UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

o		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 0-24172

SOUTHEASTERN BANK FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

GEORGIA		58-2005097
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3530 Wheeler Road
Augusta, Georgia		30909
(Address of principal executive offices)		(Zip Code)

(706) 738-6990
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $3.00 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller Reporting Company þ
				(do not check if smaller reporting company)

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

As of June 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $47,606,003 based on the closing sale price of $15.50 per share as reported on the Over the Counter Bulletin Board.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at February 17, 2010
Common Stock, $3 par value per share		6,673,352 shares

Document		Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held April 28, 2010		Part III

 

 

Introductory Note: Due to market conditions affecting the financial services industry and the Registrant during 2009, the aggregate market value of the Registrant’s common stock held by non-affiliates (its “public float”) fell below $50 million as of June 30, 2009. As a result, the Company has exited “accelerated filer” status and is now classified as a “smaller reporting company” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. The Company has elected, however, to file a report and attestation as to its internal controls over financial reporting and otherwise comply voluntarily, as to the disclosure contained in this Annual Report on Form 10-K, with the requirements applicable to an accelerated filer.

Item 1. Description of Business

General

Southeastern Bank Financial Corporation (the “Company”) is a Georgia corporation that is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company had total consolidated assets of $1.5 billion, total deposits of $1.3 billion and total stockholders’ equity of $93.7 million at December 31, 2009. The Company has two wholly-owned subsidiaries that primarily do business in the Augusta-Richmond County, GA-SC metropolitan area-Georgia Bank & Trust Company of Augusta (“GB&T”) and Southern Bank & Trust (“SB&T” or “Thrift”). GB&T, a Georgia state bank, operates its main office and eight full service branches in Augusta, Martinez, and Evans, Georgia, and one branch in Athens, Georgia, with mortgage origination offices located in Augusta, Savannah and Athens, Georgia. SB&T Capital Corporation (“the LPO”) a wholly owned subsidiary of the Bank, was organized on August 16, 2007 and opened an office in Greenville, South Carolina. During the second quarter of 2009 the Company made the decision to cease originations of new loans in the Greenville office and allow the portfolio, primarily real estate loans, to decline over the life of the remaining loans. No exit costs were incurred as a result of the decision. On November 1, 2007, GB&T entered into an Operating Agreement with NMF Asset Management LLC (“NMF”) whereby the Bank became a 30% partner. NMF is an investment management firm that provides services to individuals, trusts, pensions, nonprofit organizations as well as other institutions. During the second quarter of 2009, GB&T withdrew from its partnership and expensed its investment of $20 thousand. SB&T, a federally chartered thrift, operates three full service branches in North Augusta and Aiken, South Carolina. The Company’s operations campus is located in Martinez, Georgia and services both subsidiaries.

The Company is community oriented and focuses primarily on offering real estate, commercial and consumer loans and various deposit and other services to individuals, small to medium sized businesses and professionals in its market area. The Company is the largest locally owned and operated financial institution headquartered in Richmond and Columbia Counties. Each member of the Company’s management team is a banking professional with many years of experience in the Augusta or Aiken market with this and other banking organizations. A large percentage of Company management has worked together for many years. The Company competes against the larger regional and super-regional banks operating in its market by emphasizing the stability and accessibility of its management, management’s long-term familiarity with the market, immediate local decision making and the pride of local ownership.

The Company’s internet address is www.georgiabankandtrust.com. It makes available free of charge through its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”).

The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The Internet address of the SEC website is www.sec.gov.

History

GB&T was organized by a group of local citizens from Richmond and Columbia Counties and commenced business from the main office location at 3530 Wheeler Road in Augusta on August 28, 1989. GB&T also operates eight full service branches in Augusta, Martinez and Evans, Georgia, one full service branch in Athens, Georgia and a loan production office in Savannah, Georgia. The Thrift was organized by the Company during 2005 and 2006, opening its main office in Aiken, South Carolina on September 12, 2006. SB&T opened its first North Augusta branch at 336 Georgia Avenue in August 2007. The Thrift opened its second Aiken branch at 149 Laurens Street on January 10, 2008.

Employees

The Company had approximately 353 full-time equivalent employees at December 31, 2009. The Company maintains training, educational and affirmative action programs designed to prepare employees for positions of increasing responsibility in both management and operations, and provides a variety of benefit programs, including group life, health, accident and other insurance and retirement plans. None of the Company’s employees are covered by a collective bargaining agreement, and the Company believes its employee relations are generally good.

Management Team

GB&T was founded with an experienced management team, and that team has continued to expand with the growth of the bank. GB&T’s President and Chief Executive Officer, R. Daniel Blanton, was involved in the organization of GB&T in 1988 and previously served with a predecessor to Wachovia, Georgia State Bank, for over 13 years. With the acquisition of First Columbia, GB&T obtained its Executive Vice President and Chief Operating Officer, Ronald L. Thigpen, who had served as Chief Executive Officer of First Columbia since 1991, and before that served in various capacities with Wachovia and its predecessors. GB&T’s senior loan officer and Group Vice President, Jay Forrester, has been associated with GB&T since 1995. He previously served as Vice President, Commercial Lending for C & S National Bank and NationsBank, predecessors of Bank of America. Regina W. Mobley, Group Vice President, Bank Operations, has been with GB&T since the acquisition of First Columbia Bank. With over 32 years of bank operations experience, she previously served First Columbia Bank and C & S National Bank, as predecessor of Bank of America. GB&T’s Senior Credit Officer and Group Vice President, James R. Riordan, Jr., joined the team in 2002. For the prior ten years, he served in various capacities with SunTrust Bank, Augusta, N. A., most recently as senior lending officer. He has 22 years of bank lending and credit administration experience. Paula Tankersley, Group Vice President, Retail Banking, has been associated with GB&T since 1992. Prior to joining GB&T, she was associated with the Bank of Columbia County and its successor, Allied Bank of Georgia. In September 2004, Robert C. Osborne, Jr., joined GB&T as Executive Vice President and head of Wealth Management. For the prior 28 years, he was associated with Wachovia Corporation in Atlanta and Augusta, most recently as head of their Wealth Management unit in Augusta.

The Company opened SB&T with a management team that has extensive experience in the Aiken, South Carolina market. In 2005, both Frank Townsend and Darrell Rains joined GB&T with the responsibility of organizing SB&T. Frank Townsend became President and Chief Executive Officer of SB&T upon its opening in September 2006. Prior to joining GB&T, Mr. Townsend spent 11 years with Regions Bank and was the Commercial Sales Manager in Aiken. He has 23 years experience in both banking and insurance. Darrell Rains, Group Vice President and Chief Financial Officer, has over 28 years of financial experience, including service at Regions Bank as Regional Financial Officer for the Mid-Atlantic Region and at Palmetto Federal, a predecessor to Regions Bank in Aiken, S.C., as Chief Financial Officer. He serves as Chief Financial Officer for the Company, GB&T and SB&T. Mark Wills, Executive Vice President and Senior Credit Officer, first joined GB&T in 2005 and was one of the original employees of SB&T upon its opening in 2006. With over 28 years of banking experience, he previously served Bank of America and Regions Bank. In September 2007, Susan Yarborough joined SB&T as Executive Vice President and Business Development Officer. Prior to joining SB&T, she spent 13 years with Carolina First Bank in Aiken as Senior Vice President and City Executive and served in various capacities with Bank of America and its predecessors for 15 years.

Market Area

The Company’s primary market area includes Richmond and Columbia Counties in Georgia and Aiken County in South Carolina, all part of the Augusta-Richmond County, GA-SC metropolitan statistical area (MSA). The 2008 population of the Augusta-Richmond County, GA-SC MSA was 534,218, the second largest in Georgia and fourth largest in South Carolina. The Augusta market area has a diversified economy based principally on government, public utilities, health care, manufacturing, construction, and wholesale and retail trade. Augusta is one of the leading medical centers in the Southeast. Significant medical facilities include the Medical College of Georgia, University Hospital, Veteran’s Administration Hospital, Dwight D. Eisenhower Hospital, Gracewood State School and Hospital, Doctors’ Hospital and Trinity Hospital. Other major employers in the Augusta market area include Westinghouse Savannah River Site (nuclear defense), the Fort Gordon military installation, E-Z Go/Textron (golf car manufacturer), the Richmond County school system and the Columbia County school system. Major employers in the Aiken market include Westinghouse Savannah River Site (nuclear defense), Aiken County Board of Education, Bechtel Savannah River Company (engineering construction firm), Wal-Mart Associates Inc., Kimberly Clark Corporation, and BFS North American Tire, LLC. The area is served by Interstate 20, which connects it to Atlanta, 140 miles to the west and Columbia, South Carolina, 70 miles to the east. Augusta is also served by a major commercial airport (Bush Field) and a commuter airport (Daniel Field). The average unemployment rate for the Augusta-Richmond County MSA was 6.3% in 2008. Between June 2008 and June 2009 (the latest date for which FDIC information is available), total commercial bank and thrift deposits in the Augusta-Richmond County, GA-SC MSA increased 7.6% from $6.6 billion to $7.1 billion. Based on data reported as of June 30, 2009, the Company has 16.70% of all deposits in the Augusta-Richmond County, GA-SC MSA and is the second largest depository institution. The demographic information as presented above is based upon information and estimates provided by the U.S. Census Bureau, U.S. Department of Labor, the Federal Deposit Insurance Corporation (“FDIC”), Augusta Metro Chamber of Commerce, and the South Carolina Employment Security Commission.

The Company entered the Athens, GA market in December 2005. The 2008 population for the Athens-Clarke County, GA MSA was 189,264, ranked fifth in the state of Georgia. The Athens market area has a diversified economy based primarily on government, retail services, tourism, manufacturing, other services, and health care, with the largest share of government jobs in the state. Major employers in the Athens area include the University of Georgia, Athens Regional Medical Center, Pilgrim’s Pride (poultry processing plant), St. Mary’s Hospital, Clarke County School District, Gold Kist, Inc., Wal-Mart Associates Inc., and the Athens-Clarke County Unified Government. Athens is located 70 miles northeast of Atlanta and 120 miles northwest of Augusta. The average unemployment rate for the Athens-Clarke County MSA was 4.9% in 2008. Total commercial bank and thrift deposits for the Athens-Clarke County MSA increased 6.7% from $3.0 billion to $3.2 billion between June 2008 and June 2009. The demographic information presented above is based upon information and estimates provided by the U.S. Census Bureau, U.S. Department of Labor, the FDIC and the Athens Chamber of Commerce.

Competition

The banking business generally is highly competitive, and sources of competition are varied. The Company competes as a financial intermediary with other commercial banks, savings and loan associations, credit unions, mortgage banking companies, consumer finance companies, securities brokerages, insurance companies, and money market mutual funds operating in Richmond, Columbia and Clarke Counties in Georgia, Aiken County in South Carolina and elsewhere. In addition, customers conduct banking activities without regard to geographic barriers through computer-based banking and similar services.

Many of the financial organizations in competition with the Company have much greater financial resources, more diversified markets and larger branch networks than the Company and are able to offer similar services at varying costs with higher lending limits. In addition, with the enactment of federal and state laws affecting interstate and bank holding company expansion, there have been major interstate acquisitions involving financial institutions which have offices in the Company’s market area but are headquartered in other states. The effect of such acquisitions (and the possible increase in size of the financial institutions in the Company’s market areas) may further increase the competition faced by the Company. The Company believes, however, that it will be able to use its local independent image to its advantage in competing for retail and commercial business.

Lending Activities

The Company offers a wide range of lending services, including real estate, commercial and consumer loans, to individuals, small to medium-sized businesses and professionals that are located in, or conduct a substantial portion of their business in, the Company’s market area. The Company’s total loans at December 31, 2009, were $937.5 million, or 73.5% of total interest-earning assets. An analysis of the composition of the Company’s loan portfolio is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Composition of the Loan Portfolio.”

Real Estate Loans. Loans secured by real estate are the primary component of the Company’s loan portfolio, constituting $812.1 million, or 86.6% of the Company’s total loans, at December 31, 2009. These loans consist of commercial real estate loans, construction and development loans, residential real estate loans, and home equity loans.

Commercial Real Estate Loans. At December 31, 2009, the Company held $322.9 million of commercial real estate loans of various sizes secured by office buildings, retail establishments, and other types of property. These commercial real estate loans represented 34.4% of the Company’s total loans at December 31, 2009. Loan terms are generally limited to five years and often do not exceed three years, although the installment payments may be structured on a 20-year amortization basis with a balloon payment at maturity. Interest rates may be fixed or adjustable. The Company generally charges an origination fee. Management attempts to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 80%. In addition, the Company requires personal guarantees from the principal owners of the property supported with an analysis by the Company of the guarantors’ personal financial statements in connection with a substantial majority of such loans. The Company experienced $1.1 million in net charge-offs on commercial real estate loans during 2009. A number of the loans classified as commercial real estate loans are, in fact, commercial loans for which a security interest in real estate has been taken as additional collateral. These loans are subject to underwriting as commercial loans as described below.

