | (1,602 | )      |   | (103   | )      |   | - |   |
| Net                    of tax amount                                                  |   |                                      | 2,422  |   |   | (3,033 | )      |   | (640 | ) |
|                                                                                  |   |                                      |   |   |   |   |   |   |   |   |
| Cash                    flow hedging activities:                                      |   |                                      |   |   |   |   |   |   |   |   |
| Unrealized                    holding gains (losses) on cash flow hedging activities  |   |                                      | 69     |   |   | -      |   |   | (111 | ) |
| Tax                    effect                                                         |   |                                      | (27    | )      |   | -      |   |   | 43 |   |
| Reclassification                    of (gains) losses recognized in net income, net   |   |                                      | 28     |   |   | (214   | )      |   | (482 | ) |
| Tax                    effect                                                         |   |                                      | (10    | )      |   | 83     |   |   | 182 |   |
| Net                    of tax amount                                                  |   |                                      | 60     |   |   | (131   | )      |   | (368 | ) |
|                                                                                  |   |                                      |   |   |   |   |   |   |   |   |
| Additional                    minimum pension liability                               |   |                                      | (147   | )      |   | -      |   |   | - |   |
| Tax                    effect                                                         |   |                                      | 57     |   |   | -      |   |   | - |   |
| Net                    of tax amount                                                  |   |                                      | (90    | )      |   | -      |   |   | - |   |
|                                                                                  |   |                                      |   |   |   |   |   |   |   |   |
| Total                    other comprehensive income (loss)                            |   |                                      | 2,392  |   |   | (3,164 | )      |   | (1,008 | ) |
|                                                                                  |   |                                      |   |   |   |   |   |   |   |   |
| Comprehensive                    income                                               |   | $                                         | 6,590  |   | $      | 4,509  |   | $ | 7,107 |   |

*See          accompanying notes.*

----

***SOUTHERN          COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**CONSOLIDATED**
**          STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**Years          Ended December 31, 2006, 2005 and 2004 **

----

|                                                         |   |                                                         |       |     |   |          |   | Accumulated                      |   |   |   |
|--------------------------------------------------------------|--------|--------------------------------------------------------------|------------|----------|--------|---------------|--------|----------------------------------|--------|--------|--------|
|                                                         |   |                                                         |       |     |   |          |   | Other                            |   | Total  |   |
|                                                         |   | Common                    Stock                              |       | Retained |   | Comprehensive |   | Stockholders'                    |   |
|                                                         |   | Shares                                                       |       | Amount   |   | Earnings      |   | Income                    (Loss) |   | Equity |   |
|                                                         |   | (Amounts                    in thousands, except share data) |       |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |
| Balance                    at December 31, 2003              |   |                                                         | 8,986,796  |     | $      | 44,377        |   | $                                | 5,408  |   | $      | 1,021 |   | $ | 50,806 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Net                    income                                |   |                                                         | -          |     |   | -             |   |                             | 8,115  |   |   | - |   |   | 8,115 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Other                    comprehensive loss, net of tax      |   |                                                         | -          |     |   | -             |   |                             | -      |   |   | (1,008 | ) |   | (1,008 | ) |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Common                    stock issued pursuant to           |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Conversion                    of trust preferred securities  |   |                                                         | 2,059,846  |     |   | 15,788        |   |                             | -      |   |   | - |   |   | 15,788 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Business                    combination                      |   |                                                         | 6,426,532  |     |   | 62,659        |   |                             | -      |   |   | - |   |   | 62,659 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Fair                    value of stock options issued        |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| in                    connection with a business combination |   |                                                         | -          |     |   | 349           |   |                             | -      |   |   | - |   |   | 349 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Stock                    options exercised including         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| income                    tax benefit of $411                |   |                                                         | 323,710    |     |   | 1,856         |   |                             | -      |   |   | - |   |   | 1,856 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Employee                    stock purchase plan              |   |                                                         | 22,350     |     |   | 171           |   |                             | -      |   |   | - |   |   | 171 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Cash                    dividends of $.11 per share          |   |                                                         | -          |     |   | -             |   |                             | (1,902 | )      |   | - |   |   | (1,902 | ) |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Balance                    at December 31, 2004              |   |                                                         | 17,819,234 |     |   | 125,200       |   |                             | 11,621 |   |   | 13 |   |   | 136,834 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Net                    income                                |   |                                                         | -          |     |   | -             |   |                             | 7,673  |   |   | - |   |   | 7,673 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Other                    comprehensive loss, net of tax      |   |                                                         | -          |     |   | -             |   |                             | -      |   |   | (3,164 | ) |   | (3,164 | ) |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Shares                    repurchased                        |   |                                                         | (460,800   | )        |   | (4,271        | )      |                             | -      |   |   | - |   |   | (4,271 | ) |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Common                    stock issued pursuant to           |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Employee                    stock purchase plan              |   |                                                         | 21,059     |     |   | 164           |   |                             | -      |   |   | - |   |   | 164 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Stock                    options exercised including         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| income                    tax benefit of $323                |   |                                                         | 232,979    |     |   | 1,301         |   |                             | -      |   |   | - |   |   | 1,301 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Expense                    recognized in                     |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| connection                    with stock options             |   |                                                         | -          |     |   | 96            |   |                             | -      |   |   | - |   |   | 96 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Cash                    dividends of $.21 per share          |   |                                                         | -          |     |   | -             |   |                             | (3,748 | )      |   | - |   |   | (3,748 | ) |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Balance                    at December 31, 2005              |   |                                                         | 17,612,472 |     |   | 122,490       |   |                             | 15,546 |   |   | (3,151 | ) |   | 134,885 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Net                    income                                |   |                                                         | -          |     |   | -             |   |                             | 4,198  |   |   | - |   |   | 4,198 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Other                    comprehensive income, net of tax    |   |                                                         | -          |     |   | -             |   |                             | -      |   |   | 2,392 |   |   | 2,392 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Shares                    repurchased                        |   |                                                         | (377,126   | )        |   | (3,682        | )      |                             | -      |   |   | - |   |   | (3,682 | ) |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Common                    stock issued pursuant to           |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| stock                    options exercised including         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| income                    tax benefit of $69                 |   |                                                         | 170,594    |     |   | 749           |   |                             | -      |   |   | - |   |   | 749 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Expense                    recognized in                     |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| connection                    with stock options             |   |                                                         | -          |     |   | 59            |   |                             | -      |   |   | - |   |   | 59 |   |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Cash                    dividends of $0.135 per share        |   |                                                         | -          |     |   | -             |   |                             | (2,376 | )      |   |     |   |   | (2,376 | ) |
|                                                         |   |                                                         |       |     |   |          |   |                             |   |   |   |   |   |   |   |   |
| Balance                    at December 31, 2006              |   |                                                         | 17,405,940 |     | $      | 119,616       |   | $                                | 17,368 |   | $      | (759 | ) | $ | 136,225 |   |

*See          accompanying notes.*

----

***SOUTHERN          COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

***CONSOLIDATED          STATEMENTS OF CASH FLOWS***

***Years          Ended December 31, 200***
**6,          2005 and 2004 **

----

|                                                                            |                                                                    |   | 2006                                      |     | 2005   |   | 2004    |   |
|---------------------------------------------------------------------------------|-------------------------------------------------------------------------|--------|-------------------------------------------|----------|--------|--------|---------|--------|
|                                                                            |                                                                    |   | (Amounts                    in thousands) |     |
|                                                                            |                                                                    |   |                                      |     |   |   |    |   |
| Cash                    Flows from Operating Activities                         |                                                                    |   |                                      |     |   |   |    |   |
| Net                    income                                                   |                                                                    |   | $                                         | 4,198    |   | $      | 7,673   |   | $ | 8,115 |   |
| Adjustments                    to reconcile net income to net cash provided     |                                                                    |   |                                      |     |   |   |    |   |   |   |   |
| by                    operating activities:                                     |                                                                    |   |                                      |     |   |   |    |   |   |   |   |
| Depreciation                    and amortization                                |                                                                    |   |                                      | 3,732    |   |   | 4,245   |   |   | 4,087 |   |
| Provision                    for loan losses                                    |                                                                    |   |                                      | 2,510    |   |   | 950     |   |   | 2,239 |   |
| Stock                    options expensed                                       |                                                                    |   |                                      | 59       |   |   | 96      |   |   | - |   |
| Net                    increase in cash surrender value of life insurance       |                                                                    |   |                                      | (548     | )      |   | (364    | )      |   | (368 | ) |
| Realized                    loss on sales of available for sale securities, net |                                                                    |   |                                      | 4,156    |   |   | 266     |   |   | - |   |
| Realized                    (gain) loss on sale of premises and equipment       |                                                                    |   |                                      | 6        |   |   | 40      |   |   | (20 | ) |
| Gain                    (loss) on economic hedges                               |                                                                    |   |                                      | 432      |   |   | 743     |   |   | (127 | ) |
| Deferred                    income taxes                                        |                                                                    |   |                                      | (1,237   | )      |   | (523    | )      |   | 832 |   |
| Realized                    (gain) loss on sale of foreclosed assets            |                                                                    |   |                                      | (42      | )      |   | 53      |   |   | (75 | ) |
| Change                    in assets and liabilities:                            |                                                                    |   |                                      |     |   |   |    |   |   |   |   |
| Increase                    in other assets                                     |                                                                    |   |                                      | (2,394   | )      |   | (958    | )      |   | (3,879 | ) |
| Increase                    in other liabilities                                |                                                                    |   |                                      | 917      |   |   | 734     |   |   | 1,606 |   |
|                                                                            | Total                    Adjustments                                    |   |                                      | 7,591    |   |   | 5,282   |   |   | 4,295 |   |
|                                                                            | Net                    Cash Provided by Operating Activities            |   |                                      | 11,789   |   |   | 12,955  |   |   | 12,410 |   |
| Cash                    Flows from Investing Activities                         |                                                                    |   |                                      |     |   |   |    |   |   |   |   |
| (Increase)                    decrease in federal funds sold                    |                                                                    |   |                                      | (135     | )      |   | (568    | )      |   | 191 |   |
| Purchases                    of:                                                |                                                                    |   |                                      |     |   |   |    |   |   |   |   |
| Available                    for sale investment securities                     |                                                                    |   |                                      | (80,123  | )      |   | (32,940 | )      |   | (141,996 | ) |
| Held                    to maturity investment securities                       |                                                                    |   |                                      | (1,871   | )      |   | (19,940 | )      |   | (15,915 | ) |
| Proceeds                    from maturities and calls of:                       |                                                                    |   |                                      |     |   |   |    |   |   |   |   |
| Available                    for sale investment securities                     |                                                                    |   |                                      | 28,189   |   |   | 49,114  |   |   | 122,073 |   |
| Held                    to maturity investment securities                       |                                                                    |   |                                      | 3,466    |   |   | 6,751   |   |   | 20,572 |   |
| Proceeds                    from sale of:                                       |                                                                    |   |                                      |     |   |   |    |   |   |   |   |
| Available                    for sale investment securities                     |                                                                    |   |                                      | 86,126   |   |   | 11,503  |   |   | - |   |
| Net                    increase in loans                                        |                                                                    |   |                                      | (165,693 | )      |   | (74,408 | )      |   | (102,762 | ) |
| Purchases                    of premises and equipment                          |                                                                    |   |                                      | (13,921  | )      |   | (6,003  | )      |   | (7,626 | ) |
| Proceeds                    from disposal of premises and equipment             |                                                                    |   |                                      | 307      |   |   | 43      |   |   | 169 |   |
| Proceeds                    from sale of foreclosed assets                      |                                                                    |   |                                      | 336      |   |   | 1,179   |   |   | 1,444 |   |
| Purchase                    of bank-owned life insurance                        |                                                                    |   |                                      | (5,000   | )      |   | -       |   |   | (7,000 | ) |
| Net                    cash used in business combination                        |                                                                    |   |                                      | -        |   |   | -       |   |   | (9,393 | ) |
|                                                                            | Net                    Cash Used in Investing Activities                |   |                                      | (148,319 | )      |   | (65,269 | )      |   | (140,243 | ) |
| Cash                    Flows from Financing Activities                         |                                                                    |   |                                      |     |   |   |    |   |   |   |   |
| Net                    increase in deposits                                     |                                                                    |   |                                      | 82,633   |   |   | 96,546  |   |   | 67,578 |   |
| Net                    increase (decrease) in short-term borrowings             |                                                                    |   |                                      | 43,562   |   |   | (60,461 | )      |   | 17,747 |   |
| Proceeds                    from long-term borrowings                           |                                                                    |   |                                      | 80,814   |   |   | 39,881  |   |   | 37,623 |   |
| Repayment                    of long-term borrowings                            |                                                                    |   |                                      | (60,616  | )      |   | (10,250 | )      |   | - |   |
| Net                    proceeds from issuance of common stock                   |                                                                    |   |                                      | 749      |   |   | 1,465   |   |   | 1,616 |   |
| Cost                    of shares repurchased                                   |                                                                    |   |                                      | (3,682   | )      |   | (4,271  | )      |   | - |   |
| Cash                    dividends paid                                          |                                                                    |   |                                      | (2,376   | )      |   | (3,748  | )      |   | (1,902 | ) |
|                                                                            | Net                    Cash Provided by Financing Activities            |   |                                      | 141,084  |   |   | 59,162  |   |   | 122,662 |   |
|                                                                            | Net                    Increase (Decrease) in Cash and Cash Equivalents |   |                                      | 4,554    |   |   | 6,848   |   |   | (5,171 | ) |
| Cash                    and Cash Equivalents, Beginning of Year                 |                                                                    |   |                                      | 24,606   |   |   | 17,758  |   |   | 22,929 |   |
| Cash                    and Cash Equivalents, End of Year                       |                                                                    |   | $                                         | 29,160   |   | $      | 24,606  |   | $ | 17,758 |   |

