Southeastern Bank Financial CORP - FORM 10-Q

Attached files

file	filename
EX-31.2 - EX-31.2 - Southeastern Bank Financial CORP	c16102exv31w2.htm
EX-32.1 - EX-32.1 - Southeastern Bank Financial CORP	c16102exv32w1.htm
EX-31.1 - EX-31.1 - Southeastern Bank Financial CORP	c16102exv31w1.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2011.


o		Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission File No. 0-24172

Southeastern Bank Financial Corporation

(Exact name of registrant as specified in its charter)


Georgia		58-2005097

(State of Incorporation)		(I.R.S. Employer Identification No.)

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

(706) 738-6990

(Issuer’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 Web site, 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 whether the issuer is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o	Non-accelerated filer o	Accelerated filer o	Smaller reporting company þ
		(do not check if a 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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

6,676,467 shares of common stock, $3.00 par value per share, outstanding as of April 28, 2011.

SOUTHEASTERN BANK FINANCIAL CORPORATION

FORM 10-Q

INDEX


	Page

Part I

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010		3

Consolidated Statements of Income for the Three Months ended March 31, 2011 and 2010		4

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2011 and 2010		6

Notes to Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34

Item 3. Quantitative and Qualitative Disclosures about Market Risk		60

Item 4. Controls and Procedures		60

Part II Other Information

Item 1. Legal Proceedings		61

Item 1A. Risk Factors		61

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		61

Item 3. Defaults Upon Senior Securities		61

Item 4. [Removed and Reserved]		61

Item 5. Other Information		61

Item 6. Exhibits		62

Signature		63

EX-31.1
EX-31.2
EX-32.1


*		No information submitted under this caption

PART I
FINANCIAL INFORMATION

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets
(Dollars in thousands, except share data)


	March 31,
	2011		December 31,
	(Unaudited)		2010
Assets

Cash and due from banks	$	60,120	$	42,305
Interest-bearing deposits in other banks		65,251		22,810

Cash and cash equivalents		125,371		65,115

Investment securities
Available-for-sale		558,306		586,302
Held-to-maturity, at cost (fair values of $0 and $311, respectively)		—		310

Loans held for sale		10,700		12,775

Loans		871,017		874,095
Less allowance for loan losses		26,821		26,657

Loans, net		844,196		847,438

Premises and equipment, net		29,103		29,416
Accrued interest receivable		6,576		6,382
Bank-owned life insurance		24,397		24,178
Restricted equity securities		5,745		5,707
Other real estate owned		7,565		7,751
Prepaid FDIC assessment		4,221		4,784
Deferred tax asset		15,683		14,595
Other assets		2,939		2,352


	$	1,634,802	$	1,607,105

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets
(Dollars in thousands, except share data)


	March 31,
	2011			December 31,
	(Unaudited)			2010
Liabilities and Stockholders’ Equity

Deposits
Noninterest-bearing	$	135,220		$	120,139
Interest-bearing:
NOW accounts		363,309			356,267
Savings		433,636			409,584
Money management accounts		37,650			36,937
Time deposits over $100		332,876			346,721
Other time deposits		135,485			141,089

		1,438,176			1,410,737

Securities sold under repurchase agreements		610			818
Advances from Federal Home Loan Bank		60,000			60,000
Accrued interest payable and other liabilities		11,722			12,645
Subordinated debentures		22,947			22,947


Total liabilities		1,533,455			1,507,147


Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 0 shares outstanding in 2011 and 2010, respectively		—			—
Common stock, $3.00 par value; 10,000,000 shares authorized; 6,675,851 and 6,675,147 shares issued and outstanding in 2011 and 2010, respectively		20,028			20,025
Additional paid-in capital		62,654			62,618
Retained earnings		21,850			19,548
Accumulated other comprehensive loss, net		(3,185	)		(2,233	)


Total stockholders’ equity		101,347			99,958


	$	1,634,802		$	1,607,105

See accompanying notes to consolidated financial statements.

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income
(Dollars in thousands, except share data)

(Unaudited)


	Three Months Ended
	March 31,
	2011			2010
Interest income:
Loans, including fees	$	12,628		$	13,343
Investment securities		4,320			3,419
Federal funds sold		—			3
Interest-bearing deposits in other banks		47			89

Total interest income		16,995			16,854


Interest expense:
Deposits		4,080			5,367
Securities sold under repurchase agreements		2			11
Other borrowings		714			954

Total interest expense		4,796			6,332


Net interest income		12,199			10,522

Provision for loan losses		3,240			3,288


Net interest income after provision for loan losses		8,959			7,234


Noninterest income:
Service charges and fees on deposits		1,578			1,595
Gain on sales of loans		1,207			1,353
Gain on sale of fixed assets		17			27
Investment securities gains, net		148			13
Other-than-temporary loss
Total impairment loss		(127	)		—
Loss recognized in other comprehensive loss		65			—

Net impairment loss recognized in earnings		(62	)		—
Retail investment income		457			335
Trust service fees		273			287
Increase in cash surrender value of bank-owned life insurance		218			229
Miscellaneous income		213			161

Total noninterest income		4,049			4,000


Noninterest expense:
Salaries and other personnel expense		5,564			5,494
Occupancy expenses		1,115			1,171
Other real estate losses (gains), net		95			(85	)
Other operating expenses		3,001			2,852

Total noninterest expense		9,775			9,432


Income before income taxes		3,233			1,802

Income tax expense		931			547


Net income	$	2,302		$	1,255

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income
(Dollars in thousands, except share data)

(Unaudited)


	Three Months Ended
	March 31,
	2011		2010

Basic net income per share	$	0.34	$	0.19


Diluted net income per share	$	0.34	$	0.19


Weighted average common shares outstanding		6,675,851		6,673,334


Weighted average number of common and common equivalent shares outstanding		6,676,015		6,673,334

See accompanying notes to consolidated financial statements.

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Dollars in thousands)

(Unaudited)


	Three Months Ended
	March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	2,302		$	1,255
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		629			687
Deferred income tax benefit		(482	)		(390	)
Provision for loan losses		3,240			3,288
Net investment securities gains		(148	)		(13	)
Other-than-temporary impairment losses		62			—
Net amortization of premium on investment securities		944			280
Increase in CSV of Bank-owned life insurance		(218	)		(229	)
Stock options compensation cost		32			60
Gain on disposal of premises and equipment		(17	)		(27	)
Gain on the sale of other real estate		(18	)		(340	)
Provision for other real estate valuation allowance		113			255
Gain on sales of loans		(1,207	)		(1,353	)
Real estate loans originated for sale		(44,337	)		(58,601	)
Proceeds from sales of real estate loans		47,619			59,374
(Increase) decrease in accrued interest receivable		(194	)		611
(Increase) decrease in other assets		(23	)		5,696
Decrease in accrued interest payable and other liabilities		(923	)		(2,021	)

Net cash provided by operating activities		7,374			8,532


Cash flows from investing activities:
Proceeds from sales of securities		34,476			—
Proceeds from maturities and calls of available-for-sale securities		31,787			26,551
Proceeds from maturities of held-to-maturity securities		—			180
Purchase of available-for-sale securities		(40,373	)		(92,835	)
Purchase of restricted equity securities		(38	)		—
Net (increase) decrease in loans		(138	)		12,994
Additions to premises and equipment		(336	)		(37	)
Proceeds from sale of other real estate		230			4,424
Proceeds from sale of premises and equipment		36			30

Net cash provided by (used in) investing activities		25,644			(48,693	)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Dollars in thousands)

(Unaudited)


	Three Months Ended
	March 31,
	2011			2010

Cash flows from financing activities:
Net increase in deposits		27,439			10,363
Net decrease in securities sold under repurchase agreements		(208	)		(1,057	)
Payments of Federal Home Loan Bank advances		—			(5,000	)
Proceeds from other borrowed funds		—			100
Proceeds from Directors’ stock purchase plan		7			5

Net cash provided by financing activities		27,238			4,411


Net increase (decrease) in cash and cash equivalents	$	60,256		$	(35,750	)

Cash and cash equivalents at beginning of period		65,115			147,994


Cash and cash equivalents at end of period	$	125,371		$	112,244


Supplemental disclosures of cash paid during the period for:
Interest	$	5,084		$	6,570


Income taxes	$	2,053		$	21


Supplemental information on noncash investing activities:
Loans transferred to other real estate	$	139		$	2,230

See accompanying notes to consolidated financial statements.

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2011

Note 1 — Basis of Presentation

The accompanying consolidated financial statements include the accounts of Southeastern Bank Financial Corporation (the “Company”), and its wholly-owned subsidiaries, Georgia Bank & Trust Company of Augusta (“GB&T”) and Southern Bank & Trust (“SB&T”). Significant intercompany transactions and accounts are eliminated in consolidation. Dollar amounts are rounded to thousands except share and per share data.

The financial statements for the three months ended March 31, 2011 and 2010 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations and cash flows for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results of operations which the Company may achieve for the entire year.

Some items in the prior period financial statements were reclassified to conform to the current presentation.

Note 2 — Recent Accounting Pronouncements

In January 2010, the FASB amended previous guidance related to fair value measurements and disclosures, which requires new disclosures for transfers in and out of Levels 1 and 2 and requires a reconciliation to be provided for the activity in Level 3 fair value measurements. A reporting entity should disclose separately the amounts of significant transfers in and out of Levels 1 and 2 and provide an explanation for the transfers. This guidance is effective for interim periods beginning after December 15, 2009, and did not have a material effect on the Company’s results of operations or financial position.

In the reconciliation for fair value measurements using unobservable inputs (Level 3) a reporting entity should present separately information about purchases, sales, issuances, and settlements on a gross basis rather than a net basis. Disclosures relating to purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurement became effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position but did require expansion of the Company’s disclosures about fair value measurements.

In July 2010, the FASB amended existing guidance related to financing receivables and the allowance for credit losses, which requires further disaggregated disclosures that improve financial statement users’ understanding of 1) the nature of an entity’s credit risk associated with its financing receivables and 2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this standard did not have a material effect on the Company’s result of operations or financial position but did require expansion of the Company’s disclosures.

