Edgar Filing: STATE BANK FINANCIAL CORP

STBZ-2012.3.31-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2012



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

For the transition period from to

Commission file number: 000-54056

STATE BANK FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



Georgia		27-1744232
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3399 Peachtree Road, NE, Suite 1900, Atlanta, Georgia		30326
(Address of principal executive offices)		(Zip Code)

404-475-6599

(Registrant’s telephone number, including area code)

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

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

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



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

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

The number of shares outstanding of the registrant’s common stock, as of May 10, 2012 was 31,721,236.

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TABLE OF CONTENTS



		Page

Cautionary Note Regarding Forward-Looking Statements		1

Part I — Financial Information		2

ITEM 1.	Financial Statements	2

	Consolidated Statements of Financial Condition at March 31, 2012 (unaudited) and December 31, 2011 (audited)	2

	Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2012 and 2011	3

	Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2012 and 2011	4

	Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2012 and 2011	5

	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2012 and 2011	6

	Notes to Consolidated Financial Statements (unaudited)	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	58
ITEM 4.	Controls and Procedures	60

Part II — Other Information		60

ITEM 1.	Legal Proceedings	60
ITEM 1A.	Risk Factors	60
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
ITEM 3.	Defaults Upon Senior Securities	60
ITEM 4.	Mine Safety Disclosures	60
ITEM 5.	Other Information	60
ITEM 6.	Exhibits	60

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• other risk factors discussed from time to time in the periodic reports we file with the SEC.

For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2011, as well as Part II, Item 1A, Risk Factors, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, for a description of some of the important factors that may affect actual outcomes.

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PART I

Item 1. Financial Statements.

STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(DOLLARS IN THOUSANDS)



	March 31, 2012			December 31, 2011
	(Unaudited)			(Audited)
Assets
Cash and amounts due from depository institutions	$	11,287		$	13,747
Interest-bearing deposits in other financial institutions	199,031			206,785
Cash and cash equivalents	210,318			220,532
Investment securities available-for-sale	322,832			349,929
Federal Home Loan Bank stock	8,802			8,802
Loans receivable:
Noncovered under FDIC loss share agreements	754,635			701,029
Covered under FDIC loss share agreements, net	792,158			812,154
Allowance for loan losses (noncovered loans)	(11,681		)	(10,207		)
Allowance for loan losses (covered loans)	(56,087		)	(59,277		)
Net loans	1,479,025			1,443,699
Mortgage loans held for sale	3,719			6,229
Other real estate owned:
Noncovered under FDIC loss share agreements	957			1,210
Covered under FDIC loss share agreements	63,572			84,496
Premises and equipment, net	36,971			36,760
Goodwill	6,562			6,562
Core deposit intangible, net	1,636			1,882
FDIC receivable for loss share agreements, net	460,593			529,440
Other assets	81,661			86,793
Total assets	$	2,676,648		$	2,776,334
Liabilities and Shareholders' Equity
Liabilities:
Noninterest-bearing deposits	$	312,967		$	297,188
Interest-bearing deposits	1,875,908			2,001,277
Total deposits	2,188,875			2,298,465
Securities sold under agreements to repurchase	1,421			4,749
Notes payable	2,535			2,539
Other liabilities	75,314			73,293
Total liabilities	2,268,145			2,379,046
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized, zero shares issued and outstanding in 2012 and 2011, respectively	—			—
Common stock, $.01 par value; 100,000,000 shares authorized; 31,721,236 shares issued and outstanding in 2012 and 2011, respectively	317			317
Additional paid-in capital	293,240			293,074
Retained earnings	111,712			106,574
Accumulated other comprehensive income (loss), net of tax	3,234			(2,677		)
Total shareholders' equity	408,503			397,288
Total liabilities and shareholders' equity	$	2,676,648		$	2,776,334

See accompanying notes to consolidated financial statements.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

	Three Months Ended
	March 31
	2012			2011
Interest income:
Noncovered loans, including fees	$	11,834		$	6,739
Accretion income on covered loans	23,490			25,482
Investment securities:
Taxable	2,799			2,278
Tax-exempt	104			102
Deposits with other financial institutions	102			197
Total interest income	38,329			34,798
Interest expense:
Deposits	2,796			7,033
Notes payable	55			72
Federal funds purchased and repurchase agreements	1			13
Total interest expense	2,852			7,118
Net interest income	35,477			27,680
Provision for loan losses (noncovered loans)	1,535			961
Provision for loan losses (covered loans)	(1,283		)	—
Net interest income after provision for loan losses	35,225			26,719
Noninterest income:
Accretion (amortization) of FDIC receivable for loss sharing agreements	(7,001		)	4,973
Service charges on deposits	1,212			1,413
Mortgage banking income	302			157
Gain (loss) on sale of investment securities	93			(3		)
ATM income	585			488
Other	1,031			1,036
Total noninterest income	(3,778		)	8,064
Noninterest expense:
Salaries and employee benefits	12,963			11,677
Occupancy and equipment	2,457			1,892
Legal and professional fees	1,517			1,843
Marketing	264			760
Federal insurance premiums and other regulatory fees	418			649
Net cost of operations of real estate owned	2,078			1,930
Data processing	1,864			951
Core deposit intangible amortization	246			224
Other	1,406			1,513
Total noninterest expense	23,213			21,439
Income before income taxes	8,234			13,344
Income tax expense	3,096			5,113
Net income	$	5,138		$	8,231
Basic net income per share	$	.16		$	.26
Diluted net income per share	$	.16		$	.25
Weighted Average Shares Outstanding:
Basic	31,611,603			31,610,904
Diluted	32,794,798			32,622,623

See accompanying notes to consolidated financial statements.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(DOLLARS IN THOUSANDS)



	Three Months Ended
	March 31
	2012			2011
Net income	$	5,138		$	8,231
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on investment securities available-for-sale arising during the period, net of income tax expense of $3,597 and income tax benefit of $54, respectively	5,969			(90		)
Reclassification adjustment for (gains) losses on liquidation of equity securities included in investment securities available-for-sale, net of income tax expense of $35 and income tax benefit of $1, respectively	(58		)	2
Total other comprehensive income (loss)	5,911			(88		)
Comprehensive income	$	11,049		$	8,143

See accompanying notes to consolidated financial statements.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)



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

Balance, December 31, 2011	2,686,827		31,721,236	$	317	$	293,074		$	106,574	$	(2,677	)	$	397,288
Stock based compensation	—		—	—		166			—		—			166
Change in accumulated other comprehensive income	—		—	—		—			—		5,911			5,911
Net income	—		—	—		—			5,138		—			5,138
Balance, March 31, 2012	2,686,827		31,721,236	$	317	$	293,240		$	111,712	$	3,234		$	408,503

See accompanying notes to consolidated financial statements.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)

	Three Months Ended
	March 31
	2012			2011
Cash Flows from Operating Activities
Net income	$	5,138		$	8,231
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion on premises and equipment and investments	362			794
Amortization of intangible assets	246			224
Provision for loan losses	252			961
Amortization of premiums and discounts on acquisitions, net	(16,489		)	(30,455		)
Loss on sale of other real estate owned	941			1,048
Writedowns of other real estate owned	19,140			18,536
Increase in FDIC receivable for covered losses	(9,889		)	(5,539		)
Funds collected from FDIC receivable	66,643			47,332
Proceeds from sales of mortgage loans held for sale	18,072			8,932
Originations of mortgage loans held for sale	(15,647		)	(6,249		)
Loss on mortgage loans held for sale	85			—
Loss (gain) on available for sale securities	(93		)	3
Net change in cash surrender value of insurance	(344		)	(357		)
Stock based compensation expense	166			—
Loss share true-up liability	9			—
Changes in other assets, net	2,293			(3,003		)
Changes in other liabilities, net	2,008			3,995
Net cash provided by operating activities	72,893			44,453
Cash flows from Investing Activities
Purchase of investment securities available-for-sale	(14,097		)	(26,883		)
Proceeds from sales, calls, maturities and paydowns of investment securities available for sale	50,740			46,288
Loans to customers, net of repayments	(20,224		)	(15,762		)
Redemptions of Federal Home Loan Bank stock	—			451
Purchases of premises and equipment	(932		)	(648		)
Proceeds from sales of other real estate owned	14,324			20,097
Net cash provided by investing activities	29,811			23,543

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS)

	Three Months Ended
	March 31
	2012			2011
Cash Flows from Financing Activities
Net increase in noninterest-bearing customer deposits	15,779			5,274
Net (decrease) in interest-bearing customer deposits	(125,369		)	(157,335		)
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements	(3,328		)	125
Repurchase of stock warrants	—			(33		)
Cash (used in) financing activities	(112,918		)	(151,969		)
Net (decrease) in cash and cash equivalents	(10,214		)	(83,973		)
Cash and cash equivalents, beginning	220,532			386,489
Cash and cash equivalents, ending	$	210,318		$	302,516
Cash Received During the Period for:
Interest income on loans	$	12,769		$	6,579
Cash Paid During the Period for:
Interest expense	$	3,180		$	6,709
Income taxes	—			—
Supplemental Disclosure of Noncash Investing and Financing Activities
Unrealized gains (losses) on securities, net of tax	$	5,911		$	(88	)
Transfers of loans to other real estate owned	13,228			14,774

See accompanying notes to consolidated financial statements.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1: Basis of Presentation

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

The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. The interim consolidated financial statements included herein are unaudited, but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position and results of operations for the interim period presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the period ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto and the report of our independent registered public accounting firm included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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

Note 2: Recently Adopted Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS ("ASU 2011-04"). The amendments in ASU 2011-04 primarily represent clarification to existing guidance over the fair value measurement and disclosure requirements. ASU 2011-04 does not change the concepts of the valuation premise and high and best use, stating that they are only relevant for nonfinancial assets. The guidance also changes the application of premiums and discounts and includes new disclosures. The amendments in this guidance are effective for the Company for interim and annual reporting periods beginning after December 15, 2011. The effect of adopting this standard did not have a material effect on the Company's results of operations or financial position. The additional required disclosures are included in Note 15.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income ("ASU 2011-05"). The amendments in ASU 2011-05 require entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. The amendments in this guidance are effective for the Company as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this amendment had no impact on the consolidated financial statements as the prior presentation of comprehensive income was in compliance with this amendment.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 3: Investment Securities

Investment securities as of March 31, 2012 are summarized as follows (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Investment Securities Available-for-Sale
U.S. Government securities	$	51,949	$	1,229	$	—	$	53,178
States and political subdivisions	12,389		320		18		12,691
Residential mortgage-backed securities-nonagency	140,365		3,602		4,072		139,895
Residential mortgage-backed securities-agency	31,813		1,409		—		33,222
Collateralized mortgage obligations	80,961		2,512		5		83,468
Corporate securities	378		—		—		378
Total investment securities available-for-sale	$	317,855	$	9,072	$	4,095	$	322,832

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



	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Investment Securities Available-for-Sale
U.S. Government securities	$	76,976	$	1,294	$	—	$	78,270
States and political subdivisions	10,740		356		—		11,096
Residential mortgage-backed securities-nonagency	145,768		126		9,951		135,943
Residential mortgage-backed securities-agency	30,031		1,423		—		31,454
Collateralized mortgage obligations	90,159		2,635		—		92,794
Corporate securities	372		—		—		372
Total investment securities available-for-sale	$	354,046	$	5,834	$	9,951	$	349,929

The amortized cost and estimated fair value of available-for-sale securities at March 31, 2012 by contractual maturity are summarized in the table below. Expected maturities for mortgage-backed securities may differ from contractual maturities because in certain cases borrowers prepay obligations without prepayment penalties. Therefore, these securities are not presented by contractual maturity in the following maturity summary (in thousands):



	Amortized Cost		Fair Value
	Amortized Cost		Fair Value
Due within one year	$	40,467	$	40,490
Due from one year to five years	12,761		13,395
Due from five years to ten years	1,898		2,174
Due after ten years	9,590		10,188
Residential mortgage-backed securities (nonagency and agency) and collateralized mortgage obligations	253,139		256,585
	$	317,855	$	322,832

The Company’s investment in FHLB stock was $8.8 million at March 31, 2012 and December 31, 2011, respectively.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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



	Three Months Ended
	March 31
	2012		2011
Gross gains on securities available-for-sale	$	93	$	—
Gross losses on securities available-for-sale	—		(3		)
Net realized gains (losses) on sales of securities available-for-sale	$	93	$	(3	)

The composition of investment securities reflects the strategy of management to maintain an appropriate level of liquidity while providing a relatively stable source of revenue. The securities portfolio may at times be used to mitigate interest rate risk associated with other areas of the balance sheet while also providing a means for the investment of available funds, providing liquidity and supplying investment securities that are required to be pledged as collateral against specific deposits and for other purposes.