Construction and Development Loans. Construction and development real estate loans comprise $270.1 million, or 28.8% of the Company’s total loans at December 31, 2009. A construction and development loan portfolio presents special problems and risks, requiring additional administration and monitoring. This is necessary since most loans are originated as lines of credit and draws under the line require specific activities which add value to the asset, such as progress on the completion of a building or the placement of utilities and roads in a development. This requires specialized knowledge on the part of our personnel to appraise and evaluate that progress, hence the higher level of administration and monitoring. The level of construction and development loans are representative of the character of the Company’s market. The Company subjects this type of loan to underwriting criteria that include: certified appraisal and valuation of collateral; loan-to-value margins (typically not exceeding 75%); cash equity requirements; evaluations of borrowers’ cash flows and alternative sources of repayment; and a determination that the market is able to absorb the project on schedule.

To further reduce the risk related to construction and development loans, the Company generally relies upon the long-standing relationships between its loan officers and the developer/contractor borrowers. In most cases, these relationships exceed ten years. The Company targets seasoned developers and contractors who have experience in the local market. Various members of the Company’s Board of Directors have close contacts with the construction industry: Robert W. Pollard, Jr. owns and operates a lumber manufacturing company; E. G. Meybohm owns the largest local real estate brokerage firm; William J. Badger owns and operates a building supply company; Larry S. Prather owns a utility and grading company; and Patrick D. Cunning, an experienced real estate developer. Through these connections to the industry, the Company attempts to monitor current economic conditions in the marketplace for residential real estate, and the financial standing and ongoing reputation of its construction and development borrowers.

Infrastructure development loans are generally made with an initial maturity of one year, although the Company may renew the loan for up to two additional one-year terms to allow the developer to complete the sale of the lots comprising the property before requiring the payment of the related loan. These loans typically bear interest at a floating rate and the Company typically charges an origination fee. These loans are repaid, interest only, on a monthly or quarterly basis until sales of lots begin, and then principal payments are made as each lot is sold at a rate allowing the Company to be repaid in full by the time 75% of the lots have been sold. In order to reduce the credit risk associated with these loans, the Company requires the project’s loan to value ratio (on an as completed basis) to be not more than 75%. The Company experienced $11.4 million in net loan charge-offs on construction and development loans during 2009.

Residential construction loans are typically made for homes with a completed value in the range of $100 to $500 thousand. Loans are typically made for a term of six months to twelve months. Typically, these loans bear interest at a floating rate and the Company collects an origination fee. The Company may renew these loans for an additional term (up to 24 months total) to allow the contractor time to market the home. In order to reduce the credit risk with respect to these loans, the Company restricts the number and dollar amount of loans that are made for homes being built on a speculative basis and carefully manages its aggregate lending relationship with each borrower. The Company experienced $6.2 million in net loan charge-offs on residential construction loans during 2009.

Interest reserves are established for certain ADC (acquisition, development and construction) loans based on the feasibility of the project, the timeframe for completion, the creditworthiness of the borrower and guarantors, and collateral. An interest reserve allows the borrower’s interest cost to be capitalized and added to the loan balance. As a matter of practice the Bank does not generally establish loan funded interest reserves on ADC loans; however, the Company’s loan portfolio includes six loans with interest reserves at December 31, 2009. The following table details the loans and accompanying interest reserves as of December 31, 2009 and 2008.

		December 31, 2009
						Reserves
		Balance				Original				Advanced				Remaining
						(Dollars in thousands)
Loan 1		$	4,278				179				179				—
Loan 2			9,666				300				77				223
Loan 3			2,598				255				255				—
Loan 4			455				30				30				—
Loan 5			166				10				10				—
Loan 6			1,133				81				81				—

		December 31, 2008
						Reserves
		Balance				Original				Advanced				Remaining
						(Dollars in thousands)
Loan 1		$	1,245				138				16				122
Loan 2			—				300				—				300
Loan 3			2,088				255				192				63
Loan 4			440				30				15				15
Loan 5			163				10				5				5
Loan 6			1,113				81				19				62

Underwriting for ADC loans with interest reserves follows the same process as those loans without reserves. In order for the Bank to establish a loan funded interest reserve, the borrower must have the ability to repay without the use of a reserve and a history of developing and stabilizing similar properties. All ADC loans, including those with interest reserves, are carefully monitored through periodic construction site inspections by Bank employees or third party inspectors to ensure projects are moving along as planned. The Bank assesses the appropriateness of the use of interest reserves during the entire term of the loan as well as the adequacy of the reserve. Collateral inspections are completed before approval of advances. Two of these loans have been extended; one due to delays and time needed to obtain current financial information on the guarantors and another to allow for completion of the final punch list and negotiation of the permanent loan. None of these loans have been restructured or are currently on nonaccrual.

Residential Loans. The Company originates, on a selective basis, residential loans for its portfolio on single and multi-family properties, both owner-occupied and non-owner-occupied. At December 31, 2009, the Company held $219.2 million of such loans, including home equity loans, representing 23.4% of the Company’s loan portfolio. This portfolio typically includes 15 or 30-year adjustable rate mortgage loans whose terms mirror those prevalent in the secondary market for mortgage loans or, less typically, floating rate non-amortized term loans for purposes other than acquisition of the underlying residential property. A limited number of fixed rate loans are maintained in the portfolio when there are compelling market reasons to do so. Generally, all fixed rate residential loans are sold into the secondary market. In the case of home equity loans and lines of credit, the underwriting criteria are the same as applied by the Company when making a first mortgage loan, as described above. Home equity lines of credit typically mature ten years after their origination. The Company experienced net loan charge-offs on residential loans of $3.6 million during 2009.

The Company also originates both fixed and variable rate residential loans for sale into the secondary market, servicing released. Loans originated for sale into the secondary market are approved for purchase by an investor prior to closing. The Company generates loan origination fees, typically ranging from 1.0% to 1.5% of the loan balance, and servicing release fees, generally ranging from 0.25% to 0.75% of the loan balance. The Company bears minimal interest rate risk on these loans and only holds the loans temporarily until documentation can be completed to finalize the sale to the investor. Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on sales of loans. Fair values of these derivatives were $182 and$8 as of December 31, 2009 and 2008, respectively. The Company had $19.2 million of such loans at December 31, 2009.

Commercial Loans. The Company makes loans for commercial purposes to various types of businesses. At December 31, 2009, the Company held $102.2 million of these loans, representing 10.9% of the total loan portfolio, excluding for these purposes commercial loans secured by real estate. See “Real Estate Loans.” Equipment loans are made for a term of up to five years (more typically three years) at fixed or variable rates, with the loan being fully amortized over the term and secured by the financed equipment with a loan-to-value ratio based on the overall relationship and creditworthiness of the customer. Working capital loans are made for a term typically not exceeding one year. These loans are usually secured by accounts receivable or inventory, and principal is either repaid as the assets securing the loan are converted into cash, or principal is due at maturity. The Company experienced net loan charge-offs on commercial loans of $701 thousand during 2009.

Consumer Loans. The Company makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans, and revolving lines of credit such as overdraft protection. At December 31, 2009, the Company held $23.2 million of consumer loans, representing 2.5% of total loans. These loans typically carry balances of less than $25,000 and earn interest at a fixed rate. Non-revolving loans are either amortized over a period generally not exceeding 60 months or are ninety-day term loans. Revolving loans require monthly payments of interest and a portion of the principal balance (typically 2 to 3% of the outstanding balance). The Company entered the indirect lending business in 1997 and currently purchases sales finance contracts from dealers for new and used automobiles and home improvements. At December 31, 2009, indirect loans outstanding totaled $1.9 million. The Company experienced net charge-offs on consumer loans of $344 during 2009.

Loan Approval and Review. The Company’s loan approval policies provide for various levels of officer lending authority. When the aggregate amount of outstanding loans to a single borrower exceeds that individual officer’s lending authority, the loan request must be considered and approved by an officer with a higher lending limit or by the Directors’ Loan Committee. Individual officers’ lending limits range from $15 to $2.0 million for GB&T and $5 to $300 for SB&T depending on seniority and the type of loan. Any loan in excess of the lending limit of senior bank officers must be approved by the Directors’ Loan Committee.

The Company maintains a loan review and classification process which involves multiple officers of the Company and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans. All loan officers are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. Risk ratings are selected from an 8-point scale with ratings as follows: ratings 1 — 4 Satisfactory (pass), rating 5 Watch (potential weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful and rating 8 Loss.

When a loan officer originates a new loan, he documents the credit file with an offering sheet summary, supplemental underwriting analyses, relevant financial information and collateral evaluations. All of this information is used in the determination of the initial loan risk rating. Then, the Company’s Credit Administration department undertakes an independent credit review of that relationship in order to validate the lending officer’s rating. Lending relationships with total related exposure of $500 or greater are also placed into a tracking database and reviewed by Credit Administration personnel on an annual basis in conjunction with the receipt of updated borrower and guarantor financial information. The individual loan reviews analyze such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current/anticipated performance of the loan. The results of such reviews are presented to Executive Management.

Through the review of delinquency reports, updated financial statements or other relevant information in the normal course of business, the lending officer and/or Credit Administration review personnel may determine that a loan relationship has weakened to the point that a criticized (loan grade 5) or classified (loan grade 6 through 8) status is warranted. When a loan relationship with total related exposure of $200 or greater is adversely graded (5 or above), the lending officer is then charged with preparing a Classified/Watch report which outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assisting the borrower in moving the loans to another institution and/or collateral liquidation. All such Classified/Watch reports are reviewed on a quarterly basis by members of Executive Management at a regularly scheduled meeting in which each lending officer presents the workout plans for his criticized credit relationships.

Depending upon the individual facts, circumstances and the result of the Classified/Watch review process, Executive Management may categorize the loan relationship as impaired. Once that determination has occurred, Executive Management in conjunction with Credit Administration personnel, will complete an evaluation of the collateral (for collateral-dependent loans) based upon appraisals in file adjusting for current market conditions and other local factors that may affect collateral value. This judgmental evaluation may produce an initial specific allowance for placement in the Company’s Allowance for Loan & Lease Losses calculation. As soon as practical, updated appraisals on the collateral backing that impaired loan relationship are ordered. When the updated appraisals are received, Executive Management with assistance from Credit Administration department personnel reviews the appraisal, and updates the specific allowance analysis for each loan relationship accordingly. The Director’s Loan Committee reviews on a quarterly basis the Classified/Watch reports including changes in credit grades of 5 or higher as well as all impaired loans, the related allowances and OREO.

In general, once the specific allowance has been finalized, Executive Management will authorize a charge-off prior to the following calendar quarter-end in which that reserve calculation is finalized.

The review process also provides for the upgrade of loans that show improvement since the last review.

Deposits

The Company offers a variety of deposit programs to individuals and to small to medium-sized businesses and other organizations at interest rates generally consistent with local market conditions. The following table sets forth the mix of depository accounts for the Company as a percentage of total deposits at December 31, 2009.

Deposit Mix

		(Dollars in Thousands)
Noninterest-bearing		$	114,780				8.96	%
NOW accounts			210,438				16.44	%
Money management accounts			44,781				3.50	%
Savings			343,740				26.84	%
Time deposits
Under $100			148,044				11.56	%
$100 and over			418,751				32.70	%
		$	1,280,534				100.00	%

The Company accepts deposits at both main office locations and eleven branch banking offices, twelve of which maintain an automated teller machine. The Company is a member of Mastercard’s Maestro and Cirrus networks, VISA Plus, as well as the “STAR” network of automated teller machines, which permits customers to perform certain transactions in many cities throughout Georgia, South Carolina and other regions. The Company controls deposit volumes primarily through the pricing of deposits and to a certain extent through promotional activities such as “free checking”. The Company also utilizes other sources of funding, specifically repurchase agreements, Federal Home Loan Bank borrowings, Insured Network Deposits and brokered certificates of deposit. Deposit rates are set weekly by executive management of the Company. Management believes that the rates it offers are competitive with, or in some cases, slightly above those offered by other institutions in its market area. The Company does not actively solicit deposits outside of its market area.

Supervision and Regulation

The Company, GB&T and SB&T are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws and regulations generally are intended to protect depositors and not shareholders.

Legislation and regulations authorized by legislation influences, among other things:

•

how, when and where the Company may expand geographically;

•

into what product or service markets it may enter;

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how it must manage its assets; and

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under what circumstances money may or must flow between the Company and its subsidiaries.

Set forth below is a summary of the major pieces of legislation affecting the Company’s industry and how that legislation affects its actions. The following summary is qualified by references to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on the Company’s business and prospects, and legislative changes and the policies of various regulatory authorities may significantly affect its operations. We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on the Company’s business and earnings in the future.

The Company

The Company owns all of the capital stock of GB&T and SB&T and is a multi-bank holding company under the federal Bank Holding Company Act of 1956. As a result, the Company is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Board of Governors of the Federal Reserve System. As a bank holding company located in Georgia, the Georgia Department of Banking and Finance (“GDBF”) also regulates and monitors all significant aspects of the Company’s operations. GB&T is a commercial bank regulated by the GDBF, while SB&T is a federally chartered thrift regulated by the Office of Thrift Supervision (“OTS”). Both subsidiaries are regulated by the FDIC.

Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve Board’s prior approval before:

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acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

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acquiring all or substantially all of the assets of any bank; or

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merging or consolidating with any other bank holding company.