In April 2011, the FASB amended existing guidance to assist creditors in determining whether a modification of the terms of a receivable meets the definition of a troubled debt restructuring (“TDR”). The guidance does not change previous standards that a restructuring of debt constitutes a TDR “if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider,” but provides clarification on determining whether a debtor is in financial difficulty and if a concession was granted. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and should be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations or financial position.

Note 3 — Investment Securities

The following tables summarize the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at March 31, 2011 and December 31, 2010 and the corresponding amounts of unrealized gains and losses therein.


	March 31, 2011
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
	(Dollars in thousands)
Available-for-sale
Obligations of U.S. Government agencies	$	205,793		486		(2,275	)		204,004
Obligations of states and political subdivisions		73,529		422		(2,794	)		71,157
Mortgage backed securities
U.S. GSE’s* MBS — residential		128,859		1,561		(1,763	)		128,657
U.S. GSE’s CMO		115,923		1,476		(562	)		116,837
Other CMO		2,939		—		(287	)		2,652
Corporate bonds		36,477		45		(1,523	)		34,999

	$	563,520		3,990		(9,204	)		558,306


*		Government sponsored entities


	December 31, 2010
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
	(Dollars in thousands)
Available-for-sale
Obligations of U.S. Government agencies	$	202,153		527		(1,763	)		200,917
Obligations of states and political subdivisions		67,137		318		(3,337	)		64,118
Mortgage backed securities
U.S. GSE’s MBS — residential		141,524		1,880		(1,679	)		141,725
U.S. GSE’s CMO		139,208		1,756		(630	)		140,334
Other CMO		3,382		50		(359	)		3,073
Corporate bonds		36,551		467		(885	)		36,133
Equity securities		2		—		—			2

	$	589,957		4,998		(8,653	)		586,302


Held-to-maturity
Obligations of states and political subdivisions	$	310		1		—			311

	$	310		1		—			311

Proceeds from sales of securities and the associated gains (losses) for the three months ended March 31, 2011 and 2010 were as follows:


	March 31,
	2011		2010
	(Dollars in thousands)

Proceeds	$	34,476	$	—
Gross Gains		307		—
Gross Losses		171		—

The amortized cost and fair value of the investment securities portfolio excluding equity securities are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2011
	Amortized		Estimated
	cost		fair value
	(Dollars in thousands)
Available-for-sale:
One year or less	$	1,674		1,708
After one year through five years		17,751		17,482
After five years through ten years		84,854		84,871
After ten years		459,241		454,245

	$	563,520		558,306

The following tables summarize the investment securities with unrealized losses at March 31, 2011 and December 31, 2010, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.


	March 31, 2011
	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss		fair value		loss		fair value		loss
	(Dollars in thousands)
Temporarily impaired
Obligations of U.S. Government agencies	$	122,873		2,275		—		—		122,873		2,275
Obligations of states and political subdivisions		46,338		2,782		1,679		12		48,017		2,794
Mortgage backed securities
U.S. GSE’s MBS — residential		80,579		1,633		465		130		81,044		1,763
U.S. GSE’s CMO		27,481		524		2,619		38		30,100		562
Other CMO		—		—		2,143		222		2,143		222
Corporate bonds		26,449		375		6,559		1,148		33,008		1,523

	$	303,720		7,589		13,465		1,550		317,185		9,139


Other-than-temporarily impaired
Mortgage backed securities
Other CMO	$	—		—		510		65		510		65

	$	303,720		7,589		13,975		1,615		317,695		9,204


	December 31, 2010
	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss		fair value		loss		fair value		loss
	(Dollars in thousands)
Temporarily impaired
Obligations of U.S. Government agencies	$	99,306		1,763		—		—		99,306		1,763
Obligations of states and political subdivisions		45,906		3,245		2,309		92		48,215		3,337
Mortgage backed securities
U.S. GSE’s MBS — residential		81,783		1,538		509		141		82,292		1,679
U.S. GSE’s CMO		46,776		630		—		—		46,776		630
Other CMO		—		—		2,085		359		2,085		359
Corporate bonds		22,385		481		3,880		404		26,265		885

	$	296,156		7,657		8,783		996		304,939		8,653

Other-Than-Temporary Impairment — March 31, 2011

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under the provisions of ASC 320-10, Investments — Debt and Equity Securities. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity 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. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income or loss, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of March 31, 2011, the Company’s security portfolio consisted of 320 securities, 162 of which were in an unrealized loss position. Of these securities with unrealized losses, 44.93% were related to the Company’s mortgage-backed and corporate securities as discussed below.

Mortgage-backed Securities

At March 31, 2011, $245,494 or approximately 98.93% of the Company’s mortgage-backed securities were issued by U.S. government-sponsored entities and agencies, primarily the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Government National Mortgage Association (“Ginnie Mae”), institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011.

The Company’s mortgage-backed securities portfolio also includes five non-agency collateralized mortgage obligations with a market value of $2,652 which had unrealized losses of approximately $287 at March 31, 2011. These non-agency securities were rated AAA at purchase.

At March 31, 2011, four of these non-agency securities were rated below investment grade and a cash flow analysis was performed to evaluate OTTI. The assumptions used in the model include expected future default rates, loss severity and prepayments. The model also takes into account the structure of the security including credit support. Based on these assumptions the model calculates and projects the timing and amount of interest and principal payments expected for the security. In addition the model was used to “stress” each security, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the security could no longer fully support repayment. Upon completion of the March 31, 2011 analysis, our model indicated other-than-temporary impairment on one of these securities. This security had OTTI losses of $62 and remained classified as available-for-sale at March 31, 2011.

At March 31, 2011, the fair values of three collateralized mortgage obligations totaling $2,145 were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the period. The discount rates used in the valuation model were based on a yield of 10% over 1 month libor that the market would require for collateralized mortgage obligations with maturities and risk characteristics similar to the securities being measured.

Corporate Securities

The Company holds twenty corporate securities totaling $34,999, of which eighteen had an unrealized loss of $1,523. The Company’s unrealized losses on corporate securities relate primarily to its investment in single issuer corporate and corporate trust preferred securities. At March 31, 2011, two of the corporate securities were rated below investment grade and five securities to two issuers were not rated. None of the issuers were in default but in January of 2011 the Company was notified that two trust preferred securities totaling $1,250 to the two issuers not rated had elected to defer interest payments. The issuers are both bank holding companies with operations in the Southeast. One of the issuers of $1,000 of such securities announced a successful capital raise which was completed in the first quarter of 2011. The Company considered several factors including the financial condition and near term prospects of the issuers and concluded that the decline in fair value was primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities. Although these issuers have indicated they will defer payments going forward, the Company has considered the capital position of the subsidiary banks, the liquidity of the holding company, the existence and severity of publicly available regulatory agreements, and the fact that these deferrals are coming after the most severe impact of the national and regional recession. The prospect of capital formation in the current market, improving operating results of the industry overall have caused the Company to conclude that a return to normal subsidiary dividends and thus interest payments on the debt for these issuers is reasonably assured at this time. Because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011.

At March 31, 2011, the fair values of four corporate securities totaling $2,293 were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the period. The discount rates used in the valuation model were based on current spreads to U.S. Treasury rates of long-term corporate debt obligations with maturities and risk characteristics similar to the subordinated debentures being measured. An additional adjustment to the discount rate for illiquidity in the market for subordinated debentures was not considered necessary based on the illiquidity premium already present in the spreads used to estimate the discount rate.

The table below presents a roll forward of the credit losses recognized in earnings for the three month period ended March 31, 2011.


Beginning balance, January 1, 2011	$	571
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		—
Additions/Subtractions
Amounts realized for securities sold during the period		—
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis		—
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security		—
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		62


Ending balance, March 31, 2011	$	633

Total other-than-temporary impairment recognized in accumulated other comprehensive loss was $65 at March 31, 2011.

Other-Than-Temporary Impairment —March 31, 2010

As of March 31, 2010, the Company’s security portfolio consisted of 278 securities, 94 of which were in an unrealized loss position. The majority of unrealized losses were related to the Company’s mortgage-backed and corporate securities. Five of the mortgage-backed securities were rated below investment grade and a cash flow analysis was performed to evaluate OTTI. The assumptions used in the model include expected future default rates, loss severity and prepayments. The model also takes into account the structure of the security including credit support. Based on these assumptions, the model calculates and projects the timing and amount of interest and principal payments expected for the security. In addition, the model was used to “stress” each security, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the security could no longer fully support repayment. Upon completion of the March 31, 2010 analysis, our model indicated that none of the securities were other-than-temporarily impaired.

Note 4 — Loans

The following table summarizes loans at March 31, 2011 and December 31, 2010.


	March 31, 2011		December 31, 2010
	(Dollars in thousands)

Commercial, financial, and agricultural	$	183,637		189,128
Real estate:
Commercial		332,991		327,458
Residential		160,256		157,680
Acquisition, development and construction		178,392		182,412
Consumer installment		15,762		17,412

	$	871,038		874,090
Less allowance for loan losses		26,821		26,657
Less deferred loan origination fees (costs)		21		(5	)

	$	844,196		847,438

The following table presents the activity in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011.