The following table provides information regarding securities with unrealized losses as of March 31, 2012 and December 31, 2011 (in thousands):



	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2012
Investment securities available-for-sale:
States and political subdivisions	$	4,642	$	18	$	—	$	—	$	4,642	$	18
Residential mortgage-backed-nonagency	26,930		997		33,294		3,075		60,224		4,072
Collateralized mortgage obligations	7,179		5		—		—		7,179		5

Total	$	38,751	$	1,020	$	33,294	$	3,075	$	72,045	$	4,095

December 31, 2011
Investment securities available-for-sale:
Residential mortgage-backed-nonagency	$	109,027	$	9,082	$	8,936	$	869	$	117,963	$	9,951
Total	$	109,027	$	9,082	$	8,936	$	869	$	117,963	$	9,951

Investment securities with aggregate fair values of $33.3 million and $8.9 million had continuous unrealized losses of $3.1 million and $869,000 for more than twelve months as of March 31, 2012 and December 31, 2011, respectively. The unrealized losses arose from changes in interest rates and market conditions.

The Company reviews its investment portfolio on a quarterly basis for indications of other than temporary impairment ("OTTI"). The analysis differs depending upon the type of investment security being analyzed. The severity and duration of impairment and the likelihood of potential recovery of impairment is considered along with the intent and ability to hold any impaired security to maturity or recovery of carrying value.

The Company's nonagency portfolio is tested quarterly for OTTI by the use of cash flow models that estimate cash flows on security-specific collateral and the transaction structure. Future expected credit losses are determined

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

by using various assumptions, the most significant of which include current default rates, prepayment rates, and loss severities. For the majority of the securities that the Company has reviewed for OTTI, credit information is available and modeled at the loan level underlying each security; the Company also considers information such as loan to collateral values, FICO scores and geographic considerations, such as home price appreciation or depreciation. These inputs are updated on a regular basis to ensure the most current credit and other assumptions are utilized in the analysis. If, based on our analysis, the Company does not expect to recover the entire amortized cost basis of the security, the expected cash flows are discounted at the security's initial effective interest rate to arrive at a present value amount. OTTI credit losses reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis of these securities. As of March 31, 2012, there was no intent to sell any of the securities available-for-sale, and it is more likely than not that the Company will not be required to sell these securities. Furthermore, the present value of cash flows expected to be collected exceeded the Company's amortized cost basis of the investment securities. Therefore, these securities are not deemed to be other than temporarily impaired.

Investment securities with an aggregate carrying amount of $89.8 million and $156.1 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and FHLB advances.

Note 4: Loans Receivable

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



	March 31, 2012			December 31, 2011
Construction, land & land development	$	197,840		$	162,382
Other commercial real estate	321,905			307,814
Total commercial real estate	519,745			470,196
Commercial & industrial	36,235			35,817
Owner-occupied real estate	143,469			139,128
Total commercial & industrial	179,704			174,945
Residential real estate	33,971			33,738
Consumer & other	21,215			22,150
Total noncovered loans	754,635			701,029
Allowance for loan losses	(11,681		)	(10,207		)
Total noncovered loans, net	$	742,954		$	690,822

The table above includes net deferred loan fees that totaled approximately $1.8 million and $1.9 million at March 31, 2012 and December 31, 2011, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Loans covered by loss share agreements, net of related discounts, are summarized as follows (in thousands):



	March 31, 2012			December 31, 2011
Construction, land & land development	$	190,489		$	190,110
Other commercial real estate	229,964			233,575
Total commercial real estate	420,453			423,685
Commercial & industrial	34,507			38,174
Owner-occupied real estate	137,302			143,523
Total commercial & industrial	171,809			181,697
Residential real estate	183,174			189,109
Consumer & other	16,722			17,663
Total covered loans	792,158			812,154
Allowance for loan losses	(56,087		)	(59,277		)
Total covered loans, net	$	736,071		$	752,877

The following table documents changes in the carrying value of covered loans (in thousands):



	March 31, 2012			March 31, 2011
Balance, beginning of period	$	752,877		$	934,967
Accretion of fair value discounts	23,490			25,482
Reductions in principal balances resulting from repayments, write-offs and foreclosures	(43,486		)	(69,259		)
Change in the allowance for loan losses on covered loans	3,190			—
Balance, end of period	$	736,071		$	891,190

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table shows changes in the value of the accretable discount for the three months ended March 31, 2012 and 2011 as follows (in thousands):



	Three Months Ended
	March 31
	2012			2011
Balance, beginning of period	$	230,697		$	123,778
Accretion	(23,490		)	(25,482		)
Transfers to accretable discount (exit events), net	(11,994		)	45,520
Balance, end of period	$	195,213		$	143,816

Note 5: Allowance for Loan Losses (ALL)

The following table presents the Company’s loan loss experience on noncovered and covered loans for the periods indicated (in thousands):



	Three Months Ended March 31
	2012									2011
	Noncovered Loans			Covered Loans			Total			Noncovered Loans			Covered Loans		Total
	Noncovered Loans			Covered Loans			Total			Noncovered Loans			Covered Loans		Total
Balance, beginning of year	$	10,207		$	59,277		$	69,484		$	5,351		$	—	$	5,351
Loans charged-off	(65		)	(3,369		)	(3,434		)	(98		)	—		(98		)
Recoveries of loans previously charged off	4			6,554			6,558			—			—		—
Net (charge-offs) recoveries	(61		)	3,185			3,124			(98		)	—		(98		)
Provision for loan losses	1,535			(6,375		)	(4,840		)	961			—		961
Benefit attributable to FDIC loss share agreements	—			5,092			5,092			—			—		—
Total provision for loan losses charged to operations	1,535			(1,283		)	252			961			—		961
Provision for loan losses recorded through the FDIC loss share receivable	—			(5,092		)	(5,092		)	—			—		—
Balance, end of year	$	11,681		$	56,087		$	67,768		$	6,214		$	—	$	6,214

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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



	Commercial Real Estate			Commercial & Industrial		Residential Real Estate			Consumer & Other			Nonspecific		Total
Three Months Ended	Commercial Real Estate			Commercial & Industrial		Residential Real Estate			Consumer & Other			Nonspecific		Total
March 31, 2012
Allowance for loan losses:
Beginning balance	$	6,470		$	2,848	$	561		$	328		$	—	$	10,207
Charge-offs	(47		)	—		(8		)	(10		)	—		(65		)
Recoveries	—			—		—			4			—		4
Provision	800			718		33			(23		)	7		1,535
Ending balance	$	7,223		$	3,566	$	586		$	299		$	7	$	11,681
Ending allowance attributable to loans:
Individually evaluated for impairment	$	915		$	346	$	157		$	45		$	—	$	1,463
Collectively evaluated for impairment	6,308			3,220		429			254			7		10,218
Total ending allowance balance	$	7,223		$	3,566	$	586		$	299		$	7	$	11,681



	Commercial Real Estate			Commercial & Industrial		Residential Real Estate		Consumer & Other			Nonspecific		Total
Three Months Ended	Commercial Real Estate			Commercial & Industrial		Residential Real Estate		Consumer & Other			Nonspecific		Total
March 31, 2011
Allowance for loan losses:
Beginning balance	$	3,258		$	1,385	$	246	$	223		$	239	$	5,351
Charge-offs	(7		)	—		—		(91		)	—		(98		)
Recoveries	—			—		—		—			—		—
Provision	530			239		33		103			56		961
Ending balance	$	3,781		$	1,624	$	279	$	235		$	295	$	6,214
Ending allowance attributable to loans:
Individually evaluated for impairment	$	—		$	722	$	5	$	—		$	—	$	727
Collectively evaluated for impairment	3,781			902		274		235			295		5,487
Total ending allowance balance	$	3,781		$	1,624	$	279	$	235		$	295	$	6,214

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table details the recorded investment in noncovered loans as of March 31, 2012, December 31, 2011 and March 31, 2011 related to each balance in the allowance for loan losses by portfolio segment and segregated on the basis of the Company's impairment methodology (in thousands):



	Commercial Real Estate		Commercial & Industrial		Residential Real Estate		Consumer & Other		Total
March 31, 2012
Loans individually evaluated for impairment	$	2,743	$	694	$	369	$	90	$	3,896
Loans collectively evaluated for impairment	517,002		179,010		33,602		21,125		750,739
Ending balance	$	519,745	$	179,704	$	33,971	$	21,215	$	754,635
December 31, 2011
Loans individually evaluated for impairment	$	1,441	$	720	$	—	$	—	$	2,161
Loans collectively evaluated for impairment	468,755		174,225		33,738		22,150		698,868
Ending balance	$	470,196	$	174,945	$	33,738	$	22,150	$	701,029
March 31, 2011
Loans individually evaluated for impairment	$	1,178	$	3,579	$	148	$	—	$	4,905
Loans collectively evaluated for impairment	336,448		33,498		23,150		14,997		408,093
Ending balance	$	337,626	$	37,077	$	23,298	$	14,997	$	412,998

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table details the allowance for loan losses on loans covered by loss share agreements by portfolio segment for the periods indicated (in thousands):



	Commercial Real Estate			Commercial & Industrial			Residential Real Estate			Consumer & Other			Nonspecific		Total
Three Months Ended	Commercial Real Estate			Commercial & Industrial			Residential Real Estate			Consumer & Other			Nonspecific		Total
March 31, 2012
Allowance for loan losses:
Beginning balance	$	37,332		$	7,573		$	14,372		$	—		$	—	$	59,277
Charge-offs	(3,362		)	—			(7		)	—			—		(3,369		)
Recoveries	6,356			31			167			—			—		6,554
Provision for loan losses before benefit attributable to FDIC loss share agreements	(3,647		)	(2,400		)	(568		)	240			—		(6,375		)
Benefit attributable to FDIC loss share agreements	2,913			1,917			454			(192		)	—		5,092
Total provision for loan losses charged to operations	(734		)	(483		)	(114		)	48			—		(1,283		)
Provision for loan losses recorded through the FDIC loss share receivable	(2,913		)	(1,917		)	(454		)	192			—		(5,092		)
Ending balance	$	36,679		$	5,204		$	13,964		$	240		$	—	$	56,087
Ending allowance attributable to loans:
Individually evaluated for impairment	30,577			2,925			3,939			202			—		37,643
Collectively evaluated for impairment	6,102			2,279			10,025			38			—		18,444
Total ending allowance balance	$	36,679		$	5,204		$	13,964		$	240		$	—	$	56,087

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table details the recorded investment in covered loans as of March 31, 2012 and December 31, 2011 related to each balance in the allowance for loan losses by portfolio segment and segregated on the basis of the Company's impairment methodology (in thousands):



	Commercial Real Estate		Commercial & Industrial		Residential Real Estate		Consumer & Other		Nonspecific		Total
March 31, 2012
Loans individually evaluated for impairment	$	177,874	$	22,769	$	17,942	$	10,481	$	—	$	229,066
Loans collectively evaluated for impairment	242,579		149,040		165,232		6,241		—		563,092
Ending balance	$	420,453	$	171,809	$	183,174	$	16,722	$	—	$	792,158
December 31, 2011
Loans individually evaluated for impairment	$	197,634	$	38,285	$	18,508	$	12,288	$	—	$	266,715
Loans collectively evaluated for impairment	226,051		143,412		170,601		5,375		—		545,439
Ending balance	$	423,685	$	181,697	$	189,109	$	17,663	$	—	$	812,154

The allowance for loan losses on loans covered by loss share agreements is not presented for the three months ended March 31, 2011 because the Company had no recorded allowance for loan losses on covered loans as of March 31, 2011.

