Security Bank Corp - Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2008

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

For the transition period from to

Commission File Number 000-23261

SECURITY BANK CORPORATION

(Exact name of registrant as specified in its charter)

GEORGIA

58-2107916

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)


4219 Forsyth Road, Macon, Georgia		31210
(Address of Principal Executive Offices)		(Zip Code)

(478) 722-6200

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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


¨ Large accelerated filer		x Accelerated filer
¨ Non-accelerated filer (Do not check if a smaller reporting company)		¨ 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 x No

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


Class		Outstanding at August 5, 2008
Nonvoting Common Stock, $1.00 par value		— shares
Common Stock, $1.00 par value		23,251,836 shares

SECURITY BANK CORPORATION AND SUBSIDIARIES

INDEX


		Page Number
PART I Financial Information

ITEM 1 Financial Statements

Condensed Consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007 (audited)		3

Condensed Consolidated Statements of Income (Loss) (unaudited) for the Three and Six Months Ended June 30, 2008 and 2007		4

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Six Months Ended June 30, 2008 and 2007		5

Consolidated Statements of Changes in Shareholder’s Equity (unaudited) for the Six Months Ended June 30, 2008 and 2007		6

Condensed Consolidated Statements of Cash Flows (unaudited) for the Three and Six Months Ended June 30, 2008 and 2007		7

Notes to Condensed Consolidated Financial Statements (unaudited)		8

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk		31

ITEM 4 Controls and Procedures		31

PART II Other Information

ITEM 1 Legal Proceedings		31

ITEM 1A Risk Factors		31

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds		32

ITEM 3 Defaults Upon Senior Securities		32

ITEM 4 Submission of Matters to a Vote of Security Holders		32

ITEM 5 Other Information		33

ITEM 6 Exhibits		33

SIGNATURES		34

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

ASSETS


	June 30, 2008 (Unaudited)		December 31, 2007
Cash and Due from Banks	$	117,970	$	91,644
Federal Funds Sold		91,329		6,612
Interest-Bearing Deposits With Other Banks		3,336		7,015
Investment Securities		333,054		297,156
Federal Home Loan Bank Stock		9,940		8,243
Loans Held for Sale		6,192		7,605
Loans Receivable, Net		2,093,810		2,150,615
Premises and Equipment		43,232		43,171
Other Real Estate		62,814		28,175
Goodwill		18,373		128,571
Core Deposit Intangible, net		3,647		4,125
Accrued Interest Receivable		16,141		24,254
Other Assets		77,545		35,885

Total Assets	$	2,877,383	$	2,833,071

LIABILITIES AND SHAREHOLDERS’ EQUITY


	June 30, 2008 (Unaudited)			December 31, 2007
Deposits	$	2,455,626		$	2,298,705
Borrowed Money		216,424			206,326
Other Liabilities		22,048			21,347

Total Liabilities		2,694,098			2,526,378

Commitments and Contingencies
Shareholders’ Equity
Nonvoting Common Stock, Par Value $1 per Share; 10,000,000 Shares Authorized, Zero Shares Issued and Outstanding in 2008 and 2007, Respectively		—			—
Common Stock, Par Value $1 per Share; 50,000,000 Shares Authorized, 23,248,585 and 18,912,264 Shares Issued and Outstanding in 2008 and 2007, Respectively		23,249			18,912
Paid-In Capital		252,015			220,504
Retained Earnings (Deficit)		(85,397	)		63,011
Restricted Stock – Unearned Compensation		(59	)		(39	)
Accumulated Other Comprehensive (Loss) Gain, Net of Tax		(6,523	)		4,305

Total Shareholders’ Equity		183,285			306,693

Total Liabilities and Shareholders’ Equity	$	2,877,383		$	2,833,071

The accompanying notes are an integral part of these financial statements.

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)


	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Interest Income
Loans, Including Fees	$	33,276		$	45,297	$	70,303		$	88,237
Investment Securities		3,894			2,426		7,163			4,820
Federal Funds Sold and Other		519			452		965			1,151

		37,689			48,175		78,431			94,208

Interest Expense
Deposits		21,532			22,760		45,477			44,145
Subordinated Debentures		657			793		1,396			1,581
Federal Home Loan Bank Advances		677			685		1,349			1,343
Federal Funds Purchased and Repurchase Agreements		200			554		548			976
Notes Payable and Other		847			—		1,086			3

		23,913			24,792		49,856			48,048

Net Interest Income		13,776			23,383		28,575			46,160

Provision for Loan Losses		30,383			2,000		72,582			3,260

Net Interest Income (Loss) After Provision for Loan Losses		(16,607	)		21,383		(44,007	)		42,900

Noninterest Income
Service Charges on Deposits		2,253			2,376		4,540			4,474
Mortgage Origination and Related Fees		799			1,271		1,801			2,310
Securities Gains		1			—		2,035			2
Other		2,037			1,103		2,576			3,056

		5,090			4,750		10,952			9,842

Noninterest Expense
Salaries and Employee Benefits		8,080			9,094		16,816			18,645
Occupancy and Equipment		1,501			1,547		3,050			3,035
Foreclosed Property Expenses		2,836			710		4,436			896
Professional Fees		769			680		1,423			1,306
Marketing Expense		437			748		842			1,360
Amortization-Core Deposit Intangible		232			246		478			493
Goodwill Impairment		109,701			—		109,701			—
Other		3,698			3,519		7,415			6,697

		127,254			16,544		144,161			32,432

Income (Loss) Before Income Taxes		(138,771	)		9,589		(177,216	)		20,310
Income Tax Expense (Benefit)		(17,326	)		3,489		(31,573	)		7,424

Net Income (Loss)	$	(121,445	)	$	6,100	$	(145,643	)	$	12,886

Basic Earnings (Loss) Per Share	$	(5.23	)	$	0.32	$	(6.77	)	$	0.67

Diluted Earnings (Loss) Per Share	$	(5.23	)	$	0.31	$	(6.77	)	$	0.66

Cash Dividends Per Share	$	0.04		$	0.09	$	0.13		$	0.18

Weighted Average Common Shares Outstanding:
Basic		23,235,668			19,189,631		21,524,357			19,176,467

Diluted		23,235,668			19,463,979		21,524,357			19,463,427

The accompanying notes are an integral part of these financial statements.

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS)


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net Income (Loss)	$	(121,445	)	$	6,100		$	(145,643	)	$	12,886

Other Comprehensive Income (Loss), Net of Income Tax
Unrealized Losses on Securities Arising During the Period		(11,249	)		(1,894	)		(12,430	)		(1,447	)
Reclassification Adjustment		1			—			1,323			1

Unrealized Losses on Securities		(11,248	)		(1,894	)		(11,107	)		(1,446	)
Change in Fair Value of Derivatives Used for Cash Flow Hedges		—			(17	)		864			(17	)
Amortization of Unrealized Gain on Termination of Cash Flow Hedge		(440	)		—			(585	)		—

Comprehensive Income (Loss)	$	(133,133	)	$	4,189		$	(156,471	)	$	11,423

The accompanying notes are an integral part of these financial statements.

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (IN THOUSANDS)


	Nonvoting Common Stock		Common Shares		Common Stock			Paid-In Capital			Retained Earnings (Deficit)			Restricted Stock- Unearned Compensation			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance, December 31, 2006	$	—	19,186		$	19,186		$	224,565		$	63,697		$	(158	)	$	(552	)	$	(330	)	$	306,408
Cumulative Effect of Change in Accounting Principle												(608	)											(608	)
Cashless exercise of stock options			24			24			(24	)														—
Stock Options Exercised			3			3			44															47
Stock-Based Compensation Awards									317															317
Amortization of Unearned Compensation															32									32
Cancellation of Restricted Stock			(3	)		(3	)		(57	)					60									—
Shares Issued in Acquisition			11			11			239															250
Shares Issued to Employee Stock Purchase Plan			11			11			165															176
Retirement of Treasury Shares			(20	)		(20	)		(310	)											330			—
Change in Accumulated Other Comprehensive Income																		(1,463	)					(1,463	)
Cash Dividends												(3,358	)											(3,358	)
Net Income												12,886												12,886

Balance, June 30, 2007	$	—	19,212		$	19,212		$	224,939		$	72,617		$	(66	)	$	(2,015	)	$	—		$	314,687

Balance, December 31, 2007			18,912		$	18,912		$	220,504		$	63,011		$	(39	)	$	4,305		$	—		$	306,693
Cumulative Effect of Change in Accounting Principle												(93	)											(93	)
Stock-Based Compensation Awards									196															196
Restricted Stock Issued			5			5			31						(36	)								—
Amortization of Unearned Compensation															16									16
Shares Issued to Employee Stock Purchase Plan			21			21			106															127
Shares Issued in Rights Offering			4,311			4,311			23,744															28,055
Fair Value of Stock Warrants									5,565															5,565
Exchange of SARs for Nonvoting Warrants									1,869															1,869
Change in Accumulated Other Comprehensive Income																		(10,828	)					(10,828	)
Cash Dividends												(2,672	)											(2,672	)
Net Loss												(145,643	)											(145,643	)

Balance, June 30, 2008	$	—	23,249		$	23,249		$	252,015		$	(85,397	)	$	(59	)	$	(6,523	)	$	—		$	183,285

The accompanying notes are an integral part of these financial statements.

