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** **

 

** **

**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 March 31, 2011**

 

**or**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from           to       **

 

**Commission file number: 000-54056**

 

**STATE BANK FINANCIAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Georgia**                                                           | ** ** | **27-1744232**                       |
|-----------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)        |       | (I.R.S. Employer Identification No.) |
|                                                                  |       |                                 |
| **415 East Paces Ferry Road, NE, Suite 250,   Atlanta, Georgia** | ** ** | **30305**                            |
| (Address of principal executive offices)                              |       | (Zip Code)                           |

 

**404-475-6599**

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

 

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

 

| Large accelerated filer o                                          |   | Accelerate filer o          |
|-------------------------------------------------------------------------|--------|----------------------------------|
|                                                                    |   |                             |
| Non-accelerated filer x   (Do not check if a smaller reporting company) |   | Smaller reporting company o |

 

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

 

The number of shares outstanding of the registrant’s common stock, as of May 13, 2011 was 31,610,904.

 

 

** **

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Table of Contents

 

**TABLE OF CONTENTS**

 
| ** **                                           | ** **                                                                                                                 | **Page**   |
|------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** **                                                                                                                 | ** ** |
| Cautionary Note Regarding Forward-Looking Statements | 1                                                                                                                          |
|                                                 |                                                                                                                       |
| **Part I — Financial Information**         |                                                                                                                       |
| ** **                                           |                                                                                                                       |
| ITEM 1.                                              | Financial   Statements                                                                                                     | 2          |
|                                                 |                                                                                                                       |       |
|                                                 | Consolidated   Statements of Financial Condition at March 31, 2011 (unaudited) and   December 31, 2010 (audited) | 2          |
|                                                 |                                                                                                                       |       |
|                                                 | Consolidated   Statement of Income (unaudited) for the Three Months Ended March 31,   2011 and 2010                   | 3          |
|                                                 |                                                                                                                       |       |
|                                                 | Consolidated   Statement of Comprehensive Income (unaudited) for the Three Months Ended   March 31, 2011              | 4          |
|                                                 |                                                                                                                       |       |
|                                                 | Consolidated   Statement of Shareholders’ Equity (unaudited) for the Three Months Ended   March 31, 2011         | 5          |
|                                                 |                                                                                                                       |       |
|                                                 | Consolidated   Statement of Cash Flows (unaudited) for the Three Months Ended March 31,   2011 and 2010               | 6-7        |
|                                                 |                                                                                                                       |       |
|                                                 | Notes to   Consolidated Financial Statements (unaudited)                                                                   | 8          |
|                                                 |                                                                                                                       |       |
| ITEM 2.                                              | Management’s   Discussion and Analysis of Financial Condition and Results of Operations                               | 27         |
| ITEM 3.                                              | Quantitative   and Qualitative Disclosures About Market Risk                                                               | 47         |
| ITEM 4.                                              | Controls and   Procedures                                                                                                  | 48         |
|                                                 |                                                                                                                       |       |
| **Part II — Other Information**            |                                                                                                                       |
| ** **                                           |                                                                                                                       |
| ITEM 1.                                              | Legal Proceedings                                                                                                          | 49         |
| ITEM 1A.                                             | Risk Factors                                                                                                               | 49         |
| ITEM 2.                                              | Unregistered   Sales of Equity Securities and Use of Proceeds                                                              | 49         |
| ITEM 3.                                              | Defaults   Upon Senior Securities                                                                                          | 49         |
| ITEM 4.                                              | (Removed and   Reserved)                                                                                                   | 49         |
| ITEM 5.                                              | Other Information                                                                                                          | 49         |
| ITEM 6.                                              | Exhibits                                                                                                                   | 49         |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certain statements contained in this report that are not statements of historical fact may constitute forward-looking statements.  These forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan” and “estimate,” as well as similar expressions.  These forward-looking statements include statements related to our projected growth, anticipated future financial performance, and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from expected developments or events, or business and growth strategies, including anticipated internal growth and plans to establish or acquire banks or the assets of failed banks.

 

These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ materially from those anticipated in such statements.  Potential risks and uncertainties include the following:

 

·                   general economic conditions (both generally and in our markets) may be less favorable than expected, which could result in, among other things, a continued deterioration in credit quality, a further reduction in demand for credit and a further decline in real estate values;

·                   the general decline in the real estate and lending markets, particularly in our market areas, may continue to negatively affect our financial results;

·                   our ability to raise additional capital may be impaired if current levels of market disruption and volatility continue or worsen;

·                   we may be unable to collect reimbursements on losses that we incur on our assets covered under loss share agreements with the FDIC as we anticipate;

·                   costs or difficulties related to the integration of the banks we acquired from the FDIC as receiver may be greater than expected;

·                   restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals;

·                   legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect us;

·                   competitive pressures among depository and other financial institutions may increase significantly;

·                   changes in the interest rate environment may reduce margins or the volumes or values of the loans we make or have acquired;

·                   other financial institutions have greater financial resources and may be able to develop or acquire products that enable them to compete more successfully than we can;

·                   our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;

·                   adverse changes may occur in the bond and equity markets;

·                   war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets;

·                   economic, governmental or other factors may prevent the projected population, residential and commercial growth in the markets in which we operate; and

·                   we will or may continue to face the risk factors discussed from time to time in the periodic reports we file with the SEC.

 

For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  See Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2010, as well as Part II, Item 1A, Risk Factors, below, for a description of some of the important factors that may affect actual outcomes.

 

1

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**PART I**

 

**Item 1.  Financial Statements.**

 

**STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

 
| ** **                                                                                                                      | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                      | ** ** | **(Unaudited)**              | ** ** | **(Audited)**                   | ** ** |
| **ASSETS**                                                                                                                      |       |                         |       |                            |       |
| ** **                                                                                                                      |       |                         |       |                            |       |
| Cash and amounts due   from depository institutions                                                                             |       | $                            | 10,371     |                            | $          | 25,843 |   |
| Interest-bearing   deposits in other financial institutions                                                                     |       | 292,145                      |       | 360,646                         |       |
| Cash and cash equivalents                                                                                                       |       | 302,516                      |       | 386,489                         |       |
| Investment securities   available for sale                                                                                      |       | 385,637                      |       | 405,581                         |       |
| Federal Home Loan Bank   stock                                                                                                  |       | 14,142                       |       | 14,593                          |       |
| Loans receivable:                                                                                                               |       |                         |       |                            |       |
| Not covered under FDIC   loss sharing agreements                                                                                |       | 412,998                      |       | 342,849                         |       |
| Covered under FDIC loss   sharing agreements, net                                                                               |       | 891,190                      |       | 934,967                         |       |
| Allowance for loan   losses (non-covered loans)                                                                                 |       | (6,214                       | )          | (5,351                          | )          |
| Loans receivable, net                                                                                                           |       | 1,297,974                    |       | 1,272,465                       |       |
| Mortgage loans held for   sale                                                                                                  |       | 859                          |       | 3,542                           |       |
| Other real estate:                                                                                                              |       |                         |       |                            |       |
| Not covered under FDIC   loss sharing agreements                                                                                |       | 75                           |       | 75                              |       |
| Covered under FDIC loss   sharing agreements                                                                                    |       | 131,074                      |       | 155,981                         |       |
| Premises and equipment                                                                                                          |       | 32,157                       |       | 31,908                          |       |
| Goodwill and other   intangibles                                                                                                |       | 8,970                        |       | 9,194                           |       |
| FDIC receivable for loss   sharing agreements, net                                                                              |       | 457,608                      |       | 494,428                         |       |
| Other assets                                                                                                                    |       | 57,736                       |       | 54,323                          |       |
|                                                                                                                            |       |                         |       |                            |       |
| Total assets                                                                                                                    |       | $                            | 2,688,748  |                            | $          | 2,828,579 |   |
|                                                                                                                            |       |                         |       |                            |       |
| **LIABILITIES AND SHAREHOLDERS’   EQUITY**                                                                                 |       |                         |       |                            |       |
| ** **                                                                                                                      |       |                         |       |                            |       |
| Liabilities:                                                                                                                    |       |                         |       |                            |       |
| Non-interest bearing   deposits                                                                                                 |       | $                            | 229,817    |                            | $          | 224,543 |   |
| Interest-bearing   deposits                                                                                                     |       | 2,040,048                    |       | 2,197,383                       |       |
| Securities sold under   agreements to repurchase                                                                                |       | 5,371                        |       | 5,246                           |       |
|                                                                                                                            |       |                         |       |                            |       |
| Other liabilities                                                                                                               |       | 46,059                       |       | 42,064                          |       |
| Total liabilities                                                                                                               |       | 2,321,295                    |       | 2,469,236                       |       |
|                                                                                                                            |       |                         |       |                            |       |
| Commitments and   contingencies                                                                                                 |       |                         |       |                            |       |
|                                                                                                                            |       |                         |       |                            |       |
| Shareholders’   Equity:                                                                                                    |       |                         |       |                            |       |
| Preferred stock, $1 par value; 2,000,000 shares   authorized, zero shares issued and outstanding in 2011 and 2010, respectively |       | —                       |       | —                          |       |
| Common stock, $0.01 par value; 100,000,000 shares   authorized, 31,610,904 shares issued and outstanding in 2011 and 2010       |       | 316                          |       | 316                             |       |
| Additional paid-in-capital                                                                                                      |       | 292,909                      |       | 292,942                         |       |
| Retained earnings                                                                                                               |       | 71,799                       |       | 63,568                          |       |
| Accumulated other comprehensive income, net of tax                                                                              |       | 2,429                        |       | 2,517                           |       |
| Total shareholders’   equity                                                                                               |       | 367,453                      |       | 359,343                         |       |
|                                                                                                                            | ** ** | ** **                   |       |                            |       |
| Total liabilities and   shareholders’ equity                                                                               | ** ** | **$**                        | 2,688,748  |                            | $          | 2,828,579 |   |

 

**See accompanying notes to consolidated financial statements**

 

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**STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF INCOME**

**(UNAUDITED)**

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

 
| ** **                                                | ** ** | **Three months ended********March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                | ** ** | **2011**                                               | ** ** | **2010** | ** ** |
| **Interest and Dividend Income**                          |       |                                                   |       |   |   |
| Loans receivable                                          |       | $                                                      | 32,221     |   | $ | 39,015 |   |
| Investment securities                                     |       | 2,380                                                  |       | 1,914 |   |
| Deposits with other banks and other                       |       | 197                                                    |       | 108 |   |
| **Total interest and dividend   income**                  |       | 34,798                                                 |       | 41,037 |   |
| **Interest Expense**                                      |       |                                                   |       |   |   |
| Deposits                                                  |       | 7,033                                                  |       | 8,668 |   |
| Federal funds purchased and repurchase agreements         |       | 85                                                     |       | 12 |   |
| **Total interest expense**                                |       | 7,118                                                  |       | 8,680 |   |
| **Net interest income**                                   |       | 27,680                                                 |       | 32,357 |   |
| **Provision for loan losses**                             |       | 961                                                    |       | 497 |   |
| **Net interest income after   provision for loan losses** |       | 26,719                                                 |       | 31,860 |   |
| **Noninterest Income**                                    |       |                                                   |       |   |   |
| Accretion of FDIC receivable for loss sharing   agreement |       | 4,973                                                  |       | 4,109 |   |
| Service charges on deposits                               |       | 1,413                                                  |       | 1,641 |   |
| (Loss) gain on sale of investment securities              |       | (3                                                     | )          | 7 |   |
| Mortgage banking income                                   |       | 157                                                    |       | 18 |   |
| Other                                                     |       | 1,829                                                  |       | 954 |   |
| **Total noninterest income**                              |       | 8,369                                                  |       | 6,729 |   |
| **Noninterest Expense**                                   |       |                                                   |       |   |   |
| Salaries and employee benefits                            |       | 11,677                                                 |       | 10,988 |   |
| Occupancy and equipment                                   |       | 2,106                                                  |       | 2,130 |   |
| Legal and professional fees                               |       | 1,843                                                  |       | 580 |   |
| Marketing                                                 |       | 760                                                    |       | 657 |   |
| Federal insurance premiums and other regulatory   fees    |       | 648                                                    |       | 1,124 |   |
| Net cost of operations of real estate owned               |       | 2,021                                                  |       | 2,550 |   |
| Data processing                                           |       | 951                                                    |       | 879 |   |
| Core deposit intangible amortization expense              |       | 223                                                    |       | 165 |   |
| Other                                                     |       | 1,515                                                  |       | 914 |   |
| **Total noninterest expense**                             |       | 21,744                                                 |       | 19,987 |   |
| **Income before income taxes**                            |       | 13,344                                                 |       | 18,602 |   |
| **Income tax expense**                                    |       | 5,113                                                  |       | 6,883 |   |
| **Net income**                                            |       | $                                                      | 8,231      |   | $ | 11,719 |   |
| **Basic net income per share**                            |       | $                                                      | 0.26       |   | $ | 0.37 |   |
| **Diluted net income per share**                          |       | $                                                      | 0.25       |   | $ | 0.37 |   |
| **Weighted average common shares   outstanding:**         |       |                                                   |       |   |   |
| **Basic**                                                 |       | 31,610,904                                             |       | 31,540,977 |   |
| **Diluted**                                               |       | 32,622,623                                             |       | 31,828,164 |   |

 

**See accompanying notes to consolidated financial statements**

 

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**STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**(UNAUDITED)**

(DOLLARS IN THOUSANDS)

 
| ** **                                                                          | ** ** | **Three months ended********March 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2011**                                               | ** ** | **2010** | ** ** |
| **Net Income**                                                                      |       | $                                                      | 8,231      |   | $ | 11,719 |   |
| **Other Comprehensive Income, Net   of Income Tax**                                 |       |                                                   |       |   |   |
| Reclassification adjustment for (losses)/gains   included in net income, net of tax |       | (2                                                     | )          | 4 |   |
| Unrealized (loss)/gain on securities                                                |       | (86                                                    | )          | 1,353 |   |
| **Total other comprehensive   income (loss)**                                       |       | (88                                                    | )          | 1,357 |   |
| **Comprehensive Income**                                                            |       | $                                                      | 8,143      |   | $ | 13,076 |   |

 

**See accompanying notes to consolidated financial statements**

 

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**STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY**

**CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)**

**FOR THE THREE MONTHS ENDED MARCH 31, 2011**

(IN THOUSANDS)

 
| ** **                                         | ** ** | ** **   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|--------------|------------|------------|------------|-------------|------------|--------------|------------|-------------------|------------|-----------------|------------|------------|------------|
| ** **                                         | ** ** | ** **   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**       | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | ** **   | ** ** | **Common** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** **      | ** ** |
| ** **                                         | ** ** | **Warrants** | ** ** | **Shares** | ** ** | **Stock**   | ** ** | **Capital**  | ** ** | **Earnings**      | ** ** | **Income**      | ** ** | **Total**  | ** ** |
| ** **                                         |       |         |       |       |       |        |       |         |       |              |       |            |       |       |       |
| **Balance,****December 31,   2010**           |       | 2,715,561    |       | 31,610,904 |       | $           | 316        |         | $          | 292,942           |       | $               | 63,568     |       | $          | 2,517 |   | $ | 359,343 |   |
|                                               |       |         |       |       |       |        |       |         |       |              |       |            |       |       |       |
| Repurchase   of stock warrants                     |       | (16,000      | )          | —     |       | —      |       | (33          | )          | —            |       | —          |       | (33        | )          |
|                                               |       |         |       |       |       |        |       |         |       |              |       |            |       |       |       |
| Change   in accumulated other comprehensive income |       | —       |       | —     |       | —      |       | —       |       | —            |       | (88             | )          | (88        | )          |
|                                               |       |         |       |       |       |        |       |         |       |              |       |            |       |       |       |
| Net   income                                       |       | —       |       | —     |       | —      |       | —       |       | 8,231             |       |            |       | 8,231      |       |
| ** **                                         |       |         |       |       |       |        |       |         |       |              |       |            |       |       |       |
| **Balance,****March ****31, 2011**            |       | 2,699,561    |       | 31,610,904 |       | $           | 316        |         | $          | 292,909           |       | $               | 71,799     |       | $          | 2,429 |   | $ | 367,453 |   |

 

**See accompanying notes to consolidated financial statements**

 

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**STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(IN THOUSANDS)**

 
| ** **                                                                           | ** ** | **Three months ended********March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2011**                                               | ** ** | **2010** | ** ** |
| **Cash Flows from Operating   Activities**                                           |       |                                                   |       |   |   |
| Net Income                                                                           |       | $                                                      | 8,231      |   | $ | 11,719 |   |
| Adjustments to reconcile net income to net cash                                      |       |                                                   |       |   |   |
| Provided by operating activities:                                                    |       |                                                   |       |   |   |
| Depreciation, amortization and accretion on   premises and equipment and investments |       | 794                                                    |       | 1,154 |   |
| Amortization of intangible assets                                                    |       | 224                                                    |       | 165 |   |
| Provision for loan losses                                                            |       | 961                                                    |       | 497 |   |
| Amortization of premiums and discounts on   acquisitions, net                        |       | (30,455                                                | )          | (23,357 | ) |
| Originations of mortgage loans held for sale                                         |       | (6,249                                                 | )          | (869 | ) |
| Proceeds from sales of mortgage loans held for   sale                                |       | 8,932                                                  |       | 135 |   |
| Loss on sale of other real estate                                                    |       | 1,048                                                  |       | 1,454 |   |
| Write downs on other real estate owned                                               |       | 18,536                                                 |       | 4,657 |   |
| Increase in FDIC receivable for covered losses                                       |       | (5,539                                                 | )          | (11,179 | ) |
| Funds collected from FDIC receivable                                                 |       | 47,332                                                 |       | 50,270 |   |
| Income on bank owned life insurance                                                  |       | (357                                                   | )          | — |   |
| Loss (gain) on investment securities available for   sale                            |       | 3                                                      |       | (7 | ) |
| Change in other liabilities, net                                                     |       | 3,994                                                  |       | 6,026 |   |
| Other operating activities, net                                                      |       | (3,003                                                 | )          | 399 |   |
| Net cash provided by operating activities                                            |       | 44,452                                                 |       | 41,064 |   |
| **Cash Flows from Investing   Activities**                                           |       |                                                   |       |   |   |
| Purchase of investment securities available for   sale                               |       | (26,883                                                | )          | (50,163 | ) |
| Proceeds from sales, calls, maturities and   paydowns:                               |       |                                                   |       |   |   |
| Available for sale                                                                   |       | 46,288                                                 |       | 28,742 |   |
| FHLB stock repurchase                                                                |       | 451                                                    |       | — |   |
| Loans to customers, net of repayments                                                |       | (15,761                                                | )          | 34,109 |   |
| Purchases of premises and equipment, net                                             |       | (1,497                                                 | )          | (1,573 | ) |
| Proceeds from disposals of premises and equipment                                    |       | 849                                                    |       | — |   |
| Proceeds from sales of other real estate                                             |       | 20,097                                                 |       | 15,438 |   |
| Net cash provided by investing activities                                            |       | 23,544                                                 |       | 26,553 |   |
| **Cash Flows from Financing   Activities**                                           |       |                                                   |       |   |   |
| Interest-bearing customer deposits                                                   |       | (157,335                                               | )          | 56,806 |   |
| Noninterest-bearing customer deposits                                                |       | 5,274                                                  |       | 1,280 |   |
| Proceeds from other short term borrowings                                            |       | 30,633                                                 |       | 30,531 |   |
| Repayments of other short term borrowings                                            |       | (30,508                                                | )          | (28,699 | ) |
| Repayments of other FHLB borrowings                                                  |       | —                                                 |       | (5,000 | ) |
| Repurchase of stock warrants                                                         |       | (33                                                    | )          | — |   |
| Net cash provided by (used in) financing   activities                                |       | (151,969                                               | )          | 54,918 |   |
| **Net Increase (Decrease) in Cash   and Cash Equivalents**                           |       | (83,973                                                | )          | 122,535 |   |
| **Cash and Cash Equivalents,   Beginning**                                           |       | 386,489                                                |       | 200,166 |   |
| **Cash and Cash Equivalents, Ending**                                                |       | $                                                      | 302,516    |   | $ | 322,701 |   |
|                                                                                 |       |                                                   |       |   |   |
| **Cash payment for:**                                                                |       |                                                   |       |   |   |
| Interest                                                                             |       | $                                                      | 6,709      |   | $ | 10,833 |   |
| Income taxes                                                                         |       | $                                                      | —     |   | $ | — |   |

