UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q (Mark One) x

                        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2009o

                        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from ______________________to_______________________  Commission File Number: 000-28342  VALLEY FINANCIAL CORPORATION (Exact name of registrant as specified in its charter)  VIRGINIA

                        

                        54-1702380(State or other jurisdiction of incorporation or organization)

                        

                        (I.R.S. Employer Identification No.)36 Church Avenue, S.W.Roanoke, Virginia

                        

                        24011(Address of principal executive offices)

                        

                        (Zip Code)(540) 342-2265(Registrant’s telephone number, including area code)
  Not Applicable (Former name, former address, and former fiscal year, if changed since last report)  Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx
            No o  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer

                        o

                        Accelerated filer

                        oNon-accelerated filer (Do not check if a smaller reporting company)

                        o

                        Smaller reporting company

                        x
  Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act.) Yeso Nox  At November 9, 2009, 4,680,251 shares of common stock, no par value, of the registrant were outstanding.  
 VALLEY FINANCIAL CORPORATION FORM 10-Q September 30, 2009  TABLE OF CONTENTS Part I. FINANCIAL INFORMATIONItem 1

                        Financial StatementsConsolidated Balance Sheets

                        4Consolidated Statements of Operations

                        5Consolidated Statements of Cash Flows

                        6Notes to Consolidated Financial Statements

                        8Item 2

                        Management's Discussion and Analysis of Financial Condition and Results of Operations

                        17Item 3

                        Quantitative and Qualitative Disclosures about Market Risk

                        25Item 4

                        Controls and Procedures

                        25Part II. OTHER INFORMATIONItem 1

                        Legal Proceedings

                        25Item 1A

                        Risk Factors

                        26Item 2

                        Unregistered Sales of Equity Securities and Use of Proceeds

                        26Item 3

                        Defaults Upon Senior Securities

                        26Item 4

                        Submission of Matters to a Vote of Security Holders

                        26Item 5

                        Other Information

                        26Item 6

                        Exhibits

                        27SIGNATURES

                        28EXHIBITS INDEX

                        29CERTIFICATIONS

                        30
     2
 
  Cautionary Statement Regarding Forward-Looking Statements  This report contains statements concerning the Company’s expectations, plans, objectives, future financial performance, and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management and
            risks and uncertainties. Actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, changes in:  1.

                        interest rates
 2.

                        general economic conditions, either nationally or regionally
 3.

                        the legislative/regulatory climate
 4.

                        monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board
 5.

                        demand for loan products
 6.

                        deposit flows
 7.

                        competitive pressures among depository and other financial institutions
 8.

                        demand for financial services in our market area
 9.

                        technology and
 10.

                        accounting principles, policies and guidelines.
  These risks and uncertainties and the other risks and uncertainties described in this quarterly report on Form 10-Q and from time to time in our other reports filed with the Securities and Exchange Commission, including in our 2008 annual report on Form 10-K, should be considered in evaluating the forward-looking statements contained herein. We caution readers not to place undue
            reliance on those statements, which speak only as of the date of this report.   3
 
 PART 1 – FINANCIAL INFORMATION Item 1. Financial Statements. VALLEY FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (In 000s, except share and per share data)  (Unaudited)

                            9/30/09

                        

                        

                        (Audited)

                            12/31/08AssetsCash and due from banks

                        $

                        6,084

                        

                        $

                        7,270Interest-bearing deposits in banks

                        

                        25,045

                        

                        

                        26Federal funds sold

                        

                        300

                        

                        

                        -Securities available-for-sale

                        

                        53,964

                        

                        

                        77,243Securities held-to-maturity (approximate market values of $12,842 at September 30, 2009 and $10,039 at December 31, 2008, respectively)

                        

                        12,491

                        

                        

                        10,001Restricted equity securities

                        

                        5,737

                        

                        

                        5,607Loans, net of allowance for loan losses of $13,321 at September 30, 2009 and $7,592 at December 31, 2008

                        

                        574,662

                        

                        

                        545,454Foreclosed assets, net

                        

                        2,018

                        

                        

                        424Premises and equipment, net

                        

                        7,854

                        

                        

                        8,121Bank owned life insurance

                        

                        12,798

                        

                        

                        12,390Accrued interest receivable

                        

                        2,588

                        

                        

                        2,634Other assets

                        

                        7,094

                        

                        

                        5,309Total assets

                        $

                        710,635

                        

                        $

                        674,479Liabilities and Shareholders’ EquityLiabilities:Noninterest-bearing deposits

                        $

                        17,451

                        

                        $

                        14,550Interest-bearing deposits

                        

                        526,861

                        

                        

                        451,785Total deposits

                        

                        544,312

                        

                        

                        466,335Federal funds purchased and securities sold under agreements to repurchase

                        

                        21,116

                        

                        

                        47,019Short-term borrowings

                        

                        10,000

                        

                        

                        17,000Long-term borrowings

                        

                        58,000

                        

                        

                        63,000Guaranteed preferred beneficial interests in the Company’s junior subordinated debentures

                        

                        16,496

                        

                        

                        16,496Accrued interest payable

                        

                        3,065

                        

                        

                        2,908Other liabilities

                        

                        2,743

                        

                        

                        3,216Total liabilities

                        

                        655,732

                        

                        

                        615,974Commitments and contingencies

                        

                        -

                        

                        

                        -Shareholders' equity:Preferred stock, no par value; 10,000,000 shares authorized; 16,019 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

                        

                        15,299

                        

                        

                        15,188Common stock, no par value; 10,000,000 shares authorized; 4,680,251 and 4,678,851 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

                        

                        23,334

                        

                        

                        23,232Retained earnings

                        

                        15,836

                        

                        

                        19,596Accumulated other comprehensive income

                        

                        434

                        

                        

                        489Total shareholders’ equity

                        

                        54,903

                        

                        

                        58,505Total liabilities and shareholders’ equity

                        $

                        710,635

                        

                        $

                        674,479
 See accompanying notes to consolidated financial statements  4
 
 VALLEY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In 000s, except share and per share data)  3 Months Ended

                        

                        

                        9 Months Ended9/30/09

                        

                        9/30/08

                        

                        

                        9/30/09

                        

                        9/30/08Interest Income:Interest and fees on loans

                        $

                        7,840

                        

                        7,822

                        

                        $

                        22,638

                        $

                        23,792Interest on securities–taxable

                        

                        665

                        

                        1,032

                        

                        

                        2,590

                        

                        3,096Interest on securities-nontaxable

                        

                        144

                        

                        90

                        

                        

                        389

                        

                        293Interest on deposits in banks

                        

                        8

                        

                        42

                        

                        

                        10

                        

                        59Total interest income

                        

                        8,657

                        

                        8,986

                        

                        

                        25,627

                        

                        27,240Interest Expense:Interest on deposits

                        

                        2,754

                        

                        3,487

                        

                        

                        8,322

                        

                        11,059Interest on short-term borrowings

                        

                        153

                        

                        106

                        

                        

                        341

                        

                        405Interest on long-term borrowings

                        

                        588

                        

                        720

                        

                        

                        1,875

                        

                        1,827Interest on guaranteed preferred beneficial interests in theCompany’s junior subordinated debentures

                        

                        106

                        

                        196

                        

                        

                        382

                        

                        646Interest on federal funds purchased and securities soldunder agreements to repurchase

                        

                        15

                        

                        187

                        

                        

                        63

                        

                        664Total interest expense

                        

                        3,616

                        

                        4,696

                        

                        

                        10,983

                        

                        14,601Net interest income

                        

                        5,041

                        

                        4,290

                        

                        

                        14,644

                        

                        12,639Provision for loan losses

                        

                        438

                        

                        435

                        

                        