----

| Supplemental                    Disclosures of Cash Flow Information                                                                    |   |   |   |   |   |   |   |   |   |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Interest                    paid on deposits and borrowed funds                                                                         |   |   | $      | 44,143 |   | $      | 29,636 |   | $      | 19,506 |   |
| Income                    taxes paid                                                                                                    |   |   |   | 2,458  |   |   | 4,489  |   |   | 2,135  |   |
| Supplemental                    Schedule of Noncash Investing and Financing Activities                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Transfer                    of loans to foreclosed assets                                                                               |   |   | $      | 916    |   | $      | 425    |   | $      | 1,923  |   |
| Increase                    (decrease) in fair value of securities available for sale, net                    of                    tax |   |   |   | (132   | )      |   | (3,196 | )      |   | (640   | )      |
| Increase                    (decrease) in fair value of cash flow hedges, net of tax                                                    |   |   |   | 42     |   |   | -      |   |   | (111   | )      |
| Unrealized                    gain (loss) on fair value hedges                                                                          |   |   |   | (200   | )      |   | (573   | )      |   | 4      |   |
| Convertible                    trust preferred securities converted to common stock                                                     |   |   |   | -      |   |   | -      |   |   | 15,788 |   |

*See            accompanying notes.*

----

***SOUTHERN          COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES          TO CONSOLIDATED**
**          FINANCIAL STATEMENTS **

**Years          Ended December 31, 2006, 2005 and 2004 **

----

***(1)***
***NATURE OF OPERATIONS***

***(2)          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***

***Use          of Estimates***

***Cash          and Cash Equivalents***

***Investment          Securities***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(2)            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES            (Continued)***

***Loans          Held for Sale***

***Loans***

***Allowance          for Loan Losses***

***Premises          and Equipment***

***Foreclosed          Assets***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(2)          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES          (Continued)***

***Goodwill          and Other Intangibles***

***Income          Taxes***

***Derivative          Instruments***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***2)          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES          (Continued)***

***Derivative          Instruments (Continued)***

***Per          Share Data***

|                                                                     |   | 2006   |       | 2005   |   | 2004       |   |
|--------------------------------------------------------------------------|--------|--------|------------|--------|--------|------------|--------|
|                                                                     |   |   |       |   |   |       |   |
| Weighted                    average number of common shares used in      |   |   |       |   |   |       |   |
| computing                    basic net income per share                  |   |   | 17,566,315 |   |   | 17,825,152 |   |   | 17,298,285 |   |
|                                                                     |   |   |       |   |   |       |   |   |   |   |
| Effect                    of dilutive stock options                      |   |   | 191,121    |   |   | 308,707    |   |   | 219,624 |   |
| Effect                    of dilutive convertible preferred securities   |   |   | -          |   |   | -          |   |   | 515,424 |   |
|                                                                     |   |   |       |   |   |       |   |   |   |   |
| Weighted                    average number of common shares and dilutive |   |   |       |   |   |       |   |   |   |   |
| potential                    common shares used in computing diluted net |   |   |       |   |   |       |   |   |   |   |
| income                    per share                                      |   |   | 17,757,436 |   |   | 18,133,859 |   |   | 18,033,333 |   |

***Stock-Based          Compensation***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(2)          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES          (Continued)***

***Stock-Based          Compensation (Continued)***

|                                                                                                          |   | 2005   |       | 2004   |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|
|                                                                                                          |   |   |       |   |   |
| Net                      income:                                                                              |   |   |       |   |   |
| As                      reported                                                                              |   | $      | 7,673      |   | $      | 8,115 |   |
|                                                                                                          |   |   |       |   |   |   |   |
| Add:                            Total stock-based employee compensation expense |   |   |       |   |   |   |   |
| determined                      under fair value method for all awards                                        |   |   |       |   |   |   |   |
| net                      of related tax effects                                                               |   |   | 96         |   |   | - |   |
|                                                                                                          |   |   |       |   |   |   |   |
| Deduct:                       Total stock-based employee compensation expense                            |   |   |       |   |   |   |   |
| determined                      under fair value method for all awards                                        |   |   |       |   |   |   |   |
| net                      of related tax effects                                                               |   |   | (1,611     | )      |   | (861 | ) |
|                                                                                                          |   |   |       |   |   |   |   |
|                                                                                                          |   |   |       |   |   |   |   |
| Pro                      forma                                                                                |   | $      | 6,158      |   | $      | 7,254 |   |
|                                                                                                          |   |   |       |   |   |   |   |
| Basic                      earnings per share:                                                                |   |   |       |   |   |   |   |
| As                      reported                                                                              |   | $      | .43        |   | $      | .47 |   |
| Pro                      forma                                                                                |   |   | .35        |   |   | .42 |   |
|                                                                                                          |   |   |       |   |   |   |   |
| Diluted                      earnings per share:                                                              |   |   |       |   |   |   |   |
| As                      reported                                                                              |   | $      | .42        |   | $      | .45 |   |
| Pro                      forma                                                                                |   |   | .34        |   |   | .40 |   |
|                                                                                                          |   |   |       |   |   |   |   |
|                                                                                                          |   |   |       |   |   |   |   |
|                                                                                                          |   |   |       |   |   |   |   |
| Weighted                      Average Number of Shares Outstanding                                            |   |   |       |   |   |   |   |
| Basic                                                                                                         |   |   | 17,825,152 |   |   | 17,298,285 |   |
| Diluted                                                                                                       |   |   | 18,133,859 |   |   | 18,033,333 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(2)          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES          (Continued)***

***Comprehensive          Income***

|                                                                                                             |   | 2006                                |   | 2005   |   |
|------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|--------|--------|
|                                                                                                             |   | (In                      thousands) |   |
|                                                                                                             |   |                                |   |   |   |
| Unrealized                      holding loss - investment securities available for sale                          |   | $                                   | (1,185 | )      | $      | (5,127 | ) |
| Deferred                      income taxes                                                                       |   |                                | 456    |   |   | 1,976 |   |
| Net                      unrealized holding loss - investment securities available for                      sale |   |                                | (729   | )      |   | (3,151 | ) |
|                                                                                                             |   |                                |   |   |   |   |   |
| Unrealized                      holding loss - cash flow hedge instruments                                       |   |                                | 97     |   |   | - |   |
| Deferred                      income taxes                                                                       |   |                                | (37    | )      |   | - |   |
| Net                      unrealized holding loss - cash flow hedge instruments                                   |   |                                | 60     |   |   | - |   |
|                                                                                                             |   |                                |   |   |   |   |   |
| Additional                      minimun pension liability                                                        |   |                                | (147   | )      |   | - |   |
| Deferred                      income taxes                                                                       |   |                                | 57     |   |   | - |   |
| Net                      additional minimun pension liability                                                    |   |                                | (90    | )      |   | - |   |
|                                                                                                             |   |                                |   |   |   |   |   |
| Total                      accumulated other comprehensive income (loss)                                         |   | $                                   | (759   | )      | $      | (3,151 | ) |

***Segment          Reporting***

*Disclosures          about Segments of an Enterprise and Related Information,*

***Risk          and Uncertainties***

***Reclassifications***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(2)              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES              (Continued)***

***Recent          Accounting Pronouncements***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(3)          BUSINESS COMBINATIONS***

----

***SOUTHERN              COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES              TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years              Ended December 31, 2006, 2005 and 2004 **