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30

(UNAUDITED)

(IN THOUSANDS)


	2008			2007
Cash Flows from Operating Activities
Net Income (Loss)	$	(145,643	)	$	12,886
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) from Operating Activities:
Stock-Based Compensation		196			317
Depreciation, Amortization and Accretion		2,481			2,121
Provision for Loan Losses		72,582			3,260
Goodwill Impairment		109,701			—
Securities Gains		(2,035	)		(2	)
Loss on Sale of Other Real Estate		1,526			109
Provision for Other Real Estate Losses		371			25
Loss (Gain) on Sales of Loans		292			(235	)
Net Change in Loans Held for Sale		1,413			(174	)
Payable for Purchased Securities		—			(21,544	)
Termination of Cash Flow Hedge		6,333			—
Net Change in Other Assets		(31,008	)		(3,140	)
Net Change in Other Liabilities		608			(1,448	)
Other, Net		(1,301	)		—

		15,516			(7,825	)

Cash Flows from Investing Activities
Interest-Bearing Deposits with Other Banks		3,679			(7,205	)
Purchase of Investment Securities Available for Sale		(265,796	)		(46,528	)
Proceeds from Disposition of Investment Securities
Available for Sale		214,971			55,578
Held to Maturity		—			240
Federal Home Loan Bank Stock, Net		(1,697	)		(465	)
Loans to Customers, Net of Repayments		(69,527	)		(211,882	)
Premises and Equipment, Net		(1,270	)		(1,671	)
Purchase of Low Income Housing Credits		(2,955	)		(3,659	)
Proceeds from Sales of Other Real Estate		16,871			2,274
Other, Net		50			(198	)

		(105,674	)		(213,516	)

Cash Flows from Financing Activities
Interest-Bearing Customer Deposits		143,069			197,691
Noninterest-Bearing Customer Deposits		13,852			(7,543	)
Dividends Paid		(2,672	)		(3,358	)
Federal Funds Purchased and Securities Sold Under Repurchase Agreements		(32,333	)		8,068
Borrowed Money, Net		51,025			(5,800	)
Issuance of Common Stock		28,260			225

		201,201			189,283

Net Increase (Decrease) in Cash and Cash Equivalents		111,043			(32,058	)
Cash and Cash Equivalents, Beginning		98,256			156,903

Cash and Cash Equivalents, Ending	$	209,299		$	124,845

The accompanying notes are an integral part of these financial statements.

SECURITY BANK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include Security Bank Corporation (the Company) and its wholly owned subsidiaries: Security Interim Holding Corporation (SBKC Interim); Security Bank of Bibb County located in Macon, Georgia; Security Bank of Houston County located in Perry, Georgia; Security Bank of Jones County located in Gray, Georgia; Security Bank of North Metro located in Woodstock, Georgia; Security Bank of North Fulton located in Alpharetta, Georgia; Security Bank of Gwinnett County located in Suwanee, Georgia; and Security Real Estate Services, Inc., formerly Fairfield Financial Services, Inc., a subsidiary of Security Bank of Bibb County, which has offices throughout Georgia. All significant intercompany accounts have been eliminated in consolidation. SBKC Interim was formed in April 2008 for the purpose of issuing $40.0 million of subordinated notes. During the quarter ended March 31, 2008, we sold CFS Wealth Management, LLC back to the original owner. The entity’s assets and results of operations were not material to the Company’s consolidated financial statements.

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated balance sheet as of December 31, 2007, has been derived from audited financial statements. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by this Quarterly Report on Form 10-Q have been included. The accompanying condensed consolidated financial statements should be read in conjunction with the Security Bank Corporation consolidated financial statements and related notes appearing in the Annual Report on Form 10-K for the year ended December 31, 2007.

Recently Adopted Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements . SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement would be determined based on the assumptions that market participants would use in pricing the asset or liability. The Company adopted SFAS No. 157 on January 1, 2008 and there was no impact on the Company’s beginning retained earnings balance. See Note 11, Fair Value of Financial Instruments , for related disclosures.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities , which establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. Among its other provisions, SFAS No. 159 permits companies to elect to measure certain eligible items at fair value. Subsequent unrealized gains and losses on those items will be reported in earnings. Upfront costs and fees related to those items will be reported in earnings as incurred and not deferred. In conjunction with the adoption of SFAS No. 157, the Company adopted SFAS No. 159 on January 1, 2008. The Company elected to not use the fair value option on any of its eligible items; therefore, the adoption of SFAS No. 159 did not have an impact on the Company’s financial condition, results of operations or cash flows.

In September 2006, the FASB ratified an Emerging Issues Task Force (EITF) consensus regarding Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (Issue No. 06-04), which was adopted by the Company on January 1, 2008. The Company recorded a cumulative effect of a change in accounting principle of $93,061 to retained earnings as a result of the adoption of this consensus.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, which replaces SFAS No. 141. SFAS No. 141 (R) retains the fundamental requirements that the acquisition method of accounting be used for all business combinations and that an acquirer is identified for each business combination. The scope of SFAS No. 141 (R) is broader than SFAS No. 141, which applied only to business combinations in which control was obtained by transferring consideration. By applying the same method of accounting — the acquisition method — to all transactions and other events in which one entity obtains control over one or more other businesses, the FASB believes that SFAS No. 141 (R) will improve the comparability of the information about business combinations provided in financial reports. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Management will evaluate the impact, if any, upon adoption.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements— an Amendment of ARB No. 51. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 changes the way the consolidated income statement is presented; it requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS No. 160 also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is effective for annual periods beginning after December 15, 2008. Presently, the Company has no subsidiaries that would be accounted for under SFAS No. 160.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities— an Amendment of SFAS No. 133. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit-risk related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Management will evaluate the impact upon adoption.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles . SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles , has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result.

A variety of other proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements.

Segment Reporting

Reportable segments are business units, which offer different products and services and require different management and marketing strategies. Management of the Company considers that all banking operations are essentially similar within each of its subsidiaries and that there are no reportable operating segments.

Reclassifications

Certain reclassifications have been made to conform prior period amounts to the current period presentation.

(2) Investment Securities

Investment securities as of June 30, 2008 are summarized as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
			(In Thousands)
Securities Available for Sale
Mortgage Backed and Collateralized Mortgage Obligations	$	343,230	$	163	$	(14,560	)	$	328,833
State, County and Municipal		2,315		—		(9	)		2,306
Other Securities		1,947		23		(1,055	)		915

	$	347,492	$	186	$	(15,624	)	$	332,054

Securities Held to Maturity
U.S. Government Agencies	$	1,000	$	—	$	(4	)	$	996

Investment securities as of December 31, 2007 are summarized as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
			( In Thousands)
Securities Available for Sale
Mortgage Backed and Collateralized Mortgage Obligations	$	212,800	$	1,842	$	(492	)	$	214,150
U.S. Government Agencies		59,538		436		(28	)		59,946
State, County and Municipal		20,210		238		(211	)		20,237
Other Securities		1,958		—		(135	)		1,823

	$	294,506	$	2,516	$	(866	)	$	296,156

Securities Held to Maturity
U.S. Government Agencies	$	1,000	$	—	$	(1	)	$	999

Unrealized holding (losses) gains, net of tax, on securities available for sale of ($10.0 million) and $1.1 million have been charged and credited, respectively, to shareholders’ equity as of June 30, 2008 and December 31, 2007.

(3) Loans Receivable, Net

Loans receivable are comprised of the following:


	June 30, 2008			December 31, 2007
	(In Thousands)
Construction and Land Development	$	1,116,366		$	1,165,719
Real Estate-Other		798,017			794,211
Commercial and Industrial		163,440			161,910
Consumer		63,815			61,757
Agricultural		2,280			1,225

		2,143,918			2,184,822
Allowance for Loan Losses		(48,452	)		(31,698	)
Unearned Interest and Fees		(1,656	)		(2,509	)

	$	2,093,810		$	2,150,615

(4) Allowance for Loan Losses

The following table presents the Company’s activity in the allowance for loan losses for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In Thousands)
Balance beginning of period	$	49,749		$	23,336		$	31,698		$	22,336
Charge-Offs		(38,631	)		(1,428	)		(63,074	)		(1,975	)
Recoveries		6,951			200			7,246			487
Provision for Loan Losses		30,383			2,000			72,582			3,260

Balance end of period	$	48,452		$	24,108		$	48,452		$	24,108

(5) Goodwill

Goodwill for the Company’s single reporting unit is tested annually for impairment. For the November 30, 2007 testing date, it was determined that the fair value of the reporting unit was greater than the carrying value of the reporting unit. Due to the ongoing weakness in the credit markets and residential real estate, we began quarterly testing in 2008. Our test for the second quarter indicated the goodwill was impaired due to a decline in the fair value of the reporting unit. The lower value in the second quarter is attributable to lower market valuations for banking institutions in the first half of 2008, the continued weakening of the credit market in the first half of 2008 and the decline in real estate values, particularly in metropolitan Atlanta and coastal Florida. We determined the fair value of the Company from two approaches: the market approach and the market capitalization approach. The amount of the 2008 goodwill impairment was $109.7 million.

(6) Deposits

Components of deposits are as follows:


	June 30, 2008		December 31, 2007
	(In Thousands)
Time Deposits, $100,000 and Over	$	1,107,588	$	1,042,271
Other Time Deposits		656,979		539,516
Interest-Bearing Demand		502,928		543,420
Demand		172,610		158,759
Savings		15,521		14,739

	$	2,455,626	$	2,298,705

(7) Borrowed Money

Borrowed money is comprised of the following:


	June 30, 2008		December 31, 2007
	(In Thousands)
Federal Home Loan Bank Advances	$	107,695	$	77,171
Subordinated Debentures (trust preferred securities)		41,238		41,238
Notes Payable, net of discount		31,407		—
Federal Funds Purchased		—		33,477
Securities Sold Under Agreement to Repurchase		36,084		34,940
Advances Under Revolving Lines of Credit		—		19,500

Total Borrowed Money	$	216,424	$	206,326

In connection with the issuance of trust preferred securities, the Company formed trust subsidiaries. The interest income received from the Company’s trusts totaled $41,632 and $47,198 for the six-month periods ended June 30, 2008 and 2007, respectively. The interest expense paid to the trusts totaled $1,395,755 and $1,581,147 for the six-month periods ended June 30, 2008 and 2007, respectively.