As of March 31, 2012, the Company identified covered loans where the expected performance of such loans had deteriorated from management's performance expectations established in conjunction with the determination of the acquisition date fair values. As of March 31, 2012, the Company identified $113.3 million of impaired covered loans that were individually evaluated for impairment with an allocated allowance of $37.6 million and $296.1 million of impaired covered loans that were evaluated as part of their respective pools with an allocated allowance of $18.4 million. As of December 31, 2011, the Company identified $111.6 million of impaired covered loans that were individually evaluated for impairment with an allocated allowance of $35.5 million and $322.9 million of impaired covered loans that were evaluated as part of their respective pools with an allocated allowance of $23.8 million.

Approved credit losses will be reimbursed for covered loans under the appropriate FDIC loss share agreements at either 80 or 95 percent. The Company uses a symmetrical accounting approach in recording the loan carrying values and the FDIC receivable on covered loans. An increase in the loan value and a reduction in the FDIC receivable are accounted for as a yield adjustment over the remaining life of each asset. A reduction in the loan value, through a provision for loan losses, and an increase in the FDIC receivable, through an adjustment to income, are taken immediately.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Impaired loans not covered by loss share agreements, segregated by class of loans, as of March 31, 2012 are as follows (in thousands):



	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans:
With no related allowance recorded:
Construction, land & land development	$	—	$	—	$	—	$	—	$	—
Other commercial real estate	881		605		—		614		—
Total commercial real estate	881		605		—		614		—
Commercial & industrial	—		—		—		—		—
Owner-occupied real estate	—		—		—		—		—
Total commercial & industrial	—		—		—		—		—
Residential real estate	—		—		—		—		1
Consumer & other	—		—		—		—		—
Subtotal	881		605		—		614		1
With related allowance recorded:
Construction, land & land development	$	483	$	483	$	242	$	520	$	—
Other commercial real estate	1,816		1,655		673		1,659		12
Total commercial real estate	2,299		2,138		915		2,179		12
Commercial & industrial	87		87		43		87		—
Owner-occupied real estate	612		607		303		607		3
Total commercial & industrial	699		694		346		694		3
Residential real estate	369		369		157		373		—
Consumer & other	90		90		45		95		—
Subtotal	3,457		3,291		1,463		3,341		15
Total impaired loans	$	4,338	$	3,896	$	1,463	$	3,955	$	16

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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



	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans:
With no related allowance recorded:
Construction, land & land development	$	1,330	$	1,054	$	—	$	1,058	$	1
Other commercial real estate	387		387		—		84		1
Total commercial real estate	1,717		1,441		—		1,142		2
Commercial & industrial	—		—		—		—		—
Owner-occupied real estate	846		586		—		2,143		8
Total commercial & industrial	846		586		—		2,143		8
Residential real estate	—		—		—		79		2
Consumer & other	—		—		—		—		—
Subtotal	2,563		2,027		—		3,364		12
With related allowance recorded:
Construction, land & land development	—		—		—		—		—
Other commercial real estate	—		—		—		—		—
Total commercial real estate	—		—		—		—		—
Commercial & industrial	—		—		—		—		—
Owner-occupied real estate	433		134		46		317		—
Total commercial & industrial	433		134		—		317		—
Residential real estate	—		—		—		—		—
Consumer & other	—		—		—		—		—
Subtotal	433		134		—		317		—
Total impaired loans	$	2,996	$	2,161	$	46	$	3,681	$	12

For the three months ended March 31, 2012 and 2011, the average recorded investment in impaired loans was $4.0 million and $4.6 million, respectively. Interest foregone on impaired loans totaled $47,000 and $84,000 for the three months ended March 31, 2012 and 2011, respectively. Interest income recognized on impaired loans for the quarter ended March 31, 2012 was $16,000. Interest income recognized on impaired loans for the quarter ended March 31, 2011 was insignificant.

The following table presents the recorded investment in noncovered nonaccrual loans by loan class as of March 31, 2012 and December 31, 2011 (in thousands):



	March 31, 2012		December 31, 2011
Construction, land & land development	$	483	$	1,054
Other commercial real estate	1,655		387
Total commercial real estate	2,138		1,441
Commercial & industrial	87		—
Owner-occupied real estate	1,212		720
Total commercial & industrial	1,299		720
Residential real estate	290		—
Consumer & other	90		—
Total	$	3,817	$	2,161

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents an analysis of past due loans not covered by loss share agreements, segregated by class of loans, as of March 31, 2012 (in thousands):



	30 - 89 Days Past Due		90 days or greater Past Due		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
Construction, land & land development	$	13	$	417	$	430	$	197,410	$	197,840	$	—
Other commercial real estate	718		1,051		1,769		320,136		321,905		—
Total commercial real estate	731		1,468		2,199		517,546		519,745		—
Commercial & industrial	72		85		157		36,078		36,235		—
Owner-occupied real estate	160		157		317		143,152		143,469		—
Total commercial & industrial	232		242		474		179,230		179,704		—
Residential real estate	185		256		441		33,530		33,971		—
Consumer & other	606		98		704		20,511		21,215		—
Total	$	1,754	$	2,064	$	3,818	$	750,817	$	754,635	$	—

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



	30 - 89 Days Past Due		90 days or greater Past Due		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
Construction, land & land development	$	—	$	481	$	481	$	161,901	$	162,382	$	—
Other commercial real estate	311		594		905		306,909		307,814		—
Total commercial real estate	311		1,075		1,386		468,810		470,196		—
Commercial & industrial	157		12		169		35,648		35,817		—
Owner-occupied real estate	671		—		671		138,457		139,128		—
Total commercial & industrial	828		12		840		174,105		174,945		—
Residential real estate	68		229		297		33,441		33,738		—
Consumer & other	267		103		370		21,780		22,150		—
Total	$	1,474	$	1,419	$	2,893	$	698,136	$	701,029	$	—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents an analysis of past due loans covered by loss share agreements, segregated by class of loans, as of March 31, 2012 (in thousands):



	30 - 89 Days Past Due		90 days or greater Past Due		Total Past Due		Current		Total Loans
Construction, land & land development	$	4,399	$	133,800	$	138,199	$	52,290	$	190,489
Other commercial real estate	5,345		63,646		68,991		160,973		229,964
Total commercial real estate	9,744		197,446		207,190		213,265		420,453
Commercial & industrial	964		7,458		8,422		26,085		34,507
Owner-occupied real estate	5,985		31,339		37,324		99,978		137,302
Total commercial & industrial	6,949		38,797		45,746		126,063		171,809
Residential real estate	8,705		35,989		44,694		138,480		183,174
Consumer & other	73		792		865		15,857		16,722
Total	$	25,471	$	273,024	$	298,495	$	493,665	$	792,158

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



	30 - 89 Days Past Due		90 days or greater Past Due		Total Past Due		Current		Total Loans
Construction, land & land development	$	13,910	$	115,870	$	129,780	$	60,330	$	190,110
Other commercial real estate	5,538		63,927		69,465		164,110		233,575
Total commercial real estate	19,448		179,797		199,245		224,440		423,685
Commercial & industrial	1,254		7,291		8,545		29,629		38,174
Owner-occupied real estate	10,834		24,806		35,640		107,883		143,523
Total commercial & industrial	12,088		32,097		44,185		137,512		181,697
Residential real estate	8,675		31,914		40,589		148,520		189,109
Consumer & other	342		2,645		2,987		14,676		17,663
Total	$	40,553	$	246,453	$	287,006	$	525,148	$	812,154

At March 31, 2012 and December 31, 2011, a significant portion of the Company's covered loans were past due, including many that were 90 days or greater past due. However, such delinquencies were included in the Company's performance expectations in determining the fair values of covered loans at the acquisition dates. Accordingly, all covered loans continue to accrete interest income.

Asset Quality Grades:

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

Pass (Grades 1-4)—Pass graded loans represent average to above average business risk and demonstrate an ability to adequately service both short-term and long-term obligations.

Watch (Grade 5)—Watch graded loans are indicative of borrowers that have not met performance expectations, or

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

that are acceptable business credits but with considerable risk. The increased risk may be due to a smaller less diverse asset base, very little liquidity or limited debt capacity, but still greater than one to one.

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

Substandard (Grade 7)—Loans graded substandard have well-defined weaknesses and represent significant problem accounts. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual credits classified substandard. Loss potential could exist if the deficiencies causing the substandard rating are not corrected. These loans should be handled with extreme care to protect the position of the Bank. Legal action may not yet be appropriate, but the officer should prepare primary and contingency plans to either secure an upgrade for the credit, or exit the credit from the Bank. Such loans are typically inadequately protected by net worth, paying capacity (debt service coverage < 1:1), collateral adequacy, liquidity or character or ability of the borrower or its management.

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

The following table presents the risk grades of the loan portfolio not covered by loss share agreements, segregated by class of loans, as of March 31, 2012 (in thousands):



	Construction, Land & Land Development		Other Commercial Real Estate		Commercial & Industrial		Owner-Occupied Real Estate		Residential Real Estate		Consumer & Other		Total
Pass	$	134,248	$	293,614	$	29,443	$	122,354	$	27,679	$	20,674	$	628,012
Watch	54,936		26,529		3,296		17,542		5,142		235		107,680
OAEM	7,281		—		2,787		2,168		59		18		12,313
Substandard	1,375		1,762		709		1,405		1,091		286		6,628
Doubtful	—		—		—		—		—		2		2
Total	$	197,840	$	321,905	$	36,235	$	143,469	$	33,971	$	21,215	$	754,635

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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



	Construction, Land & Land Development		Other Commercial Real Estate		Commercial & Industrial		Owner-Occupied Real Estate		Residential Real Estate		Consumer & Other		Total
Pass	$	116,192	$	279,258	$	28,895	$	115,405	$	27,527	$	21,253	$	588,530
Watch	38,737		26,584		3,420		20,070		4,770		554		94,135
OAEM	6,157		23		2,915		2,217		63		21		11,396
Substandard	1,296		1,949		587		1,436		1,340		304		6,912
Doubtful	—		—		—		—		38		18		56
Total	$	162,382	$	307,814	$	35,817	$	139,128	$	33,738	$	22,150	$	701,029

The following table presents the risk grades of the loan portfolio covered by loss sharing agreements, segregated by class of loans, as of March 31, 2012 (in thousands):



	Construction, Land & Land Development		Other Commercial Real Estate		Commercial & Industrial		Owner-Occupied Real Estate		Residential Real Estate		Consumer & Other		Total
Pass	$	23,029	$	57,710	$	15,662	$	62,267	$	84,549	$	5,288	$	248,505
Watch	4,478		38,498		2,796		11,168		11,926		154		69,020
OAEM	11,814		17,753		3,311		5,108		12,875		89		50,950
Substandard	151,168		115,211		9,046		57,426		68,907		10,900		412,658
Doubtful	—		792		3,692		1,333		4,917		291		11,025
Total	$	190,489	$	229,964	$	34,507	$	137,302	$	183,174	$	16,722	$	792,158

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



	Construction, Land & Land Development		Other Commercial Real Estate		Commercial & Industrial		Owner-Occupied Real Estate		Residential Real Estate		Consumer & Other		Total
Pass	$	27,214	$	68,553	$	14,006	$	74,242	$	90,179	$	3,604	$	277,798
Watch	9,418		40,316		3,643		14,667		16,796		341		85,181
OAEM	6,560		14,430		3,787		8,169		15,148		147		48,241
Substandard	146,097		110,276		12,374		46,445		63,162		13,164		391,518
Doubtful	821		—		4,364		—		3,824		407		9,416
Total	$	190,110	$	233,575	$	38,174	$	143,523	$	189,109	$	17,663	$	812,154

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 6: Other Real Estate Owned

The following is a summary of transactions in noncovered and covered other real estate owned for the three months ended March 31, 2012 and 2011 (in thousands):



