##### Table of Contents





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 September 30, 2008



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

For the transition period from  to

Commission File Number
000-23261





SECURITY BANK CORPORATION

(Exact
name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|GEORGIA                                                        |  | 58-2107916                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4219 Forsyth Road, Macon, Georgia                              |  | 31210                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(478) 722-6200

(Registrants Telephone Number, Including Area Code)

N/A

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





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

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



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

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

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





|                                        |  |                                
|--------------------------------------- |  | -------------------------------
|Class                                   |  | Outstanding at November 7, 2008
|Nonvoting Common Stock, $1.00 par value |  |  shares                       
|Common Stock, $1.00 par value           |  | 23,261,185 shares              









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##### Table of Contents

SECURITY BANK CORPORATION AND SUBSIDIARIES

INDEX



|                                                                                                                                              |  |           
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                                                              |  | PageNumber
|PART I Financial Information                                                                                                                  |  |           
|                                                                                                                                              | 
|ITEM 1 Financial Statements                                                                                                                   |  |           
|                                                                                                                                              | 
|Condensed Consolidated Balance Sheets at September 30, 2008 (unaudited) and December 31, 2007 (audited)                                       |  | 2         
|                                                                                                                                              | 
|Condensed Consolidated Statements of Income (Loss) (unaudited) for the Three and Nine Months Ended September 
30, 2008 and 2007               |  | 3         
|                                                                                                                                              | 
|Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Nine Months Ended September 30,
 2008 and 2007 |  | 4         
|                                                                                                                                              | 
|Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Nine Months Ended September 
30, 2008 and 2007                 |  | 5         
|                                                                                                                                              | 
|Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2008 and
2007                             |  | 6         
|                                                                                                                                              | 
|Notes to Condensed Consolidated Financial Statements (unaudited)                                                                              |  | 7         
|                                                                                                                                              | 
|ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations                                                  |  | 14        
|                                                                                                                                              | 
|ITEM 3 Quantitative and Qualitative Disclosures About Market Risk                                                                             |  | 31        
|                                                                                                                                              | 
|ITEM 4 Controls and Procedures                                                                                                                |  | 31        
|                                                                                                                                              | 
|PART II Other Information                                                                                                                     |  |           
|                                                                                                                                              | 
|ITEM 1 Legal Proceedings                                                                                                                      |  | 31        
|                                                                                                                                              | 
|ITEM 1A Risk Factors                                                                                                                          |  | 32        
|                                                                                                                                              | 
|ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds                                                                            |  | 34        
|                                                                                                                                              | 
|ITEM 3 Defaults Upon Senior Securities                                                                                                        |  | 34        
|                                                                                                                                              | 
|ITEM 4 Submission of Matters to a Vote of Security Holders                                                                                    |  | 34        
|                                                                                                                                              | 
|ITEM 5 Other Information                                                                                                                      |  | 34        
|                                                                                                                                              | 
|ITEM 6 Exhibits                                                                                                                               |  | 34        
|                                                                                                                                              | 
|SIGNATURES                                                                                                                                    |  | 35        



1



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | Financial Statements
|------- | --------------------

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

ASSETS



|                                           |  |                              |           |                  |   |          
|------------------------------------------ |  | ---------------------------- | --------- | ---------------- | - | ---------
|                                           |  | September 30,2008(Unaudited) |           | December 31,2007
|Cash and Due from Banks                    |  | $                            | 283,238   |                  | $ | 91,644   
|Federal Funds Sold                         |  |                              | 13,369    |                  |   | 6,612    
|Interest-Bearing Deposits With Other Banks |  |                              | 1,187     |                  |   | 7,015    
|Investment Securities                      |  |                              | 333,223   |                  |   | 297,156  
|Federal Home Loan Bank Stock               |  |                              | 13,797    |                  |   | 8,243    
|Loans Held for Sale                        |  |                              | 4,780     |                  |   | 7,605    
|Loans Receivable, Net                      |  |                              | 1,989,667 |                  |   | 2,150,615
|Premises and Equipment                     |  |                              | 38,561    |                  |   | 43,171   
|Long-Lived Assets Held for Sale            |  |                              | 4,808     |                  |   |         
|Other Real Estate                          |  |                              | 83,362    |                  |   | 28,175   
|Goodwill                                   |  |                              | 18,373    |                  |   | 128,571  
|Core Deposit Intangible, net               |  |                              | 3,444     |                  |   | 4,125    
|Accrued Interest Receivable                |  |                              | 15,193    |                  |   | 24,254   
|Other Assets                               |  |                              | 85,351    |                  |   | 35,885   
|                                           |  |                              |           |                  |   |          
|Total Assets                               |  | $                            | 2,888,353 |                  | $ | 2,833,071
|                                           |  |                              |           |                  |   |          

LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                                           |  |                              |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                           |  | September 30,2008(Unaudited) |           |   | December 31,2007 |  
|Deposits                                                                                                                                                   |  | $                            | 2,402,554 |   |                  | $ | 2,298,705 |  
|Borrowed Money                                                                                                                                             |  |                              | 297,901   |   |                  |   | 206,326   |  
|Other Liabilities                                                                                                                                          |  |                              | 21,236    |   |                  |   | 21,347    |  
|                                                                                                                                                           |  |                              |           |   |                  |   |           |  
|Total Liabilities                                                                                                                                          |  |                              | 2,721,691 |   |                  |   | 2,526,378 |  
|                                                                                                                                                           |  |                              |           |   |                  |   |           |  
|Commitments and Contingencies                                                                                                                              |  |                              |           |   |                  |   |           |  
|Shareholders Equity                                                                                                                                       |  |                              |           |   |                  |   |           |  
|Nonvoting Common Stock, Par Value $1 per Share; 10,000,000 Shares Authorized, Zero Shares Issued and Outstanding in 2008 and 2007,
Respectively            |  |                              |          |   |                  |   |          |  
|Common Stock, Par Value $1 per Share; 50,000,000 Shares Authorized, 23,259,539 and 18,912,264 Shares Issued and Outstanding in 2008 and 2007,
Respectively |  |                              | 23,260    |   |                  |   | 18,912    |  
|Paid-In Capital                                                                                                                                            |  |                              | 252,193   |   |                  |   | 220,504   |  
|Retained Earnings (Deficit)                                                                                                                                |  |                              | (105,546  | ) |                  |   | 63,011    |  
|Restricted Stock  Unearned Compensation                                                                                                                   |  |                              | (50       | ) |                  |   | (39       | )
|Accumulated Other Comprehensive (Loss) Gain, Net of Tax                                                                                                    |  |                              | (3,195    | ) |                  |   | 4,305     |  
|                                                                                                                                                           |  |                              |           |   |                  |   |           |  
|Total Shareholders Equity                                                                                                                                 |  |                              | 166,662   |   |                  |   | 306,693   |  
|                                                                                                                                                           |  |                              |           |   |                  |   |           |  
|Total Liabilities and Shareholders Equity                                                                                                                 |  | $                            | 2,888,353 |   |                  | $ | 2,833,071 |  
|                                                                                                                                                           |  |                              |           |   |                  |   |           |  

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



2



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##### Table of Contents

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)



|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                           |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                           |  | 2008                            |            |   | 2007                           |   |            | 2008 |  |   | 2007       |  
|Interest Income                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Loans, Including Fees                                      |  | $                               | 31,363     |   |                                | $ | 46,351     |      |  | $ | 101,666    |   |  | $ | 134,588    |  
|Investment Securities                                      |  |                                 | 3,941      |   |                                |   | 2,844      |      |  |   | 11,104     |   |  |   | 7,664      |  
|Federal Funds Sold and Other                               |  |                                 | 846        |   |                                |   | 448        |      |  |   | 1,811      |   |  |   | 1,599      |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 | 36,150     |   |                                |   | 49,643     |      |  |   | 114,581    |   |  |   | 143,851    |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Interest Expense                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Deposits                                                   |  |                                 | 21,061     |   |                                |   | 24,841     |      |  |   | 66,538     |   |  |   | 68,986     |  
|Subordinated Debentures                                    |  |                                 | 658        |   |                                |   | 799        |      |  |   | 2,054      |   |  |   | 2,380      |  
|Federal Home Loan Bank Advances                            |  |                                 | 1,087      |   |                                |   | 654        |      |  |   | 2,436      |   |  |   | 1,997      |  
|Federal Funds Purchased and Repurchase Agreements          |  |                                 | 130        |   |                                |   | 517        |      |  |   | 678        |   |  |   | 1,493      |  
|Notes Payable and Other                                    |  |                                 | 1,190      |   |                                |   | 51         |      |  |   | 2,276      |   |  |   | 54         |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 | 24,126     |   |                                |   | 26,862     |      |  |   | 73,982     |   |  |   | 74,910     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net Interest Income                                        |  |                                 | 12,024     |   |                                |   | 22,781     |      |  |   | 40,599     |   |  |   | 68,941     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Provision for Loan Losses                                  |  |                                 | 26,359     |   |                                |   | 9,400      |      |  |   | 98,941     |   |  |   | 12,660     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net Interest Income (Loss) After Provision for Loan Losses |  |                                 | (14,335    | ) |                                |   | 13,381     |      |  |   | (58,342    | ) |  |   | 56,281     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Noninterest Income                                         |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Service Charges on Deposits                                |  |                                 | 2,425      |   |                                |   | 2,356      |      |  |   | 6,965      |   |  |   | 6,830      |  
|Mortgage Origination and Related Fees                      |  |                                 | 650        |   |                                |   | 1,170      |      |  |   | 2,451      |   |  |   | 3,480      |  
|Securities Gains (Losses)                                  |  |                                 |           |   |                                |   | (5         | )    |  |   | 2,035      |   |  |   | (3         | )
|Other                                                      |  |                                 | 689        |   |                                |   | 1,080      |      |  |   | 3,265      |   |  |   | 4,135      |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 | 3,764      |   |                                |   | 4,601      |      |  |   | 14,716     |   |  |   | 14,442     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Noninterest Expense                                        |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Salaries and Employee Benefits                             |  |                                 | 7,803      |   |                                |   | 8,852      |      |  |   | 24,619     |   |  |   | 27,497     |  
|Occupancy and Equipment                                    |  |                                 | 1,848      |   |                                |   | 1,559      |      |  |   | 4,898      |   |  |   | 4,594      |  
|Foreclosed Property Expenses                               |  |                                 | 5,924      |   |                                |   | 1,153      |      |  |   | 10,360     |   |  |   | 2,050      |  
|Professional Fees                                          |  |                                 | 709        |   |                                |   | 971        |      |  |   | 2,132      |   |  |   | 2,277      |  
|Marketing Expense                                          |  |                                 | 400        |   |                                |   | 664        |      |  |   | 1,242      |   |  |   | 2,024      |  
|Amortization-Core Deposit Intangible                       |  |                                 | 203        |   |                                |   | 246        |      |  |   | 681        |   |  |   | 739        |  
|Goodwill Impairment                                        |  |                                 |           |   |                                |   |           |      |  |   | 109,701    |   |  |   |           |  
|Other                                                      |  |                                 | 4,163      |   |                                |   | 3,615      |      |  |   | 11,578     |   |  |   | 10,310     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 | 21,050     |   |                                |   | 17,060     |      |  |   | 165,211    |   |  |   | 49,491     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Income (Loss) Before Income Taxes                          |  |                                 | (31,621    | ) |                                |   | 922        |      |  |   | (208,837   | ) |  |   | 21,232     |  
|Income Tax Expense (Benefit)                               |  |                                 | (11,472    | ) |                                |   | 347        |      |  |   | (43,045    | ) |  |   | 7,771      |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net Income (Loss)                                          |  | $                               | (20,149    | ) |                                | $ | 575        |      |  | $ | (165,792   | ) |  | $ | 13,461     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic Earnings (Loss) Per Share                            |  | $                               | (0.87      | ) |                                | $ | 0.03       |      |  | $ | (7.50      | ) |  | $ | 0.70       |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Diluted Earnings (Loss) Per Share                          |  | $                               | (0.87      | ) |                                | $ | 0.03       |      |  | $ | (7.50      | ) |  | $ | 0.69       |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Cash Dividends Per Share                                   |  | $                               |           |   |                                | $ | 0.09       |      |  | $ | 0.13       |   |  | $ | 0.26       |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Weighted Average Common Shares Outstanding:                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                      |  |                                 | 23,247,824 |   |                                |   | 19,075,958 |      |  |   | 22,103,040 |   |  |   | 19,142,901 |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                    |  |                                 | 23,247,824 |   |                                |   | 19,184,272 |      |  |   | 22,103,040 |   |  |   | 19,359,809 |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