On April 28, 2008, Company entered into a Subordinated Note and Securities Purchase Agreement by and among the Company, SBKC Interim, and private equity funds managed by FSI Group, LLC (the Purchasers), pursuant to which the Company sold, through SBKC Interim, $40 million of subordinated notes (the Notes). The Notes were sold to the Purchasers in a private offering, bear an interest rate of 9.5%, are callable after the first five years at a premium, and mature in 2018. The subordinated debt has been structured to count as Tier 2 regulatory capital on a consolidated basis.

In connection with the issuance and sale of the Notes by SBKC Interim, the Company issued to the Purchasers immediately exercisable warrants to purchase 2,552,717 shares of the Company’s common stock at an exercise price of $6.58 per share, subject to certain adjustments (the voting warrants). The Company also issued to the Purchasers 3,526,310 stock appreciation rights (SARs) that entitle the holders, upon exercise, to receive a cash payment from the Company in an amount equal to the number of SARs outstanding multiplied by the excess of the Company’s Common Stock price above the exercise price of $6.58 per share, subject to certain adjustments. The $40.0 million face amount of the Notes was allocated to the Notes, the voting warrants and the SARs based on their fair values of $31.3 million, $5.6 million and $3.1 million, respectively. During the three and six-month periods ended June 30, 2008, the Company amortized $0.1 million of the $8.7 million discount on the Notes.

On June 26, 2008, at a Special Shareholders’ Meeting, our shareholders approved two proposals: (1) an amendment to the Amended and Restated Articles of Incorporation authorizing non-voting common stock and (2) the exchange of the SARs on a one-for-one basis for non-voting warrants, which are exercisable for non-voting common stock. On June 27, 2008, we effected the exchange of the SARs for the non-voting warrants which may be exercised at a price of $5.92 per share, subject to certain adjustments, to purchase 3,526,310 shares of non-voting common stock. In addition, the non-voting common stock is convertible into shares of common stock under certain limited circumstances. As a result, as of June 30, 2008, there were 6.1 million shares of common stock reserved for the voting warrants and nonvoting warrants and 3.5 million shares of nonvoting stock reserved for the nonvoting warrants.

(8) Share-Based Compensation Plans

A summary of option transactions for the six months ended June 30, 2008 follows:


	Shares Under Incentive Stock Options	Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted- average Remaining Contractual Life
Outstanding, December 31, 2007	1,807,839	$	18.10
Granted	—		—
Forfeited	37,500		20.95
Exercised	—		—

Outstanding, June 30, 2008	1,770,339	$	18.04	$	—	7.47

Eligible to be Exercised, June 30, 2008	619,529	$	14.92	$	—	5.50

(9) Earnings (Loss) Per Share

Due to the net loss in the first and second quarters of 2008, basic shares were used to calculate diluted earnings per share. Adding diluted securities to the denominator would result in anti-dilution.

The following presents earnings (loss) per share for the periods presented:


	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Basic Earnings Per Share
Net Income Per Common Share	$	(5.23	)	$	0.32	$	(6.77	)	$	0.67
Weighted Average Common Shares		23,235,668			19,189,631		21,524,357			19,176,467
Diluted Earnings Per Share
Net Income Per Common and Common Equivalent Share	$	(5.23	)	$	0.31	$	(6.77	)	$	0.66
Weighted Average Common Shares and Common Stock Equivalents		23,235,668			19,463,979		21,524,357			19,463,427

For the three- and six month periods ended June 30, 2008, 298,390 and 2,900 shares of common stock equivalents, respectively, were excluded from the calculation of diluted earnings per share because they would have an anti-dilutive effect.

The assumed exercise of stock options is included in the diluted earnings per share computation using the treasury stock method and assuming an average market price for Security Bank Corporation stock of $19.97 and $22.32 for the three- and six-month periods ended June 30, 2007, respectively. The Company’s stock is quoted on the NASDAQ Global Select Market under the symbol SBKC.

(10) Regulatory Capital Matters

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. The amounts and ratios as defined in regulations are presented hereafter. Management believes, as of June 30, 2008, the Company and the Banks meet all capital adequacy requirements to which they are subject and the Banks are classified as “well capitalized” under the regulatory framework for prompt corrective action.

The Company’s actual ratios as of June 30, 2008 are as follows:


	Tier 1 Capital Ratio		Total Capital Ratio		Leverage Ratio
Minimum Capital Adequacy	4.00	%	8.00	%	4.00	%
Well Capitalized	6.00	%	10.00	%	5.00	%
Security Bank Corporation (Consolidated)	9.10	%	11.69	%	7.28	%
Security Bank of Bibb County	9.08	%	10.33	%	7.52	%
Security Bank of Houston County	8.83	%	10.09	%	6.79	%
Security Bank of Jones County	9.03	%	10.18	%	6.49	%
Security Bank of North Metro	8.85	%	10.10	%	7.64	%
Security Bank of North Fulton	9.42	%	10.18	%	7.64	%
Security Bank of Gwinnett County	8.78	%	10.08	%	6.76	%

At the request of the Federal Reserve Bank of Atlanta, our Board of Directors passed a resolution stating that we will not declare or pay any dividends to our shareholders without the prior written approval of the Federal Reserve Bank of Atlanta.

(11) Derivative Financial Instruments

On June 29, 2007, the Company executed an interest rate swap. The Company’s objective in using the derivative was to add stability to interest income and to manage our exposure to adverse changes in interest rates. The interest rate swap agreement, with a maturity date of July 1, 2010, effectively converts the variable interest receipts on $100.0 million of prime-based loans to a fixed rate of 8.145% plus any credit spread, if applicable, over the life of the agreement. At December 31, 2007, the interest rate swap had an aggregate notional amount of $100.0 million.

In March 2008, we terminated the interest rate swap and received $6.3 million. Upon termination or sale of any cash flow swaps, any amounts received (or paid) are generally not immediately recognized as income but remain in “Other Comprehensive Income (Loss)” and are amortized to earnings, as interest income (or expense), over the remaining term of the originally hedged item. The cash received (or paid) as a result of terminating the hedges is classified, in the statement of cash flows, in the same category as the cash flows relating to the items being hedged.

(12) Fair Value of Financial Instruments

SFAS No. 157, Fair Value Measurements , defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:

•

Level 1 Inputs — Quoted prices for identical assets or liabilities in active markets that the reporting entity has the ability to access at the measurement date;

•

Level 2 Inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

•

Level 3 Inputs — Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

•

Investment Securities Available for Sale — Securities classified as available for sale are reported at fair value utilizing Level 1 and Level 2 Inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The majority of the Company’s securities are classified as Level 2 inputs.

•

Impaired Loans — Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 Inputs based on internally customized discounting criteria.

•

Loans Held for Sale — These loans are reported at the lower of cost or fair value. Fair value is determined based on expected proceeds based on sales contracts and commitments and are considered Level 2 Inputs.

•

Other Real Estate — These assets are reported at the lower of the loan carrying amount at foreclosure or fair value. Fair value is based on third party or internally developed appraisals considering the assumptions in the valuation and are considered Level 2 or Level 3 Inputs.

ITEM 2.

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

The following narrative presents management’s discussion and analysis of the Company and its subsidiaries’ financial condition and results of operations as of and for the three-month and six-month periods ended June 30, 2008 and 2007. The historical financial statements of the Company are set forth elsewhere herein. This discussion should be read in conjunction with those financial statements and the other financial information included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Forward-looking statements are generally identifiable by the use of forward-looking terminology such as “anticipate,” “assume,” “believe,” “continue,” “could,” “would,” “endeavor,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and other similar words and expressions of future intent.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could cause actual results and performance to differ from those expressed in our forward-looking statements we make or incorporate by reference in this Quarterly Report on Form 10-Q include, but are not limited to:

•

the effects of future economic and business conditions, including, without limitation, the recent and dramatic deterioration of real estate values, the subprime mortgage, credit and liquidity markets, as well as the Federal Reserve’s actions with respect to interest rates, may lead to a further deterioration in credit quality, thereby requiring increases in our provision for credit losses, or a reduced demand for credit, which would reduce earning assets;

•

possible changes in trade, monetary and fiscal policies, as well as legislative and regulatory changes, including changes in accounting standards and banking, securities and tax laws and regulations, as well as changes affecting financial institutions’ ability to lend and otherwise do business with consumers;

•

our ability to effectively manage interest rate risk and other market risk, credit risk and operational risk;

•

adverse changes in the status or financial condition of the Government Sponsored Enterprises (the GSEs) impacting the GSEs’ guarantees or ability to pay or issue debt;

•

changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact interest margins and may impact prepayments on the mortgage-backed securities portfolio;

•

possible changes in the quality or composition of our loans or investment portfolios, including further adverse developments in the real estate markets, the borrowers’ industries or in the repayment ability of individual borrowers or issuers;

•

increases in our nonperforming assets, or our inability to recover or absorb losses created by such nonperforming assets;

•

our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business;

•

the failure of our assumptions underlying the establishment of allowances for loan losses and other estimates, or dramatic changes in those underlying assumptions or judgments in future periods, that, in either case, render the allowance for loan losses inadequate or require that further provisions for loan losses be made;

•

unexpected outcomes of existing or new litigation;

•

our ability to keep pace with technological changes;

•

our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers and potential customers;

•

the risks of merger, acquisitions and divestitures, including with out limitation, the costs of integrating our operations, potential customer loss and deposit attrition and the failure to achieve expected gains, revenue growth and/or expense savings from such a transaction;

•

easing of restrictions on participants in the financial services industry, such as banks, securities brokers and dealers, investment companies, credit unions and finance companies, may increase competitive pressures and affect our ability to preserve our customer relationships and margins;

•

the threat or occurrence of war or acts of terrorism and the existence or exacerbation of general geopolitical instability and uncertainty;

•

management’s ability to develop and execute plans to effectively respond to unexpected changes; and

•

other factors and information contained in this Quarterly Report on Form 10-Q and other reports that we file with the Securities and Exchange Commission (SEC) under the Exchange Act.