	Three Months Ended
	March 31
Noncovered other real estate owned	2012			2011
Balance, beginning of period	$	1,210		$	75
Other real estate acquired through foreclosure of loans receivable	—			—
Other real estate sold	(164		)	—
Write down of other real estate	(89		)	—
Balance, end of period	$	957		$	75

	Three Months Ended
	March 31
Covered other real estate owned	2012			2011
Balance, beginning of period	$	84,496		$	155,981
Other real estate acquired through foreclosure of loans receivable	13,228			14,774
Other real estate sold	(15,101		)	(21,145		)
Write down of other real estate	(19,051		)	(18,536		)
Balance, end of period	$	63,572		$	131,074

Note 7: Troubled Debt Restructuring

The Bank has directly charged off $161,000 on loans modified in troubled debt restructurings as of March 31, 2012. The modification of the terms of one loan restructured in 2011 included a reduction in the stated interest rate of the loan for a term of twelve months, after which the loan will mature. The loan matures August 2012. The modification of the terms of another loan restructured in 2012 included a reduction in the stated interest rate of the loan and an extension of the maturity date for 80 months. The loan matures September 2018. The recorded investment in the loans did not change post modification of the restructurings. The Bank has not committed to lend additional funds to the customers with the outstanding loans that are classified as troubled debt restructurings. Both modified loans are currently paying under the restructured terms.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Note 8: FDIC Receivable for Loss Share Agreements

The following table documents changes in the carrying value of the FDIC receivable for loss share agreements relating to covered loans and other real estate owned for the three months ended March 31, 2012 and 2011 (in thousands):



	Three Months Ended
	March 31
	2012			2011
Fair value of FDIC receivable for loss share agreements at beginning of period	$	529,440		$	494,428
Reductions resulting from:
Wires received	(66,643		)	(47,332		)
Additions resulting from:
Charge-offs, write-downs and other losses	3,627			5,689
Accretion (amortization)	(7,001		)	4,973
External expenses qualifying under loss share agreements	1,170			(150		)
Balance, end of period	$	460,593		$	457,608

The FDIC receivable for loss share agreements is measured separately from the related covered assets and is recorded at fair value. The fair value was estimated using estimated cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages. At March 31, 2012, the Company estimated that $88.2 million was currently due from the FDIC.

Note 9: Derivative Instruments and Hedging Activities

The Bank has entered into interest rate swap contracts in connection with its hedging of specific loans made to customers. As of March 31, 2012, the Bank has entered into interest rate swaps totaling $57.9 million using receive-variable swaps to mitigate the exposure to changes in the fair value attributable to the benchmark interest rate (fixed rate) and the hedged items (loans receivable) from the effective date of the hedged instruments. As structured, the pay-fixed, receive-variable swaps are evaluated as fair value hedges and are considered highly effective. As highly effective fair value designated hedges, the underlying hedged instruments are recorded on the balance sheet at fair value with the periodic changes of the fair value reported in the consolidated statements of income.

For the three months ended March 31, 2012, the interest rate swaps designated as fair value hedges resulted in a reduction in interest income of $122,000, on the related loans receivable. The fair value of the swaps at March 31, 2012 was recorded on the consolidated statements of financial condition as a liability in the amount of $905,000. There were no outstanding interest rate swaps at March 31, 2011.

Net losses, after tax, on the fair value swaps were $584,000 at March 31, 2012. The fixed rate loans being hedged with interest rate swaps are structured to include a prepayment make-whole clause. The prepayment make-whole fee represents a reasonable estimate of the economic loss (if any) from the early prepayment, in part or in whole, of the loan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Note 10: Other Assets

The more significant components of other assets outstanding at March 31, 2012 and December 31, 2011 were as follows (in thousands):



Other Assets	March 31, 2012		December 31, 2011
Accrued interest receivable	$	4,736	$	6,015
Accrued income tax receivable	29,128		29,397
Cash surrender value of life insurance	37,739		37,395
Prepaid FDIC insurance assessments	5,225		5,550
Other prepaid expenses	2,520		1,960
Miscellaneous receivables and other assets	2,313		6,476
Total other assets	$	81,661	$	86,793

Note 11: Other Liabilities and Accrued Expenses

The more significant components of other liabilities and accrued expenses outstanding at March 31, 2012 and December 31, 2011 were as follows (in thousands):



Other Liabilities and Accrued Expenses	March 31, 2012		December 31, 2011
Accrued interest payable	$	1,929	$	2,257
Accrued incentive compensation	1,433		5,926
Net deferred tax liability	63,627		60,800
Derivatives	905		1,021
FDIC clawback liability	950		941
Accrued audit fees	450		908
Miscellaneous payables and accrued expenses	6,020		1,440
Total accrued expenses and other liabilities	$	75,314	$	73,293

Note 12: Share-Based Compensation

The Company maintains an incentive compensation plan that includes share-based compensation. The State Bank Financial Corporation 2011 Omnibus Equity Compensation Plan (the "Plan") was approved by the Company's shareholders in 2011 and authorizes up to 3,160,000 shares of stock for issuance in accordance with the Plan terms. All stock option and restricted stock activity occurred during the third quarter 2011. Descriptions of these plans, including the terms of awards and the number of shares authorized for issuance, were included in Note 18 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. No share-based compensation awards were granted during the first quarter of 2012. There were 2,000 restricted stock shares that were earned and issued in the first quarter of 2012. There was no activity related to stock options.

The Company recognized compensation expense relating to options of $17,000 for the three months ended March 31, 2012 in the Company's consolidated statement of income. Unearned share-based compensation associated with these options totaled $155,000 at March 31, 2012. All stock options were granted during the third quarter of 2011. The Company recognized compensation expense relating to restricted stock awards of $149,000 for the three months ended March 31, 2012 in the Company's consolidated statement of income. Unearned share-based compensation associated with these awards totaled $1.2 million at March 31, 2012. All restricted stock awards were issued during the third quarter of 2011.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 13: Regulatory Matters

The Company’s and the Bank’s regulatory ratios as of March 31, 2012 and December 31, 2011 are presented below (dollars in thousands):



	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2012
Total Capital to Risk-Weighted Assets
Consolidated	$	413,392	34.22	%	$	96,636	8.00	%	$	120,795	10.00	%
State Bank and Trust Company	$	397,337	32.90	%	$	96,630	8.00	%	$	120,788	10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated	$	397,643	32.92	%	$	48,318	4.00	%	$	72,477	6.00	%
State Bank and Trust Company	$	381,589	31.59	%	$	48,315	4.00	%	$	72,473	6.00	%
Tier I Capital to Average Assets
Consolidated	$	397,643	15.06	%	$	105,607	4.00	%	$	—	N/A
State Bank and Trust Company	$	381,589	14.45	%	$	105,606	4.00	%	$	132,008	5.00	%



	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2011
Total Capital to Risk-Weighted Assets
Consolidated	$	407,343	35.15	%	$	92,708	8.00	%	$	115,884	10.00	%
State Bank and Trust Company	$	391,317	33.78	%	$	92,665	8.00	%	$	115,832	10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated	$	392,179	33.84	%	$	46,354	4.00	%	$	69,531	6.00	%
State Bank and Trust Company	$	376,159	32.47	%	$	46,333	4.00	%	$	69,499	6.00	%
Tier I Capital to Average Assets
Consolidated	$	392,179	13.76	%	$	114,000	4.00	%	$	—	N/A
State Bank and Trust Company	$	376,159	13.23	%	$	113,771	4.00	%	$	142,213	5.00	%

The Company and the Bank have executed a Capital Maintenance Agreement with the FDIC. Under the terms of that agreement, the Bank must at all times maintain a leverage ratio of at least 10% and a total risk-based capital ratio of at least 12%. The agreement terminates on December 31, 2013. At March 31, 2012 and December 31, 2011, the Bank was in compliance with the Capital Maintenance Agreement.

In addition, under the Georgia Department of Banking and Finance's letter dated July 24, 2009, issuing its approval of the Interagency Notice of Change in Control filing with respect to the Bank, for a period of three years after consummation of the change in control transaction, the Bank must also obtain approval from the Georgia Department of Banking and Finance before paying any dividends, including dividend payments to the Company. In addition, during the first three years of the Company's operations, the Company may not pay dividends without the prior written approval of the Georgia Department of Banking and Finance. No dividends were paid from the Bank to the Company during the first quarter of 2012.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 14: Commitments and Contingent Liabilities

In order to meet the financing needs of its customers, the Company maintains financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate and/or liquidity risk.

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed maturity dates or other termination clauses with required fee payments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The amount of collateral obtained, if deemed necessary upon extension of credit, is determined on a case by case basis by management through credit evaluation of the customer.

Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. In order to minimize its exposure, the Company's credit policies govern the issuance of standby letters of credit.

The Company's exposure to credit loss is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Company's commitments is as follows (in thousands):



	March 31, 2012		December 31, 2011
Commitments to extend credit:
Fixed	$	15,088	$	32,460
Variable	159,891		139,976
Financial standby letters of credit:
Fixed	375		381
Variable	3,117		3,669
Total	$	178,471	$	176,486

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 1.88% to 18.00% and maturities ranging from six months to 20 years.

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company's financial statements.

Note 15: Fair Value

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

Fair Value Hierarchy

Level 1

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Level 2

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

Level 3

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

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. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's valuation process. For the three months ended March 31, 2012 and the year ended December 31, 2011, there were no transfers between levels.

The following methods and assumptions are used by the Company in estimating the fair value of its financial assets and financial liabilities on a recurring basis:

Investment Securities Available-for-Sale

At March 31, 2012, the Company's investment portfolio primarily consisted of U.S. government agency mortgage-backed securities, nonagency mortgage-backed securities, U.S. government securities, corporate bonds and municipal securities. The fair value for U.S. Treasury securities are determined by obtaining quoted prices on nationally recognized securities exchanges utilizing Level 1 inputs. Other securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. The fair value of other securities classified as available-for-sale are determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications. Inputs 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 relevant items. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. From time to time, the Company validates the appropriateness of the valuations provided by the independent pricing service to prices obtained from an additional third party or prices derived using internal models.

Derivative Instruments and Hedging Activities

The Company uses interest-rate swaps to provide long-term fixed rate funding to its customers. The majority of these derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract. Therefore, these derivative contracts are classified as Level 2. The Company utilizes an independent third party valuation company to validate the dealer prices. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are considered to have been derived

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utilizing Level 3 inputs.

The Company evaluates the credit risk of its counterparties as well as that of the Company. The Company has considered factors such as the likelihood of default by the Company and its counterparties, its net exposures, and remaining contractual life, among other things, in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting arrangements, as well as considering the amount of collateral securing the position. The Company reviews its counterparty exposure on a regular basis, and, when necessary, appropriate business actions are taken to adjust the exposure. The Company also utilizes this approach to estimate its own credit risk on derivative liability positions. To date, the Company has not realized any losses due to a counterparty's inability to pay any net uncollateralized position.

Financial Assets and Financial Liabilities Measured on a Recurring Basis:

The following table presents the fair value measurements of financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.



(in thousands)	Quoted Market Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
U.S. Government securities	$	788	$	52,390	$	—	$	53,178
States and political subdivisions	—		12,691		—		12,691
Residential mortgage-backed securities—nonagency	—		139,895		—		139,895
Residential mortgage-backed securities—agency	—		33,222		—		33,222
Collateralized-mortgage obligations	—		83,468		—		83,468
Corporate securities	—		378		—		378
Total recurring assets at fair value	$	788	$	322,044	$	—	$	322,832

Liabilities:
Derivative instruments—swap liability	$	—	$	905	$	—	$	905
Total recurring liabilities at fair value	$	—	$	905	$	—	$	905

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(UNAUDITED)

The following table presents the fair value measurements of financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.