Additionally, the Bank Holding Company Act provides that the Federal Reserve Board may not approve any of these transactions if it would result in or tend to create a monopoly or, substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve Board’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Company or any other bank holding company located in Georgia may purchase a bank located outside of Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Georgia may purchase a bank located inside Georgia. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. Currently, Georgia law prohibits acquisitions of banks that have been incorporated for less than three years. Because GB&T has been chartered for more than three years, this restriction would not limit its ability to sell.

Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is also presumed to exist although rebuttable if a person or company acquires 15% or more, but less than 25%, of any class of voting securities and either:

•

the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or

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no other person owns a greater percentage of that class of voting securities immediately after the transaction.

The Company’s common stock is registered under the Securities Exchange Act of 1934. The regulations provide a procedure for challenging the rebuttable presumption of control.

Permitted Activities. The Bank Holding Company Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company. Under the regulations implementing the Gramm-Leach-Bliley Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activity. Those activities include, among other activities, certain insurance and securities activities.

To qualify to become a financial holding company, any depository institution subsidiary of the Company must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.” Additionally, the Company must file an election with the Federal Reserve Board to become a financial holding company and must provide the Federal Reserve Board with 30 days’ written notice prior to engaging in a permitted financial activity. While the Company meets the qualification standards applicable to financial holding companies, the Company has not elected to become a financial holding company at this time.

Capital Adequacy. The Company, GB&T and SB&T are required to comply with the capital adequacy standards established by the Federal Reserve Board, in the case of the Company, and the FDIC, in the case of GB&T and SB&T. The Federal Reserve Board has established a risk-based and a leverage measure of capital adequacy for bank holding companies. GB&T and SB&T are also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the Federal Reserve Board for bank holding companies.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components: Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stockholders’ equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock, and notes payable to unconsolidated special purpose entities that issue trust preferred securities, net of investment in the entity, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock and hybrid capital, and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. The Company’s ratio of total capital to risk-weighted assets was 12.55% and the ratio of Tier 1 Capital to risk-weighted assets was 11.06% at December 31, 2009.

In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve Board’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. At December 31, 2009, our leverage ratio was 7.51%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. As described in “Prompt Corrective Action” below, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.

Payment of Dividends

The Company is a legal entity separate and distinct from its subsidiaries. The principal sources of the Company’s cash flow, including cash flow to pay dividends to its shareholders, are dividends paid by the subsidiaries to the Company. Statutory and regulatory limitations apply to GB&T’s and SB&T’s payment of dividends. If, in the opinion of the federal banking regulator, such subsidiaries were engaged in or about to engage in an unsafe or unsound practice, the federal banking agencies could require, after notice and a hearing, that it stop or refrain from engaging in the questioned practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. See “The Company—Prompt Corrective Action.”

GB&T and SB&T have additional restrictions for dividends imposed by their respective regulatory agencies. Cash dividends on GB&T’s common stock may be declared and paid only out of its retained earnings, and dividends may not be declared at any time when GB&T’s paid-in capital and appropriated earnings do not, in combination, equal at least 20% of its capital stock account. In addition, the GDBF’s current rules and regulations require prior approval before cash dividends may be declared and paid if: (1) the bank’s ratio of equity capital to adjusted total assets is less than 6%; (ii) the aggregate amount of dividends declared or anticipated to be declared in that calendar year exceeds 50% of the bank’s net profits, after taxes but before dividends, for the previous calendar year; or (iii) the percentage of the bank’s loans classified as adverse as to repayment or recovery by the GDBF at the most recent examination of the bank exceeds 80% of the bank’s equity as reflected at such examination.

GB&T declared cash dividends payable to the Company of $0 in 2009, $1.5 million in 2008 and $0 in 2007. The Company suspended the payment of quarterly cash dividends on its common stock effective April 22, 2009. The Company considered the action prudent in order to maintain its capital position in the current state of the economy. The Company plans to reinstate the dividend payment at an appropriate time once economic conditions improve and stabilize.

Restrictions on Transactions with Affiliates

The Company, GB&T and SB&T are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

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a bank’s loans or extensions of credit to affiliates;

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a bank’s investment in affiliates;

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assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve Board;

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loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and

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a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. GB&T and SB&T must also comply with other provisions designed to avoid taking low-quality assets.

The Company, GB&T and SB&T are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

GB&T and SB&T are also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

Support of Subsidiary Institutions. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength for its subsidiaries and to commit resources to support them. This support may be required at times when, without this Federal Reserve Board policy, the Company might not be inclined to provide it. In addition, any capital loans made by the Company to its subsidiaries will be repaid only after the applicable subsidiary’s deposits and various other obligations are repaid in full. In the unlikely event of the Company’s bankruptcy, any commitment by it to a federal bank regulatory agency to maintain the capital of GB&T and SB&T will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of the other categories.

Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The other capital categories are well capitalized, adequately capitalized, and undercapitalized. As of December 31, 2009, the Bank qualified for the well capitalized category. A “well-capitalized” bank is one that significantly exceeds all of its capital requirements, which include maintaining a total risk-based capital ratio of at least 10%, a tier 1 risk-based capital ratio of at least 6%, and a tier 1 leverage ratio of at least 5%. Generally, a classification as well capitalized will place a bank outside of the regulatory zone for purposes of prompt corrective action. However, a well-capitalized bank may be reclassified as “adequately capitalized” based on criteria other than capital, if the federal regulator determines that a bank is in an unsafe or unsound condition, or is engaged in unsafe or unsound practices and has not corrected the deficiency.

FDIC Insurance Assessments. The FDIC has adopted a risk-based assessment system for insured depository institutions that accounts for the risks attributable to different categories and concentrations of assets and liabilities. The system assesses higher rates on those institutions that pose greater risks to the Deposit Insurance Fund (the “DIF”). The FDIC places each institution in one of four risk categories based on three primary sources of information: supervisory risk ratings for all institutions, financial ratios for most institutions, and long-term debt issuer ratings for institutions that have such ratings.

In February 2009, the FDIC issued new risk based assessment rates that took effect April 1, 2009. For insured depository institutions in the lowest risk category, the annual assessment rate ranges from 7 to 77.5 cents for every $100 of domestic deposits. For institutions assigned to higher risk categories, the new assessment rates range from 17 to 43 cents per $100 of domestic deposits. These ranges reflect a possible downward adjustment for unsecured debt outstanding and possible upward adjustments for secured liabilities and, in the case of institutions outside the lowest risk category, brokered deposits.

The FDIC’s assessment rates are intended to result in a reserve ratio of at least 1.15%. As of December 31, 2008, the ratio had fallen well below this floor. The FDIC is required to return the DIF to its statutorily mandated minimum reserve ratio of 1.15 percent within eight years, and has undertaken several initiatives to satisfy this requirement.

On September 30, 2009, the FDIC collected a one-time special assessment of five basis points of an institution’s assets minus tier 1 capital as of June 30, 2009. The amount of the special assessment could not exceed ten basis points times the institution’s assessment base for the second quarter 2009. In addition, on November 12, 2009, the FDIC adopted a rule that required nearly all FDIC-insured depository institutions to prepay their DIF assessments for the fourth quarter of 2009 and for the next three years. The FDIC has indicated that the prepayment of DIF assessments will be in lieu of additional special assessments, although there can be no guarantee that continued pressures on the DIF will not result in additional special assessments being collected by the FDIC in the future.

The FDIC also collects a deposit-based assessment from insured financial institutions on behalf of The Financing Corporation (“FICO”). The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings & Loan Insurance Corporation. The FICO assessment rate is set quarterly and in 2009 ranged from 1.14 cents to 1.02 cents per $100 of assessable deposits. These assessments will continue until the debt matures in 2017 through 2019.

The FDIC may, without further notice-and-comment rulemaking, adopt rates that are higher or lower than the stated base assessment rates, provided that the FDIC cannot (i) increase or decrease the total rates from one quarter to the next by more than three basis points, or (ii) deviate by more than three basis points from the stated assessment rates. The FDIC has proposed maintaining current assessment rates through December 31, 2010, followed by a uniform increase in risk-based assessment rates of three basis points effective January 1, 2011.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

FDIC Temporary Liquidity Guarantee Program. On October 14, 2008, the FDIC announced that its Board of Directors, under the authority to prevent “systemic risk” in the U.S. banking system, approved the Temporary Liquidity Guarantee Program (“TLGP”). The purpose of the TLGP is to strengthen confidence and encourage liquidity in the banking system. The TLGP is composed of two components, the Debt Guarantee Program and the Transaction Account Guarantee Program, and institutions had the opportunity, prior to December 5, 2008, to opt-out of either or both components of the TLGP.

The Debt Guarantee Program: Under the TLGP, the FDIC is permitted to guarantee certain newly issued senior unsecured debt issued by participating financial institutions. The annualized fee that the FDIC will assess to guarantee the senior unsecured debt varies by the length of maturity of the debt. For debt with a maturity of 180 days or less (excluding overnight debt), the fee is 50 basis points; for debt with a maturity between 181 days and 364 days, the fee is 75 basis points, and for debt with a maturity of 365 days or longer, the fee is 100 basis points. The Bank did not opt-out of the Debt Guarantee component of the TLGP.

The Transaction Account Guarantee Program: Under the TLGP, the FDIC is permitted to fully insure non-interest bearing deposit accounts held at participating FDIC-insured institutions, regardless of dollar amount. The temporary guarantee will expire on June 30, 2010. For the eligible noninterest-bearing transaction deposit accounts (including accounts swept from a noninterest bearing transaction account into an noninterest bearing savings deposit account), a 10 basis point annual rate surcharge will be applied to noninterest-bearing transaction deposit amounts over $250,000. Institutions will not be assessed on amounts that are otherwise insured. The Bank did not opt-out of the Transaction Account Guarantee component of the TLGP.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve or the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Company. Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements.

Allowance for Loan and Lease Losses. The Allowance for Loan and Lease Losses (the “ALLL”) represents one of the most significant estimates in the Company’s financial statements and regulatory reports. Because of its significance, the Company has developed a system by which it develops, maintains and documents a comprehensive, systematic and consistently applied process for determining the amounts of the ALLL and the provision for loan and lease losses. The Interagency Policy Statement on the Allowance for Loan and Lease Losses, issued on December 13, 2006, encourages all banks to ensure controls are in place to consistently determine the ALLL in accordance with generally accepted accounting principles, the bank’s stated policies and procedures, management’s best judgment and relevant supervisory guidance. Consistent with supervisory guidance, the Company maintains a prudent and conservative, but not excessive, ALLL, that is at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The Company’s estimate of credit losses reflects consideration of all significant factors that affect the collectability of the portfolio as of the evaluation date. See “Management’s Discussion and Analysis – Critical Accounting Policies.”

Commercial Real Estate Lending. Our lending operations may be subject to enhanced scrutiny by federal banking regulators based on its concentration of commercial real estate loans. On December 6, 2006, the federal banking regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate (“CRE”) lending concentrations. CRE loans generally include land development, construction loans and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:

	•		total reported loans for construction, land development and other land represent 100% or more of the institutions total capital, or
	•		total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.

Other Regulations. Interest and other charges collected or contracted for are subject to state usury laws and federal laws concerning interest rates.

Our loan operations are also subject to federal laws applicable to credit transactions, such as the:

	•		Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
	•		Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
	•		Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
	•		Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;
	•		Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

	•		Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended, governing the repayment terms of, and property rights underlying, secured obligations of persons currently on active duty with the U.S. military;
	•		Talent Amendment in the 2007 Defense Authorization Act, establishing a 36% annual percentage rate ceiling, which includes a variety of charges including late fees, for certain types of consumer loans to military service members and their dependents; and
	•		rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

Our deposit operations are subject to federal laws applicable to depository accounts, such as the following:

	•		Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;
	•		Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
	•		Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and,
	•		rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

Georgia Bank & Trust Company

Because GB&T is a commercial bank chartered under the laws of the State of Georgia, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the GDBF. The FDIC and the GDBF regularly examine GB&T’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. In addition to the matters identified above, the following requirements apply specifically to GB&T.

Branching. Under current Georgia law, GB&T may open branch offices throughout Georgia with the prior approval of the GDBF. In addition, with prior regulatory approval, GB&T may acquire branches of existing banks located in Georgia. GB&T and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. Georgia law, with limited exceptions, currently permits branching across state lines through interstate mergers.

Under the Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state banks to branch into their state by establishing a new start-up branch in the state. Currently, Georgia has not opted-in to this provision. Therefore, interstate merger is the only method through which a bank located outside of Georgia may branch into Georgia. This provides a limited barrier of entry into the Georgia banking market, which protects us from an important segment of potential competition. However, because Georgia has elected not to opt-in, our ability to establish a new start-up branch in another state may be limited. Consequently, until Georgia changes its election, the only way we will be able to branch into states that have elected to opt-in on a reciprocal basis will be through interstate merger. The Company entered the South Carolina market by chartering a thrift, which is not subject to the same limitation.

Southern Bank & Trust

SB&T is a federally chartered thrift subject to the supervision, examination and reporting requirements of the OTS. The OTS regularly examines SB&T’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions, as well as the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Qualified Thrift Lender Status. To be a Qualified Thrift Lender (QTL), an institution must meet the requirements of the Home Owner’s Loan Act QTL test for nine out of the last twelve months or the taxable year.