----

***(4)            INVESTMENT SECURITIES***

|                                              |   | 2006                                           |                                    |
|---------------------------------------------------|--------|------------------------------------------------|-----------------------------------------|
|                                              |   | Amortized                    Cost              |                                    | Gross                    Unrealized Gains |   | Gross                    Unrealized Losses |   | Fair                    Value |   |
|                                              |   | (Amount                    in thousands)       |                                    |
|                                              |   |                                           |                                    |   |   |   |   |   |   |
| Securities                    available for sale: |   |                                           |                                    |   |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                              | 77,942                                  |   | $ | 592 |   | $ | 431 |   | $ | 78,103 |   |
| Mortgage-backed                    securities     |   |                                           | 72,258                                  |   |   | 234 |   |   | 1,249 |   |   | 71,243 |   |
| Municipals                                        |   |                                           | 1,303                                   |   |   | 9 |   |   | - |   |   | 1,312 |   |
| Other                                             |   |                                           | 18,703                                  |   |   | - |   |   | 340 |   |   | 18,363 |   |
|                                              |   | $                                              | 170,206                                 |   | $ | 835 |   | $ | 2,020 |   | $ | 169,021 |   |
|                                              |   |                                           |                                    |   |   |   |   |   |   |   |   |   |   |
| Securities                    held to maturity:   |   |                                           |                                    |   |   |   |   |   |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                              | 74,793                                  |   | $ | 5 |   | $ | 2,235 |   | $ | 72,563 |   |
| Mortgage-backed                    securities     |   |                                           | 2,795                                   |   |   | 5 |   |   | 61 |   |   | 2,739 |   |
| Municipals                                        |   |                                           | 8,887                                   |   |   | 128 |   |   | 104 |   |   | 8,911 |   |
|                                              |   | $                                              | 86,475                                  |   | $ | 138 |   | $ | 2,400 |   | $ | 84,213 |   |
|                                              |   |                                           |                                    |   |   |   |   |   |   |   |   |   |   |
|                                              |   | 2005                                           |
|                                              |   |                                           | Amortized                    Cost  |   |   | Gross                    Unrealized Gains |   |   | Gross                    Unrealized Losses |   |   | Fair                    Value |   |
|                                                   |   | (Amount                    in thousands)  |
|                                              |   |                                           |                                    |   |   |   |   |   |   |   |   |   |   |
| Securities                    available for sale: |   |                                           |                                    |   |   |   |   |   |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                              | 66,426                                  |   | $ | - |   | $ | 1,147 |   | $ | 65,279 |   |
| Mortgage-backed                    securities     |   |                                           | 124,212                                 |   |   | 156 |   |   | 3,870 |   |   | 120,498 |   |
| Municipals                                        |   |                                           | 1,000                                   |   |   | 1 |   |   | 4 |   |   | 997 |   |
| Other                                             |   |                                           | 17,297                                  |   |   | 62 |   |   | 325 |   |   | 17,034 |   |
|                                              |   | $                                              | 208,935                                 |   | $ | 219 |   | $ | 5,346 |   | $ | 203,808 |   |
|                                              |   |                                           |                                    |   |   |   |   |   |   |   |   |   |   |
| Securities                    held to maturity:   |   |                                           |                                    |   |   |   |   |   |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                              | 75,046                                  |   | $ | - |   | $ | 2,395 |   | $ | 72,651 |   |
| Mortgage-backed                    securities     |   |                                           | 3,228                                   |   |   | 11 |   |   | 67 |   |   | 3,172 |   |
| Municipals                                        |   |                                           | 9,834                                   |   |   | 171 |   |   | 54 |   |   | 9,951 |   |
|                                              |   | $                                              | 88,108                                  |   | $ | 182 |   | $ | 2,516 |   | $ | 85,774 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(4)          INVESTMENT SECURITIES (Continued)***

|                                              |   | 2006                                     |   |
|---------------------------------------------------|--------|------------------------------------------|--------|
|                                              |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
|                                              |   | Less                    than 12 Months   |   | 12                    Months or More |   | Total |   |
|                                              |   | Fair                    Value            |   | Unrealized                    losses |   | Fair                    Value |   | Unrealized                    losses |   | Fair                    Value |   | Unrealized                    losses |   |
|                                              |   | (Amount                    in thousands) |   |
|                                              |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Securities                    available for sale: |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                        | 4,970  |   | $ | 31 |   | $ | 30,541 |   | $ | 400 |   | $ | 35,511 |   | $ | 431 |   |
| Mortgage-backed                    securities     |   |                                     | 5,384  |   |   | 12 |   |   | 37,714 |   |   | 1,237 |   |   | 43,098 |   |   | 1,249 |   |
| Other                                             |   |                                     | -      |   |   | - |   |   | 735 |   |   | 340 |   |   | 735 |   |   | 340 |   |
|                                              |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    temporarily impaired     |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| securities                                        |   | $                                        | 10,354 |   | $ | 43 |   | $ | 68,990 |   | $ | 1,977 |   | $ | 79,344 |   | $ | 2,020 |   |
|                                              |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                    held to maturity:   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.                    S. government agencies      |   | $                                        | 9,656  |   | $ | 344 |   | $ | 60,402 |   | $ | 1,891 |   | $ | 70,058 |   | $ | 2,235 |   |
| Mortgage-backed                    securities     |   |                                     | 466    |   |   | 2 |   |   | 1,974 |   |   | 59 |   |   | 2,440 |   |   | 61 |   |
| Municipals                                        |   |                                     | 1,899  |   |   | 76 |   |   | 2,598 |   |   | 28 |   |   | 4,497 |   |   | 104 |   |
|                                              |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    temporarily impaired     |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| securities                                        |   | $                                        | 12,021 |   | $ | 422 |   | $ | 64,974 |   | $ | 1,978 |   | $ | 76,995 |   | $ | 2,400 |   |

----

***SOUTHERN              COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES              TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years              Ended December 31, 2006, 2005 and 2004 **

----

***(4)              INVESTMENT SECURITIES (Continued)***

|                                                |   | 2005                                       |   |
|-----------------------------------------------------|--------|--------------------------------------------|--------|
|                                                |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
|                                                |   | Less                      than 12 Months   |   | 12                      Months or More |   | Total |   |
|                                                |   | Fair                      Value            |   | Unrealized                      losses |   | Fair                      Value |   | Unrealized                      losses |   | Fair                      Value |   | Unrealized                      losses |   |
|                                                |   | (Amount                      in thousands) |   |
|                                                |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
| Securities                      available for sale: |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
| U.                      S. government agencies      |   | $                                          | 28,024 |   | $ | 356 |   | $ | 37,255 |   | $ | 791 |   | $ | 65,279 |   | $ | 1,147 |   |
| Mortgage-backed                      securities     |   |                                       | 27,628 |   |   | 807 |   |   | 79,160 |   |   | 3,063 |   |   | 106,788 |   |   | 3,870 |   |
| Municipals                                          |   |                                       | 749    |   |   | 4 |   |   | - |   |   | - |   |   | 749 |   |   | 4 |   |
| Other                                               |   |                                       | 675    |   |   | 325 |   |   | - |   |   | - |   |   | 675 |   |   | 325 |   |
|                                                |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                      temporarily impaired     |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| securities                                          |   | $                                          | 57,076 |   | $ | 1,492 |   | $ | 116,415 |   | $ | 3,854 |   | $ | 173,491 |   | $ | 5,346 |   |
|                                                |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                      held to maturity:   |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.                      S. government agencies      |   | $                                          | 19,231 |   | $ | 268 |   | $ | 53,166 |   | $ | 2,127 |   | $ | 72,397 |   | $ | 2,395 |   |
| Mortgage-backed                      securities     |   |                                       | 2,025  |   |   | 55 |   |   | 305 |   |   | 12 |   |   | 2,330 |   |   | 67 |   |
| Municipals                                          |   |                                       | 2,875  |   |   | 37 |   |   | 963 |   |   | 17 |   |   | 3,838 |   |   | 54 |   |
|                                                |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                      temporarily impaired     |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| securities                                          |   | $                                          | 24,131 |   | $ | 360 |   | $ | 54,434 |   | $ | 2,156 |   | $ | 78,565 |   | $ | 2,516 |   |

|                                                    |   | Securities                    Available for Sale |    | Securities                    Held to Maturity |   |
|---------------------------------------------------------|--------|--------------------------------------------------|---------|------------------------------------------------|--------|
|                                                    |   | Amortized                    Cost                |    | Fair                    Value                  |   | Amortized                    Cost |   | Fair                    Value |   |
|                                                    |   | (Amount                    in thousands)         |    |
|                                                    |   |                                             |    |                                           |   |   |   |   |   |
|                                                    |   |                                             |    |                                           |   |   |   |   |   |
| Due                    within one year                  |   | $                                                | 9,991   |                                           | $      | 9,896 |   | $ | 17,773 |   | $ | 17,636 |   |
| Due                    after one but through five years |   |                                             | 36,951  |                                           |   | 36,395 |   |   | 40,410 |   |   | 39,179 |   |
| Due                    after five but through ten years |   |                                             | 34,054  |                                           |   | 34,576 |   |   | 3,767 |   |   | 3,824 |   |
| Due                    after ten years                  |   |                                             | 16,952  |                                           |   | 16,911 |   |   | 21,730 |   |   | 20,835 |   |
| Mortgage-backed                    securities           |   |                                             | 72,258  |                                           |   | 71,243 |   |   | 2,795 |   |   | 2,739 |   |
|                                                    |   |                                             |    |                                           |   |   |   |   |   |   |   |   |   |
|                                                    |   | $                                                | 170,206 |                                           | $      | 169,021 |   | $ | 86,475 |   | $ | 84,213 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(4)          INVESTMENT SECURITIES (Continued)***

***Investments          in Equity Securities***

***(5)          LOANS***

|                                               |   | 2006                                      |      | 2005   |   |
|----------------------------------------------------|--------|-------------------------------------------|-----------|--------|--------|
|                                               |   | (Amounts                    in thousands) |      |
|                                               |   |                                      |      |   |   |
| Residential                    mortgage loans      |   | $                                         | 262,480   |   | $      | 244,177 |   |
| Commercial                    mortgage loans       |   |                                      | 359,987   |   |   | 286,658 |   |
| Construction                    loans              |   |                                      | 211,858   |   |   | 156,900 |   |
| Commercial                    and industrial loans |   |                                      | 177,706   |   |   | 151,950 |   |
| Loans                    to individuals            |   |                                      | 21,380    |   |   | 29,142 |   |
|                                               |   |                                      |      |   |   |   |   |
| Total                                              |   | $                                         | 1,033,411 |   | $      | 868,827 |   |

|                                 |   | 2006                                      |   | 2005   |   |
|--------------------------------------|--------|-------------------------------------------|--------|--------|--------|
|                                 |   | (Amounts                    in thousands) |   |
|                                 |   |                                      |   |   |   |
| Nonaccrual                    loans  |   | $                                         | 2,636  |   | $      | 1,408 |   |
| Foreclosed                    assets |   |                                      | 895    |   |   | 280 |   |
|                                 |   |                                      |   |   |   |   |   |
| Total                                |   | $                                         | 3,531  |   | $      | 1,688 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(5)          LOANS (Continued)***

| Loans                    to directors and officers as a group (12) at December 31,                    2005 |   | $      | 12,617 |   |
|------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                                                       |   |   |   |   |
| Less                    exposure to directors no longer on board at December 31,                    2006   |   |   | (82    | )      |
|                                                                                                       |   |   |   |   |
| Disbursements                    during year ended December 31, 2006                                       |   |   | 18,146 |   |
| Amounts                    collected during year ended December 31, 2006                                   |   |   | (8,451 | )      |
|                                                                                                       |   |   |   |   |
| Loans                    to directors and officers as a group (15) at December 31,                    2006 |   | $      | 22,230 |   |