(in thousands)	Quoted Market Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
U.S. Government securities	$	794	$	77,476	$	—	$	78,270
States and political subdivisions	—		11,096		—		11,096
Residential mortgage-backed securities—nonagency	—		135,943		—		135,943
Residential mortgage-backed securities—agency	—		31,454		—		31,454
Collateralized-mortgage obligations	—		92,794		—		92,794
Corporate securities	—		372		—		372
Total recurring assets at fair value	$	794	$	349,135	$	—	$	349,929

Liabilities:
Derivative instruments—swap liability	$	—	$	1,021	$	—	$	1,021
Total recurring liabilities at fair value	$	—	$	1,021	$	—	$	1,021

The following methods and assumptions are used by the Company in estimating the fair value of its financial assets on a nonrecurring basis:

Impaired Noncovered Loans

Noncovered loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The fair values of impaired noncovered loans are measured on a nonrecurring basis and are based on the underlying collateral value of the each loan if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs that are based on observable market data such as an appraisal. Updated appraisals are obtained on at least an annual basis. Level 3 inputs are based on the Company's customized discounting criteria when management determines the fair value of the collateral is further impaired. After evaluating the underlying collateral, the fair value of the impaired loans is determined by allocating specific reserves from the allowance for loan losses to the loans. Thus, the fair value reflects the loan balance less the specifically allocated reserve. Impaired loans for which no reserve has been specifically allocated are not included in the table below.

Impaired Covered Loans

The fair values of impaired covered loans are measured on a nonrecurring basis. As of March 31, 2012, the Company identified acquired loans covered by FDIC loss share agreements where the expected performance of such loans had deteriorated from management's performance expectations established in conjunction with the determination of the acquisition date fair values. The fair values of impaired covered loans are determined by discounted cash flow estimations, or unobservable assumptions, as such, they are recorded within nonrecurring Level 3 hierarchy. The Company determines its fair value of impaired covered loans by discounting the expected cash flows for covered loans individually evaluated for impairment and covered loans collectively evaluated for impairment in pools. For collateral dependent loans, the cash flow may be based on the estimated fair value of the underlying collateral.

Potential credit losses on acquired loans are calculated based on the Company's specific review of covered loans individually evaluated for impairment and on the probability of default and loss given default estimates for covered loans collectively evaluated for impairment. The potential credit losses reduce the expected principal cash flows in

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(UNAUDITED)

computing fair value.

The discounted cash flow analysis takes into consideration the contractual terms of the loan, including the period to maturity and use of observable market discount rates for similar instruments with adjustments for implied volatility. The adjustments that impact the fair value include probability of default, loss given default, prepayment rates and cash flow timing assumptions. There are several assumptions for each product type that determine the timing of cash flows for principal, interest, or collateral value.

Financial Assets Measured on a Nonrecurring Basis:

The following table presents the fair value measurements of financial assets measured at fair value on a nonrecurring basis as of March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.



(in thousands)	Quoted Market Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
March 31, 2012
Impaired loans, net of specific reserve:
Not covered by loss share agreements	$	—	$	—	$	2,433	$	2,433
Covered by loss share agreements	—		—		353,454		353,454
Total impaired loans	$	—	$	—	$	355,887	$	355,887
December 31, 2011
Impaired loans, net of specific reserve:	—
Not covered by loss share agreements	$	—	$	—	$	1,296	$	1,296
Covered by loss share agreements	—		—		375,231		375,231
Total impaired loans	$	—	$	—	$	376,527	$	376,527

Noncovered impaired loans that are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $3.8 million with a valuation allowance of $1.5 million at March 31, 2012. The Bank also has one loan that is classified as a troubled debt restructuring with a principal balance of $79,000 at March 31, 2012. The troubled debt restructuring included above is not considered collateral dependent. The fair value of the troubled debt restructuring was measured by discounting expected future cash flows at the effective interest rate, or the original contractual loan rate, resulting in a valuation allowance of $12,000.

At March 31, 2012, the Company identified $113.3 million of impaired covered loans that were individually evaluated for impairment with an allocated allowance of $37.6 million and $296.1 million of impaired covered loans that were evaluated as part of their respective pools with an allocated allowance of $18.4 million. At December 31, 2011, the Company identified $111.6 million of impaired covered loans that were individually evaluated for impairment with an allocated allowance of $35.5 million and $322.9 million of impaired covered loans that were evaluated as part of their respective pools with an allocated allowance of $23.8 million.

The following methods and assumptions are used by the Company in estimating the fair value of its nonfinancial assets on a nonrecurring basis:

Other Real Estate Owned

The fair value of other real estate owned is determined when the asset is transferred to foreclosed assets. Fair value is based on appraised values of the collateral. When the value is based on observable market prices such as an appraisal, the asset is recorded in Level 2 hierarchy. When an appraised value is not available or management determines the fair value of the collateral is further impaired, the asset is recorded as a nonrecurring Level 3 hierarchy. Management requires a new appraisal at the time of foreclosure or repossession of the underlying

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collateral. Updated appraisals are obtained on at least an annual basis on all other real estate owned.

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(UNAUDITED)

The following table presents the fair value measurements of nonfinancial assets measured at fair value on a nonrecurring basis as of March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.



(in thousands)	Quoted Market Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
March 31, 2012
Other Real Estate Owned:
Not covered by loss share agreements	$	—	$	—	$	1,040	$	1,040
Covered by loss share agreements	—		—		69,100		69,100
Total other real estate owned	$	—	$	—	$	70,140	$	70,140
December 31, 2011
Other Real Estate Owned:
Not covered by loss share agreements	$	—	$	—	$	1,315	$	1,315
Covered by loss share agreements	—		—		90,171		90,171
Total other real estate owned	$	—	$	—	$	91,486	$	91,486

Other real estate owned is initially accounted for at fair value, less estimated costs to dispose of the property. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan losses at the time of foreclosure. The ability of the Company to recover the carrying value of other real estate owned is based upon future sales of the real estate. The ability to affect such sales is subject to market conditions and other factors beyond our control; future declines in the value of the real estate would result in a charge to earnings.

The following table is a reconciliation of the fair value measurement of other real estate owned disclosed in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, to the amount recorded on the consolidated statement of financial condition.



(in thousands)	March 31, 2012			December 31, 2011
Noncovered under FDIC loss share agreements:
Other real estate owned at fair value	$	1,040		$	1,315
Estimated selling costs	(83		)	(105		)
Other real estate owned	$	957		$	1,210

Covered under FDIC loss share agreements:
Other real estate owned at fair value	$	69,100		$	90,171
Estimated selling costs	(5,528		)	(5,675		)
Other real estate owned	$	63,572		$	84,496

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at March 31, 2012.



(in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range
Noncovered impaired loans - collateral dependent	$	2,366	Third party appraisal	Management discount for property type and recent market volatility	0% - 20% discount
Noncovered impaired loans - noncollateral dependent	$	67	Discounted cash flow analysis	1) Interest rate 2) Loan term	1) 7.90% 2) 78 months
Covered impaired loans - individually evaluated for impairment	$	75,717	Discounted cash flow analysis and/or third party appraisal	1) Probability of default 2) Loss given default 3) Discount rates 4) Management discount for property type and recent market volatility	1) 10%-70% 2) 45% - 70% 3) 6.8% average discount rate 4) 10% - 40% discount
Covered impaired loans - collectively evaluated for impairment	$	277,737	Discount cash flow analysis	1) Probability of default 2) Loss given default 3) Discount rates	1) 10%-70% 2) 45%-70% 3) 6.8% average discount rate
Noncovered other real estate owned	$	1,040	Third party appraisal	Management discount for property type and recent market volatility	30% - 40% discount
Covered other real estate owned	$	69,100	Third party appraisal	Management discount for property type and recent market volatility	30% - 40% discount

The following table includes the estimated fair value of the Company's financial assets and financial liabilities. The methodologies for estimating the fair value of financial assets and financial liabilities measured on a recurring and nonrecurring basis are discussed above. The methodologies for estimating the fair value for other financial assets and financial liabilities are discussed below. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts at March 31, 2012 and December 31, 2011.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



		March 31, 2012				December 31, 2011
(in thousands)	Fair Value Hierarchy Level	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	Level 1	$	210,318	$	210,318	$	220,532	$	220,532
Investment securities available-for-sale	See previous table	322,832		322,832		349,929		349,929
Federal Home Loan Bank stock	Level 1	8,802		8,802		8,802		8,802
Mortgage loans held for sale	Level 2	3,719		3,719		6,229		6,229
Net loans	Level 3	1,479,025		1,491,763		1,443,699		1,457,424
FDIC receivable for loss share agreements, net	Level 3	460,593		437,070		529,440		522,877
Accrued interest receivable	Level 2	4,736		4,736		6,015		6,015
Liabilities:
Deposits	Level 2	$	2,188,875	$	2,190,303	$	2,298,465	$	2,301,139
Securities sold under agreements to repurchase	Level 1	1,421		1,421		4,749		4,749
Notes payable	Level 2	2,535		2,535		2,539		2,539
Derivative instruments	Level 2	905		905		1,021		1,021
Accrued interest payable	Level 2	1,929		1,929		2,257		2,257

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Cash and Cash Equivalents

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

Federal Home Loan Bank Stock

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

Mortgage Loans Held for Sale

Mortgage loans held for sale are recorded at fair value. Estimated fair value is determined on the basis of existing forward commitments, or the current market value of similar loans. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Noncovered Loans

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

Covered Loans

Acquired covered loans are recorded at fair value at the date of acquisition exclusive of expected cash flow reimbursements from the FDIC. The fair values of loans with evidence of credit deterioration are recorded net of a nonaccretable discount and, if appropriate, an accretable discount. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases to the expected cash flows result in a reversal of the provision for loan losses to the extent of prior changes or a reclassification of the difference from the nonaccretable to accretable with a positive impact on the accretable discount. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized in interest income over the remaining life of the loan when there is reasonable expectation about the amount and timing of such cash flows.

Cash Surrender Value of Life Insurance

The carrying amount of the bank-owned life insurance approximates fair value.

FDIC Receivable for Loss Share Agreements

The FDIC receivable is recorded at fair value at the acquisition date. The FDIC receivable is recognized at the same time as the covered loans, and measured on the same basis, subject to collectability or contractual limitations, and the FDIC receivable is impacted by changes in estimated cash flows associated with these loans.

Accrued Interest Receivable

The carrying amounts of accrued interest approximate fair value.

Deposits

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing deposits, and savings and money market deposits, is equal to the amount payable on demand. The fair value of time deposits is estimated by discounting the expected life. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

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STATE BANK FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Securities Sold Under Agreements to Repurchase and Notes Payable

The fair value of securities sold under agreements to repurchase approximates the carrying amount because of the short maturity of these borrowings. The discount rate is estimated using the rates currently offered for borrowings of similar remaining maturities. The notes payable are variable rate subordinated debt for which the performance is based on the underlying notes receivable and adjust accordingly.

Commitments and Contingencies

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

Note 16: Earnings Per Share

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



	Three Months Ended
	March 31
	2012		2011
Net Income	$	5,138	$	8,231
Denominator:
Weighted average common shares outstanding	31,612		31,611
Weighted average dilutive grants	1,183		1,012
Weighted average common shares outstanding including dilutive grants	32,795		32,623

Net Income per share:
Basic	$	.16	$	.26
Diluted	$	.16	$	.25

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

Introduction

The following discussion describes our results of operations for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 and also analyzes our financial condition as of March 31, 2012 as compared to December 31, 2011. This discussion should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing in this report and in conjunction with the financial statements and related notes and disclosures in our 2011 Annual Report on Form 10-K.

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

Overview

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

On July 24, 2009, the Bank raised approximately $292.1 million in gross proceeds (before expenses) from investors in a private offering of its common stock. In connection with the private offering, the FDIC and the Georgia Department of Banking and Finance approved the Interagency Notice of Change in Control application filed by our new management team, which took control of the Bank on July 24, 2009. Since that date and through the date of this report, the Bank has acquired approximately $3.9 billion in total assets and assumed approximately $3.6 billion in deposits from the FDIC, as receiver, in twelve different failed bank transactions, including:

•the six bank subsidiaries of Security Bank Corporation, Macon, Georgia on July 24, 2009;

•The Buckhead Community Bank, Atlanta, Georgia on December 4, 2009;

•First Security National Bank, Norcross, Georgia on December 4, 2009;

•NorthWest Bank & Trust, Acworth, Georgia on July 30, 2010;

•United Americas Bank, Atlanta, Georgia on December 17, 2010;

•Piedmont Community Bank, Gray, Georgia on October 14, 2011; and

•Community Capital Bank, Jonesboro, Georgia on October 21, 2011.