 

**See accompanying notes to consolidated financial statements**

 

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| ** **                                                                    | ** ** | **Three months ended********March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2011**                                               | ** ** | **2010** | ** ** |
| **Supplemental disclosure on   non-cash investing and financing activities:** | ** ** | ** **                                             |       |   |   |
| Unrealized (losses) gains on securities                                       |       | $                                                      | (88        | ) | $ | 1,361 |   |
| Transfer of loans to other real estate                                        |       | $                                                      | 14,773     |   | $ | 52,590 |   |

 

**See accompanying notes to consolidated financial statements**

 

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** **

**STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**(1)****       ****Basis of Presentation**

 

State Bank Financial Corporation (the “Company”) is a bank holding company whose business is primarily conducted through its wholly-owned banking subsidiary, State Bank and Trust Company (the “Bank”).  Through the Company, the Bank operates a full service banking business and offers a broad range of commercial and retail banking products to its customers, which range from Metro Atlanta to middle Georgia.

 

The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Regulation S-X.  Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation.  The interim consolidated financial statements included herein are unaudited, but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods presented.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The results of operations for the period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year.  These financial statements should be read in conjunction with the financial statements and notes thereto and the report of our registered independent public accounting firm included in the Company’s Annual Report for the year ended December 31, 2010.

 

Certain amounts have been reclassified to conform to current period presentation.  The reclassifications had no effect on net income or shareholders’ equity as previously reported.

 

**Recently Adopted Accounting Pronouncements**

 

In April 2011, the FASB issued an update to the accounting standards to provide additional guidance to assist creditors in determining whether a restructuring is a troubled debt restructuring (“TDR”).  The provisions of this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  For purposes of measuring the impairment of newly identified receivables as a result of applying this guidance, an entity should apply the provisions prospectively for the first interim or annual period beginning on or after June 15, 2011.  The information required to be disclosed regarding TDRs within the new credit quality disclosures will now be required for interim and annual periods beginning on or after June 15, 2011 as well.  The Company is currently evaluating the impact of adoption on its financial position and results of operations, but does not believe that adoption will have a material impact.

 

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**(2) ****Investment Securities**

 

Investment securities as of March 31, 2011 are summarized as follows *(in thousands)*:

 
| ** **                                     | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|---------------------------------|------------|---------------------|------------|
| **Securities Available for Sale**              |       |                 |       |                           |       |                            |       |                |       |
| U.S. Government agencies                       |       | $                    | 132,818    |                           | $          | 587                             |       | $                   | 9          |   | $ | 133,396 |   |
| State and political subdivisions               |       | 10,341               |       | 201                            |       | 10                              |       | 10,532              |       |
| Residential mortgage-backed securities-private |       | 85,708               |       | 1,320                          |       | 1,119                           |       | 85,909              |       |
| Residential mortgage-backed securities-agency  |       | 37,522               |       | 769                            |       | —                          |       | 38,291              |       |
| Collateralize-mortgage obligations (CMO)       |       | 115,013              |       | 2,029                          |       | 37                              |       | 117,005             |       |
| Corporate securities                           |       | 354                  |       | 150                            |       | —                          |       | 504                 |       |
|                                           |       | $                    | 381,756    |                           | $          | 5,056                           |       | $                   | 1,175      |   | $ | 385,637 |   |

 

Investment securities as of December 31, 2010 are summarized as follows *(in thousands)*:

 
| ** **                                     | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|---------------------------------|------------|---------------------|------------|
|                                           |       |                 |       |                           |       |                            |       |                |       |
| **Securities Available for Sale**              |       |                 |       |                           |       |                            |       |                |       |
| U.S. Government agencies                       |       | $                    | 163,002    |                           | $          | 699                             |       | $                   | 20         |   | $ | 163,681 |   |
| State and political subdivisions               |       | 9,490                |       | 114                            |       | 49                              |       | 9,555               |       |
| Residential mortgage-backed securities-private |       | 61,504               |       | 705                            |       | 1,184                           |       | 61,025              |       |
| Residential mortgage-backed securities-agency  |       | 40,892               |       | 781                            |       | —                          |       | 41,673              |       |
| Collateralized-mortgage obligations (CMO)      |       | 125,146              |       | 2,836                          |       | 27                              |       | 127,955             |       |
| Corporate securities                           |       | 1,525                |       | 167                            |       | —                          |       | 1,692               |       |
|                                           |       | $                    | 401,559    |                           | $          | 5,302                           |       | $                   | 1,280      |   | $ | 405,581 |   |

 

The amortized cost and estimated fair value available-for-sale securities at March 31, 2011 by contractual maturity are summarized in the table below.  Expected maturities for mortgage-backed securities may differ from contractual maturities because in certain cases borrowers prepay obligations without prepayment penalties.  Therefore, these securities are not included in the following maturity summary *(in thousands):*

 
| ** **                                             | ** ** | **Amortized   Cost** | ** ** | **Fair Value** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|---------------------|------------|
|                                                   |       |                 |       |                |       |   |   |
| Due in one year or less                                |       | $                    | 82,896     |                | $          | 83,015 |   |
| Due from one year to five years                        |       | 45,756               |       | 46,050              |       |
| Due from five years to ten years                       |       | 5,629                |       | 5,854               |       |
| Due after ten years                                    |       | 9,232                |       | 9,513               |       |
| FNMA, GNMA, FHLMC and CMO mortgage-backed   securities |       | 238,243              |       | 241,205             |       |
|                                                   |       | $                    | 381,756    |                | $          | 385,637 |   |

 

The Company’s investment in FHLB stock was $14.1 million and $14.6 million at March 31, 2011 and December 31, 2010, respectively.

 

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Gains and losses on the sales and calls of securities available for sale consist of the following *(in thousands)*:

 
| ** **                                                              | ** ** | **Three months ended********March 31** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2011**                                              | ** ** | **2010** | ** ** |
| Gross gains on securities available for sale                            |       | $                                                     | —     |   | $ | 7 |   |
| Gross losses on securities available for sale                           |       | (3                                                    | )          | — |   |
| Net realized gains (losses) on   sales of securities available for sale |       | $                                                     | (3         | ) | $ | 7 |   |

 

The composition of investment securities reflects the strategy of management to maintain an appropriate level of liquidity while providing a relatively stable source of revenue.  The securities portfolio may at times provide a balance over interest rate risk associated with other areas of the balance sheet while also providing a means for the investment of available funds, providing liquidity and supplying investment securities that are required to be pledged as collateral against specific deposits. Management monitors the investment portfolio and evaluates investments for other-than-temporary impairment on a quarterly basis.  Consideration during the evaluation is placed on (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the positive intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for anticipated recovery in fair value.  As of March 31, 2011, there was no intent to sell any of the securities available for sale.  Furthermore, it is not likely that the Company will have to sell such securities before a recovery of the amortized cost basis.

 

The following table provides information regarding securities with unrealized losses as of March 31, 2011 and December 31, 2010 *(in thousands)*:

 
| ** **                                | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**        | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|------------------|------------|
| ** **                                | ** ** | **Fair   Value**                       | ** ** | **Unrealized   Losses**              | ** ** | **Fair   Value** | ** ** | **Unrealized   Losses** | ** ** | **Fair   Value** | ** ** | **Unrealized   Losses** | ** ** |
| **March 31, 2011**                   |       |                                   |       |                                 |       |             |       |   |   |   |   |   |   |
| Investment securities available for sale: |       |                                   |       |                                 |       |             |       |   |   |   |   |   |   |
| U.S. Government securities                |       | $                                      | 14,120     |                                 | $          | 9                |       | $ | — |   | $ | — |   | $ | 14,120 |   | $ | 9 |   |
| State and political subdivisions          |       | 2,974                                  |       | 4                                    |       | 250              |       | 6 |   | 3,224 |   | 10 |   |
| Residential mortgage-backed-private       |       | 41,324                                 |       | 1,119                                |       | —           |       | — |   | 41,324 |   | 1,119 |   |
| Collateralized mortgage obligations       |       | 11,620                                 |       | 37                                   |       | —           |       | — |   | 11,620 |   | 37 |   |
| **Total**                                 |       | $                                      | 70,038     |                                 | $          | 1,169            |       | $ | 250 |   | $ | 6 |   | $ | 70,288 |   | $ | 1,175 |   |
|                                      |       |                                   |       |                                 |       |             |       |   |   |   |   |   |   |
| **December 31, 2010**                | ** ** | ** **                             | ** ** | ** **                           |       |             |       |   |   |   |   |   |   |
| Investment securities available for sale: |       |                                   |       |                                 |       |             |       |   |   |   |   |   |   |
| U.S. Government securities                |       | $                                      | 34,128     |                                 | $          | 20               |       | $ | — |   | — |   | $ | 34,128 |   | 20 |   |
| State and political subdivisions          |       | 3,896                                  |       | 32                                   |       | 239              |       | 17 |   | 4,135 |   | 49 |   |
| Residential mortgage-backed-private       |       | 23,788                                 |       | 1,184                                |       | —           |       | — |   | 23,788 |   | 1,184 |   |
| Collateralized-mortgage obligations       |       | 12,598                                 |       | 27                                   |       | —           |       | — |   | 12,598 |   | 27 |   |
| **Total**                                 |       | $                                      | 74,410     |                                 | $          | 1,263            |       | $ | 239 |   | $ | 17 |   | $ | 74,649 |   | $ | 1,280 |   |

 

Investment securities with aggregate fair values of $250,000 and $239,000 had continuous unrealized losses of $6,000 and $17,000 for more than twelve months as of March 31, 2011 and December 31, 2010, respectively.   The unrealized losses arose from changes in interest rates and market conditions and maintain an acceptable investment grade where the repayment of principal and interest are fully backed by the U.S. Government.  As of the dates noted above, the Company had the ability and intent to retain this investment security for a period of time sufficient to recover all unrealized losses.  Therefore, the security is deemed to be other than temporarily impaired.

 

Investment securities with an aggregate carrying amount of $73.8 million and $148.5 million at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and FHLB advances.

 

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**(3) Loans Receivable**

 

Loans not covered by loss sharing agreements are summarized as follows *(in thousands):*

 
| ** **                          | ** ** | **March 31,********2011** | ** ** | **December 31,********2010** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
|                                |       |                           |       |                              |       |
| 1-4 family residential real estate  |       | $                              | 23,298     |                              | $          | 23,255 |   |
| Commercial real estate-construction |       | 90,257                         |       | 70,543                            |       |
| Commercial real estate-other        |       | 247,369                        |       | 196,243                           |       |
| Commercial and industrial           |       | 37,077                         |       | 38,919                            |       |
| Consumer and other                  |       | 14,997                         |       | 13,889                            |       |
|                                |       | 412,998                        |       | 342,849                           |       |
| Allowance for loan losses           |       | (6,214                         | )          | (5,351                            | )          |
|                                |       | $                              | 406,784    |                              | $          | 337,498 |   |

 

Loans covered by loss sharing agreements are summarized as follows *(in thousands):*

 
| ** **                          | ** ** | **March 31,   2011** | ** ** | **December 31,   2010** | ** ** |
|-------------------------------------|------------|---------------------------|------------|------------------------------|------------|
|                                |       |                      |       |                         |       |
| 1-4 family residential real estate  |       | $                         | 301,221    |                         | $          | 314,536 |   |
| Commercial real estate-construction |       | 389,840                   |       | 435,619                      |       |
| Commercial real estate-other        |       | 586,902                   |       | 613,529                      |       |
| Commercial and industrial           |       | 113,206                   |       | 144,913                      |       |
| Consumer and other                  |       | 27,173                    |       | 29,764                       |       |
|                                |       | 1,418,342                 |       | 1,538,361                    |       |
| Fair value adjustment               |       | (527,152                  | )          | (603,394                     | )          |
|                                |       | $                         | 891,190    |                         | $          | 934,967 |   |

 

The following table documents changes in the carrying value of acquired loans during the periods ended March 31, 2011 and 2010:

 
| ** **                                                                                                          | ** ** | **March 31, 2011** | ** ** | **March 31, 2010** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Balance, at beginning of   period                                                                                   |       | $                            | 934,967    |                         | $          | 1,134,499 |   |
| Accretion of fair value   discounts                                                                                 |       | 25,482                       |       | 19,249                       |       |
| Reduction of fair value   discounts through write-offs                                                              |       | 50,760                       |       | 74,772                       |       |
| Reductions in principle balances   since acquisition date resulting from repayments, write-offs, and   foreclosures |       | (120,019                     | )          | (192,449                     | )          |
| Balance, end of period                                                                                              |       | $                            | 891,190    |                         | $          | 1,036,071 |   |

 

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Loans covered under loss sharing agreements with the FDIC (referred to as covered loans) are reported in loans excluding the expected reimbursement from the FDIC.  Covered loans are initially recorded at fair value at the acquisition date.  Prospective losses incurred on covered loans are eligible for partial reimbursement by the FDIC under loss sharing agreements.  Subsequent decreases in the amount of cash expected to be collected result in a provision for loan losses, an increase in the allowance for loan losses, and a proportional adjustment to the FDIC receivable for the estimated amount to be reimbursed.  Subsequent increases in the amount of cash expected to be collected from the borrower result in the reversal of any previously-recorded provision for loan losses and related allowance for loan losses and adjustments to the FDIC receivable, or prospective adjustment to the accretable discount if no provision for loan losses had been recorded.  Accretable discounts related to certain fair value adjustments are accreted into income over the estimated lives of the loans on a level yield basis.  The increase in the accretable discount was a result of quarterly changes in cash flows.

 

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The following table shows changes in the value of the accretable discount for the three months ended March 31, 2011 and 2010 as follows (*in thousands*):

 
| ** **                                                      | ** ** | **Three months ended   March 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                      | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Balance, at beginning of period                                 |       | $                                                 | 123,778    |   | $ | 183,840 |   |
| Additions                                                       |       | —                                            |       | — |   |
| Accretion                                                       |       | (25,482                                           | )          | (19,249 | ) |
| Transfers from non-accretable discount to   accretable discount |       | 45,520                                            |       | — |   |
|                                                            |       |                                              |       |   |   |
| Balance, end of period                                          |       | $                                                 | 143,816    |   | $ | 164,591 |   |

 

The following table shows changes in the carrying value of the FDIC receivable for loss sharing agreements relating to covered loans and other real estate for the periods indicated (*in thousands*):

 
| ** **                                                                                | ** ** | **Three months ended********March, 31** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2011**                                               | ** ** | **2010** | ** ** |
| Fair value of FDIC receivable for loss sharing agreements   at beginning of 2011 and 2010 |       | $                                                      | 494,428    |   | $ | 605,502 |   |
| Reductions resulting from:                                                                |       |                                                   |       |   |   |
| Wires received                                                                            |       | (47,332                                                | )          | (50,270 | ) |
| Recovery of previous loss reimbursements                                                  |       | —                                                 |       | — |   |
| Additions resulting from:                                                                 |       |                                                   |       |   |   |
| Charge-offs, write-downs and other losses                                                 |       | 5,689                                                  |       | 6,122 |   |
| Discount accretion                                                                        |       | 4,973                                                  |       | 4,109 |   |
| External expenses qualifying under loss sharing   agreements                              |       | (150                                                   | )          | 5,056 |   |
| Balance, end of period                                                                    |       | $                                                      | 457,608    |   | $ | 570,519 |   |

 

**(4) Allowance for Loan Losses**

 

The following table presents the Company’s loan loss experience on all non-covered loans for the period indicated *(in thousands):*

 
| ** **                                              | ** ** | **Three months ended   March 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Balance, at beginning of period                         |       | $                                                 | 5,351      |   | $ | 2,524 |   |
| Loans charged off                                       |       | (98                                               | )          | — |   |
| Recoveries on previously charged off loans   receivable |       | —                                            |       | — |   |
| Provision for loan losses charged to loan   operations  |       | 961                                               |       | 497 |   |
|                                                    |       |                                              |       |   |   |
| Balance, end of period                                  |       | $                                                 | 6,214      |   | $ | 3,021 |   |

 