***(6)          ALLOWANCE FOR LOAN LOSSES***

|                                               |   | 2006                                      |   | 2005   |   | 2004   |   |
|----------------------------------------------------|--------|-------------------------------------------|--------|--------|--------|--------|--------|
|                                               |   | (Amounts                    in thousands) |   |
|                                               |   |                                      |   |   |   |   |   |
| Balance                    at beginning of period  |   | $                                         | 11,785 |   | $      | 12,537 |   | $ | 7,275 |   |
|                                               |   |                                      |   |   |   |   |   |   |   |   |
| Provision                    for loan losses       |   |                                      | 2,510  |   |   | 950    |   |   | 2,239 |   |
|                                               |   |                                      |   |   |   |   |   |   |   |   |
| Charge-offs                                        |   |                                      | (1,554 | )      |   | (1,362 | )      |   | (1,574 | ) |
| Recoveries                                         |   |                                      | 299    |   |   | 151    |   |   | 150 |   |
| Net                    charge-offs                 |   |                                      | (1,255 | )      |   | (1,211 | )      |   | (1,424 | ) |
|                                               |   |                                      |   |   |   |   |   |   |   |   |
| Allowance                    for loans acquired in |   |                                      |   |   |   |   |   |   |   |   |
| purchase                    transactions, net      |   |                                      | -      |   |   | (491   | )      |   | 4,447 |   |
|                                               |   |                                      |   |   |   |   |   |   |   |   |
| Balance                    at end of period        |   | $                                         | 13,040 |   | $      | 11,785 |   | $ | 12,537 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(7)          PREMISES AND EQUIPMENT***

|                                                    |   | 2006                                      |    | 2005   |   |
|---------------------------------------------------------|--------|-------------------------------------------|---------|--------|--------|
|                                                    |   | (Amounts                    in thousands) |    |
|                                                    |   |                                      |    |   |   |
| Land                                                    |   | $                                         | 9,583   |   | $      | 7,182 |   |
| Buildings                    and leasehold improvements |   |                                      | 28,858  |   |   | 20,702 |   |
| Furniture                    and equipment              |   |                                      | 15,092  |   |   | 14,342 |   |
|                                                    |   | $                                         | 53,533  |   | $      | 42,226 |   |
| Less                    accumulated depreciation        |   |                                      | (13,041 | )      |   | (10,967 | ) |
|                                                    |   |                                      |    |   |   |   |   |
| Total                                                   |   | $                                         | 40,492  |   | $      | 31,259 |   |

***(8)***
** **
***GOODWILL          AND OTHER INTANGIBLES***

|                                                                    |   | 2006                                      |   | 2005   |   |
|-------------------------------------------------------------------------|--------|-------------------------------------------|--------|--------|--------|
|                                                                    |   | (Amounts                    in thousands) |   |
|                                                                    |   |                                      |   |   |   |
| Goodwill,                    beginning of year                          |   | $                                         | 49,792 |   | $      | 50,135 |   |
| Adjustments                    to preliminary purchase price allocation |   |                                      | -      |   |   | (343 | ) |
|                                                                    |   |                                      |   |   |   |   |   |
| Goodwill,                    end of year                                |   | $                                         | 49,792 |   | $      | 49,792 |   |
|                                                                    |   |                                      |   |   |   |   |   |
| Other                    intangibles - gross                            |   |                                      | 2,627  |   |   | 2,627 |   |
| Less                    accumulated amortization                        |   |                                      | 906    |   |   | 544 |   |
|                                                                    |   |                                      |   |   |   |   |   |
| Other                    intangibles - net                              |   | $                                         | 1,721  |   | $      | 2,083 |   |

|                                               |   | Estimated                    Amortization Expense |   |
|----------------------------------------------------|--------|---------------------------------------------------|--------|
|                                               |   | (Amounts                    in thousands)         |   |
| For                    the Year Ended December 31: |   |                                              |   |   |
| 2007                                               |   | $                                                 | 301    |   |
| 2008                                               |   |                                              | 265    |   |
| 2009                                               |   |                                              | 265    |   |
| 2010                                               |   |                                              | 218    |   |
| 2011                                               |   |                                              | 218    |   |
| Thereafter                                         |   |                                              | 454    |   |
|                                               |   |                                              |   |   |
|                                               |   | $                                                 | 1,721  |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(9)          DEPOSITS***

|       |   | $100,000                                  |    | Under    |   |    |   |
|------------|--------|-------------------------------------------|---------|----------|--------|---------|--------|
|       |   | and                    Over               |    | $100,000 |   | Total   |   |
|       |   | (Amounts                    in thousands) |    |
|       |   |                                      |    |     |   |    |   |
| 2007       |   | $                                         | 212,966 |     | $      | 195,860 |   | $ | 408,826 |   |
| 2008       |   |                                      | 15,143  |     |   | 8,916   |   |   | 24,059 |   |
| 2009       |   |                                      | 35,636  |     |   | 1,317   |   |   | 36,953 |   |
| 2010       |   |                                      | 27,618  |     |   | 921     |   |   | 28,539 |   |
| 2011       |   |                                      | 13,427  |     |   | 824     |   |   | 14,251 |   |
| Thereafter |   |                                      | 9,851   |     |   | 1       |   |   | 9,852 |   |
|       |   |                                      |    |     |   |    |   |   |   |   |
| Total      |   | $                                         | 314,641 |     | $      | 207,839 |   | $ | 522,480 |   |

***(10)          BORROWINGS***

|                           |   | FHLB                                           |    | Term                    Repo |   |
|--------------------------------|--------|------------------------------------------------|---------|------------------------------|--------|
|                           |   | 2006                                           |    | 2006                         |   |
|                           |   | (Amounts in                    thousands) |    |
|                           |   |                                           |    |                         |   |
| Due                    in 2007 |   | $                                              | 55,000  |                         | $      | - |   |
| Due                    in 2008 |   |                                           | 15,000  |                         |   | - |   |
| Due                    in 2009 |   |                                           | 45,000  |                         |   | 10,000 |   |
| Due                    in 2010 |   |                                           | 10,000  |                         |   | - |   |
| Due                    in 2011 |   |                                           | -       |                         |   | 5,000 |   |
| Thereafter                     |   |                                           | 52,676  |                         |   | - |   |
|                           |   |                                           |    |                         |   |   |   |
|                           |   | $                                              | 177,676 |                         | $      | 15,000 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(10)          BORROWINGS (Continued)***

|                                           |   | 2006                                      |    | 2005   |   |
|------------------------------------------------|--------|-------------------------------------------|---------|--------|--------|
|                                           |   | (Amounts                    in thousands) |    |
| **Short-term                    borrowings**   |   |                                      |    |   |   |
| FHLB                                           |   | $                                         | 55,000  |   | $      | - |   |
| Federal                    funds purchased     |   |                                      | 23,183  |   |   | 4,000 |   |
| Repurchase                    agreements       |   |                                      | 14,565  |   |   | 5,186 |   |
|                                           |   | $                                         | 92,748  |   | $      | 9,186 |   |
|                                           |   |                                      |    |   |   |   |   |
| **Long-term                    borrowings**    |   |                                      |    |   |   |   |   |
| FHLB                                           |   | $                                         | 122,676 |   | $      | 157,478 |   |
| Term                    repurchase agreements  |   |                                      | 15,000  |   |   | - |   |
| Jr.                    subordinated debentures |   |                                      | 34,873  |   |   | 35,073 |   |
|                                           |   | $                                         | 172,549 |   | $      | 192,551 |   |

***(11)          JUNIOR SUBORDINATED DEBENTURES***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(11)          JUNIOR SUBORDINATED DEBENTURES (Continued)***

***(12)          EMPLOYEE AND DIRECTOR BENEFIT PLANS***

***401(k)          Retirement Plan***

***Employment          Agreements***

***Termination          Agreements***

***Defined          Benefit Pension Plan***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(12)          EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)***

***Defined          Benefit Pension Plan (Continued)***

|                                                                                                               |   | 2006                                      |   | 2005   |   | 2004   |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|--------|--------|--------|--------|
|                                                                                                               |   | (Amounts                    in thousands) |   |
| Change                    in Benefit Obligation                                                                    |   |                                      |   |   |   |   |   |
|                                                                                                               |   |                                      |   |   |   |   |   |
| Beginning                    of year                                                                               |   | $                                         | 823    |   | $      | 775    |   | $ | 920 |   |
| Actuarial                    loss                                                                                  |   |                                      | 2      |   |   | 25     |   |   | 72 |   |
| Service                    cost                                                                                    |   |                                      | -      |   |   | -      |   |   | 101 |   |
| Interest                    cost                                                                                   |   |                                      | 53     |   |   | 51     |   |   | 73 |   |
| Settlement                                                                                                         |   |                                      | -      |   |   | -      |   |   | (381 | ) |
| Benefits                    paid                                                                                   |   |                                      | (33    | )      |   | (28    | )      |   | (10 | ) |
| End                    of year                                                                                     |   | $                                         | 845    |   | $      | 823    |   | $ | 775 |   |
|                                                                                                               |   |                                      |   |   |   |   |   |   |   |   |
| Change                    in Plan Assets Fair Value                                                                |   |                                      |   |   |   |   |   |   |   |   |
|                                                                                                               |   |                                      |   |   |   |   |   |   |   |   |
| Beginning                    of year                                                                               |   | $                                         | 1,109  |   | $      | 1,034  |   | $ | 1,014 |   |
| Benefits                    paid                                                                                   |   |                                      | (33    | )      |   | (28    | )      |   | (10 | ) |
| Return                    on assets                                                                                |   |                                      | 95     |   |   | 103    |   |   | 30 |   |
| End                    of year                                                                                     |   | $                                         | 1,171  |   | $      | 1,109  |   | $ | 1,034 |   |
|                                                                                                               |   |                                      |   |   |   |   |   |   |   |   |
| Funded                    status                                                                                   |   | $                                         | 326    |   | $      | 286    |   | $ | 259 |   |
| Unrecognized                    (gain)/loss                                                                        |   |                                      | (9     | )      |   | 2      |   |   | - |   |
| Prepaid                    pension cost recognized                                                                 |   | $                                         | 317    |   | $      | 288    |   | $ | 259 |   |
|                                                                                                               |   |                                      |   |   |   |   |   |   |   |   |
| Actuarial                    assumptions used in accounting for net periodic pension cost                    were: |   |                                      |   |
|                                                                                                               |   |                                      |   |   |   |   |   |   |   |   |
| Weighted                    average discount rate                                                                  |   |                                      | 6.50   | %      |   | 6.50   | %      |   | 6.50 | % |
| Weighted                    average rate of increase in                                                            |   |                                      |   |   |   |   |   |   |   |   |
| compensation                    level                                                                              |   |                                      | N/A    |   |   | N/A    |   |   | 5.00 | % |
| Weighted                    average expected long-term                                                             |   |                                      |   |   |   |   |   |   |   |   |
| rate                    of return on plan assets                                                                   |   |                                      | 7.50   | %      |   | 7.50   | %      |   | 7.50 | % |
|                                                                                                               |   |                                      |   |   |   |   |   |   |   |   |
| Components                    of Net Periodic Pension Cost (Benefit)                                               |   |                                      |   |   |   |   |   |   |   |   |
|                                                                                                               |   |                                      |   |   |   |   |   |   |   |   |
| Service                    cost                                                                                    |   | $                                         | -      |   | $      | -      |   | $ | 101 |   |
| Interest                    cost                                                                                   |   |                                      | 53     |   |   | 51     |   |   | 73 |   |
| Expected                    return on plan assets                                                                  |   |                                      | (82    | )      |   | (79    | )      |   | (76 | ) |
| Loss                                                                                                               |   |                                      | -      |   |   | -      |   |   | 5 |   |
| Amortization                    of prior service cost                                                              |   |                                      | -      |   |   | -      |   |   | 7 |   |
| Net                    periodic pension cost (benefit)                                                             |   | $                                         | (29    | )      | $      | (28    | )      | $ | 110 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(12)          EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)***