	Commercial,
	Financial, and		CRE - Owner		CRE - Non Owner		Residential			ADC		ADC		ADC			ADC		ADC		ADC
	Agricultural		Occupied		Occupied		Real Estate			CSRA		Savannah		Greenville			Athens		Participations - FL		Participations - GA		Consumer			Total
	(Dollars in thousands)

Allowance for loan losses:
Beginning balance	$	3,463		3,921		4,777		5,372			5,097		453		284			796		888		975		631			26,657
Charge-offs		1,122		—		424		162			114		—		—			496		888		—		36			3,242
Recoveries		102		—		—		4			—		—		6			—		—		—		54			166
Provision		1,987		458		169		(1,148	)		1,175		117		(128	)		451		—		374		(215	)		3,240

Ending balance	$	4,430		4,379		4,522		4,066			6,158		570		162			751		—		1,349		434			26,821


Ending balance attributable to loans:
Individually evaluated for impairment		—		3		35		258			298		300		—			—		—		—		31			925
Collectively evaluated for impairment		4,430		4,376		4,487		3,808			5,860		270		162			751		—		1,349		403			25,896

	$	4,430		4,379		4,522		4,066			6,158		570		162			751		—		1,349		434			26,821


Loans:
Individually evaluated for impairment		1,849		581		3,335		5,638			7,345		1,946		—			3,722		521		—		85			25,022
Collectively evaluated for impairment		181,788		185,766		143,316		154,622			141,692		8,711		1,432			6,523		—		6,500		15,677			846,027

	$	183,637		186,347		146,651		160,260			149,037		10,657		1,432			10,245		521		6,500		15,762			871,049

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2011 and December 31, 2010.


	March 31, 2011
					Allowance for		Average				Cash Basis
	Unpaid Principal		Recorded		Loan Losses		Recorded		Interest Income		Interest Income
	Balance		Investment		Allocated		Investment		Recognized		Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial, financial, and agricultural:
Commerical	$	8		8		—		8		—		—
Financial		—		—		—		—		—		—
Agricultural		1,016		1,016		—		1,016		—		—
Equity lines		725		725		—		725		—		—
Other		—		—		—		—		—		—
Commercial real estate:
Owner occupied		293		293		—		334		—		—
Non Owner occupied		173		173		—		177		8		8
Residential real estate:
Secured by first liens		1,689		1,689		—		1,614		12		12
Secured by junior liens		46		46		—		46		—		—
Acquisition, development and construction:
Residential		73		73		—		73		—		—
Other		3,975		3,975		—		3,965		—		—
Consumer		—		—		—		—		—		—

		7,998		7,998		—		7,958		20		20

With an allowance recorded:
Commercial, financial, and agricultural:
Commerical		100		100		—		46		—		—
Financial		—		—		—		—		—		—
Agricultural		—		—		—		—		—		—
Equity lines		—		—		—		—		—		—
Other		—		—		—		—		—		—
Commercial real estate:
Owner occupied		288		288		3		290		2		2
Non Owner occupied		3,155		3,162		35		3,639		27		27
Residential real estate:
Secured by first liens		3,732		3,736		165		3,784		25		25
Secured by junior liens		167		167		93		168		1		1
Acquisition, development and construction:
Residential		1,199		1,199		131		1,346		3		3
Other		8,287		8,287		467		8,850		2		2
Consumer		85		85		31		87		—		—

		17,013		17,024		925		18,210		60		60


	$	25,011		25,022		925		26,168		80		80


	December 31, 2010
					Allowance for
	Unpaid Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial, financial, and agricultural:
Commerical	$	8		8		—
Financial		—		—		—
Agricultural		1,016		1,016		—
Equity lines		720		720		—
Other		—		—		—
Commercial real estate:
Owner occupied		390		390		—
Non Owner occupied		180		180		—
Residential real estate:
Secured by first liens		1,742		1,742		—
Secured by junior liens		—		—		—
Acquisition, development and construction:
Residential		636		636		—
Other		5,987		5,987		—
Consumer		—		—		—

		10,679		10,679		—

With an allowance recorded:
Commercial, financial, and agricultural:
Commerical		—		—		—
Financial		—		—		—
Agricultural		—		—		—
Equity lines		—		—		—
Other		—		—		—
Commercial real estate:
Owner occupied		129		129		3
Non Owner occupied		3,227		3,230		210
Residential real estate:
Secured by first liens		3,229		3,234		42
Secured by junior liens		—		—		—
Acquisition, development and construction:
Residential		156		156		—
Other		7,628		7,638		1,219
Consumer		—		—		—

		14,369		14,387		1,474


	$	25,048		25,066		1,474

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2011 and December 31, 2010.


	March 31, 2011
			Loans Past Due
			90 Days or More
	Nonaccrual		Still Accruing
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	176		—
Financial		—		—
Agricultural		1,249		—
Equity lines		1,752		—
Other		—		—
Commercial real estate:
Owner occupied		1,229		—
Non Owner occupied		2,518		—
Residential real estate:
Secured by first liens		4,309		—
Secured by junior liens		316		—
Acquisition, development and construction:
Residential		1,509		—
Other		12,366		—
Consumer		284		—

	$	25,708		—


	December 31, 2010
			Loans Past Due
			90 Days or More
	Nonaccrual		Still Accruing
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	190		—
Financial		—		—
Agricultural		1,250		—
Equity lines		1,136		—
Other		348		—
Commercial real estate:
Owner occupied		1,207		—
Non Owner occupied		2,586		—
Residential real estate:
Secured by first liens		4,551		69
Secured by junior liens		183		—
Acquisition, development and construction:
Residential		1,275		—
Other		10,678		—
Consumer		301		—

	$	23,705		69

The following tables present the aging of the recorded investment in past due loans as of March 31, 2011 and December 31, 2010 by class of loans.


	March 31, 2011
	30 - 89 Days		90 Days or		Nonaccrual		Total		Loans Not
	Past Due		More Past Due		Loans		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	153		—		176		329		116,213		116,542
Financial		—		—		—		—		3,506		3,506
Agricultural		598		—		1,249		1,847		13,130		14,977
Equity lines		107		—		1,752		1,859		39,597		41,456
Other		—		—		—		—		7,156		7,156
Commercial real estate:
Owner occupied		99		—		1,229		1,328		185,019		186,347
Non Owner occupied		120		—		2,518		2,638		144,006		146,644
Residential real estate:
Secured by first liens		2,031		—		4,309		6,340		143,779		150,119
Secured by junior liens		—		—		316		316		9,821		10,137
Acquisition, development and construction:
Residential		66		—		1,509		1,575		41,811		43,386
Other		178		—		12,366		12,544		122,462		135,006
Consumer		28		—		284		312		15,450		15,762

	$	3,380		—		25,708		29,088		841,950		871,038


	December 31, 2010
	30 - 89 Days		90 Days or		Nonaccrual		Total		Loans Not
	Past Due		More Past Due		Loans		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	170		—		190		360		117,786		118,146
Financial		—		—		—		—		3,588		3,588
Agricultural		—		—		1,250		1,250		12,940		14,190
Equity lines		214		—		1,136		1,350		41,687		43,037
Other		—		—		348		348		9,819		10,167
Commercial real estate:
Owner occupied		317		—		1,207		1,524		182,939		184,463
Non Owner occupied		521		—		2,586		3,107		139,888		142,995
Residential real estate:
Secured by first liens		2,417		69		4,551		7,037		140,238		147,275
Secured by junior liens		155		—		183		338		10,067		10,405
Acquisition, development and construction:
Residential		—		—		1,275		1,275		41,538		42,813
Other		121		—		10,678		10,799		128,800		139,599
Consumer		31		—		301		332		17,080		17,412

	$	3,946		69		23,705		27,720		846,370		874,090

Troubled Debt Restructurings:

The Company had troubled debt restructurings (TDRs) with a balance of $3,884 and $3,514 included in impaired loans at March 31, 2011 and December 31, 2010. The Company has allocated $115 and $80 of specific reserves to customers whose loan terms have been modified in TDRs as of March 31, 2011 and December 31, 2010. The Company is not committed to lend additional amounts as of March 31, 2011 and December 31, 2010 to customers with outstanding loans that are classified as TDRs. The following table presents TDRs as of March 31, 2011.


	March 31, 2011
			Pre-Modification		Post-Modification
	Number of		Outstanding		Outstanding
	Contracts		Recorded Investment		Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		—	$	—	$	—
Financial		—		—		—
Agricultural		—		—		—
Equity lines		—		—		—
Other		—		—		—
Commercial real estate:
Owner occupied		1		127		127
Non Owner occupied		5		2,116		2,098
Residential real estate:
Secured by first liens		5		1,506		1,497
Secured by junior liens		2		135		128
Acquisition, development and construction:
Residential		—		—		—
Other		—		—		—
Consumer		—		—		—

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company, through its originating account officer, places an initial credit risk rating on every loan. An annual review and analysis of loan relationships (irrespective of loan types included in the overall relationship) with total related exposure of $500 or greater is performed by the Credit Administration department in order to update risk ratings given current available information. The Company uses the following definitions for risk ratings.

Watch: Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows.


	March 31, 2011
	Pass		Watch		Substandard		Doubtful
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	103,029		6,629		6,884		—
Financial		—		3,506		—		—
Agricultural		10,157		2,583		2,237		—
Equity lines		37,737		1,730		1,989		—
Other		5,704		838		614		—
Commercial real estate:
Owner occupied		157,630		21,760		6,957		—
Non Owner occupied		121,762		18,234		6,648		—
Residential real estate:
Secured by first liens		128,541		13,073		8,505		—
Secured by junior liens		8,995		732		410		—
Acquisition, development and construction:
Residential		39,716		1,654		2,016		—
Other		95,663		10,956		28,387		—
Consumer		14,831		411		520		—

	$	723,765		82,106		65,167		—


	December 31, 2010
	Pass		Watch		Substandard		Doubtful
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	103,337		8,074		6,735		—
Financial		1,103		2,485		—		—
Agricultural		9,343		2,609		2,238		—
Equity lines		39,144		1,915		1,978		—
Other		8,893		926		348		—
Commercial real estate:
Owner occupied		157,155		22,329		4,979		—
Non Owner occupied		119,160		16,579		7,256		—
Residential real estate:
Secured by first liens		124,261		14,837		8,177		—
Secured by junior liens		9,418		708		279		—
Acquisition, development and construction:
Residential		38,374		2,721		1,718		—
Other		92,514		23,285		23,800		—
Consumer		16,247		567		598		—

	$	718,949		97,035		58,106		—

Note 5 — Fair Value Measurements

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:


Level 1:		Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:		Significant other observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3:		Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In determining the appropriate levels, the Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Mortgage Banking Derivatives: The fair value of mortgage banking derivatives is determined by individual third party sales contract prices for the specific loans held at each reporting period end (Level 2 inputs). The fair value adjustment is included in other assets.