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



3



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##### Table of Contents

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS)



|                                                                  |  |                                 |         |                                |      |   |       |  |   |          |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------------------------- | ------- | ------------------------------ | ---- | - | ----- |  | - | -------- | - |  | - | ------ | -
|                                                                  |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30, |     
|                                                                  |  | 2008                            |         |                                | 2007 |   | 2008  |  |   | 2007     |  
|Net Income (Loss)                                                 |  | $                               | (20,149 | )                              |      | $ | 575   |  | $ | (165,792 | ) |  | $ | 13,461 |  
|Other Comprehensive Income (Loss), Net of Income Tax              |  |                                 |         |                                |      |   |       |  |   |          |   |  |   |        |  
|Unrealized Gains (Losses) on Securities Arising During the Period |  |                                 | 3,767   |                                |      |   | 1,440 |  |   | (8,663   | ) |  |   | (5     | )
|Reclassification Adjustment                                       |  |                                 |        |                                |      |   | 3     |  |   | 1,323    |   |  |   | 2      |  
|                                                                  |  |                                 |         |                                |      |   |       |  |   |          |   |  |   |        |  
|Unrealized Gains (Losses) on Securities                           |  |                                 | 3,767   |                                |      |   | 1,443 |  |   | (7,340   | ) |  |   | (3     | )
|Change in Fair Value of Derivatives Used for Cash Flow Hedges     |  |                                 |        |                                |      |   | 1,408 |  |   | 864      |   |  |   | 1,391  |  
|Amortization of Unrealized Gain on Termination of Cash Flow Hedge |  |                                 | (439    | )                              |      |   |      |  |   | (1,024   | ) |  |   |       |  
|                                                                  |  |                                 |         |                                |      |   |       |  |   |          |   |  |   |        |  
|Comprehensive Income (Loss)                                       |  | $                               | (16,821 | )                              |      | $ | 3,426 |  | $ | (173,292 | ) |  | $ | 14,849 |  
|                                                                  |  |                                 |         |                                |      |   |       |  |   |          |   |  |   |        |  

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



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##### Table of Contents

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (IN THOUSANDS)



|                                                    |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   |          |  
|--------------------------------------------------- |  | -------------------- | - | ------------ | ------ | - | ----------- | - | ------ | -------------- |  | - | ------------------------- | - |  | ------------------------------------ | -------- | - | ------------------------------------------ | - | ---- | ------------- |  | - | ------ | - |  | - | ---- | - |  | - | -------- | -
|                                                    |  | NonvotingCommonStock |   | CommonShares |        |   | CommonStock |   |        | Paid-InCapital |  |   | RetainedEarnings(Deficit) |   |  | RestrictedStock-UnearnedCompensation |          |   | AccumulatedOtherComprehensiveIncome (Loss) |   |      | TreasuryStock |  |   | Total  |  
|Balance, December 31, 2006                          |  | $                    |  |              | 19,186 |   |             | $ | 19,186 |                |  | $ | 224,565                   |   |  | $                                    | 63,697   |   |                                            | $ | (158 | )             |  | $ | (552   | ) |  | $ | (330 | ) |  | $ | 306,408  |  
|Cumulative Effect of Change in Accounting Principle |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      | (608     | ) |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | (608     | )
|Cashless exercise of stock options                  |  |                      |   |              | 31     |   |             |   | 31     |                |  |   | (31                       | ) |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   |         |  
|Stock Options Exercised                             |  |                      |   |              | 3      |   |             |   | 3      |                |  |   | 44                        |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 47       |  
|Stock-Based Compensation Awards                     |  |                      |   |              |        |   |             |   |        |                |  |   | 708                       |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 708      |  
|Amortization of Unearned Compensation               |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      |          |   |                                            |   | 45   |               |  |   |        |   |  |   |      |   |  |   | 45       |  
|Cancellation of Restricted Stock                    |  |                      |   |              | (3     | ) |             |   | (3     | )              |  |   | (57                       | ) |  |                                      |          |   |                                            |   | 60   |               |  |   |        |   |  |   |      |   |  |   |         |  
|Shares Issued in Acquisition                        |  |                      |   |              | 11     |   |             |   | 11     |                |  |   | 239                       |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 250      |  
|Shares Issued to Employee Stock Purchase Plan       |  |                      |   |              | 16     |   |             |   | 16     |                |  |   | 236                       |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 252      |  
|Shares Repurchased and Retired                      |  |                      |   |              | (335   | ) |             |   | (335   | )              |  |   | (4,569                    | ) |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | (4,904   | )
|Retirement of Treasury Shares                       |  |                      |   |              | (20    | ) |             |   | (20    | )              |  |   | (310                      | ) |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   | 330  |   |  |   |         |  
|Change in Accumulated Other Comprehensive Income    |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      |          |   |                                            |   |      |               |  |   | 1,388  |   |  |   |      |   |  |   | 1,388    |  
|Cash Dividends                                      |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      | (5,011   | ) |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | (5,011   | )
|Net Income                                          |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      | 13,461   |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 13,461   |  
|                                                    |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   |          |  
|Balance, September 30, 2007                         |  | $                    |  |              | 18,889 |   |             | $ | 18,889 |                |  | $ | 220,825                   |   |  | $                                    | 71,539   |   |                                            | $ | (53  | )             |  | $ | 836    |   |  | $ |     |   |  | $ | 312,036  |  
|                                                    |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   |          |  
|Balance, December 31, 2007                          |  |                      |   |              | 18,912 |   |             | $ | 18,912 |                |  | $ | 220,504                   |   |  | $                                    | 63,011   |   |                                            | $ | (39  | )             |  | $ | 4,305  |   |  | $ |     |   |  | $ | 306,693  |  
|Cumulative Effect of Change in Accounting Principle |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      | (93      | ) |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | (93      | )
|Stock-Based Compensation Awards                     |  |                      |   |              |        |   |             |   |        |                |  |   | 341                       |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 341      |  
|Restricted Stock Issued                             |  |                      |   |              | 5      |   |             |   | 5      |                |  |   | 31                        |   |  |                                      |          |   |                                            |   | (36  | )             |  |   |        |   |  |   |      |   |  |   |         |  
|Amortization of Unearned Compensation               |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      |          |   |                                            |   | 25   |               |  |   |        |   |  |   |      |   |  |   | 25       |  
|Shares Issued to Employee Stock Purchase Plan       |  |                      |   |              | 32     |   |             |   | 32     |                |  |   | 139                       |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 171      |  
|Shares Issued in Rights Offering                    |  |                      |   |              | 4,311  |   |             |   | 4,311  |                |  |   | 23,744                    |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 28,055   |  
|Fair Value of Stock Warrants                        |  |                      |   |              |        |   |             |   |        |                |  |   | 5,565                     |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 5,565    |  
|Exchange of SARs for Nonvoting Warrants             |  |                      |   |              |        |   |             |   |        |                |  |   | 1,869                     |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | 1,869    |  
|Change in Accumulated Other Comprehensive Income    |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      |          |   |                                            |   |      |               |  |   | (7,500 | ) |  |   |      |   |  |   | (7,500   | )
|Cash Dividends                                      |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      | (2,672   | ) |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | (2,672   | )
|Net Loss                                            |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      | (165,792 | ) |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   | (165,792 | )
|                                                    |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   |          |  
|Balance, September 30, 2008                         |  | $                    |  |              | 23,260 |   |             | $ | 23,260 |                |  | $ | 252,193                   |   |  | $                                    | (105,546 | ) |                                            | $ | (50  | )             |  | $ | (3,195 | ) |  | $ |     |   |  | $ | 166,662  |  
|                                                    |  |                      |   |              |        |   |             |   |        |                |  |   |                           |   |  |                                      |          |   |                                            |   |      |               |  |   |        |   |  |   |      |   |  |   |          |  

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



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##### Table of Contents

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30

(UNAUDITED)

(IN THOUSANDS)



|                                                                                                  |  |      |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                  |  | 2008 |          |   | 2007 |  
|Cash Flows from Operating Activities                                                              |  |      |          |   |      |   |          |  
|Net Income (Loss)                                                                                 |  | $    | (165,792 | ) |      | $ | 13,461   |  
|Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) from Operating Activities: |  |      |          |   |      |   |          |  
|Stock-Based Compensation                                                                          |  |      | 341      |   |      |   | 708      |  
|Depreciation, Amortization and Accretion                                                          |  |      | 2,857    |   |      |   | 3,295    |  
|Provision for Loan Losses                                                                         |  |      | 98,941   |   |      |   | 12,660   |  
|Goodwill Impairment                                                                               |  |      | 109,701  |   |      |   |         |  
|Securities Losses (Gains)                                                                         |  |      | (2,035   | ) |      |   | 3        |  
|Loss on Sale of Other Real Estate                                                                 |  |      | 1,921    |   |      |   | 461      |  
|Provision for Other Real Estate Losses                                                            |  |      | 3,892    |   |      |   | 49       |  
|Loss (Gain) on Sales of Loans                                                                     |  |      | 442      |   |      |   | (152     | )
|Net Change in Loans Held for Sale                                                                 |  |      | 2,825    |   |      |   | 10       |  
|Payable for Purchased Securities                                                                  |  |      |         |   |      |   | (21,544  | )
|Termination of Cash Flow Hedge                                                                    |  |      | 6,333    |   |      |   |         |  
|Net Change in Other Assets                                                                        |  |      | (39,730  | ) |      |   | (9,459   | )
|Net Change in Other Liabilities                                                                   |  |      | (204     | ) |      |   | (2,475   | )
|Other, Net                                                                                        |  |      | (1,276   | ) |      |   | (3       | )
|                                                                                                  |  |      |          |   |      |   |          |  
|                                                                                                  |  |      | 18,216   |   |      |   | (2,986   | )
|                                                                                                  |  |      |          |   |      |   |          |  
|Cash Flows from Investing Activities                                                              |  |      |          |   |      |   |          |  
|Interest-Bearing Deposits with Other Banks                                                        |  |      | 5,828    |   |      |   | (4,252   | )
|Purchase of Investment Securities Available for Sale                                              |  |      | (265,796 | ) |      |   | (64,931  | )
|Proceeds from Disposition of Investment Securities                                                |  |      |          |   |      |   |          |  
|Available for Sale                                                                                |  |      | 220,644  |   |      |   | 67,671   |  
|Held to Maturity                                                                                  |  |      |         |   |      |   | 240      |  
|Federal Home Loan Bank Stock, Net                                                                 |  |      | (5,554   | ) |      |   | (307     | )
|Loans to Customers, Net of Repayments                                                             |  |      | (22,040  | ) |      |   | (300,105 | )
|Premises and Equipment, Net                                                                       |  |      | (2,029   | ) |      |   | (3,506   | )
|Purchase of Low Income Housing Tax Credits                                                        |  |      | (2,955   | ) |      |   | (3,695   | )
|Proceeds from Sales of Other Real Estate                                                          |  |      | 23,968   |   |      |   | 13,762   |  
|Other, Net                                                                                        |  |      | (1,363   | ) |      |   | (198     | )
|                                                                                                  |  |      |          |   |      |   |          |  
|                                                                                                  |  |      | (49,297  | ) |      |   | (295,321 | )
|                                                                                                  |  |      |          |   |      |   |          |  
|Cash Flows from Financing Activities                                                              |  |      |          |   |      |   |          |  
|Interest-Bearing Deposits                                                                         |  |      | 117,192  |   |      |   | 237,392  |  
|Noninterest-Bearing Deposits                                                                      |  |      | (13,343  | ) |      |   | (17,221  | )
|Dividends Paid                                                                                    |  |      | (2,672   | ) |      |   | (5,011   | )
|Federal Funds Purchased and Securities Sold Under Repurchase Agreements                           |  |      | (37,074  | ) |      |   | 31,077   |  
|Borrowed Money, Net                                                                               |  |      | 137,024  |   |      |   | (3,300   | )
|Issuance (Purchase) of Common Stock                                                               |  |      | 28,305   |   |      |   | (4,605   | )
|                                                                                                  |  |      |          |   |      |   |          |  
|                                                                                                  |  |      | 229,432  |   |      |   | 238,332  |  
|                                                                                                  |  |      |          |   |      |   |          |  
|Net Increase (Decrease) in Cash and Cash Equivalents                                              |  |      | 198,351  |   |      |   | (59,975  | )
|Cash and Cash Equivalents, Beginning                                                              |  |      | 98,256   |   |      |   | 156,903  |  
|                                                                                                  |  |      |          |   |      |   |          |  
|Cash and Cash Equivalents, Ending                                                                 |  | $    | 296,607  |   |      | $ | 96,928   |  
|                                                                                                  |  |      |          |   |      |   |          |  

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



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##### Table of Contents

SECURITY BANK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Summary of Significant Accounting Policies

Basis of Presentation

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

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

Recently Adopted Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a
fair value measurement would be determined based on the assumptions that market participants would use in pricing the asset or liability. The Company adopted SFAS No. 157 on January 1, 2008 and there was no impact on the Companys
beginning retained earnings balance. See Note 12,Fair Value of Financial Instruments, for related disclosures.