***Defined          Benefit Pension Plan (Continued)***

|                                                 |   | 2006   |   |
|------------------------------------------------------|--------|--------|--------|
| Asset                    category:                   |   |   |   |
| U.S.                    equity                       |   |   | 57     | % |
| International                    blend               |   |   | 5      |   |
| Fixed                    income and cash equivalents |   |   | 38     |   |

| Year      | Pension                    Benefits |
|-----------|-------------------------------------|
| 2007      |  $                             |  36 |
| 2008      |                                |  39 |
| 2009      |                                |  38 |
| 2010      |                                |  37 |
| 2011      |                                |  37 |
| 2012-2016 |                                |  250 |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(12)          EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)***

***Supplemental          Retirement***

***Employee          Stock Purchase Plan***

***Stock          Option Plans***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(12)          EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)***

***Stock          Option Plans (Continued)***

|                                      |   |                                                  |    | Outstanding                    Options |   | Exercisable                    Options             |   |
|-------------------------------------------|--------|-------------------------------------------------------|---------|----------------------------------------|--------|----------------------------------------------------|--------|
|                                      |   | Shares                    Available for Future Grants |    | Number                    Outstanding  |   | Weighted                    Average Exercise Price |   | Number                    Outstanding |   | Weighted                    Average Exercise Price |   |
|                                      |   |                                                  |    |                                   |   |                                               |   |   |   |   |   |
| At                    December 31, 2005   |   |                                                  | 352,912 |                                   |   | 1,271,917                                          |   |   | 7.51 |   |   | 1,263,917 |   |   | 7.50 |   |
|                                      |   |                                                  |    |                                   |   |                                               |   |   |   |   |   |   |   |   |   |   |
| Options                    authorized     |   |                                                  | 150,000 |                                   |   | -                                                  |   |   | - |   |   | - |   |   | - |   |
| Options                    granted/vested |   |                                                  | (79,500 | )                                      |   | 79,500                                             |   |   | 9.48 |   |   | 17,900 |   |   | 9.43 |   |
| Options                    exercised      |   |                                                  | -       |                                   |   | (170,594                                           | )      |   | 3.99 |   |   | (170,594 | ) |   | 3.99 |   |
| Options                    forfeited      |   |                                                  | 52,349  |                                   |   | (52,349                                            | )      |   | 9.41 |   |   | (52,349 | ) |   | 9.41 |   |
|                                      |   |                                                  |    |                                   |   |                                               |   |   |   |   |   |   |   |   |   |   |
| At                    December 31, 2006   |   |                                                  | 475,761 |                                   |   | 1,128,474                                          |   | $ | 8.09 |   |   | 1,058,874 |   | $ | 8.01 |   |

|                                          |   | Number                    of           |      | Number                    of           |   |
|-----------------------------------------------|--------|----------------------------------------|-----------|----------------------------------------|--------|
| Range                    of Exercise Prices   |   | Options                    Outstanding |      | Options                    Exercisable |   |
| $3.44                    - $7.15              |   |                                   | 439,184   |                                   |   | 439,184 |   |
| $7.16                    - $10.10             |   |                                   | 384,439   |                                   |   | 314,839 |   |
| $10.11                    - $12.15            |   |                                   | 304,851   |                                   |   | 304,851 |   |
|                                          |   |                                   |           |                                   |   |  |   |
| Outstanding                    at end of year |   |                                   | 1,128,474 |                                   |   | 1,058,874 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(12)          EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)***

***Stock          Option Plans (Continued)***

|                                                                |   | 2006   |                       | 2005   |   | 2004                       |   |
|---------------------------------------------------------------------|--------|--------|----------------------------|--------|--------|----------------------------|--------|
|                                                                |   |   |                       |   |   |                       |   |
| Estimated                    fair value of options granted          |   | $      | 3.31                       |   | $      | 2.85                       |   | $ | 4.64 |   |
|                                                                |   |   |                       |   |   |                       |   |   |   |   |
| Assumptions                    in estimating average option values: |   |   |                       |   |   |                       |   |   |   |   |
| Risk-free                    interest rate                          |   |   | 4.69                       | %      |   | 3.50                       | %      |   | 3.48 | % |
| Dividend                    yield                                   |   |   | 1.33                       | %      |   | 1.25                       | %      |   | 1.00 | % |
| Volatility                                                          |   |   | 28                         | %      |   | 30                         | %      |   | 33 | % |
| Expected                    life                                    |   |   | 7                    years |   |   | 6                    years |   |   | 7                    years |   |

***(13)          LEASES***

| 2007       |   | $      | 1,255  |   |
|------------|--------|--------|--------|--------|
| 2008       |   |   | 1,079  |   |
| 2009       |   |   | 677    |   |
| 2010       |   |   | 599    |   |
| 2011       |   |   | 351    |   |
| Thereafter |   |   | 1,901  |   |
|       |   |   |   |   |
|       |   | $      | 5,862  |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(14)          INCOME TAXES***

|                                              |   | 2006                                      |   | 2005   |   | 2004   |   |
|---------------------------------------------------|--------|-------------------------------------------|--------|--------|--------|--------|--------|
|                                              |   | (Amounts                    in thousands) |   |
| Current                    tax provision          |   |                                      |   |   |   |   |   |
| Federal                                           |   | $                                         | 2,857  |   | $      | 4,040  |   | $ | 3,163 |   |
| State                                             |   |                                      | 270    |   |   | 644    |   |   | 561 |   |
|                                              |   |                                      | 3,127  |   |   | 4,684  |   |   | 3,724 |   |
|                                              |   |                                      |   |   |   |   |   |   |   |   |
| Deferred                    tax provision         |   |                                      |   |   |   |   |   |   |   |   |
| Federal                                           |   |                                      | (1,070 | )      |   | (428   | )      |   | 675 |   |
| State                                             |   |                                      | (167   | )      |   | (95    | )      |   | 157 |   |
|                                              |   |                                      | (1,237 | )      |   | (523   | )      |   | 832 |   |
|                                              |   |                                      |   |   |   |   |   |   |   |   |
| Net                    provision for income taxes |   | $                                         | 1,890  |   | $      | 4,161  |   | $ | 4,556 |   |

|                                                          |   | 2006                                      |   | 2005   |   | 2004   |   |
|---------------------------------------------------------------|--------|-------------------------------------------|--------|--------|--------|--------|--------|
|                                                          |   | (Amounts                    in thousands) |   |
|                                                          |   |                                      |   |   |   |   |   |
| Tax                    computed at the statutory federal rate |   | $                                         | 2,070  |   | $      | 4,023  |   | $ | 4,310 |   |
|                                                          |   |                                      |   |   |   |   |   |   |   |   |
| Increase                    (decrease) resulting from:        |   |                                      |   |   |   |   |   |   |   |   |
| State                    income taxes, net of federal benefit |   |                                      | 68     |   |   | 387    |   |   | 475 |   |
| Tax                    exempt income                          |   |                                      | (377   | )      |   | (360   | )      |   | (520 | ) |
| Valuation                    allowance                        |   |                                      | 2      |   |   | 131    |   |   | 227 |   |
| Other                    permanent differences                |   |                                      | 127    |   |   | (20    | )      |   | 64 |   |
|                                                          |   |                                      | (180   | )      |   | 138    |   |   | 246 |   |
|                                                          |   |                                      |   |   |   |   |   |   |   |   |
| Provision                    for income taxes                 |   | $                                         | 1,890  |   | $      | 4,161  |   | $ | 4,556 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(14)          INCOME TAXES (Continued)***

|                                                                    |   | 2006                                      |   | 2005   |   |
|-------------------------------------------------------------------------|--------|-------------------------------------------|--------|--------|--------|
|                                                                    |   | (Amounts                    in thousands) |   |
|                                                                    |   |                                      |   |   |   |
| Deferred                    tax assets relating to:                     |   |                                      |   |   |   |
| Allowance                    for loan losses                            |   | $                                         | 4,916  |   | $      | 4,349 |   |
| Deferred                    compensation                                |   |                                      | 1,185  |   |   | 1,041 |   |
| Accumulated                    other comprehensive income               |   |                                      | 489    |   |   | 1,976 |   |
| Derivative                    financial instrument                      |   |                                      | 466    |   |   | 363 |   |
| NEL                    carryforward                                     |   |                                      | 360    |   |   | 358 |   |
| Other                                                                   |   |                                      | 352    |   |   | 416 |   |
| Total                    deferred tax assets                            |   |                                      | 7,768  |   |   | 8,503 |   |
|                                                                    |   |                                      |   |   |   |   |   |
| Less:                    valuation allowance                            |   |                                      | 360    |   |   | 358 |   |
|                                                                    |   |                                      |   |   |   |   |   |
| Total                    deferred tax assets net of valuation allowance |   |                                      | 7,408  |   |   | 8,145 |   |
|                                                                    |   |                                      |   |   |   |   |   |
| Deferred                    tax liabilities relating to:                |   |                                      |   |   |   |   |   |
| Property                    and equipment                               |   |                                      | (1,004 | )      |   | (1,312 | ) |
| Loan                    fees and costs                                  |   |                                      | (633   | )      |   | (570 | ) |
| Core                    deposit intangible                              |   |                                      | (596   | )      |   | (679 | ) |
| Prepaid                    expenses                                     |   |                                      | (253   | )      |   | (223 | ) |
| Other                                                                   |   |                                      | (234   | )      |   | (423 | ) |
| Total                    deferred tax liabilities                       |   |                                      | (2,720 | )      |   | (3,207 | ) |
|                                                                    |   |                                      |   |   |   |   |   |
| Net                    recorded deferred tax asset                      |   | $                                         | 4,688  |   | $      | 4,938 |   |
|                                                                    |   |                                      |   |   |   |   |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(15)          NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE***