Loans Held for Sale: Loans held for sale are carried at fair value, as determined by outstanding commitments, from third party investors (Level 2).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Investments in Tax Credits: The fair values for tax credits are measured on a recurring basis and are based upon total credits and deductions remaining to be allocated and total estimated credits and deductions to be allocated (Level 3 inputs).

Other Real Estate Owned: The fair value of other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management may adjust the appraised value for estimated costs to sell. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring Basis

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy as of March 31, 2011 and December 31, 2010.


			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	March 31,		Identical Assets		Observable Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Available-for-sale securities
Obligations of U.S. Government agencies	$	204,004		38,510		165,494		—
Obligations of states and political subdivisions		71,157		—		71,157		—
Mortgage-backed securities
U.S. GSE’s MBS — residential		128,657		—		128,192		465
U.S. GSE’s CMO		116,837		—		116,837		—
Other CMO		2,652		—		507		2,145
Corporate bonds		34,999		—		32,706		2,293

Total available-for-sale securities	$	558,306		38,510		514,893		4,903


Tax credits		336		—		—		336

Loans held for sale		10,700		—		10,700		—

Mortgage banking derivatives		19		—		19		—


Total	$	569,361		38,510		525,612		5,239


			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Available-for-sale securities
Obligations of U.S. Government agencies	$	200,917		31,405		169,512		—
Obligations of states and political subdivisions		64,118		—		64,118		—
Mortgage-backed securities
U.S. GSE’s MBS — residential		141,725		—		141,216		509
U.S. GSE’s CMO		140,334		985		139,349		—
Other CMO		3,073		—		663		2,410
Corporate bonds		36,133		—		25,395		10,738
Equity securities		2		2		—		—

Total available-for-sale securities	$	586,302		32,392		540,253		13,657


Tax credits		356		—		—		356

Loans held for sale		12,775		—		12,775		—

Mortgage banking derivatives		2		—		2		—


Total	$	599,435		32,392		553,030		14,013

During the three months ended March 31, 2011, three U.S. agency securities with a market value of $8,379 were transferred out of Level 2 and into Level 1. Eight corporate securities with a market value of $7,278 were transferred out of Level 3 and into Level 2 based on observable market data for these securities due to increased market activity for these securities. The tables below present a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2011 and 2010.


	Fair Value Measurements Using Significant Unobservable Inputs
	(Level 3)
				Available-for-sale
	Tax credits			Securities			Total
	(Dollars in thousands)

Beginning balance, January 1, 2011	$	356			13,657			14,013
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales		—			—			—
Other-than-temporary impairment		—			(62	)		(62	)
Amortization of tax credit investment		(20	)		—			(20	)
Included in other comprehensive income		—			(1,414	)		(1,414	)
Purchases, sales, issuances and settlements
Purchases		—			—			—
Sales		—			—			—
Issuances		—			—			—
Settlements		—			—			—
Transfers into Level 3		—			—			—
Transfers out of Level 3		—			(7,278	)		(7,278	)


Ending balance, March 31, 2011	$	336			4,903			5,239


	Fair Value Measurements Using Significant Unobservable Inputs
	(Level 3)
				Available-for-sale
	Tax credits			Securities		Total
	(Dollars in thousands)

Beginning balance, January 1, 2010	$	435			14,365		14,800
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales		—			—		—
Other-than-temporary impairment		—			—		—
Amortization of tax credit investment		(20	)		—		(20	)
Included in other comprehensive income		—			1,513		1,513
Purchases, sales, issuances and settlements		—			—		—
Transfers into Level 3		—			—		—
Transfers out of Level 3		—			—		—


Ending balance, March 31, 2010	$	415			15,878		16,293

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2011 and December 31, 2010 are summarized below.


			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	March 31,		Identical Assets		Observable Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans
Commercial, financial, and agricultural	$	100		—		—		100
Real estate:
Commercial		3,405		—		—		3,405
Residential		3,641		—		—		3,641
Acquisition, development and construction		8,888		—		—		8,888
Consumer installment		54		—		—		54

Total impaired loans	$	16,088		—		—		16,088


Other real estate owned		7,565		—		—		7,565


Total	$	23,653		—		—		23,653


			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans
Commercial, financial, and agricultural	$	—		—		—		—
Real estate:
Commercial		3,143		—		—		3,143
Residential		3,187		—		—		3,187
Acquisition, development and construction		6,565		—		—		6,565
Consumer installment		—		—		—		—

Total impaired loans	$	12,895		—		—		12,895


Other real estate owned		7,751		—		—		7,751


Total	$	20,646		—		—		20,646

The following represents impairment charges recognized during the period:

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $17,013, with a valuation allowance of $925, resulting in an additional provision for loan losses of $1,610 for the three months ended March 31, 2011, respectively. Impaired loans that are not carried at fair value had a carrying amount of $7,998 at March 31, 2011.

As of December 31, 2010, impaired loans had a carrying amount of $14,369, with a valuation allowance of $1,474, resulting in an additional provision for loan losses of $6,831 for the year ending 2010. Impaired loans that are not carried at fair value had a carrying amount of $10,679 at December 31, 2010.

Other real estate owned, which is carried at lower of cost or fair value, was $7,565 which consisted of the outstanding balance of $9,779, less a valuation allowance of $2,214, resulting in a write down of $113 for the three months ended March 31, 2011.

As of December 31, 2010, other real estate owned was $7,751 which consisted of the outstanding balance of $9,866, less a valuation allowance of $2,115, resulting in a write down of $1,909 for the year ending 2010.

Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value is required. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather a good-faith estimate of the fair value of financial instruments held by the Company. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

	*(a)*		*Cash and Cash Equivalents*

			Fair value equals the carrying value of such assets due to their nature.

	*(b)*		*Loans, net*

			The fair value of loans is calculated using discounted cash flows by loan type. The discount rate used to determine the present value of the loan portfolio is an estimated market rate that reflects the credit and interest rate risk inherent in the loan portfolio without considering widening credit spreads due to market illiquidity. The estimated maturity is based on the Company’s historical experience with repayments adjusted to estimate the effect of current market conditions. The carrying amount of related accrued interest receivable approximates its fair value and is not disclosed. The carrying amount of real estate loans originated for sale approximates their fair value. The allowance for loan losses is considered a reasonable discount for credit risk.

	*(c)*		*Deposits*

			Fair values for certificates of deposit have been determined using discounted cash flows. The discount rate used is based on estimated market rates for deposits of similar remaining maturities. The carrying amounts of all other deposits, due to their short-term nature, approximate their fair values. The carrying amount of related accrued interest payable approximates its fair value and is not disclosed.

	*(d)*		*Securities Sold Under Repurchase Agreements*

			Fair value approximates the carrying value of such liabilities due to their short-term nature.

	*(e)*		*Advances from Federal Home Loan Bank*

			The fair value of the Federal Home Loan Bank (“FHLB”) advances is obtained from the FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the Company for debt of similar remaining maturities and collateral terms.

	*(f)*		*Subordinated debentures*

			The fair value for subordinated debentures is calculated based upon current market spreads to LIBOR for debt of similar remaining maturities and collateral terms.

	*(g)*		*Commitments*

			The difference between the carrying values and fair values of commitments to extend credit are not significant and are not disclosed.

The carrying amounts and estimated fair values of the Company’s financial instruments at March 31, 2011 and December 31, 2010 are as follows:


	March 31, 2011
	Carrying		Estimated
	amount		fair value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	125,371		125,371
Loans, net		854,896		854,899
Financial liabilities:
Deposits with stated maturities		468,361		472,515
Deposits without stated maturities		969,815		969,815
Securities sold under repurchase agreements		610		610
Advances from FHLB		60,000		63,975
Subordinated debentures		22,947		15,025


	December 31, 2010
	Carrying		Estimated
	amount		fair value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	65,115		65,115
Loans, net		860,213		858,505
Financial liabilities:
Deposits with stated maturities		487,810		491,867
Deposits without stated maturities		922,927		922,927
Securities sold under repurchase agreements		818		818
Advances from FHLB		60,000		64,615
Subordinated debentures		22,947		14,978

Note 6 — Comprehensive Income

Other comprehensive income for the Company consists of changes in net unrealized gains and losses on investment securities available-for-sale. Net income of $2,302 coupled with a $952 change in other comprehensive loss for the quarter resulted in total comprehensive income of $1,350 for the three months ended March 31, 2011 compared to total comprehensive income of $3,790 for the three months ended March 31, 2010.


	Three Months Ended
	March 31,
	2011			2010
	(Dollars in thousands)

Net income	$	2,302		$	1,255
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period		(1,472	)		4,131
Reclassification adjustment for gains, net of OTTI included in net income		(86	)		(13	)
Tax effect		606			(1,583	)

Other comprehensive income (loss)		(952	)		2,535


Total comprehensive income	$	1,350		$	3,790

Note 7 — Dividends

The Company suspended the payment of quarterly cash dividends on the company’s 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.


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

(Dollar amounts are expressed in thousands unless otherwise noted)

Overview

Southeastern Bank Financial Corporation (the “Company”) operates two wholly-owned subsidiaries in the Augusta-Richmond County, GA-SC metropolitan area — Georgia Bank & Trust Company (“GB&T”) and Southern Bank & Trust (“SB&T”), a South Carolina State Bank (collectively, the “Banks”). GB&T was organized by a group of local citizens and commenced business on August 28, 1989, with one branch location. Today, it is Augusta’s largest community banking company operating nine full service branches in Augusta, Martinez, and Evans, Georgia. Mortgage origination offices are located in Augusta and Savannah, Georgia. SB&T was organized by the Company during 2005 and 2006 and opened its main office on September 12, 2006. Today it operates three full service branches in North Augusta and Aiken, South Carolina. The Company’s Operations Center is located in Martinez, Georgia and services both subsidiaries.