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

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

Recently Issued Accounting Pronouncements

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



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##### Table of Contents

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

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

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

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

Segment Reporting

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

Reclassifications

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

(2) Investment Securities

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



|                                                        |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------- |  | -------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                        |  | AmortizedCost  |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|                                                        |  | (In Thousands)
|Securities Available for Sale                           |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|Mortgage Backed and Collateralized Mortgage Obligations |  | $              | 337,610 |                      | $ | 886                   |  | $ | (9,615     | ) |  | $ | 328,881
|State, County and Municipal                             |  |                | 2,315   |                      |   |                      |  |   | (199       | ) |  |   | 2,116  
|Other Securities                                        |  |                | 1,941   |                      |   | 13                    |  |   | (728       | ) |  |   | 1,226  
|                                                        |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|                                                        |  | $              | 341,866 |                      | $ | 899                   |  | $ | (10,542    | ) |  | $ | 332,223
|                                                        |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|Securities Held to Maturity                             |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|U.S. Government Agencies                                |  | $              | 1,000   |                      | $ |                      |  | $ | (1         | ) |  | $ | 999    
|                                                        |  |                |         |                      |   |                       |  |   |            |   |  |   |        



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



|                                                        |  |                 |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------- |  | --------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                        |  | AmortizedCost   |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|                                                        |  | ( In Thousands)
|Securities Available for Sale                           |  |                 |         |                      |   |                       |  |   |            |   |  |   |        
|Mortgage Backed and Collateralized Mortgage Obligations |  | $               | 212,800 |                      | $ | 1,842                 |  | $ | (492       | ) |  | $ | 214,150
|U.S. Government Agencies                                |  |                 | 59,538  |                      |   | 436                   |  |   | (28        | ) |  |   | 59,946 
|State, County and Municipal                             |  |                 | 20,210  |                      |   | 238                   |  |   | (211       | ) |  |   | 20,237 
|Other Securities                                        |  |                 | 1,958   |                      |   |                      |  |   | (135       | ) |  |   | 1,823  
|                                                        |  |                 |         |                      |   |                       |  |   |            |   |  |   |        
|                                                        |  | $               | 294,506 |                      | $ | 2,516                 |  | $ | (866       | ) |  | $ | 296,156
|                                                        |  |                 |         |                      |   |                       |  |   |            |   |  |   |        
|Securities Held to Maturity                             |  |                 |         |                      |   |                       |  |   |            |   |  |   |        
|U.S. Government Agencies                                |  | $               | 1,000   |                      | $ |                      |  | $ | (1         | ) |  | $ | 999    
|                                                        |  |                 |         |                      |   |                       |  |   |            |   |  |   |        

Unrealized holding (losses) gains, net of tax, on securities available for sale of ($6.3 million)
and $1.1 million have been charged and credited, respectively, to shareholders equity as of September 30, 2008 and December 31, 2007.

(3) Loans Receivable, Net

Loans receivable are comprised of the following:



|                                  |  |                   |           |   |                  |   |           |  
|--------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                  |  | September 30,2008 |           |   | December 31,2007 |  
|                                  |  | (In Thousands)    |          
|Construction and Land Development |  | $                 | 1,049,178 |   |                  | $ | 1,165,719 |  
|Real Estate-Other                 |  |                   | 768,109   |   |                  |   | 794,211   |  
|Commercial and Industrial         |  |                   | 167,357   |   |                  |   | 161,910   |  
|Consumer                          |  |                   | 63,539    |   |                  |   | 61,757    |  
|Agricultural                      |  |                   | 3,263     |   |                  |   | 1,225     |  
|                                  |  |                   |           |   |                  |   |           |  
|                                  |  |                   | 2,051,446 |   |                  |   | 2,184,822 |  
|Allowance for Loan Losses         |  |                   | (60,442   | ) |                  |   | (31,698   | )
|Unearned Interest and Fees        |  |                   | (1,337    | ) |                  |   | (2,509    | )
|                                  |  |                   |           |   |                  |   |           |  
|                                  |  | $                 | 1,989,667 |   |                  | $ | 2,150,615 |  
|                                  |  |                   |           |   |                  |   |           |  

(4) Allowance for Loan Losses

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



|                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|--------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                            |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                            |  | 2008                            |         |   | 2007                           |   |        | 2008 |  |   | 2007    |  
|                            |  | (In Thousands)                  |        
|Balance beginning of period |  | $                               | 48,452  |   |                                | $ | 24,108 |      |  | $ | 31,698  |   |  | $ | 22,336 |  
|Charge-Offs                 |  |                                 | (16,000 | ) |                                |   | (6,690 | )    |  |   | (79,074 | ) |  |   | (8,665 | )
|Recoveries                  |  |                                 | 1,631   |   |                                |   | 314    |      |  |   | 8,877   |   |  |   | 801    |  
|Provision for Loan Losses   |  |                                 | 26,359  |   |                                |   | 9,400  |      |  |   | 98,941  |   |  |   | 12,660 |  
|                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Balance end of period       |  | $                               | 60,442  |   |                                | $ | 27,132 |      |  | $ | 60,442  |   |  | $ | 27,132 |  
|                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  



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(5) Goodwill

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

(6) Deposits

Components of deposits are as follows:



|                                 |  |                   |           |                  |   |          
|-------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                 |  | September 30,2008 |           | December 31,2007
|                                 |  | (In Thousands)   
|Time Deposits, $100,000 and Over |  | $                 | 1,106,411 |                  | $ | 1,035,643
|Other Time Deposits              |  |                   | 761,857   |                  |   | 546,144  
|Interest-Bearing Demand          |  |                   | 374,579   |                  |   | 543,420  
|Demand                           |  |                   | 145,416   |                  |   | 158,759  
|Savings                          |  |                   | 14,291    |                  |   | 14,739   
|                                 |  |                   |           |                  |   |          
|                                 |  | $                 | 2,402,554 |                  | $ | 2,298,705
|                                 |  |                   |           |                  |   |          

(7) Borrowed Money

Borrowed money is comprised of the following:



|                                                     |  |                   |         |                  |   |        
|---------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                     |  | September 30,2008 |         | December 31,2007
|                                                     |  | (In Thousands)   
|Federal Home Loan Bank Advances                      |  | $                 | 193,695 |                  | $ | 77,171 
|Subordinated Debentures (Trust Preferred Securities) |  |                   | 41,238  |                  |   | 41,238 
|Notes Payable, Net of Discount                       |  |                   | 31,625  |                  |   |       
|Federal Funds Purchased                              |  |                   |        |                  |   | 33,477 
|Securities Sold Under Agreement to Repurchase        |  |                   | 31,343  |                  |   | 34,940 
|Advances Under Revolving Lines of Credit             |  |                   |        |                  |   | 19,500 
|                                                     |  |                   |         |                  |   |        
|Total Borrowed Money                                 |  | $                 | 297,901 |                  | $ | 206,326
|                                                     |  |                   |         |                  |   |        

In connection with the issuance of trust preferred securities, the Company formed trust
subsidiaries. The interest income received from the Companys trusts totaled $61,270 and $71,054 for the nine-month periods ended September 30, 2008 and 2007, respectively. The interest expense paid to the trusts totaled $2,054,424 and
$2,380,287 for the nine-month periods ended September 30, 2008 and 2007, respectively.

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

In connection with the issuance and sale of the Notes by SBKC Interim, the Company issued to the
Purchasers immediately exercisable warrants to purchase 2,552,717 shares of the Companys common stock at an exercise price of $6.58 per share, subject to certain adjustments (the voting warrants). The Company also issued to the Purchasers
3,526,310 stock appreciation rights (SARs) that entitled the holders, upon exercise, to receive a cash payment from the Company in an amount equal to the number of SARs outstanding multiplied by the excess of the Companys Common Stock price
above the exercise price of $6.58 per share, subject to certain adjustments. The $40.0 million face amount of the Notes was allocated to the Notes, the voting warrants and the SARs based on their fair values of $31.3 million, $5.6 million and $3.1
million, respectively. During the three and nine-month periods ended September 30, 2008, the Company amortized $218,465 and $364,108 of the $8.7 million discount on the Notes.



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

(8) Share-Based Compensation Plans

A summary of option transactions for the nine months ended September 30, 2008 follows:



|                                             |  |                                    |  |                              |       |                         |   |                                          |  |     
|-------------------------------------------- |  | ---------------------------------- |  | ---------------------------- | ----- | ----------------------- | - | ---------------------------------------- |  | ----
|                                             |  | Shares UnderIncentive StockOptions |  | WeightedAverageExercisePrice |       | AggregateIntrinsicValue |   | Weighted-averageRemainingContractualLife
|Outstanding, December 31, 2007               |  | 1,807,839                          |  | $                            | 18.10 |                         |   |                                          |  |     
|Granted                                      |  |                                   |  |                              |      |                         |   |                                          |  |     
|Forfeited                                    |  | 150,558                            |  |                              | 20.93 |                         |   |                                          |  |     
|Exercised                                    |  |                                   |  |                              |      |                         |   |                                          |  |     
|                                             |  |                                    |  |                              |       |                         |   |                                          |  |     
|Outstanding, September 30, 2008              |  | 1,657,281                          |  | $                            | 18.04 |                         | $ |                                         |  | 7.21
|                                             |  |                                    |  |                              |       |                         |   |                                          |  |     
|Eligible to be Exercised, September 30, 2008 |  | 621,529                            |  | $                            | 14.92 |                         | $ |                                         |  | 5.26
|                                             |  |                                    |  |                              |       |                         |   |                                          |  |     

(9) Earnings (Loss) Per Share

Due to the net loss in 2008, basic shares were used to calculate diluted earnings per share. Adding common stock equivalents to the denominator would result in anti-dilution.

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



|                                                            |  |                                  |            |                                 |      |   |            |  |   |            |   |  |   |           
|----------------------------------------------------------- |  | -------------------------------- | ---------- | ------------------------------- | ---- | - | ---------- |  | - | ---------- | - |  | - | ----------
|                                                            |  | Three Months Ended September 30, |            | Nine Months Ended September 30,
|                                                            |  | 2008                             |            |                                 | 2007 |   | 2008       |  |   | 2007      
|Basic Earnings (Loss) Per Share                             |  |                                  |            |                                 |      |   |            |  |   |            |   |  |   |           
|Net Income (Loss) Per Common Share                          |  | $                                | (0.87      | )                               |      | $ | 0.03       |  | $ | (7.50      | ) |  | $ | 0.70      
|Weighted Average Common Shares                              |  |                                  | 23,247,824 |                                 |      |   | 19,075,958 |  |   | 22,103,040 |   |  |   | 19,142,901
|Diluted Earnings (Loss) Per Share                           |  |                                  |            |                                 |      |   |            |  |   |            |   |  |   |           
|Net Income (Loss) Per Common and Common Equivalent Share    |  | $                                | (0.87      | )                               |      | $ | 0.03       |  | $ | (7.50      | ) |  | $ | 0.69      
|Weighted Average Common Shares and Common Stock Equivalents |  |                                  | 23,247,824 |                                 |      |   | 19,184,272 |  |   | 22,103,040 |   |  |   | 19,359,809

For the three- and nine month periods ended September 30, 2008, 7,812,919 and 4,442,195
shares of common stock equivalents, respectively, were excluded from the calculation of diluted earnings per share because they would have an anti-dilutive effect.