                        9,872

                        

                        1,114Net interest income after provision for loan losses

                        

                        4,603

                        

                        3,855

                        

                        

                        4,772

                        

                        11,525Noninterest Income:Service charges on deposit accounts

                        

                        306

                        

                        288

                        

                        

                        875

                        

                        839Income earned on bank owned life insurance

                        

                        138

                        

                        143

                        

                        

                        408

                        

                        421Realized gain (loss) on sale of securities

                        

                        702

                        

                        -

                        

                        

                        969

                        

                        (14)Realized gain (loss) on sale of foreclosed assets

                        

                        -

                        

                        6

                        

                        

                        (165)

                        

                        6Other income

                        

                        178

                        

                        235

                        

                        

                        395

                        

                        614Total noninterest income

                        

                        1,324

                        

                        672

                        

                        

                        2,482

                        

                        1,866Noninterest Expense:Compensation expense

                        

                        1,958

                        

                        1,863

                        

                        

                        5,607

                        

                        5,453Occupancy and equipment expense

                        

                        394

                        

                        386

                        

                        

                        1,230

                        

                        1,149Data processing expense

                        

                        272

                        

                        189

                        

                        

                        785

                        

                        601Advertising and marketing expense

                        

                        80

                        

                        84

                        

                        

                        216

                        

                        386Insurance

                        

                        274

                        

                        97

                        

                        

                        1,012

                        

                        306Audit fees

                        

                        91

                        

                        63

                        

                        

                        260

                        

                        184Legal

                        

                        181

                        

                        90

                        

                        

                        463

                        

                        166Franchise tax expense

                        

                        106

                        

                        100

                        

                        

                        319

                        

                        301Deposit expense

                        

                        135

                        

                        79

                        

                        

                        351

                        

                        189Loan expenses

                        

                        71

                        

                        131

                        

                        

                        264

                        

                        318Computer software expense

                        

                        108

                        

                        112

                        

                        

                        325

                        

                        336Foreclosed asset expenses, net

                        

                        23

                        

                        5

                        

                        

                        101

                        

                        22Other expense

                        

                        318

                        

                        341

                        

                        

                        1,005

                        

                        999Total noninterest expense

                        

                        4,011

                        

                        3,540

                        

                        

                        11,938

                        

                        10,410Income (loss) before income taxes

                        

                        1,916

                        

                        987

                        

                        

                        (4,684)

                        

                        2,981Income (loss) tax expense

                        

                        603

                        

                        270

                        

                        

                        (1,719)

                        

                        828Net income (loss)

                        $

                        1,313

                        $

                        717

                        

                        $

                        (2,965)

                        

                        2,153Preferred dividends accrued

                        

                        242

                        

                        -

                        

                        

                        716

                        

                        -Net income (loss) available to common shareholders

                        $

                        1,071

                        $

                        717

                        

                        $

                        (3,681)

                        

                        2,153Earnings (loss) per shareBasic earnings (loss) per share

                        $

                        0.23

                        $

                        $0.15

                        

                        $

                        (0.79)

                        $

                        $0.46Diluted earnings (loss) per share

                        $

                        0.23

                        $

                        $0.15

                        

                        $

                        (0.79)

                        $

                        $0.46Weighted average shares outstanding

                        

                        4,680,251

                        

                        4,661,202

                        

                        

                        4,680,215

                        

                        4,635,668Diluted average shares outstanding

                        

                        4,680,251

                        

                        4,662,374

                        

                        

                        4,680,215

                        

                        4,652,635Dividends declared per share

                        $

                        -

                        $

                        -

                        

                        $

                        0.04

                        $

                        0.07
  See accompanying notes to the consolidated financial statements  5
 
 VALLEY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In 000s, except share and per share data)  Nine Months Ended9/30/09

                        

                        9/30/08Cash flows from operating activitiesNet income/(loss)

                        $ (2,965)

                        

                        $ 2,153Adjustments to reconcile net income (losses) to net cash provided by operating activities:Provision for loan losses

                        9,872

                        

                        1,114Depreciation and amortization of bank premises, equipment and software

                        657

                        

                        629Stock compensation expense

                        110

                        

                        75(Increase) decrease in deferred income tax

                        (1,392)

                        

                        469Net (gains) losses on sale of securities

                        (969)

                        

                        14Net (gains) losses on foreclosed and repossessed assets

                        165

                        

                        (6)Net losses on equipment disposals

                        5

                        

                        6Net amortization of bond premiums/discounts

                        118

                        

                        111Increase in unearned fees

                        (39)

                        

                        (158)Decrease in accrued interest receivable

                        46

                        

                        308Decrease in other assets

                        (396)

                        

                        (275)Increase in value of life insurance contracts

                        (408)

                        

                        (421)Increase in accrued interest payable

                        157

                        

                        329Decrease in other liabilities

                        (102)

                        

                        (470)Net cash provided by operating activities

                        4,859

                        

                        3,878Cash flows from investing activitiesIncrease in interest bearing deposits in banks

                        (25,019)

                        

                        (1)Increase in federal funds sold

                        (300)

                        

                        (12,392)Purchases of bank premises, equipment and software

                        (393)

                        

                        (2,312)Purchases of securities available-for-sale

                        (49,274)

                        

                        (28,842)Purchases of securities held-to-maturity

                        (6,315)

                        

                        -Purchases of restricted equity securities

                        (130)

                        

                        (1,229)Proceeds from sales/calls/paydowns/maturities of securities available-for-sale

                        73,374

                        

                        17,438Proceeds from paydowns on securities held-to-maturity

                        3,801

                        

                        6,416Principal repayments of restricted equity securities

                        -

                        

                        675Purchase of bank owned life insurance

                        -

                        

                        (200)Proceeds from sale of foreclosed and repossessed assets

                        1,916

                        

                        802Capitalized expenses on foreclosed assets

                        (20)

                        

                        (286)Increase in loans, net

                        (42,697)

                        

                        (28,180)Net cash used in investing activities

                        (45,057)

                        

                        (48,111)Cash flows from financing activitiesIncrease in non-interest bearing deposits

                        2,901

                        

                        1,983Increase in interest bearing deposits

                        75,076

                        

                        27,495Proceeds from short-term borrowings

                        46,000

                        

                        12,000Principal repayments of short-term borrowings

                        (53,000)

                        

                        (13,000)Increase (decrease) in securities sold under agreements to repurchase

                        (14,577)

                        

                        2,124Decrease in federal funds purchased

                        (11,326)

                        

                        (3,288)Proceeds from long-term borrowings

                        -

                        

                        20,000Principal repayments of long-term borrowings

                        (5,000)

                        

                        (7,000)Cash dividends paid

                        (1,055)

                        

                        (646)Net proceeds from issuance of common stock

                        (7)

                        

                        426Net cash provided by financing activities

                        39,012

                        

                        40,094Net (decrease) in cash and due from banks

                        (1,186)

                        

                        (4,139)Cash and due from banks at beginning of year

                        7,270

                        

                        10,895Cash and due from banks at end of year

                        $ 6,084

                        

                        $ 6,756See accompanying notes to consolidated financial statements
   6
 
  Supplemental disclosure of cash flow informationCash paid during the year for interest

                        $ 10,826

                        

                        $ 14,272Cash paid during the year for income taxes

                        $ 610

                        

                        $ 500Noncash financing and investing activitiesTransfer of loans to foreclosed property

                        $ 3,656

                        

                        $ 567Reclassification of borrowings from long-term to short-term

                        $ 5,000

                        

                        $ -See accompanying notes to consolidated financial statements.
   7
 
  VALLEY FINANCIAL CORPORATION Notes to Consolidated Financial Statements
 September 30, 2009 (Unaudited)
 (In ‘000s, except share and per share data)
  (1)