Under the QTL test, an institution must hold Qualified Thrift Investments (QTI) equal to at least 65.0% of its portfolio assets. QTI must fall into one of the two following categories: (1) assets that are includable in QTI without limit; or (2) assets limited to 20% of portfolio assets. Portfolio assets are total assets minus goodwill and other identifiable intangible assets, office property, and liquid assets not exceeding 20% of total assets. An institution ceases to be a QTL when its actual thrift investment percentage (the ratio of QTI divided by portfolio assets) falls, at month end, below 65.0% for four months within any 12-month period. At December 31, 2009, the actual thrift investment percentage for SB&T was 69.75% compared to 72.78% at December 31, 2008.

Assets that are includable as QTI without limit include:

	•		Loans to purchase, refinance, construct, improve or repair domestic residential or manufactured housing;
	•		Home equity loans;
	•		Educational loans;
	•		Small business loans;
	•		Loans made through credit card or credit card accounts;
	•		Securities backed by or representing an interest in mortgages on domestic residential or manufactured housing;
	•		Federal Home Loan Bank stock; and
	•		Obligations of the FDIC, FSLIC, RTC, and the FSLIC Resolution Fund.

Assets that are includable as QTI up to 20% of portfolio assets include:

	•		Fifty percent of the amount of domestic residential housing mortgage loans originated and sold within 90 days. An institution may, on a consistent basis, include as QTI either the sales amounts from a previous quarter or the previous rolling 90 days or three-month period;
	•		Investments in a service corporation that derives at least 80% of its gross revenues from activities related to domestic or manufactured residential housing;
	•		Two hundred percent of the amount of loans and investments in “starter homes”;
	•		Two hundred percent of the amount of certain loans in “credit-needy areas”;
	•		Loans for the purchase, construction, development, or improvements of “community service facilities” not in credit-needy areas;
	•		Loans for personal, family, or household purposes (other than those reported in the assets includable without limit category); and
	•		FNMA and FHLMC stock.

Lending Limit. Lenders create a form of concentration risk when they extend a significant amount of credit to any one borrower or to borrowers who are related in a common enterprise. As such, savings associations are subject to regulatory limitations on loans to one borrower. Under the general lending limit an association’s total loans and extensions of credit outstanding to one borrower at one time shall not exceed 15% of the association’s unimpaired capital and unimpaired surplus. If certain qualifications are met, the savings association can have an additional 10% for loans and extensions of credit fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of the funds outstanding. There are also other exceptions to the general lending limit based on the loan type. The Director of the OTS may impose more stringent restrictions on a savings association’s loans to one borrower if OTS determines that such restrictions are necessary to protect the safety and soundness of the association.

Unimpaired capital and unimpaired surplus are defined as: core capital and supplementary capital included in total capital, plus any allowance for loan losses not included in supplementary capital, plus the amount of investment in, and advances to, subsidiaries not included in calculating core capital. As of December 31, 2009, the general lending limit for loans to one borrower for SB&T was $2.4 million.

Unlike commercial banks, thrifts may generally make the following categories of loans only to the extent specified:

	•		Commercial loans up to 20% of assets (50% of which must be in small business loans).
	•		Nonresidential real property loans up to 400% of capital (the OTS may grant increased authority if it is determined that the increased authority poses no significant threat to the safe and sound operation of the institution and is consistent with prudent operating practices).
	•		Consumer loans up to 35% of assets (all loans in excess of 30% of assets must be direct loans).
	•		Education loans up to 5% of assets.
	•		Non-conforming loans up to 5% of assets.
	•		Construction loans (residential) without security up to 5% of assets.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks and thrifts through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

Item 1A. Risk Factors

An investment in our common stock involves risks. If any of the following risks or other risks, which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results of operations could be harmed. In such a case, the trading price of our common stock could decline, and investors could lose all or part of their investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

The amount of “other real estate owned” (“OREO”) may increase significantly, resulting in additional losses, and costs and expenses that will negatively affect our operations

At December 31, 2009, we had a total of $8.0 million of OREO as compared to $5.7 million at December 31, 2008. This increase in OREO is due, among other things, to the continued deterioration of the residential real estate market and the tightening of the credit market. As the amount of OREO increases, our losses and the costs and expenses of maintaining the real estate will likewise increase. Due to the on-going economic crisis, the amount of OREO may continue to increase throughout 2010. Any additional increase in losses, and maintenance costs and expenses due to OREO may have material adverse effects on our business, financial condition, and results of operations. Such effects may be particularly pronounced in a market of reduced real estate values and excess inventory, which may make the disposition of OREO properties more difficult, increase maintenance costs and expenses, and reduce our ultimate realization from any OREO sales.

The deterioration in the residential mortgage market may continue to spread to commercial credits, which may result in greater losses and non-performing assets, adversely affecting our business operations.

The losses that were initially associated with subprime residential mortgages rapidly spread into the residential mortgage market generally. If the losses in the residential mortgage market continue to spread to commercial credits, then we may be forced to take greater losses or to hold more non-performing assets. Our business operations and financial results could be adversely affected if we continue to experience losses from our commercial loan portfolio.

The FDIC Deposit Insurance assessments that we are required to pay may materially increase in the future, which would have an adverse effect on our earnings.

As an insured depository institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC. These assessments are required to ensure that the FDIC deposit insurance reserve ratio is at least 1.15% of insured deposits. Under the Federal Deposit Insurance Act, the FDIC, absent extraordinary circumstances, must establish and implement a plan to restore the deposit insurance reserve ratio to 1.15% of insured deposits, over a five-year period, when the reserve ratio falls below 1.15%. The recent failures of several financial institutions have significantly increased the Deposit Insurance Fund’s loss provisions, resulting in a decline in the reserve ratio. The FDIC expects a higher rate of insured institution failures in the next few years, which may result in a continued decline in the reserve ratio.

On September 30, 2009, the FDIC collected a one-time special assessment of five basis points of an institution’s assets minus tier 1 capital as of June 30, 2009. The amount of the special assessment could not exceed ten basis points times the institution’s assessment base for the second quarter 2009. In addition, on November 12, 2009, the FDIC adopted a final rule that required nearly all FDIC-insured depository institutions to prepay their DIF assessments for the fourth quarter of 2009 and for the next three years. This rule did not affect our net income, although it has had a negative effect on cash flow. The FDIC has indicated that the prepayment of DIF assessments will be in lieu of additional special assessments, although there can be no guarantee that continued pressures on the DIF will not result in additional special assessments being collected by the FDIC in the future. If we are required to pay significantly higher premiums or additional special assessments in the future, our earnings could be adversely affected. A downgrade in our regulatory condition could also cause our assessment to materially increase.

During the year ended December 31, 2009, we expensed $2.7 million in deposit insurance assessments. On December 31, 2009 we prepaid three years deposit insurance in the amount of $6,886.

Future impairment losses could be required on various investment securities, which may materially reduce the Company’s and the Bank’s regulatory capital levels.

The Company establishes fair value estimates of securities available-for-sale in accordance with generally accepted accounting principles. The Company’s estimates can change from reporting period to reporting period, and we cannot provide any assurance that the fair value estimates of our investment securities would be the realizable value in the event of a sale of the securities.

A number of factors could cause the Company to conclude in one or more future reporting periods that any difference between the fair value and the amortized cost of one or more of the securities that we own constitutes an other-than-temporary impairment. These factors include, but are not limited to, an increase in the severity of the unrealized loss on a particular security, an increase in the length of time unrealized losses continue without an improvement in value, a change in our intent or whether the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery, or changes in market conditions or industry or issuer specific factors that would render us unable to forecast a full recovery in value, including adverse developments concerning the financial condition of the companies in which we have invested.

The Company may be required to take other-than-temporary impairment charges on various securities in its investment portfolio. In addition, depending on various factors, including the fair values of other securities that we hold, we may be required to take additional other-than-temporary impairment charges on other investment securities. Any other-than-temporary impairment charges would negatively affect our regulatory capital levels, and may result in a change to our capitalization category, which could limit certain corporate practices and could compel us to take specific actions.

The Company recognized an other-than-temporary impairment charge of $975 for the year ended December 31, 2009.

We could suffer loan losses from a decline in credit quality.

We could sustain losses if borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for credit losses that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations. In particular, we face credit quality risks presented by past, current and potential economic and real estate market conditions as more fully described in the risk factors appearing below.

As a community financial institution, we have different lending risks than larger banks.

We provide services to our local communities. Our ability to diversify our economic risks is limited by our own local markets and economies. We lend primarily to small to medium-sized businesses and, to a lesser extent, individuals, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories.

We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, the economies in which we and our borrowers operate, as well as the judgment of our regulators. Our loan loss reserves may not be sufficient to absorb future loan losses or prevent a material adverse effect on our business, financial condition, or results of operations. See the disclosure below under “Our allowance for loan losses may not be adequate to cover actual loan losses, which may require us to take a charge to our earnings and adversely impact our financial condition and results of operations.”

If the value of real estate in our core market were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our business, financial condition and results of operations.

With most of our loans concentrated in Richmond, Columbia and Clarke counties in the state of Georgia and Aiken County in the state of South Carolina, a decline in local economic conditions could adversely affect the values of our real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

In addition to considering the financial strength and cash flow characteristics of borrowers, we often secure loans with real estate collateral. At December 31, 2009, approximately 86.6% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. Our markets and the U.S. generally are experiencing a period of reduced real estate values, and if we are required to liquidate the collateral securing a significant loan or collection of loans to satisfy the debt during such a period, our earnings and capital could be adversely affected. See the disclosure below under “An economic downturn, especially one affecting our market areas, could adversely affect our financial condition, results of operations, or cash flows.”

We make and hold in our portfolio a significant number of land acquisition and development and construction loans, which pose more credit risk than other types of loans typically made by financial institutions.

We offer land acquisition and development and construction loans for builders and developers. As of December 31, 2009, approximately $270.1 million (28.8%) of our loan portfolio represented loans for which the related property is neither presold nor preleased. These land acquisition and development and construction loans are considered more risky than other types of residential mortgage loans. The primary credit risks associated with land acquisition and development and construction lending are underwriting, project risks and market risks. Project risks include cost overruns, borrower credit risk, project completion risk, general contractor credit risk, and environmental and other hazard risks. Market risks are risks associated with the sale of the completed residential units. They include affordability risk, which means the risk of affordability of financing by borrowers, product design risk, and risks posed by competing projects. Given the current environment, we expect that in 2010, the non-performing loans in our land acquisition and development and construction portfolio could increase substantially, which would reduce our interest income. These non-performing loans could also result in an increased level of charge-offs, which would negatively impact our capital and earnings.

Our profitability is vulnerable to interest rate fluctuations.

Our profitability depends substantially upon our net interest income. Net interest income is the difference between the interest earned on assets, such as loans and investment securities, and the interest paid for liabilities, such as savings and time deposits and out-of-market certificates of deposit. Market interest rates for loans, investments and deposits are highly sensitive to many factors beyond our control. Recently, interest rate spreads (the difference between interest rates earned on assets and interest rates paid on liabilities) have generally narrowed as a result of changing market conditions, policies of various government and regulatory authorities and competitive pricing pressures, and we cannot predict whether these rate spreads will narrow even further. This narrowing of interest rate spreads could adversely affect our financial condition and results of operations. In addition, we cannot predict whether interest rates will continue to remain at present levels. Changes in interest rates may cause significant changes, up or down, in our net interest income. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Asset/Liability Management, Interest Rate Sensitivity and Liquidity.”

Our allowance for loan losses may not be adequate to cover actual loan losses, which may require us to take a charge to our earnings and adversely impact our financial condition and results of operations.

We maintain an allowance for estimated loan losses that we believe is adequate for absorbing any probable losses in our loan portfolio. Management determines the provision for loan losses based upon an analysis of general market conditions, credit quality of our loan portfolio, and performance of our customers relative to their financial obligations with us. We periodically evaluate our loan portfolio for risk grading, which can result in changes in our allowance for estimated loan losses. The amount of future losses is susceptible to changes in economic, operating, and other conditions, including changes in interest rates that may be beyond our control and such losses may exceed the allowance for estimated loan losses. Significant increases to the provision for loan losses may be necessary if material adverse changes in general economic conditions occur or the performance of our loan portfolio deteriorates. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review the allowance for estimated loan losses. Consultations with these regulatory agencies may lead us to conclude that an increase in the allowance for loan losses is necessary. Such an increase would have a negative effect on our results of operations and financial condition. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Provision for Loan Losses, Net Charge-Offs and Allowance for Loan Losses.”

An economic downturn, especially one affecting our market areas, could adversely affect our financial condition, results of operations or cash flows.

Our success depends upon the growth in population, income levels, deposits and housing starts in our primary market areas which principally include Richmond, Columbia and Clarke counties in the state of Georgia and Aiken County in the state of South Carolina. If the communities in which we operate do not grow, or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. Unpredictable economic conditions may have an adverse effect on the quality of our loan portfolio and our financial performance. Economic recession over a prolonged period or other economic problems in our market areas could have a material adverse impact on the quality of the loan portfolio and the demand for our products and services. We experienced a higher percentage of non-performing loans to total loans in 2009 than in past years based in part on general economic conditions in our market areas. Future adverse changes in the economies in our market areas may have a material adverse effect on our financial condition, results of operations or cash flows. Further, the banking industry in Georgia and South Carolina is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond our control. As community financial institutions, we are less able to spread the risk of unfavorable local economic conditions than larger or more regional banks. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas even if they do occur.