The assumed exercise of stock options is included in the diluted earnings per share computation using the treasury stock method and assuming an average market price for Security Bank Corporation stock of $15.10 and
$17.64 for the three- and nine-month periods ended September 30, 2007, respectively. The Companys stock is quoted on the Nasdaq Global Select Market under the symbol SBKC.

(10) Regulatory Capital Matters

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



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##### Table of Contents

The Companys actual ratios as of September 30, 2008 are as follows:



|                                         |  |                      |   |  |                     |   |  |                |  
|---------------------------------------- |  | -------------------- | - |  | ------------------- | - |  | -------------- | -
|                                         |  | Tier 1 Capital Ratio |   |  | Total Capital Ratio |   |  | Leverage Ratio |  
|Minimum Capital Adequacy                 |  | 4.00                 | % |  | 8.00                | % |  | 4.00           | %
|Well Capitalized                         |  | 6.00                 | % |  | 10.00               | % |  | 5.00           | %
|Security Bank Corporation (Consolidated) |  | 8.67                 | % |  | 11.39               | % |  | 6.66           | %
|Security Bank of Bibb County             |  | 8.85                 | % |  | 10.12               | % |  | 7.14           | %
|Security Bank of Houston County          |  | 9.34                 | % |  | 10.59               | % |  | 6.74           | %
|Security Bank of Jones County            |  | 9.01                 | % |  | 10.26               | % |  | 6.32           | %
|Security Bank of North Metro             |  | 8.92                 | % |  | 10.19               | % |  | 7.39           | %
|Security Bank of North Fulton            |  | 9.17                 | % |  | 10.43               | % |  | 7.11           | %
|Security Bank of Gwinnett County         |  | 8.85                 | % |  | 10.17               | % |  | 6.80           | %

(11) Derivative Financial Instruments

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

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

(12) Fair Value of Financial Instruments

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



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



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



| |  |  | Level 3 Inputs  Significant unobservable inputs that reflect an entitys own assumptions that market participants would use in pricing the assets or
liabilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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##### Table of Contents

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



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



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



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

(13)
Contingent Liabilities

The Company and its subsidiaries are parties to lawsuits and other claims that arise in the ordinary course of
business, all of which are being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provision is made for anticipated losses whenever management believes that such
losses are probable and can be reasonably estimated. At the present time, management believes, based on currently available information, that the anticipated final resolution of pending legal proceedings will not have a material impact on the
Companys consolidated financial condition or results of operations.



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##### Table of Contents

|ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

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

Forward-Looking Statements

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

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



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



| |  |  | the U.S. governments proposed plan to purchase large amounts of illiquid mortgage-backed and other securities from financial institutions may not have the
desired impact on the financial markets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | possible changes in trade, monetary and fiscal policies, as well as legislative and regulatory changes, including changes in accounting standards and banking,
securities and tax laws and regulations and governmental intervention in the U.S. financial system, as well as changes affecting financial institutions ability to lend and otherwise do business with consumers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the imposition of enforcement orders, capital directives or other enforcement actions by our regulators;
| | - |  | --------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



| |  |  | unexpected outcomes of existing or new litigation;
| | - |  | --------------------------------------------------



| |  |  | our ability to keep pace with technological changes;
| | - |  | ----------------------------------------------------



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



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



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##### Table of Contents

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



| |  |  | managements ability to develop and execute plans to effectively respond to unexpected changes; and
| | - |  | ---------------------------------------------------------------------------------------------------



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

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

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

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

Overview

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

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

As of September 30, 2008, we had 448 employees on a full-time equivalent basis.

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

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



15



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##### Table of Contents

Our capital plan includes the following steps:

Rights Offering

On February 11,
2008, we distributed non-transferable rights to subscribe for and purchase up to 5,319,148 shares of our common stock to our then-current shareholders. In the offering, each shareholder received a right to purchase 0.28121 shares of common
stock, at a subscription price of $6.58 per share, for each share owned on the record date. Shareholders who exercised their full basic subscription right were also able to exercise an oversubscription right enabling such shareholder to purchase
shares remaining after the exercise of all other shareholders basic subscription rights. In conjunction with the rights offering, we entered into a standby purchase agreement with two shareholders, one of whom is a director of the holding
company and one of whom is a director of a subsidiary bank, pursuant to which these shareholders agreed to purchase up to $18 million of common stock remaining after the exercise of shareholders basic and oversubscription rights. This
aggregate amount included all of the shares purchasable by these two individuals in connection with their basic subscription privileges along with their standby commitment. The offering closed on March 10, 2008, and we raised approximately
$28.1 million.

Subordinated Notes

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

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

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

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

Other Steps

During the first quarter of 2008 we also completed cost saving steps aimed at achieving a targeted reduction of noninterest expenses of $3.0 million for 2008. Finally, we suspended our quarterly cash dividend and all Board of
Directors fees during the third quarter of 2008. We also restructured our investment portfolio to include more securities of a lower risk weighting by selling certain securities with higher risk weightings.



16



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##### Table of Contents

Third Quarter Update

During the third quarter of 2008, the economic crisis that had been confined to residential real estate and subprime lending evolved into a global economic crisis that negatively impacted not only liquidity and credit
quality but also economic indicators such as the labor market, volatile equity markets and declining home values. The capital and credit markets experienced extreme volatility and disruption at unprecedented levels as economic fears and illiquidity
persisted. The markets have exerted downward pressure on stock prices and credit capacity for certain issuers. Additionally, certain financial institutions failed or merged with other institutions and FNMA and FHLMC entered into conservatorship with
the U.S. government. During September the federal government relied on nearly every legal authority available to address the unfolding crisis, including direct and indirect financial assistance, government takeovers and the bankruptcy process.

In October, the Congress passed and the President signed into law the Emergency Economic Stabilization Act of 2008 (the EESA). The EESA
provides up to $700 billion of relief for financial institutions holding troubled residential and commercial mortgage loans and other assets. The major components of the EESA include:



| |  |  | Troubled Asset Relief Program (TARP). Under the TARP, the Treasury Department may purchase and hold up to $700 billion in troubled assets which are defined
as residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008 and that the Secretary
determines promotes financial market stability.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Capital Purchase Program (CPP). The CPP allocates up to $250 billion of the $700 billion under TARP that Treasury may use to inject capital into qualifying
financial institutions via acquiring senior preferred stock in the institutions. The senior preferred stock would be perpetual, receive cumulative dividends of 5% for the first five years and 9% thereafter, be callable at par after three years and
come with warrants for common equity equal to 15% of the amount of the preferred stock. The Federal Reserve Board has adopted an interim rule that allows bank holding companies to include in capital without restriction the senior preferred stock
issued to the Treasury in Tier 1 capital.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Program for Systemically Significant Failing Institutions. This program will potentially provide direct assistance to certain failing firms on terms
negotiated on a case-by-case basis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under each of these plans, the qualifying institutions must agree to certain
compensation and governance guidelines applicable to the Chief Executive Officer, Chief Financial Officer and the next three highest paid officers of the institution. The compensation guidelines include these provisions: incentive compensation plans
should not include provisions that would encourage reckless or high risk activities in order to qualify for the incentive compensation; a clawback provision that bonuses or other incentive compensation received based on financial results that are
later found to be inaccurate would be returned to the institution; executive compensation in excess of $500,000 per executive officer may not be deducted for income tax purposes; and a prohibition against making a golden parachute payment based on
the Internal Revenue Code provision.

Presently, we cannot determine whether these steps undertaken by the federal government will be
successful or not. Nor can we determine the full effects of these steps on the Company; however, we are currently reviewing these programs to determine in which, if any, the Company will participate.



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Financial Condition

At September 30, 2008, our total assets were $2.89 billion compared to $2.83 billion at December 31, 2007. The increase in total assets compared to December 31, 2007 is primarily due to increases in
cash and cash equivalents, investment securities, other real estate and other assets, offset by decreases in loans receivable and goodwill.

Assets

The composition of our assets is as follows:



|                                           |  |                   |           |                  |   |           |  |   |          |   |  |       |  
|------------------------------------------ |  | ----------------- | --------- | ---------------- | - | --------- |  | - | -------- | - |  | ----- | -
|(In Thousands)                             |  | September 30,2008 |           | December 31,2007 |   | $ Change  |  |   | % Change |  
|Cash and Due From Banks                    |  | $                 | 283,238   |                  | $ | 91,644    |  | $ | 191,594  |   |  | 209.1 | %
|Federal Funds Sold                         |  |                   | 13,369    |                  |   | 6,612     |  |   | 6,757    |   |  | 102.2 | %
|Interest-Bearing Deposits With Other Banks |  |                   | 1,187     |                  |   | 7,015     |  |   | (5,828   | ) |  | -83.1 | %
|Investment Securities                      |  |                   | 333,223   |                  |   | 297,156   |  |   | 36,067   |   |  | 12.1  | %
|Federal Home Loan Bank Stock               |  |                   | 13,797    |                  |   | 8,243     |  |   | 5,554    |   |  | 67.4  | %
|Loans Held For Sale                        |  |                   | 4,780     |                  |   | 7,605     |  |   | (2,825   | ) |  | -37.1 | %
|Loans Receivable, Net                      |  |                   | 1,989,667 |                  |   | 2,150,615 |  |   | (160,948 | ) |  | -7.5  | %
|Premises and Equipment                     |  |                   | 38,561    |                  |   | 43,171    |  |   | (4,610   | ) |  | -10.7 | %
|Long-Lived Assets Held For Sale            |  |                   | 4,808     |                  |   |          |  |   | 4,808    |   |  | 100.0 | %
|Other Real Estate                          |  |                   | 83,362    |                  |   | 28,175    |  |   | 55,187   |   |  | 195.9 | %
|Goodwill                                   |  |                   | 18,373    |                  |   | 128,571   |  |   | (110,198 | ) |  | -85.7 | %
|                                           |  |                   |           |                 
|Core Deposit Intangible, net               |  |                   | 3,444     |                  |   | 4,125     |  |   | (681     | ) |  | -16.5 | %
|Accrued Interest Receivable                |  |                   | 15,193    |                  |   | 24,254    |  |   | (9,061   | ) |  | -37.4 | %
|Other Assets                               |  |                   | 85,351    |                  |   | 35,885    |  |   | 49,466   |   |  | 137.8 | %
|                                           |  |                   |           |                  |   |           |  |   |          |   |  |       |  
|                                           |  | $                 | 2,888,353 |                  | $ | 2,833,071 |  | $ | 55,282   |   |  | 2.0   | %
|                                           |  |                   |           |                  |   |           |  |   |          |   |  |       |  

Cash and Cash Equivalents

The increase of $198.4 million is due primarily to the sale of other real estate, increased borrowings from the Federal Home Loan Bank and the issuance of
notes payable in an effort to bolster on-balance sheet liquidity in response to current economic conditions. See the Condensed Consolidated Statement of Cash Flows for a detail of the sources and uses of cash and cash equivalents during the nine
months ended September 30, 2008 and 2007.

Investment Securities

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

During the nine-month period ended
September 30, 2008, the Company sold certain U.S. Government sponsored mortgage-backed securities and reinvested the proceeds into securities with lower risk-weightings in order to make the portfolio more capital efficient. Compared to
December 31, 2007, investment securities increased $36.1 million or 12.1%. At September 30, 2008 and December 31, 2007, the securities portfolio accounted for approximately 11.5% and 10.5%, respectively, of total assets.

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



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lead to lower levels of liquidity due to the delay of timing of cash receipts and can result in the holding of a below market yielding asset for a longer
time period.

Loans Receivable, Net

Loans receivable, net decreased approximately $160.9 million from December 31, 2007 as a result of $70.2 million in charge-offs and $83.6 million in foreclosures. Additionally, due to the fact that adverse market conditions have
restrained the pace of new real estate project financing, we have significantly slowed the origination of new loans when compared with previous periods. Furthermore, during the third quarter of 2008, loans of $30 million were sold in connection with
the sale of a loan production office of Security Bank of Bibb County in Bogart, GA.