|                                                                                                                                                                             |   | 2006                                            |   | 2005   |   | 2004   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|--------|--------|--------|--------|
|                                                                                                                                                                             |   | (Amounts                    in thousands)       |   |
|                                                                                                                                                                             |   |                                            |   |
| Service                    charges and fees on deposit accounts                                                                                                                  |   | $                                               | 4,318  |   | $      | 3,755  |   | $ | 3,502 |   |
| Presold                    mortgage loan fees and income                                                                                                                         |   |                                            | 1,205  |   |   | 1,106  |   |   | 750 |   |
| Investment                    brokerage and trust fees                                                                                                                           |   |                                            | 780    |   |   | 888    |   |   | 832 |   |
| SBIC                    management fees & income                                                                                                                             |   |                                            | 792    |   |   | 1,211  |   |   | 659 |   |
| Gain                    (loss) on economic hedges                                                                                                                                |   |                                            | (432   | )      |   | (743   | )      |   | 127 |   |
| Net                    cash settlement on economic hedges                                                                                                                        |   |                                            | (366   | )      |   | 79     |   |   | 416 |   |
| Loss                    on sale of investment securities                                                                                                                         |   |                                            | (4,156 | )      |   | (266   | )      |   | - |   |
| Other                                                                                                                                                                            |   |                                            | 1,537  |   |   | 1,104  |   |   | 1,663 |   |
|                                                                                                                                                                             |   |                                            |   |   |   |   |   |   |   |   |
| Total                                                                                                                                                                            |   | $                                               | 3,678  |   | $      | 7,134  |   | $ | 7,949 |   |
|                                                                                                                                                                             |   |                                            |   |   |   |   |   |   |   |   |
| Income                    tax benefits related to losses on sales of securities were $1.5                    million                    for 2006 and $103 thousand for 2005.     |
|                                                                                                                                                                             |   |                                            |   |   |   |   |   |   |   |   |
| The                    major components of other non-interest expense for the years                    ended                    December 31, 2006, 2005 and 2004 are as follows: |
|                                                                                                                                                                             |   |                                            |   |   |   |   |   |   |   |   |
|                                                                                                                                                                             |   |                                            | 2006   |   |   | 2005   |   |   | 2004 |   |
|                                                                                                                                                                                  |   | (Amounts                    in thousands)  |
|                                                                                                                                                                             |   |                                            |   |   |   |   |   |   |   |   |
| Postage,                    printing and office supplies                                                                                                                         |   | $                                               | 846    |   | $      | 859    |   | $ | 875 |   |
| Telephone                    and communication                                                                                                                                   |   |                                            | 897    |   |   | 851    |   |   | 799 |   |
| Advertising                    and promotion                                                                                                                                     |   |                                            | 1,085  |   |   | 896    |   |   | 776 |   |
| Outsourced                    services fees                                                                                                                                      |   |                                            | 905    |   |   | 571    |   |   | 1,503 |   |
| Professional                    services                                                                                                                                         |   |                                            | 1,476  |   |   | 1,745  |   |   | 1,723 |   |
| Other                                                                                                                                                                            |   |                                            | 4,932  |   |   | 4,569  |   |   | 3,743 |   |
|                                                                                                                                                                             |   |                                            |   |   |   |   |   |   |   |   |
| Total                                                                                                                                                                            |   | $                                               | 10,141 |   | $      | 9,491  |   | $ | 9,419 |   |

***(16)          REGULATORY MATTERS***

** **

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(16)          REGULATORY MATTERS (Continued)***

|                                                        |   | Actual                                    |    | Minimum                    For Capital Adequacy Purposes |   | Minimum                    To Be Well Capitalized Under Prompt Corrective Action                    Provisions |   |
|-------------------------------------------------------------|--------|-------------------------------------------|---------|----------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------|--------|
|                                                        |   | Amount                                    |    | Ratio                                                    |   | Amount                                                                                                         |   | Ratio |   | Amount |   | Ratio |   |
|                                                        |   | (Amounts                    in thousands) |    |
| *As                    of December 31, 2006*                |   |                                      |    |                                                     |   |                                                                                                           |   |   |   |   |   |   |   |
|                                                        |   |                                      |    |                                                     |   |                                                                                                           |   |   |   |   |   |   |   |
| Total                    Capital (to Risk-Weighted Assets)  |   | $                                         | 127,567 |                                                     |   | 10.87                                                                                                          | %      | $ | 93,900 |   |   | 8.00 | % | $ | 117,300 |   |   | 10.00 | % |
| Tier                    I Capital (to Risk-Weighted Assets) |   |                                      | 114,527 |                                                     |   | 9.76                                                                                                           | %      |   | 46,900 |   |   | 4.00 | % |   | 70,400 |   |   | 6.00 | % |
| Tier                    I Capital (to Average Assets)       |   |                                      | 114,527 |                                                     |   | 8.36                                                                                                           | %      |   | 54,800 |   |   | 4.00 | % |   | 68,500 |   |   | 5.00 | % |
|                                                        |   |                                      |    |                                                     |   |                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *As                    of December 31, 2005*                |   |                                      |    |                                                     |   |                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                        |   |                                      |    |                                                     |   |                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    Capital (to Risk-Weighted Assets)  |   | $                                         | 119,693 |                                                     |   | 11.88                                                                                                          | %      | $ | 80,600 |   |   | 8.00 | % | $ | 100,800 |   |   | 10.00 | % |
| Tier                    I Capital (to Risk-Weighted Assets) |   |                                      | 107,908 |                                                     |   | 10.71                                                                                                          | %      |   | 40,300 |   |   | 4.00 | % |   | 60,500 |   |   | 6.00 | % |
| Tier                    I Capital (to Average Assets)       |   |                                      | 107,908 |                                                     |   | 8.65                                                                                                           | %      |   | 49,900 |   |   | 4.00 | % |   | 62,400 |   |   | 5.00 | % |

|                                               |   | At                    December 31, 2006   |    | At                    December 31, 2005 |   |
|----------------------------------------------------|--------|-------------------------------------------|---------|-----------------------------------------|--------|
|                                               |   | Actual                                    |    | Actual                                  |   |
|                                               |   | Amount                                    |    | Ratio                                   |   | Amount |   | Ratio |   |
|                                               |   | (Amounts                    in thousands) |    |
|                                               |   |                                      |    |                                    |   |   |   |   |   |
| Total                    risk-based capital ratio  |   | $                                         | 134,077 |                                    |   | 11.40 | % | $ | 133,513 |   |   | 13.21 | % |
| Tier                    1 risk-based capital ratio |   |                                      | 119,970 |                                    |   | 10.20 | % |   | 120,661 |   |   | 11.94 | % |
| Leverage                    ratio                  |   |                                      | 119,970 |                                    |   | 8.73 | % |   | 120,661 |   |   | 9.60 | % |

***(17)          DERIVATIVES***

***Derivative          Financial Instruments***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(17)          DERIVATIVES (Continued)***

***Risk          Management Policies - Hedging Instruments***

|                                                               |   | December                    31, 2006      |   | December                    31, 2005 |   |
|--------------------------------------------------------------------|--------|-------------------------------------------|--------|--------------------------------------|--------|
|                                                               |   | Fair                    Value             |   | Notional                    Amount   |   | Fair                    Value |   | Notional                    Amount |   |
|                                                               |   | (Amounts                    in thousands) |   |
| Fair                    value hedges                               |   |                                      |   |                                 |   |   |   |   |   |
| Interest                    rate swaps associated                  |   |                                      |   |                                 |   |   |   |   |   |
| with                    borrowing activities                       |   | $                                         | (695   | )                                    | $      | 20,000 |   | $ | (488 | ) | $ | 20,000 |   |
|                                                               |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| Interest                    rate swaps associated                  |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| with                    deposit taking activities                  |   |                                      | (1,054 | )                                    |   | 90,500 |   |   | - |   |   | - |   |
|                                                               |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| Cash                    flow hedges                                |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| Interest                    rate options associated                |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| with                    lending activities                         |   |                                      | 228    |                                 |   | 25,000 |   |   | - |   |   | - |   |
|                                                               |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| Derivatives                    not designated as accounting hedges |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| Interest                    rate options associated                |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| with                    lending activities                         |   |                                      | 4      |                                 |   | 50,000 |   |   | 42 |   |   | 50,000 |   |
|                                                               |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| Interest                    rate swaps associated                  |   |                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| with                    deposit taking activities                  |   |                                      | -      |                                 |   | - |   |   | (1,262 | ) |   | 58,500 |   |
|                                                               |   | $                                         | (1,517 | )                                    | $      | 185,500 |   | $ | (1,708 | ) | $ | 128,500 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(17)          DERIVATIVES (Continued)***

***Interest          Rate Risk Management - Cash Flow Hedging Instruments***

***Interest          Rate Risk Management - Fair Value Hedging Instruments***

***(18)***
***OFF-BALANCE          SHEET RISK, COMMITMENTS AND CONTINGENCIES***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(18)***
***OFF-BALANCE          SHEET RISK, COMMITMENTS AND CONTINGENCIES (Continued)***

|                                                                                   |   | 2006   |    | 2005   |   |
|----------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|
|                                                                                   |   |   |    |   |   |
| Financial                    instruments whose contract amounts represent credit risk: |   |   |    |   |   |
| Loan                    commitments and undisbursed lines of credit                    |   | $      | 224,045 |   | $      | 206,691 |   |
| Undisbursed                    standby letters of credit                               |   |   | 11,849  |   |   | 12,012 |   |
| Undisbursed                    portion of construction loans                           |   |   | 103,797 |   |   | 92,412 |   |

***(19)          DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL          INSTRUMENTS***

***Cash          and due from banks, federal funds sold, and other interest-bearing          deposits***

***Investment          securities***

***Loans***

***Investment          in bank-owned life insurance***

***Deposits***

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**CONSOLIDNOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(19)          DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS          (Continued)***

***Borrowings***

***Accrued          interest***

***Derivative          financial instruments***

***Financial          instruments with off-balance sheet risk***

|                                                                      |   | 2006                                      |      | 2005                                    |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------|-----------|-----------------------------------------|--------|
|                                                                      |   | Carrying                    amount        |      | Estimated                    fair value |   | Carrying                    amount |   | Estimated                    fair value |   |
|                                                                      |   | (Amounts                    in thousands) |      |
|                                                                      |   |                                      |      |                                    |   |   |   |   |   |
| Financial                    assets:                                      |   |                                      |      |                                    |   |   |   |   |   |
| Cash                    and due from banks                                |   | $                                         | 29,160    |                                    | $      | 29,160 |   | $ | 24,606 |   | $ | 24,606 |   |
| Federal                    funds sold and other interest-bearing deposits |   |                                      | 783       |                                    |   | 783 |   |   | 648 |   |   | 648 |   |
| Investment                    securities available for sale               |   |                                      | 169,021   |                                    |   | 169,021 |   |   | 203,808 |   |   | 203,808 |   |
| Investment                    securities held to maturity                 |   |                                      | 86,475    |                                    |   | 84,213 |   |   | 88,108 |   |   | 85,774 |   |
| Loans,                    net                                             |   |                                      | 1,020,371 |                                    |   | 1,011,008 |   |   | 857,042 |   |   | 848,159 |   |
| Investment                    in life insurance                           |   |                                      | 16,154    |                                    |   | 16,154 |   |   | 10,617 |   |   | 10,617 |   |
| Accrued                    interest receivable                            |   |                                      | 8,217     |                                    |   | 8,217 |   |   | 6,065 |   |   | 6,065 |   |
|                                                                      |   |                                      |      |                                    |   |   |   |   |   |   |   |   |   |
| Financial                    liabilities:                                 |   |                                      |      |                                    |   |   |   |   |   |   |   |   |   |
| Deposits                                                                  |   |                                      | 1,024,582 |                                    |   | 1,022,717 |   |   | 941,949 |   |   | 934,371 |   |
| Short-term                    borrowings                                  |   |                                      | 92,748    |                                    |   | 92,748 |   |   | 9,186 |   |   | 9,178 |   |
| Long-term                    borrowings                                   |   |                                      | 172,549   |                                    |   | 174,172 |   |   | 192,551 |   |   | 194,052 |   |
| Accrued                    interest payable                               |   |                                      | 4,319     |                                    |   | 4,319 |   |   | 3,664 |   |   | 3,664 |   |
|                                                                      |   |                                      |      |                                    |   |   |   |   |   |   |   |   |   |
| On-balance                    sheet derivative financial instruments:     |   |                                      |      |                                    |   |   |   |   |   |   |   |   |   |
| Interest                    rate swap and option agreements:              |   |                                      |      |                                    |   |   |   |   |   |   |   |   |   |
| Liabilities,                    net                                       |   |                                      | 1,517     |                                    |   | 1,517 |   |   | 1,708 |   |   | 1,708 |   |