                        Organization and Summary of Significant Accounting Policies
  Valley Financial Corporation (the "Company") was incorporated under the laws of the Commonwealth of Virginia on March 15, 1994, primarily to serve as a holding company for Valley Bank (the "Bank"), which opened for business on May 15, 1995. The Company's fiscal year end is December 31.  The consolidated financial statements of the Company conform to generally accepted accounting principles and to general banking industry practices. The interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments of a normal recurring nature which are necessary for a fair presentation of the consolidated financial statements herein have been
            included. The consolidated financial statements herein should be read in conjunction with the Company's 2008 Annual Report on Form 10-K.  Interim financial performance is not necessarily indicative of performance for the full year.  The Company reports its activities as a single business segment.  Use of Estimates  The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Subsequent Events  In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through November 9, 2009, the date the financial statements were issued.  (2)

                        Securities
  The carrying values, unrealized gains, unrealized losses, and approximate fair values of available-for-sale and held-to-maturity investment securities at September 30, 2009 are shown in the tables below. As of September 30, 2009, investments (including both available-for-sale and held-to-maturity) and restricted equity securities with amortized costs and fair values of $58,303 and $59,059, respectively,
            were pledged as collateral for public deposits, a line of credit available from the Federal Home Loan Bank, customer sweep accounts, and for other purposes as required or permitted by law. At September 30, 2009 we evaluated our investment portfolio and determined all unrealized losses presented in the table below are not related to an issuer’s financial condition but are due to changes in the level of interest rates and no declines are deemed to be other than temporary in
            nature.  The amortized costs, gross unrealized gains and losses, and approximate fair values of securities available-for-sale (“AFS”) as of September 30, 2009 and December 31, 2008 were as follows:  8
 
  Amortized

                            Costs

                        

                        

                        Unrealized

                            Gains

                        

                        

                        Unrealized   Losses

                        

                        

                        Fair

                            ValuesSeptember 30, 2009U.S. Government and federal agency

                        $

                        568

                        

                        $

                        10

                        

                        $

                        -

                        

                        $

                        578Government-sponsored enterprises

                        

                        22,979

                        

                        

                        196

                        

                        

                        (50)

                        

                        

                        23,125Mortgage-backed securities

                        

                        22,230

                        

                        

                        405

                        

                        

                        (96)

                        

                        

                        22,539States and political

                            subdivisions

                        

                        7,528

                        

                        

                        241

                        

                        

                        (47)

                        

                        

                        7,722$

                        53,305

                        

                        $

                        852

                        

                        $

                        (193)

                        

                        $

                        53,964
  December 31, 2008U.S. Government and federal agency

                        $

                        629

                        

                        $

                        11

                        

                        $

                        -

                        

                        $

                        640Government-sponsored enterprises

                        

                        25,922

                        

                        

                        503

                        

                        

                        -

                        

                        

                        26,425Mortgage-backed securities

                        

                        45,153

                        

                        

                        690

                        

                        

                        (370)

                        

                        

                        45,473States and political

                            subdivisions

                        

                        4,798

                        

                        

                        22

                        

                        

                        (115)

                        

                        

                        4,705$

                        76,502

                        

                        $

                        1,226

                        

                        $

                        (485)

                        

                        $

                        77,243
   The amortized costs, gross unrealized gains and losses, and approximate fair values of securities held-to-maturity (“HTM”) as of September 30, 2009 and December 31, 2008 were as follows:  Amortized

                            Costs

                        

                        

                        Unrealized

                            Gains

                        

                        

                        Unrealized

                            Losses

                        

                        

                        Fair

                            ValuesSeptember 30, 2009U.S. Government and federal agency

                        $

                        -

                        

                        $

                        -

                        

                        $

                        -

                        

                        $

                        -Government-sponsored enterprises

                        

                        -

                        

                        

                        -

                        

                        

                        -

                        

                        

                        -Mortgage-backed securities

                        

                        6,767

                        

                        

                        146

                        

                        

                        -

                        

                        

                        6,913States and political

                            subdivisions

                        

                        5,724

                        

                        

                        207

                        

                        

                        (2)

                        

                        

                        5,929$

                        12,491

                        

                        $

                        353

                        

                        $

                        (2)

                        

                        $

                        12,842
   Amortized

                            Costs

                        

                        

                        Unrealized

                            Gains

                        

                        

                        Unrealized

                            Losses

                        

                        

                        Fair

                            ValuesDecember 31, 2008U.S. Government and federal agency

                        $

                        -

                        

                        $

                        -

                        

                        $

                        -

                        

                        $

                        -Government-sponsored enterprises

                        

                        1,981

                        

                        

                        27

                        

                        

                        -

                        

                        

                        2,008Mortgage-backed securities

                        

                        1,830

                        

                        

                        18

                        

                        

                        (1)

                        

                        

                        1,847States and political subdivisions

                        

                        6,190

                        

                        

                        103

                        

                        

                        (109)

                        

                        

                        6,184$

                        10,001

                        

                        $

                        148

                        

                        $

                        (110)

                        

                        $

                        10,039
   The following table presents the maturity ranges of securities available-for-sale as of September 30, 2009 and the weighted average yields of such securities. Maturities may differ from scheduled maturities on mortgage-backed securities and collateralized mortgage obligations because the mortgages underlying the securities may be repaid prior to the scheduled maturity date. Maturities on all other
            securities are based on the contractual maturity. The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Weighted average yields on tax-exempt obligations have been computed on a taxable equivalent basis using a tax rate of 34%.  9
 
 INVESTMENT PORTFOLIO – MATURITY DISTRIBUTION (in 000’s)  Available for SaleSeptember 30, 2009Amortized

                            Costs

                        Fair

                            Value

                        YieldU.S.Government and federal agency:Within one year

                        $ 207

                        $ 207

                        3.95%After one but within five years

                        213

                        223

                        5.88%After five but within ten years

                        -

                        -

                        -After ten years

                        148

                        148

                        2.97%Government-sponsored enterprises:Within one year

                        -

                        -

                        -After one but within five years

                        -

                        -

                        -After five but within ten years

                        14,968

                        15,158

                        4.49%After ten years

                        8,011

                        7,967

                        5.60%Obligations of states and subdivisions:Within one year

                        -

                        -

                        -After one but within five years

                        245

                        246

                        4.80%After five but within ten years

                        278

                        281

                        4.85%After ten years

                        7,005

                        7,195

                        5.10%Mortgage-backed securities

                        8,627

                        8,705

                        4.79%Collateralized mortgage obligations

                        13,603

                        13,834

                        4.73%Total

                        $ 53,305

                        $ 53,964Total Securities by Maturity Period *Within one year

                        $ 207

                        $ 207After one but within five years

                        458

                        469After five but within ten years

                        15,246

                        15,439After ten years

                        15,164

                        15,310Mortgage-backed securities

                        8,627

                        8,705Collateralized mortgage obligations

                        13,603

                        13,834Total by Maturity Period

                        $ 53,305

                        $ 53,964
  *Maturities on mortgage-backed securities and collateralized mortgage obligations are not presented in this table because maturities may differ substantially from contractual terms due to early repayments of principal.  The following table presents the maturity ranges of securities held-to-maturity as of September 30, 2009 and the weighted average yields of such securities. Maturities may differ from scheduled maturities on mortgage-backed securities and collateralized mortgage obligations because the mortgages underlying the securities may be repaid prior to the scheduled maturity date. Maturities on all other
            securities are based on the contractual maturity. The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Weighted average yields on tax-exempt obligations have been computed on a taxable equivalent basis using a tax rate of 34%.    10
 