Ongoing deterioration in the housing market and the homebuilding industry may lead to increased losses and further worsening of delinquencies and non-performing assets in our loan portfolios. Consequently, our results of operations may be adversely impacted.

There has been substantial industry concern and publicity over asset quality among financial institutions due in large part to issues related to subprime mortgage lending, declining real estate values and general economic concerns. As of December 31, 2009, our non-performing assets had increased significantly to $40.2 million, or 4.3%, of our loan portfolio plus other real estate owned. Furthermore, the housing and the residential mortgage markets recently have experienced a variety of difficulties and changed economic conditions. If market conditions continue to deteriorate, they may lead to additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the market value of our loan portfolio, the losses associated with the loans in default and the net realizable value of real estate owned.

The homebuilding industry has experienced a significant and sustained decline in demand for new homes and an oversupply of new and existing homes available for sale in various markets, including some of the markets in which we lend. Our customers who are builders and developers face greater difficulty in selling their homes in markets where these trends are more pronounced. Consequently, we are facing increased delinquencies and non-performing assets as these builders and developers are forced to default on their loans with us. We do not know when the housing market will improve, and accordingly, additional downgrades, provisions for loan losses and charge-offs related to our loan portfolio may occur.

We will realize additional future losses if the proceeds we receive upon liquidation of non-performing assets are less than the fair value of such assets.

Non-performing assets are recorded on our financial statements at our best estimate of fair value, as required under GAAP. If the proceeds we receive upon dispositions of non-performing assets are less than the recorded fair value of such assets then additional losses will be recognized.

Our use of appraisals in deciding whether to make a loan on or secured by real property or how to value such loan in the future may not accurately describe the net value of the real property collateral that we can realize.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values in our market area have experienced changes in value in relatively short periods of time, this estimate might not accurately describe the net value of the real property collateral after the loan has been closed. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. The valuation of the property may negatively impact the continuing value of such loan and could adversely affect our operating results and financial condition.

Confidential customer information transmitted through our online banking service is vulnerable to security breaches and computer viruses, which could expose us to litigation and adversely affect our reputation and ability to generate deposits.

We provide our customers with the ability to bank online. The secure transmission of confidential information over the Internet is a critical element of online banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes, and other security problems. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our clients involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing clients to lose confidence in our systems and could adversely affect our reputation and ability to generate deposits.

We face intense competition in all of our current and planned markets.

The financial services industry, including commercial banking, mortgage banking, consumer lending, and home equity lending, is highly competitive, and we encounter strong competition for deposits, loans, and other financial services in all of our market areas in each of our lines of business. Our principal competitors include other commercial banks, savings banks, savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, credit unions, and mortgage companies. Many of our non-bank competitors are not subject to the same degree of regulation as us and have advantages over us in providing certain services. Many of our competitors are significantly larger than us and have greater access to capital and other resources. Also, our ability to compete effectively in our business is dependent on our ability to adapt successfully to regulatory and technological changes within the banking and financial services industry generally. If we are unable to compete effectively, we will lose market share and our income from loans and other products may diminish.

Our ability to compete successfully depends on a number of factors, including, among other things:

	•		the ability to develop, maintain, and build upon long-term customer relationships based on top quality service and high ethical standards;
	•		the scope, relevance, and pricing of products and services offered to meet customer needs and demands;
	•		the rate at which we introduce new products and services relative to our competitors;
	•		customer satisfaction with our level of service; and
	•		industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Additional growth may require us to raise additional capital in the future, but that capital may not be available when it is needed, which could adversely affect our financial condition and results of operations.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future, although we may need to raise additional capital to support our continued growth.

Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital on terms that are acceptable to us or that are not dilutive to existing shareholders. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired.

Our ability to pay dividends is limited and we may be unable to pay future dividends. As a result, capital appreciation, if any, of our common stock may be your sole opportunity for gains on your investment for the foreseeable future.

We make no assurances that we will pay any dividends in the future. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that our Board of Directors may deem relevant. The holders of our common stock are entitled to receive dividends when, and if declared by our Board of Directors out of funds legally available for that purpose. As part of our consideration to pay cash dividends, we intend to retain adequate funds from future earnings to support the development and growth of our business. In addition, our ability to pay dividends is restricted by federal policies and regulations and by the terms of our existing indebtedness. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. Further, our principal source of funds to pay dividends are cash dividends that we receive from our subsidiaries. See “Business — Supervision and Regulation — Payment of Dividends.”

We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, which limitations or restrictions could adversely affect our profitability.

As a bank holding company, we are primarily regulated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). Our subsidiary bank is primarily regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the GDBF. Our subsidiary thrift is primarily regulated by the Office of Thrift Supervision (“OTS”). Our compliance with Federal Reserve Board, FDIC, Georgia Department of Banking and Finance and OTS regulations is costly and may limit our growth and restrict certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capital requirements of our regulators.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks, thrifts and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

Environmental liability associated with lending activities could result in losses.

In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances are discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit the use of properties that we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

Holders of our subordinated debentures have rights that are senior to those of our common shareholders.

We have supported our continued growth by issuing trust preferred securities from special purpose trusts and accompanying subordinated debentures. At December 31, 2009, we had outstanding subordinated debentures totaling $22.9 million and may issue additional trust preferred securities in the future. We unconditionally guarantee the payment of principal and interest on the trust preferred securities. Also, the debentures we issued to the special purpose trusts that relate to those trust preferred securities are senior to our common stock. As a result, we must make payments on the subordinated debentures before we can pay any dividends on our common stock. In the event of our bankruptcy, dissolution or liquidation, holders of our subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on our subordinated debentures (and related trust preferred securities) for up to five years, but during that time we would not be able to pay dividends on our common stock.

If we are unable to increase our share of deposits in our market, we may accept out of market and brokered deposits, the costs of which may be higher than expected.

We can offer no assurance that we will be able to maintain or increase our market share of deposits in our highly competitive service area. If we are unable to do so, we may be forced to accept increased amounts of out of market or brokered deposits. As of December 31, 2009, we had approximately $216.2 million in out of market deposits, including brokered deposits, which represented approximately 16.9% of our total deposits. At times, the cost of out of market and brokered deposits exceeds the cost of deposits in our local market. In addition, the cost of out of market and brokered deposits can be volatile, and if we are unable to access these markets or if our costs related to out of market and brokered deposits increases, our liquidity and ability to support demand for loans could be adversely affected.

Opening new offices may not result in increased assets or revenues for us.

The investment necessary for branch expansion may negatively impact our efficiency ratio. There is a risk that we will be unable to manage our growth, as the process of opening new branches may divert our time and resources. There is also risk that we may fail to open any additional branches, and a risk that, if we do open these branches, they may not be profitable which would negatively impact our results of operations.

Changes in monetary policies may have an adverse effect on our business, financial condition and results of operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. Actions by monetary and fiscal authorities, including the Federal Reserve Board, could have an adverse effect on our deposit levels, loan demand or business and earnings.

Our directors and executive officers own a significant portion of our common stock and can influence shareholder decisions.

Our directors, executive officers and relatives of directors, as a group, beneficially owned approximately 53.4% of our fully diluted outstanding common stock as of February 17, 2010. As a result of their ownership, the directors and executive officers will have the ability, if they voted their shares in concert, to control the outcome of all matters submitted to our shareholders for approval, including the election of directors.

Item 1B. Unresolved Staff Comments

None

Item 2.		Properties

The Company currently operates two main offices, eleven branches and an operations center. The principal administrative offices of the Company are located at 3530 Wheeler Road, Augusta, Georgia. Locations in Georgia include the main office, four branch offices in Augusta, Georgia, two branches in Martinez, Georgia, two branches in Evans, Georgia, and one branch in Athens, Georgia. SB&T locations include the main office and one additional branch in Aiken, South Carolina, and one leased facility in North Augusta, South Carolina. All banking offices except the leased facility are owned by the Company, are not subject to mortgage, and are covered by appropriate insurance for replacement value.

Each banking office in metro Augusta is a brick building with a teller line, customer service area, offices for the Company’s lenders, drive-in teller lanes, a vault with safe deposit boxes, and a walk-up or drive-up automated teller machine. The banking offices are generally 3,000 to 5,000 square foot buildings. Exceptions are the main office with approximately 14,000 square feet, the Washington Road branch with 1,800 square feet, and the Cotton Exchange branch with 7,500 square feet of space.

In December 2005, the first branch located outside of metro Augusta was opened in Athens, Georgia. This 4,000 square foot banking office is located on the border of the Athens historic district and includes a teller line, customer service area, and lending offices. The Pine Log Road office, located in Aiken, South Carolina, opened in September 2006, and consists of a 4,000 square foot banking office with all the facilities of the metro Augusta offices. In July 2007, a 1,600 square foot drive-thru facility was opened in Evans, Georgia, and in August 2007, a 4,600 square foot full-service branch was opened in North Augusta, South Carolina. On January 10, 2008, the Thrift opened its second branch in Aiken, South Carolina and relocated its main office to a 3,168 square foot wood frame historic home on Laurens Street.

In 1997, the Company acquired 24,000 square feet of commercial office space located at 3515 Wheeler Road, across the street from the main office. This office space is partially leased but mainly occupied by the Company’s mortgage operations, wealth management and construction lending departments.

Due to continued growth, the Company purchased a commercial building with approximately 45,000 square feet of office space on Columbia Road in Martinez in May 2006. This office space was renovated during 2006 and 2007, and operational functions including data processing, deposit operations, human resources, loan operations, credit administration and accounting were relocated to this facility in October 2007.

The Company’s automated teller machine network includes three drive-up machines located in major retail shopping areas as well as machines located at twelve of the thirteen branch offices.

See Note 7 to the Consolidated Financial Statements for additional information concerning the Company’s premises and equipment and Note 8 to the Consolidated Financial Statements for additional information concerning the Company’s commitments under various equipment leases.

Item 3.		Legal Proceedings

In the ordinary course of business, the Company and its subsidiaries are parties to various legal proceedings. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, there is no proceeding pending or, to the knowledge of management, threatened in which an adverse decision would result in a material adverse change to the consolidated results of operations or financial condition of the Company or its subsidiaries.

Item 4.		Submission of Matters to a Vote of Shareholders

There were no matters submitted to a vote of the shareholders of the Company during the fourth quarter of the Company’s fiscal year ended December 31, 2009.

PART II

Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of February 17, 2010, there were approximately 989 holders of record of the Company’s common stock. As of February 17, 2010, there were 6,673,352 shares of the Company’s common stock outstanding. The Company’s common stock is traded via the Over-the-Counter Bulletin Board under the trading symbol “SBFC”. The following table reflects the range of high and low bid quotations, adjusted for stock dividends and splits, in the Company’s common stock for the past two years:

Southeastern Bank Financial Corporation Stock Price

		Low				High
Quarter ended
March 31, 2008			23.64				31.82
June 30, 2008			24.68				32.05
September 30, 2008			25.55				30.00
December 31, 2008			14.55				28.00
Quarter ended
March 31, 2009			12.00				19.50
June 30, 2009			13.05				18.00
September 30, 2009			11.00				15.50
December 31, 2009			10.00				13.00
Period ended
February 17, 2010			9.17				11.75

The Company declared cash dividends of $0.13 per share on January 21, 2009, but suspended cash dividends as of April 22, 2009. The Company declared cash dividends of $0.13 per share in each quarter of 2008 and 2007. The Company’s primary sources of income are dividends and other payments received from its subsidiaries. The amount of dividends that may be paid by GB&T and SB&T to the Company depends upon the subsidiaries’ earnings and capital position and is limited by federal and state law, regulations and policies.

Cash dividends on GB&T’s common stock may be declared and paid only out of its retained earnings, and dividends may not be declared at any time when GB&T’s paid-in capital and appropriated earnings do not, in combination, equal at least 20% of its capital stock account. In addition, the GDBF’s current rules and regulations require prior approval before cash dividends may be declared and paid if: (i) the bank’s ratio of equity capital to adjusted total assets is less than 6%; (ii) the aggregate amount of dividends declared or anticipated to be declared in that calendar year exceeds 50% of the bank’s net profits, after taxes but before dividends, for the previous calendar year; or (iii) the percentage of the bank’s loans classified as adverse as to repayment or recovery by the GDBF at the most recent examination of the bank exceeds 80% of the bank’s equity as reflected at such examination. Cash dividends on SB&T’s common stock are not permitted during its first three years of operation without approval from the OTS pursuant to its current business plan.

The Company’s ability to pay cash dividends is further subject to continued payment of interest that is owed on subordinated debentures issued in connection with the Southeastern Bank Financial Statutory Trust I issuance in December 2005 of $10.0 million of trust preferred securities and the Southeastern Bank Financial Trust II issuance in March 2006 of $10.0 million of trust preferred securities. As of December 31, 2009, the Company had approximately $22.9 million of subordinated debentures outstanding. On $20 million of subordinated debt the Company has the right to defer payment of interest for a period not exceeding 20 consecutive quarters. If the Company defers, or fails to make, interest payments on the subordinated debentures, the Company will be prohibited, subject to certain exceptions, from paying cash dividends on common stock until all deferred interest is paid and interest payments on the subordinated debentures resumes.