Risk Elements and Allowance for Loan Losses (ALL)

Nonperforming assets consist of nonaccrual loans, loans 90 days past due and accruing and other real estate, which is real estate
acquired through foreclosure. As a result of continued deteriorating conditions primarily in the residential real estate and development market, nonperforming assets increased to $283.3 million or 9.8% of total assets at September 30, 2008,
compared to 8.7%, 7.9% and 2.8% of total assets at June 30, 2008, March 31, 2008 and December 31, 2007, respectively.

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



|                                    |  |                   |         |              |   |               |  |                  |         |  |   |       
|----------------------------------- |  | ----------------- | ------- | ------------ | - | ------------- |  | ---------------- | ------- |  | - | ------
|(In Thousands)                      |  | September 30,2008 |         | June 30,2008 |   | March 31,2008 |  | December 31,2007
|Nonaccrual Loans                    |  | $                 | 199,907 |              | $ | 186,139       |  | $                | 186,520 |  | $ | 50,635
|Loans 90 Days Past Due and Accruing |  |                   |        |              |   |              |  |                  | 68      |  |   | 242   
|Other Real Estate                   |  |                   | 83,362  |              |   | 62,814        |  |                  | 35,749  |  |   | 28,175
|                                    |  |                   |         |              |   |               |  |                  |         |  |   |       
|Total Nonperforming Assets          |  | $                 | 283,269 |              | $ | 248,953       |  | $                | 222,337 |  | $ | 79,052
|                                    |  |                   |         |              |   |               |  |                  |         |  |   |       

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

Nonaccrual loans increased sequentially by $13.8 million during the quarter ended September 30,
2008. There was significant movement within these loans during the period as $14.4 million of nonaccrual loans were charged-off, $30.9 million went into foreclosure, $66.9 million of loans went on nonaccrual status and $7.8 million was collected or
upgraded to accrual status. At September 30, 2008, the 10 largest nonaccrual loans comprised $99.1 million or 50% of the total and all were collateralized by residential real estate.

Other real estate increased sequentially by $20.5 million during the quarter ended September 30, 2008, as we foreclosed on $30.9 million of real
estate, sold $8.1 million of real estate and recorded provision for losses of $2.9 million. Of the total balance of $83.4 million of other real estate at September 30, 2008, the largest component is residential lots at 41%, followed by single
family homes at 33%, raw land at 25% and commercial property at 1%.

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

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

We establish the general amount by taking the remaining loan portfolio (excluding those impaired loans discussed above) with allocations based on historical losses in the total loan portfolio. The calculation of the
general amount is then subjected to stress factors that are somewhat subjective. The amount due to stress testing attempts to correlate the historical loss rates with current economic factors and current risks in the portfolio. The stress factors
consist of: (1) economic factors including such matters as



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changes in the local or national economy; (2) the depth or experience in the lending staff; (3) any concentrations of credit (such as commercial
real estate) in any particular industry group; (4) new banking laws or regulations; (5) the credit grade of the loans in our unsecured consumer loan portfolio; and (6) additional risks resulting from the level of speculative real
estate loans in the portfolio. After we assess the applicable factors, we evaluate the remaining amount based on managements experience.

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

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

Goodwill

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

Other Assets

Other assets increased largely as a result of the increase in the Companys income tax benefit of
approximately $39.7 million, resulting from the net loss incurred during 2008. The increase is also related to the unrealized loss on our bond portfolio during 2008, which resulted in an increase in related deferred taxes of $4.0 million. Further,
we paid the final installment to a low income housing tax credit fund totaling $2.6 million during the nine months ended September 30, 2008.

Liabilities

The composition of liabilities is as follows:



|                  |  |                   |           |                  |   |           |  |   |          |   |  |      |  
|----------------- |  | ----------------- | --------- | ---------------- | - | --------- |  | - | -------- | - |  | ---- | -
|(In Thousands)    |  | September 30,2008 |           | December 31,2007 |   | $ Change  |  |   | % Change |  
|Deposits          |  | $                 | 2,402,554 |                  | $ | 2,298,705 |  | $ | 103,849  |   |  | 4.5  | %
|Borrowed Money    |  |                   | 297,901   |                  |   | 206,326   |  |   | 91,575   |   |  | 44.4 | %
|Other Liabilities |  |                   | 21,236    |                  |   | 21,347    |  |   | (111     | ) |  | -0.5 | %
|                  |  |                   |           |                  |   |           |  |   |          |   |  |      |  
|                  |  | $                 | 2,721,691 |                  | $ | 2,526,378 |  | $ | 195,313  |   |  | 7.7  | %
|                  |  |                   |           |                  |   |           |  |   |          |   |  |      |  

Deposits

The increase in total deposits of approximately $103.8 million is due primarily to an increase in the use of brokered and wholesale certificates of deposit in effort to enhance our liquidity position due to current
upheaval in the banking industry and the U.S. economy. Due to decreases in the interest rates on these deposits since December 2007 and the decrease in demand deposits during the period, we have increased our use of these deposits as a funding
source. Further discussion of our use of brokered and wholesale certificates of deposit is included below in the Liquiditysection of this discussion.

Borrowed Money

The increase in borrowed money is primarily related to the sale of $40 million of subordinated notes
(net balance of $31.6 million at September 30, 2008) and the $116.5 million increase in advances from the Federal Home Loan Bank, offset by the $19.5 million payoff and termination of the holding company lines of credit and a $33.5 million
reduction in the federal funds purchased balance.



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

Equity

In March 2008, we completed a rights offering of common stock to our shareholders. We issued 4,311,359 shares and generated net
proceeds of approximately $28.1 million. We utilized the proceeds to maintain the Banks well capitalized regulatory status and for general corporate purposes including the reduction of borrowings under our lines of credit.

At September 30, 2008, total equity was $166.7 million or 5.8% of total assets compared to $306.7 million or 10.8% of total assets as
of December 31, 2007. The decrease in equity is due primarily to the net loss of $165.8 million, the reduction in accumulated other comprehensive income of $7.5 million related to unrealized losses on our available for sale bond portfolio and
dividends paid, offset partially by the proceeds from the $28.1 million of common stock issued in connection with the rights offering, and the exchange of the SARs for the nonvoting warrants totaling $7.4 million.

Results of Operations

Net Income (Loss)

Net income (loss) for the three- and nine-month periods ended September 30, 2008 was ($20.1 million) or ($0.87) diluted loss per share and ($165.8
million) or ($7.50) diluted loss per share, respectively, compared to $0.6 million or $0.03 diluted earnings per share and $13.5 million or $0.69 diluted earnings per share in the same periods of the preceding year, respectively. The decrease in net
income for the three-month period ended September 30, 2008 is primarily attributable to a $15.0 million decrease in interest income recognized on outstanding loans and a $17.0 million increase in the provision for loan losses, both of which are
directly related to the substantial increase in nonperforming assets during 2008. The decrease in net income for the nine-month period ended September 30, 2008 is primarily attributable to the goodwill impairment charge of 109.7 million,
an increase of $86.3 million in the provision for loan losses and a reduction of interest income on outstanding loans of $32.9 million. The decreases in net income resulting from these additional charges and reductions in interest income are offset
by the recognition of income tax benefits of $11.2 million and $42.8 million during the three- and nine month periods ended September 30, 2008, respectively.

Net Interest Income

The net interest margin of the Company was 1.82% for the three-month period ended
September 30, 2008 compared to 3.81% for the same three-month period of the preceding year. Total interest income decreased to $36.2 million for the three-month period ended September 30, 2008, from $49.8 million during the comparable
prior year period. The decrease in total interest income is due primarily to a $14.9 million decrease in interest generated from loans receivable, which resulted mainly from a 273 basis point decline in the yield on these assets. The decline in the
yield on loans receivable is the result of rate decreases during 2007 as well as forfeited interest from nonperforming assets and reversal of interest on nonaccrual loans, which reduced the yield by 71 and 15 basis points, respectively. Total
interest expense decreased $2.7 million to $24.1 million as a result of a 161 basis point decrease in the cost of interest-bearing demand and savings deposits and a decrease in the volume of these deposits.

The net interest margin of the Company was 2.09% for the nine-month period ended September 30, 2008 compared to 4.04% for the same nine-month period
of the preceding year. Total interest income decreased to $114.7 million for the nine-month period ended September 30, 2008, from $144.2 million during the comparable prior year period. The decrease in total interest income is due primarily to
a $32.8 million decrease in interest generated from loans receivable, which resulted mainly from a 249 basis point decline in the yield on these assets. The decline in the yield on loans receivable is the result of rate decreases during 2008 and the
addition of nonperforming assets and reversal of interest on nonaccrual loans, which reduced the yield by 60 and 27 basis points, respectively. Total interest expense did not change significantly from the same nine-month period of the preceding
year.



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



|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|-------------------------------------------------------------------- |  | --------------- | --------- | -------------- | ---- | ------------ |  | ----- | --------------- |  | -------------- | --------- | ------------ | - | ------ |  | ---- | -
|                                                                     |  | 2008            |           |                | 2007 |             
|(Dollars in thousands)                                               |  | AverageBalances |           | Income/Expense |      | Yields/Rates |  |       | AverageBalances |  | Income/Expense |           | Yields/Rates |  
|Assets                                                               |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Interest-Earning Assets                                              |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Loans Receivable                                                     |  | $               | 2,108,224 |                | $    | 31,297       |  | 5.91  | %               |  | $              | 2,123,612 |              | $ | 46,232 |  | 8.64 | %
|Loans Held for Sale                                                  |  |                 | 3,869     |                |      | 66           |  | 6.79  |                 |  |                | 6,367     |              |   | 119    |  | 7.42 |  
|Investment Securities-Taxable                                        |  |                 | 343,503   |                |      | 3,915        |  | 4.53  |                 |  |                | 199,898   |              |   | 2,639  |  | 5.24 |  
|Investment Securities- Tax-Exempt, Tax Equivalent Basis              |  |                 | 2,272     |                |      | 41           |  | 7.18  |                 |  |                | 20,481    |              |   | 315    |  | 6.10 |  
|Interest-Bearing Deposits With Other Banks                           |  |                 | 9,254     |                |      | 46           |  | 1.98  |                 |  |                | 8,059     |              |   | 109    |  | 5.37 |  
|Federal Funds Sold                                                   |  |                 | 160,013   |                |      | 780          |  | 1.94  |                 |  |                | 23,719    |              |   | 315    |  | 5.25 |  
|Other Interest-Earning Assets                                        |  |                 | 1,238     |                |      | 20           |  | 6.43  |                 |  |                | 1,238     |              |   | 24     |  | 7.69 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Total Interest-Earning Assets                                        |  |                 | 2,628,373 |                |      | 36,165       |  | 5.47  |                 |  |                | 2,383,374 |              |   | 49,753 |  | 8.28 |  
|                                                                     |  |                 |           |                |      |             
|Noninterest-Earning Assets                                           |  |                 | 234,855   |                |      |              |  |       |                 |  |                | 264,926   |              |   |        |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Total Assets                                                         |  | $               | 2,863,228 |                |      |              |  |       |                 |  | $              | 2,648,300 |              |   |        |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|                                                                     |  |                 |           |                |      |             
|Liabilities and Shareholders Equity                                 |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Interest-Bearing Liabilities:                                        |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Interest-Bearing Deposits:                                           |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|NOW, Money Market and Savings                                        |  | $               | 429,694   |                | $    | 2,292        |  | 2.12  | %               |  | $              | 544,389   |              | $ | 5,115  |  | 3.73 |  
|Time Deposits                                                        |  |                 | 1,808,710 |                |      | 18,769       |  | 4.13  |                 |  |                | 1,472,744 |              |   | 19,725 |  | 5.31 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Total Interest-Bearing Deposits                                      |  |                 | 2,238,404 |                |      | 21,061       |  | 3.74  |                 |  |                | 2,017,133 |              |   | 24,840 |  | 4.89 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Borrowings                                                           |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|FHLB Advances                                                        |  |                 | 157,728   |                |      | 1,087        |  | 2.74  |                 |  |                | 48,340    |              |   | 656    |  | 5.38 |  
|Subordinated Debentures                                              |  |                 | 41,238    |                |      | 658          |  | 6.36  |                 |  |                | 41,238    |              |   | 799    |  | 7.69 |  
|Federal Funds Purchased and Securities Under Agreement to Repurchase |  |                 | 32,168    |                |      | 130          |  | 1.61  |                 |  |                | 41,946    |              |   | 517    |  | 4.89 |  
|Notes Payable and Other                                              |  |                 | 31,487    |                |      | 1,190        |  | 15.04 |                 |  |                | 2,804     |              |   | 50     |  | 7.07 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Total Borrowings                                                     |  |                 | 262,621   |                |      | 3,065        |  | 4.64  |                 |  |                | 134,328   |              |   | 2,022  |  | 5.97 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Total Interest-Bearing Liabilities                                   |  |                 | 2,501,025 |                |      | 24,126       |  | 3.84  |                 |  |                | 2,151,461 |              |   | 26,862 |  | 4.95 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Noninterest-Bearing Liabilities                                      |  |                 | 177,863   |                |      |              |  |       |                 |  |                | 180,779   |              |   |        |  |      |  
|Shareholders Equity                                                 |  |                 | 184,340   |                |      |              |  |       |                 |  |                | 316,060   |              |   |        |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Total Liabilities and Shareholders Equity                           |  | $               | 2,863,228 |                |      |              |  |       |                 |  | $              | 2,648,300 |              |   |        |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Interest Rate Spread                                                 |  |                 |           |                |      |              |  | 1.63  | %               |  |                |           |              |   |        |  | 3.33 | %
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Net Interest Income                                                  |  |                 |           |                | $    | 12,039       |  |       |                 |  |                |           |              | $ | 22,891 |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  
|Net Interest Margin                                                  |  |                 |           |                |      |              |  | 1.82  | %               |  |                |           |              |   |        |  | 3.81 | %
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |        |  |      |  