The Company’s primary market 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 2009 population of the Augusta-Richmond County, GA-SA MSA was 539,154, 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.

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 primary market area, Augusta-Richmond County, GA-SC metropolitan area, the Company had 18.62% of all deposits and was the second largest depository institution at June 30, 2010, as cited from the Federal Deposit Insurance Corporation’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 life-long relationships with its customers, employees, shareholders, and the communities it serves.

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 during the first three months of 2011 as compared to the first three months of 2010 and is due primarily to decreased loan volume. Interest income on investment securities increased primarily due to a significantly larger investment portfolio but the increase was limited by declining yields on the portfolio. The average portfolio yield decreased due to declining market interest rates which caused higher yielding securities to be called. Decreases in non-sufficient funds (“NSF”) income on retail checking accounts, due primarily to decreased economic activity, were offset in part by increases in ATM/Debit card income which resulted in a net decrease in service charges and fees on deposits for the first three months of 2011. For the three month period gain on sales of loans decreased and resulted primarily from decreased mortgage refinancing activity during the first three months of the year. Investment securities gains increased on a net basis during the first three months of 2011 as compared to the same period last year due in part to selected sales of higher duration securities to reduce exposure to rising interest rates and a settlement of $149 with an institution regarding premium amortization on certain bonds purchased in 2010.

Table 1 — Selected Financial Data


	March 31,			December 31,			March 31,
	2011			2010			2010
	(Dollars in thousands)

Assets	$	1,634,802		$	1,607,105		$	1,497,359
Loans		871,017			874,095			919,777
Deposits		1,438,176			1,410,737			1,290,897

Annualized return on average total assets		0.58	%		0.44	%		0.34	%
Annualized return on average equity		9.37	%		6.81	%		5.31	%

The Company continues to focus on the net interest margin, regulatory capital levels, liquidity management, asset quality and risk mitigation. Asset growth has been driven by a $27,439 increase in deposits during the quarter and $147,279 over the prior year, which has created a larger base of core deposits with less reliance on more volatile funding sources. In addition, loan balances have continued to decline as demand has remained low. As a result, investment portfolio balances have increased in order to obtain an improvement in net interest income.

Annualized return on average total assets and annualized return on average equity have improved in 2011 as compared to 2010. The increased returns were due primarily to increased net interest income and somewhat decreased loan loss provisions in 2011. Net income for the three months ended March 31, 2011 was $2,302 compared to $1,255 for the same period in 2010. The effects of the economic downturn continue to negatively affect financial results primarily through a continued elevated level of provision for loan losses. The Company suspended the payment of dividends indefinitely 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 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 interest income in a ramp up and down annually 300 basis points (3.00%) scenario and as it applies to economic value of equity in a shock up and down 300 basis points (3.00%) scenario. The Company monitors operating expenses through responsibility center budgeting.

Forward-Looking Statements

Southeastern Bank Financial Corporation may, from time to time, make written or oral forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission (the “Commission”) and its reports to shareholders. Statements made in such documents, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The Company’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including unanticipated changes in the Company’s local economies, the national economy, governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values and securities portfolio values; difficulties in interest rate risk management; the effects of competition in the banking business; difficulties in expanding the Company’s business into new markets; changes in governmental regulation relating to the banking industry, including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act; failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans; and other factors. The Company cautions that such factors are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, the Company.

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, 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 probable 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; and (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.

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, mortgage banking derivatives and other real estate owned. At March 31, 2011 and December 31, 2010 the percentage of total assets measured at fair value was 36.27% and 38.58% respectively. The majority of assets carried at fair value are based on either quoted market prices or market prices for similar instruments. At March 31, 2011 4.87% of assets measured at fair value were based on significant unobservable inputs. This represents approximately 1.77% of the Company’s total assets. See Note 5 “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

Assets acquired through or instead of loan foreclosure are initially recorded at lower of cost or fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Costs related to the development and improvement of property are capitalized.

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. As of March 31, 2011, the Company had approximately $4,903 of available-for-sale securities, which is approximately 0.30% 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

Net income for the first three months of 2011 was $2,302, an increase of $1,047 compared with net income of $1,255 for the first three months of 2010. The increase in net income was primarily a result of an increase in net interest income of $1,677 due primarily to an increased level of investments coupled with declining costs of deposits.

Noninterest income increased a net of $49 or 1.23% for the three months ended March 31, 2011 and resulted from an increase in retail investment income and investment securities gains offset in part by decreased gain on sales of loans and a net impairment loss recognized during the quarter.

Gain on sales of loans decreased $146 or 10.79% as mortgage production decreased in the first quarter of 2011.

Retail investment income increased $122 or 36.42% due to increased brokerage activity and improvement in assets under management. Net investment securities gains year to date are $148 as compared to net securities gains of $13 in 2010.

Noninterest expense totaled $9,775 for the three months ended March 31, 2011, an increase of $343 or 3.64% compared to the same period ended March 31, 2010. Notable changes included an increase in FDIC insurance of $76 due to higher deposit balances, an increase in other real estate losses of $180 due to $95 in losses for the three months ended March 31, 2011 compared to a gain of $85 in 2010. This included a provision for loss of $113 and $255 in 2011 and 2010 on certain properties based on updated appraisals.

Table 2 — Selected Balance Sheet Data


	March 31,		December 31,		Variance
	2011		2010		Amount			%
	(Dollars in thousands)
Cash, due from banks and interest-bearing deposits	$	125,371	$	65,115	$	60,256			92.5	%
Investment securities		558,306		586,612		(28,306	)		(4.8	%)
Loans		871,017		874,095		(3,078	)		(0.4	%)
Other real estate owned		7,565		7,751		(186	)		(2.4	%)
Assets		1,634,802		1,607,105		27,697			1.7	%
Deposits		1,438,176		1,410,737		27,439			1.9	%
Securities sold under repurchase agreements		610		818		(208	)		(25.4	%)
Advances from Federal Home Loan Bank		60,000		60,000		—			0.0	%
Liabilities		1,533,455		1,507,147		26,308			1.7	%
Stockholders’ equity		101,347		99,958		1,389			1.4	%

Table 2 highlights significant changes in the balance sheet at March 31, 2011 as compared to December 31, 2010. Total assets increased $27,697 and the balance sheet changes primarily reflect a significant increase in deposits coupled with a decline in loans and investment securities and a corresponding increase in cash and cash equivalents. Cash, due from banks and interest-bearing deposits in other banks increased $60,256 or 92.54% from $65,115 at December 31, 2010 to $125,371 at March 31, 2011, $43,576 of which was held at the Federal Reserve Bank. The Company has continued to maintain a relatively high level of liquid funds in light of current economic conditions and volatility in the banking industry but has elected to invest a portion of these funds and funds obtained through deposit growth and loan repayments into the investment portfolio. Loan demand was weak during the first three months of 2011 and resulted in a decrease in gross loans of $3,078 or 0.35%. The decreased demand caused normal principal repayments to exceed the originations of new loans during the year. Investment securities decreased $27,996 or 4.77% during the quarter primarily to sales of high duration securities for interest rate risk management purposes and certain called bonds.

The increase in deposits was net of the repayment of approximately $10,753 in brokered deposits which totaled $172,979 at March 31, 2011 compared to $183,732 at December 31, 2010. Retail time deposits decreased $19,449. These decreases were offset by savings accounts which increased $24,052, noninterest-bearing deposits which increased $15,081 and NOW accounts which increased $7,042.

The annualized return on average assets for the Company was 0.58% for the three months ended March 31, 2011, compared to 0.34% for the same period last year.

The annualized return on average stockholders’ equity was 9.37% for the three months ended March 31, 2011, compared to 5.31% for the same period last year.

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, annualized average yields earned and rates paid on those respective balances, and the actual 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.

Table 3 — Average Balances, Income and Expenses, Yields and Rates


	Three Months Ended March 31, 2011							Three Months Ended March 31, 2010
			Annualized							Annualized
			Average			Amount				Average			Amount
	Average		Yield or			Paid or		Average		Yield or			Paid or
	Amount		Rate			Earned		Amount		Rate			Earned
	(Dollars in thousands)
Interest-earning assets:
Loans	$	880,117		5.76	%	$	12,628	$	940,030		5.70	%	$	13,343
Investment securities
Taxable		529,588		2.92	%		3,863		311,253		4.10	%		3,187
Tax-exempt		42,777		4.27	%		457		21,529		4.31	%		232
Federal funds sold		—		0.00	%		—		7,300		0.16	%		3
Interest-bearing deposits in other banks		35,265		0.54	%		47		85,446		0.42	%		89

Total interest-earning assets	$	1,487,747		4.58	%	$	16,995	$	1,365,558		4.95	%	$	16,854


Interest-bearing liabilities:
Deposits	$	1,280,371		1.29	%	$	4,080	$	1,168,891		1.86	%	$	5,367
Securities sold under repurchase agreements		672		1.19	%		2		3,058		1.47	%		11
Other borrowings		82,947		3.49	%		714		100,307		3.86	%		954

Total interest-bearing liabilities	$	1,363,990		1.43	%	$	4,796	$	1,272,256		2.02	%	$	6,332


Net interest margin/income:				3.28	%	$	12,199				3.07	%	$	10,522

Net interest income increased $1,677 (15.94%) during the three month period as compared to the same period in 2010. Loan interest income decreased $715 (5.36%) in the three month period primarily as a result of decreased volume offset in part by slightly higher yields. Deposit interest expense decreased $1,287 (23.98%) in the three month period primarily as a result of declining costs from repricing deposits offset in part by the continued growth of account balances. Annualized loan yields for the year increased slightly from 5.70% to 5.76% and were somewhat impacted by decreases in levels of nonaccrual loans for the comparable periods. Nonaccrual loans resulted in the reversal of $68 in interest income compared to $338 in 2010. Due to the low interest rate environment, the annualized average rate of interest bearing liabilities decreased from 2.02% to 1.43% at March 31, 2011 compared to March 31, 2010.