----

***SOUTHERN            COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES            TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years            Ended December 31, 2006, 2005 and 2004 **

----

***(20)          PARENT COMPANY FINANCIAL DATA***

***Condensed          Balance Sheets***

***December          31, 2006 and 2005***

|                                                             |   | 2006   |    | 2005   |   |
|------------------------------------------------------------------|--------|--------|---------|--------|--------|
| Assets:                                                          |   |   |    |   |   |
| Cash                    and due from banks                       |   | $      | 3,332   |   | $      | 10,562 |   |
| Investment                    in subsidiary                      |   |   | 166,289 |   |   | 157,693 |   |
| Investment                    securities available for sale      |   |   | 915     |   |   | 278 |   |
| Other                    assets                                  |   |   | 641     |   |   | 1,431 |   |
|                                                             |   |   |    |   |   |   |   |
| Total                    assets                                  |   | $      | 171,177 |   | $      | 169,964 |   |
|                                                             |   |   |    |   |   |   |   |
| Liabilities:                                                     |   |   |    |   |   |   |   |
| Junior                    subordinated debentures                |   | $      | 34,873  |   | $      | 35,073 |   |
| Other                    liabilities                             |   |   | 79      |   |   | 6 |   |
|                                                             |   |   |    |   |   |   |   |
| Total                    liabilities                             |   |   | 34,952  |   |   | 35,079 |   |
|                                                             |   |   |    |   |   |   |   |
| Stockholders'                    equity                          |   |   |    |   |   |   |   |
| Common                    stock                                  |   |   | 119,616 |   |   | 122,490 |   |
| Retained                    earnings                             |   |   | 17,368  |   |   | 15,546 |   |
| Accumulated                    other comprehensive income (loss) |   |   | (759    | )      |   | (3,151 | ) |
|                                                             |   |   |    |   |   |   |   |
| Total                    stockholders' equity                    |   |   | 136,225 |   |   | 134,885 |   |
|                                                             |   |   |    |   |   |   |   |
| Total                    liablilites and stockholders' equity    |   | $      | 171,177 |   | $      | 169,964 |   |

***Condensed          Statements of Operations***

***Years          Ended December 31, 2006, 2005 and 2004***

|                                                |   | 2006   |   | 2005   |   | 2004   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                |   |   |   |   |   |   |   |
| Equity                    in income of subsidiaries |   | $      | 6,216  |   | $      | 9,615  |   | $ | 9,675 |   |
| Interest                    income                  |   |   | 150    |   |   | 144    |   |   | 542 |   |
| Other                    income                     |   |   | 70     |   |   | 64     |   |   | - |   |
| Interest                    expense                 |   |   | (2,740 | )      |   | (2,376 | )      |   | (1,999 | ) |
| Other                    expense                    |   |   | (543   | )      |   | (747   | )      |   | (890 | ) |
| Income                    tax benefit               |   |   | 1,045  |   |   | 973    |   |   | 787 |   |
|                                                |   |   |   |   |   |   |   |   |   |   |
| Net                    income                       |   | $      | 4,198  |   | $      | 7,673  |   | $ | 8,115 |   |

----

***SOUTHERN              COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY***

**NOTES              TO CONSOLIDATED**FINANCIAL STATEMENTS****

**Years              Ended December 31, 2006, 2005 and 2004 **

----

***(20)          PARENT COMPANY FINANCIAL DATA (Continued)***

***Condensed          Statements of Cash Flows***

***Years          Ended December 31, 200***
**6,          *2005 and 2004***

|                                                                   |   | 2006   |   | 2005   |   | 2004   |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Operating                    activities:                               |   |   |   |   |   |   |   |
| Net                    income                                          |   | $      | 4,198  |   | $      | 7,673  |   | $ | 8,115 |   |
| Equity                    in income of subsidiaries                    |   |   | (6,216 | )      |   | (9,615 | )      |   | (9,675 | ) |
| Amortization                    of debt issuance costs                 |   |   | 51     |   |   | 51     |   |   | 61 |   |
| (Increase)                    decrease in receivable from subsidiaries |   |   | -      |   |   | -      |   |   | 36,275 |   |
| (Increase)                    decrease in other assets                 |   |   | 596    |   |   | 3,809  |   |   | (774 | ) |
| Net                    cash provided (used) by operating activities    |   |   | (1,371 | )      |   | 1,918  |   |   | 34,002 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |   |
| Investing                    activities:                               |   |   |   |   |   |   |   |   |   |   |
| Investment                    in subsidiaries                          |   |   | -      |   |   | -      |   |   | (21,985 | ) |
| Cash                    dividend from subsidiary                       |   |   | -      |   |   | 500    |   |   | 2,725 |   |
| Purchase                    of investments                             |   |   | (550   | )      |   | (40    | )      |   | (228 | ) |
| Proceeds                    from maturities and calls of investments   |   |   | -      |   |   | 126    |   |   | - |   |
| Net                    cash provided (used) by investing activities    |   |   | (550   | )      |   | 586    |   |   | (19,488 | ) |
|                                                                   |   |   |   |   |   |   |   |   |   |   |
| Financing                    activities:                               |   |   |   |   |   |   |   |   |   |   |
| Net                    proceeds from issuance of common stock          |   |   | 749    |   |   | 1,465  |   |   | 1,616 |   |
| Cost                    of shares repurchased                          |   |   | (3,682 | )      |   | (4,271 | )      |   | - |   |
| Cash                    dividend paid                                  |   |   | (2,376 | )      |   | (3,748 | )      |   | (1,902 | ) |
| Net                    cash provided (used) by financing activities    |   |   | (5,309 | )      |   | (6,554 | )      |   | (286 | ) |
|                                                                   |   |   |   |   |   |   |   |   |   |   |
| Net                    increase (decrease) in cash                     |   |   | (7,230 | )      |   | (4,050 | )      |   | 14,228 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |   |
| Cash,                    beginning of year                             |   |   | 10,562 |   |   | 14,612 |   |   | 384 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |   |
| Cash,                    end of year                                   |   | $      | 3,332  |   | $      | 10,562 |   | $ | 14,612 |   |

***(21)          SUBSEQUENT EVENTS (unaudited)***

----

**Item          9. Changes in and Disagreements with Accountants on Accounting and Financial          Disclosure**

**Item          9A. Controls and Procedures**

**Management’s          Report On Internal Control Over Financial Reporting**

*Internal          Control - Integrated Framework*
*Internal          Control - Integrated Framework*

**Changes          in Internal Controls over Financial Reporting**

----

**Report          Of Independent Registered Public Accounting Firm**

* *
*          Internal Control—Integrated Framework *
* *
* *
* *
* *

----

*Internal          Control—Integrated Framework *
*Internal          Control—Integrated Framework *

***/s/          Dixon Hughes PLLC***

*Raleigh,          North Carolina*

*March          15, 2007*

----

**Item          9B. Other Information**

**PART          III **

**Item          10. Directors and Executive Officers of the Registrant**

**Item          11. Executive Compensation**

**Item          12. Security Ownership of Certain Beneficial Owners and Management**

| **Equity                    Compensation Plan Information**                 |   |
|-----------------------------------------------------------------------------|--------|
| **Plan                    Category**                                        |   | **Number                    of securities to be issued upon exercised of outstanding options                    warrants                    and rights** |   | **Weighted-average                    exercise price of outstanding options, warrants and                    rights** |   | **Number                    of securities remaining available for future issuance under equity                    compensation plans (excluding securities reflected in column                    (a))** |   |
|                                                                        |   | (a) |   | (b) |   | (c) |   |
| Equity                    compensation plans approved by security holders   |   |   |   |   |   |   |   |
|                                                                        |   |   |   |   |   |   |   |
| Stock                    Option Plans                                       |   |   | 1,128,474 |   | $ | 8.09 |   |   | 475,761 |   |
|                                                                        |   |   |  |   |   |  |   |   |  |   |
| Employee                    Stock Purchase Plan                             |   |   | 14,201 |   | $ | 9.22 |   |   | 925,882 |   |
|                                                                        |   |   |  |   |   |  |   |   |  |   |
| Equity                  compensation plans not approved by security holders |   |   | N/A |   |   | N/A |   |   | N/A |   |
| Total                                                                       |   |   | 1,142,675 |   | $ | 8.10 |   |   | 1,401,643 |   |

----

**PART          III (Continued)**

**Item          13. Certain Relationships and Related Transactions **

**Item          14. Principal Accountant Fees and Services**

----

**PART          IV**

**Item          15. Exhibits, Financial Statement Schedules**

| (a)(1) | Financial                      Statements. The following financial statements and supplementary                      data are                      included in Item 8 of this report.                                                                                                        |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                         |   |
|   | Financial                      Statements                                                                                                                                                                                                                                                    | Form                      10-K Page |
|   | Report                      of Independent Registered Public Accounting Firm                                                                                                                                                                                                                 | 57 |
|   |                                                                                                                                                                                                                                                                                         |   |
|   | Consolidated                      Balance Sheets as of December 31, 2006 and 2005                                                                                                                                                                                                            | 58 |
|   |                                                                                                                                                                                                                                                                                         |   |
|   | Consolidated                      Statements of Operations for the years ended                                                                                                                                                                                                               |   |
|   | December                      31, 2006, 2005 and 2004                                                                                                                                                                                                                                        | 59 |
|   |                                                                                                                                                                                                                                                                                         |   |
|   | Consolidated                      Statements of Comprehensive Income for the years ended                                                                                                                                                                                                     |   |
|   | December                      31, 2006, 2005 and 2004                                                                                                                                                                                                                                        | 60 |
|   |                                                                                                                                                                                                                                                                                         |   |
|   | Consolidated                      Statements of Changes in Stockholders’ Equity for the years ended                                                                                                                                                                                    |   |
|   | December                      31, 2006, 2005 and 2004                                                                                                                                                                                                                                        | 61 |
|   |                                                                                                                                                                                                                                                                                         |   |
|   | Consolidated                      Statements of Cash Flows for the years ended                                                                                                                                                                                                               |   |
|   | December                      31, 2006, 2005 and 2004                                                                                                                                                                                                                                        | 62-63 |
|   |                                                                                                                                                                                                                                                                                         |   |
|   | Notes                      to Consolidated Financial Statements                                                                                                                                                                                                                              | 64-95 |
|   |                                                                                                                                                                                                                                                                                         |   |
| (a)(2) | Financial                      Statement Schedules. All applicable financial statement schedules                      required                      under Regulation S-X have                      been included in the Notes to the Consolidated Financial                      Statements. |
|        |                                                                                                                                                                                                                                                                                         |   |
|   |                                                                                                                                                                                                                                                                                         |   |
| (a)(3) | Exhibits.                      The exhibits required by Item 601 of Regulation S-K are listed                      below.                                                                                                                                                                    |