 INVESTMENT PORTFOLIO – MATURITY DISTRIBUTION (in 000’s) Held to MaturitySeptember 30, 2009Amortized

                            Costs

                        Fair

                            Value

                        YieldU.S Government and federal agency:Within one year

                        $ -

                        $ -

                        -After one but within five years

                        -

                        -

                        -After five but within ten years

                        -

                        -

                        -After ten years

                        -

                        -

                        -Government-sponsored enterprises:Within one year

                        -

                        -

                        -After one but within five years

                        -

                        -

                        -After five but within ten years

                        -

                        -

                        -After ten years

                        -

                        -

                        -Obligations of states and subdivisions:Within one year

                        -

                        -

                        -After one but within five years

                        542

                        576

                        3.90%After five but within ten years

                        2,136

                        2,220

                        4.75%After ten years

                        3,046

                        3,133

                        5.65%Mortgage-backed securities

                        1,002

                        1,038

                        4.36%Collateralized mortgage obligations

                        5,765

                        5,875

                        5.54%Total

                        $ 12,491

                        $ 12,842Total Securities by Maturity Period *Within one year

                        $ -

                        $ -After one but within five years

                        542

                        576After five but within ten years

                        2,136

                        2,220After ten years

                        3,046

                        3,133Mortgage-backed securities

                        1,002

                        1,038Collateralized mortgage obligations

                        5,765

                        5,875Total by Maturity Period

                        $ 12,491

                        $ 12,842
  *Maturities on mortgage-backed securities and collateralized mortgage obligations are not presented in this table because maturities may differ substantially from contractual terms due to early repayments of principal.  The following tables detail unrealized losses and related fair values in the Bank’s available-for-sale investment securities portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2009 and December 31, 2008.      11
 
  Temporarily Impaired Securities in AFS Portfolio  September 30, 2009
        
        Less than 12 Months
        
        
        12 Months or More
        
        
        TotalFair
        
        
        Unrealized
        
        
        Fair
        
        
        Unrealized
        
        
        Fair
        
        
        UnrealizedValue
        
        
        Losses
        
        
        Value
        
        
        Losses
        
        
        Value
        
        
        LossesGovernment-sponsored enterprises*
        $
        3,963
        
        $
        (50)
        
        $
        -
        
        $
        -
        
        $
        3,963
        
        $
        (50)Mortgage-backed securities
        
        6,004
        
        
        (36)
        
        
        2,450
        
        
        (60)
        
        
        8,454
        
        
        (96)State and political subdivisions
        
        -
        
        
        -
        
        
        1,765
        
        
        (47)
        
        
        1,765
        
        
        (47)Total temporarily impaired securities
        $
        9,967
        
        $
        (86)
        
        $
        4,215
        
        $
        (107)
        
        $
        14,182
        
        $
        (193)
   Temporarily Impaired Securities in AFS Portfolio  December 31, 2008
        
        Less than 12 Months
        
        
        12 Months or More
        
        
        TotalFair
        
        
        Unrealized
        
        
        Fair
        
        
        Unrealized
        
        
        Fair
        
        
        UnrealizedValue
        
        
        Losses
        
        
        Value
        
        
        Losses
        
        
        Value
        
        
        LossesGovernment-sponsored enterprises*
        $
        -
        
        $
        -
        
        $
        -
        
        $
        -
        
        $
        -
        
        $
        -Mortgage-backed securities
        
        16,822
        
        
        (263)
        
        
        2,439
        
        
        (107)
        
        
        19,261
        
        
        (370)State and political subdivisions
        
        3,058
        
        
        (115)
        
        
        -
        
        
        -
        
        
        3,058
        
        
        (115)Total temporarily impaired securities
        $
        19,880
        
        $
        (378)
        
        $
        2,439
        
        $
        (107)
        
        $
        22,319
        
        $
        (485)
   The following tables detail unrealized losses and related fair values in the Banks held-to-maturity investment securities portfolio.  This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2009 and December 31, 2008.  Temporarily Impaired Securities in HTM Portfolio  September 30, 2009
        
        Less than 12 months
        
        
        12 Months or More
        
        
        TotalFair
        
        
        Unrealized
        
        
        Fair
        
        
        Unrealized
        
        
        Fair
        
        
        UnrealizedValue
        
        
        Losses
        
        
        Value
        
        
        Losses
        
        
        Value
        
        
        LossesGovernment-sponsored enterprises*
        $
        -
        
        $
        -
        
        $
        -
        
        $
        -
        
        $
        -
        
        $
        -Mortgage-backed securities
        
        -
        
        
        -
        
        
        -
        
        
        -
        
        
        -
        
        
        -State and political subdivisions
        
        207
        
        
        (1)
        
        
        709
        
        
        (1)
        
        
        916
        
        
        (2)Total temporarily impaired securities
        $
        207
        
        $
        (1)
        
        $
        709
        
        $
        (1)
        
        $
        916
        
        $
        (2)
  12 
 Temporarily Impaired Securities in HTM Portfolio  December 31, 2008
        
        Less than 12 months
        
        
        12 Months or More
        
        
        TotalFair
        
        
        Unrealized
        
        
        Fair
        
        
        Unrealized
        
        
        Fair
        
        
        UnrealizedValue
        
        
        Losses
        
        
        Value
        
        
        Losses
        
        
        Value
        
        
        LossesGovernment-sponsored enterprises*
        $
        -
        
        $
        -
        
        $
        -
        
        $
        -
        
        $
        -
        
        $
        -Mortgage-backed securities
        
        403
        
        
        (1)
        
        
        -
        
        
        -
        
        
        403
        
        
        (1)State and political subdivisions
        
        2,006
        
        
        (109)
        
        
        -
        
        
        -
        
        
        2,006
        
        
        (109)Total temporarily impaired securities
        $
        2,409
        
        $
        (110)
        
        $
        -
        
        $
        -
        
        $
        2,409
        
        $
        (110)
  *Such as FNMA, FHLMC and FHLB.  Proceeds received from the sale of securities were $25,947 and $31,823 for the three- and nine-month periods ended September 30, 2009. Gross gains from the sale of securities were $702 and $969 for the three- and nine-month periods ended September 30, 2009. No losses were recognized on the sale of securities in 2009.  (3)

                        Allowance for Loan Losses
  The following table summarizes the loan loss experience for the nine-month periods ended September 30, 2009 and 2008.  Allowance for Loan Losses (dollars in 000s)  9/30/09

                        9/30/08Balance at January 1

                        $7,592

                        $4,883Provision for loan losses

                        9,872

                        1,114Recoveries:Commercial

                        5

                        51Loans to individuals

                        2

                        -Charged off loans:Commercial

                        (2,342)

                        (165)Loans to individuals

                        (80)

                        (21)Commercial Real Estate

                        (204)

                        (252)Residential Real Estate

                        (214)

                        (189)Real Estate Construction

                        (1,310)

                        (43)Balance at September 30

                        $13,321

                        $5,378
   (4)

                        Earnings/(Loss) Per Share
  Basic earnings/(loss) per share are based upon the weighted average number of common shares outstanding  13
 
 during the period. The weighted average shares outstanding for the diluted earnings per share computations were adjusted to reflect the assumed conversion of shares available under stock options. The following tables summarize earnings/(loss) per share and the shares utilized in the computations:  Earnings/(Loss) Per Share3 Months Ending

                        

                        9 Months Ending9/30/09

                        9/30/08

                        

                        9/30/09

                        9/30/08Basic

                        $0.23

                        $0.15

                        

                        ($0.79)

                        $0.46Diluted

                        $0.23

                        $0.15

                        

                        ($0.79)

                        $0.46
   Weighted Average Shares Outstanding3 Months Ending

                        

                        9 Months Ending9/30/09

                        9/30/08

                        