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The following tables detail the allowance for loan losses on loans not covered by loss sharing by portfolio segment for the periods indicated *(in thousands):*

 
| **Three months ended   March 31, 2011** | ** ** | **Residential   real estate** | ** ** | **Commercial   real estate-   construction** | ** ** | **Commercial   real estate-   other** | ** ** | **Commercial   & industrial** | ** ** | **Consumer   and other** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|-------------------------------|------------|-----------------|------------|-----------|------------|
| **Allowance for loan losses:**                              |       |                               |       |                                              |       |                                       |       |                                   |       |                          |       |            |       |      |       |
| Beginning   balance                                         |       | $                                  | 246        |                                              | $          | 2,252                                      |       | $                                      | 1,803      |                          | $          | 588             |       | $         | 223        |   | $ | 239 |   | $ | 5,351 |   |
| Charge-offs                                                 |       | —                             |       | (7                                                | )          | —                                     |       | —                                 |       | (91                           | )          | —          |       | (98       | )          |
| Recoveries                                                  |       | —                             |       | —                                            |       | —                                     |       | —                                 |       | —                        |       | —          |       | —    |       |
| Provision                                                   |       | 33                                 |       | 375                                               |       | 433                                        |       | (39                                    | )          | 103                           |       | 56              |       | 961       |       |
| Ending   balance                                            |       | $                                  | 279        |                                              | $          | 2,620                                      |       | $                                      | 2,236      |                          | $          | 549             |       | $         | 235        |   | $ | 295 |   | $ | 6,214 |   |
| Ending   allowance attributable to loans:                   |       |                               |       |                                              |       |                                       |       |                                   |       |                          |       |            |       |      |       |
| Individually   evaluated for impairment                     |       | $                                  | 5          |                                              | $          | —                                     |       | $                                      | 722        |                          | $          | —          |       | $         | —     |   | $ | — |   | $ | 727 |   |
| Collectively   evaluated for impairment                     |       | 274                                |       | 2,620                                             |       | 1,514                                      |       | 549                                    |       | 235                           |       | 295             |       | 5,487     |       |
| **Total ending allowance Balance**                          |       | $                                  | 279        |                                              | $          | 2,620                                      |       | $                                      | 2,236      |                          | $          | 549             |       | $         | 235        |   | $ | 295 |   | $ | 6,214 |   |
| ** **                                                  |       |                               |       |                                              |       |                                       |       |                                   |       |                          |       |            |       |      |       |
| **Loans:**                                                  |       |                               |       |                                              |       |                                       |       |                                   |       |                          |       |            |       |      |       |
| Individually   evaluated for impairment                     |       | $                                  | 148        |                                              | $          | 1,115                                      |       | $                                      | 3,642      |                          | $          | —          |       | $         | —     |   | — |   | $ | 4,905 |   |
|                                                        |       |                               |       |                                              |       |                                       |       |                                   |       |                          |       |            |       |      |       |
| Collectively   evaluated for impairment                     |       | 23,150                             |       | 89,142                                            |       | 243,727                                    |       | 37,077                                 |       | 14,997                        |       | —          |       | 408,093   |       |
| ** **                                                  |       |                               |       |                                              |       |                                       |       |                                   |       |                          |       |            |       |      |       |
| **Total loans**                                             |       | $                                  | 23,298     |                                              | $          | 90,257                                     |       | $                                      | 247,369    |                          | $          | 37,077          |       | $         | 14,997     |   | — |   | $ | 412,998 |   |

 
| **December 31, 2010**         | ** ** | **Residential   real estate** | ** ** | **Commercial   real estate-   construction** | ** ** | **Commercial   real estate-   other** | ** ** | **Commercial   & industrial** | ** ** | **Consumer   and other** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|-------------------------------|------------|-----------------|------------|-----------|------------|
| **Allowance for loan losses:**          |       |                               |       |                                              |       |                                       |       |                                   |       |                          |       |            |       |      |       |
| Ending   balance                        |       | $                                  | 246        |                                              | $          | 2,252                                      |       | $                                      | 1,803      |                          | $          | 588             |       | $         | 223        |   | $ | 239 |   | $ | 5,351 |   |
| Individually   evaluated for impairment |       | $                                  | —     |                                              | $          | 518                                        |       | $                                      | 5          |                          | $          | —          |       | $         | —     |   | $ | — |   | $ | 523 |   |
| **Loans**                               |       |                               |       |                                              |       |                                       |       |                                   |       |                          |       |            |       |      |       |
| Ending   balance                        |       | $                                  | 23,255     |                                              | $          | 70,543                                     |       | $                                      | 196,243    |                          | $          | 38,919          |       | $         | 13,889     |   | — |   | $ | 342,849 |   |
| Individually   evaluated for impairment |       | $                                  | 64         |                                              | $          | 1,085                                      |       | $                                      | 3,212      |                          | $          | —          |       | $         | —     |   | — |   | $ | 4,361 |   |

 

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Impaired loans not covered by loss share agreements, segregated by class of loans, as of March 31, 2011 are as follows (*in thousands*):

 
| ** **                          | ** ** | **Recorded   Investment** | ** ** | **Unpaid   Principal   Balance** | ** ** | **Related   Allowance** | ** ** | **Average   Recorded   Investment** | ** ** | **Interest   Income   Recognized** | ** ** |
|-------------------------------------|------------|---------------------------|------------|----------------------------------|------------|-------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| Impaired Loans:                     |       |                      |       |                             |       |                    |       |                                |       |                               |       |
|                                |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| With no related allowance recorded: |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| Commercial and industrial           |       | $                         | —     |                             | $          | —                  |       | $                                   | —     |                               | $          | — |   | $ | — |   |
| Commercial Real Estate:             |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| Construction                        |       | 1,115                     |       | 1,391                            |       | —                  |       | 997                                 |       | —                             |       |
| Other                               |       | 1,798                     |       | 2,143                            |       | —                  |       | 1,640                               |       | 1                                  |       |
| Residential Real Estate             |       | 84                        |       | 84                               |       | —                  |       | 84                                  |       | —                             |       |
| Consumer                            |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Subtotal                            |       | 2,997                     |       | 3,618                            |       | —                  |       | 2,721                               |       | 1                                  |       |
|                                |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| With a related allowance recorded:  |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| Commercial and industrial           |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Commercial Real Estate:             |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| Construction                        |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Other                               |       | 1,844                     |       | 2,177                            |       | 722                     |       | 1,844                               |       | —                             |       |
| Residential Real Estate             |       | 64                        |       | 64                               |       | 5                       |       | 6                                   |       | —                             |       |
| Consumer                            |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Subtotal                            |       | 1,908                     |       | 2,241                            |       | 727                     |       | 1,850                               |       | —                             |       |
|                                |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| Total Impaired Loans                |       | $                         | 4,905      |                             | $          | 5,859                   |       | $                                   | 727        |                               | $          | 4,571 |   | $ | 1 |   |

 

Impaired loans not covered by loss share agreements, segregated by class of loans, as of December 31, 2010 are as follows (*in thousands*):

 
| ** **                          | ** ** | **Unpaid**    | ** ** | ** **     | ** ** | **Allowance for** | ** ** |
|-------------------------------------|------------|---------------|------------|----------------|------------|------------------------|------------|
| ** **                          | ** ** | **Principal** | ** ** | **Recorded**   | ** ** | **Loan Losses**   | ** ** |
| ** **                          | ** ** | **Balance**   | ** ** | **Investment** | ** ** | **Allocated**          | ** ** |
| With no related allowance recorded: |       |          |       |           |       |                   |       |
| Commercial and industrial           |       | $             | —     |           | $          | —                 |       | $ | — |   |
| Commercial real estate:             |       |          |       |           |       |                   |       |
| Construction                        |       | 1,362         |       | 1,085          |       | —                 |       |
| Other                               |       | 2,391         |       | 1,719          |       | —                 |       |
| Residential real estate             |       | —        |       | —         |       | —                 |       |
| Consumer                            |       | —        |       | —         |       | —                 |       |
| Subtotal:                           |       | 3,753         |       | 2,804          |       | —                 |       |
| With an allowance recorded:         |       |          |       |           |       |                   |       |
| Commercial and industrial           |       | —        |       | —         |       | —                 |       |
| Commercial real estate:             |       |          |       |           |       |                   |       |
| Construction                        |       | —        |       | —         |       | —                 |       |
| Other                               |       | 1,493         |       | 1,493          |       | 518                    |       |
| Residential real estate             |       | 64            |       | 64             |       | 5                      |       |
| Consumer                            |       | —        |       | —         |       | —                 |       |
| Subtotal:                           |       | 1,557         |       | 1,557          |       | 523                    |       |
|                                |       |          |       |           |       |                   |       |
| Total                               |       | $             | 5,310      |           | $          | 4,361                  |       | $ | 523 |   |

 

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The average investment in impaired loans as of March 31, 2011 was $4.3 million and the interest foregone on impaired loans totaled $84,000.  Interest income recognized on impaired loans for the quarter ended March 31, 2011 was insignificant.

 

The following tables present the recorded investment in covered and non-covered nonaccrual loans, respectively, by loan class as of March 31, 2011 and December 31, 2010 *(in thousands)*.

 
| ** **                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2011**           | ** ** | **2010**              | ** ** |
|                                |       |               |       |                  |       |
| Nonaccrual covered loans            |       |               |       |                  |       |
| 1-4 family residential real estate  |       | $                  | 69,114     | ** **            | **$**      | 63,705 | ** ** |
| Commercial real estate-construction |       | 264,062            |       | 268,902               |       |
| Commercial real estate-other        |       | 140,919            |       | 136,637               |       |
| Commercial and industrial           |       | 37,776             |       | 52,487                |       |
| Consumer and other                  |       | 6,369              |       | 6,677                 |       |
| Total                               |       | $                  | 518,240    |                  | $          | 528,408 |   |

 
| ** **                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2011**           | ** ** | **2010**              | ** ** |
|                                | ** ** |               |       |                  |       |
| Nonaccrual non-covered loans        | ** ** |               |       |                  |       |
| 1-4 family residential real estate  |       | $                  | 148        | ** **            | **$**      | — | ** ** |
| Commercial real estate-construction |       | 1,115              |       | 695                   |       |
| Commercial real estate-other        |       | 3,378              |       | 2,944                 |       |
| Commercial and industrial           |       | —             |       | —                |       |
| Consumer and other                  |       | 458                |       | 1,392                 |       |
| Total                               |       | $                  | 5,099      |                  | $          | 5,031 |   |

 

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The following table presents an analysis of past due loans not covered by loss sharing, segregated by class of loans, as of March 31, 2011 *(in thousands):*

 
| ** **              | ** ** | **30 - 89** | ** ** | **Greater than** | ** ** | ** **        | ** ** | ** **  | ** ** | ** ** | ** ** | **Loans > 90** | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------|------------|-------------|------------|------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Days**              | ** ** | **90 days**      | ** ** | **Total**         | ** ** | ** **  | ** ** | **Total**  | ** ** | **days and**           | ** ** |
| ** **              | ** ** | **Past Due**     | ** ** | **Past Due**     | ** ** | **Past Due** | ** ** | **Current** | ** ** | **Loans**  | ** ** | **accruing**                | ** ** |
|                    |       |                  |       |                  |       |              |       |        |       |       |       |                        |       |   |   |   |   |   |   |
| Commercial              |       | $                     | 99         |                  | $          | 27                |       | $           | 126        |       | $          | 36,951                      |       | $ | 37,077 |   | $ | — |   |
| Commercial real estate: |       |                  |       |                  |       |              |       |        |       |       |       |                        |       |
| Construction            |       | 1,896                 |       | 18                    |       | 1,914             |       | 88,343      |       | 90,257     |       | —                      |       |
| Other                   |       | 123                   |       | 2,751                 |       | 2,874             |       | 244,495     |       | 247,369    |       | —                      |       |
| Residential real estate |       | 109                   |       | 116                   |       | 225               |       | 23,073      |       | 23,298     |       | —                      |       |
| Consumer                |       | 330                   |       | 509                   |       | 839               |       | 14,158      |       | 14,997     |       | —                      |       |
|                    |       |                  |       |                  |       |              |       |        |       |       |       |                        |       |
| Total                   |       | $                     | 2,557      |                  | $          | 3,421             |       | $           | 5,978      |       | $          | 407,020                     |       | $ | 412,998 |   | $ | — |   |

 

The following table presents an analysis of past due loans covered by loss sharing, segregated by class of loans, as of March 31, 2011 *(in thousands)*:

 
| ** **              | ** ** | **30 - 89** | ** ** | **Greater than** | ** ** | ** **        | ** ** | ** **  | ** ** | ** **         | ** ** | **Loans > 90** | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------|------------|-------------|------------|--------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **days**              | ** ** | **90 days**      | ** ** | **Total**         | ** ** | ** **  | ** ** | **Total**          | ** ** | **days and**           | ** ** |
| ** **              | ** ** | **past due**     | ** ** | **past due**     | ** ** | **past due** | ** ** | **Current** | ** ** | **loans (1)** | ** ** | **accruing**                | ** ** |
|                    |       |                  |       |                  |       |              |       |        |       |               |       |                        |       |   |   |   |   |   |   |
| Commercial              |       | $                     | 3,640      |                  | $          | 33,452            |       | $           | 37,092     |               | $          | 76,114                      |       | $ | 113,206 |   | $ | — |   |
| Commercial real estate: |       |                  |       |                  |       |              |       |        |       |               |       |                        |       |
| Construction            |       | 16,433                |       | 245,459               |       | 261,892           |       | 127,948     |       | 389,840            |       | —                      |       |
| Other                   |       | 36,457                |       | 129,054               |       | 165,511           |       | 421,391     |       | 586,902            |       | —                      |       |
| Residential real estate |       | 21,601                |       | 55,926                |       | 77,527            |       | 223,694     |       | 301,221            |       | —                      |       |
| Consumer                |       | 523                   |       | 5,026                 |       | 5,549             |       | 21,624      |       | 27,173             |       | —                      |       |
|                    |       |                  |       |                  |       |              |       |        |       |               |       |                        |       |
| Total                   |       | $                     | 78,654     |                  | $          | 468,917           |       | $           | 547,571    |               | $          | 870,771                     |       | $ | 1,418,342 |   | $ | — |   |

 

----

(1) Total covered loans as of March 31, 2011 are shown gross of the fair value discount of $527.2 million.

 

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The following table presents an analysis of past due loans not covered by loss sharing, segregated by class of loans, as of December 31, 2010 *(in thousands):*

 
| ** **              | ** ** | **30 - 89** | ** ** | **Greater than** | ** ** | ** **        | ** ** | ** **  | ** ** | ** ** | ** ** | **Loans > 90** | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------|------------|-------------|------------|------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Days**              | ** ** | **90 days**      | ** ** | **Total**         | ** ** | ** **  | ** ** | **Total**  | ** ** | **days and**           | ** ** |
| ** **              | ** ** | **Past Due**     | ** ** | **Past Due**     | ** ** | **Past Due** | ** ** | **Current** | ** ** | **Loans**  | ** ** | **accruing**                | ** ** |
|                    |       |                  |       |                  |       |              |       |        |       |       |       |                        |       |   |   |   |   |   |   |
| Commercial              |       | $                     | 200        |                  | $          | 2                 |       | $           | 202        |       | $          | 38,717                      |       | $ | 38,919 |   | $ | — |   |
| Commercial real estate: |       |                  |       |                  |       |              |       |        |       |       |       |                        |       |
| Construction            |       | 171                   |       | 64                    |       | 235               |       | 70,308      |       | 70,543     |       | —                      |       |
| Other                   |       | 649                   |       | 2,758                 |       | 3,407             |       | 192,836     |       | 196,243    |       | —                      |       |
| Residential real estate |       | 30                    |       | 118                   |       | 148               |       | 23,107      |       | 23,255     |       | —                      |       |
| Consumer                |       | 1,255                 |       | 460                   |       | 1,715             |       | 12,174      |       | 13,889     |       | —                      |       |
|                    |       |                  |       |                  |       |              |       |        |       |       |       |                        |       |
| Total                   |       | $                     | 2,305      |                  | $          | 3,402             |       | $           | 5,707      |       | $          | 337,142                     |       | $ | 342,849 |   | $ | — |   |

 

The following table presents an analysis of past due loans covered by loss sharing, segregated by class of loans, as of December 31, 2010 *(in thousands)*:

 
| ** **              | ** ** | **30 - 89** | ** ** | **Greater than** | ** ** | ** **        | ** ** | ** **  | ** ** | ** **         | ** ** | **Loans > 90** | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------|------------|-------------|------------|--------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **days**              | ** ** | **90 days**      | ** ** | **Total**         | ** ** | ** **  | ** ** | **Total**          | ** ** | **days and**           | ** ** |
| ** **              | ** ** | **past due**     | ** ** | **past due**     | ** ** | **past due** | ** ** | **Current** | ** ** | **loans (1)** | ** ** | **accruing**                | ** ** |
|                    |       |                  |       |                  |       |              |       |        |       |               |       |                        |       |   |   |   |   |   |   |
| Commercial              |       | $                     | 4,914      |                  | $          | 49,089            |       | $           | 54,003     |               | $          | 90,910                      |       | $ | 144,913 |   | $ | — |   |
| Commercial real estate: |       |                  |       |                  |       |              |       |        |       |               |       |                        |       |
| Construction            |       | 31,681                |       | 258,679               |       | 290,360           |       | 145,259     |       | 435,619            |       | —                      |       |
| Other                   |       | 33,059                |       | 129,927               |       | 162,986           |       | 450,543     |       | 613,529            |       | —                      |       |
| Residential real estate |       | 25,670                |       | 55,294                |       | 80,964            |       | 233,572     |       | 314,536            |       | —                      |       |
| Consumer                |       | 673                   |       | 5,896                 |       | 6,569             |       | 23,195      |       | 29,764             |       | —                      |       |
|                    |       |                  |       |                  |       |              |       |        |       |               |       |                        |       |
| Total                   |       | $                     | 95,997     |                  | $          | 498,885           |       | $           | 594,882    |               | $          | 943,479                     |       | $ | 1,538,361 |   | $ | — |   |

 

----

(1) Total covered loans as of December 31, 2010 are shown gross of the fair value discount of $603.4 million.

 

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**Asset Quality Grades:**

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company utilizes risk-grading guidelines to assign a risk grade to each of its loans.  Loans are graded on a scale of 1 to 8.  A description of the general characteristics of the nine risk grades is as follows:

 

**Pass (Grade 1-4)**- Pass graded loans are considered the highest quality as they do not display any of the characteristics for adverse classification.  These relationships demonstrate a strong primary and secondary cash flow capacity to retire long-term debt that is unquestioned.  They produce unusually high profits and ratios that are well above industry guidelines.  These relationships will also exhibit a high percentage of liquid assets with substantial working capital to satisfy current obligations.

 

**Watch****(Grade 5) -** A Watch rating is indicative of borrowers that have not met performance expectations, or that are acceptable business credits but with considerable risk.  The increased risk may be due to a smaller less diverse asset base, very little liquidity or limited debt capacity, but still greater than one to one.