----

| **Exhibit                      No.** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      3.1:    | Articles                      of Incorporation (incorporated by reference to Exhibit 3(i)                      to the Current                      Report on Form 8-K dated October 1, 2001)                                                                                                                                                                                                                                                                                    |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      3.2:    | Bylaws                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      3.3:    | Amendment                      to Articles of Incorporation (incorporated by reference to                      Exhibit 3.3 to                      the Annual Report on Form 10-K for the year ended December                      31, 2001 (“2001                      Annual Report”))                                                                                                                                                                            |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      4.1:    | Specimen                      certificate for Common Stock of Southern Community Financial                      Corporation                      (incorporated by reference to Exhibit 4 to the Current Report                      on Form 8-K                      dated October 1, 2001)                                                                                                                                                                                     |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      4.2:    | Form                      of 7.95% Convertible Junior Subordinated Debenture (incorporated                      by                      reference to Exhibit 4.2 to the Registration Statement on Form                      S-3 dated                      September 26, 2003, Registration No. 333-109167 (the                      “S-3 Registration Statement”))                                                                                                 |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      4.3:    | Form                      of Certificate for 7.95% Trust Preferred Security of Southern                      Community                      Capital Trust II (incorporated by reference to Exhibit 4.6                      to the S-3                      Registration Statement)                                                                                                                                                                                             |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.1:   | 1997                      Incentive Stock Option Plan of Southern Community Financial                      Corporation                      (incorporated by reference to Exhibit 10.1 to Amendment Number                      One to the                      Registration Statement on Form S-2 dated January 10, 2002,                      Registration                      Number 333-74084 (the “Amended S-2 Registration                      Statement”)) |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.2:   | 1997                      Non-Statutory Stock Option Plan of Southern Community Financial                      Corporation (incorporated by reference to Exhibit 10.2 to the Amended S-2                      Registration Statement)                                                                                                                                                                                                                                           |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.3:   | 2002                      Incentive Stock Option Plan of Southern Community Financial                      Corporation                      (incorporated by reference to Exhibit 10.7 to the Annual Report                      on Form                      10-K for the year ended December 31, 2003 (“2003 Annual                      Report”))                                                                                                                |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.4:   | 2002                      Non-Statutory Stock Option Plan of Southern Community Financial                      Corporation (incorporated by reference to Exhibit 10.8 to the                      2003 Annual                      Report)                                                                                                                                                                                                                                      |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.5:   | Indenture                      with respect to the Company’s 7.95% Convertible Junior Subordinated                      Debentures (incorporated by reference to Exhibit 10.9 to the                      2003 Annual                      Report)                                                                                                                                                                                                                        |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.6:   | Amended                      and Restated Trust Agreement of Southern Community Capital                      Trust II                      (incorporated by reference to Exhibit 10.10 to the 2003 Annual                      Report)                                                                                                                                                                                                                                          |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.7:   | Guarantee                      Agreement for Southern Community Capital Trust II (incorporated                      by                      reference to Exhibit 10.11 to the 2003 Annual Report)                                                                                                                                                                                                                                                                               |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.8:   | Agreement                      as to Expenses and Liabilities with respect to Southern Community                      Capital                      Trust II (incorporated by reference to Exhibit 10.12 to the                      2003 Annual                      Report)                                                                                                                                                                                                    |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.9:   | 2002                      Employee Stock Purchase Plan (incorporated by reference to                      Exhibit 10.13                      to the 2003 Annual Report)                                                                                                                                                                                                                                                                                                         |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.10:  | The                      Community Bank Amended and Restated Stock Option Plan for Key                      Employees                      (incorporated by reference to Exhibit 4.2 to the Registration                      Statement on                      Form S-8 dated April 29, 2004, Registration Number                      333-114997)                                                                                                                             |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.11:  | 2001                      Incentive Stock Option Plan of Southern Community Financial                      Corporation                      (incorporated by reference to Exhibit 4.2 to the Registration                      Statement on                      Form S-8 dated April 29, 2004, Registration Number                      333-114993)                                                                                                                            |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.12:  | 2001                      Stock Option Plan for Directors of Southern Community Financial                      Corporation (incorporated by reference to Exhibit 4.2 to the                      Registration                      Statement on Form S-8 dated April 29, 2004, Registration Number                      333-114991)                                                                                                                                             |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.13:  | 2006                      Nonstatutory Stock Option Plan of Southern Community Financial                      Corporation                      (incorporated by reference to Exhibit 4.2 to the Registration                      Statement on                      Form S-8 dated November 11, 2006, Registration Number                      333-138601)                                                                                                                      |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit                      10.14:  | Employment                      Agreement with F. Scott Bauer (incorporated by reference to                      Exhibit 10.1                      to the Quarterly Report on Form 10-Q for the quarter ended                      March 31, 2006                      (“2006 First Quarter Form 10-Q”))                                                                                                                                                            |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

----

| Exhibit                      10.15: | Employment                      Agreement with Jeff T. Clark (incorporated by reference to                      Exhibit 10.2 to                      the 2006 First Quarter Form 10-Q)    |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                                                                      |
| Exhibit                      10.16: | Employment                      Agreement with David W. Hinshaw (incorporated by reference                      to Exhibit 10.3                      to the 2006 First Quarter Form 10-Q) |
|                                |                                                                                                                                                                                      |
| Exhibit                      21:    | Subsidiaries                      of the Registrant                                                                                                                                  |
|                                |                                                                                                                                                                                      |
| Exhibit                      23:    | Consent                      of Dixon Hughes PLLC                                                                                                                                         |
|                                |                                                                                                                                                                                      |
| Exhibit                      31.1:  | Rule                      13a-14(a)/15d-14(a) Certification by Chief Executive                      Officer                                                                               |
|                                |                                                                                                                                                                                      |
| Exhibit                      31.2:  | Rule                      13a-14(a)/15d-14(a) Certification by Chief Financial                      Officer                                                                               |
|                                |                                                                                                                                                                                      |
| Exhibit                      32:    | Section                      1350 Certifications                                                                                                                                          |

----

**SIGNATURES**

|                                        |                                                                                  |                                        |
|---------------------------------------------|---------------------------------------------------------------------------------------|---------------------------------------------|
|                                        | **SOUTHERN                    COMMUNITY****FINANCIAL                    CORPORATION** |
|                                   |                                                                             |                                   |
| Date:                  March 16, 2007  | By:                                                                         | */s/                  F, Scott Bauer*  |
|                                        | F.                    Scott Bauer                                                     |
|                                        | Chairman                    and Chief                    Executive Officer            |

| **SIGNATURE**                                  |   | **TITLE**                                                                    |   | **DATE**                          |
|------------------------------------------------|--------|------------------------------------------------------------------------------|--------|-----------------------------------|
|                                           |   |                                                                         |   |                              |
| */s/                    F. Scott Bauer*        |   | Chairman                    of the Board                                     |   |                                   |
| F.                  Scott Bauer                |   | and Chief                  Executive                  Officer                |   | March                    16, 2007 |
|                                           |   |                                                                         |   |                              |
| */s/                    David W. Hinshaw*      |   | Executive                    Vice President and Chief Financial Officer      |   |                                   |
| David                  W. Hinshaw              |   | (principal                  financiaand                  accounting officer) |   | March                    16, 2007 |
|                                           |   |                                                                         |   |                              |
| */s/                    Durward A. Smith, Jr.* |   | Vice                    Chairman of the Board                                |   |                                   |
| Durward                  A. Smith, Jr.         |   |                                                                         |   | March                    16, 2007 |
|                                           |   |                                                                         |   |                              |
| */s/                    Don Gray Angell*       |   | Director                                                                     |   |                              |
| Don                  Gray Angell               |   |                                                                         |   | March                    16, 2007 |
|                                           |   |                                                                         |   |                              |
| */s/                    Edward T. Brown*       |   | Director                                                                     |   |                              |
| Edward                  T. Brown               |   |                                                                         |   | March                    16, 2007 |
|                                           |   |                                                                         |   |                              |
| */s/                    Zack W. Blackmon, Sr.* |   | Director                                                                     |   |                              |
| Zack                  W. Blackmon, Sr.         |   |                                                                              |   | March                    16, 2007 |
|                                           |   |                                                                         |   |                              |
| */s/                    James G. Chrysson*     |   | Director                                                                     |   |                              |
| James                  G. Chrysson             |   |                                                                         |   | March                    16, 2007 |

----

| **SIGNATURE**                                |   | **TITLE** |   | **DATE**                          |
|----------------------------------------------|--------|-----------|--------|-----------------------------------|
|                                         |   |      |   |                              |
| */s/                    James O. Frye*       |   | Director  |   |                              |
| James                  O. Frye               |   |      |   | March                    16, 2007 |
|                                         |   |      |   |                              |
| */s/                    Matthew G. Gallins*  |   | Director  |   |                              |
| Matthew                  G. Gallins          |   |      |   | March                    16, 2007 |
|                                         |   |      |   |                              |
| */s/                    Beverly H. Godfrey*  |   | Director  |   |                              |
| Beverly                  H. Godfrey          |   |      |   | March                    16, 2007 |
|                                         |   |      |   |                              |
| */s/                    Lynn L. Lane*        |   | Director  |   |                              |
| Lynn                  L. Lane                |   |      |   | March                    16, 2007 |
|                                         |   |      |   |                              |
| */s/                    H. Lee Merritt, Jr.* |   | Director  |   |                              |
| H.                  Lee Merritt, Jr.         |   |      |   | March                    16, 2007 |
|                                         |   |      |   |                              |
| */s/                    W. Samuel Smoak*     |   | Director  |   |                              |
| W.                  Samuel Smoak             |   |      |   | March                    16, 2007 |
|                                         |   |      |   |                              |
|                                         |   | Director  |   |                              |
| William                  G. Ward, Sr., M.D.  |   |      |   | March                    16, 2007 |

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