The Company’s net interest margin for the three months ended March 31, 2011 was 3.28% as compared to 3.07% for the three months ended March 31, 2010. The increase in the net interest margin for the three month period was primarily impacted by several factors, including decreased levels of nonaccrual loans, an increase in the average taxable investment portfolio of $218,335 (70.15%), a decrease in average loans of $59,913 (6.37%) and an increase in average deposits of $111,480 (9.54%).

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 or decreases 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 tables present the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to changes attributable to change in volume (change in volume multiplied by prior rate), changes attributable to change in rate (change in rate multiplied by prior volume), and changes in rate/volume (change in rate multiplied by change in volume).

Table 4 — Rate/Volume Analysis


	Three Months Ended
	March 31, 2011 compared to March 31, 2010
	Increase (Decrease) due to
	Volume			Rate			Combined			Total
	(Dollars in thousands)
Interest-earning assets:
Loans		(851	)		145			(9	)		(715	)
Investment securities
Taxable		2,236			(917	)		(643	)		676
Tax-exempt		229			(2	)		(2	)		225
Federal funds sold		(3	)		(3	)		3			(3	)
Interest-bearing deposits in other banks		(52	)		25			(15	)		(42	)

Total interest-earning assets		1,559			(752	)		(666	)		141


Interest-bearing liabilities:
Deposits		512			(1,642	)		(157	)		(1,287	)
Securities sold under repurchase agreements		(9	)		(2	)		2			(9	)
Other borrowings		(165	)		(91	)		16			(240	)

Total interest-bearing liabilities		338			(1,735	)		(139	)		(1,536	)


Net change in net interest income										$	1,677

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 probable incurred losses in the loan portfolio. The provision for loan losses totaled $3,240 for the three months ended March 31, 2011 compared to $3,288 for the three months ended March 31, 2010. See “Allowance for Loan Losses” for further analysis of the provision for loan losses.

Noninterest Income

Table 5 — Noninterest Income


	Three Months Ended
	March 31,				Variance
	2011		2010		Amount			%
	(Dollars in thousands)

Service charges and fees on deposits	$	1,578	$	1,595	$	(17	)		(1.1	%)
Gain on sales of loans		1,207		1,353		(146	)		(10.8	%)
Gain on sale of fixed assets		17		27		(10	)		(37.0	%)
Investment securities gains, net of other-than-temporary impairment		86		13		73			561.5	%
Retail investment income		457		335		122			36.4	%
Trust services fees		273		287		(14	)		(4.9	%)
Increase in cash surrender value of bank-owned life insurance		218		229		(11	)		(4.8	%)
Miscellaneous income		213		161		52			32.3	%

Total noninterest income	$	4,049	$	4,000	$	49			1.2	%

Noninterest income increased $49 (1.23%) during the three month period as compared to the same period in 2010. The most significant changes for the three month period were increases in retail investment income, net investment securities gains and miscellanous income, which were offset in part by decreases in gain on sales of loans and services charges and fees on deposits.

Noninterest Expense

Table 6 — Noninterest Expense


	Three Months Ended
	March 31,						Variance
	2011			2010			Amount			%
	(Dollars in thousands)
Salaries and other personnel expense	$	5,564		$	5,494		$	70			1.3	%
Occupancy expenses		1,115			1,171			(56	)		(4.8	%)
Marketing & business development		334			293			41			14.0	%
Processing expense		412			366			46			12.6	%
Legal and professional fees		393			432			(39	)		(9.0	%)
Data processing expense		349			345			4			1.2	%
FDIC insurance		617			541			76			14.0	%
Gain on sale of other real estate		(18	)		(340	)		322			(94.7	%)
Other real estate valuation allowance		113			255			(142	)		(55.7	%)
Other operating expenses		896			875			21			2.4	%

Total noninterest expense	$	9,775		$	9,432		$	343			3.6	%

Salaries and other personnel expense increased $70 (1.3%) during the three month period as compared to the same period in 2010. Increased incentive accruals, salary continuation expense and merit increases were mostly offset by lower full time employees (FTE’s). FTE’s decreased from 352 at March 31, 2010 to 341 at March 31, 2011.

Occupancy expenses decreased $56 (4.8%) during the first three months of 2011 and were primarily due to decreased depreciation expense as a result of certain assets becoming fully depreciated.

Other real estate expenses increased $180 and resulted from a decreased gain on sale of OREO in the first three months of 2011 as compared to 2010. In addition, updated appraisals in 2011 on other real estate owned resulted in a valuation allowance on other real estate owned of $113 as compared to $255 in 2010.

FDIC insurance expense increased $76 (14.0%) and was due to higher balances of insured deposits. Processing expense increased $46 (12.6%) and was due to an increase in ATM processing fees in the three months ended 2011 as compared to the same period ended 2010.

Income Taxes

The Company recognized income tax expense of $931 for the three months ended March 31, 2011 as compared to an income tax expense of $547 for the same period in 2010. The significant increase in pretax income coupled with a higher proportion of nontaxable interest income resulted in an increase in income tax expense and slightly lower effective income tax rate for the comparable three month periods. The effective income tax rate for the three months ended March 31, 2011 was 28.80%.

At March 31, 2011, the Company maintains net deferred tax assets of $15,683. ASC 740-30-25 provides accounting guidance for determining when a company is required to record a valuation allowance on its deferred tax assets. A valuation allowance is required for deferred tax assets if, based on available evidence, it is more likely than not that all or some portion of the asset may not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the deferred tax asset. In making this assessment, all sources of taxable income available to realize the deferred tax asset are considered including taxable income in prior carry-back years, future reversals of existing temporary differences, tax planning strategies and future taxable income exclusive of reversing temporary differences and carryforwards. Based on management’s assessment, no valuation allowance was deemed necessary at March 31, 2011.

The Company has no net operating loss carryforwards. The Company was able to carryback both the federal and state net operating losses (NOLs) sustained in 2009. These carrybacks generated a federal tax refund of $2,755 that was received in the first quarter of 2010 and a state tax refund of $495 that has not been received as of March 31, 2011.

Loans

The following table presents the composition of the Company’s loan portfolio as of March 31, 2011 and December 31, 2010.

Table 7 — Loan Portfolio Composition


	March 31, 2011						December 31, 2010
	Amount			%			Amount		%
	(Dollars in thousands)
Commercial financial and agricultural	$	183,637			21.08	%	$	189,128		21.64	%

Real estate
Commercial		332,991			38.23	%		327,458		37.46	%
Residential		160,256			18.40	%		157,680		18.04	%
Acquisition, development and construction		178,392			20.48	%		182,412		20.87	%

Total real estate		671,639			77.11	%		667,550		76.37	%

Consumer
Direct		14,855			1.70	%		15,643		1.79	%
Indirect		741			0.09	%		899		0.10	%
Revolving		166			0.02	%		870		0.10	%

Total consumer		15,762			1.81	%		17,412		1.99	%

Deferred loan origination costs (fees)		(21	)		(0.00	%)		5		0.00	%

Total	$	871,017			100.00	%	$	874,095		100.00	%

At March 31, 2011, the loan portfolio is comprised of 77.11% real estate loans. Commercial, financial and agricultural loans comprise 21.08%, and consumer loans comprise 1.81% of the portfolio.

Commercial real estate comprises 38.23% of the loan portfolio and consist of both non-owner occupied and owner occupied properties where the operations of the commercial entity provide the necessary cash flow to service the debt. For this portion of the real estate loan portfolio, repayment is not dependent upon the sale of the real estate held as collateral. Construction and development loans comprise 20.48% of the real estate loan portfolio and the Company has recognized significant losses in this portfolio. The Company carefully monitors the loans in this category since the repayment of these loans is generally dependent upon the sale of the real estate in the normal course of business and can be impacted by national and local economic conditions. New construction and absorption of existing real estate inventory in the Company’s primary market area of the Augusta-Richmond County, GA-SC MSA have slowed and prices have declined but less than the national rate. Conditions on certain loans the Company has made in markets outside the Company’s primary market area are outlined in Table 10. The residential category, 18.40% of the portfolio, represents those loans that the Company chooses to maintain in its portfolio rather than selling into the secondary market for marketing and competitive reasons and commercial loans secured by residential real estate.

The Company has no large loan concentrations to individual borrowers. Unsecured loans at March 31, 2011 totaled $14,139.

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 Banks do not generally establish loan funded interest reserves on ADC loans; however, the Company’s loan portfolio includes six loans with interest reserves at March 31, 2011. The following tables detail the loans and accompanying interest reserves as of March 31, 2011 and December 31, 2010.


	March 31, 2011
			Reserves
	Balance		Original		Advanced		Remaining
	(Dollars in thousands)

Loan 1	$	4,154		179		179		—
Loan 2		10,072		300		300		—
Loan 3		2,145		255		255		—
Loan 4		452		30		30		—
Loan 5		161		10		10		—
Loan 6		1,111		81		81		—


	December 31, 2010
			Reserves
	Balance		Original		Advanced		Remaining
	(Dollars in thousands)

Loan 1	$	4,166		179		179		—
Loan 2		10,135		300		300		—
Loan 3		2,234		255		255		—
Loan 4		452		30		30		—
Loan 5		162		10		10		—
Loan 6		1,114		81		81		—

Underwriting for ADC loans with interest reserves follows the same process as those loans without reserves. In order for the Banks 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. Management 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 renewed; 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.

Loan Review and Classification Process

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 or she 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 their 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 on 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 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.

Nonperforming Assets

Non-performing assets include nonaccrual loans, loans past due 90 days or more, restructured loans and other real estate owned. Table 8 shows the current and prior period amounts of non-performing assets. Non-performing assets were $35,884 at March 31, 2011, compared to $34,000 at December 31, 2010 and $37,730 at March 31, 2010. Significant changes from December 2010 to March 2011 include a $2,003 increase in nonaccrual loans of which $1,922 was related to ADC loans and a $67 increase in restructured loans still accruing.