Concurrently with each of our acquisitions, we entered into loss share agreements with the FDIC that cover certain of the acquired assets, including 100% of the acquired loans (except consumer loans with respect to the NorthWest Bank & Trust, United Americas Bank, Piedmont Community Bank and Community Capital Bank acquisitions) and other real estate owned. Where applicable, we refer to loans subject to loss share agreements with the FDIC as “covered loans” and loans that are not subject to loss share agreements with the FDIC as “noncovered loans.”

As a result of our failed bank acquisitions, the Bank was transformed from a small community bank in Pinehurst, Georgia to a much larger commercial bank now operating 23 full service branches throughout middle Georgia and metropolitan Atlanta. We offer a variety of community banking services to individuals and businesses within our middle Georgia and metropolitan Atlanta markets. Our product lines include loans to small and medium-sized businesses, residential and commercial construction and development loans, commercial real estate loans, farmland and agricultural production loans, residential mortgage loans, home equity loans, consumer loans and a variety of commercial and consumer demand, savings and time deposit products. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers. As of March 31, 2012, our total assets were approximately $2.7 billion, our total loans receivable were approximately $1.5 billion, our total deposits were approximately $2.2 billion and our total shareholders’ equity was approximately $408.5 million.

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Financial Summary

The following table provides unaudited selected financial data for the periods presented. You should read this data in conjunction with the consolidated financial statements and the notes to them and the information contained in this Item 2.



	2012			2011
(dollars in thousands, except per share amounts)	First Quarter			Fourth Quarter			Third Quarter			Second Quarter			First Quarter

Selected Results of Operations:
Interest income	$	38,329		$	45,048		$	50,074		$	37,081		$	34,798
Interest expense	2,852			3,595			4,603			6,457			7,118
Net interest income	35,477			41,453			45,471			30,624			27,680
Provision for loan losses	252			19,636			3,875			2,044			961
Noninterest income	(3,778		)	18,783			6,689			7,835			8,064
Noninterest expense	23,213			27,227			21,789			23,094			21,439
Income before income taxes	8,234			13,373			26,496			13,321			13,344
Income taxes	3,096			4,284			9,392			4,739			5,113
Net income	$	5,138		$	9,089		$	17,104		$	8,582		$	8,231

Selected Average Balances:
Total assets	$	2,660,418		$	2,857,643		$	2,711,296		$	2,720,112		$	2,729,885
Investment securities	343,860			376,655			365,249			383,944			413,940
Loans	1,529,416			1,527,972			1,370,488			1,325,342			1,295,742
Interest-earning assets	2,032,225			2,166,480			2,124,750			2,050,252			1,992,347
Total deposits	2,203,564			2,404,501			2,298,343			2,306,532			2,317,500
Interest-bearing liabilities	1,908,961			2,109,292			2,044,172			2,070,772			2,092,646
Shareholders’ equity	407,101			396,496			379,177			371,139			364,524

Per Common Share Data:
Basic earnings	$	.16		$	.29		$	.54		$	.27		$	.26
Diluted earnings	.16			.28			.53			.26			.25
Tangible book value	$	12.62		$	12.26		$	12.00		$	11.57		$	11.34
Weighted average shares outstanding:
Basic	31,612			31,612			31,612			31,611			31,611
Diluted	32,795			32,586			32,413			32,718			32,623

Performance Ratios:
Return on average assets	.78		%	1.26		%	2.50		%	1.27		%	1.22		%
Return on average equity	5.08		%	9.09		%	17.90		%	9.27		%	9.16		%
Net interest margin(1)(2)	7.03		%	7.70		%	8.50		%	6.00		%	5.65		%
Efficiency ratio(3)	73.10		%	45.15		%	41.73		%	59.96		%	59.89		%

Capital Ratios:
Average equity to average assets	15.30		%	13.87		%	13.99		%	13.64		%	13.35		%
Leverage ratio	15.06		%	13.76		%	14.16		%	13.49		%	13.16		%
Tier 1 risk-based capital ratio	32.92		%	33.84		%	33.78		%	34.80		%	39.24		%
Total risk-based capital ratio	34.22		%	35.15		%	35.03		%	35.46		%	39.93		%


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


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


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

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Critical Accounting Policies

There have been no changes to the Company's critical accounting policies subsequent to year end 2011. The reader should refer to the notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Balance Sheet Review

General

At March 31, 2012, we had total assets of $2.7 billion, consisting principally of $1.5 billion in net loans, $322.8 million in investment securities, $460.6 million in FDIC receivable, $64.5 million in other real estate owned and $210.3 million in cash and cash equivalents. Our liabilities at March 31, 2012 totaled $2.3 billion, consisting principally of $2.2 billion in deposits. At March 31, 2012, our shareholders' equity was $408.5 million.

At December 31, 2011, we had total assets of $2.8 billion, consisting principally of $1.4 billion in net loans, $349.9 million in investment securities, $529.4 million in FDIC receivable, $85.7 million in other real estate owned and $220.5 million in cash and cash equivalents. Our liabilities at December 31, 2011 totaled $2.4 billion, consisting principally of $2.3 billion in deposits. At December 31, 2011, our shareholders' equity was $397.3 million.

Investments

The composition of our 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. At March 31, 2012, $322.8 million in our available-for-sale investment securities portfolio represented approximately 12.1% of our total assets compared, to $349.9 million, or 12.6% of total assets, at December 31, 2011. Investment securities were down $27.1 million, or 7.7%, compared to December 31, 2011. The decreased investment in securities reflects management's current projections for both loan demand and the level of liquidity in the Bank's traditional customer funding base.

At March 31, 2012, $53.2 million, or 16.5%, of our available-for-sale securities were invested in U.S. government agencies, compared to $78.3 million, or 22.4%, as of December 31, 2011. At March 31, 2012, $116.7 million, or 36.1%, of our available-for-sale securities were invested in agency mortgage-backed securities, compared to $124.2 million, or 35.5%, as of December 31, 2011. At March 31, 2012, $139.9 million, or 43.3% of our available-for-sale securities were invested in nonagency mortgage-backed securities, compared to $135.9 million, or 38.8%, as of December 31, 2011. Continuing in 2012, we reinvested the proceeds of maturing fixed rate mortgage-backed securities and U.S. government agencies into floating rate nonagency mortgage-backed securities. Such nonagency mortgage-backed securities were purchased at significant market discounts compared to par value. This has allowed us to shorten the effective duration of the portfolio which helps position our balance sheet for a rising rate environment and achieve a better mix of earning assets. The underlying collateral consists of mortgages originated prior to 2006 with the majority being 2004 and earlier. None of the collateral is subprime and we own the senior tranche of each bond.

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



	March 31, 2012				December 31, 2011
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Government securities	$	51,949	$	53,178	$	76,976	$	78,270
States and political subdivisions	12,389		12,691		10,740		11,096
Residential mortgage-backed securities — nonagency	140,365		139,895		145,768		135,943
Residential mortgage-backed securities — agency	31,813		33,222		30,031		31,454
Collateralized mortgage obligations	80,961		83,468		90,159		92,794
Corporate securities	378		378		372		372
Total	$	317,855	$	322,832	$	354,046	$	349,929

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The following table shows contractual maturities and yields on our investments at March 31, 2012. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



	U.S. Government Securities				States and Political Subdivisions				Mortgage-backed Securities				Other Investments
(dollars in thousands)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Maturity:
One year or less	$	40,021	.36	%	$	469	6.74	%	$	—	—	%	$	—	—	%
After one year through five years	8,058		3.19	%	4,959		0.94	%	—		—	%	$	378	17.03	%
After five years through 10 years	1,843		4.17	%	331		5.27	%	598		2.29	%	—		—	%
After 10 years	3,256		4.02	%	6,932		6.63	%	255,987		3.32	%	—		—	%
Total	$	53,178	1.09	%	$	12,691	4.32	%	$	256,585	3.32	%	$	378	17.03	%

Loans

Loans receivable constitutes our largest interest-earning asset. Total net loans outstanding at March 31, 2012 and December 31, 2011 were approximately $1.5 billion and $1.4 billion, respectively, after subtracting the accretable discount, nonaccretable discount, allowance for loan losses and net unamortized loan origination fees.

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

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

As seen below, during the three months ended March 31, 2012, our noncovered loans increased by $53.6 million, or 7.6%, and our covered loans decreased by $20.0 million, or 2.5%, from December 31, 2011. We have planned for and expect these trends to continue. The covered loans will decrease as they are collected or charged-off or the underlying collateral is foreclosed on and sold. Our covered loans may increase in the future if we acquire more banks. Our noncovered loans will increase as we originate and purchase well-underwritten loans. Due to the current economic environment, covered loans will likely decrease faster than noncovered loans increase, thereby resulting in a net decrease in loans receivable.

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The following table summarizes the composition of our loan portfolio for the periods presented.



	March 31, 2012											December 31, 2011
(dollars in thousands)	Noncovered Loans			Covered Loans			Total Amount			% of Gross Total		Noncovered Loans			Covered Loans			Total Amount			% of Gross Total
Construction, land & land development	$	197,840		$	190,489		$	388,329		25.1	%	$	162,382		$	190,110		$	352,492		23.3	%
Other commercial real estate	321,905			229,964			551,869			35.7	%	307,814			233,575			541,389			35.8	%
Total commercial real estate	519,745			420,453			940,198			60.8	%	470,196			423,685			893,881			59.1	%
Commercial & industrial	36,235			34,507			70,742			4.6	%	35,817			38,174			73,991			4.9	%
Owner-occupied real estate	143,469			137,302			280,771			18.1	%	139,128			143,523			282,651			18.7	%
Total commercial & industrial	179,704			171,809			351,513			22.7	%	174,945			181,697			356,642			23.6	%
Residential real estate	33,971			183,174			217,145			14.0	%	33,738			189,109			222,847			14.7	%
Consumer & other	21,215			16,722			37,937			2.5	%	22,150			17,663			39,813			2.6	%
Total gross loans receivable, net of deferred fees	754,635			792,158			1,546,793			100.0	%	701,029			812,154			1,513,183			100.0	%
Less - allowance for loan losses	(11,681		)	(56,087		)	(67,768		)			(10,207		)	(59,277		)	(69,484		)
Total loans, net	$	742,954		$	736,071		$	1,479,025				$	690,822		$	752,877		$	1,443,699

FDIC Receivable for Loss Share Agreements and Clawback Liability

As of March 31, 2012, approximately 51.2% of our outstanding principal balance of loans and 98.5% of our other real estate assets were covered under loss share agreements with the FDIC in which the FDIC has agreed to reimburse us for between 80% and 95% of all losses incurred in connection with those assets. We estimated the FDIC reimbursement that will result from losses incurred as we dispose of covered loans and other real estate assets, and we recorded the estimate as a receivable from the FDIC. The FDIC receivable for loss share agreements was $460.6 million as of March 31, 2012 and $529.4 million as of December 31, 2011. Realized losses in excess of acquisition date estimates will result in an increase in the FDIC receivable for loss share agreements. Conversely, if realized losses are less than acquisition date estimates, the FDIC receivable for loss share agreements will be reduced. The discount on the FDIC receivable is accreted into noninterest income using the level yield method over the estimated life of the receivable, including estimates of the timing of cash flow receipts and the disposition of nonperforming assets. Improved asset quality on covered assets results in a decrease in the estimated cash flows expected to be received and results in an impairment of the FDIC receivable. The impairment is not recorded in the current period, it is recognized prospectively over the remaining life of the loss share agreement or the covered asset, whichever is shorter, resulting in an adjustment to the yield.