There were no shares repurchased under an existing stock repurchase plan or otherwise during the fourth quarter of 2009.

The Company did not sell any of its equity securities without registration under the Securities Act of 1933, as amended, during the fourth quarter of 2009.

See “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for a table presenting information on equity securities subject to future issuance under the Company’s equity compensation plans.

Item 6.		Selected Financial Data

The selected consolidated financial data presented on the following page as of December 31, 2009 and 2008 and for each of the years in the three-year period ended December 31, 2009 is derived from the audited consolidated financial statements and related notes included in this report and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data as of December 31, 2006 and 2005 is derived from audited consolidated financial statements that are not included in this report but that are included in the Annual Reports on Form 10-K filed with the Securities and Exchange Commission for those years. The per share data presented on the following page has been adjusted accordingly for the 10% stock dividend paid June 2, 2008.

In September 2006, the SEC issued guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. Public companies are required to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach, are to be recorded upon initial adoption. The amount so recorded is shown as a cumulative effect adjustment is recorded in opening retained earnings as of January 1, 2006. Included in this cumulative effect adjustment are the following items and amounts: The allowance for loan loss was decreased $694,000 to adjust for estimated losses on unfunded lines and commitments and standby letters of credit. This reduction also resulted in a $269,235 decrease in the deferred income tax asset account and a $424,765 increase in retained earnings. Accrued income taxes were decreased by $369,726 to eliminate a tax contingency reserve due to an assumption of taxability of certain federal agency interest for state purposes, subsequently determined to be nontaxable. The reduction in accrued income taxes resulted in an increase in retained earnings of $369,726. Both of these amounts had been recorded in immaterial amounts over the preceding six to seven years.

Proforma disclosures illustrating the effects of this guidance on what the allowance for loan loss and the related provision for loan loss and ratios would have been excluding the error are provided in selected financial data and in other related areas of the report.

Selected Consolidated Financial Data		2009				2008				2007				2006				2005
		(Dollars in thousands, except per share data)
Earnings
Total interest income		$	70,760			$	75,675			$	79,181			$	65,626			$	47,277
Total interest expense			28,483				35,489				40,932				31,423				17,885
Net interest income			42,277				40,186				38,249				34,203				29,392
Provision for loan losses			30,904				9,055				3,823				2,478				1,842
Noninterest income			20,739				16,705				16,168				14,040				12,371
Noninterest expense			46,511				36,752				32,508				28,932				25,012
Net income (loss)			(7,985	)			7,578				11,765				11,160				9,954
Per Share Data
Net income (loss)- Diluted		$	(1.24	)		$	1.26			$	1.95			$	1.89			$	1.69
Book value			14.05				15.81				15.04				13.21				10.98
Cash dividends declared per common share			0.13				0.52				0.52				0.52				0.52
Weighted average common and common equivalent shares outstanding			6,422,867				6,011,689				6,044,871				5,908,659				5,885,261
Selected Average Balances
Assets		$	1,476,887			$	1,318,384			$	1,133,064			$	951,115			$	785,081
Total loans (net of unearned income)			965,111				934,512				800,852				647,421				530,662
Deposits			1,221,100				1,057,198				893,959				735,128				611,029
Stockholders’ equity			100,760				89,337				83,850				69,317				61,655
Selected Year-End Balances
Assets		$	1,491,119			$	1,411,039			$	1,212,980			$	1,041,202			$	864,277
Loans (net of unearned income)			937,489				986,831				871,440				735,112				579,088
Allowance for loan losses			22,338				14,742				11,800				9,777				9,125
Deposits			1,280,534				1,139,552				952,166				801,763				663,655
Short-term borrowings			20,788				62,553				81,666				76,020				73,013
Long-term borrowings			82,947				104,000				79,000				75,000				57,000
Stockholders’ equity			93,744				94,651				89,758				78,924				63,583
Selected Ratios
Return on average total assets			(0.54	%)			0.57	%			1.04	%			1.17	%			1.27	%
Return on average equity			(7.92	%)			8.48	%			14.03	%			16.10	%			16.15	%
Average earning assets to average total assets			91.54	%			94.11	%			93.66	%			93.67	%			93.90	%
Average loans to average deposits			79.04	%			88.40	%			89.58	%			88.07	%			86.85	%
Average equity to average total assets			6.82	%			6.78	%			7.40	%			7.29	%			7.85	%
Net interest margin			3.12	%			3.24	%			3.60	%			3.84	%			3.98	%
Operating efficiency			75.66	%			64.52	%			60.64	%			60.20	%			59.78	%
Net charge-offs to average loans			2.42	%			0.65	%			0.22	%			0.17	%			0.12	%
Allowance for loan losses to net loans (year-end)			2.38	%			1.49	%			1.35	%			1.33	%			1.58	%
Risk-based capital
Tier 1 capital			11.06	%			10.45	%			11.38	%			12.09	%			11.10	%
Total capital			12.55	%			11.70	%			12.61	%			13.29	%			12.35	%
Tier 1 leverage ratio			7.51	%			8.14	%			9.08	%			9.78	%			9.01	%
Proforma data to illustrate the effect of SAB 108
Allowance for loan losses to net loans excluding amount applicable to unfunded lines, commitments and standby letters of credit (year-end)																			1.40	%
Provision for loan losses excluding amount applicable to unfunded lines, commitments and standby letters of credit																			1,723
Allowance for loan losses excluding amount applicable to unfunded lines, commitments and standby letters of credit (year- end)																			8,431

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

(Dollar amounts are expressed in thousands unless otherwise noted)

The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company and its subsidiaries, Georgia Bank & Trust Company of Augusta (“GB&T”) and Southern Bank & Trust (“SB&T”), during the past three years. The discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and related notes to the consolidated financial statements.

Overview

The Company’s services include the origination of residential and commercial real estate loans, construction and development loans, and commercial and consumer loans. The Company also offers a variety of deposit programs, including noninterest-bearing demand, interest checking, money management, savings, and time deposits. In the Augusta-Richmond County, GA-SC metropolitan statistical area, the Company had 16.70% of all deposits and was the second largest depository institution and the largest locally based institution at June 30, 2009 based on deposit levels, as cited from the FDIC’s website. Securities sold under repurchase agreements are also offered. Additional services include wealth management, trust, retail investment, and mortgage. As a matter of practice, most mortgage loans are sold in the secondary market; however, some mortgage loans are placed in the portfolio based on asset/liability management strategies. The Company continues to concentrate on increasing its market share through various new deposit and loan products and other financial services, by adding locations, and by focusing on the customer relationship management philosophy. The Company is committed to building lifelong relationships with its customers, employees, shareholders, and the communities it serves.

Net loss in 2009 was $8.0 million compared to net income of $7.6 million in 2008. National economic conditions contributed to problems with loan quality. As a result the provision for loan loss expense increased $21.8 million primarily due to increased losses on nonperforming assets and downgrades in the loan portfolio.

The Company’s primary source of income is from its lending activities followed by interest income from its investment activities, service charges and fees on deposits, and gain on sales of mortgage loans in the secondary market. Interest income on loans decreased primarily due to lower rates, decreased volumes and higher levels of nonaccrual loans. Service charges and fees on deposits decreased due to decreases in NSF income on retail and business checking accounts and debit/ATM card income, both the result of decreased economic activity. Gain on sales of mortgage loans for 2009 increased over 2008 due to higher production levels from adding lending personnel at the Thrift and due to increased mortgage refinance activity resulting from declining interest rates. Retail investment income experienced a slight increase due to increased bond trading. Trust service fees were relatively unchanged as growth in assets under management offset declines in fees due to declining portfolio balances. Salary and benefit expenses have increased $1.7 million from 2008 primarily due to increased commissions related to mortgage originations and expenses related to salary continuation agreements. Occupancy expense increased $318 from 2008 primarily due to depreciation expense associated with the Company’s purchase of upgraded data processing equipment and software programs in late 2008 and in 2009.

The Company continues to experience growth, although at a slower rate, due to economic conditions. Over the past four years, assets grew from $864.3 million at December 31, 2005 to $1.5 billion at December 31, 2009. From year end 2005 to year end 2009, loans increased $358 million, and deposits increased $617 million. Net interest income for the year ended 2005 was $29.4 million compared to net interest income of $42.3 million in 2009. The Company has paid cash dividends of $0.13 per share each quarter since 2004 but elected to suspend dividends effective April 22, 2009 to conserve capital.

The Company meets its liquidity needs by managing cash and due from banks, federal funds purchased and sold, maturity of investment securities, principal repayments received from mortgage backed securities, and draws on lines of credit. Additionally, liquidity can be managed through structuring deposit and loan maturities. The Company funds loan and investment growth with core deposits, securities sold under repurchase agreements, Federal Home Loan Bank advances and other wholesale funding including brokered certificates of deposit. During inflationary periods, interest rates generally increase and operating expenses generally rise. When interest rates rise, variable rate loans and investments produce higher earnings; however, deposit and other borrowings interest expense also rise. The Company monitors its interest rate risk as it applies to net income in a ramp up and down annually 200 basis points (2.0%) scenario and as it applies to economic value of equity in a shock up and down 200 (2.0%) basis points scenario. The Company monitors operating expenses through responsibility center budgeting. See “Interest Rate Sensitivity” below.

Critical Accounting Estimates

The accounting and financial reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Of these policies, management has identified the allowance for loan losses, determining the fair values of financial instruments including other real estate owned, investment securities, income taxes and other-than-temporary impairment as critical accounting estimates that requires difficult, subjective judgment and are important to the presentation of the financial condition and results of operations of the Company.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects the Company’s earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management’s estimate of the level of incurred losses in the portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to: (1) detailed reviews of individual loans; (2) historical and current trends in loan charge-offs for the various portfolio segments evaluated; (3) the level of the allowance in relation to total loans and to historical loss levels; (4) levels and trends in non-performing and past due loans; (5) collateral values of properties securing loans; (6) management’s assessment of economic conditions. The Company’s Board of Directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors.

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. The Company has developed policies and procedures for evaluating the overall quality of its loan portfolio and the timely identification of problem credits. Management continues to review these policies and procedures and makes further improvements as needed. The adequacy of the Company’s allowance for loan losses and the effectiveness of the Company’s internal policies and procedures are also reviewed periodically by the Company’s regulators and the Company’s internal loan review personnel. The Company’s regulators may advise the Company to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is considered, and the Company may recognize additions to the allowance as a result.

The Company continues to refine the methodology on which the level of the allowance for loan losses is based, by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to the Company.

Please see “Allowance for Loan Losses” and “Non-Performing Assets” for a further discussion of the Company’s loans, loss experience, and methodology in determining the allowance.

Fair Value of Financial Instruments

A significant portion of the Company’s assets are financial instruments carried at fair value. This includes securities available for sale, loans held for sale, certain impaired loans, tax credits and other real estate owned. At December 31, 2009 and December 31, 2008 the percentage of total assets measured at fair value was 23.04% and 24.05% respectively. The majority of assets carried at fair value are based on either quoted market prices or market prices for similar instruments. At December 31, 2009, 9.47% of assets measured at fair value were based on significant unobservable inputs. This represents approximately 2.18% of the Company’s total assets. See Note 6 “Fair Value Measurements” in the “Notes to Consolidated Financial Statements” herein for additional disclosures regarding the fair value of financial instruments.

Other Real Estate Owned

Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lesser of the outstanding loan balance or the fair value at the date of foreclosure minus estimated costs to sell. Any valuation adjustments required at the time of foreclosure are charged to the allowance for loan losses. After foreclosure, the properties are carried at the lower of carrying value or fair value less estimated costs to sell. Any subsequent valuation adjustments, operating expenses or income, and gains and losses on disposition of such properties are recognized in current operations. The valuation allowance is established based on our historical realization of losses and adjusted for current market trends.

Investment Securities

The fair values for available-for-sale securities are generally based upon quoted market prices or observable market prices for similar instruments. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment. The Company conducts periodic reviews to identify and evaluate each available-for-sale security that has an unrealized loss for other-than-temporary impairment. An unrealized loss exists when the fair value of an individual security is less than its amortized cost basis. The primary factors the Company considers in determining whether an impairment is other-than-temporary are the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether the Company intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. As of December 31, 2009 the Company had approximately $14.4 million of available-for-sale securities, which is approximately 0.96% of total assets, valued using unobservable inputs (Level 3). These securities were primarily non-agency mortgage-backed securities and subordinated debentures issued by financial institutions.

Results of Operations

Total assets increased $80.1 million, or 5.68% in 2009 compared to year end 2008, primarily due to growth in cash and cash equivalents resulting from decreased levels of loans coupled with increased levels of deposits. The Company recorded a net loss of $8.0 million in 2009 compared to net income of $7.6 million in 2008. The decrease in net income is primarily attributable to a $21.8 million increase in provision for loan losses associated with increased levels of nonperforming assets and loan charge-offs. Loan charge-offs increased from $6.7 million in 2008 to $24.1 million in 2009 and resulted primarily from segments of the Company’s acquisition development and construction loan portfolio (“ADC”) outside of its primary market. Loans participated with other banks on properties in the metro Atlanta market as well as ADC loans in the Athens and Savannah, Georgia markets experienced a level of charge offs higher than that experienced in the Company’s primary market area of the Augusta-Richmond County, GA-SC metropolitan statistical area (MSA).