There were no loans past due 90 days or more and still accruing at March 31, 2011 and March 31, 2010 compared to $69 at December 31, 2010.

Troubled debt Restructurings (TDRs) are troubled loans on which the original terms have been modified in favor of the borrower or either principal or interest has been forgiven due to deterioration in the borrower’s financial condition. There were $3,884 in TDRs at March 31, 2011, of which $1,273 were on nonaccrual status. TDRs totaled $3,514 at December 31, 2010, of which $970 were on nonaccrual status. There were no TDRs at March 31, 2010.

Table 8 — Non-Performing Assets


	March 31, 2011			December 31, 2010			March 31, 2010
	(Dollars in thousands)
Nonaccrual loans:
Commercial financial and agricultural	$	3,177		$	2,924		$	1,145
Real Estate:
Commercial		3,747			3,793			9,314
Residential		4,625			4,734			3,757
Acquisition, development and construction		13,875			11,953			17,113
Consumer		284			301			536

Total Nonaccrual loans		25,708			23,705			31,865

Restructured loans (1)		2,611			2,544			—
Other real estate owned		7,565			7,751			5,865

Total Non-performing assets	$	35,884		$	34,000		$	37,730


Loans past due 90 days or more and still accruing interest	$	—		$	69		$	—


Non-performing assets to total assets		2.20	%		3.89	%		2.52	%

Non-performing assets to total loans and OREO		4.08	%		3.86	%		4.08	%

Allowance for loan loss to total nonaccrual loans		104.33	%		112.45	%		72.61	%


(1)		Restructured loans on nonaccrual status at period end are included under nonaccrual loans in the table.

The ratio of non-performing assets to total loans and other real estate was 4.08% at March 31, 2011 compared to 3.86% at December 31, 2010 and 4.08% at March 31, 2010. The ratio of allowance for loan losses to total nonaccrual loans was 104.33% at March 31, 2011 compared to 112.45% at December 31, 2010 and 72.61% at March 31, 2010. The resolution of non-performing assets continues to be a priority of management.

The following table presents a roll forward of other real estate owned for the three month period ended March 31, 2011 and 2010, respectively.

Table 9 — Other Real Estate Owned


	2011			2010
	(Dollars in thousands)

Beginning balance, January 1	$	7,751			7,974
Additions		139			2,230
Increase in valuation allowance		(113	)		(255	)
Sales		(230	)		(4,424	)
Net gain on sale of OREO		18			340

Ending balance, March 31	$	7,565			5,865

The following table provides details of other real estate owned as of March 31, 2011 and 2010, respectively.


	2011			2010
	(Dollars in thousands)
Other Real Estate:
Single family developed lots	$	1,938		$	1,651
Residential land		196			—
1-4 Family residential		1,692			284
Commercial real estate		3,126			1,299
Condominums		2,827			2,886

		9,779			6,120

Valuation allowance		(2,214	)		(255	)

	$	7,565		$	5,865

The increase in other real estate owned is due to the continuing process of resolving problem loans. In the first three months of 2011, proceeds from sales of other real estate totaled $230. In addition, there was a $113 increase to the valuation allowance as a result of declining property values. The net decrease in nonaccrual loans from March 31, 2010 reflects a significant decline in ADC properties that the Company has been actively addressing over the past year. A significant portion of nonaccrual loans are collateral dependent ADC and Residential real estate loans. The following table provides further information regarding the Company’s nonaccrual loans.

Nonaccrual

Appraisal

Appraised

Balance

Originated

Date

Trigger

Collateral

Allowance

Method

Date

Value

(Dollars in thousands)

1-4 Family Residential

1,086

05/08-06/08

12/14/10

financial condition

houses & land

—

collateral value

03/11

1,450

ADC Loan — Savannah, Georgia

1,604

09/30/08

05/06/10

delinquency

lots & land

300

collateral value

06/10

2,110

ADC Loan — CSRA

1,009

03/07-04/08

11/30/09

delinquency

lots & land

—

collateral value

03/11

1,075

1-4 Family Residential

982

01/08-09/08

11/09-09/10

delinquency

houses

—

collateral value

03/11

1,843

Farmland & Equity lines

1,163

09/18/08

11/10-12/10

financial condition

house & land

—

collateral value

11/10 - 12/10

2,328

ADC Loan — CSRA

945

06/07-12/10

03/29/11

financial condition

lots & land

325

collateral value

03/10 - 12/10

1,413

1-4 Family Residential

805

04/19/07

06/21/10

financial condition

house

collateral value

08/10

895

ADC Loan — CSRA

2,908

8/06-11/07

08/17/09

delinquency

lots & land

—

collateral value

09/10 - 03/11

5,726

ADC Loan — Athens, Georgia

934

09/07/07

12/16/10

financial condition

lots & land

—

collateral value

03/11

1,038

1-4 Family Residential

863

02/07-05/09

10/10-03/11

financial condition

houses

collateral value

01/08 - 03/11

1,128

ADC Loan — Athens, Georgia

1,974

08/06-01/07

01/28/09

delinquency

land & townhomes

—

collateral value

02/09 - 09/10

2,255

ADC Loan — Georgia Loan Participation

1,500

03/29/11

financial condition

land

—

collateral value

12/09

2,600

15,773

Other, net

9,935

Nonaccrual loans at March 31, 2011

25,708

Allowance for Loan Losses

The allowance for loan losses represents an allocation for the estimated amount of probable incurred losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with particular emphasis on impaired, non-accruing, past due, and other loans that management believes require special attention. The determination of the allowance for loan losses is considered a critical accounting estimate of the Company. See “Critical Accounting Estimates.”

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may advise additions to the allowance based on 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.

Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based upon management’s analysis of risk in the loan portfolio. Loans determined to be uncollectible are charged to the allowance for loan losses and subsequent recoveries are added to the allowance. A provision for losses in the amount of $3,240 was charged to expense for the quarter ended March 31, 2011 compared to $3,288 for the 2010 quarter.

Significant portions of the overall level of losses in 2011 relate to the charge off of specific reserve allowances on impaired loans. The following table provides selected asset quality information related to the acquisition, development and construction loan portfolio as of March 31, 2011 and December 31, 2010.

Table 10 — Acquisition Development and Construction Loans


	March 31,			December 31,
	2011			2010
	(Dollars in thousands)

CSRA — primary market area
Period-end loans	$	149,037		$	148,570
Impaired loans		7,345			4,492
Other classified/watch rated loans		19,973			27,719
Charge-offs % (annualized)		0.31	%		2.20	%
Specific reserve allowance / Impaired loans		4.06	%		3.47	%
General reserve allowance / Loans not impaired %		4.14	%		3.43	%
Allowance / Charge-offs		13.50			1.56

Savannah, Georgia
Period-end loans	$	10,657		$	10,985
Impaired loans		1,946			2,066
Other classified/watch rated loans		493			638
Charge-offs % (annualized)		0.00	%		13.32	%
Specific reserve allowance / Impaired loans		15.42	%		8.47	%
General reserve allowance / Loans not impaired %		3.10	%		3.13	%
Allowance / Charge-offs		0			0.31

Athens, Georgia
Period-end loans	$	10,245		$	11,178
Impaired loans		3,722			4,193
Other classified/watch rated loans		1,767			1,439
Charge-offs % (annualized)		19.37	%		3.38	%
Specific reserve allowance / Impaired loans		0.00	%		0.00	%
General reserve allowance / Loans not impaired %		11.51	%		11.40	%
Allowance / Charge-offs		0.38			2.11

ADC Participations — Georgia
Period-end loans	$	6,500		$	6,500
Impaired loans		—			—
Other classified/watch rated loans		6,500			6,500
Charge-offs % (annualized)		0.00	%		22.52	%
Specific reserve allowance / Impaired loans		0.00	%		0.00	%
General reserve allowance / Loans not impaired %		20.75	%		15.00	%
Allowance / Charge-offs		0			0.67

ADC Loans — Greenville
Period-end loans	$	1,432		$	1,673
Impaired loans		—			150
Other classified/watch rated loans		746			821
Charge-offs % (annualized)		(1.96	%)		17.33	%
Specific reserve allowance / Impaired loans		0.00	%		0.00	%
General reserve allowance / Loans not impaired %		11.31	%		18.65	%
Allowance / Charge-offs		(5.79	)		0.21

ADC Participations — Florida
Period-end loans	$	521		$	3,506
Impaired loans		521			3,506
Other classified/watch rated loans		—			—
Charge-offs % (annualized)		44.10	%		5.56	%
Specific reserve allowance / Impaired loans		0.00	%		25.33	%
General reserve allowance / Loans not impaired %		0.00	%		0.00	%
Allowance / Charge-offs		—			4.55

At March 31, 2011 the ratio of allowance for loan losses to total loans was 3.08% compared to 3.05% at December 31, 2010 and 2.52% at March 31, 2010. Net charge offs totaled $3,076 of which $1,492, or 48.50%, were related to ADC loans. Of the ADC charge-offs $888 or 59.52% was related to collateral dependent ADC loan participations and $496 or 33.24% was related to ADC loans in the Athens, Georgia market. The provision for loan losses allocated to individual portfolio segments are affected by the calculation of average historical net loss rate factors and by the internal and external qualitative factors within each category. The loan loss provision allocated to the Commercial Financial, and Agricultural portfolio was $1,987 and was affected in part by an increase in the adjusted historical loss factor and qualitative factors related to collateral values. The loan loss provision allocated to the ADC-CSRA portfolio was $1,175 and was affected in part by an increase in the level of substandard rated loans and qualitative factors related to trends in classified loans, collateral values and other external factors related to competition, legal and regulatory requirements. The loan loss provision allocated to the Residential real estate was ($1,148) and was affected in part by a decrease in the adjusted historical loss factor. See note 4 to the Financial Statements.