We recorded the FDIC receivable at its estimated fair value at the date of each acquisition. The initial fair value was established by discounting the expected cash flows with a market discount rate for like maturity and risk instruments. For the three months ended March 31, 2012, we recognized $7.0 million of amortization of the FDIC receivable compared to $5.0 million of accretion income recognized for the three months ended March 31, 2011. The amortization recognized during the three months ended March 31, 2012 resulted from improved credit quality in the covered loan portfolio. We expect to continue to experience amortization of the FDIC receivable in future quarters, but such amounts are expected to decline over time unless asset quality trends further improve. We have received $620.1 million from the FDIC for reimbursement of losses and expenses that have occurred from the dates of each acquisition through March 31, 2012.

Within 45 days of the end of the loss share agreements with the FDIC, with the exception of the six bank

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subsidiaries of Security Bank Corporation, we may be required to reimburse the FDIC in the event that losses on covered assets do not reach original expected losses, based on the initial discount received less cumulative servicing amounts for the covered assets acquired. As of March 31, 2012 we have recorded a $950,000 liability to the FDIC related to the NorthWest Bank and Trust acquisition, which is included in other liabilities in our consolidated statements of financial condition.

Allowance for Loan Losses (ALL)

The ALL represents the amount that management believes is necessary to absorb probable losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. The ALL is critical to the portrayal and understanding of our financial condition, liquidity and results of operations. The determination and application of the ALL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity and results of operations.

Our determination of the ALL on our noncovered loan portfolio is based on factors such as changes in the nature and volume of the portfolio, overall portfolio quality, delinquency trends, adequacy of collateral, loan concentrations, specific problem loans, and economic conditions that may affect the borrower's ability to pay. The ALL for noncovered loans consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers nonimpaired loans and is based on historical loss experience adjusted for current economic factors. Historical losses are adjusted by a qualitative analysis that reflects several key economic indicators such as gross domestic product, unemployment and core inflation as well as asset quality trends, rate risk and unusual events or significant changes in personnel, policies or procedures. The qualitative analysis requires judgment by management and is subject to continuous validation.

Our determination of the ALL on our covered loan portfolio is based on expected future cash flows. We record acquired loans at their acquisition date fair values, which are based on expected future cash flows and include an estimate for future loan losses. On the date of acquisition, management determines which covered loans are placed in homogeneous risk pools or reviewed specifically as part of the periodic cash flow re-estimation process. If a loan is placed in a pool, the overall performance of the pool will determine if any future ALL is required.

The covered loan ALL analysis represents management's estimate of the potential impairment of the acquired loan portfolio over time. Typically, decreased cash flows result in impairment, while increased cash flows result in a full or partial reversal of previously recorded impairment and potentially the calculation of a higher effective yield. If our actual losses exceed the estimated losses, we will record a provision for loan losses on covered loans as an expense on our consolidated statement of income. We also record an amount that will be recovered by us, under the related FDIC loss share agreements, as a reduction of the provision for loan losses on our consolidated statement of income.

At March 31, 2012, our total ALL for noncovered and covered loans was $67.8 million, a decrease of $1.7 million compared to December 31, 2011. The ALL at March 31, 2012 reflected net recoveries of $3.1 million on noncovered and covered loans and total provisions for loan losses of $252,000 for the three months ended March 31, 2012, net of $5.1 million recorded through the FDIC loss-share receivable.

Our noncovered ALL increased $1.5 million to $11.7 million at March 31, 2012, compared to $10.2 million at December 31, 2011. The provision for loan losses charged to expense was $1.5 million for the three months ended March 31, 2012 compared to $1.0 million for the same period in 2011. The increase in our noncovered ALL during 2012 is due to management's further evaluation and refinement of loans specifically reviewed for losses. The noncovered ALL to total noncovered loans held for investment was 1.55% at March 31, 2012, compared to 1.46% at December 31, 2011.

Our covered ALL decreased $3.2 million to $56.1 million at March 31, 2012, compared to $59.3 million at December 31, 2011. During 2011, we established the covered ALL due to evidence of additional credit deterioration subsequent to initial fair valuation. During the first quarter of 2012, the review of performance of the loan pools as well as specifically reviewed loans resulted in a decrease in the overall loss expectation by $6.4 million, which resulted in a negative net provision for loan losses of $1.3 million for the three months ended March 31, 2012. The negative provision for loan losses recognized for the three months ended March 31, 2012 reflects more recoveries than charge-offs and stabilization of cash flows. Conversely, at March 31, 2011, the expected future cash flows on

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the pools of loans acquired with evidence of credit quality deterioration was greater than the carrying value of such pools, and therefore we did not record an allowance for loan losses on the covered portfolio as of March 31, 2011.

The overall covered loan portfolio continues to perform in excess of our initial projections at the applicable acquisition dates. However, the performance is not uniform across all asset classes and individual loans. Despite the positive credit trends in covered loans, there remains the potential for future volatility within the provision for loan losses on covered loans.

As the majority of our covered loans are considered purchased credit impaired loans, our provision for loan losses in future periods will be most significantly influenced in the short term by differences in actual credit losses resulting from the resolution of problem loans from the estimated credit losses used in determining the estimated fair values of purchased impaired loans as of their acquisition dates. For loans originated by us, the provision for loan losses will be affected by the loss potential of impaired loans and trends in the delinquency of loans, nonperforming loans and net charge-offs, which may be more than our historical experience.

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The following table summarizes the activity in our allowance for loan losses related to our noncovered and covered loans for the periods presented.



	Three Months Ended March 31
	2012									2011
(dollars in thousands)	Noncovered Loans			Covered Loans			Total			Noncovered Loans			Covered Loans			Total
Balance, at the beginning of period	$	10,207		$	59,277		$	69,484		$	5,351		$	—		$	5,351
Charge-offs:
Construction, land & land development	47			3,069			3,116			7			—			7
Other commercial real estate	—			293			293			—			—			—
Total commercial real estate	47			3,362			3,409			7			—			7
Commercial & industrial	—			—			—			—			—			—
Owner-occupied real estate	—			—			—			—			—			—
Total commercial & industrial	—			—			—			—			—			—
Residential real estate	8			7			15			—			—			—
Consumer & other	10			—			10			91			—			91
Total charge-offs	$	65		$	3,369		$	3,434		$	98		$	—		$	98
Recoveries on loans previously charged-off:
Construction, land & land development	—			5,701			5,701			—			—			—
Other commercial real estate	—			655			655			—			—			—
Total commercial real estate	—			6,356			6,356			—			—			—
Commercial & industrial	—			6			6			—			—			—
Owner-occupied real estate	—			25			25			—			—			—
Total commercial & industrial	—			31			31			—			—			—
Residential real estate	—			167			167			—			—			—
Consumer & other	4			—			4			—			—			—
Total recoveries	$	4		$	6,554		$	6,558		$	—		$	—		$	—
Net charge-offs	61			(3,185		)	(3,124		)	98			—			98
Provision for loan losses	1,535			(6,375		)	(4,840		)	961			—			961
Benefit attributable to FDIC loss share agreements	—			5,092			5,092			—			—			—
Total provision for loan losses charged to operations	1,535			(1,283		)	252			961			—			961
Provision for loan losses recorded through the FDIC loss share receivable	—			(5,092		)	(5,092		)	—			—			—
Balance, at end of period	$	11,681		$	56,087		$	67,768		$	6,214		$	—		$	6,214
Allowance for loan losses to loans receivable	1.55		%	7.08		%	4.38		%	1.50		%	—		%	.48		%
Ratio of net charge-offs to average loans outstanding	.03		%	(1.58		)%	(2.41		)%	.10		%	—		%	.03		%

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Allocation of Allowance for Loan Losses

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



	March 31, 2012				December 31, 2011
(dollars in thousands)	Amount		% of Loans to total Loans		Amount		% of Loans to total Loans
Noncovered loans:
Construction, land & land development	$	3,555	12.8	%	$	2,422	10.8	%
Other commercial real estate	3,668		20.8	%	4,048		20.3	%
Total commercial real estate	7,223		33.6	%	6,470		31.1	%
Commercial & industrial	625		2.3	%	591		2.4	%
Owner-occupied real estate	2,941		9.3	%	2,257		9.2	%
Total commercial & industrial	3,566		11.6	%	2,848		11.6	%
Residential real estate	586		2.2	%	561		2.2	%
Consumer & other	299		1.4	%	328		1.4	%
Nonspecific	7		—		—		—
Total allowance for noncovered loans	$	11,681	48.8	%	$	10,207	46.3	%
Covered loans:
Construction, land & land development	$	24,661	12.3	%	$	25,300	12.6	%
Other commercial real estate	12,018		14.9	%	12,032		15.4	%
Total commercial real estate	36,679		27.2	%	37,332		28.0	%
Commercial & industrial	3,178		2.2	%	3,371		2.5	%
Owner-occupied real estate	2,026		8.9	%	4,202		9.5	%
Total commercial & industrial	5,204		11.1	%	7,573		12.0	%
Residential real estate	13,964		11.8	%	14,372		12.5	%
Consumer & other	240		1.1	%	—		1.2	%
Nonspecific	—		—		—		—
Total allowance for covered loans	$	56,087	51.2	%	$	59,277	53.7	%
Total allowance for loan losses	$	67,768	100	%	$	69,484	100.0	%

Nonperforming Assets

Nonperforming assets consist of noncovered nonaccrual loans, troubled debt restructurings and noncovered and covered other real estate owned, which is real estate acquired through foreclosure. However, loans and troubled debt restructurings acquired with evidence of deteriorated credit quality are not considered nonperforming assets. Substantially all of our covered loans were acquired with evidence of deteriorated credit quality and are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In addition to being covered by loss share agreements, these assets were marked to fair value at the time of acquisition, mitigating much of our loss potential on these assets. As a result, the levels of our nonperforming assets may not be fully comparable to those of our peers or to industry benchmarks.

As of March 31, 2012, all loans acquired with evidence of deteriorated credit quality and accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were covered by loss share agreements with the FDIC. These loans are recorded at a fair value based on cash flow projections that considered the deteriorated credit quality and expected losses. These loans are accounted for either on a pool or individual review basis, and any nonpayment of contractual principal or interest is considered in our periodic re-estimation of expected future cash flows. To the extent that our cash flow projections decrease, we record an immediate impairment expense through the provision for loan losses. We recognize increases in expected future

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cash flows through an increased yield over the remaining life of the portfolio. As a result of this accounting treatment, pools may be considered performing, even though some or all of the individual loans may be contractually past due. At March 31, 2012, all loans accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, continue to accrete income, as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows is being recognized on all acquired loans.

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

We contract with a third-party appraisal management company to order, obtain and review for Uniform Standards of Professional Appraisal Practice ("USPAP") compliance appraisals prepared by preapproved third-party appraisers. We conduct this process independently from our loan production staff. For noncovered loans, we will record either a specific allowance or a charge-off against the allowance for loan losses if our review of the current appraisal or the new appraisal indicates a loss. Subsequently, we will review our noncovered allowance and replenish it as required by our allowance for loan losses model. For covered loans, we re-estimate cash flows on a periodic basis. Increases in cash flow expectations result in a favorable adjustment to interest income over the remaining life of the covered loans, and decreases in cash flow expectations result in an immediate recognition of a provision for loan losses, in both cases, net of any adjustments to the FDIC receivable.

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

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

Loan modifications on covered loans accounted for within a pool under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, do not result in the removal of the loan from the pool even if the modification of the loan would otherwise be considered a troubled debt restructuring. At March 31, 2012, the Company did not have any covered loans classified as troubled debt restructurings.

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The following tables set forth our nonperforming assets for the periods presented.