The cautionary statements in this Quarterly Report on Form 10-Q also identify important factors and possible events that involve risk and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. We do not intend, and undertake no obligation, to update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.

Readers should carefully review all disclosures we file from time to time with the SEC.

Unless indicated otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “SBKC” or the “Company” refer to Security Bank Corporation and its consolidated subsidiaries, Security Interim Holding Company, Security Bank of Bibb County, Security Bank of Houston County, Security Bank of Jones County, Security Bank of North Metro, Security Bank of North Fulton and Security Bank of Gwinnett County. Together, the consolidated subsidiary banks are referred to as “the Banks.”

Overview

Security Bank Corporation was incorporated on February 10, 1994 for the purpose of becoming a bank holding company. We are subject to extensive federal and state banking laws and regulations, including the Bank Holding Company Act of 1956, as amended, and the bank holding company laws of Georgia. We own six subsidiary banks—Security Bank of Bibb County, Security Bank of Houston County, Security Bank of Jones County, Security Bank of North Metro, Security Bank of North Fulton and Security Bank of Gwinnett County. We also own Security Real Estate Services, Inc. (SRES, Inc.) (formerly Fairfield Financial Services, Inc.), an interim real estate and development lender and traditional mortgage originator, which functions as an operating subsidiary of Security Bank of Bibb County. Effective July 15, 2008, we changed the name of Fairfield Financial Services, Inc. to Security Real Estate Services, Inc. The Banks are also subject to various federal and state banking laws and regulations. During the quarter ended March 31, 2008, we sold CFS Wealth Management, LLC back to its original owner. The entity’s assets and results of operations were not material to the Company’s consolidated financial statements. SBKC Interim, a wholly owned subsidiary of Security Bank Corporation, was formed in April 2008 for the purpose of issuing $40.0 million of subordinated notes.

The Banks each operate as a separate legal entity under the corporate umbrella of Security Bank Corporation. As a result, each Bank has its own board of directors and management comprised of persons known in the local community in which each Bank operates. We provide significant assistance and oversight to the Banks in the areas such as budgeting, marketing, human resource management, credit administration, operations and funding. This allows us to maintain efficient, centralized reporting and policies while maintaining local decision-making capabilities.

As of June 30, 2008, we had 466 employees on a full-time equivalent basis.

Like most financial institutions, our profitability depends largely upon net interest income, which is the difference between the interest received on earning assets, such as loans and investment securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Our results of operations are also affected by our provision for loan losses; noninterest expenses, such as salaries, employee benefits and occupancy expenses; and noninterest income, such as mortgage loan fees and service charges on deposit accounts.

During the first quarter of 2008, we implemented a capital plan to enhance and strengthen the levels of capital at the holding company such that we could maintain the resources needed to maintain “well capitalized” levels of regulatory capital at each of the Banks. We believed such a plan was necessary in light of the continuing substantial deterioration of the residential real estate markets nationally and in our local markets. This continued deterioration has resulted in increasingly higher levels of nonperforming assets, higher provisions for loan losses and associated expenses.

Our capital plan includes three steps as described below:

Rights Offering

On February 11, 2008 we distributed non-transferable rights to subscribe for and purchase up to 5,319,148 shares of our common stock to our then-current shareholders. In the offering, each shareholder received a right to purchase 0.28121 shares of common stock, at a subscription price of $6.58 per share, for each share owned on the record date. Shareholders who exercised their full basic subscription right were also able to exercise an oversubscription right enabling such shareholder to purchase shares remaining after the exercise of all other shareholders’ basic subscription rights. In conjunction with the rights offering, we entered into a standby purchase agreement with two shareholders, one of which is a director of the holding company and one of which is a director of a subsidiary bank, pursuant to which these shareholders agreed to purchase up to $18 million of common stock remaining after the

exercise of shareholders’ basic and oversubscription rights. This aggregate amount included all of the shares purchasable by these two individuals in connection with their basic subscription privileges along with their standby commitment. The offering closed on March 10, 2008, and we raised approximately $28.1 million.

Subordinated Notes

On April 28, 2008, we entered into a Subordinated Note and Securities Purchase Agreement by and among the Company, SBKC Interim, and private equity funds managed by FSI Group, LLC (the Purchasers), pursuant to which we sold $40 million of subordinated notes (the Notes). The Notes were sold to the Purchasers in a private offering, bear an interest rate of 9.5%, are callable after the first five years and mature in 2018. The subordinated debt has been structured to count as Tier 2 regulatory capital on a consolidated basis.

In connection with the issuance and sale of the Notes by SBKC Interim, the Company issued to the Purchasers immediately exercisable warrants to purchase 2,552,717 shares of the Company’s common stock at an exercise price of $6.58 per share, subject to certain adjustments (the voting warrants). The Company also issued to the Purchasers 3,526,310 stock appreciation rights (SARs) that entitle the holders, upon exercise, to receive a cash payment from the Company in an amount equal to the number of SARs outstanding multiplied by the excess of the Company’s common stock price above the exercise price of $6.58 per share, subject to certain adjustments. On June 26, 2008, at a Special Shareholders’ Meeting, our shareholders approved two proposals: (1) an amendment to the Amended and Restated Articles of Incorporation authorizing non-voting common stock and (2) the exchange of the SARs on a one-for-one basis for non-voting warrants, which are exercisable for non-voting common stock. On June 27, 2008, we completed the exchange of the SARs for the non-voting warrants, which may be exercised at a price of $5.92 per share, subject to certain adjustments, to purchase 3,526,310 shares of non-voting common stock. In addition, the non-voting common stock is convertible into shares of common stock under certain limited circumstances.

We used a portion of the proceeds from the Notes to pay off and terminate the holding company lines of credit. We have and will continue to use the remainder of the proceeds for general corporate purposes, which will include infusing additional capital in our Banks so that they will maintain “well capitalized” levels of regulatory capital.

The Purchasers have been granted certain registration rights with respect to any common stock of the Company issued or issuable to the Purchasers in respect of their holdings of voting warrants, non-voting warrants or non-voting common stock, which is set forth in a Registration Agreement between the Company and the Purchasers.

Other Steps

During the first quarter we also completed cost saving steps aimed at achieving a targeted reduction of noninterest expenses of $3.0 million for 2008. Finally, we reduce our quarterly cash dividend to $0.04375 per share, effective with the second quarter dividend. This reduction in the dividend will result in an increase of $3.0 million in shareholders’ equity on an annualized basis.

Financial Condition

At June 30, 2008, our total assets were $2.88 billion compared to $2.83 billion at December 31, 2007. The increase in total assets compared to December 31, 2007 is primarily due to increases in cash and cash equivalents, investment securities, other real estate and other assets, offset by decreases in loans receivable and goodwill.

Assets

The composition of our assets is as follows:


(In Thousands)	June 30, 2008		December 31, 2007		$ Change			% Change
Cash and Due From Banks	$	117,970	$	91,644	$	26,326		28.7	%
Federal Funds Sold		91,329		6,612		84,717		1,281.3	%
Interest-Bearing Deposits With Other Banks		3,336		7,015		(3,679	)	-52.5	%
Investment Securities		333,054		297,156		35,898		12.1	%
Federal Home Loan Bank Stock		9,940		8,243		1,697		20.6	%
Loans Held For Sale		6,192		7,605		(1,413	)	-18.6	%
Loans Receivable, Net		2,093,810		2,150,615		(56,805	)	-2.6	%
Premises and Equipment		43,232		43,171		61		0.1	%
Other Real Estate		62,814		28,175		34,639		122.9	%
Goodwill		18,373		128,571		(110,198	)	-85.7	%
Core Deposit Intangible, net		3,647		4,125		(478	)	-11.6	%
Accrued Interest Receivable		16,141		24,254		(8,113	)	-33.5	%
Other Assets		77,545		35,885		41,660		116.1	%

	$	2,877,383	$	2,833,071	$	44,312		1.6	%

Cash and Cash Equivalents

See the Condensed Consolidated Statement of Cash Flows for a detail of the sources and uses of cash and cash equivalents during the six months ended June 30, 2008 and 2007.

Investment Securities

The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.

During the six-month period ended June 30, 2008, the Company sold certain U.S. Government sponsored mortgage-backed securities and reinvested the proceeds into securities with lower risk-weightings in order to make the portfolio more capital efficient. Compared to December 31, 2007, investment securities increased $35.9 million or 12.1%. At June 30, 2008 and December 31, 2007, the securities portfolio accounted for approximately 11.6% and 10.5%, respectively, of total assets.