 

**OAEM (Grade 6) -** Loans graded other assets especially mentioned (OAEM) are marginally acceptable with some potential weakness.  If left uncorrected, these weaknesses could jeopardize repayment at some future date. Although loss is possible, it is not probable.  Collateral coverage, guarantor strength, and/or equity are still sufficient to protect the bank from loss. Loans in this category may be affected by current unfavorable economic conditions or have declining trends.  The account officer may not be able to properly supervise the credit due to an inadequate loan or credit agreement, or may not have control of the collateral or its condition. The borrower may have experienced a loss in the most recent financial reporting period, have limited net worth and marginal debt service coverage. These credits clearly warrant a higher degree of attention and servicing by the account officer.

 

**Substandard (Grade 7) -** Loans graded substandard have well-defined weaknesses and represent significant problem accounts.  Loss potential, while existing in the aggregate amount of substandard credits does not have to exist in individual credits classified substandard.  Loss potential could exist if the deficiencies causing the substandard rating are not corrected. These loans should be handled with extreme care to protect the position of the bank. Legal action may not yet be appropriate, but the officer should prepare primary and contingency plans to either secure an upgrade for the credit, or exit the credit from the bank.  Such loans are typically inadequately protected by net worth, paying capacity (DSC < 1:1), collateral adequacy, liquidity, or character or ability of the borrower or its management. These credits are typically in ‘default’ via one or more provisions of the repayment schedule, the note or loan agreement. All non-accrual loans and bankruptcies carry a minimum rating of substandard. Loans 60 days past due should also be rated substandard.

 

**Doubtful (Grade 8) -** Loans that carry a doubtful credit rating represent more severe weaknesses than those inherent in the substandard classification, and where collection or liquidation in full is improbable.  While immediate charge-off may not be appropriate, legal and aggressive collection action should be undertaken to attempt to recover the bank’s funds or minimize eventual loss to the bank. A Doubtful classification is a temporary rating when the exact amount of the loss cannot be determined, or when potential loss exposure of 50% or more exists in a substandard credit.  A Doubtful credit carries a specific allocation for the amount estimated as loss. The portion of a credit that can be clearly identified as loss should be charged off.

 

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The following table presents the risk grades of the loan portfolio not covered by loss sharing agreements, segregated by class of loans, as of March 31, 2011 *(in thousands)*:

 
| ** **  | ** ** | **Commercial** | ** ** | **Commercial**        | ** ** | **Commercial**        | ** ** | ** **           | ** ** | ** **         | ** ** | ** ** | ** ** |
|-------------|------------|----------------|------------|-----------------------|------------|-----------------------|------------|----------------------|------------|--------------------|------------|------------|------------|
| ** **  | ** ** | **and**        | ** ** | **real estate-** | ** ** | **real estate-** | ** ** | **Residential**      | ** ** | **Consumer**       | ** ** | ** ** | ** ** |
| ** **  | ** ** | **industrial** | ** ** | **construction**      | ** ** | **other**             | ** ** | **real estate** | ** ** | **and other** | ** ** | **Total**  | ** ** |
|        |       |           |       |                  |       |                  |       |                 |       |               |       |       |       |   |   |   |   |   |   |
| Pass        |       | $              | 36,324     |                  | $          | 63,606                |       | $                    | 234,882    |               | $          | 20,794     |       | $ | 12,255 |   | $ | 367,861 |   |
| Watch       |       | 471            |       | 25,105                |       | 7,603                 |       | 1,419                |       | 883                |       | 35,481     |       |
| OAEM        |       | 167            |       | 27                    |       | 230                   |       | 208                  |       | 588                |       | 1,220      |       |
| Substandard |       | 115            |       | 1,519                 |       | 4,635                 |       | 789                  |       | 1,215              |       | 8,273      |       |
| Doubtful    |       | —         |       | —                |       | 19                    |       | 88                   |       | 56                 |       | 163        |       |
|        |       |           |       |                  |       |                  |       |                 |       |               |       |       |       |
| Total       |       | $              | 37,077     |                  | $          | 90,257                |       | $                    | 247,369    |               | $          | 23,298     |       | $ | 14,997 |   | $ | 412,998 |   |

 

The following table presents the risk grades of the loan portfolio covered by loss sharing agreements, segregated by class of loans, as of March 31, 2011 *(in thousands)*:

 
| ** **  | ** ** | **Commercial** | ** ** | **Commercial**        | ** ** | **Commercial**        | ** ** | ** **           | ** ** | ** **         | ** ** | ** **         | ** ** |
|-------------|------------|----------------|------------|-----------------------|------------|-----------------------|------------|----------------------|------------|--------------------|------------|--------------------|------------|
| ** **  | ** ** | **and**        | ** ** | **real estate-** | ** ** | **real estate-** | ** ** | **Residential**      | ** ** | **Consumer**       | ** ** | ** **         | ** ** |
| ** **  | ** ** | **industrial** | ** ** | **construction**      | ** ** | **other**             | ** ** | **real estate** | ** ** | **and other** | ** ** | **Total (1)** | ** ** |
|        |       |           |       |                  |       |                  |       |                 |       |               |       |               |       |   |   |   |   |   |   |
| Pass        |       | $              | 39,731     |                  | $          | 69,097                |       | $                    | 252,863    |               | $          | 179,200            |       | $ | 9,160 |   | $ | 550,051 |   |
| Watch       |       | 10,091         |       | 10,216                |       | 76,630                |       | 13,090               |       | 1,272              |       | 111,299            |       |
| OAEM        |       | 11,258         |       | 10,853                |       | 39,783                |       | 18,119               |       | 28                 |       | 80,041             |       |
| Substandard |       | 51,612         |       | 293,292               |       | 213,289               |       | 90,762               |       | 16,710             |       | 665,665            |       |
| Doubtful    |       | 514            |       | 6,382                 |       | 4,337                 |       | 50                   |       | 3                  |       | 11,286             |       |
|        |       |           |       |                  |       |                  |       |                 |       |               |       |               |       |
| Total       |       | $              | 113,206    |                  | $          | 389,840               |       | $                    | 586,902    |               | $          | 301,221            |       | $ | 27,173 |   | $ | 1,418,342 |   |

 

----

(1) Total covered loans as of March 31, 2011 are shown gross of the fair value discount of $527.2 million.

 

The following table presents the risk grades of the loan portfolio not covered by loss sharing agreements, segregated by class of loans, as of December 31, 2010 *(in thousands)*:

 
| ** **  | ** ** | **Commercial** | ** ** | **Commercial**        | ** ** | **Commercial**        | ** ** | ** **           | ** ** | ** **         | ** ** | ** ** | ** ** |
|-------------|------------|----------------|------------|-----------------------|------------|-----------------------|------------|----------------------|------------|--------------------|------------|------------|------------|
| ** **  | ** ** | **and**        | ** ** | **real estate-** | ** ** | **real estate-** | ** ** | **Residential**      | ** ** | **Consumer**       | ** ** | ** ** | ** ** |
| ** **  | ** ** | **industrial** | ** ** | **construction**      | ** ** | **other**             | ** ** | **real estate** | ** ** | **and other** | ** ** | **Total**  | ** ** |
|        |       |           |       |                  |       |                  |       |                 |       |               |       |       |       |   |   |   |   |   |   |
| Pass        |       | $              | 38,135     |                  | $          | 50,174                |       | $                    | 186,067    |               | $          | 20,908     |       | $ | 12,444 |   | $ | 307,728 |   |
| Watch       |       | 661            |       | 20,274                |       | 6,559                 |       | 1,514                |       | 698                |       | 29,706     |       |
| OAEM        |       | 64             |       | 28                    |       | 237                   |       | 489                  |       | 450                |       | 1,268      |       |
| Substandard |       | 59             |       | 67                    |       | 2,105                 |       | 256                  |       | 234                |       | 2,721      |       |
| Doubtful    |       | —         |       | —                |       | 1,275                 |       | 88                   |       | 63                 |       | 1,426      |       |
|        |       |           |       |                  |       |                  |       |                 |       |               |       |       |       |
| Total       |       | $              | 38,919     |                  | $          | 70,543                |       | $                    | 196,243    |               | $          | 23,255     |       | $ | 13,889 |   | $ | 342,849 |   |

 

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The following table presents the risk grades of the loan portfolio covered by loss sharing agreements, segregated by class of loans, as of December 31, 2010 *(in thousands)*:

 
| ** **  | ** ** | **Commercial** | ** ** | **Commercial**        | ** ** | **Commercial**        | ** ** | ** **           | ** ** | ** **         | ** ** | ** **         | ** ** |
|-------------|------------|----------------|------------|-----------------------|------------|-----------------------|------------|----------------------|------------|--------------------|------------|--------------------|------------|
| ** **  | ** ** | **and**        | ** ** | **real estate-** | ** ** | **real estate-** | ** ** | **Residential**      | ** ** | **Consumer**       | ** ** | ** **         | ** ** |
| ** **  | ** ** | **industrial** | ** ** | **construction**      | ** ** | **other**             | ** ** | **real estate** | ** ** | **and other** | ** ** | **Total (1)** | ** ** |
|        |       |           |       |                  |       |                  |       |                 |       |               |       |               |       |   |   |   |   |   |   |
| Pass        |       | $              | 57,223     |                  | $          | 85,771                |       | $                    | 286,682    |               | $          | 200,511            |       | $ | 11,506 |   | $ | 641,693 |   |
| Watch       |       | 9,083          |       | 19,629                |       | 68,869                |       | 10,552               |       | 847                |       | 108,980            |       |
| OAEM        |       | 16,349         |       | 14,990                |       | 42,051                |       | 11,691               |       | 186                |       | 85,267             |       |
| Substandard |       | 61,858         |       | 311,556               |       | 215,900               |       | 91,688               |       | 17,122             |       | 698,124            |       |
| Doubtful    |       | 400            |       | 3,673                 |       | 27                    |       | 94                   |       | 103                |       | 4,297              |       |
|        |       |           |       |                  |       |                  |       |                 |       |               |       |               |       |
| Total       |       | $              | 144,913    |                  | $          | 435,619               |       | $                    | 613,529    |               | $          | 314,536            |       | $ | 29,764 |   | $ | 1,538,361 |   |

 

----

(1) Total covered loans as of December 31, 2010 are shown gross of the fair value discount of $603.4 million.

 

**(5) Other Real Estate Owned**

 

The following is a summary of transactions in the Company’s other real estate owned *(in thousands):*

** **
| ** **                                                           | ** ** | **Three months ended   March 31,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Non-covered other real estate**                     | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Balance, at beginning of year                                        |       | $                                                 | 75         |   | $ | 120 |   |
| Other real estate acquired through foreclosure of   loans receivable |       | —                                            |       | 55 |   |
| Other real estate sold                                               |       | —                                            |       | (55 | ) |
| Write down of other real estate                                      |       | —                                            |       | — |   |
|                                                                 |       |                                              |       |   |   |
| Balance, end of year                                                 |       | $                                                 | 75         |   | $ | 120 |   |

** **
| ** **                                                           | ** ** | **Three months ended   March 31,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Covered other real estate**                         | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Balance, at beginning of year                                        |       | $                                                 | 155,981    |   | $ | 141,690 |   |
| Other real estate acquired through foreclosure of   loans receivable |       | 14,774                                            |       | 52,535 |   |
| Other real estate sold                                               |       | (21,145                                           | )          | (16,837 | ) |
| Write down of other real estate                                      |       | (18,536                                           | )          | (4,657 | ) |
|                                                                 |       |                                              |       |   |   |
| Balance, end of year                                                 |       | $                                                 | 131,074    |   | $ | 172,731 |   |

 

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**(6) Earnings Per Share**

 

Earnings per share have been computed based on the following weighted average number of common shares outstanding *(in thousands, except per share data)*:

 
| ** **                                                   | ** ** | **Three months ended********March 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2011**                                               | ** ** | **2010** | ** ** |
| **Net Income**                                               |       | $                                                      | 8,231      |   | $ | 11,719 |   |
| **Denominator:**                                             |       |                                                   |       |   |   |
| Weighted average common shares outstanding                   |       | 31,611                                                 |       | 31,541 |   |
| Equivalent shares issuable upon Exercise of stock   warrants |       | 1,012                                                  |       | 287 |   |
| Diluted Shares                                               |       | 32,623                                                 |       | 31,828 |   |
|                                                         |       |                                                   |       |   |   |
| Net Income per share:                                        |       |                                                   |       |   |   |
| Basic                                                        |       | $                                                      | 0.26       |   | $ | 0.37 |   |
| Diluted                                                      |       | $                                                      | 0.25       |   | $ | 0.37 |   |

 

**(7) Fair Value**

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, the Financial Accounting Standards Board’s Accounting Standards Codification Topic 820 (“ASC 820”) *Fair Value Measurements and Disclosures*establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant  assumptions developed based on the best information available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).

 

Fair Value Hierarchy

 

*Level 1*

 

Valuation is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

*Level 2*

 

Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other market-corroborated inputs.

 

*Level 3*

 

Valuation inputs are unobservable inputs for the asset or liability which shall be used to measure fair value to the extent that observable inputs are not available.  The inputs shall reflect the Company’s**own assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments and other accounts recorded based on their fair value:

 

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***(a)     Cash and Cash Equivalents:***

 

The carrying amount approximates fair value because of the short maturity of these instruments.

 

***(b)     Securities Available for Sale***

 

The fair value of most securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1).  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows (Level 2).  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 hierarchy.

 

***(c)     Loans Receivable***

 

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions.

 

Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

 

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans are subject to nonrecurring fair value adjustments to reflect write-downs that are based on the market price or current appraised value of the collateral, adjusted to reflect local market conditions or other economic factors. After evaluating the underlying collateral, the fair value of the impaired loans is determined by allocating specific reserves from the allowance for loan and lease losses to the loans.  Thus, the fair value reflects the loan balance less the specifically allocated reserve.  Impaired loans for which no reserve has been specifically allocated are not included in the table above.

 

***(d)     Loans Held for Sale***

 

Loans held for sale are originated at market value and the holding period for these loans is typically five to seven business days, therefore the carrying value approximates the fair value in the aggregate of the portfolio given this short time frame.

 

***(e)       Federal Home Loan Bank stock***

 

FHLB stock is carried at its original cost basis, as cost approximates fair value and there is no ready market for such investments.

 

***(f)      FDIC Receivable for Loss Sharing Agreements***

 

The Company’s FDIC receivable for loss sharing agreements approximates fair value.

 

***(g)     Deposits***

 

The fair value of deposits with no stated maturity, such as noninterest—bearing demand deposits, savings, NOW accounts, and money market and checking accounts, is equal to the amount payable on demand as of March 31, 2011. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

 

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***(h)     Borrowings***

 

The fair value of securities sold under agreements to repurchase approximates the carrying amount because of the short maturity of these borrowings. The discount rate is estimated using rates quoted for the same or similar issues or the current rates offered to the Company for debt of the same remaining maturities.

 

***(i)      Commitments and Contingencies***

 

The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees charged to enter into such agreements.

 

***(j)      Other Real Estate Owned***

 

The fair value of other real estate owned (“OREO”) is determined when the asset is transferred to foreclosed assets.  The assets are carried at the lower of the carrying value or fair value.  Fair value is based on appraised values of the collateral or management’s estimation of the value of the collateral.  When the value is based on observable market prices such as an appraisal, the asset is recorded in Level 2 hierarchy.  When an appraised value is not available or management determines the fair value of the collateral is further impaired, the asset is recorded as a nonrecurring Level 3 hierarchy.

 

Other real estate owned is initially accounted for at fair value, less estimated costs to dispose of the property. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan and lease losses at the time of foreclosure. A provision is charged to earnings for subsequent losses on other real estate owned when market conditions indicate such losses have occurred. The ability of the Company to recover the carrying value of other real estate owned is based upon future sales of the real estate. The ability to affect such sales is subject to market conditions and other factors beyond our control, and future declines in the value of the real estate would result in a charge to earnings. The recognition of sales and sales gains is dependent upon whether the nature and terms of the sales, including possible future involvement of the Company, if any, meet certain defined requirements. If those requirements are not met, sale and gain recognition is deferred.