                        9/30/09

                        9/30/08Basic

                        4,680,251

                        4,661,202

                        

                        4,680,215

                        4,635,668Diluted

                        4,680,251

                        4,662,374

                        

                        4,680,215

                        4,652,635
   
 (5)

                        Comprehensive Income
  For the nine months ended September 30, 2009 and 2008, total comprehensive income/(loss) was ($3,020) and $1,831 respectively. For the three-month periods ended September 30, 2009 and 2008, total comprehensive income was $1,074 and $978 respectively.  The information that follows discloses the reclassification adjustments and the income taxes related to the net unrealized gains on securities available-for-sale that are included in other comprehensive income, net of income taxes for the three- and nine-month periods ended September 30, 2009 and 2008.   3 Months Ended

                            (dollars in 000s)

                        

                        9 Months Ended

                            (dollars in 000s)9/30/09

                        

                        9/30/08

                        

                        9/30/09

                        

                        9/30/08Net unrealized gains (losses) on securities available for sale:Net unrealized holding gains (losses) during the year

                        $

                        (363)

                        $

                        396

                        $

                        (82)

                        $

                        (492)Income tax benefit (expense)

                        

                        124

                        

                        (135)

                        

                        27

                        

                        170Other comprehensive income (loss), net of income taxes

                        $

                        (239)

                        $

                        261

                        $

                        (55)

                        $

                        (322)
   (6)

                        Financial Instruments With Off-Balance Sheet Risk
  In the normal course of business to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance-sheet risk, which involve commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.  The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments.  14
 
 The same credit policy is used in making commitments as is used for on-balance-sheet risk. At September 30, 2009 outstanding commitments to extend credit were $153,755 as compared to $141,436 at December 31, 2008.  Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments may expire without ever being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash outlays for
            the Company.  (7)

                        Borrowings
  Short-term FHLB borrowings at September 30, 2009 totaled $10,000, a reduction of $7,000 from December 31, 2008. In April, a $12,000 short-term advance matured and was not replaced, reducing our total outstanding FHLB borrowings. In May, a $5,000 convertible FHLB advance was reclassified into short-term borrowings from long-term borrowings as it matures in May 2010. The remaining $5,000 is a fixed rate
            FHLB advance set to mature in December 2009.  The Company has outstanding long-term debt with the Federal Home Loan Bank of Atlanta in the amount of $58,000 as of September 30, 2009, a reduction of $5,000 as compared to the $63,000 reported at December 31, 2008. This reduction is due to the convertible advance that was reclassified into short-term borrowings in May as described above.  (8)

                        Stock Based Compensation
  The Company has two share-based compensation plans, which are described Company’s Annual Report Form 10-K. The compensation cost that has been charged against income for those plans was approximately $110 and $75 for the nine-month periods ended September 30, 2009 and 2008, respectively. The Company incurred compensation cost of $36 and $24 for the three-month periods ended September 30, 2009 and
            2008, respectively. The Company has no nonqualified stock options outstanding at September 30, 2009.  A summary of option activity during the nine-month period ended September 30, 2009 is presented below:  Options

                            Outstanding

                        

                        Weighted Average

                            Exercise

                            Price

                        

                        Weighted Average Grant Date Fair Value

                        

                        Intrinsic Value of Options Exercised

                        Weighted

                            Average

                            Contractual

                            TermBalance at 12/31/08

                        256,982

                        $

                        8.79

                        $

                        2.66

                        $

                        302

                        5.97 yearsExercised

                        1,400

                        

                        5.08

                        

                        0.95

                        

                        -Forfeited

                        35,750

                        

                        5.49

                        

                        1.17Granted

                        2,000

                        

                        5.11

                        

                        1.49Expired

                        -

                        

                        -

                        

                        -Balance at 9/30/09

                        221,832

                        $

                        9.32

                        $

                        2.90

                        $

                        -

                        6.15 yearsExercisable at 9/30/09

                        119,722

                        $

                        9.69

                        $

                        2.79

                        

                        n/a

                        4.33 years
  Information regarding shares vested during the three- and nine-month periods ended September 30, 2009 and  15
 
 2008 are as follows:  3 Months Ended

                            (dollars in,000s)

                        

                        9 Months Ended

                            (dollars in,000s)9/30/09

                        

                        9/30/08

                        

                        9/30/09

                        

                        9/30/08Number of shares vested:

                        

                        7,560

                        

                        9,560

                        

                        17,740

                        

                        17,100Total fair value of shares vested:

                        $

                        37

                        $

                        40

                        $

                        73

                        $

                        64
   (9)

                        Fair Value
  The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy:  Assets and Liabilities Recorded at Fair Value on a Recurring Basis at September 30, 2009  (in 000’s)

                        

                        Total

                        

                        Level 1

                        

                        Level 2

                        

                        Level 3Investment securities available-for-sale

                        $

                        53,964

                        $

                        -

                        $

                        53,964

                        $

                        -Total assets at fair value

                        $

                        53,964

                        $

                        -

                        $

                        53,964

                        $

                        -Total liabilities at fair value

                        $

                        -

                        $

                        -

                        $

                        -

                        $

                        -
  Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis at September 30, 2009  (in 000’s)

                        

                        Total

                        

                        Level 1

                        

                        Level 2

                        

                        Level 3Impaired loans

                        $

                        42,983

                        $

                        -

                        $

                        42,983

                        $

                        -Foreclosed assets

                        

                        2,018

                        

                        -

                        

                        2,018

                        

                        -Total assets at fair value

                        $

                        45,001

                        $

                        -

                        $

                        45,001

                        $

                        -Total liabilities at fair value

                        $

                        -

                        $

                        -

                        $

                        -

                        $

                        -
   The carrying amounts and approximate fair values of the Corporation's financial instruments are as follows at September 30, 2009 and December 31, 2008:        16
 
   September 30, 2009

                        

                        

                        December 31, 2008Carrying

                            Amounts

                        

                        

                        Approximate

                            Fair Values

                        

                        

                        Carrying

                            Amounts

                        

                        

                        Approximate

                            Fair ValuesFinancial assetsCash and due from banks

                        $

                        6,084

                        

                        $

                        6,084

                        

                        $

                        7,270

                        

                        $

                        7,270Interest-bearing deposits in banks

                        

                        25,045

                        

                        

                        25,045

                        

                        

                        26

                        

                        

                        26Fed Funds sold

                        

                        300

                        

                        

                        300

                        

                        

                        -

                        

                        

                        -Securities available-for-sale

                        

                        53,964

                        

                        

                        53,964

                        

                        

                        77,243

                        

                        

                        77,243Securities held-to-maturity

                        

                        12,491

                        

                        

                        12,842

                        

                        

                        10,001

                        

                        

                        10,039Restricted equity securities

                        

                        5,737

                        

                        

                        5,737

                        

                        

                        5,607

                        

                        

                        5,607Loans, net

                        

                        574,662

                        

                        

                        574,098

                        

                        

                        545,454

                        

                        

                        549,360Bank owned life insurance

                        

                        12,798

                        

                        

                        12,798

                        

                        

                        12,390

                        

                        

                        12,390Financial liabilitiesTotal deposits

                        

                        544,312

                        

                        

                        545,565

                        

                        

                        466,335

                        

                        

                        467,860Short-term borrowings

                        

                        10,000

                        

                        

                        10,000

                        

                        

                        17,000

                        

                        

                        17,000Securities sold under agreements to repurchase

                        

                        21,116

                        

                        

                        21,116

                        

                        

                        35,693

                        

                        

                        35,693Federal funds purchased

                        

                        -

                        

                        

                        -

                        

                        

                        11,326

                        

                        

                        11,326Long-term borrowings

                        