The investment securities portfolio primarily consists of U.S. Government sponsored collateralized mortgage obligation bonds, agency mortgage-backed securities, non-agency mortgage-backed securities, and municipal securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. Substantially all of our mortgage-backed and collateralized mortgage obligation bonds are Government National Mortgage Association issued, and we do not have any bonds secured by subprime mortgages. The actual maturities of these securities will differ from the contractual maturities because loans underlying the securities may prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining interest rate environment, we may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs. Prepayments tend to slow down and the weighted average life extends. This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of timing of cash receipts and can result in the holding of a below market yielding asset for a longer time period.

Loans Receivable, Net

Loans receivable, net decreased approximately $56.8 million from December 31, 2007. Due to the fact that adverse market conditions have restrained the pace of new real estate project financing in the metropolitan Atlanta market, we have significantly slowed the origination of new loans in this market when compared with previous periods. Furthermore, the Company’s commitment to reduce the level of nonperforming assets in its loan portfolio has also contributed to the decrease during the quarter.

Risk Elements and Allowance for Loan Losses (ALL)

Nonperforming assets consist of nonaccrual loans, loans 90 days past due and accruing and other real estate, which is real estate acquired through foreclosure. As a result of continued deteriorating conditions primarily in the residential real estate market in the metropolitan Atlanta market, nonperforming assets increased to $249.0 million or 8.7% of total assets at June 30, 2008, compared to $222.3 million or 7.9% of total assets at March 31, 2008, and $79.1 million or 2.8% of total assets at December 31, 2007.

The following table presents our nonperforming assets as of the dates indicated:


(In Thousands)	June 30 2008		March 31, 2008		December 31, 2007
Nonaccrual Loans	$	186,139	$	186,520	$	50,635
Loans 90 Days Past Due and Accruing		—		68		242
Other Real Estate		62,814		35,749		28,175

Total Nonperforming Assets	$	248,953	$	222,337	$	79,052

The increase in nonperforming assets is primarily attributable to the significant slowdown in residential real estate sales that began in late summer of 2007 and has continued through the second quarter of 2008. A significant portion of the loan portfolios of our metropolitan Atlanta banks and SRES, Inc. is concentrated in loans to residential builders and developers. With the significant slowing of home and land sales, the prices of homes and land have declined. Therefore, many of our customers who develop and sell residential real estate cannot service their loans because they are not generating any revenue. We believe that the adverse impact on our net interest margin from the elevated level of nonperforming assets will continue through the remainder of 2008.

Nonaccrual loans increased by $135.5 million during the six-month period ended June 30, 2008. There was significant movement within these loans during the period as $55.8 million of nonaccrual loans were charged-off, $52.7 million went into foreclosure and $244.0 million of loans went on nonaccrual status. At June 30, 2008, the 10 largest nonaccrual loans comprised $91.8 million or 49% of the total and all were collateralized by residential real estate.

Other real estate increased by $34.6 million during the six months ended June 30, 2008, as we foreclosed on $51.5 million of real estate and sold $16.9 million of real estate. Of the total balance of $62.8 million at June 30, 2008, the largest component is residential lots at 47%, followed by single family homes at 36%, raw land at 15% and commercial property at 2%.

Our management assesses the adequacy of the ALL quarterly. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The ALL consists of two components: (1) a specific amount representative of identified credit exposures that are readily predictable by the current performance of the borrower and underlying collateral (SFAS No. 114 component); and (2) a general amount based upon historical losses that is then adjusted for various stress factors representative of various economic factors and characteristics of the loan portfolio (SFAS No. 5 component). Even though the ALL is composed of two components, the entire ALL is available to absorb any credit losses.

We establish the specific amount by examining impaired loans. Under generally accepted accounting principles, we may measure the loss either by (1) the observable market price of the loan; or (2) the present value of expected future cash flows discounted at the loan’s effective interest rate; or (3) the fair value of the collateral if the loan is collateral dependent. Because the majority of our impaired loans are collateral dependent, nearly all of our specific allowances are calculated based on the fair value of the collateral.

We establish the general amount by taking the remaining loan portfolio (excluding those impaired loans discussed above) with allocations based on historical losses in the total loan portfolio. The calculation of the general amount is then subjected to stress factors that are somewhat subjective. The amount due to stress testing attempts to correlate the historical loss rates with current economic factors and current risks in the portfolio. The stress factors consist of: (1) economic factors including such matters as changes in the local or national economy; (2) the depth or experience in the lending staff; (3) any concentrations of credit (such as commercial real estate) in any particular industry group; (4) new banking laws or regulations; (5) the credit grade of the loans in our unsecured consumer loan portfolio; and (6) additional risks resulting from the level of speculative real estate loans in the portfolio. After we assess the applicable factors, we evaluate the remaining amount based on management’s experience.

Finally, we compare the level of the ALL with historical trends and peer information as a reasonableness test. Management then evaluates the result of the procedures performed, including the result of our testing, and makes a conclusion regarding the appropriateness of the ALL in its entirety.

In assessing the adequacy of the ALL, we also rely on an ongoing independent credit administration review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our credit administration review process includes the judgment of management, the input of our internal loan review function, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process. The Credit Quality Committee, which is a committee comprised of members of the Boards of Directors of the Company and its subsidiaries, regularly reviews the ALL process and results.

Goodwill

The Company wrote its goodwill down by $109.7 million during the second quarter of 2008. In 2008, we began quarterly tests of goodwill for impairment due to the ongoing decline in the Company’s stock price combined with the ongoing crises in the credit markets and residential real estate. The Company recorded significant amounts of goodwill in connection with the acquisitions we made from 2000 to 2006. The companies we acquired have contributed significantly to the Company. However, our market valuation as a whole has been significantly affected with concerns related to commercial banks, metropolitan Atlanta housing and real estate lending operations. We determined the fair value of the Company from two approaches: the market approach and the market capitalization approach. We concluded that $109.7 million of the goodwill was impaired and was required to be expensed as a non-cash charge during the second quarter of 2008.

Other Assets

Other assets increased largely as a result of the increase in the Company’s income tax benefit of approximately $28.4 million, resulting from the net loss incurred during the first and second quarters of 2008. The increase is also related to the unrealized loss on our bond portfolio during 2008, which resulted in an increase in related deferred taxes of $6.0 million. Further, we paid the final installment to a low income housing tax credit fund totaling $2.6 million during the six months ended June 30, 2008.

Liabilities

The composition of liabilities is as follows:


(In Thousands)	June 30, 2008		December 31, 2007		$ Change		% Change
Deposits	$	2,455,626	$	2,298,705	$	156,921	6.8	%
Borrowed Money		216,424		206,326		10,098	4.9	%
Other Liabilities		22,048		21,347		701	3.3	%

	$	2,694,098	$	2,526,378	$	167,720	6.6	%

Deposits

The increase in total deposits of approximately $156.9 million is due primarily to an increase in the use of brokered and wholesale certificates of deposit in effort to improve liquidity. Due to decreases in the interest rates on these deposits since December 2007, we have increased our use of these deposits as a funding source which reduces our interest expense. Further discussion of our use of brokered and wholesale certificates of deposit is included below in the Liquidity section of this discussion.

Borrowed Money

The increase in borrowed money is primarily related to the $40 million sale of subordinated notes (net balance of $31.4 million at June 30, 2008) and the $30.5 million increase in advances from the Federal Home Loan Bank, offset by the $19.5 million payoff and termination of the holding company lines of credit and a $33.5 million reduction in the federal funds purchased balance.

The Company utilizes its credit with the Federal Home Loan Bank and federal funds lines as necessary to meet funding needs. At the request of the Federal Reserve Bank of Atlanta, our Board of Directors approved a resolution stating that we will not incur additional debt at the holding company without the prior written approval of the Federal Reserve Bank of Atlanta. See Overview section above for further discussion of the $40 million subordinated notes issued during the quarter ended June 30, 2008.

Equity

In March 2008, the Company completed a rights offering of common stock to its shareholders. We issued 4,311,359 shares and generated net proceeds of approximately $28.1 million. The Company utilized the proceeds to maintain the Banks’ “well capitalized” regulatory status and for general corporate purposes including the reduction of borrowings under the Company’s lines of credit.

At June 30, 2008, total equity was $183.3 million or 6.4% of total assets compared to $306.7 million or 10.8% of total assets as of December 31, 2007. The decrease in equity is due primarily to the net loss of $145.6 million, the reduction in accumulated other comprehensive income of $10.8 million related to unrealized losses on our available for sale bond portfolio and dividends paid, offset partially by the proceeds from the $28.1 million of common stock issued in connection with the rights offering, and the exchange of the SARs for the nonvoting warrants totaling $7.4 million.

Results of Operations

Net Income (Loss)

Net income (loss) for the three- and six-month periods ended June 30, 2008 was ($121.4 million) or $5.23 diluted loss per share and ($145.6 million) or $6.77 diluted loss per share, respectively, compared to $6.1 million or $0.31 diluted earnings per share and $12.9 million or $0.66 diluted earnings per share in the same periods of the preceding year, respectively. The decrease in net income for the three- and six-month periods ended June 30, 2008 is primarily attributable to the goodwill impairment charge of $109.7 million and significant increases of $28.4 million and $69.3 million, respectively, in the provision for loan losses related to the substantial increase in our nonperforming assets since December 31, 2007. The decrease in net income resulting from these additional charges is offset by the recognition of income tax benefits of $17.3 million and $31.6 million during the three- and six month periods ended June 30, 2008, respectively.