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##### Table of Contents

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



|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|-------------------------------------------------------------------- |  | ---------------------------------------------------- | ------ | - | ---- | - | ------- | --------- |  | - | ------- | -
|                                                                     |  | Changes From September 30, 2007 toSeptember 30, 2008 |       
|                                                                     |  | Volume                                               |        |   | Rate |   |         | NetChange | 
|                                                                     |  | (In Thousands)                                       |       
|Interest Income                                                      |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Loans Receivable                                                     |  | $                                                    | (334   | ) |      | $ | (14,600 | )         |  | $ | (14,934 | )
|Loans Held For Sale                                                  |  |                                                      | (47    | ) |      |   | (6      | )         |  |   | (53     | )
|Investment SecuritiesTaxable                                        |  |                                                      | 1,891  |   |      |   | (616    | )         |  |   | 1,275   |  
|Investment SecuritiesTax-Exempt                                     |  |                                                      | (279   | ) |      |   | 5       |           |  |   | (274    | )
|Interest-Bearing Deposits With Other Banks                           |  |                                                      | 16     |   |      |   | (79     | )         |  |   | (63     | )
|Federal Funds Sold and Other                                         |  |                                                      | 1,805  |   |      |   | (1,344  | )         |  |   | 461     |  
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Total Interest Income                                                |  |                                                      | 3,052  |   |      |   | (16,640 | )         |  |   | (13,588 | )
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Interest Expense                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Interest-Bearing Demand and Savings Deposits                         |  |                                                      | (1,075 | ) |      |   | (1,749  | )         |  |   | (2,824  | )
|Time Deposits                                                        |  |                                                      | 4,487  |   |      |   | (5,443  | )         |  |   | (956    | )
|Borrowings:                                                          |  |                                                      |        |   |      |   |         |           |  |   |         |  
|FHLB Advances                                                        |  |                                                      | 1,480  |   |      |   | (1,049  | )         |  |   | 431     |  
|Subordinated Debentures                                              |  |                                                      |       |   |      |   | (140    | )         |  |   | (140    | )
|Federal Funds Purchased and Securities Under Agreement to Repurchase |  |                                                      | (120   | ) |      |   | (267    | )         |  |   | (387    | )
|Notes Payable and Other                                              |  |                                                      | 1,140  |   |      |   |        |           |  |   | 1,140   |  
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Total Interest Expense                                               |  |                                                      | 5,912  |   |      |   | (8,648  | )         |  |   | (2,736  | )
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Net Interest Income                                                  |  | $                                                    | (2,860 | ) |      | $ | (7,992  | )         |  | $ | (10,852 | )
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  



23



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##### Table of Contents

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



|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|-------------------------------------------------------------------- |  | --------------- | --------- | -------------- | ---- | ------------ |  | ----- | --------------- |  | -------------- | --------- | ------------ | - | ------- |  | ---- | -
|                                                                     |  | 2008            |           |                | 2007 |             
|(Dollars in thousands)                                               |  | AverageBalances |           | Income/Expense |      | Yields/Rates |  |       | AverageBalances |  | Income/Expense |           | Yields/Rates |  
|Assets                                                               |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Interest-Earning Assets                                              |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Loans Receivable                                                     |  | $               | 2,152,068 |                | $    | 101,432      |  | 6.30  | %               |  | $              | 2,042,883 |              | $ | 134,240 |  | 8.79 | %
|Loans Held for Sale                                                  |  |                 | 4,846     |                |      | 234          |  | 6.45  |                 |  |                | 6,557     |              |   | 348     |  | 7.10 |  
|Investment Securities-Taxable                                        |  |                 | 326,184   |                |      | 10,958       |  | 4.49  |                 |  |                | 182,893   |              |   | 7,044   |  | 5.15 |  
|Investment Securities- Tax-Exempt, Tax Equivalent Basis              |  |                 | 4,155     |                |      | 226          |  | 7.27  |                 |  |                | 20,422    |              |   | 954     |  | 6.25 |  
|Interest-Bearing Deposits With Other Banks                           |  |                 | 5,391     |                |      | 99           |  | 2.45  |                 |  |                | 5,095     |              |   | 206     |  | 5.41 |  
|Federal Funds Sold                                                   |  |                 | 100,961   |                |      | 1,651        |  | 2.18  |                 |  |                | 33,459    |              |   | 1,322   |  | 5.28 |  
|Other Interest-Earning Assets                                        |  |                 | 1,238     |                |      | 61           |  | 6.58  |                 |  |                | 1,238     |              |   | 71      |  | 7.67 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Total Interest-Earning Assets                                        |  |                 | 2,594,843 |                |      | 114,661      |  | 5.90  |                 |  |                | 2,292,547 |              |   | 144,185 |  | 8.41 |  
|Noninterest-Earning Assets                                           |  |                 | 265,917   |                |      |              |  |       |                 |  |                | 247,800   |              |   |         |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Total Assets                                                         |  | $               | 2,860,760 |                |      |              |  |       |                 |  | $              | 2,540,347 |              |   |         |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Liabilities and Shareholders Equity                                 |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Interest-Bearing Liabilities:                                        |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Interest-Bearing Deposits:                                           |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|NOW, Money Market and Savings                                        |  | $               | 475,500   |                | $    | 8,564        |  | 2.41  | %               |  | $              | 534,761   |              | $ | 14,551  |  | 3.64 |  
|Time Deposits                                                        |  |                 | 1,717,616 |                |      | 57,974       |  | 4.51  |                 |  |                | 1,373,523 |              |   | 54,434  |  | 5.30 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Total Interest-Bearing Deposits                                      |  |                 | 2,193,116 |                |      | 66,538       |  | 4.05  |                 |  |                | 1,908,284 |              |   | 68,985  |  | 4.83 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Borrowings                                                           |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|FHLB Advances                                                        |  |                 | 111,843   |                |      | 2,436        |  | 2.91  |                 |  |                | 49,852    |              |   | 1,997   |  | 5.36 |  
|Subordinated Debentures                                              |  |                 | 41,238    |                |      | 2,054        |  | 6.65  |                 |  |                | 41,238    |              |   | 2,380   |  | 7.72 |  
|Federal Funds Purchased and Securities Under Agreement to Repurchase |  |                 | 37,480    |                |      | 678          |  | 2.42  |                 |  |                | 39,957    |              |   | 1,498   |  | 5.01 |  
|Notes Payable and Other                                              |  |                 | 24,721    |                |      | 2,276        |  | 12.30 |                 |  |                | 945       |              |   | 50      |  | 7.07 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Total Borrowings                                                     |  |                 | 215,282   |                |      | 7,444        |  | 4.62  |                 |  |                | 131,992   |              |   | 5,925   |  | 6.00 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Total Interest-Bearing Liabilities                                   |  |                 | 2,408,398 |                |      | 73,982       |  | 4.10  |                 |  |                | 2,040,276 |              |   | 74,910  |  | 4.91 |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Noninterest-Bearing Liabilities                                      |  |                 | 184,482   |                |      |              |  |       |                 |  |                | 187,168   |              |   |         |  |      |  
|Shareholders Equity                                                 |  |                 | 267,880   |                |      |              |  |       |                 |  |                | 312,903   |              |   |         |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Total Liabilities and Shareholders Equity                           |  | $               | 2,860,760 |                |      |              |  |       |                 |  | $              | 2,540,347 |              |   |         |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Interest Rate Spread                                                 |  |                 |           |                |      |              |  | 1.80  | %               |  |                |           |              |   |         |  | 3.50 | %
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Net Interest Income                                                  |  |                 |           |                | $    | 40,679       |  |       |                 |  |                |           |              | $ | 69,275  |  |      |  
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  
|Net Interest Margin                                                  |  |                 |           |                |      |              |  | 2.09  | %               |  |                |           |              |   |         |  | 4.04 | %
|                                                                     |  |                 |           |                |      |              |  |       |                 |  |                |           |              |   |         |  |      |  



24



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##### Table of Contents

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



|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|-------------------------------------------------------------------- |  | ---------------------------------------------------- | ------ | - | ---- | - | ------- | --------- |  | - | ------- | -
|                                                                     |  | Changes From September 30, 2007 toSeptember 30, 2008 |       
|                                                                     |  | Volume                                               |        |   | Rate |   |         | NetChange | 
|                                                                     |  | (In Thousands)                                       |       
|Interest Income                                                      |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Loans Receivable                                                     |  | $                                                    | 7,181  |   |      | $ | (39,988 | )         |  | $ | (32,807 | )
|Loans Held For Sale                                                  |  |                                                      | (91    | ) |      |   | (23     | )         |  |   | (114    | )
|Investment SecuritiesTaxable                                        |  |                                                      | 5,524  |   |      |   | (1,611  | )         |  |   | 3,913   |  
|Investment SecuritiesTax-Exempt                                     |  |                                                      | (761   | ) |      |   | 33      |           |  |   | (728    | )
|Interest-Bearing Deposits With Other Banks                           |  |                                                      | 12     |   |      |   | (119    | )         |  |   | (107    | )
|Federal Funds Sold and Other                                         |  |                                                      | 2,670  |   |      |   | (2,351  | )         |  |   | 319     |  
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Total Interest Income                                                |  |                                                      | 14,535 |   |      |   | (44,059 | )         |  |   | (29,524 | )
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Interest Expense                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Interest-Bearing Demand and Savings Deposits                         |  |                                                      | (1,614 | ) |      |   | (4,374  | )         |  |   | (5,988  | )
|Time Deposits                                                        |  |                                                      | 13,649 |   |      |   | (10,109 | )         |  |   | 3,540   |  
|Borrowings:                                                          |  |                                                      |        |   |      |   |         |           |  |   |         |  
|FHLB Advances                                                        |  |                                                      | 2,486  |   |      |   | (2,047  | )         |  |   | 439     |  
|Subordinated Debentures                                              |  |                                                      | 0      |   |      |   | (326    | )         |  |   | (326    | )
|Federal Funds Purchased and Securities Under Agreement to Repurchase |  |                                                      | (93    | ) |      |   | (726    | )         |  |   | (819    | )
|Notes Payable and Other                                              |  |                                                      | 2,226  |   |      |   | 0       |           |  |   | 2,226   |  
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Total Interest Expense                                               |  |                                                      | 16,654 |   |      |   | (17,582 | )         |  |   | (928    | )
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  
|Net Interest Income                                                  |  | $                                                    | (2,119 | ) |      | $ | (26,477 | )         |  | $ | (28,596 | )
|                                                                     |  |                                                      |        |   |      |   |         |           |  |   |         |  