 

Assets Measured at Fair Value on a Recurring Basis

 

The following table presents the fair value measurements of assets measured at fair value on a recurring basis as of  March 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

 
| ** **                                     | ** ** | ** **                     | ** ** | **Significant**         | ** ** | ** **         | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **Quoted Market**         | ** ** | **Other**               | ** ** | **Significant**    | ** ** |
| ** **                                     | ** ** | **Prices in Active** | ** ** | **Observable**          | ** ** | **Unobservable**   | ** ** |
| ** **                                     | ** ** | **Markets**                    | ** ** | **Inputs**              | ** ** | **Inputs**         | ** ** |
| ** **                                     | ** ** | **(Level 1)**             | ** ** | **(Level 2)**      | ** ** | **(Level 3)** | ** ** |
| ** **                                     | ** ** | ** **                     | ** ** | **(in thousands)** | ** ** | ** **         | ** ** |
| ** **                                     | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **         | ** ** |
| U.S. Government agencies                       | ** ** | **$**                          | **—** |                    | $          | 133,396            |       | $ | — |   |
| State and political subdivisions               |       | —                         |       | 10,532                  |       | —             |       |
| Residential mortgage-backed securities-agency  |       | —                         |       | 38,291                  |       | —             |       |
| Residential mortgage-backed securities-private |       | —                         |       | 85,909                  |       | —             |       |
| Collateralized-mortgage   obligations          |       | —                         |       | 117,005                 |       | —             |       |
| Corporate securities                           |       | —                         |       | 504                     |       | —             |       |
| Total recurring assets at fair value           |       | $                              | —     |                    | $          | 385,637            |       | $ | — |   |

 

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The following table presents the fair value measurements of assets measured at fair value on a recurring basis as of December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

 
| ** **                                       | ** ** | ** **                     | ** ** | **Significant**         | ** ** | ** **         | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **                                       | ** ** | **Quoted Market**         | ** ** | **Other**               | ** ** | **Significant**    | ** ** |
| ** **                                       | ** ** | **Prices in Active** | ** ** | **Observable**          | ** ** | **Unobservable**   | ** ** |
| ** **                                       | ** ** | **Markets**                    | ** ** | **Inputs**              | ** ** | **Inputs**         | ** ** |
| ** **                                       | ** ** | **(Level 1)**             | ** ** | **(Level 2)**      | ** ** | **(Level 3)** | ** ** |
| ** **                                       | ** ** | ** **                     | ** ** | **(in thousands)** | ** ** | ** **         | ** ** |
| ** **                                       | ** ** | ** **                     | ** ** | ** **              | ** ** | ** **         | ** ** |
| U.S. Government agencies                         |       | $                              | —     |                    | $          | 163,681            |       | $ | — |   |
| State and political subdivisions                 |       | —                         |       | 9,555                   |       | —             |       |
| Residential mortgage-backed securities-agency    |       | —                         |       | 41,673                  |       | —             |       |
| Residential   mortgage-backed securities-private |       | —                         |       | 61,025                  |       | —             |       |
| Collateralized-mortgage obligations              |       | —                         |       | 127,955                 |       | —             |       |
| Corporate securities                             |       | —                         |       | 1,692                   |       | —             |       |
| Total recurring assets at fair value             |       | $                              | —     |                    | $          | 405,581            |       | $ | — |   |

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

The following table presents the fair value measurements of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

 
| ** **                             | ** ** | ** **                     | ** ** | **Significant**         | ** ** | ** **         | ** ** |
|----------------------------------------|------------|--------------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **Quoted Market**         | ** ** | **Other**               | ** ** | **Significant**    | ** ** |
| ** **                             | ** ** | **Prices in Active** | ** ** | **Observable**          | ** ** | **Unobservable**   | ** ** |
| ** **                             | ** ** | **Markets**                    | ** ** | **Inputs**              | ** ** | **Inputs**         | ** ** |
| ** **                             | ** ** | **(Level 1)**             | ** ** | **(Level 2)**      | ** ** | **(Level 3)** | ** ** |
| ** **                             | ** ** | ** **                     | ** ** | **(in thousands)** | ** ** | ** **         | ** ** |
| **Assets**                             |       |                           |       |                    |       |               |       |
| Impaired Loans                         |       |                           |       |                    |       |               |       |
| Covered by loss sharing agreements     |       | $                              | —     |                    | —     |               | $          | — |   |
| Not covered by loss sharing agreements |       | —                         |       | —                  |       | 4,178              |       |
| Total Impaired Loans                   |       | —                         |       | —                  |       | 4,178              |       |
| Other Real Estate                      |       |                           |       |                    |       |               |       |
| Covered by loss sharing agreements     |       | —                         |       | —                  |       | 131,074            |       |
| Not covered by loss sharing agreements |       | —                         |       | —                  |       | 75                 |       |
| Total Other Real Estate                |       | $                              | —     |                    | $          | —             |       | $ | 131,149 |   |
|                                        |            |                                |            |                         |            |                    |            |  |  |  |

 

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The following table presents the fair value measurements of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

 
| ** **                             | ** ** | ** **                     | ** ** | **Significant**         | ** ** | ** **         | ** ** |
|----------------------------------------|------------|--------------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **Quoted Market**         | ** ** | **Other**               | ** ** | **Significant**    | ** ** |
| ** **                             | ** ** | **Prices in Active** | ** ** | **Observable**          | ** ** | **Unobservable**   | ** ** |
| ** **                             | ** ** | **Markets**                    | ** ** | **Inputs**              | ** ** | **Inputs**         | ** ** |
| ** **                             | ** ** | **(Level 1)**             | ** ** | **(Level 2)**      | ** ** | **(Level 3)** | ** ** |
| ** **                             | ** ** | ** **                     | ** ** | **(In thousands)** | ** ** | ** **         | ** ** |
| **Assets**                             |       |                           |       |                    |       |               |       |
| Impaired Loans                         | ** ** | **$**                          |       |                    |       |               |       |   |
| Covered by loss sharing agreements     |       | —                         | ** ** | **—**              | ** ** | **—**         | ** ** |
| Not covered by loss sharing agreements |       | —                         |       | —                  |       | 3,838              |       |
| Total Impaired Loans                   |       | —                         | ** ** | **—**              |       | 3,838              |       |
| Other Real Estate                      |       |                           |       |                    |       |               |       |
| Covered by loss sharing agreements     |       | —                         | ** ** | **—**              |       | 155,981            |       |
| Not covered by loss sharing agreements |       | —                         |       | —                  |       | 75                 |       |
| Total Other Real Estate                |       | $                              | —     |                    | $          | —             |       | $ | 156,056 |   |
|                                        |            |                                |            |                         |            |                    |            |  |  |  |

 

The fair carrying amount and estimated fair value of the Company’s financial instruments, not shown elsewhere in these financial statements, were as follows *(in thousands):*

 
| ** **                                  | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **Carrying**                 | ** ** | **Estimated**                   | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                  | ** ** | **Amount**                   | ** ** | **Fair Value**             | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| **Assets**                                  |       |                         |       |                            |       |   |   |   |   |
| Cash and due from banks                     |       | $                            | 302,516    |                            | $          | 302,516 |   | $ | 386,489 |   | $ | 386,489 |   |
| Investment securities available for sale    |       | 385,637                      |       | 385,637                         |       | 405,581 |   | 405,581 |   |
| Federal Home Loan Bank of Atlanta stock     |       | 14,142                       |       | 14,142                          |       | 14,593 |   | 14,593 |   |
| Mortgage loans held for sale                |       | 859                          |       | 859                             |       | 3,542 |   | 3,542 |   |
| Loans, net                                  |       | 1,297,974                    |       | 1,299,942                       |       | 1,272,465 |   | 1,275,479 |   |
| FDIC receivable for loss sharing agreements |       | 457,608                      |       | 457,608                         |       | 494,428 |   | 494,428 |   |
| Accrued interest receivable                 |       | 8,412                        |       | 8,412                           |       | 8,594 |   | 8,594 |   |
|                                        |       |                         |       |                            |       |   |   |   |   |
| **Liabilities**                             |       |                         |       |                            |       |   |   |   |   |
| Deposits                                    |       | 2,269,865                    |       | 2,274,484                       |       | 2,421,926 |   | 2,429,608 |   |
| Short-term borrowings                       |       | 5,371                        |       | 5,371                           |       | 5,246 |   | 5,246 |   |
| Accrued interest payable                    |       | 5,258                        |       | 5,258                           |       | 4,850 |   | 4,850 |   |
|                                             |            |                              |            |                                 |            |  |  |  |  |  |  |  |  |

 

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

 

**Introduction**

 

The following discussion describes our results of operations for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 and also analyzes our financial condition as of March 31, 2011 as compared to December 31, 2010.  This discussion should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing in this report and in conjunction with the financial statements and related notes and disclosures in our 2010 Annual Report on Form 10-K.

 

Unless the context indicates otherwise, all references to the “Company,” “we,” “us” and “our” refer to State Bank Financial Corporation and our wholly-owned subsidiary, State Bank and Trust Company, except that if the discussions relate to a period before July 23, 2010, these terms refer solely to State Bank and Trust Company.  All references to the “Bank” refer to State Bank and Trust Company.

 

**Overview**

 

On July 23, 2010, the Company became the bank holding company of the Bank under a plan of reorganization and share exchange that was approved by the boards of directors of the Company and the Bank and adopted by the shareholders of the Bank at the annual meeting held on March 11, 2010.  The Bank is a Georgia state-chartered bank that opened in October 2005 in Pinehurst, Georgia.  From October 2005 until July 23, 2009, the Bank operated as a small community bank with two branch offices located in Dooly County, Georgia with total assets of approximately $33.6 million, total loans receivable of approximately $22.5 million, total deposits of approximately $26.1 million and total shareholders’ equity of approximately $5.7 million at December 31, 2008.

 

On July 24, 2009, the Bank raised approximately $292.1 million in gross proceeds (before expenses) from investors in a private offering of its common stock.  Immediately following the private offering, these investors owned approximately 97% of the Bank’s outstanding common stock.  In connection with the private offering, the FDIC and the Georgia Department of Banking and Finance approved the Interagency Notice of Change in Control application filed by our new management team, which took control of the Bank on July 24, 2009.

 

Also on July 24, 2009, the Bank assumed all of the deposits and acquired certain assets and liabilities of the six bank subsidiaries of Security Bank Corporation, Macon, Georgia, from the FDIC, as receiver, under the terms of a purchase and assumption agreement between the Bank and the FDIC.  On December 4, 2009, the Bank assumed substantially all of the deposits and acquired certain assets and liabilities of The Buckhead Community Bank, Atlanta, Georgia and First Security National Bank, Norcross, Georgia, in two separate FDIC-assisted transactions.  In 2010, the Bank assumed substantially all of the deposits and acquired certain assets and liabilities of NorthWest Bank & Trust, Acworth, Georgia and United Americas Bank, Atlanta, Georgia, in two additional FDIC-assisted transactions.  Concurrently with each of our acquisitions, we entered into loss share agreements with the FDIC that cover certain of the acquired assets, including 100% of the acquired loans (except consumer loans with respect to the NorthWest Bank & Trust and United Americas Bank acquisitions) and other real estate.  Where applicable, we refer to loans subject to loss share agreements with the FDIC as “covered loans” and loans that are not subject to loss share agreements with the FDIC as “non-covered loans.”

 

As a result of the private offering and our failed bank acquisitions, the Bank was transformed from a small community bank in Pinehurst, Georgia to a much larger commercial bank operating 22 full service branches throughout middle Georgia and metropolitan Atlanta.  We now offer a variety of community banking services to individuals and businesses within our middle Georgia and metropolitan Atlanta markets.  Our product line includes loans to small and medium-sized businesses, residential and commercial construction and development loans, commercial real estate loans, farmland and agricultural production loans, residential mortgage loans, home equity loans, consumer loans and a variety of commercial and consumer demand, savings and time deposit products.  We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers.  As of March 31, 2011, our total assets were approximately $2.7 billion, our total loans receivable were approximately $1.3 billion, our total deposits were approximately $2.3 billion and our total shareholders’ equity was approximately $367.5 million.

 

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** **

**Financial Summary**

 

The following table provides unaudited selected quarterly financial data for the first quarter of 2011 and for 2010.  You should read this data in conjunction with the consolidated financial statements and the notes to them and the information contained in this Item 2.   The notes to this table are on the following page.

 
| ** **                                                                      | ** ** | **2011**                 | ** ** | **2010**                  | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|
| **(dollars in thousands,   except per share amounts)** | ** ** | **First********Quarter** | ** ** | **Fourth********Quarter** | ** ** | **Third********Quarter** | ** ** | **Second********Quarter** | ** ** | **First********Quarter** | ** ** |
|                                                                            |       |                     |       |                      |       |   |   |   |   |   |   |
| **Results of Operations:**                                                      |       |                     |       |                      |       |   |   |   |   |   |   |
| Interest income                                                                 |       | $                        | 34,798     |                      | $          | 46,691 |   | $ | 40,730 |   | $ | 39,785 |   | $ | 41,037 |   |
| Interest expense                                                                |       | 7,118                    |       | 8,582                     |       | 9,899 |   | 10,079 |   | 8,680 |   |
| Net interest income                                                             |       | 27,680                   |       | 38,109                    |       | 30,831 |   | 29,706 |   | 32,357 |   |
| Provision for loan losses                                                       |       | 961                      |       | 2,108                     |       | 655 |   | 695 |   | 497 |   |
| Noninterest income                                                              |       | 8,369                    |       | 12,959                    |       | 8,297 |   | 5,522 |   | 6,729 |   |
| Noninterest expense                                                             |       | 21,744                   |       | 27,317                    |       | 21,272 |   | 19,120 |   | 19,987 |   |
| Income before income taxes                                                      |       | 13,344                   |       | 21,643                    |       | 17,201 |   | 15,413 |   | 18,602 |   |
| Income taxes                                                                    |       | 5,113                    |       | 8,152                     |       | 6,439 |   | 5,839 |   | 6,883 |   |
| Net income                                                                      |       | $                        | 8,231      |                      | $          | 13,491 |   | $ | 10,762 |   | $ | 9,574 |   | $ | 11,719 |   |
|                                                                            |       |                     |       |                      |       |   |   |   |   |   |   |
| **Selected Average Balances:**                                                  |       |                     |       |                      |       |   |   |   |   |   |   |
| Total assets                                                                    |       | 2,721,009                |       | 2,786,613                 |       | 2,665,011 |   | 2,561,118 |   | 2,488,662 |   |
| Investment securities                                                           |       | 413,940                  |       | 425,218                   |       | 432,852 |   | 387,216 |   | 335,790 |   |
| Loans                                                                           |       | 1,289,113                |       | 1,209,053                 |       | 1,144,379 |   | 1,109,009 |   | 1,137,902 |   |
| Interest-earning assets                                                         |       | 1,985,718                |       | 2,039,635                 |       | 1,877,410 |   | 1,769,266 |   | 1,669,445 |   |
| Total deposits                                                                  |       | 2,317,500                |       | 2,395,992                 |       | 2,305,592 |   | 2,205,598 |   | 2,138,553 |   |
| Interest-bearing liabilities                                                    |       | 2,090,089                |       | 2,187,178                 |       | 2,098,331 |   | 2,027,727 |   | 1,973,902 |   |
| Shareholders’ equity                                                       |       | 364,474                  |       | 350,487                   |       | 338,204 |   | 328,467 |   | 316,737 |   |
|                                                                            |       |                     |       |                      |       |   |   |   |   |   |   |
| **Per Common Share Data:**                                                      |       |                     |       |                      |       |   |   |   |   |   |   |
| Basic earnings                                                                  |       | $                        | 0.26       |                      | $          | 0.43 |   | $ | 0.34 |   | $ | 0.30 |   | $ | 0.37 |   |
| Diluted earnings                                                                |       | 0.25                     |       | 0.41                      |       | 0.34 |   | 0.30 |   | 0.37 |   |
| Tangible book value                                                             |       | $                        | 11.34      |                      | $          | 11.08 |   | $ | 10.68 |   | $ | 10.29 |   | $ | 9.89 |   |
| Weighted average shares outstanding:                                            |       |                     |       |                      |       |   |   |   |   |   |   |
| Basic                                                                           |       | 31,611                   |       | 31,611                    |       | 31,541 |   | 31,541 |   | 31,541 |   |
| Diluted                                                                         |       | 32,623                   |       | 32,535                    |       | 31,828 |   | 31,828 |   | 31,828 |   |
|                                                                            |       |                     |       |                      |       |   |   |   |   |   |   |
| **Performance Ratios:**                                                         |       |                     |       |                      |       |   |   |   |   |   |   |
| Return on average assets                                                        |       | 1.23                     | %          | 1.92                      | %          | 1.60 | % | 1.50 | % | 1.91 | % |
| Return on average equity                                                        |       | 9.16                     | %          | 15.27                     | %          | 12.62 | % | 11.69 | % | 15.01 | % |
| Net interest margin(1)(2)                                                       |       | 5.68                     | %          | 7.41                      | %          | 6.52 | % | 6.73 | % | 7.87 | % |
| Interest rate spread(3)                                                         |       | 5.75                     | %          | 7.53                      | %          | 6.74 | % | 7.03 | % | 8.19 | % |
| Efficiency ratio(4)                                                             |       | 60.32                    | %          | 53.49                     | %          | 54.37 | % | 54.28 | % | 51.14 | % |
|                                                                            |       |                     |       |                      |       |   |   |   |   |   |   |
| **Capital Ratios:**                                                             |       |                     |       |                      |       |   |   |   |   |   |   |
| Average equity to average assets                                                |       | 13.39                    | %          | 12.58                     | %          | 12.69 | % | 12.83 | % | 12.73 | % |
| Leverage ratio                                                                  |       | 13.16                    | %          | 12.77                     | %          | 11.24 | % | 12.63 | % | 12.62 | % |
| Tier 1 risk-based capital ratio(5)                                              |       | 39.24                    | %          | 43.56                     | %          | 47.65 | % | 57.35 | % | 61.11 | % |
| Total risk-based capital ratio(5)                                               |       | 39.93                    | %          | 44.23                     | %          | 48.13 | % | 58.00 | % | 61.70 | % |

 

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(1)          Net interest income divided by average interest-earning assets.

(2)          Calculated on a fully tax-equivalent basis.

(3)          Yield on interest-earning assets less costs of interest-bearing liabilities.

(4)          Noninterest expenses divided by net interest income and noninterest income.

(5)          Under the FDIC Financial Institutions Letter (FIL-7-2010) dated February 26, 2010, entitled “Regulatory Capital Standards Clarification of the Risk Weights for FDIC Claims and Guarantees,” the FDIC receivable may be assigned a zero risk weight.

 

**Critical Accounting Policies**

 

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements.  We describe our significant accounting policies in the notes to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Some of the accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of our assets and liabilities.  We consider these accounting policies to be critical accounting policies.  The judgment and assumptions we use are based on historical experience and other factors that we believe to be reasonable under the circumstances.  Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates and could materially affect the carrying values of our assets and liabilities and our results of operations.

 

The following is a summary of the more judgmental estimates and complex accounting principles, which represent our critical accounting policies.

 

***Acquisition Accounting***

 

Generally accepted accounting principles require the use of fair value accounting in determining the carrying values of certain assets and liabilities acquired in business combinations and accordingly we recorded assets purchased and liabilities assumed in our FDIC-assisted acquisitions at their fair values.  The fair value of  the  loan portfolios  acquired in these transactions was recorded and is being accounted for under the principles prescribed by FASB ASC Topic 310.

 

On the date of acquisition all loans acquired  are assigned a fair value based on the present value of projected future cash flows and a fair value discount is recorded as an offset to the principal balances of the loans. An accretable portion of the discount is determined based on the timing of the projected cash flows and is taken into income over the projected life of the loans. Such accretion is included in interest income.  Expected cash flows are re-estimated at each reporting date.  Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.  Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges and adjusted accretable discount, which will have a positive effect on interest income.

 

Because we record loans acquired in connection with FDIC-assisted acquisitions at fair value, we record no allowance for loan losses related to the acquired covered loans on the acquisition date, given that the fair value of the loans acquired incorporates assumptions regarding credit risk.

 

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***FDIC Receivable******for Loss Share Agreements***

 

The majority of our loan and other real estate assets are covered under loss share agreements with the FDIC in which the FDIC has agreed to reimburse us for between 80% and 95% of all losses as well as certain expenses incurred in connection with those assets.  We estimated the amount that we will receive from the FDIC under the loss share agreements that will result from losses incurred as we dispose of covered loans and other real estate assets, and we recorded the estimate as a receivable from the FDIC.  We discounted the receivable for the expected timing and receipt of those cash flows using a risk free rate plus a premium for risk. The accretion of the FDIC receivable discount is recorded into noninterest income using the level yield method over the estimated life of the receivable.

 

The FDIC receivable for loss share agreements is measured separately from the related covered assets because it is not contractually embedded in the assets and is not transferable if we sell the assets.   We will review and update the fair value of the FDIC receivable prospectively as loss estimates related to covered loans and other real estate owned change.