Net Interest Income

The net interest margin of the Company was 2.13% for the three-month period ended June 30, 2008 compared to 4.11% for the same three-month period of the preceding year. Total interest income decreased to $37.7 million for the three-month period ended June 30, 2008, from $48.2 million during the comparable prior year period. The decrease in total interest income is due primarily to an $11.9 million decrease in interest generated from loans receivable, which resulted from a 262 basis point decline in the yield on these assets. The decline in the yield on loans receivable is the result of rate decreases during 2007 as well as forfeited interest from nonperforming assets and reversal of interest on nonaccrual loans, which reduced the yield by 66 and 20 basis points, respectively. Total interest expense decreased $0.9 million to $23.9 million as a result of an 89 basis point decrease in the cost of interest-bearing deposits. The decrease in the cost of interest-bearing deposits is partially offset by an increase in the volume of time deposits.

The net interest margin of the Company was 2.23% for the six-month period ended June 30, 2008 compared to 4.16% for the same six-month period of the preceding year. Total interest income decreased to $78.4 million for the six-month period ended June 30, 2008, from $94.2 million during the comparable prior year period. The decrease in total interest income is due primarily to a $17.9 million decrease in interest generated from loans receivable, which resulted from a 238 basis point decline in the yield on these assets. The decline in the yield on loans receivable is the result of rate decreases during 2007 and the addition of nonperforming assets and reversal of interest on nonaccrual loans, which reduced the yield by 54 and 34 basis points, respectively. Total interest expense increased $1.8 million to $49.9 million as a result of the increased volume of time deposits, which was partially offset by a 106 basis point decline in the cost of interest-bearing deposits.

The following table represents the effective yields and costs of funds for the three-month periods ended June 30:


	2008						2007
*(Dollars in thousands)*	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Interest-Earning Assets
Loans Receivable	$	2,154,371	$	33,201	6.20	%	$	2,052,273	$	45,138	8.82	%
Loans Held for Sale		4,782		75	6.31			8,728		156	7.17
Investment Securities-Taxable		346,284		3,866	4.49			174,720		2,218	5.09
Investment Securities- Tax-Exempt, Tax Equivalent Basis		2,393		43	7.24			20,311		320	6.32
Interest-Bearing Deposits With Other Banks		2,834		18	2.55			3,835		51	5.33
Federal Funds Sold		96,270		482	2.01			29,207		380	5.22
Other Interest-Earning Assets		1,238		19	6.17			1,238		24	7.78

Total Interest-Earning Assets		2,608,172		37,704	5.81			2,290,312		48,287	8.46
Noninterest-Earning Assets		269,432						238,830

Total Assets	$	2,877,604					$	2,529,142

Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
NOW, Money Market and Savings	$	488,757	$	2,697	2.22	%	$	537,322	$	4,837	3.61
Time Deposits		1,705,410		18,835	4.44			1,350,602		17,923	5.32

Total Interest-Bearing Deposits		2,194,167		21,532	3.95			1,887,924		22,760	4.84

Borrowings
FHLB Advances		105,986		677	2.57			51,039		685	5.38
Subordinated Debentures		41,238		657	6.41			41,238		793	7.71
Federal Funds Purchased and Securities Under Agreement to Repurchase		39,601		200	2.03			43,682		554	5.09
Notes Payable and Other		24,769		847	13.75			—		—	—

Total Borrowings		211,594		2,381	4.53			135,959		2,032	5.99

Total Interest-Bearing Liabilities		2,405,761		23,913	4.00			2,023,883		24,792	4.91

Noninterest-Bearing Liabilities		165,263						191,382
Shareholders’ Equity		306,580						313,877

Total Liabilities and Shareholders’ Equity	$	2,877,604					$	2,529,142

Interest Rate Spread					1.81	%					3.55	%

Net Interest Income			$	13,791					$	23,495

Net Interest Margin					2.13	%					4.11	%

The following table provides a detailed analysis of the changes in interest income and interest expense due to changes in rate and volume for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Changes in the average balances outstanding for interest earning assets and interest bearing liabilities are volume changes and changes in the interest rates earned and paid on such assets and liabilities are rate changes. Changes resulting from a combination of changes in volume and rate have been included in the rate changes.


	Changes From June 30, 2007 to June 30, 2008
	Volume			Rate			Net Change
	(In Thousands)
Interest Income
Loans Receivable	$	2,246		$	(14,183	)	$	(11,937	)
Loans Held For Sale		(71	)		(10	)		(81	)
Investment Securities—Taxable		2,178			(530	)		1,648
Investment Securities—Tax-Exempt		(282	)		5			(277	)
Interest-Bearing Deposits With Other Banks		(13	)		(20	)		(33	)
Federal Funds Sold and Other		873			(776	)		97

Total Interest Income		4,931			(15,514	)		(10,583	)

Interest Expense
Interest-Bearing Demand and Savings Deposits		(437	)		(1,703	)		(2,140	)
Time Deposits		4,708			(3,796	)		912
Borrowings:
FHLB Advances		737			(745	)		(8	)
Subordinated Debentures		—			(136	)		(136	)
Federal Funds Purchased and Securities Under Agreement to Repurchase		(52	)		(302	)		(354	)
Notes Payable and Other		847			—			847

Total Interest Expense		5,803			(6,682	)		(879	)

Net Interest Income	$	(872	)	$	(8,832	)	$	(9,704	)

The following table represents the effective yields and costs of funds for the six-month periods ended June 30:


	2008						2007
*(Dollars in thousands)*	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Interest-Earning Assets
Loans Receivable	$	2,174,231	$	70,136	6.49	%	$	2,001,849	$	88,006	8.87	%
Loans Held for Sale		5,339		167	6.29			6,654		229	6.94
Investment Securities-Taxable		317,398		7,042	4.46			174,250		4,406	5.10
Investment Securities- Tax-Exempt, Tax Equivalent Basis		5,137		186	7.29			20,392		638	6.31
Interest-Bearing Deposits With Other Banks		3,438		53	3.10			3,589		97	5.45
Federal Funds Sold		71,111		870	2.46			38,409		1,008	5.29
Other Interest-Earning Assets		1,238		42	6.82			1,238		47	7.66

Total Interest-Earning Assets		2,577,892		78,496	6.12			2,246,381		94,431	8.48
Noninterest-Earning Assets		268,555						239,095

Total Assets	$	2,846,447					$	2,485,476

Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
NOW, Money Market and Savings	$	498,654	$	6,272	2.53	%	$	529,867	$	9,436	3.59
Time Deposits		1,671,569		39,205	4.72			1,323,090		34,709	5.29

Total Interest-Bearing Deposits		2,170,223		45,477	4.21			1,852,957		44,145	4.80

Borrowings
FHLB Advances		88,649		1,349	3.06			50,620		1,346	5.36
Subordinated Debentures		41,238		1,396	6.81			41,238		1,581	7.73
Federal Funds Purchased and Securities Under Agreement to Repurchase		40,165		548	2.74			38,947		976	5.05
Notes Payable and Other		21,300		1,086	10.25			—		—	—

Total Borrowings		191,352		4,379	4.60			130,805		3,903	6.02

Total Interest-Bearing Liabilities		2,361,575		49,856	4.25			1,983,762		48,048	4.88

Noninterest-Bearing Liabilities		174,476						190,416
Shareholders’ Equity		310,396						311,298

Total Liabilities and Shareholders’ Equity	$	2,846,447					$	2,485,476

Interest Rate Spread					1.87	%					3.60	%

Net Interest Income			$	28,640					$	46,383

Net Interest Margin					2.23	%					4.16	%

The following table provides a detailed analysis of the changes in interest income and interest expense due to changes in rate and volume for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Changes in the average balances outstanding for interest earning assets and interest bearing liabilities are volume changes and changes in the interest rates earned and paid on such assets and liabilities are rate changes. Changes resulting from a combination of changes in volume and rate have been included in the rate changes.


	Changes From June 30, 2007 to June 30, 2008
	Volume			Rate			Net Change
	(In Thousands)
Interest Income
Loans Receivable	$	3,810		$	(21,680	)	$	(17,870	)
Loans Held For Sale		(23	)		(39	)		(62	)
Investment Securities—Taxable		1,820			816			2,636
Investment Securities—Tax-Exempt		(240	)		(212	)		(452	)
Interest-Bearing Deposits With Other Banks		(2	)		(42	)		(44	)
Federal Funds Sold and Other		431			(574	)		(143	)

Total Interest Income		5,796			(21,731	)		(15,935	)

Interest Expense
Interest-Bearing Demand and Savings Deposits		(279	)		(2,885	)		(3,164	)
Time Deposits		4,596			(100	)		4,496
Borrowings:
FHLB Advances		508			(505	)		3
Subordinated Debentures		0			(185	)		(185	)
Federal Funds Purchased and Securities Under Agreement to Repurchase		15			(443	)		(428	)
Notes Payable and Other		1,086			0			1,086

Total Interest Expense		5,926			(4,118	)		1,808

Net Interest Income	$	(130	)	$	(17,613	)	$	(17,743	)

Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level that is deemed to be appropriate by management. The amount of this provision is based upon an assessment of prior loss experience, the volume and type of lending presently being conducted by the Company, industry standards, past due loans, economic conditions of the Company’s market area and other factors related to the collectibility of the loans in our loan portfolio.