Interest income decreased $4.9 million or 6.49% to $70.8 million in 2009. Interest income on loans decreased $5.4 million from 2008 and was primarily the result of a decline in average yield on loans from 6.46% in 2008 to 5.70% in 2009. Loan yields were impacted by the reduction in the prime lending rate during 2008 when the Federal Reserve Board reduced its target funds rate by 400bp causing a corresponding reduction in the prime lending rate from 7.25% to 3.25%. Interest income on investment securities increased $691 in 2009 primarily as a result of a $39.3 million increase in the average balance of the investment portfolio in 2009. The yield on the taxable investment portfolio declined from 5.38% in 2008 to 4.88% in 2009.

Noninterest income increased $4.0 million in 2009 and was due primarily to increased gain on sale of mortgage loans of $2.7 million and increased gains on sales of investment securities of $2.6 million. Partially offsetting the increase were other-than-temporary impairment losses of $975 and a decrease in service charges and fees on deposits.

Interest expense decreased $7.0 million to $28.5 million in 2009. The Company had total deposit growth of $141.0 million, or 12.37% in 2009. Interest expense on deposits decreased $5.8 million to $24.2 million primarily due to continuing declines in cost of funds somewhat offset by the growth of deposits. The most significant increases were in savings accounts, NOW accounts and time deposits over $100. Savings accounts increased $96.5 million, a significant portion of which resulted from funds moving from securities sold under repurchase agreements. NOW accounts increased $43.9 million and resulted from increased public funds of $23.8 million and a $22.8 million increase in the Bank’s premium interest checking product. Time deposits over $100 increased $33.3 million due primarily to increased balances of brokered CDs which increased from $183.2 million at year end 2008 to $216.2 million at year end 2009.

Noninterest expense increased $9.8 million or 26.55% in 2009. The principal reasons for the increased expense were due to losses on sale of other real estate of $6.3 million, $1.8 million increase in FDIC insurance premiums, $786 increase in commissions and $795 increase in accruals for the Company’s non-qualified defined benefit plan. The operating efficiency ratio of 75.66% in 2009 is an 11.14% increase from 2008.

The earnings performance of the Company is reflected in its return on average assets and average equity of (0.54%) and (7.92%), respectively, during 2009 compared to 0.57% and 8.48%, respectively, during 2008. Basic net income (loss) per share on weighted average common shares outstanding declined to ($1.24) in 2009 compared to $1.27 in 2008 and $1.97 in 2007. Diluted net income (loss) per share on weighted average common and common equivalent shares outstanding declined to ($1.24) in 2009 compared to $1.26 in 2008 and $1.95 in 2007.

Net Interest Income

The primary source of earnings for the Company is net interest income, which is the difference between income on interest-earning assets, such as loans and investment securities, and interest expense incurred on interest-bearing sources of funds, such as deposits and borrowings. The following table shows the average balances of interest-earning assets and interest-bearing liabilities, average yields earned and rates paid on those respective balances, and the resulting interest income and interest expense for the periods indicated. Average balances are calculated based on daily balances, yields on non-taxable investments are not reported on a tax equivalent basis and average balances for loans include nonaccrual loans even though interest was not earned.

Average Balances, Income and Expenses, Yields and Rates

		Year Ended Dec. 31, 2009												Year Ended Dec. 31, 2008												Year Ended Dec. 31, 2007
						Average				Amount								Average				Amount								Average				Amount
		Average				Yield or				Paid or				Average				Yield or				Paid or				Average				Yield or				Paid or
		Amount				Rate				Earned				Amount				Rate				Earned				Amount				Rate				Earned
		(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans		$	986,305				5.70	%		$	56,196			$	952,800				6.46	%		$	61,568			$	811,509				8.16	%		$	66,219
Investments
Taxable			273,834				4.88	%			13,376				239,253				5.38	%			12,875				209,082				5.27	%			11,023
Tax-exempt			20,969				4.32	%			906				16,266				4.40	%			716				18,734				4.27	%			800
Federal funds sold			22,322				0.43	%			95				29,916				1.57	%			470				21,434				5.19	%			1,112
Interest-bearing deposits in other banks			48,509				0.39	%			187				2,557				1.80	%			46				506				5.34	%			27
Total interest-earning assets			1,351,939				5.23	%		$	70,760				1,240,792				6.10	%		$	75,675				1,061,265				7.46	%		$	79,181
Cash and due from banks			49,848												22,846												25,624
Premises and equipment			32,894												33,584												26,676
Other			58,036												34,581												30,527
Allowance for loan losses			(15,830	)											(13,419	)											(11,029	)
Total assets		$	1,476,887											$	1,318,384											$	1,133,063
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW accounts		$	187,250				0.95	%		$	1,777			$	147,227				1.46	%		$	2,149			$	127,093				2.30	%		$	2,926
Savings and money management accounts			341,118				1.71	%			5,842				353,719				2.52	%			8,912				341,097				4.04	%			13,788
Time deposits			577,897				2.88	%			16,630				446,434				4.25	%			18,956				317,298				5.18	%			16,433
Federal funds purchased / securities sold under repurchase agreements			40,823				0.80	%			327				60,629				2.17	%			1,317				65,735				5.03	%			3,305
Other borrowings			103,238				3.78	%			3,907				98,741				4.21	%			4,155				79,250				5.65	%			4,480
Total interest-bearing liabilities			1,250,326				2.28	%			28,483				1,106,750				3.21	%			35,489				930,473				4.40	%			40,932
Noninterest-bearing demand deposits			114,835												109,818												108,470
Other liabilities			10,966												12,479												10,270
Stockholders’ equity			100,760												89,337												83,850
Total liabilities and stockholders’ equity		$	1,476,887											$	1,318,384											$	1,133,063
Net interest spread							2.95	%											2.89	%											3.06	%
Benefit of noninterest sources							0.17	%											0.35	%											0.54	%
Net interest margin/income							3.12	%		$	42,277								3.24	%		$	40,186								3.60	%		$	38,249

2009 compared with 2008:

Interest earning asset yields declined sharply in 2009 compared to 2008, decreasing 87 basis points while interest bearing liability rates declined 93 basis points. As a result the Company’s average interest rate spread improved slightly to 2.95% in 2009 as compared to 2.89% in 2008. The year over year decline in asset yields and liability costs were a result of decreased market interest rates coupled with an increased level of liquidity. The Federal Reserve Board decreased its target Federal Funds rate seven times totaling 400 basis points during 2008. As a result, the prime interest rate dropped from 7.25% at year end 2007 to 3.25% at year end 2008. A significant portion of the Company’s loan portfolio adjusts immediately to these changes in rates while deposit liabilities typically lag. In addition, the yield on federal funds sold declined 114 basis points and negatively impacted overall asset yields. These factors contributed to the net interest margin declining from 3.24% in 2008 to 3.12% in 2009.

The increase in average loans of $33.5 million, average investments of $39.3 million, average interest bearing deposits in other banks of $46.0 million and average cash and due from banks of $27.0 million were funded by increases in average interest bearing deposits of $158.9 million and other borrowings of $4.5 million, offset in part by decreases in federal funds purchased and securities sold under repurchase agreements of $19.8 million. For 2009, average total assets were $1.5 billion, a 12.02% increase over 2008. Average interest-earning assets for 2009 were $1.4 billion, or 91.5% of average total assets.

Interest income is the largest contributor to income. Interest income on loans, including loan fees, decreased $5.4 million from 2008 to $56.2 million in 2009. Declining interest rates accounted for approximately $7.3 million reduction in interest but was offset by approximately $2.2 million due to increased average balances of loans. Also affecting the overall yield on loans was an increase in average non-accrual loans from $22.7 million in 2008 to $38.3 million in 2009. Loans placed on non-accrual resulted in the reversal of interest income of $1.3 million for the year ended 2009 and $1.0 in 2008. If these non-accrual loans had been accruing interest under their original terms, approximately $2.4 million in 2009 and $1.6 million in 2008 would have been recognized in earnings. Interest income on investments increased $691 to $14.3 million primarily as a result of higher average balances partially offset by lower investment yields in 2009. The average yield on the taxable investment portfolio declined from 5.38% in 2008 to 4.88% in 2009 and accounted for $1.2 million in decreased interest in 2009. Market yields available on high quality investments made during the year were lower in 2009 and were impacted by the investment of funds from increased deposits, maturities of investments coupled with funds reinvested from the liquidation of certain securities based on asset liability strategies. Interest income on federal funds sold decreased as the average yield declined from 1.57% in 2008 to 0.43% in 2009. Average yields on interest-earning assets were 5.23% in 2009, compared to 6.10% in 2008.

Interest expense on deposits decreased $5.8 million from 2008 to $24.2 million in 2009. Declining interest rates paid on deposits more than offset the additional interest due to growth. The mix of interest bearing deposits also affects the interest rate spread. During 2009 the proportion of higher cost time deposits as a percent of interest bearing liabilities increased from 40% to 46% while lower cost money management and savings accounts decreased from 32% to 27%. The overall result was an increase in net interest income of $2.1 million or 5.2% in 2009 from 2008.

A key performance measure for net interest income is the “net interest margin”, or net interest income divided by average interest-earning assets. Unlike the “net interest spread” (the difference between interest rates earned on assets and interest rates paid on liabilities), the net interest margin is affected by the level of non-interest sources of funding used to support interest-earning assets. The Company’s net interest margin decreased to 3.12% in 2009 from 3.24% in 2008. The net interest margin deteriorated in 2009 as the benefit of noninterest sources decreased from 0.35% in 2008 to 0.17% in 2009 reflecting the reduced benefit of such balances in the net interest margin. The high level of competition in the local market for both loans and particularly deposits continues to influence the net interest margin. The net interest margin continues to be supported by demand deposits which provide a noninterest-bearing source of funds. The Company’s marketing efforts continue to be focused on demand deposits and NOW accounts to help prevent further deterioration in the net interest margin. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing sources of funds. The net interest spread eliminates the impact of noninterest-bearing funds and gives a direct perspective on the effect of market interest rate movements. As a result of changes in interest rates in 2009, the net interest spread increased 6 basis points to 2.95% in 2009.

2008 compared with 2007:

Despite declining yields, net interest income increased $1.9 million in 2008 compared to 2007 as a result of the growth in the volume of average earning assets. Interest earning assets averaged $1.2 billion in 2008, an increase of 16.9%, from the $1.1 billion averaged in 2007. Average yields on earning assets decreased to 6.10% in 2008, compared to 7.46% in 2007 as a result of decreased market interest rates. The Federal Reserve Board decreased its target Federal Funds rate seven times totaling 400 basis points during 2008. As a result, the prime interest rate dropped from 7.25% at year end 2007 to 3.25% at year end 2008.

In 2008, the Company’s net interest margin decreased to 3.24% from 3.60% in 2007 as the average rate paid on interest-bearing deposits decreased less than the average rate on interest-earning assets. The 2008 net interest spread of 2.89% decreased 17 basis points from 2007’s 3.06% due to changes in interest rates.

Changes in the net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases in the average rates earned and paid on such assets and liabilities, the ability to manage the earning asset portfolio, and the availability of particular sources of funds, such as noninterest-bearing deposits. The following table: “Analysis of Changes in Net Interest Income” indicates the changes in the Company’s net interest income as a result of changes in volume and rate from 2009 to 2008, and 2008 to 2007. The analysis of changes in net interest income included in the following table indicates that on an overall basis in 2009 to 2008, the increase in the balances or volumes of interest-earning assets created a positive impact in net income. This was somewhat offset by the impact of increased volumes of interest-bearing liabilities. The rate environment of 2009 resulted in significant rate decreases on interest-earning assets and interest-bearing liabilities. In 2008 to 2007, the increase in the balances or volumes of interest-earning assets created a positive impact in net income which was partially offset by the impact of increased volumes of interest-bearing liabilities. Declining rates in 2008 resulted in rate decreases on interest-earning assets and interest-bearing liabilities.