25



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##### Table of Contents

Provision for Loan Losses

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



|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|-------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                       |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                       |  | 2008                            |         |   | 2007                           |   |        | 2008 |  |   | 2007    |  
|                                       |  | (Dollars in Thousands)          |        
|Balance, beginning of period           |  | $                               | 48,452  |   |                                | $ | 24,108 |      |  | $ | 31,698  |   |  | $ | 22,336 |  
|Charge-Offs                            |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Construction and Land Development      |  |                                 | (13,891 | ) |                                |   | (5,086 | )    |  |   | (73,504 | ) |  |   | (5,368 | )
|Commercial, Financial and Agricultural |  |                                 | (486    | ) |                                |   | (105   | )    |  |   | (1,605  | ) |  |   | (494   | )
|Real Estate  Other                    |  |                                 | (1,261  | ) |                                |   | (1,008 | )    |  |   | (2,940  | ) |  |   | (1,784 | )
|Consumer                               |  |                                 | (362    | ) |                                |   | (491   | )    |  |   | (1,025  | ) |  |   | (1,019 | )
|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                       |  |                                 | (16,000 | ) |                                |   | (6,690 | )    |  |   | (79,074 | ) |  |   | (8,665 | )
|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Recoveries                             |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Construction and Land Development      |  |                                 | 632     |   |                                |   |       |      |  |   | 7,224   |   |  |   | 6      |  
|Commercial, Financial and Agricultural |  |                                 | 119     |   |                                |   | 48     |      |  |   | 317     |   |  |   | 203    |  
|Real Estate  Other                    |  |                                 | 751     |   |                                |   | 5      |      |  |   | 885     |   |  |   | 17     |  
|Consumer                               |  |                                 | 129     |   |                                |   | 261    |      |  |   | 451     |   |  |   | 575    |  
|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                       |  |                                 | 1,631   |   |                                |   | 314    |      |  |   | 8,877   |   |  |   | 801    |  
|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net Charge-Offs                        |  |                                 | (14,369 | ) |                                |   | (6,376 | )    |  |   | (70,197 | ) |  |   | (7,864 | )
|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Provision for Loan Losses              |  |                                 | 26,359  |   |                                |   | 9,400  |      |  |   | 98,941  |   |  |   | 12,660 |  
|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Balance, end of period                 |  | $                               | 60,442  |   |                                | $ | 27,132 |      |  | $ | 60,442  |   |  | $ | 27,132 |  
|                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  

We incurred net charge-offs of $14.4 million and $70.2 million and $6.4 million and $7.9 million
during the three- and nine-month periods ended September 30, 2008 and 2007, respectively. The allowance for loan losses on September 30, 2008 was 2.95% of loans receivable compared to 1.25% at September 30, 2007. The increase in
charge-offs in 2008 resulted from the substantial increase in our level of nonperforming assets.

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



26



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##### Table of Contents

Noninterest Income and Expense

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



|                                      |  |                                 |       |      |   |       |          |  |   |          |   |  |        |  
|------------------------------------- |  | ------------------------------- | ----- | ---- | - | ----- | -------- |  | - | -------- | - |  | ------ | -
|                                      |  | Three Months EndedSeptember 30, |       |      |   |       |          |  |  
|(In Thousands)                        |  | 2008                            |       | 2007 |   |       | $ Change |  |   | % Change |  
|Service Charges on Deposits           |  | $                               | 2,425 |      | $ | 2,356 |          |  | $ | 69       |   |  | 2.9    | %
|Mortgage Origination and Related Fees |  |                                 | 650   |      |   | 1,170 |          |  |   | (520     | ) |  | -44.4  | %
|Securities Gains/Losses               |  |                                 |      |      |   | (5    | )        |  |   | 5        |   |  | -100.0 | %
|Other                                 |  |                                 | 689   |      |   | 1,080 |          |  |   | (391     | ) |  | -36.2  | %
|                                      |  |                                 |       |      |   |       |          |  |   |          |   |  |        |  
|                                      |  | $                               | 3,764 |      | $ | 4,601 |          |  | $ | (837     | ) |  | -18.2  | %
|                                      |  |                                 |       |      |   |       |          |  |   |          |   |  |        |  

The decrease of $837,000 or 18% in noninterest income is due primarily to the following:



| |  |  | reduction of $0.5 million in mortgage originations and related fees resulting from decreased loan demand;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | decrease of $0.1 million in commission fees earned by CFS professionals. The Company sold CFS during the first quarter of 2008 and therefore did not generate such
fees in the third quarter of 2008; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decrease of $0.2 million in commission fees on interim construction loans originated by SRES, Inc.; due to the downturn in the real estate market and high level of
nonperforming assets which require the attention of loan officers, loan originations have declined from the prior year period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                                      |  |                                |        |      |   |        |          |  |   |          |   |  |       |  
|------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------ | -------- |  | - | -------- | - |  | ----- | -
|                                      |  | Nine Months EndedSeptember 30, |        |      |   |        |          |  |  
|(In Thousands)                        |  | 2008                           |        | 2007 |   |        | $ Change |  |   | % Change |  
|Service Charges on Deposits           |  | $                              | 6,965  |      | $ | 6,830  |          |  | $ | 135      |   |  | 2.0   | %
|Mortgage Origination and Related Fees |  |                                | 2,451  |      |   | 3,480  |          |  |   | (1,029   | ) |  | -29.6 | %
|Securities Gains/Losses               |  |                                | 2,035  |      |   | (3     | )        |  |   | 2,038    |   |  | NM    |  
|Other                                 |  |                                | 3,265  |      |   | 4,135  |          |  |   | (870     | ) |  | -21.0 | %
|                                      |  |                                |        |      |   |        |          |  |   |          |   |  |       |  
|                                      |  | $                              | 14,716 |      | $ | 14,442 |          |  | $ | 274      |   |  | 1.9   | %
|                                      |  |                                |        |      |   |        |          |  |   |          |   |  |       |  

The increase of $274,000 or 1.9% in noninterest income is due primarily to the following:



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



| |  |  | recognition of income of $1.3 million for the change in valuation of SARs;
| | - |  | --------------------------------------------------------------------------



| |  |  | reduction of $1.0 million in mortgage originations and related fees as a result of decreased loan demand;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | loss of $0.5 million on the termination of our relationship with CFS in the first quarter of 2008;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | decrease of $1.0 million in commission fees on interim construction loans originated by SRES, Inc., which is due to the decline in loan originations resulting from
the downturn in the real estate market and high level of nonperforming assets; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | loss of $0.4 million in 2008 on sale of Small Business Administration loans compared to a gain of $0.2 million on the sale of such loans in 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



27



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##### Table of Contents

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



|                                     |  |                                 |        |      |   |          |  |   |          |   |  |       |  
|------------------------------------ |  | ------------------------------- | ------ | ---- | - | -------- |  | - | -------- | - |  | ----- | -
|                                     |  | Three Months EndedSeptember 30, |        |      |   |          |  |  
|(In Thousands)                       |  | 2008                            |        | 2007 |   | $ Change |  |   | % Change |  
|Salaries and Employee Benefits       |  | $                               | 7,803  |      | $ | 8,852    |  | $ | (1,049   | ) |  | -11.9 | %
|Occupancy and Equipment              |  |                                 | 1,848  |      |   | 1,559    |  |   | 289      |   |  | 18.5  | %
|Foreclosed Property Expenses         |  |                                 | 5,924  |      |   | 1,153    |  |   | 4,771    |   |  | 413.8 | %
|Professional Fees                    |  |                                 | 709    |      |   | 971      |  |   | (262     | ) |  | -27.0 | %
|Marketing Expense                    |  |                                 | 400    |      |   | 664      |  |   | (264     | ) |  | -39.8 | %
|Amortization-Core Deposit Intangible |  |                                 | 203    |      |   | 246      |  |   | (43      | ) |  | -17.5 | %
|Other                                |  |                                 | 4,163  |      |   | 3,615    |  |   | 548      |   |  | 15.2  | %
|                                     |  |                                 |        |      |   |          |  |   |          |   |  |       |  
|                                     |  | $                               | 21,050 |      | $ | 17,060   |  | $ | 3,990    |   |  | 23.4  | %
|                                     |  |                                 |        |      |   |          |  |   |          |   |  |       |  

The increase of $4.0 million in noninterest expense is due primarily to the following:



| |  |  | An increase of $4.8 million in foreclosed property expenses, which also includes fees and expenses of legal counsel and other professionals, as a result of the
increase in nonperforming assets from the third quarter 2007 levels to third quarter 2008 levels. We expect this elevated level of foreclosed property expenses to continue as we work through our problem assets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease of $0.4 million in directors fees as a result of the suspension of the payment of such fees beginning in the third quarter; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decrease of $1.0 million in salaries and employee benefits due to a reduction in salaries of $0.4 million, commissions of $0.4 million, and other performance
compensation of $0.2 million related to the decreased financial performance in 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.2 million in professional fees; however, given the difficult operating environment, the Company is likely to experience increased professional fees
and expenses as a result of increased litigation and claims with borrowers, guarantors and co-lenders in connection with loans and loan participations
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                                     |  |                                |         |      |   |          |  |   |          |   |  |       |  
|------------------------------------ |  | ------------------------------ | ------- | ---- | - | -------- |  | - | -------- | - |  | ----- | -
|                                     |  | Nine Months EndedSeptember 30, |         |      |   |          |  |  
|(In Thousands)                       |  | 2008                           |         | 2007 |   | $ Change |  |   | % Change |  
|Salaries and Employee Benefits       |  | $                              | 24,619  |      | $ | 27,497   |  | $ | (2,878   | ) |  | -10.5 | %
|Occupancy and Equipment              |  |                                | 4,898   |      |   | 4,594    |  |   | 304      |   |  | 6.6   | %
|Foreclosed Property                  |  |                                | 10,360  |      |   | 2,050    |  |   | 8,310    |   |  | 405.4 | %
|Professional Fees                    |  |                                | 2,132   |      |   | 2,277    |  |   | (145     | ) |  | 6.4   | %
|Marketing                            |  |                                | 1,242   |      |   | 2,024    |  |   | (782     | ) |  | -38.6 | %
|Amortization-Core Deposit Intangible |  |                                | 681     |      |   | 739      |  |   | (58      | ) |  | -7.8  | %
|Goodwill Impairment                  |  |                                | 109,701 |      |   |         |  |   | 109,701  |   |  | 100.0 | %
|Other                                |  |                                | 11,578  |      |   | 10,310   |  |   | 1,268    |   |  | 12.3  | %
|                                     |  |                                |         |      |   |          |  |   |          |   |  |       |  
|                                     |  | $                              | 165,211 |      | $ | 49,491   |  | $ | 115,720  |   |  | 233.8 | %
|                                     |  |                                |         |      |   |          |  |   |          |   |  |       |  

The increase of $115.7 million in noninterest expense is due primarily to the following:



| |  |  | goodwill impairment charge of $109.7 million;
| | - |  | ---------------------------------------------



| |  |  | An increase of $8.3 million in foreclosed property expenses, which also includes fees and expenses of legal counsel and other professionals, as a result of the
increase in nonperforming assets from 2007 levels to 2008 levels. We expect this elevated level of foreclosed property expenses to continue as we work through our problem assets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decrease of $2.9 million in salaries and employee benefits due to reductions of: $1.2 million in loan production commissions; $0.7 million in bonus and incentive
plan expense; and $1.3 million in other performance based compensation resulting from the companys decreased financial performance in 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.1 million in professional fees; however, given the difficult operating environment, the Company is likely to experience increased professional fees
and expenses as a result of increased litigation and claims with borrowers, guarantors and co-lenders in connection with loans and loan participations
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Income Taxes

Income tax (benefit) expense totaled ($11.5 million) and $0.3 million for the three-month periods ended September 30, 2008 and 2007, respectively. The effective tax rates for the 2008 and 2007 quarters were
approximately 36.3% and 37.6%, respectively.

Income tax (benefit) expense totaled ($43.0 million) for the nine-month period ended
September 30, 2008 compared to $7.8 million for the nine-month period ended September 30, 2007. These amounts resulted in effective tax rates of 20.6% and 36.6% for 2008 and 2007, respectively. Due to the goodwill impairment charge of
$109.7 million incurred during the second quarter of 2008 (the majority of which is nontaxable), the effective tax rates for the nine-month period ended September 30, 2008 is lower than the corresponding period in 2007. Prior to the second
quarter of 2008, the effective tax rate has historically been at or just below the maximum corporate federal and state income tax rates due to the relatively small percentage of tax-free investments carried on the consolidated balance sheets.