Table 11 — Allowance for Loan Losses


	March 31,
	2011			2010
	(Dollars in thousands)

Total loans outstanding at end of period, net of unearned income	$	871,017		$	919,777


Average loans outstanding, net of unearned income	$	870,927		$	920,584


Balance of allowance for loan losses at beginning of year	$	26,657		$	22,338

Charge-offs:
Commercial, financial and agricultural		1,122			223
Real estate — commercial		424			66
Real estate — residential mortgage		162			326
Real estate — acquisition, development and construction		1,498			2,214
Consumer		36			194

Total charge-offs		3,242			3,023


Recoveries of previous loan losses:
Commercial, financial and agricultural		102			72
Real estate — commercial		—			5
Real estate — residential mortgage		4			31
Real estate — acquisition, development and construction		6			356
Consumer		54			71

Total recoveries		166			535


Net loan losses		3,076			2,488
Provision for loan losses		3,240			3,288

Balance of allowance for loan losses at end of period	$	26,821		$	23,138


Allowance for loan losses to period end loans		3.08	%		2.52	%
Annualized net charge-offs to average loans		1.43	%		1.10	%

Management considers the current allowance for loan losses appropriate based upon its analysis in the portfolio using the methods previously discussed. Management’s judgment is based upon a number of assumptions about events which are believed to be reasonable, but which may or may not prove correct. While it is the Company’s policy to charge off in the current period the loans in which a loss is considered probable, there are additional risks of losses which cannot be quantified precisely or attributed to a particular loan or class of loans. Because management evaluates such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrower’s ability to repay, management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance will not be required.

Liquidity and Capital Resources

The Company has maintained adequate liquidity to meet operating and loan funding requirements despite the lack of such demand due to current market conditions. The loan to deposit ratio at March 31, 2011 was 60.56% compared to 61.96% at December 31, 2010 and 71.25% at March 31, 2010. The decrease in the loan to deposit ratio from December 31, 2010 to March 31, 2011 reflects the decreased demand for loans resulting from the slowing economy coupled with an increased level of deposits. Deposits at March 31, 2011 and December 31, 2010 include $172,979 and $183,732 of brokered certificates of deposit, respectively. GB&T and SB&T have also utilized borrowings from the Federal Home Loan Bank. They each maintain a line of credit with the Federal Home Loan Bank approximating 10% of their total assets. Federal Home Loan Bank advances are collateralized by eligible first mortgage loans, commercial real estate loans and investment securities. These borrowings totaled $60,000 at March 31, 2011. GB&T and SB&T maintain repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20,000 and $10,000, respectively, of which no amounts were outstanding at March 31, 2011. GB&T and SB&T have federal funds purchased accommodations with SunTrust Bank, Atlanta, Georgia for advances up to $10,000 and $3,750 respectively. GB&T also has a $10,000 repurchase line of credit with Center State Bank, Orlando, Florida. Additionally, liquidity needs can be supplemented by the structuring of the maturities of investment securities and the pricing and maturities on loans and deposits offered to customers. The Company also uses retail securities sold under repurchase agreements to fund operations. Retail securities sold under repurchase agreements were $610 at March 31, 2011.

Stockholders’ equity to total assets was 6.20% at March 31, 2011 compared to 6.22% at December 31, 2010 and 6.52% at March 31, 2010. The capital of the Company exceeded all required regulatory guidelines at March 31, 2011. The Company’s Tier 1 risk-based, total risk-based and leverage capital ratios were 12.25%, 13.69%, and 7.78%, respectively, at March 31, 2011.

The following table reflects the current regulatory capital levels in more detail, including comparisons to the regulatory minimums.

Table 12 — Regulatory Capital Requirements
March 31, 2011


						Required for capital
	Actual					adequacy purposes					Excess
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Southeastern Bank Financial Corporation

Risk-based capital:
Tier 1 capital	$	124,392		12.25	%		40,630		4.00	%		83,762		8.25	%
Total capital		139,031		13.69	%		81,259		8.00	%		57,772		5.69	%
Tier 1 leverage ratio		124,392		7.78	%		63,983		4.00	%		60,409		3.78	%

Georgia Bank & Trust Company

Risk-based capital:
Tier 1 capital	$	109,248		12.22	%		35,748		4.00	%		73,500		8.22	%
Total capital		120,579		13.49	%		71,496		8.00	%		49,083		5.49	%
Tier 1 leverage ratio		109,248		7.67	%		64,077		4.50	%		45,171		3.17	%

Southern Bank & Trust

Risk-based capital:
Tier 1 capital	$	14,621		12.10	%		4,832		4.00	%		9,789		8.10	%
Total capital		16,146		13.37	%		9,664		8.00	%		6,482		5.37	%
Tier 1 leverage ratio		14,621		7.92	%		7,389		4.00	%		7,232		3.92	%

Georgia Bank & Trust Company is regulated by the Department of Banking and Finance of the State of Georgia (DBF). The DBF requires that state banks in Georgia generally maintain a minimum ratio of Tier 1 capital to total assets of four and one-half percent (4.50%).

Management is not aware of any other events or uncertainties that are reasonably likely to have a material effect on the Company’s liquidity, capital resources or operations.

Commitments and Contractual Obligations

The Company is a party to lines of credit with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Lines of credit are unfunded commitments to extend credit. These instruments involve, in varying degrees, exposure to credit and interest rate risk in excess of the amounts recognized in the financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unfunded commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company evaluates construction and acquisition and development loans for the percentage completed before extending additional credit. The Company follows the same credit policies in making commitments and contractual obligations as it does for on-balance sheet instruments.

Unfunded commitments to extend credit where contract amounts represent potential credit risk totaled $145,246 at March 31, 2011. These commitments are primarily at variable interest rates.

The Company’s commitments are funded through internal funding sources of scheduled repayments of loans and sales and maturities of investment securities available-for-sale or external funding sources through acceptance of deposits from customers or borrowings from other financial institutions.

The following table is a summary of the Company’s commitments to extend credit, commitments under contractual leases as well as the Company’s contractual obligations, consisting of deposits, FHLB advances, which are subject to early termination options, and borrowed funds by contractual maturity date.

Table 13 — Commitments and Contractual Obligations


	Less than 1		1 - 3		3 - 5		More than 5
	Year		Years		Years		Years
	(Dollars in thousands)

Lines of credit	$	145,246		—		—		—
Lease agreements		290		184		84		17
Deposits		1,263,120		146,587		26,912		1,557
Securities sold under repurchase agreements		610		—		—		—
FHLB advances		8,000		13,000		—		39,000
Subordinated debentures		—		—		2,947		20,000

Total commitments and contractual obligations	$	1,417,266	$	159,771	$	29,943	$	60,574

Although management regularly monitors the balance of outstanding commitments to fund loans to ensure funding availability should the need arise, management believes that the risk of all customers fully drawing on all these lines of credit at the same time is remote.

Effects of Inflation and Changing Prices

Inflation generally increases the cost of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction and to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation can increase a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and stockholders’ equity. Mortgage originations and refinances tend to slow as interest rates increase, and can reduce the Company’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.

Regulatory Reform Legislation

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Reform Act”) was signed into law. The Dodd-Frank Reform Act represents a significant overhaul of many aspects of the regulation of the financial services industry, although many of its provisions (e.g., the interchange and trust preferred capital limitations) apply to companies that are significantly larger than the Company. The Dodd-Frank Reform Act directs applicable regulatory authorities to promulgate regulations implementing its provisions, and its effect on the Company and on the financial services industry as a whole will be clarified as those regulations are issued. Major elements of the Dodd-Frank Reform Act include:

• A permanent increase in deposit insurance coverage to $250,000 per account, permanent unlimited deposit insurance on noninterest-bearing transaction accounts, and an increase in the minimum Deposit Insurance Fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits.

• New disclosure and other requirements relating to executive compensation and corporate governance.

• Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations.

• The establishment of the Financial Stability Oversight Council, which will be responsible for identifying and monitoring systemic risks posed by financial firms, activities, and practices.

• The development of regulations to limit debit card interchange fees.

• The future elimination of trust preferred securities as a permitted element of Tier 1 capital.

• The creation of a special regime to allow for the orderly liquidation of systemically important financial companies, including the establishment of an orderly liquidation fund.

• The development of regulations to address derivatives markets, including clearing and exchange trading requirements and a framework for regulating derivatives-market participants.

• Enhanced supervision of credit rating agencies through the Office of Credit Ratings within the SEC.

• Increased regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least 5% of the risk of the asset-backed securities.

• The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to serve as a dedicated consumer-protection regulatory body.


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

As of March 31, 2011, there were no substantial changes in the interest rate sensitivity analysis or the sensitivity of market value of portfolio equity for various changes in interest rates calculated as of December 31, 2010. A detailed discussion of market risk is provided in the Company’s 2010 Annual Report on Form 10-K.


Item 4.		Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer (principal executive officer) and its Group Vice President and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, such officers concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There have been no changes in the Company’s internal controls or, to the Company’s knowledge, in other factors during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Part II
OTHER INFORMATION


Item 1.		Legal Proceedings

There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is subject.


Item 1A.		Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect its business, financial condition or future results. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.


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

Issuer Purchases of Equity Securities

On April 15, 2004, the Company announced the commencement of a stock repurchase program, pursuant to which it will, from time to time, repurchase up to 100,000 shares of its outstanding stock. The program does not have a stated expiration date. No stock repurchase programs were terminated during the first quarter of 2011 and there were no shares repurchased under the existing stock repurchase plan or otherwise during the first quarter.


Item 3.		Defaults Upon Senior Securities

Not applicable


Item 4.		[Removed and Reserved]


Item 5.		Other Information

None


Item 6.		Exhibits


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

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

	32.1			Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SOUTHEASTERN BANK FINANCIAL CORPORATION

Form 10-Q Signatures

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


	SOUTHEASTERN BANK FINANCIAL CORPORATION
Date: April 29, 2011	By:	/s/ Darrell R. Rains
		Darrell R. Rains
		Group Vice President, Chief Financial Officer (Duly Authorized Officer of Registrant and Principal Financial Officer)

Southeastern Bank Financial CORP - FORM 10-Q - April 29, 2011

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