 

***Allowance for Loan and Lease Losses (ALLL)***

 

We assess the adequacy of the ALLL quarterly with respect to non-covered loans.  This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance.  The ALLL 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; and

(2)           a general amount, based upon peer information, that is then adjusted for various stress factors representative of various economic factors and characteristics of the loan portfolio.

 

Even though the ALLL is composed of two components, the entire ALLL 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;

(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, we calculate nearly all of our specific allowances 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 peer information.  We then subject the calculation of the general amount to stress factors that are somewhat subjective.  The 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 changes in the local or national economy;

(2)           the depth of 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 ALLL 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 ALLL in its entirety.

 

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***Income Taxes***

 

*Income Tax Expense. *The calculation of our income tax expense requires significant judgment and the use of estimates.  We periodically assess tax positions based on current tax developments, including enacted statutory, judicial and regulatory guidance.  In analyzing our overall tax position, we consider the amount and timing of recognizing income tax liabilities and benefits.  In applying the tax and accounting guidance to the facts and circumstances, we adjust income tax balances appropriately through the income tax provision.  We maintain reserves for income tax uncertainties at levels we believe are adequate to absorb probable payments.  Actual amounts paid, if any, could differ significantly from these estimates.

 

*Deferred Income Taxes. *We use the asset and liability method of accounting for income taxes.  Under this method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  We assess deferred tax assets based on expected realizations, and we establish a valuation allowance for any amounts we do not expect to realize.  No valuation allowance is currently recorded.

 

**Results of Operations**

 

***General***

 

We reported net income of $8.2 million for the three months ended March 31, 2011, compared to $11.7 million for the three months ended March 31, 2010.  Earnings per share on a diluted basis were $0.25 for the three months ended March 31, 2011, compared to $0.37 for the three months ended March 31, 2010.  The accretion of fair value discounts on covered loans under our loss share agreements with the FDIC has significantly affected our earnings for 2010 and the first three months of 2011.

 

We expect that over the next two to three years, as we manage the disposition of our covered loans and other real estate assets acquired from the FDIC, a significant portion of our earnings will result from the accretion of fair value discounts on our covered loan portfolio.  During this period, as we dispose of our covered loans, we also plan to grow our balance sheet by replacing our covered loans and the related accretion on the accretable discount with new performing loans and related interest income.

 

***Net Interest Income***

 

Our earnings depend to a large extent on net interest income, which is the excess of the interest income recognized on interest earning assets (such as loans and investment securities), as well as any accretion of fair value discounts on our covered loans, over the interest expense incurred on interest bearing liabilities such as deposits and borrowings.  Net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned and paid on them.  Net interest income is a function of our balances of interest-earning assets and interest-bearing liabilities and the effect of market rates of interest as influenced by the Federal Reserve’s monetary policy.  Following our acquisitions, the accretion of fair value discounts on covered loans under our loss share agreements with the FDIC has significantly affected our net interest income, and we expect that to continue for the immediate future.

 

Our net interest income was $27.7 million for the three months ended March 31, 2011.  Our net interest rate spread, which is the yield on interest earning assets, including the accretion of the fair value discount on our covered loans, minus the cost of interest bearing liabilities, was 5.75% for the three months ended March 31, 2011, while our net interest margin, which is net interest income divided by average interest earnings assets, was 5.68%.  Our net interest income was $32.4 million for the three months ended March 31, 2010.  Our net interest rate spread was 8.19% for the three months ended March 31, 2010, while our net interest margin was 7.87%.

 

Our interest income was $34.8 million for the three months ended March 31, 2011, which included interest and fees earned on loans of $6.7 million and the accretion of the fair value discounts on our covered loans of $25.5 million. Our interest income was $41.0 million for the three months ended March 31, 2010, which included interest and fees earned 

 

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on loans of $905,000 and the accretion of the fair value discounts on our covered loans of $38.1 million.  The continuing accretion of fair value discounts resulting from acquired loans will likely contribute to volatility in net interest income in future periods.

 

Interest expense was $7.1 million for the three months ended March 31, 2011, compared to $8.7 million for the three months ended March 31, 2010, and was comprised almost entirely of interest paid on deposit accounts of $7.0 million for the 2011 period and $8.7 million for the 2010 period.  The average balance of interest bearing deposit accounts was $2.1 billion, or 99.7 % of total interest bearing liabilities for the three months ended March 31, 2011, compared to $2.0 billion, or 99.5% of total interest bearing liabilities for the three months ended March 31, 2010.

 

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***Average Balances, Income and Expenses, and Rates***

 

The following table shows our average balance sheet and our average yields on assets and average costs of liabilities for the periods indicated.  We derive these yields by dividing income or expense by the average balance of the corresponding assets or liabilities.  We have derived average balances from the daily balances throughout the periods indicated.

 
| ** **                                                         | ** ** | **For the Three Months Ended   March 31, 2011** | ** ** | **For the Three Months Ended   March 31, 2010** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **(dollars in thousands)**                               | ** ** | **Average   Balance**                                                         | ** ** | **Income/   Expense**                                                         | ** ** | **Yield/   Rate(1)** | ** ** | **Average   Balance** | ** ** | **Income/   Expense** | ** ** | **Yield/   Rate(1)** | ** ** |
|                                                               |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| **Assets:**                                                        |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest earning balances                                          |       | $                                                                             | 282,665    |                                                                          | $          | 197 |   | 0.28 | % | $ | 195,504 |   | $ | 108 |   | 0.22 | % |
| Taxable investment securities                                      |       | 403,649                                                                       |       | 2,278                                                                         |       | 2.29 | % | 332,703 |   | 1,883 |   | 2.29 | % |
| Non-taxable investment securities, tax- equivalent   basis **(2)** |       | 10,291                                                                        |       | 157                                                                           |       | 6.22 | % | 3,087 |   | 48 |   | 6.36 | % |
| Loans receivable**(3)**                                            |       | 1,289,113                                                                     |       | 32,221                                                                        |       | 10.14 | % | 1,136,955 |   | 39,015 |   | 13.92 | % |
| Total earning assets                                               |       | 1,985,718                                                                     |       | 34,853                                                                        |       | 7.12 | % | 1,668,249 |   | 41,054 |   | 9.98 | % |
| Total nonearning assets                                            |       | 735,291                                                                       |       |                                                                          |       |   |   | 816,234 |   |   |   |   |   |
| Total assets                                                       |       | $                                                                             | 2,721,009  |                                                                          |       |   |   |   | $ | 2,484,483 |   |   |   |   |   |
|                                                               |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| **Liabilities:**                                                   |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                      |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest bearing transaction accounts                              |       | $                                                                             | 244,476    |                                                                          | $          | 185 |   | 0.31 | % | $ | 239,881 |   | $ | 560 |   | 0.95 | % |
| Savings & money market                                    |       | 1,267,305                                                                     |       | 3,679                                                                         |       | 1.18 | % | 851,030 |   | 4,311 |   | 2.05 | % |
| Time deposits less than $100,000                                   |       | 325,471                                                                       |       | 1,780                                                                         |       | 2.22 | % | 476,087 |   | 140 |   | 1.77 | % |
| Time deposits greater than $100,000                                |       | 249,261                                                                       |       | 1,389                                                                         |       | 2.26 | % | 390,548 |   | 3,657 |   | 1.79 | % |
| Advances from FHLB                                                 |       | —                                                                        |       | —                                                                        |       | 0.00 | % | 167 |   | — |   | 0.29 | % |
| Repurchase agreements and federal funds sold                       |       | 3,576                                                                         |       | 13                                                                            |       | 1.49 | % | 9,076 |   | 12 |   | 0.55 | % |
| Total interest-bearing liabilities                                 |       | 2,090,089                                                                     |       | 7,046                                                                         |       | 1.37 | % | $ | 1,966,789 |   | $ | 8,680 |   | 1.79 | % |
|                                                               |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing liabilities:                                   |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Noninterest bearing demand deposits                                |       | 230,987                                                                       |       |                                                                          |       |   |   | 175,212 |   |   |   |   |   |
| Other liabilities                                                  |       | 35,459                                                                        |       |                                                                          |       |   |   | 25,170 |   |   |   |   |   |
| Shareholders’ equity                                          |       | 364,474                                                                       |       |                                                                          |       |   |   | 317,312 |   |   |   |   |   |
|                                                               |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity                    |       | $                                                                             | 2,721,009  |                                                                          |       |   |   |   | $ | 2,484,483 |   |   |   |   |   |
| Net interest income                                                |       |                                                                          |       | $                                                                             | 27,807     |   |   |   |   |   | $ | 32,374 |   |   |   |
| Net interest spread                                                |       |                                                                          |       |                                                                          |       | 5.75 | % |   |   |   |   | 8.19 | % |
| Net interest margin                                                |       |                                                                          |       |                                                                          |       | 5.68 | % |   |   |   |   | 7.87 | % |

 

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(1)   Annualized for the applicable period.

(2)   Reflects taxable equivalent adjustments using the statutory tax rate of 35% in adjusting interest on tax-exempt securities to a fully taxable basis.  The taxable equivalent adjustments included above amounts to $55,000 for 2011 and $17,000 for 2010.

(3)   Includes nonaccruing loans.

 

***Provision for Loan Losses***

 

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our statement of income.  We review our non-covered loan portfolio, consisting of loans that are not covered by loss share agreements with the FDIC, on a quarterly basis to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.  Please see the discussion below under “Balance Sheet Review — Provision and Allowance for Loan Losses” for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

 

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We do not maintain an allowance for loan loss for the covered loans in our loan portfolio that we acquired under the loss share agreements with the FDIC, because we recorded these loans at fair value at the time of each respective acquisition.  To date, there has been no significant deterioration that would require an allowance.  We do evaluate the adequacy of the fair value discount on our covered loans, and we determined that no additional provision for loan losses on covered loans was required for the three months ended March 31, 2011.  The increase in the accretable discount was a result of quarterly changes in estimated cash flows.  At March 31, 2011, our non-covered loans totaled $413.0 million, or 31.8% of our total loan portfolio, compared to $78.4 million, or 7.0% of our total loan portfolio at March 31, 2010.

 

For the three months ended March 31, 2011, our provision for loan losses was $961,000, compared to $497,00 for the three months ended March 31, 2010.  The allowance for loan losses was approximately $6.2 million for the 2011 period and $3.0 million for the 2010 period.  Our allowance for loan losses as a percentage of gross non-covered loans was 1.50% at March 31, 2011, compared to 3.84% at March 31, 2010.  The decrease in the allowance for loan losses as a percentage of gross non-covered loans was a result of increases in non-covered loans.

 

We review our loss experience on our covered loan portfolio periodically and compare our losses to the estimated losses in the fair value discounts.  In the future, if our actual losses exceed the estimated losses, we will record an adjustment to these discounts through a provision for loan losses charged as an expense on our statement of income.  In that event, due to the FDIC loss share agreements, we would only expense between 5% and 20% of the estimated loss, depending upon the applicable acquisition and loss share agreement to which the loss is related.  No such adjustments were required for the three months ended March 31, 2011 and 2010.

 

***Noninterest Income***

 

Noninterest income totaled $8.4 million for the three months ended March 31, 2011, compared to $6.7 million for the 2010 period.  The accretion of the FDIC receivable of $5.0 million comprised 59.4% of our noninterest income for the three months ended March 31, 2011, compared to $4.1 million, or 61.1% of our noninterest income for the 2010 period.  Service charges on deposits of $1.4 million comprised 16.9% of our noninterest income for the three months ended March 31, 2011, compared to $1.6 million, or 24.4% of our noninterest income, for the 2010 period.  These service charges are primarily from fees related to insufficient funds checks and the Bank’s bounce protection product.

 

***Noninterest Expense***

 

Noninterest expense totaled $21.7 million for the three months ended March 31, 2011.  Salaries and employee benefits were our most significant expense totaling $11.7 million, or 53.7% of noninterest expense for the three months ended March 31, 2011.  Noninterest expense totaled $20.0 million for the three months ended March 31, 2010.  Salaries and employee benefits were our most significant expense totaling $11.0 million, or 55.0% of noninterest expense for the 2010 period.  We currently have higher than peer average expenses as a result of expenses associated with (a) the operation of our Special Assets Division, which services the problem assets acquired under the loss share agreements with the FDIC, and (b) our Regulatory Relations Department, which manages our compliance with the FDIC loss share agreements.

 

Federal deposit insurance premiums and fees were $648,000, or 3.0% of noninterest expense for the three months ended March 31, 2011, compared to $1.1 million, or 5.6% of noninterest expense, for the 2010 period.  The decrease in deposit insurance premiums is a result of a change in the calculation of the FDIC assessment resulting from a continued decline in total assets.  Occupancy and equipment expenses were $2.1 million, or 9.7% of noninterest expense for the three months ended March 31, 2011, compared to $2.1 million, or 10.7% of noninterest expense for the 2010 period.  During the first half of 2010, we leased each of the acquired branch locations from our 2009 acquisitions from the FDIC.  As a result, our occupancy and equipment expenses include very little depreciation expense but a significant amount of leasing expense.  The settlement with the FDIC on the 2009 acquisitions occurred in the third quarter of 2010, when we purchased the acquired branch locations for $21.9 million from the FDIC.  We have now begun depreciating the acquired assets.

 

Legal and professional expenses were $1.8 million, or 8.5% of noninterest expense for the three months ended March 31, 2011, comprised of $277,000 in legal fees, $368,000 in accounting and audit fees and $1.2 million of consulting and other professional fees.  Legal and professional expenses were $580,000, or 2.9% of noninterest expense for the three months ended March 31, 2010, comprised of $135,000 in legal fees, $246,000 in accounting and audit fees and $199,000 of

 

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consulting and other professional fees.  Our resolution efforts with respect to our covered assets and our acquisition activity in 2009 and 2010 have resulted in increased legal and professional expenses.  In addition, the Company engaged a consulting company during 2011 to implement a sophisticated cash flow projection model as a tool in calculating fair values and future cash flows on the covered loans acquired in the FDIC-assisted acquisitions. Following the effective date of our registration statement on Form 10 on December 28, 2010, we are now obligated to file various reports required by the Exchange Act, including current reports on Form 8-K, quarterly reports on Form 10-Q and annual reports on Form 10-K.  As a result, we anticipate we will incur significant legal, accounting and other expenses that we did not incur in the past and, therefore, are not reflected in our historical financial statements.

 

Net costs of operations of other real estate owned were $2.0 million, or 9.3% of noninterest expense, for the three months ended March 31, 2011.  These costs include losses on sales of other real estate of $1.0 million and expenses related to the management and collection of other real estate of $973,000.   Net costs of operations of other real estate owned were $2.6 million, or 12.8% of noninterest expense, for the 2010 period.  These costs include losses on sales of other real estate of $1.5 million and expenses related to the management and collection of other real estate of $1.1 million.  Under the loss share agreements, we record a portion of these losses and expenses in our statements of income (generally 20%) and we record the remaining 80% to the FDIC receivable.

 

**Balance Sheet Review**

 

***General***

 

At March 31, 2011, we had total assets of $2.7 billion, consisting principally of $1.3 billion in loans net of deferred fees and costs, fair value discount and the allowance for loan loss, $385.6 million in investment securities, $457.6 million in the FDIC receivable, $131.1 million in other real estate owned and $302.5 million in cash and cash equivalents.  Our liabilities at March 31, 2011 totaled $2.3 billion, consisting principally of $2.3 billion in deposits.  At March 31, 2011, our shareholders’ equity was $367.5 million.

 

***Investments***

 

Our investment portfolio serves as a source of liquidity and earnings and is also used to manage interest rate risk.  At March 31, 2011, the $385.6 million in our available-for-sale investment securities portfolio represented approximately 14.3% of our total assets compared to $405.6 million, or 14.3% of total assets, at December 31, 2010.  We anticipate maintaining an investment portfolio to provide both increased earnings and liquidity.

 

Our investment portfolio primarily consists of U.S. government agency securities and agency mortgage-backed securities.  As of March 31, 2011, $155.3 million, or 40.3%, of our available-for-sale securities were invested in agency mortgage-backed securities, compared to $169.6 million, or 41.8%, as of December 31, 2010.  As of March 31, 2011, $85.9  million, or 22.3% of our available-for-sale securities, were invested in non-agency mortgage-backed securities, compared to $61.0 million, or 15.0% as of December 31, 2010.  We purchased these non-agency mortgage-backed securities at significant market discounts compared to par value.

 

Agency mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages and are principally issued by “quasi-federal” agencies such as Fannie Mae and Freddie Mac.  These securities are deemed to have high credit ratings, and the minimum monthly cash flows of principal and interest are guaranteed by the issuing agencies.  Although investors generally assume that the federal government will support these agencies, it is under no obligation to do so.  Other agency mortgage-backed securities are issued by Ginnie Mae, which is a federal agency, and are guaranteed by the U.S. government.  As of March 31, 2011, $133.4 million, or 34.6%, of our available-for-sale securities were invested in U.S. government agencies, compared to $163.7 million, or 40.4%, as of December 31, 2010.