Capital Adequacy

The Federal
Reserve Board measures capital adequacy for bank holding companies by using a risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines. The minimum ratio of total risk-based capital to risk-adjusted assets is
8%, of which 4% must be Tier 1 capital. Our total risk-based capital ratio was 11.39% at September 30, 2008. Our Tier 1 risk-based capital ratio was 8.67% at September 30, 2008.

In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. Those guidelines provide for a
minimum leverage ratio of 3% for financial institutions that meet certain criteria, including that they maintain the highest regulatory rating. All other financial institutions are required to maintain a leverage ratio of 4%. Our leverage ratio was
6.66% at September 30, 2008.

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

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

We
are currently evaluating participation in the Capital Purchase Program (see Overview for details). Under this program, the Department of the Treasury would purchase between $22.1 million and $66.4 million in senior preferred stock from the Company
(based on the Companys risk-weighted assets as of September 30, 2008). The senior preferred stock would pay a dividend of 5% for three years and 9% thereafter. Additionally, the senior preferred stock would be callable at par after three
years. We would also have to issue warrants to Treasury to purchase common stock with an aggregate market value equal to 15% of the preferred stock investment.

Liquidity

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

Our Asset/Liability Senior Management Committee (ALCO) and our recently formed Liquidity Task Force review a series of weekly reports related to liquidity-related issues such as loan pipelines, deposit pricing and upcoming deposit
maturities, among others. These groups meet monthly and as needed to discuss these reports. Through various asset/liability management strategies, we maintain a balance among goals of liquidity, safety and earnings potential, with a current emphasis
on liquidity and safety. Our Banks monitor internal policies that are consistent with regulatory liquidity guidelines.



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##### Table of Contents

The Companys investment portfolio provides a ready means to raise cash if liquidity needs arise. As
of September 30, 2008, we held $332.2 million in bonds at current market value in our available for sale portfolio with $295.3 million or 89% pledged to secure various public funds deposits, federal funds lines and repurchase agreements and for
other purposes.

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

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

In response to rate decreases on time deposits and reduced demand deposit balances, our Banks have increased deposit sources with brokered
deposits and wholesale certificates of deposit. As of September 30, 2008 and December 31, 2007, the Banks reported $1.10 billion, or 46% of total deposits and $854.4 million, or 40% of total deposits in brokered and wholesale certificates
of deposit, respectively.

We have established multiple borrowing sources to augment our funds management. Borrowing capacity exists
through the membership of our Banks in the FHLB program. Our Banks have also established overnight borrowing lines for federal funds purchased through various correspondent banks. At September 30, 2008, the Company has availability from all
borrowing sources of $134.9 million.

In the second and third quarters of 2008, in response to the continued turmoil in the economy
regarding the credit markets, equity markets, as well as the continued decline in residential real estate values, we deemed it prudent to significantly increase the liquidity of the Company and the Banks. Our cash and cash equivalents increased from
$98.3 million at December 31, 2007, to $209.3 million at June 30, 2008, and to $296.6 million at September 30, 2008. This increased liquidity reduced our net interest margin by 9 basis points in the third quarter of 2008. However, in light of
current conditions, we believed this was the prudent course of action to take despite the cost of the increased liquidity.

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

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

See the
Stockholders Equity section of this report for discussion of the Capital Purchase Program, which also provides a significant source of liquidity to the Company.

Interest Rate Risk Management

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

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

We believe that our elevated levels of nonperforming assets will continue to have an
adverse impact on our net interest margin through the remainder of 2008. Using the outlook for market interest rates at September 30, 2008, continued elevated levels of nonperforming assets and actual pricing experience, our simulation model
projects changes in the net interest margin to be as follows:



|                      |  |                           |   |  |             
|--------------------- |  | ------------------------- | - |  | ------------
|Scenario              |  | Net InterestMargin Change
|+300 Basis Point Ramp |  | +35                       |   |  | basis points
|+200 Basis Point Ramp |  | +23                       |   |  | basis points
|+100 Basis Point Ramp |  | +11                       |   |  | basis points
|Base Case             |  |                          |   |  | basis points
|-100 Basis Point Ramp |  | (10                       | ) |  | basis points
|-200 Basis Point Ramp |  | (20                       | ) |  | basis points
|-300 Basis Point Ramp |  | (30                       | ) |  | basis points



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##### Table of Contents

Off-Balance Sheet Arrangements

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

Unfulfilled loan commitments are arrangements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Historically, many commitments expire without being drawn upon; therefore, the following total commitment amounts are not necessarily
indicative of future funding requirements. Unfulfilled loan commitments as of September 30, 2008 and December 31, 2007 approximated $242.7 million and $430.8 million, respectively.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved in extending loans to customers, and letters of credit are collateralized when deemed necessary. We had commitments under financial and performance standby letters of credit of
$13.3 million as of September 30, 2008 and $14.9 million as of December 31, 2007.

Critical Accounting Estimates

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



|ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

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



|ITEM 4. | Controls and Procedures
|------- | -----------------------

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

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

PART II. OTHER
INFORMATION



|ITEM 1. | Legal Proceedings
|------- | -----------------

The Company and its subsidiaries
are parties to claims and lawsuits arising in the course of their normal business activities, some of which involve claims for substantial amounts. Based on our current understanding of the relevant facts, it is the opinion of management that none
of these matters, when resolved, will have a material effect on the Companys consolidated results of operations or financial position.



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|ITEM 1A. | Risk Factors
|-------- | ------------

The following risk factors amend or
supplement the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2007. If any of the events described below actually occurred, our business, financial condition or results of operations would likely suffer. In
that case, the trading price of our common stock would likely decline, and you would lose all or part of your investment in our common stock.

Our
regulators have the authority to issue formal enforcement actions against one or more of our banking subsidiaries as a result of their operations during the recent financial crisis and if this were to occur such action could adversely impact our
operations and financial condition.

Under applicable laws, the Federal Reserve Board, the FDIC as our deposit insurer, and the Georgia
Department of Banking and Finance, as our chartering authority, have the ability to impose substantial sanctions, restrictions and requirement on us if they determine, upon examination or otherwise, violations of laws with which we must comply, or
weaknesses or failures with respect to general standards of safety and soundness. We operate six banking subsidiaries and each of the Banks are regulated by these governmental entities. Applicable law prohibits disclosure of specific
examination findings by the institution although formal enforcement actions are routinely disclosed by the regulatory authorities. These actions generally require certain corrective steps , impose limits on activities (such as lending, deposit
taking, acquisitions or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised. In many cases, policies must be revised by the institution and submitted to the regulatory
authority for approval within time frames prescribed by the regulatory authorities. Failure to adhere to the requirements of any action, once issued, can result in more severe penalties. Generally, these enforcement actions can be lifted only after
a subsequent examination substantiates complete correction of the underlying issues.

The failure of the recently enacted emergency economic
stabilization act of 2008 (the EESA) to help stabilize the U.S. financial system could adversely affect the Companys business, financial condition and results of operations

On October 3, 2008, President Bush signed into law the EESA. The legislation was the result of a proposal by Treasury Secretary Henry Paulson to the
U.S. Congress on September 20, 2008 in response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions. The U.S. Department of Treasury (the
Treasury) and banking regulators are implementing a number of programs under this legislation to address capital and liquidity issues in the banking system. There can be no assurance, however, as to the actual impact that the EESA will have on the
financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of the EESA to help stabilize the financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect the Companys business, financial condition, results of operations, access to credit or the trading price of the Companys common stock.

Participation in the Treasurys Troubled Asset Relief Program (TARP) may not be available to the Company and may have a dilutive effect on current shareholders

On October 14, 2008, the Treasury announced that as a part of the EESA, it will offer to qualifying U.S. banking organizations
the opportunity to issue and sell preferred stock to the Treasury on what may be considered attractive terms under the TARP Capital Purchase Program. In conjunction with the purchase of preferred stock, the Treasury will receive warrants to purchase
common stock with an aggregate market price equal to 15% of the preferred stock investment. Participating financial institutions will be required to adopt the Treasurys standards for executive compensation and corporate governance for the
period during which the Treasury holds equity issued under the TARP Capital Purchase Program. The Company is evaluating its options under the TARP Capital Purchase Program. If the Company does participate, its participation will be subject to the
Treasurys approval, the execution of definitive agreements and standard closing conditions. There can be no assurance that the Companys application would be approved or that the Company would receive funds under the TARP Capital Purchase
Program. In addition, if the Companys application were to be approved and it participates in the TARP Capital Purchase Program, the Company will issue preferred stock and warrants to purchase common stock to the Treasury, which will have a
dilutive effect on the Companys current shareholders.



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Current levels of market volatility are unprecedented, which may have an adverse effect on the Companys ability
to access capital

The capital and credit markets have been experiencing volatility and disruption for more than 12 months. In recent
weeks, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers underlying financial
strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that the Company will not experience an adverse effect, which may be material, on the Companys ability to access capital and on its
business, financial condition and results of operations.

Current market developments may adversely affect our industry, business and results of
operations.

Dramatic declines in the housing market during the prior year, with falling home prices and increasing foreclosures and
unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative securities have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some case, to fail. Reflecting concern about the stability
of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers including other financial institutions. The resulting lack of
available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results of operations.

As a result of the downturn in the real estate market, the Company has experienced more elevated legal related costs and expenses associated with resolving
troubled loans, including participated loans, than it would normally experience during more stable economic times. These additional legal costs and expenses are expected to continue as we work to resolve our troubled credits and along with any
adverse outcomes from litigation, could negatively impact the Companys results of operations and financial condition

From time
to time, we are involved in litigation in the ordinary course of business to resolve problem credits. Given the current market downturn in real estate and the general economy, we are experiencing an increase in the volume of this ordinary course
litigation, and as such we have experienced an increase in legal related costs and expenses which include foreclosed property expenses, fees and expenses of legal counsel and other professional fees. We have also been named as a defendant in
lawsuits where co-lenders in loan participations are seeking damages against us. Based on current information, we believe that we have valid defenses to these litigation claims but we cannot provide assurance that we will ultimately be successful in
our defense, and regardless of our success, we expect to incur increased legal fees and costs to defend these litigation claims and in defending against litigation, we may be required to pay damages for settlements and adverse judgments.



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##### Table of Contents

|ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None.



|ITEM 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|ITEM 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



|ITEM 5. | Other Information
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------

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



|      |  |                                                                                                                                                                                                              
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Amended and Restated Articles of Incorporation, (incorporated by reference to Exhibit 3.1 to the registrants Form 8-K (File No. 000-23261) filed on July 1, 2008).                                          
|      | 
|3.2   |  | Amended and Restated Bylaws, (incorporated by reference as Exhibit 3.2 to the registrants Form 10-Q (File No. 000-23261) filed on August 8, 2008).                                                          
|      | 
|4.1   |  | See Exhibits 3.1 and 3.2 for provisions of Amended and Restated Articles of Incorporation and Bylaws, as amended, which define the rights of its shareholders.                                               
|      | 
|4.2   |  | Form of Stock Certificate (incorporated herein by reference as Exhibit 4.1 to the registrants Registration Statement on Form S-4 (File No. 333-49977), filed on April 13,
1998).                            
|      | 
|10.1  |  | Separation Agreement with H. Averett Walker dated October 10, 2008 (incorporated by reference as Exhibit 10.1 to the registrants Current Report on Form 8-K (File No. 000-23261) filed on
October 16, 2008).
|      | 
|31.1* |  | Certificate of the Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                
|      | 
|31.2* |  | Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                        
|      | 
|32.1* |  | Certificate of the Interim Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                    



|* | Filed herewith
|- | --------------



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SIGNATURES

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



|                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------
|SECURITY BANK CORPORATION                                                                                                                       
|                                                                                                                                                
|/s/ Tony E. Collins                                                                                                                             
|Tony E. Collins Interim President and Chief Executive
Officer (Principal Executive Officer) Date: November 10,
2008                             
|                                                                                                                                                
|/s/ James R. McLemore, Jr.                                                                                                                      
|James R. McLemore, Jr. Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 10, 2008



35