                        58,000

                        

                        

                        62,308

                        

                        

                        63,000

                        

                        

                        69,455Guaranteed preferred beneficial interests in the Company’s junior

                            subordinated debentures

                        

                        16,496

                        

                        

                        16,498

                        

                        

                        16,496

                        

                        

                        16,503
   (10)

                        Common Stock Dividends
  On July 1, 2009, the Company paid its tenth consecutive semi-annual cash dividend on the Company’s stock in the amount of $0.04 per share, payable to shareholders of record June 1, 2009.  (11)

                        Preferred Stock Dividends
  On July 30, 2009, the Board of Directors declared a cash dividend on the Company’s preferred stock in the amount of $200,000. This dividend was paid August 17, 2009.  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations  Management’s discussion and analysis of the financial condition and results of operations of the Company as of and for the three- and nine-month periods ended September 30, 2009 and 2008 is as follows. The discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes on the December 31, 2008 Form 10-K.  Critical Accounting Policy  For a discussion of the Company’s critical accounting policy related to the allowance for loan losses, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.  17
 
  Results of Operations  Net income for the quarter ended September 30, 2009 was $1,313,000, compared to net income of $717,000 for the same period last year, an increase of $596,000 or 83.1%. After the dividend on preferred stock, net income available to common shareholders for the quarter was $1,071,000 or $0.23 per diluted common share as compared to $717,000 or $0.15 per diluted common share for the third quarter of 2008.
            The increase in net income over the same period last year is largely due to an improvement in our net interest margin as well gains realized on investment transactions. Our net interest margin for the three months ended September 30, 2009 was 3.00%, an improvement of 15 basis points from 2.85% in the same three-month period in 2008. Gains from sales in our investment portfolio totaled $702,000 in the third quarter of this year.  Net loss for the nine-month period ending September 30, 2009 was $2,965,000 compared to net income of $2,153,000 for the same period last year, representing a decrease of $5,118,000 or 237.7%. After the dividend on preferred stock, net loss to common shareholders was $3,681,000, or $0.79 per diluted share as compared of net income of $2,153,000 or $0.46 per diluted share for the nine-month period
            ended September 30, 2008. The decrease in net income for the nine-month period is largely attributable to the significant loan loss provisioning taken earlier this year.  For the three-month period ended September 30, 2009, interest income decreased $329,000, or 3.7%, to $8,657,000 from $8,986,000 in the same three-month period last year. For the nine-month period ended September 30, 2009, interest income decreased by $1,613,000, or 5.9%, to $25,627,000 from $27,240,000 reported for the prior year. These decreases are attributable to the lower interest rate
            environment, as the Wall Street Journal prime rate was 5.00% at September 30, 2008, 175 basis points (bps) higher than the 3.25% at September 30, 2009. The 1-month London Interbank Offering Rate (LIBOR) was over 200 bps higher a year ago as well. This has caused a compression of our earnings on our interest earning asset portfolio, which has increased $33,868,000, or 5.3% as compared to December 31, 2008.  Likewise, we have experienced a reduction in our interest expense during the period due to the lower interest rate environment. For the three-month period ended September 30, 2009, interest expense totaled $3,616,000 compared to $4,696,000 for the same period last year, a decrease of $1,080,000, or 23.0%. For the nine-month period ended September 30, 2009, interest expense totaled $10,983,000 compared
            to $14,601,000 for the same period last year, a decrease of $3,618,000, or 24.8%. This decrease is largely reflective of the majority of our certificates of deposits opening or re-pricing at lower rates within the first nine months of this year as well as lower rates on our Prime money market product. Interest expense on deposits decreased $2,737,000, or 24.7%, in the nine-month period ended September 30, 2009 while interest expense on borrowings decreased $881,000, or
            24.9%.  As a result of our liability costs re-pricing downward more quickly than our asset yields, we experienced a significant increase in our net interest income of 17.5% for the third quarter of 2009 as compared to the same three-month period in 2008 and an increase of 15.9% year-to-date over the same nine-month period in 2008. Our net interest margin increased by 15 basis points to 3.00% for the third
            quarter of 2009 in comparison to 2.85% for quarter ended September 30, 2008.  For the three-month period ended September 30, 2009, we recorded a provision for losses on loans of $438,000 compared to $435,000 for the same period last year, an increase of $3,000. The provision for losses on loans totaled $9,872,000 for the nine-month period ended September 30, 2009 compared to $1,114,000 for the same period last year, an increase of $8,758,000. The ratio of the allowance for loan
            losses to total loans outstanding was approximately 2.27% at September 30, 2009, which compares to approximately 1.37% at December 31, 2008. At September 30, 2009, our total reserves amounted to  18
 
 $13,231,000 with $5,199,000 as specific reserves on our impaired loans and $8,121,000 as general reserves to cover inherent risks in our loan portfolio based on the current economic environment. Based upon our detailed quarterly analysis performed on our loan portfolio, we believe our reserve balances are appropriate given the uncertain economic climate. We were successful in resolving one large
            commercial account during the third quarter which resulted in a decrease of $8.8 million in our non-accrual loans. This decrease was offset by new non-accrual loans of approximately $3.0 million in the residential and commercial real estate segments. We continue to see weaknesses in the automobile industry, as well as the residential and commercial real estate markets and as a result, we increased our general reserves further to account for such continued weaknesses.  Noninterest income increased $652,000 for the three-month period ended September 30, 2009, or 97.0%, compared to the same period last year, from $672,000 to $1,324,000. The primary driver in our performance was the completion of an investment portfolio restructuring transaction to increase overall liquidity and to better position our portfolio for a rising rate environment. The transaction resulted in
            the recognition of $702,000 in gains during the quarter. For the nine-month period ended September 30, 2009, noninterest income was $2,482,000, an increase of $616,000, or 33.0%, over the same period last year.  Noninterest expense for the third quarter of 2009 totaled $4,011,000, an increase of $471,000, or 13.3%, compared to $3,540,000 during the same quarter in 2009. For the nine-month period ended September 30, 2009, noninterest expense totaled $11,938,000, an increase of $1,528,000, or 14.7%, from $10,410,000 recorded in the same period last year. Our FDIC insurance costs have risen dramatically this
            year, from $256,000 in the first nine months of 2008 to $957,000 this year, an increase of 273.8%. We have seen similar increases in our legal expenses (due to ongoing credit issues and work-outs), deposit expenses (due to increased program fees related to our new deposit products) and data processing expense (due to both increased levels of customer transactions and costs related to improved information systems). We have managed other expense categories firmly, with compensation
            costs increasing just 2.8% and advertising fees decreasing 44.0% this year compared to the same nine-month period last year.  The following table shows our key performance ratios for the periods ended September 30, 2009, December 31, 2008 and September 30, 2008:  Key Performance Ratios9 months

                        

                        12 months

                        

                        9 monthsEnded

                        

                        Ended

                        

                        Ended9/30/09

                        

                        12/31/08

                        

                        9/30/08Return on average assets

                        (0.57%)

                        

                        0.27%

                        

                        0.46%Return on average equity (1)

                        (6.93%)

                        

                        3.87%

                        

                        6.83%Net interest margin (2)

                        2.99%

                        

                        2.90%

                        

                        2.89%Cost of funds

                        2.33%

                        

                        3.26%

                        

                        3.40%Yield on earning assets

                        5.20%

                        

                        6.05%

                        

                        6.18%Basic net earnings per share

                        ($0.79)

                        

                        $0.35

                        

                        $0.46Diluted net earnings per share

                        ($0.79)

                        

                        $0.35

                        

                        $0.46
  (1) The calculation of ROE excludes the effect of any unrealized gains or losses on investment securities available-for-sale. (2)  Calculated on a fully taxable equivalent basis (“FTE”).  19
   