 

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Following is a summary of our available for sale investment portfolio for the periods presented.

 
| ** **                                            | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                               | ** ** | **Amortized   Cost**         | ** ** | **Fair   Value**                | ** ** | **Amortized   Cost** | ** ** | **Fair   Value** | ** ** |
| Government-sponsored enterprises                      |       | $                            | 132,818    |                            | $          | 133,396 |   | $ | 163,002 |   | $ | 163,681 |   |
| Residential mortgage-backed securities — agency  |       | 37,522                       |       | 38,291                          |       | 40,892 |   | 41,673 |   |
| Residential mortgage-backed securities — private |       | 85,708                       |       | 85,909                          |       | 61,504 |   | 61,025 |   |
| Collateralized mortgage obligations non-amortizing    |       | 115,013                      |       | 117,005                         |       | 125,146 |   | 127,955 |   |
| State, county and municipals                          |       | 10,341                       |       | 10,532                          |       | 9,490 |   | 9,555 |   |
| Other investments                                     |       | 354                          |       | 504                             |       | 1,525 |   | 1,692 |   |
| Total                                                 |       | $                            | 381,756    |                            | $          | 385,637 |   | $ | 401,559 |   | $ | 405,581 |   |

 

The following table shows contractual maturities and yields on our investments at March 31, 2011.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
| ** **                        | ** ** | **Government-   sponsored enterprises** | ** ** | **Mortgage-backed   securities** | ** ** | **State, county and   municipals** | ** ** | **Other investments** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|----------------------------------|------------|----------------------------------------------|------------|----------------------------|------------|
| **(in thousands)**           | ** ** | **Amount**                                   | ** ** | **Yield**                        | ** ** | **Amount**                                   | ** ** | **Yield**                  | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
|                              |       |                                         |       |                             |       |                                         |       |                       |       |   |   |   |   |   |   |   |   |
| **Maturity**:                     |       |                                         |       |                             |       |                                         |       |                       |       |   |   |   |   |   |   |   |   |
| One year or less                  |       | 80,908                                       |       | 0.58                             | %          | —                                       |       | —                     |       | 2,107 |   | 0.70 | % | — |   | — |   |
| After one year through five years |       | 43,991                                       |       | 0.53                             | %          | 219                                          |       | 2.02                       | %          | 1,556 |   | 1.96 | % | 504 |   | 17.04 | % |
| After five years through10 years  |       | 5,421                                        |       | 3.68                             | %          | 1,655                                        |       | 2.16                       | %          | 433 |   | 5.54 | % | — |   | — |   |
| After 10 years                    |       | 3,076                                        |       | 4.00                             | %          | 239,331                                      |       | 3.05                       | %          | 6,436 |   | 7.31 | % | — |   | — |   |
| Total                             |       | 133,396                                      |       | 0.76                             | %          | 241,205                                      |       | 3.04                       | %          | 10,532 |   | 5.08 | % | 504 |   | 17.04 | % |

 

***Loans***

 

Loans receivable constitutes our largest interest-earning asset.  Total loans outstanding at March 31, 2011 and December 31, 2010 were approximately $1.3 billion after subtracting the fair value discount, allowance for loan losses and net unamortized loan origination fees.

 

Loans secured by real estate mortgages are the principal component of our loan portfolio.  Most of our real estate loans are secured by residential or commercial property.  We do not generally originate traditional long-term residential mortgages for the portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit.  We obtain a security interest in real estate whenever possible, in addition to any other available collateral, to increase the likelihood of the ultimate repayment of the loan.  Generally, loan-to-value ratios on loans are based on regulatory guidance as noted in our loan policy guidelines.

 

We acquired the vast majority of our loans in our ten FDIC-assisted transactions.  As a result, the current concentrations in our loan portfolio may not be indicative of concentrations in our loan portfolio in the future.  We will attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral.

 

We have planned for and expect that the size of our covered loan portfolio will decrease as covered loans are collected, charged-off, or the underlying collateral is foreclosed on and sold.  Our covered loans may increase in the future if we acquire more failed banks from the FDIC in transactions that include loss share agreements.  Our non-covered loans

 

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will increase as we originate and purchase well-underwritten loans.  Due to the current economic environment, covered loans may continue to decrease faster than non-covered loans increase, thereby resulting in a net decrease in loans receivable.

 

The following tables summarize the composition of our loan portfolio at the dates presented:

 
| ** **                                             | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **(dollars in thousands)**                   | ** ** | **Covered   Loans**          | ** ** | **Non-   Covered   Loans**      | ** ** | **Total   Amount** | ** ** | **% of   Total** | ** ** | **Covered   Loans** | ** ** | **Non-   Covered   Loans** | ** ** | **Total   Amount** | ** ** | **% of   Total** | ** ** |
|                                                   |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Commercial*                                           |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial   and industrial                            |       | $                            | 113,206    |                            | $          | 37,077 |   | $ | 150,283 |   | 8.2 | % | $ | 144,913 |   | $ | 38,919 |   | $ | 183,832 |   | 9.8 | % |
|                                                   |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Real Estate*                                          |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage                                               |       | 301,221                      |       | 23,298                          |       | 324,519 |   | 17.7 | % | 314,536 |   | 23,255 |   | 337,791 |   | 18.0 | % |
| Commercial                                             |       | 586,902                      |       | 247,369                         |       | 834,271 |   | 45.6 | % | 613,529 |   | 196,243 |   | 809,772 |   | 43.0 | % |
| Construction                                           |       | 389,840                      |       | 90,257                          |       | 480,097 |   | 26.2 | % | 435,619 |   | 70,543 |   | 506,162 |   | 26.9 | % |
| Total   real estate                                    |       | 1,277,963                    |       | 360,924                         |       | 1,638,887 |   | 89.5 | % | 1,363,684 |   | 290,041 |   | 1,653,725 |   | 87.9 | % |
|                                                   |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Consumer*                                             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer                                               |       | 27,173                       |       | 14,997                          |       | 42,170 |   | 2.3 | % | 29,764 |   | 13,889 |   | 43,653 |   | 2.3 | % |
|                                                   |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total gross loans receivable, net of deferred fees** |       | $                            | 1,418,342  |                            | $          | 412,998 |   | $ | 1,831,340 |   | 100.0 | % | $ | 1,538,361 |   | $ | 342,849 |   | $ | 1,881,210 |   | 100.0 | % |
|                                                   |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Less   — allowance for loan losses                |       | —                       |       | (6,214                          | )          | (6,214 | ) |   |   | — |   | (5,351 | ) | (5,351 | ) |   |   |
| Less   — discounts                                |       | (527,152                     | )          | —                          |       | (527,152 | ) |   |   | (603,694 | ) | — |   | (603,394 | ) |   |   |
| **Total loans, net**                                   |       | 891,190                      |       | 406,784                         |       | 1,297,974 |   |   |   | 934,667 |   | 337,498 |   | $ | 1,272,465 |   |   |   |

 

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***Maturities and Sensitivity of Loans to Changes in Interest Rates***

 

The information in the following table is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity.  Renewal of these loans is subject to review and credit approval, as well as modification of terms upon maturity.  Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.

 

The following summarizes the loan maturity distribution by type and related interest rate characteristics at March 31, 2011:

 
| **(in thousands)**                   | ** ** | **One year   or less** | ** ** | **After one   but   within   five years** | ** ** | **After five   years** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------|------------|-----------------------------|------------|-----------|------------|
|                                      |       |                             |       |                                                |       |                        |       |      |       |
| Commercial                                |       | $                                | 73,405     |                                                | $          | 62,918                      |       | $         | 13,960     |   | $ | 150,283 |   |
| Real estate                               |       | 807,967                          |       | 593,788                                             |       | 237,132                     |       | 1,638,887 |       |
| Consumer                                  |       | 10,331                           |       | 31,185                                              |       | 654                         |       | 42,170    |       |
| Total gross loans                         |       | $                                | 891,703    |                                                | $          | 687,891                     |       | $         | 251,746    |   | $ | 1,831,340 |   |
|                                      |       |                             |       |                                                |       |                        |       |      |       |
| Gross loans maturing after one year with: |       |                             |       |                                                |       |                        |       |      |       |
| Fixed interest rates                      |       | $                                | 424,288    |                                                |       |                        |       |      |       |   |
| Floating or adjustable interest rates     |       | 515,349                          |       |                                                |       |                        |       |      |       |
| Total loans                               |       | $                                | 939,637    |                                                |       |                        |       |      |       |   |

 

***FDIC Receivable for Loss Share Agreements***

 

As of March 31, 2011, 77.4% of our outstanding principal balance of loans and 99.9% of our other real estate assets were covered under loss share agreements with the FDIC in which the FDIC has agreed to reimburse us for between 80% and 95% of all losses incurred in connection with those assets.  We estimated the FDIC reimbursement that will result from losses incurred as we dispose of covered loans and other real estate assets, and we recorded the estimate as a receivable from the FDIC.  The FDIC receivable for loss share agreements was $457.6 million as of March 31, 2011 and $494.4 million as of December 31, 2010.  Realized losses in excess of acquisition date estimates will result in an increase in the FDIC receivable for loss share agreements.  Conversely, if realized losses are less than acquisition date estimates, the FDIC receivable for loss share agreements will be reduced.  The discount on the FDIC receivable is accreted into noninterest income using the level yield method over the estimated life of the receivable, including estimates of the timing of cash flow receipts.

 

***Allowance for Loan Losses***

 

We recorded the loans acquired in our acquisitions at their acquisition date fair value, which was based on expected cash flows and included an estimation of expected future loan losses.  As a result, the loans acquired are excluded from the calculation of allowance for loan losses and thus we have not recorded any provision for loan losses for these loans.  At each acquisition date, we were unable to obtain all of the information necessary for us to measure the fair values of the assets we acquired.  This was particularly true because each acquisition was of a failed bank, where we could perform only limited due diligence before the acquisition date.  Under current accounting principles, within a given measurement period not to exceed one year, we may adjust our estimate of loan and other real estate fair values based on new information we obtain about facts and circumstances that existed as of the acquisition date that, if known, would have affected our loan or other real estate fair values.  This measurement period ends on the earlier of one year after the acquisition or the date we receive the information about the facts and circumstances that existed on each acquisition date.  If we discover during the measurement period that we have materially underestimated or overestimated our loan or other real estate fair values and that the facts and circumstances that resulted in the adjustment existed at the date of acquisition, we will retroactively adjust our loan or other real estate fair values and make a corresponding adjustment to our bargain purchase gain or goodwill.  Beyond the measurement period (or if we determine that losses arose based on facts and

 

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circumstances that arose after the acquisition date) our portion of any additional losses will be reflected as a provision for loan losses.

 

To date, we have not made any measurement period adjustments based on facts and circumstances that existed as of the respective acquisition dates.  Through March 31, 2011, we have not recorded any provisions to the allowance for loan losses related to the covered loan acquired.

 

For our non-covered loans, we have established an allowance for loan losses through a provision for loan losses charged to expense on our statement of income.  We maintain the allowance at a level deemed appropriate by management to provide adequately for known and inherent losses in our non-covered loan portfolio.  Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate.  In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio.  Because our non-covered loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels.

 

Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix and size of our non-covered loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans and a review of specific problem loans.  In addition, because of the lack of seasoning in our non-covered loan portfolio, we use peer data to develop our historical loss migration analysis, rather than our own historical loan loss data.  We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit and peer group comparisons.  More specifically, in determining our allowance for loan losses, we review loans for specific impaired reserves based on current appraisals of collateral less disposal costs.  We determine general reserves by using the peer data applied to risk rated loans grouped by FDIC call report classification code.  We calculate the general reserves by applying the appropriate historical loss ratio to the loan categories grouped by risk rating (pass, special mention, substandard and doubtful) and adjusted for quantitative factors.  Impaired loans are excluded from this analysis as they are individually reviewed for valuation.

 

We assign the relationships that comprise our loan portfolio a risk grade based on a common set of parameters.  These parameters include debt to worth, liquidity of the borrower, net worth, experience in a particular field and other factors.  We also give weight to the relative strength of any guarantors on the loan.  We have an internal loan specialist dedicated to the review of loan files on a test basis to confirm the grading of each loan.

 

A significant portion of our non-covered loan portfolio has been booked within the last 18 months under stringent underwriting standards and has not experienced any significant losses to date.  Due to the lack of historical loss data, we use peer group data to determine an appropriate basis for historical losses.  As a result of the economic conditions present in the country in general and in our markets in particular, we believe the use of peer group data to develop loss estimates is appropriate until our non-covered loan portfolio ages and reaches a size that will yield its own loss characteristics.

 

Separately, we review all impaired non-covered loans to determine a specific allocation for each.  In our assessment of impaired loans, we consider the primary source of repayment when determining whether loans are collateral dependent.  We measure impairment of a loan based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  When management determines that a loan is impaired, the difference between our investment in the related loan and the present value of the expected future cash flows, or the fair value of the collateral, is established as a specific allowance.  For collateral-dependant impaired loans, we charge-off such losses on a timely basis.

 

Periodically, we adjust the amount of the allowance based on changing circumstances.  We recognize loan losses to the allowance and add back subsequent recoveries.  In addition, on a quarterly basis we informally compare our allowance for loan losses to various peer institutions.  We recognize, however, that allowances will vary because financial institutions are unique in the make-up of their loan portfolios and customers, which necessarily creates different risk profiles for the institutions.  We would only consider further adjustments to our allowance for loan losses based on this peer

 

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review if our allowance was significantly different from our peer group.  To date, we have not made any such adjustment.  Loan charge-offs in future periods may exceed the allowance for loan losses as estimated at any point in time, and provisions for loan losses may be significant to a particular accounting period, especially considering the overall weakness in the commercial and residential real estate markets in our market areas.

 

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The following table summarizes the activity related to our allowance for loan losses related to our non-covered loans for the periods presented.

 
| **(dollars in thousands)**                        | ** ** | **March 31, 2011** | ** ** | **March 31, 2010** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                                        |       |                         |       |                         |       |
| Balance, at the beginning of period                         |       | $                            | 5,351      |                         | $          | 2,524 |   |
| *Charge-offs*:                                              |       |                         |       |                         |       |
| Commercial and industrial                                   |       | —                       |       | —                       |       |
| Commercial real estate-other                                |       | —                       |       | —                       |       |
| Commercial real estate – construction                  |       | 7                            |       | —                       |       |
| Residential real estate                                     |       | —                       |       | —                       |       |
| Consumer                                                    |       | 91                           |       | —                       |       |
| Total charge-offs                                           |       | $                            | 98         |                         | $          | — |   |
| *Recoveries*:                                               |       |                         |       |                         |       |
| Commercial and industrial                                   |       | —                       |       | —                       |       |
| Commercial real estate-other                                |       | —                       |       | —                       |       |
| Commercial real estate – construction                  |       | —                       |       | —                       |       |
| Residential real estate                                     |       | —                       |       | —                       |       |
| Consumer                                                    |       | —                       |       | —                       |       |
| Total recoveries                                            |       | $                            | —     |                         | $          | — |   |
| Net charge-offs                                             |       | 98                           |       | —                       |       |
| Provision for loan losses                                   |       | 961                          |       | 497                          |       |
| **Balance, at end of period**                               |       | $                            | 6,214      |                         | $          | 3,021 |   |
|                                                        |       |                         |       |                         |       |
| Allowance for loan losses to non-covered loans   receivable |       | 1.50                         | %          | 3.84                         | %          |
| Ratio of net charge-offs to non-covered loans   outstanding |       | 0.02                         | %          | 0.00                         | %          |

 

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***Allocation of Allowance for Loan Losses***

 

The following tables present the allocation of the allowance for loan losses and the percentage of the total amount of loans in each loan category listed as of the dates indicated.

 
| ** **                            | ** ** | **March 31, 2011** | ** ** | **December 31, 2010**                  | ** ** |
|---------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| **(dollars in thousands)**  | ** ** | **Amount**                   | ** ** | **% of loans   to total   loans** | ** ** | **Amount** | ** ** | **% of loans   to total   loans** | ** ** |
| *Commercial*                          |       |                         |       |                                             |       |   |   |   |   |
| Commercial and industrial             |       | $                            | 549        |                                             | 2.0        | % | $ | 588 |   | 2.2 | % |
| *Real Estate*                         |       |                         |       |                                             |       |   |   |   |   |
| Mortgage                              |       | 279                          |       | 1.3                                              | %          | 246 |   | 1.4 | % |
| Commercial                            |       | 2,236                        |       | 13.5                                             | %          | 1,803 |   | 10.6 | % |
| Construction                          |       | 2,620                        |       | 4.9                                              | %          | 2,252 |   | 3.9 | % |
| Total real estate                     |       | 5,135                        |       | 19.7                                             | %          | 4,301 |   | 15.9 | % |
| *Consumer*                            |       |                         |       |                                             |       |   |   |   |   |
| Consumer                              |       | 235                          |       | 0.9                                              | %          | 223 |   | 0.8 | % |
| *Nonspecific*                         |       |                         |       |                                             |       |   |   |   |   |
| Nonspecific                           |       | 295                          |       | —                                           |       | 239 |   | — |   |
| Total allowance for non-covered loans |       | 6,214                        |       | 22.6                                             | %          | 5,351 |   | 18.9 | % |
| Total allowance for covered loans     |       | —                       |       | 77.4                                             | %          | — |   | 81.1 | % |
| **Total allowance for loan losses**   |       | $                            | 6,214      |                                             | 100.0      | % | $ | 5,351 |   | 100.0 | % |

 

***Non-performing Assets***

 

Non-performing assets consist of nonaccrual loans, loans past due 90 days or more as to interest or principal and still accruing, and other real estate owned, which is real estate acquired through foreclosure.  Nonaccrual loans are those loans on which we have discontinued recognition of interest income.  When management believes there is sufficient doubt as to the collectibility of principal or interest on any loan, or generally when loans are 90 days or more past due, we discontinue the accrual of the applicable interest and designate the loan as “nonaccrual,” unless the loan is well secured and in the process of collection.  Management reviews past due loans on a monthly basis and will place certain loans on nonaccrual status at 60 days past due in some circumstances.  We apply interest payments received on nonaccrual loans against principal.  We return loans to an accrual status when factors indicating doubtful collectibility on a timely basis no longer exist.  We record a provision for estimated losses if a subsequent decline in value occurs.

 

Nonaccrual loans are valued at either the observable market price of the loan, the present value of expected future cash flows or the fair value of the collateral if the loan is collateral dependent.  Substantially all of our nonaccrual loans are collateral dependent and, therefore, are valued at the fair value of collateral.  The fair value of collateral is determined through a review of the appraised value and assessment of recovery value of the collateral through discounts related to various factors noted below.  When a loan reaches nonaccrual status, we review the appraisal on file and determine if the appraisal is current and valid.  A current appraisal is one that has been performed in the last twelve months, and a valid appraisal is one that we believe accurately and appropriately addresses current market conditions.  If the appraisal is more than twelve months old or if market conditions have deteriorated since the last appraisal, we will order a new appraisal.  In addition, we require a new appraisal at the time of foreclosure or repossession of the underlying collateral.  Upon determining that an appraisal is both current and valid, management assesses the recovery value of the collateral, which involves the application of various discounts to the market value.  These discounts include the following:  length of time to market and sell the property, as well as expected maintenance costs, insurance and taxes and real estate commissions on sale.  We initially record other real estate owned at the lower of cost or estimated fair value less estimated costs to dispose at the date of acquisition.

 

We contract a third-party property valuation company to order, obtain and review the appraisals prepared by a pre-approved third-party appraiser.  We conduct this process independently from our loan production staff.  Due to the current 

 

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economic conditions and the number of non-performing loans in our markets, there is often a 60 to 90 day period between the date we order an appraisal and the date we receive and review it.  Once the third-party property valuation company completes its review of the new appraisal, they provide it either to our Credit Administration Department (for non-covered loans) or the Special Assets Division (for covered loans).  For non-covered loans, we will record either a specific allowance or a charge-off against the allowance for loan losses if our review of the current appraisal or the new appraisal indicates a loss.  Subsequently, we will review our allowance at the end of each quarter and replenish it as required by our ALLL model.  For covered loans, we will record a charge-off against the appropriate fair value discount (impaired or other) if our review of the current appraisal or the new appraisal indicates a loss.