Analysis of Changes in Net Interest Income

		2009 vs. 2008																2008 vs. 2007
		Increase (Decrease)																Increase (Decrease)
		Average				Average												Average				Average
		Volume				Rate				Combined				Total				Volume				Rate				Combined				Total
		(Dollars in thousands)																(Dollars in thousands)
Interest income from interest-earning assets:
Loans		$	2,164			$	(7,264	)		$	(272	)		$	(5,372	)		$	11,529			$	(13,781	)		$	(2,399	)		$	(4,651	)
Investments, taxable			1,860				(1,185	)			(174	)			501				1,590				233				29				1,852
Investments, tax-exempt			207				(13	)			(4	)			190				(105	)			24				(3	)			(84	)
Federal funds sold			(119	)			(342	)			86				(375	)			440				(726	)			(356	)			(642	)
Interest-bearing deposits in other banks			827				(36	)			(650	)			141				109				(19	)			(71	)			19
Total		$	4,939			$	(8,840	)		$	(1,014	)		$	(4,915	)		$	13,563			$	(14,269	)		$	(2,800	)		$	(3,506	)
Interest expense on interest-bearing liabilities:
NOW accounts		$	584			$	(752	)		$	(204	)		$	(372	)		$	463			$	(1,068	)		$	(172	)		$	(777	)
Savings and money management accounts			(318	)			(2,857	)			104				(3,071	)			510				(5,186	)			(200	)			(4,876	)
Time deposits			5,587				(6,127	)			(1,785	)			(2,325	)			6,689				(2,963	)			(1,203	)			2,523
Federal funds purchased / securities sold under repurchase agreements			(430	)			(829	)			269				(990	)			(257	)			(1,878	)			147				(1,988	)
Other borrowings			189				(420	)			(17	)			(248	)			1,101				(1,143	)			(283	)			(325	)
Total		$	5,612			$	(10,985	)		$	(1,633	)		$	(7,006	)		$	8,506			$	(12,238	)		$	(1,711	)		$	(5,443	)
Change in net interest income														$	2,091															$	1,937

The variances for each major category of interest-earning assets and interest-bearing liabilities are attributable to (a) changes in volume (changes in volume times prior year rate), (b) changes in rate (changes in rate times prior year volume) and (c) combined (changes in rate times the change in volume).

Provision for Loan Losses

The provision for loan losses is the charge to operating earnings necessary to maintain the allowance for loan losses at a level which, in management’s estimate, is adequate to cover the estimated amount of incurred losses in the loan portfolio. The provision for loan losses totaled $30.9 million for the year ended December 31, 2009 compared to $9.1 million for the year ended December 31, 2008. See “Allowance for Loan Losses” for further analysis of the provision for loan losses.

Noninterest Income

Noninterest income consists of revenues generated from a broad range of financial services and activities, including service charges on deposit accounts, gain on sales of loans, gain on sale of fixed assets, fee-based services, and products where commissions are earned through sales of products such as real estate mortgages, retail investment services, trust services, and other activities. In addition, the increases in cash surrender value of bank-owned life insurance and gains or losses realized from the sale of investment securities are included in noninterest income.

2009 compared with 2008:

Noninterest income for 2009 was $20.7 million, an increase of $4.0 million or 24.15% from 2008. Gain on sales of loans increased $2.7 million as falling rates caused an increase in mortgage refinance activity coupled with improved pricing. Investment securities gains increased $2.6 million due to increased sales of investments which occurred in part to asset liability strategies during the year. These increases were partially offset by other-than-temporary impairment losses of $975 and reduced service charges and fees on deposits of $240. The reduced level of service charges was primarily due to lower returned check fees resulting from decreased economic activity.

2008 compared with 2007:

Noninterest income for 2008 was $16.7 million, an increase of $537 or 3.3% from 2007. Service charges and fees on deposits increased $882 in 2008 primarily due to increases in NSF fees for retail checking accounts and debit/ATM card income, both the result of new account growth. The gain on the sale of fixed assets decreased $1.0 million from 2007. Gain on sale of loans increased $562 as falling rates caused an increase in mortgage refinance activity coupled with improved pricing. These increases were somewhat offset by decreases in retail investment income of $171 which was impacted by the declining stock market. Investment securities losses decreased $160 from 2007.

The following table presents the principal components of noninterest income for the last three years:

Noninterest Income

		Year Ended December 31,
		2009				2008				2007
		(Dollars in thousands)
Service charges and fees on deposits		$	7,051			$	7,291			$	6,409
Gain on sales of loans			8,493				5,747				5,185
(Loss) gain on sale of fixed assets, net			(15	)			8				1,049
Investment securities gains (losses), net of OTTI			1,557				(77	)			(237	)
Retail investment income			1,175				1,096				1,267
Trust service fees			1,040				1,134				1,132
Increase in cash surrender value of bank-owned life insurance			880				708				678
Miscellaneous income			558				798				685
Total noninterest income		$	20,739			$	16,705			$	16,168
Noninterest income as a percentage of total average assets			1.40	%			1.27	%			1.43	%
Noninterest income as a percentage of total income			22.67	%			18.08	%			16.96	%

Noninterest Expense

2009 compared with 2008:

Noninterest expense totaled $46.5 million in 2009, an increase of $9.8 million or 26.55% over 2008.

The significant increase in noninterest expense in 2009 was from losses on sales of other real estate which increased $5.8 million and a $588 valuation allowance established based on recent appraisals. The increase was due primarily to aggressive liquidation of such assets in the fourth quarter. During the fourth quarter, management became concerned with declining real estate values on foreclosed properties and concluded that liquidation of a significant portion of such assets was necessary to avoid further value declines. Proceeds from sales of other real estate totaled $5.8 million during the fourth quarter and a loss of $5.2 million was recorded on those sales.

Salaries and other personnel expense increased $1.7 million or 8.06% due primarily to a $787 increase in commissions paid due to higher mortgage production and a $795 increase in accruals to the Company’s non-qualified defined benefit plan due to a reduction in the discount rate and newly added participants.

FDIC insurance expense increased $1.8 million or 203.14% due primarily to a special assessment of $670 and increased assessment rates. Occupancy expense increased $317 in 2009 due primarily to depreciation expense on purchases of upgraded computer systems and software. Loan costs increased $322 primarily related to the increase in expense from foreclosed properties.

2008 compared with 2007:

Noninterest expense totaled $36.8 million in 2008, an increase of $4.2 million or 13.1% from 2007 noninterest expense of $32.5 million. Salaries and other personnel expense increased $1.5 million or 7.8% due to full year expense of offices opened in the Aiken and Greenville, South Carolina and Evans, Georgia markets, the expansion of the wealth management area, medical expenses, employer 401K expense, and stock options compensation expense somewhat offset by an increase in FAS 91 deferred cost expense. Occupancy expense increased $916 in 2008 due primarily to a full years expense associated with the Company’s new Operation center which was occupied in October 2007. In addition, the full year effect of two new branches and a loan production office impacted the increase. FDIC insurance expense increased $785 due primarily to credits which expired in 2007, increased assessments and growth in deposits. Processing expenses increased $167 primarily due to ATM processing fees related to new account growth of checking products, payroll processing fees related to employee growth, disaster recovery fee increases and CDARS account fees related to new account growth. IT maintenance expense increased $261 primarily for increase in core software maintenance agreement and security maintenance. Professional fees increased $255 due in part to the Company outsourcing a portion of the Company’s routine Sarbanes Oxley testing. Contribution expense decreased from 2007 primarily due to a donation to Georgia Bank Foundation in 2007. Loan costs increased $135 primarily related to the increase in expense from foreclosed properties.

The Company continues to monitor expenditures in all organizational units by utilizing specific cost-accounting and reporting methods as well as responsibility center budgeting. The following table presents the principal components of noninterest expense for the years ended December 31, 2009, 2008 and 2007.

Noninterest Expense

		Year Ended December 31,
		2009				2008				2007
		(Dollars in thousands)
Salaries and other personnel expense		$	22,534			$	20,852			$	19,343
Occupancy expense			4,691				4,373				3,457
Marketing & business development			1,451				1,668				1,586
Processing expense			1,733				1,917				1,750
Legal and professional fees			1,552				1,763				1,508
Data processing expense			1,265				1,203				942
FDIC insurance			2,723				898				113
Loss (gain) on sale of other real estate			5,741				(63	)			29
Other real estate valuation allowance			588				—				—
Loan costs			917				658				460
Supplies expense			604				763				704
Other expense			2,712				2,720				2,616
Total noninterest expense		$	46,511			$	36,752			$	32,508
Noninterest expense as a percentage of total average assets			3.15	%			2.79	%			2.87	%
Operating efficiency ratio			75.66	%			64.52	%			60.64	%

The Company’s efficiency ratio (noninterest expense as a percentage of net interest income and noninterest income, excluding gains and losses on the sale of investments) increased to 75.66% in 2009 compared to 64.52% in 2008, and 60.64% in 2007.

Income Taxes

Income tax expense decreased $9.9 million to a net tax benefit of $6.4 million in 2009 from 2008, and decreased $2.8 million or 44.5% in 2008 from 2007. The effective tax rate as a percentage of pre-tax income was 44.5% in 2009, 31.6% in 2008, and 34.9% in 2007. A significant driver in the effective tax rate in 2008 was the loan loss provision which lowered pre-tax income and thereby increased the proportion of tax exempt income to taxable income. In 2009, the effective tax rate exceeded the combined statutory rate due to the coupling of the net loss while maintaining existing levels of tax exempt income.

At December 31, 2009, the Company maintains net deferred tax assets of $11.2 million. In evaluating the need for a valuation allowance against the deferred tax asset, management has considered primarily existing carryback potential of $22.8 million. Furthermore, management has considered the severity and number of consecutive quarterly losses and has determined that a valuation allowance is not necessary based on a single quarterly loss.

Financial Condition

Composition of the Loan Portfolio

Loans are the primary component of the Company’s interest-earning assets and generally are expected to provide higher yields than the other categories of earning assets. Those higher yields reflect the inherent credit risks associated with the loan portfolio. Management attempts to control and balance those risks with the rewards associated with higher returns.

Loans outstanding averaged $965.1 million in 2009 compared to $934.5 million in 2008 and $800.9 million in 2007. At December 31, 2009, loans totaled $937.5 million compared to $986.8 million at December 31, 2008, a decrease of $49.3 million or 5.0%.

The Company experienced significant increases in loan volumes and balances during 2008 but has experienced decreased balances during 2009 as the economy continued to worsen. Beginning in the fourth quarter of 2008 loan demand began to decrease and has continued to decline through 2009. Commercial real estate loans increased $56.5 million or 21.2% in 2009. Construction and development loans decreased $99.7 million or 27.0% from year end 2008. Loan growth in 2008 was impacted by the purchase of a $29.7 million portfolio in the Athens, Georgia market.

The following table sets forth the composition of the Company’s loan portfolio as of December 31^st for the past five years. The Company’s loan portfolio does not contain any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed as a category of loans in this table. The Company has not invested in loans to finance highly-leveraged transactions (“HLT”), such as leveraged buy-out transactions, as defined by the Federal Reserve and other regulatory agencies. Loans made by a bank for recapitalization or acquisitions (including acquisitions by management or employees) which result in a material change in the borrower’s financial structure to a highly-leveraged condition are considered HLT loans. The Company had no foreign loans or loans to lesser-developed countries as of December 31^st of any of the years presented.

Loan Portfolio Composition

		December 31,
		2009								2008								2007								2006								2005
		Amount				%				Amount				%				Amount				%				Amount				%				Amount				%
		(Dollars in thousands)
Commercial financial and agricultural		$	102,160				10.90	%		$	109,751				11.12	%		$	93,318				10.71	%		$	80,823				10.99	%		$	64,398				11.12	%
Real estate
Commercial			322,864				34.44	%			266,362				26.99	%			236,358				27.12	%			198,453				27.00	%			156,896				27.09	%
Residential			219,217				23.38	%			212,856				21.57	%			190,613				21.88	%			158,543				21.57	%			138,716				23.95	%
Acquisition, development and construction			270,062				28.81	%			369,731				37.47	%			318,438				36.54	%			266,875				36.30	%			184,826				31.92	%
Total real estate			812,143				86.63	%			848,949				86.03	%			745,409				85.54	%			623,871				84.87	%			480,438				82.96	%
Lease financing			0				0.00	%			33				0.00	%			37				0.00	%			116				0.02	%			111				0.02	%
Consumer
Direct			20,507				2.19	%			24,272				2.46	%			25,569				2.93	%			24,146				3.28	%			24,343				4.20	%
Indirect			1,898				0.20	%			3,319				0.34	%			4,237				0.49	%			6,232				0.85	%			9,752				1.69	%
Revolving			836				0.09	%			905				0.09	%			3,819				0.44	%			843				0.12	%			656				0.11	%
Total consumer			23,241				2.48	%			28,496				2.89	%			33,625				3.86	%			31,221				4.25	%			34,751				6.00	%
Deferred loan origination fees			(55	)			(0.01	%)			(398	)			(0.04	%)			(949	)			(0.11	%)			(919	)			(0.13	%)			(610	)			(0.10	%)
Total		$	937,489				100.00	%		$	986,831				100.00	%		$	871,440				100.00	%		$	735,112				100.00	%		$	579,088				100.00	%

Loans may be periodically renewed with principal reductions and appropriate interest rate adjustments. Loan maturities as of December 31, 2009 are set forth in the following table based upon contractual terms. Actual cash flows may differ as borrowers generally have the right to prepay without prepayment penalties.

Loan Maturity Schedule At
December 31, 2009

		Within				One to Five				After Five
		One Year				Years				Years				Total
		(Dollars in thousands)
Commercial, financial and agricultural		$	59,443			$	41,369			$	1,348			$	102,160
Real Estate
Commercial			94,632				219,457				8,775				322,864
Residential			103,825				91,765				23,627				219,217
Acquisition, development and construction			202,139				62,707				5,216				270,062
Consumer			12,573				10,343				325				23,241
Deferred loan origination fees			(55	)			—				—				(55	)
Total loans		$	472,557			$	425,641			$	39,291			$	937,489