  Non-GAAP Financial Measures The Company measures the net interest margin as an indicator of profitability. The net interest margin is calculated by dividing tax-equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax-equivalent net interest income is considered in the calculation of this ratio. Tax-equivalent net interest income is
            calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for 2009 and 2008 is 34%. The reconciliation of tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below.  Nine months ended 9/30/09

                        

                        Twelve months ended 12/31/08

                        

                        Nine months ended 9/30/08Net interest income, non tax-equivalent

                        $

                        14,644

                        $

                        17,199

                        $

                        12,639Less: tax-exempt interest income

                        

                        (389)

                        

                        (378)

                        

                        (293)Add: tax-equivalent of tax-exempt interest income

                        

                        589

                        

                        573

                        

                        444Net interest income, tax-equivalent

                        $

                        14,844

                        $

                        17,394

                        $

                        12,790
  Capital Adequacy  Our capital levels remain strong during this economic downturn. We seek to maintain a capital structure adequate to support anticipated asset growth and serve as a cushion to absorb potential losses. Tier 1 risk-based and total risk-based capital ratios were 11.9% and 13.2%, well above the regulatory well-capitalized capital ratios of 6.0% and 10.0%, respectively. Our financial position at September
            30, 2009 reflects liquidity and capital levels currently adequate to fund anticipated near-term business expansion. We review the adequacy of our capital on an ongoing basis at the Company and Bank level and are committed to maintaining a total risk based capital ratio of 10% or greater at the Bank level, as is required for a “well capitalized” institution.  For the periods indicated, the Company had the following risk-based capital and leverage ratios:  Valley Financial Corporation  Ratio

                        

                        Well Capitalized

                        

                        9/30/09

                        

                        12/31/08

                        

                        9/30/08Tier 1

                        

                        6.0%

                        

                        11.9%

                        

                        13.1%

                        

                        10.7%Total

                        

                        10.0%

                        

                        13.2%

                        

                        14.4%

                        

                        12.0%Leverage

                        

                        5.0%

                        

                        10.0%

                        

                        11.3%

                        

                        9.0%
  For the periods indicated, the Bank had the following risk-based capital and leverage ratios:    20
 
  Valley Bank  Ratio

                        

                        Well Capitalized

                        

                        9/30/09

                        

                        12/31/08

                        

                        9/30/08Tier 1

                        

                        6.0%

                        

                        10.8%

                        

                        9.0%

                        

                        9.6%Total

                        

                        10.0%

                        

                        12.1%

                        

                        10.3%

                        

                        10.6%Leverage

                        

                        5.0%

                        

                        9.1%

                        

                        7.8%

                        

                        8.1%
   At its October 29, 2009 meeting, the Board of Directors of Valley Financial Corporation unanimously approved the suspension of the payment of the semi-annual common stock cash dividend. Due to the uncertain economic challenges ahead, we find it prudent, and in the longer term interest of our shareholders, to preserve our capital. As conditions improve, we will re-evaluate our position with respect to the
            dividend.  Financial Condition  The following table shows our key growth indicators:  Key Growth Indicators(dollars in,000s)9/30/09

                        

                        12/31/08

                        

                        9/30/08Investment securities

                        $

                        72,192

                        $

                        92,851

                        $

                        86,181Loans, net

                        $

                        574,662

                        $

                        545,454

                        $

                        508,939Deposits

                        $

                        544,312

                        $

                        466,335

                        $

                        461,931Total assets

                        $

                        710,635

                        $

                        674,479

                        $

                        642,828
  Total assets grew by $36.2 million through the first nine months of 2009. We have recorded $29.2 million in net loan growth and a decline in investment securities of $20.1 million. Our cash reserves (including cash, due from banks, interest-bearing deposits and overnight federal funds sold) have increased $25.3 million. In July 2009, we entered into participation with our
            correspondent bank, Community Bankers Bank, to sell overnight excess cash balances directly to the Federal Reserve Bank in Richmond. At September 30, 2009, we had a balance of $25.3 million at the Federal Reserve Bank with CBB as our agent which is reflected in our interest-bearing deposits in banks. We completed the sale side of an investment restructure transaction during September which resulted in the sale of $26.9 million in securities and a gain of $702,000. We completed
            approximately 50% of the buy-side of this transaction during September and the remainder in October. As a result, our investment securities decreased as compared to the prior quarter and our cash reserves increased.  On the funding side, deposits have increased $78.0 million with strong growth generated in our MyLifestyle Checking, Prime money market accounts and our CDARS CDs product lines. Borrowings, excluding fed funds, have decreased by $26.6 million with a $14.6 million decrease in our overnight repo deposit product and a decrease of $12.0 million in our outstanding FHLB borrowings. The
            decline in our overnight repo product is primarily economic driven, as our commercial customers are not holding as large of cash reserve balances as previously held. Shareholder’s equity has declined by $3.6 million, primarily due to the year-to-  21
 
 date net loss available to common shareholders of $3.0 million and the declared preferred and common shareholder dividends of $683,000.  Non-Performing Assets  The Company’s ratio of non-performing assets as a percentage of total assets decreased 50 basis points to 3.03% as of September 30, 2009, as compared to 3.53% as of June 30, 2009. Non-performing assets decreased from $24.6 million at June 30, 2009 to $21.6 million at September 30, 2009. We were successful in resolving one large commercial account during the third quarter which resulted in a
            decrease of $8.8 million in our non-accrual loans. This decrease was offset by new non-accrual loans of approximately $3.0 million in the residential and commercial real estate segments. At September 30, 2009, non-performing assets consisted of non-accrual loans of $17.3 million, foreclosed property of $2.0 million, and troubled debt restructured loans of $42,000. Also included in non-performing assets at September 30, 2009 are loans totaling $2.2 million that are past due greater
            than 90 days, but that are in the process of collection. The Company anticipates full payment of all past due amounts. Net charge-offs as a percentage of average loans receivable also decreased to 0.06% for the third quarter of 2009, compared to 0.41% for the second quarter of 2009 and increased slightly as compared to 0.01% for the same quarter in the prior year. Net charge-offs for the quarter ended September 30, 2009 were $332,000, in comparison to $2.4 million for the second
            quarter of 2009 and $75,000 for the same quarter one year ago.  Non-performing assets at September 30, 2009, December 31, 2008 and September 30, 2008 are presented in the following table:  Non-performing Assets(dollars in 000s)9/30/09

                        

                        12/31/08

                        

                        9/30/08Nonaccrual loans

                        $

                        17,285

                        $

                        9,532

                        $

                        1,669Loans past due 90 days or more

                        

                        2,217

                        

                        57

                        

                        -Restructured loans

                        

                        42

                        

                        -

                        

                        -Total nonperforming loans

                        $

                        19,544

                        $

                        9,589

                        $

                        1,669Foreclosed, repossessed and idled properties

                        

                        2,018

                        

                        424

                        

                        500Total nonperforming assets

                        $

                        21,562

                        $

                        10,013

                        $

                        2,169
  If nonaccrual loans had performed in accordance with their original terms, additional interest income would have been recorded in the amount of $405,000 for the nine months ended September 30, 2009; $149,000 for the year ended December 31, 2008; and $151,000 for the nine months ended September 30, 2008.  Higher Risk Loans  Certain types of loans, such as option ARM products, interest-only loans, subprime loans, and loans with initial teaser rates, can have a greater risk of non-collection than other loans. We have not offered option ARM, interest-only, or subprime mortgage loans. The only initial teaser-rate product we have ever offered have been 80% loan-to-value home equity lines of credit. This teaser-rate product was
            introduced in mid-2004 to stimulate activity and was terminated in late 2005.  Junior-lien mortgages can also be considered higher risk loans and our junior lien portfolio currently consists of balances totaling $25.2 million (4.3% of total portfolio) at September 30, 2009. Loans included in this category that were initially made with high loan-to-value ratios of 100% or greater have current balances totaling less than $2 million and have current loan-to-value ratios of 80% or less
            at September 30, 2009.  22
 