 

Partially charged-off collateral dependent loans with an updated appraisal remain on nonaccrual status until the factors that previously indicated doubtful collectability on a timely basis no longer exist.  Specifically, we look at the following factors before returning a partially charged-off loan to performing status:  documented evidence of debt service capacity; adequate collateral; and a minimum of six months of receiving payments as agreed.

 

Loan modifications constitute a troubled debt restructuring if we, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider.  For loans that are considered troubled debt restructurings, we either compute the present value of expected future cash flows discounted at the original loan’s effective interest rate or, as a practical expedient, we may measure impairment based on the observable market price of the loan or the fair value of the collateral even though we do not expect to deem troubled debt restructurings collateral dependent.  We record the difference between the carrying value and fair value of the loan as a valuation allowance.

 

The following tables set forth our non-performing assets for the periods presented.

 
| ** **                                         | ** ** | **At March 31, 2011** | ** ** | **At December 31, 2010** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| **(dollars in thousands)**               | ** ** | **Covered   Loans(1)**               | ** ** | **Non-   Covered   Loans**              | ** ** | **Total** | ** ** | **Covered   Loans** | ** ** | **Non-   Covered   Loans** | ** ** | **Total** | ** ** |
|                                               |       |                                 |       |                                    |       |   |   |   |   |   |   |   |   |
| Nonaccrual loans                                   |       | $                                    | 518,698    |                                    | $          | 5,099 |   | $ | 523,339 |   | $ | 529,360 |   | $ | 4,079 |   | $ | 533,439 |   |
| Accruing loans 90 days or more past due            |       | —                               |       | —                                  |       | — |   | — |   | — |   | — |   |
| Troubled debt restructurings not included in above |       | —                               |       | —                                  |       | — |   | — |   | — |   | — |   |
| Total non-performing loans                         |       | 518,698                              |       | 5,099                                   |       | 523,797 |   | 529,360 |   | 4,079 |   | 533,439 |   |
| Other real estate owned                            |       | 131,074                              |       | 75                                      |       | 131,149 |   | 155,981 |   | 75 |   | 156,056 |   |
| Total non-performing assets                        |       | $                                    | 649,772    |                                    | $          | 5,174 |   | $ | 654,946 |   | $ | 685,341 |   | $ | 4,154 |   | $ | 689,495 |   |
|                                               |       |                                 |       |                                    |       |   |   |   |   |   |   |   |   |
| Non-performing loans to total loans                |       | 36.57                                | %          | 1.23                                    | %          | 37.69 | % | 34.41 | % | 1.19 | % | 35.60 | % |
| Non-performing assets to total assets              |       | 41.94                                | %          | 1.25                                    | %          | 43.19 | % | 40.45 | % | 1.21 | % | 41.66 | % |

 

----

(1) Nonaccrual as to contractual interest for covered loans as these loans recognize accretion income.

 

Non-performing assets, defined as nonaccrual loans, loans past due 90 days or more as to interest or principal and still accruing, trouble debt restructurings and other real estate owned, totaled $654.9 million, or 43.2% of total assets at March 31, 2011, compared to $689.5 million, or 41.7% of total assets at December 31, 2010.  Of the $654.9 million in non-performing assets at March 31, 2011, $649.8 million related to assets that are covered by loss share agreements with the FDIC.  Of the $689.5 million in non-performing assets at December 31, 2010, $685.3 million related to assets that are covered by loss share agreements with the FDIC.

 

Total non-performing covered assets accounted for 99.3% of total non-performing assets at March 31, 2011 and 98.4% of total non-performing assets at December 31, 2010.

 

At March 31, 2011, we had approximately $81.3 million in potential problem loans, compared to $86.5 million at December 31, 2010.  Potential problem loans are those loans where management has a concern about the financial health of a borrower that causes management to have serious doubts as to the ability of the borrower to comply with the present loan terms.  At March 31, 2010 and December 31, 2010, substantially all of our potential problem loans were covered loans, with only $1.2 million in non-covered potential problem loans at March 31, 2011.

 

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***Deposits***

 

Total deposits at March 31, 2011 were $2.3 billion and at December 31, 2010 were $2.4 billion.  At March 31, 2011, noninterest bearing accounts totaled $229.8 million, or 10.1% of total deposits, compared to $224.5 million, or 9.3% of total deposits at December 31, 2010.  Time deposits totaled $547.5 million, or 26.8% of interest bearing deposits at March 31, 2011, compared to $626.9 million, or 28.5% of interest bearing deposits at December 31, 2010.  Out of market brokered and wholesale time deposits totaled $22.5 million at March 31, 2011 and $51.3 million at December 31, 2010.  Money market and savings accounts totaled $1.2 billion, or 61.2% of interest bearing deposits, at March 31, 2011, compared to $1.3 billion, or 58.1% of interest bearing deposits, at December 31, 2010.

 

The following table shows the average balance amounts and the average rates paid on deposit we held for the periods presented.

 
| ** **                           | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** |
|--------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **(dollars in thousands)** | ** ** | **Amount**                   | ** ** | **Rate**                        | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Noninterest bearing demand deposits  |       | $                            | 230,987    |                            | 0.00       | % | $ | 199,592 |   | 0.00 | % |
| Interest bearing demand deposits     |       | 244,476                      |       | 0.31                            | %          | 239,795 |   | 0.71 | % |
| Savings and money market accounts    |       | 1,267,305                    |       | 1.18                            | %          | 1,064,404 |   | 1.86 | % |
| Time deposits less than $100,000     |       | 325,471                      |       | 2.22                            | %          | 414,005 |   | 2.00 | % |
| Time deposits greater than $100,000  |       | 249,261                      |       | 2.26                            | %          | 344,464 |   | 2.17 | % |
| Total deposits                       |       | $                            | 2,317,500  |                            | 1.37       | % | $ | 2,262,260 |   | 1.80 | % |

 

The maturity distribution of our time deposits of $100,000 or more at March 31, 2011 was as follows:

 
| **(dollars in thousands)** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Three months or less                 |       | $          | 51,406     |   |
| Over three through six months        |       | 55,590     |       |
| Over six though twelve months        |       | 85,534     |       |
| Over twelve months                   |       | 47,887     |       |
| Total                                |       | $          | 240,417    |   |

 

**Borrowings and Other Interest-Bearing Liabilities**

 

The following table outlines our various sources of borrowed funds for the three months ended March 31, 2011 and the year ended December 31, 2010, and the amounts outstanding at the end of each period, the maximum amount for each component during such period, the average amounts for each period and the average interest rate that we paid for each borrowing source.  The maximum month-end balance represents the high indebtedness for each component of borrowed funds at any time during each of the periods shown.

 
| ** **                                                  | ** ** | **Ending**  | ** ** | **Period   End** | ** ** | **Maximum   Month   End** | ** ** | **Average   for the Period** | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|------------------|------------|---------------------------|------------|----------------------------------------|------------|
| **(dollars in thousands)**                        | ** ** | **Balance** | ** ** | **Rate**         | ** ** | **Balance**               | ** ** | **Balance**                            | ** ** | **Rate** | ** ** |
|                                                        |       |        |       |             |       |                      |       |                                   |       |   |   |
| **At or for the three months   ended March 31, 2011:** |       |        |       |             |       |                      |       |                                   |       |   |   |
| Securities sold under agreement to repurchase               |       | $           | 5,371      |             | 0.25       | %                         | $          | 5,371                                  |       | $ | 3,576 |   | 1.49 | % |
|                                                        |       |        |       |             |       |                      |       |                                   |       |   |   |
| **At or for year ended   December 31, 2010:**          |       |        |       |             |       |                      |       |                                   |       |   |   |
| Securities sold under agreement to repurchase               |       | $           | 5,246      |             | 0.24       | %                         | $          | 11,438                                 |       | $ | 6,135 |   | 0.44 | % |

 

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**Capital Resources**

 

We strive to maintain an adequate capital base to support our activities in a safe manner while at the same time maximizing shareholder returns.  At March 31, 2011, we exceeded all minimum regulatory capital requirements as shown in the tables below.  At March 31, 2011, our shareholders’ equity was $367.5 million, or 13.7% of total assets, compared to $359.3 million, or 12.7% of total assets, at December 31, 2010.

 

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and average equity to average assets ratio (average equity divided by average total assets) for the periods presented:

 
| ** **               | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** |
|--------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                     |       |                         |       |                            |       |
| Return on average assets |       | 1.23                         | %          | 1.73                            | %          |
| Return on average equity |       | 9.16                         | %          | 13.66                           | %          |
| Equity to assets ratio   |       | 13.39                        | %          | 12.70                           | %          |

 

The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.  Under the capital adequacy guidelines, regulatory capital is classified into two tiers.  These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets.  Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets.  In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset.  Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations.  The Bank is required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

 

To be considered “well capitalized” under capital guidelines, we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.  To be considered “adequately capitalized” under capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital.  In addition, banking regulators have established a minimum Tier 1 leverage ratio of at least 4%.  We expect banking regulators to increase these minimum levels in the future.

 

The following table shows the Bank’s and the Company’s regulatory capital ratios for the periods presented.

 
| ** **                      | ** ** | **Bank**                     | ** ** | **Company**                  | ** ** | **Bank**                        | ** ** | **Company**                     | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **March 31, 2011** | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** | **December 31, 2010** | ** ** |
|                            |       |                         |       |                         |       |                            |       |                            |       |
| Leverage ratio                  |       | 13.11                        | %          | 13.16                        | %          | 12.71                           | %          | 12.77                           | %          |
| Tier 1 risk-based capital ratio |       | 39.11                        | %          | 39.24                        | %          | 43.38                           | %          | 43.56                           | %          |
| Total risk-based capital ratio  |       | 39.80                        | %          | 39.93                        | %          | 44.05                           | %          | 44.23                           | %          |

 

For all periods, the Bank was considered “well capitalized,” and we intend to maintain a capital level for the Bank that exceeds the FDIC requirements to be classified as a “well capitalized” bank.  In addition, as a condition to the FDIC’s approval of the Notice of Change in Control filing of Mr. Evans, Mr. Speight and Mr. Childers (our management team) in connection with our July 2009 recapitalization and acquisition, the Bank was required to execute a Capital Maintenance Agreement with the FDIC.  Under the terms of the agreement, the Bank must at all times maintain a leverage ratio of at least 10% and a total risk-based capital ratio of at least 12%.  The agreement terminates on July 23, 2012.  At March 31, 2011, the Bank was in compliance with the Capital Maintenance Agreement.

 

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**Effect of Inflation and Changing Prices**

 

The effect of relative purchasing power over time due to inflation is not reflected in our consolidated financial statements.  Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.

 

Unlike most industrial companies, our assets and liabilities are primarily monetary in nature.  Therefore, the effect of changes in interest rates will have a more significant effect on our performance than will the effect of changing prices and inflation in general.  In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude.

 

**Off-Balance Sheet Arrangements**

 

Commitments to extend credit are agreements to lend to a customer as long as the customer has not violated any material condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee.  At March 31, 2011, unfunded commitments to extend credit were $203.7 million.  A significant portion of the unfunded commitments related to commercial real estate and land development and to consumer equity lines of credit.  Based on experience, we anticipate that a significant portion of these lines of credit will not be funded.  We evaluate each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower.  The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

 

At March 31, 2011, there were commitments totaling approximately $2.2 million under letters of credit.  The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Because most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

 

Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements, transactions that could result in liquidity needs or other commitments that significantly impact earnings.

 

**Contractual Obligations**

 

In the normal course of business, we have various outstanding contractual obligations that will require future cash outflows.  The following table presents our contractual obligations as of March 31, 2011.

 
| ** **                                             | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)   Contractual Obligations** | ** ** | **Total**                                 | ** ** | **Less than 1   year** | ** ** | **1 to 3   years** | ** ** | **3 to 5   years** | ** ** | **More   than   5 years** | ** ** |
|                                                   |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating Lease Obligations                            |       | $                                         | 2,904      |   | $ | 1,103 |   | $ | 1,801 |   | $ | — |   | $ | — |   |
| Securities Repurchase Agreements                       |       | 5,371                                     |       | 5,371 |   | — |   | — |   | — |   |
|                                                   |       | $                                         | 8,275      |   | $ | 6,474 |   | $ | 1,801 |   | $ | — |   | $ | — |   |

 

**Liquidity**

 

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities.  Liquidity management involves monitoring our sources and uses of funds to meet our day-to-day cash flow requirements while maximizing profits.  Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control.  For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree

 

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of control when we make investment decisions.  Net deposit inflows and outflows, however, are far less predictable and are not subject to the same degree of control.

 

At March 31, 2011, our liquid assets, which consist of cash and due from banks, interest bearing deposits and federal funds sold, amounted to $302.5 million, or 11.3% of total assets.  Our available for sale securities at March 31, 2011 amounted to $385.6 million, or 14.3% of total assets.  Investment securities and lines of credit traditionally provide a secondary source of liquidity because they can be converted into cash in a timely manner.

 

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity.  We plan to meet our future cash needs through the generation of deposits and through collection of the FDIC receivable as we dispose of our covered loans and assets.  In addition, we receive cash on the maturity and sale of loans and the maturity of investment securities.  We maintain six federal funds lines of credit with correspondent banks totaling $135.0 million.  We are also a member of the Federal Home Loan Bank of Atlanta (FHLB), from which we can borrow for leverage or liquidity purposes.  The FHLB requires that securities, qualifying mortgage loans and stock of the FHLB owned by the Bank be pledged to secure any advances.  At March 31, 2011, we had no advances from the FHLB and a remaining credit availability of $31.9 million.  In addition, we maintain a line of credit with the Federal Reserve Bank of $42.4 million secured by certain loans in our loan portfolio.

 

**Item 3.  Quantitative and Qualitative Disclosures about Market Risk.**

 

Market risk is the risk of loss from adverse changes in market prices and rates, which principally arise from interest rate risk inherent in our lending, investing, deposit gathering and borrowing activities.  Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.  Asset/liability management is the process by which we monitor and control the mix and maturities of our assets and liabilities.  The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities to minimize potentially adverse effects on earnings from changes in market interest rates.  Our asset/liability committee monitors and considers methods of managing exposure to interest rate risk.  The asset/liability committee is responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.

 

At March 31, 2011, approximately 41.5% of our loans were variable rate loans.  Approximately 95.0% of our interest-bearing liabilities reprice within one year.  However, interest rate movements typically result in changes in interest rates on assets that are different in magnitude from the corresponding changes in rates paid on liabilities.  While a substantial portion of our loans reprice within the first three months of the year, a large majority of our deposits will also reprice within the same 3-month period.  Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities.  These repricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments.  Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates.  Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable timeframe that minimizes the changes in net interest income.

 

One of the tools management uses to estimate the sensitivity of net interest revenue changes to interest rates is an asset/liability simulation model.  The resulting estimates are based upon a number of assumptions for each scenario, including the level of balance sheet growth, loan and deposit repricing characteristics and the rate of prepayments.  The asset/liability committee actively monitors the assumptions and estimates based on input data and future expectations.  Actual net interest revenue, however,  may vary from model results.

 

Our policy is based on a 12-month impact on net interest income of interest rate ramps that increase 200 basis points and decrease 200 basis points from the base scenario.  In the ramp scenarios, rates change 16.7 basis points per month over 12 months.  The policy limits the change in net interest income over 12 months to a 10% decrease in either scenario.  The policy ramp and base scenarios assume a static balance sheet.  Given the historically low rate environment, management has determined that the use of the down 200 basis point scenario is not meaningful and, therefore, has used what it believes to be a more reasonable rate scenario of down 100 basis points over a 12-month period, or 8.3 basis points per month over 12 months.  At March 31, 2011, our most recent asset/liability simulation run, the model indicated that a

 

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200 basis point increase would cause an approximate 41 basis point increase in net interest income over the next 12 months and a 100 basis point decrease in rates would cause an approximate 106 basis point decrease in net interest income over the next 12 months.

 

In addition, management seeks to reduce overall interest rate risk by maintaining relatively short maturities.  For additional detail on loan maturity and distribution and information regarding sensitivity of loans and leases to changes in interest rates see the table under “Maturities and Sensitivities of Loans to Changing Interest Rates” on page 37.  Information on the maturity of our investment securities is located in the table on page 35.  Information regarding the maturity distributions of our time deposits with balances in excess of $100,000 is located on page 43.

 

**Item 4.  Controls and Procedures.**

 

**Disclosure Controls and Procedures**

 

Based on our management’s evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, as of March 31, 2011, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

**Changes in Internal Controls**

 

There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

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**PART II**

 

**Item 1.  Legal Proceedings.**

 

We have nothing to report with respect to the period covered by this report.

 

**Item 1A.  Risk Factors.**

 

There have been no material changes to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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

 

None.

 

**Item 3.  Defaults Upon Senior Securities.**

 

None.

 

**Item 4.  (Removed and Reserved).**

 

**Item 5.  Other Information.**

 

None.

 

**Item 6.  Exhibits.**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                    |
|----------------------|------------|-------------------------------------------------------------------------|
|                 |       |                                                                    |
| 31.1                 |       | Rule 13a-14(a) Certification   of the Chief Executive Officer |
|                 |       |                                                                    |
| 31.2                 |       | Rule 13a-14(a) Certification   of the Chief Financial Officer |
|                 |       |                                                                    |
| 32.1                 |       | Section 1350   Certifications                                      |

 

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**SIGNATURES**

 

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

 
|                      |   | **STATE   BANK FINANCIAL CORPORATION** |
|---------------------------|--------|----------------------------------------|
|                      |   | ** **                             |
|                      |   |                                   |
| Date:   May 16, 2011 | By:    | /s/   Joseph W. Evans                  |
|                      |   | Joseph   W. Evans                      |
|                      |   | Chief   Executive Officer              |
|                      |   |                                   |
| Date:   May 16, 2011 | By:    | /s/   John S. Poelker                  |
|                      |   | John   S. Poelker                      |
|                      |   | Chief   Financial Officer              |

 

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**Exhibit List**

 
| 31.1   | Rule 13a-14(a) Certification   of the Chief Executive Officer |
|--------|-------------------------------------------------------------------------|
|   |                                                                    |
| 31.2   | Rule 13a-14(a) Certification   of the Chief Financial Officer |
|   |                                                                    |
| 32.1   | Section 1350   Certifications                                      |

 

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