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Dollars in Thousands)
Balance, beginning of period	$	49,749		$	23,336		$	31,698		$	22,336
Charge-Offs
Construction and Land Development		(36,027	)		(282	)		(59,613	)		(282	)
Commercial, Financial and Agricultural		(788	)		(191	)		(1,119	)		(389	)
Real Estate – Other		(1,432	)		(653	)		(1,679	)		(776	)
Consumer		(384	)		(302	)		(663	)		(528	)

		(38,631	)		(1,428	)		(63,074	)		(1,975	)

Recoveries
Construction and Land Development		6,589			5			6,592			6
Commercial, Financial and Agricultural		130			86			198			155
Real Estate – Other		84			2			134			12
Consumer		148			107			322			314

		6,951			200			7,246			487

Net Charge-Offs		(31,680	)		(1,228	)		(55,828	)		(1,488	)

Provision for Loan Losses		30,383			2,000			72,582			3,260

Balance, end of period	$	48,452		$	24,108		$	48,452		$	24,108

We incurred net charge-offs of $31.7 million and $1.2 million and $55.8 million and $1.5 million during the three- and six-month periods ended June 30, 2008 and 2007, respectively. The allowance for loan losses on June 30, 2008 was 2.26% of loans receivable compared to 1.45% at December 31, 2007. The increase in charge-offs in 2008 resulted from the substantial increase in our level of nonperforming assets.

Although management utilizes its best judgment in providing for inherent losses in our loan portfolio, there can be no assurance that we will not have to increase the provision for loan losses in the future as a result of future increases in nonperforming loans or for other reasons, which could further adversely affect our results of operations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance for loan losses based on their judgments of information that is available to them at the time of their examination.

Noninterest Income and Expense

The composition of noninterest income for the periods presented is as follows:


(In Thousands)	Three Months Ended June 30,				$ Change			% Change
(In Thousands)	2008		2007		$ Change			% Change
Service Charges on Deposits	$	2,253	$	2,376	$	(123	)	-5.2	%
Mortgage Origination and Related Fees		799		1,271		(472	)	-37.1	%
Securities Gains		1		—		1		100.0	%
Other		2,037		1,103		934		84.7	%

	$	5,090	$	4,750	$	340		7.2	%

The increase of $0.3 million or 7.2% in noninterest income is due primarily to the following:

•

recognition of income of $1.3 million for the change in valuation of stock appreciation rights;

•

reduction in mortgage originations and related fees of $0.5 million as a result of decreased loan demand;

•

loss on sale of Small Business Administration loans totaling $0.2 million in 2008 compared to an insignificant gain on the sale of such loans in 2007; and

•

decrease of $0.1 million in commission fees on interim construction loans originated by SRES, Inc.; due to the downturn in the real estate market and high level of nonperforming assets which require the attention of loan officers, loan originations have declined from the prior year period.

The composition of noninterest income for the periods presented is as follows:


(In Thousands)	Six Months Ended June 30,				$ Change			% Change
(In Thousands)	2008		2007		$ Change			% Change
Service Charges on Deposits	$	4,540	$	4,474	$	66		1.5	%
Mortgage Origination and Related Fees		1,801		2,310		(509	)	-22.0	%
Securities Gains		2,035		2		2,033		NM
Other		2,576		3,056		(480	)	-15.7	%

	$	10,952	$	9,842	$	1,110		11.3	%

The increase of $1.1 million or 11.3% in noninterest income is due primarily to the following:

•

a $2.0 million dollar gain on sale, due to an increase in the level of investment securities sold, including certain U.S. Government sponsored mortgage-backed securities, during the period.

•

recognition of income of $1.3 million for the change in valuation of stock appreciation rights;

•

reduction in mortgage originations and related fees of $0.5 million as a result of decreased loan demand;

•

loss on the termination of our relationship with CFS Wealth Management, LLC of $0.5 million in the first quarter of 2008; and

•

decrease of $0.8 million in commission fees on interim construction loans originated by SRES, Inc., which is due to the decline in loan originations resulting from the downturn in the real estate market and high level of nonperforming assets.

The composition of noninterest expense for the periods presented is as follows:


(In Thousands)	Three Months Ended June 30,				$ Change			% Change
(In Thousands)	2008		2007		$ Change			% Change
Salaries and Employee Benefits	$	8,080	$	9,094	$	(1,014	)	-11.2	%
Occupancy and Equipment		1,501		1,547		(46	)	-3.0	%
Foreclosed Property Expenses		2,836		710		2,126		299.4	%
Professional Fees		769		680		89		13.1	%
Marketing Expense		437		748		(311	)	-41.6	%
Amortization-Core Deposit Intangible		232		246		(14	)	-5.7	%
Goodwill Impairment		109,701		—		109,701		100.0	%
Other		3,698		3,519		179		5.1	%

	$	127,254	$	16,544	$	110,710		669.2	%

The increase of $110.7 million in noninterest expense is due primarily to the following:

•

goodwill impairment charge of $109.7 million;

•

an increase of $2.1 million in foreclosed property expense as a result of the increase in nonperforming assets from the second quarter 2007 levels to second quarter 2008 levels (see Risk Elements section in this discussion); and

•

decrease in salaries and employee benefits of $1.0 million due to a reduction in bonus plan expense of $0.2 million, salaries of $0.1 million, commissions of $0.2 million, and other performance compensation of $0.3 million related to the decreased financial performance in 2008.

The composition of noninterest expense for the periods presented is as follows:


(In Thousands)	Six Months Ended June 30,				$ Change			% Change
(In Thousands)	2008		2007		$ Change			% Change
Salaries and Employee Benefits	$	16,816	$	18,645	$	(1,829	)	-9.8	%
Occupancy and Equipment		3,050		3,035		15		0.5	%
Foreclosed Property		4,436		896		3,540		395.1	%
Professional Fees		1,423		1,306		117		8.9	%
Marketing		842		1,360		(518	)	-38.1	%
Amortization-Core Deposit Intangible		478		493		(15	)	-3.1	%
Goodwill Impairment		109,701		—		109,701		100.0	%
Other		7,415		6,697		718		10.7	%

	$	144,161	$	32,432	$	111,729		344.5	%

The increase of $111.7 million in noninterest expense is due primarily to the following:

•

goodwill impairment charge of $109.7 million;

•

an increase of $3.5 million in foreclosed property expense as a result of the increase in nonperforming assets from 2007 levels to 2008 levels (see Risk Elements section in this discussion); and

•

decrease in salaries and employee benefits of $1.8 million due to a reduction in bonus plan expense of $0.7 million, commissions of $0.8 million, and other performance compensation of $0.3 million related to the decreased financial performance in 2008.

Income Taxes

Income tax (benefit) expense totaled ($17.3 million) and $3.5 million for the three-month periods ended June 30, 2008 and 2007, respectively. The effective tax rates for the 2008 and 2007 quarters were approximately 12.4% and 36.4%, respectively.

Income tax (benefit) expense totaled ($31.6 million) for the six-month period ended June 30, 2008 compared to $7.4 million for the six-month period ended June 30, 2007. These amounts resulted in effective tax rates of 17.8% and 36.6% for 2008 and 2007, respectively. Due to the goodwill impairment charge of $109.7 million incurred during the second quarter of 2008 (the majority of which is nontaxable), the effective tax rates for the three- and six-month periods ended June 30, 2008 are substantially lower than the corresponding periods in 2007. Prior to the second quarter of 2008, the effective tax rate has historically been at or just below the maximum corporate federal and state income tax rates due to the relatively small percentage of tax-free investments carried on the consolidated balance sheets.

Capital Adequacy

The Federal Reserve Board measures capital adequacy for bank holding companies by using a risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines. The minimum ratio of total risk-based capital to risk-adjusted assets is 8%, of which 4% must be Tier 1 capital. Our total risk-based capital ratio was 11.69% at June 30, 2008. Our Tier 1 risk-based capital ratio was 9.10% at June 30, 2008.

In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. Those guidelines provide for a minimum leverage ratio of 3% for financial institutions that meet certain criteria, including that they maintain the highest regulatory rating. All other financial institutions are required to maintain a leverage ratio of 4%. Our leverage ratio was 7.28% at June 30, 2008.

The Federal Deposit Insurance Corporation Improvement Act established minimum capital requirements for all depository institutions and imposes significant restrictions on the operations of a bank that is not at least adequately capitalized. A depository institution’s capital tier will depend upon where its capital levels are in relation to various other capital measures that include a risk-based capital measure, a leverage ratio capital measure and other factors. Under regulations adopted, for an institution to be classified as “well capitalized,” it must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a Tier 1 leverage ratio of at least 5%. Also, the institution may not be subject to any specific capital order or directive. At June 30, 2008, each of the Banks met the capital requirements to be classified as “well capitalized.”

As discussed in more detail in the Overview section, given the continuing substantial deterioration of the residential real estate markets nationally and in our local markets, we implemented a three-step plan to enhance and strengthen the levels of capital and liquidity at the holding company such that we could maintain the resources needed to maintain “well capitalized” levels of regulatory capital at each of the Banks. The three-step plan included a rights offering of our common stock, the issuance of subordinated notes and a targeted reduction in noninterest expenses.

Our ability to raise capital in the future will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed on favorable terms. If we cannot raise additional capital when needed, our ability to operate our business could be materially impaired.

Liquidity

Primarily through the actions of our Banks, we manage our liquidity to ensure adequate cash flow for deposit withdrawals, credit commitments and repayments of borrowed funds. Liquidity needs are met through loan repayments, cash flows received from pay downs on mortgage-backed securities, net interest and fee income and the sale or maturity of existing assets. In addition, liquidity is continuously provided through the acquisition of new deposits, the renewal of maturing deposits and external borrowings. Management regularly monitors deposit flow and evaluates alternate pricing structures to retain and grow deposits as needed. To the extent needed to fund loan demand, traditional local deposit funding sources are supplemented by the use of FHLB borrowings, brokered deposits and other wholesale deposit sources outside our immediate market area, including an Internet-based national certificate of deposit service. Management has found that most non-relationship oriented retail certificates of deposit are interchangeable with wholesale funding sources such as brokered deposits and wholesale certificates of deposit and as a result, the Company alternates between these funding sources depending on the relative costs.