 Over the past seven years, we have experienced charge-offs totaling $52,000 in junior lien mortgages. Additionally, we have residential first mortgages with balances approximating $3.0 million that are at current loan-to-value ratios in excess of 100%. We have not experienced any charge-offs of loans in this category.  Interest Rate Risk  For a discussion on interest rate risks, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Our cumulative repricing gap for the 90-day time period indicates a liability-sensitive position as of September 30, 2009.  Liquidity
  One of the principal goals of the Bank’s asset and liability management strategy is to maintain adequate liquidity. Liquidity measures our ability to meet our maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund our operations and to provide for customers’ credit needs. Liquidity represents a financial institution’s ability to meet present
            and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds from alternative funding sources. We sell excess funds as overnight federal funds sold to provide an immediate source of liquidity and as of September 30, 2009 we had a total of $25.3 million in federal funds sold. The Company also maintains approved lines of credit with correspondent banks as backup liquidity sources.  The secondary liquidity source for both short-term and long-term borrowings consists of a secured line of credit from the Federal Home Loan Bank (“FHLB”). At September 30, 2009, the line of credit had a maximum lendable value of $74.8 million and we had $68.0 million in borrowings against this line. Borrowings from the FHLB are secured by a blanket collateral agreement on a pledged portion of
            the Bank’s 1-4 family residential real estate loans, multifamily mortgage loans, and commercial mortgage collateral. Additionally, we have an established line with the Federal Reserve Discount Window. At September 30, 2009, the line had a maximum lendable value of $57.8 million with no outstanding balance against it. Borrowings from the FRB Discount Window are secured by a collateral agreement on a pledged portion of the Bank’s commercial and real estate construction
            collateral.  The Company maintains a liquidity policy as a means to manage liquidity and the associated risk. The policy includes a Liquidity Contingency Plan (“the Liquidity Plan”) that is designed as a tool for the Company to detect liquidity issues in order to protect depositors, creditors and shareholders. The Liquidity Plan includes monitoring various internal and external indicators such as changes
            in core deposits and changes in the market conditions. It provides for timely responses to a wide variety of funding scenarios ranging from changes in loan demand to a decline in the Company’s quarterly earnings to a decline in market price of the Company’s stock. The Liquidity Plan calls for specific responses designed to meet a wide range of liquidity needs based upon assessments that are performed on a recurring basis by the Company and its Board of Directors.  As a result of our management of liquid assets and our ability to generate liquidity through alternative funding sources, we believe we maintain overall liquidity sufficient to meet our depositors’ requirements and satisfy our customers’ credit needs.  Recent and Future Accounting Considerations  In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “TheFASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162,”  23
 
 (“SFAS 168”). SFAS 168 establishes theFASB Accounting Standards Codification TM (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual
            pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and
            Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands forAccounting Standards Codification. Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (“ASU”).  In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 –Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC. ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on
            the Company’s financial position or results of operations but will change the referencing system for accounting standards. Certain of the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs. For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section are provided where applicable in addition to the original standard type and number.  In December 2008 the FASB issued FASB Staff Position (“FSP”) SFAS 132(R)-1 (FASB ASC 715-20-65), “Employers’ Disclosures about Postretirement Benefit Plan Assets,” (“FSP SFAS 132(R)-1”). This FSP provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The objective of the FSP is to
            provide the users of financial statements with an understanding of: (a) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (b) the major categories of plan assets; (c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (e)
            significant concentrations of risk within plan assets. The FSP also requires a nonpublic entity, as defined in Statement of Financial Accounting Standard (“SFAS”) 132, to disclose net periodic benefit cost for each period for which a statement of income is presented. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Staff Position will require the Company to provide additional disclosures related to its benefit plan.  The FASB issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140,” (“SFAS 166”) in June 2009. SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the
            transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS 140 along with the exception from applying FIN 46(R). The standard is effective for the first annual reporting period
            that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the standard to have any impact on the Company’s financial statements.  The FASB issued ASU 2009–05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value” in August, 2009 to provide guidance when estimating the fair value of a liability. When a quoted price in an active market for the identical liability is not available, fair value should be measured using (a) the quoted price of an identical liability when
            traded as an asset; (b) quoted prices for  24
 
 similar liabilities or similar liabilities when traded as assets; or (c) another valuation technique consistent with the principles of Topic 820 such as an income approach or a market approach. If a restriction exists that prevents the transfer of the liability, a separate adjustment related to the restriction is not required when estimating fair value. The ASU was effective October 1, 2009 for the
            Company and will have no impact on financial position or operations.  Item 3. Quantitative and Qualitative Disclosures about Market Risk.  Not applicable.  Item 4. Controls and Procedures.  As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive
            Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There has not been any change in our internal control over financial reporting that occurred during the last quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goal under every potential condition, regardless of how remote. In addition, the operation of any system of controls and procedures is dependent upon the employees responsible for executing it. While we have
            evaluated the operation of our disclosure controls and procedures and found them effective, there can be no assurance that they will succeed in every instance to achieve their objective.  PART II. OTHER INFORMATION  Item 1. Legal Proceedings. On or about March 23, 2009, The Collection, LLC ("The Collection") filed a civil action against the Bank and Scott Newcomb Motors, LLC, d/b/a Scott Newcomb Chrysler Jeep ("Newcomb") in the United States District Court for the Western District of Virginia, Danville Division, alleging claims for breach of contract against Newcomb, tortious interference with contract and conversion against the Bank, and
            common law and statutory conspiracy against both Newcomb and the Bank. The Collection alleged that Newcomb, using floor plan financing provided by the Bank, purchased fifteen vehicles from The Collection but failed to pay The Collection for the vehicles. The Collection sought monetary damages for the alleged cost of the fifteen vehicles (approximately $340,800), plus treble and/or punitive damages. On October 16, 2009, without waiving any claims against Newcomb and without admitting any liability, The Collection and the Bank entered into a settlement agreement resolving The Collection's claims against the Bank in their entirety. The Court's formal dismissal of The Collection's claims against the Bank with prejudice is pending. The settlement will have no material financial impact on the
            Company.  25    
 **Item 1A. Risk Factors.**  There were no material changes to the Company’s risk factors as disclosed in the Annual Report Form 10-K for December 31, 2008.  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  There were no unregistered sales of equity securities during the quarter.  Item 3. Defaults Upon Senior Securities.  There were no defaults upon Senior Securities in the quarter.  Item 4. Submission of Matters to a Vote of Security Holders.  None.  Item 5. Other Information  None.  26
 
   Item 6. Exhibits  Exhibit

                            Number

                        

                        Description31.1

                        

                        Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2

                        

                        Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1

                        

                        Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2

                        

                        Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
  * Filed herewith.  27
 
   SIGNATURES  Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.   VALLEY FINANCIAL CORPORATIONNovember 9, 2009

                        

                        /s/ Ellis L. GutshallDate

                        

                        Ellis L. Gutshall, President and ChiefExecutive OfficerNovember 9, 2009

                        

                        /s/ Kimberly B. SnyderDate

                        

                        Kimberly B. Snyder, Executive VicePresident and Chief Financial Officer
   28
 
  EXHIBIT INDEX
   Exhibit

                            Number

                        

                        Description31.1

                        

                        Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2

                        

                        Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1

                        

                        Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2

                        

                        Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
  * Filed herewith.  29