Our Asset/Liability Senior Management Committee (ALCO) reviews a series of weekly reports related to liquidity-related issues such as loan pipelines, deposit pricing and upcoming deposit maturities, among others. This committee meets monthly or more often if needed, to discuss these reports. Through various asset/liability management strategies, we maintain a balance among goals of liquidity, safety and earnings potential. Our Banks monitor internal policies that are consistent with regulatory liquidity guidelines.

The Company’s investment portfolio provides a ready means to raise cash if liquidity needs arise. As of June 30, 2008, we held $332.1 million in bonds at current market value in our available for sale portfolio. We purchase only marketable investment grade bonds. Although $253.3 million or 76% of our bond portfolio is pledged to secure various public funds deposits, federal funds lines and repurchase agreements and for other purposes, management can restructure and make available investment securities for sale if required to meet liquidity needs.

Management continues to emphasize programs to generate local core deposits as our primary funding source. The stability of our core deposit base is an important factor in our liquidity position. A large percentage of the deposit base is comprised of accounts of individuals and small businesses with comprehensive banking relationships and limited volatility.

At June 30, 2008 and December 31, 2007, our Banks had $1.11 billion and $1.04 billion, respectively, in certificates of deposit of $100,000 or more. These larger deposits represented 49% and 48% of respective total interest-bearing deposits. Management seeks to monitor and control the use of these larger certificates, which tend to be more volatile in nature, to ensure an adequate supply of funds as needed. The Company compares relative interest costs to attract local core relationships to the cost associated with market rates of interest on various external deposit sources to help minimize our overall cost of funds.

Local market deposit sources have not been sufficient to fund our loan growth in previous years. As a result, our Banks supplemented deposit sources with brokered deposits and wholesale certificates of deposit. As of June 30, 2008 and December 31, 2007, the Banks reported $1.04 billion, or 42% of total deposits and $854.4 million, or 40% of total deposits in brokered and wholesale certificates of deposit, respectively.

We have established multiple borrowing sources to augment our funds management. Borrowing capacity exists through the membership of our Banks in the FHLB program. Our Banks have also established overnight borrowing lines for federal funds purchased through various correspondent banks. At June 30, 2008, the Company has availability under secured and unsecured lines of $141.7 million and $4.0 million, respectively.

We used a portion of the net proceeds of the $40 million of subordinated notes issued in April 2008 to pay off and terminate two existing holding company secured lines of credit in the amount of $10.5 million. See Overview section of this discussion for further information regarding the issuance of the subordinated notes.

Management believes that the various funding sources discussed above are adequate to meet our liquidity needs in the future without any material adverse impact on operating results.

Interest Rate Risk Management

The management of interest rate risk is the primary goal of our ALCO Committee. We attempt to achieve consistent growth in net interest income while limiting volatility from changes in interest rates. Management seeks to accomplish this goal by balancing the maturity and repricing characteristics of various assets and liabilities. ALCO meets regularly and has responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing our interest rate sensitivity.

To help us manage fluctuations in our net interest income, we use simulation modeling to estimate the impact on net interest income of both the current level of market interest rates and for changes to the current level of market interest rates. We measure the projected changes in market interest rates in terms of rate “shifts” of plus or minus 100, 200 and 300 basis points over the current levels of market interest rates. We assume rate shifts occur ratably over a 12-month measurement horizon. We base projected pricing for maturing and repricing assets and liabilities upon actual pricing experience over the period immediately preceding the projection period.

Using the outlook for market interest rates at June 30, 2008, continued elevated levels of nonperforming assets and actual pricing experience, our simulation model projects changes in the net interest margin to be as follows:


Scenario	Net Interest Margin Change
+300 Basis Point Ramp	+49		basis points
+200 Basis Point Ramp	+32		basis points
+100 Basis Point Ramp	+16		basis points
Base Case	—		basis points
-100 Basis Point Ramp	(15	)	basis points
-200 Basis Point Ramp	(29	)	basis points
-300 Basis Point Ramp	(44	)	basis points

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments primarily include unfulfilled loan commitments and standby letters of credit. Our exposure to credit loss in the event of nonperformance by the counter party to the financial instrument for unfulfilled loan commitments and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet transactions.

Unfulfilled loan commitments are arrangements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Historically, many commitments expire without being drawn upon; therefore, the following total commitment amounts are not necessarily indicative of future funding requirements. Unfulfilled loan commitments as of June 30, 2008 and December 31, 2007 approximated $298.1 million and $430.8 million, respectively.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers, and letters of credit are collateralized when deemed necessary. We had commitments under financial and performance standby letters of credit of $13.9 million as of June 30, 2008 and $14.9 million as of December 31, 2007.

Critical Accounting Estimates

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our ALL, goodwill and stock-based compensation have been critical to the determination of our financial position and results of operations. See Provision for Loan Losses section included herein and Critical Accounting Policies section included in our Annual Report on Form 10-K for the year ended December 31, 2007.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

The information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Interest Rate Risk Management .

ITEM 4.

Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures in accordance with Rule 13a-15 under the Securities Exchange Act of 1934. Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There were no changes in our internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect internal control over financial reporting subsequent to the date of this evaluation.

PART II. OTHER INFORMATION

ITEM 1.

Legal Proceedings

In the ordinary course of business, we are sometimes a party to litigation. We are not currently a party to any litigation that management believes, if determined adversely to us, would have a material adverse effect on our results of operations, financial condition or cash flows.

ITEM 1A.

Risk Factors

In addition to other information set forth in this Quarterly Report on Form 10-Q, the risk factors discussed in Item 1A to Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2007 contain valuable information concerning factors that could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3.

Defaults Upon Senior Securities

None.

ITEM 4.

Submission of Matters to a Vote of Security Holders

The Company’s Annual Meeting of Shareholders was held on May 15, 2008. At the annual meeting, the following matters were submitted to a vote:

(I) Proposal 1 – Election of Directors


	For	Withheld
Edward M. Beckham, II	20,542,008	606,950
Alford C. Bridges	20,414,218	734,740
Thad G. Childs, Jr.	20,471,563	677,395
John W. Ramsey	20,174,381	974,577
Robert M. Stalnaker	19,966,681	1,182,277
Richard W. White, Jr.	20,373,158	775,800

The terms of office of the other directors continued after the Annual Meeting of Shareholders:


Name		Term Expiring
Frank H. Childs, Jr.		2009
Benjamin W. Griffith, III		2010
Ruthie G. McMichael		2010
Robert T. Mullis		2009
Ben G. Porter		2010
Joe E. Timberlake, III		2009
H. Averett Walker		2010
Larry C. Walker		2010
James R. Williams		2010

(II) Other Proposals


	For	Against	Abstain	Broker Non-Vote
Proposal 2 – Ratification of Amended and Restated Bylaws	20,599,451	416,175	133,332	—
Proposal 3 – Ratification of Selection of Independent Auditors	20,798,088	259,730	91,140	—
Proposal 4 – Shareholder Proposal to Declassify the Terms of Directors	2,976,468	13,724,219	225,920	4,222,351

The Company held a Special Shareholders Meeting on June 26, 2008. At the special meeting, the following matters were submitted to a vote:


	For	Against	Abstain	Broker Non-Vote
Proposal 1 – Increase in Number of Authorized Shares	6,051,614	83,317	46,041	—
Proposal 2 – Exchange of Stock Appreciation Rights for Nonvoting Warrants	6,048,036	92,171	40,765	—

ITEM 5.

Other Information

None.

ITEM 6.

EXHIBITS

(a) The following is a list of exhibits including items incorporated by reference:


3.1		Amended and Restated Articles of Incorporation, (incorporated by reference to Exhibit 3.1 to the registrant’s Form 8-K (File No. 000-23261) filed on July 1, 2008).

3.2*		Amended and Restated Bylaws.

4.1		See Exhibits 3.1 and 3.2 for provisions of Amended and Restated Articles of Incorporation and Bylaws, as amended, which define the rights of its shareholders.

4.2		Form of Stock Certificate (incorporated herein by reference as Exhibit 4.1 to the registrant’s Registration Statement on Form S-4 (File No. 333-49977), filed on April 13, 1998).

10.1		Subordinated Note and Purchase Agreement with Financial Stocks Capital Partners IV, L.P. and Financial Stocks Capital Partners V, L.P. dated April 28, 2008 (incorporated by reference as Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-23261), filed on April 30, 2008.

10.2		Form of Note dated April 28, 2008 (incorporated by reference as Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-23261), filed on April 30, 2008.

10.3		Form of Voting Warrant dated April 28, 2008 (incorporated by reference as Exhibit 10.3 to the registrant’s Form 8-K (File No. 000-23261), filed on April 30, 2008.

10.4		Form of Stock Appreciation Right dated April 28, 2008 (incorporated by reference as Exhibit 10.4 to the registrant’s Form 8-K (File No. 000-23261), filed on April 30, 2008.

10.5		Form of Non-Voting Warrant dated April 28, 2008 (incorporated by reference as Exhibit 10.5 to the registrant’s Form 8-K (File No. 000-23261), filed on April 30, 2008.

10.6		Registration Agreement dated April 28, 2008 (incorporated by reference as Exhibit 10.6 to the registrant’s Form 8-K (File No. 000-23261), filed on April 30, 2008.

31.1*		Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certificate of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Security Bank Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SECURITY BANK CORPORATION

/s/ H. Averett Walker

H. Averett Walker

President and Chief Executive Officer

(Principal Executive Officer)

Date: August 8, 2008

/s/ James R. McLemore

James R. McLemore

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: August 8, 2008

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