	At March 31, 2012									At December 31, 2011
(dollars in thousands)	Noncovered Assets			Covered Assets			Total			Noncovered Assets			Covered Assets			Total
Nonaccrual loans	$	3,561		$	—		$	3,561		$	1,905		$	—		$	1,905
Troubled debt restructurings not included above	335			—			335			256			—			256
Total nonperforming loans	3,896			—			3,896			2,161			—			2,161
Other real estate owned	957			63,572			64,529			1,210			84,496			85,706
Total nonperforming assets	$	4,853		$	63,572		$	68,425		$	3,371		$	84,496		$	87,867
Nonperforming loans to total loans	.52		%	—		%	.25		%	.31		%	—		%	.14		%
Nonperforming assets to total loans and other real estate owned	.64		%	7.43		%	4.25		%	.48		%	9.42		%	5.50		%

Nonperforming assets, defined as nonaccrual loans, troubled debt restructurings and other real estate owned, totaled $68.4 million, or 4.3% of total loans plus other real estate owned, at March 31, 2012, compared to $87.9 million, or 5.5% of total loans plus other real estate owned, at December 31, 2011. Of the $68.4 million in nonperforming assets at March 31, 2012, $63.6 million related to assets that are covered by loss share agreements with the FDIC. Of the $87.9 million in nonperforming assets at December 31, 2011, $84.5 million related to assets that are covered by loss share agreements with the FDIC. Total nonperforming covered assets accounted for 92.9% and 96.2% of total nonperforming assets at March 31, 2012 and December 31, 2011, respectively.

At March 31, 2012 and December 31, 2011, the Company had no accruing noncovered loans greater than 90 days past due. At March 31, 2012 and December 31, 2011, a significant portion of the Company's covered loans were past due, including many that were 90 days or greater past due. However, such delinquencies were included in the Company's performance expectations in determining the fair values of covered loans at the acquisition dates. Accordingly, all covered loans continue to accrete interest income.

Potential problem loans, excluding covered loans which are not included in nonperforming loans, amounted to $11.8 million, or 1.6%, of total noncovered loans outstanding at March 31, 2012, compared to $11.3 million, or 1.6%, of total noncovered loans outstanding at December 31, 2011. Potential problem loans are those loans where management has a concern about the financial health of a borrower that causes management to have serious doubts as to the ability of the borrower to comply with the present loan terms.

Deposits

Total deposits at March 31, 2012 decreased approximately 4.8%, or $109.6 million, from December 31, 2011. During the three months ended March 31, 2012, the Bank continued to enhance its deposit product offerings for both commercial and personal customers. The level of deposits was also supported by relatively strong liquidity in the Bank's deposit base, limited alternative investment opportunities in the low rate environment and the availability of unlimited deposit insurance coverage on certain deposit products. Interest rates paid on specific deposit types are determined based on (i) the interest rates offered by competitors, (ii) the anticipated amount and timing of funding needs, (iii) the availability and cost of alternative sources of funding, and (iv) the anticipated future economic conditions and interest rates. Deposits are attractive sources of funding because of their stability and relative cost. Deposits are regarded as an important part of the overall client relationship and provide opportunities to cross sell other services.

The overall mix of deposits improved during the three months ended March 31, 2012, with noninterest-bearing deposits increasing $15.8 million to approximately $313 million and representing 14.3% of total deposits, compared to 12.9% at December 31, 2011. The increase in noninterest-bearing deposits resulted primarily from new business checking accounts.

Interest-bearing demand deposits decreased $42.3 million during the three months ended March 31, 2012, primarily resulting from the seasonality of some of our municipal deposits, while interest-bearing deposits in savings and money market accounts decreased $37.4 million, primarily resulting from our strategic decision to lower cost of funds. Time deposits, which are comprised mostly of certificates of deposits ("CDs"), decreased $45.7 million during the three months ended March 31, 2012. The short duration of our CD portfolio provides an opportunity to

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aggressively reprice deposits. Due to the Bank's strategy of lowering cost of funds and strengthening its deposit mix, the Bank did not renew all maturing deposits. Customers with maturing CD's during the three months ended March 31, 2012 were offered lowered rates at renewal and generally did not renew or shifted their deposits to other products.

The following table shows the composition of deposits at March 31, 2012 and December 31, 2011.



	March 31, 2012				December 31, 2011
(dollars in thousands)	Amount		% of total		Amount		% of total
Noninterest-bearing demand deposits	$	312,967	14.3	%	$	297,188	12.9	%
Interest-bearing demand deposits	316,738		14.5	%	359,020		15.6	%
Savings and money market accounts	1,103,151		50.4	%	1,140,552		49.6	%
Time deposits less than $100,000	251,375		11.5	%	275,413		12.0	%
Time deposits $100,000 or greater	204,644		9.3	%	226,292		9.9	%
Total deposits	$	2,188,875	100.0	%	$	2,298,465	100.0	%

The following table shows the average balance amounts and the average rates paid on deposits held by us for the quarter ended March 31, 2012 and the year ended December 31, 2011.



	March 31, 2012				December 31, 2011
(dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Noninterest-bearing demand deposits	$	300,704	—	%	$	259,910	—	%
Interest-bearing demand deposits	310,662		.13	%	264,703		.22	%
Savings and money market accounts	1,115,877		.50	%	1,266,858		.86	%
Time deposits less than $100,000	262,116		1.12	%	299,992		1.75	%
Time deposits $100,000 or greater	214,205		1.08	%	240,404		1.98	%
Total deposits	$	2,203,564	.52	%	$	2,331,867	.92	%

The maturity distribution of our time deposits of $100,000 or greater at March 31, 2012 was as follows:



(in thousands)
Three months or less	$	57,389
Over three through six months	43,193
Over six though twelve months	48,551
Over twelve months	55,511
Total	$	204,644

Borrowings and Other Interest-Bearing Liabilities

The following table outlines our various sources of borrowed funds for the three months ended March 31, 2012 and for the year ended December 31, 2011, and the amounts outstanding at the end of each period, the maximum amount for each component during such period, the average amounts outstanding for each period and the average interest rate that we paid for each borrowing source. The maximum month-end balance represents the high indebtedness for each component of borrowed funds at any time during each of the periods shown. In 2010, the Bank sold a junior participation interest in three loans. The participation agreements have various provisions regarding collateral position, pricing and other matters. The terms of the agreements do not convey proportionate ownership rights with equal priority to each participating interest and entitles the Bank to receive principal and interest payments before other participating interest holders. Therefore, the participations sold do not qualify for sale treatment in accordance with guidance provided in ASC Topic 860, Accounting for Transfers of Financial

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Assets, because they do not qualify as participating interests. The Bank recorded the transaction as a secured borrowing. At March 31, 2012, the balance of the secured borrowing was $2.5 million, a decrease of approximately $4,000 from December 31, 2011. The loans are recorded at their gross balances outstanding on the balance sheet.



	Ending Balance		Period End Rate		Maximum Month-End Balance		Average for the Period
(dollars in thousands)	Ending Balance		Period End Rate		Maximum Month-End Balance		Balance		Rate
At or for the three months ended March 31, 2012:
Securities sold under agreements to repurchase	$	1,421	.10	%	$	5,575	$	3,564	.11	%
Notes payable	2,535		8.79	%	2,537		2,537		8.72	%
At or for the year ended December 31, 2011:
Securities sold under agreements to repurchase	$	4,749	.10	%	$	7,463	$	3,515	.20	%
Notes payable	2,539		8.49	%	2,563		2,548		9.58	%

Results of Operations

General

We reported net income of $5.1 million for the three months ended March 31, 2012, compared to $8.2 million for the three months ended March 31, 2011. Diluted earnings per share were $.16 for the three months ended March 31, 2012, compared to $.25 for the three months ended March 31, 2011. Accretion on covered loans under our loss share agreements with the FDIC has materially contributed to our earnings for 2011 and the first three months of 2012.

We expect that over the near term, as we manage the disposition of our covered loans and other real estate assets acquired from the FDIC, a significant portion of our earnings will result from accretion income on our covered loan portfolio. During this period, as we dispose of our covered loans, we also plan to grow our balance sheet by replacing our covered loans with new performing loans and related interest income. At March 31, 2012, our noncovered loans totaled $754.6 million, or 48.8% of our total loan portfolio, compared to $413.0 million, or 31.7% of our total loan portfolio at March 31, 2011.

Net Interest Income

Our primary source of earnings is net interest income, which is the excess of the interest income recognized on interest earning assets (such as loans and investment securities), as well as any accretion income on covered loans, over the interest expense incurred on interest bearing liabilities such as deposits and borrowings. Net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned and paid on them as influenced by the Federal Reserve monetary policy. Following our acquisitions, the accretion income on covered loans under our loss share agreements with the FDIC has materially contributed to our net interest income, and we expect that to continue for the immediate future.

Our net interest income on a taxable equivalent basis was $35.5 million for the three months ended March 31, 2012. Our net interest margin, which is net interest income on a taxable equivalent basis divided by average interest-earning assets, was 7.03% for the same period. Our net interest income on a taxable equivalent basis was $27.7 million for the three months ended March 31, 2011. Our net interest margin was 5.65% for the same period. Asset yields have increased 51 basis points, which is mainly driven by a change in the investment portfolio mix. As a result of investing in nonagency bonds, we have been able to achieve higher yields on the portfolio, while keeping the duration short. Noninterest-bearing deposits have continued to increase during the quarter and now comprise more than 14% of total deposits. This increase in noninterest-bearing transactional account balances, as well as continued aggressive repricing of the higher cost interest-bearing deposits, has resulted in a 72 basis point decrease in the cost of funds compared to March 31, 2011.

Our interest income was $38.3 million for the three months ended March 31, 2012, which included interest and fees earned on noncovered loans of $11.8 million and accretion income on covered loans of $23.5 million. Our interest income was $34.8 million for the three months ended March 31, 2011, which included interest and fees earned on noncovered loans of $6.7 million and accretion income on covered loans of $25.5 million. Interest and fees earned on noncovered loans increased by $5.1 million, which is mainly attributable to organic loan growth.

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Accretion income on covered loans has generated volatility in net interest income. Accretion income decreased $2.0 million, which is principally due to the lengthening of the accretion period that matches our current cash flow estimations. This volatility trend in interest income related to the covered loans will likely continue for the immediate future. Accretion income will fluctuate based on our re-estimation of expected cash flows, the management of our acquired portfolio, the timing of loan repayments or liquidation of collateral, and the potential acquisition of new loan portfolios.

Interest expense was $2.9 million for the three months ended March 31, 2012, compared to $7.1 million for the three months ended March 31, 2011, and was comprised almost entirely of interest paid on deposit accounts of $2.8 million for the 2012 period and $7.0 million for the 2011 period. The average balance of interest-bearing deposit accounts was $1.9 billion for the three months ended March 31, 2012, compared to $2.1 billion for the three months ended March 31, 2011.

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Average Balances, Net Interest Income, Yields, and Rates

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



	For the Three Months Ended March 31, 2012						For the Three Months Ended March 31, 2011
(dollars in thousands)	Average Balance		Income/ Expense		Yield/ Rate(1)		Average Balance		Income/ Expense		Yield/ Rate(1)
Assets:
Interest-bearing deposits in other financial institutions	$	158,949	$	102	.26	%	$	282,665	$	197	.28	%
Taxable investment securities	333,661		2,799		3.37	%	403,649		2,278		2.29	%
Nontaxable investment securities, tax-equivalent basis (2)	10,199		160		6.31	%	10,291		157		6.19	%
Noncovered loans receivable (3)	722,908		11,834		6.58	%	405,635		6,739		6.74	%
Covered loans receivable	806,508		23,490		11.71	%	890,107		25,482		11.61	%
Total earning assets	2,032,225		38,385		7.60	%	1,992,347		34,853		7.09	%
Total nonearning assets	628,193						737,538
Total assets	$	2,660,418					$	2,729,885

Liabilities:
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	310,662	$	98	.13	%	$	244,476	$	185	.31	%
Savings & money market deposits	1,115,877		1,390		.50	%	1,267,305		3,679		1.18	%
Time deposits less than $100,000	262,116		731		1.12	%	325,471		1,780		2.22	%
Time deposits $100,000 or greater	214,205		577		1.08	%	249,261		1,389		2.26	%
Notes Payable	2,537		55		8.72	%	2,557		72		11.42	%
Securities sold under agreements to repurchase and federal funds purchased	3,564		1		.11	%	3,576		13		1.47	%
Total interest-bearing liabilities	1,908,961		2,852		.60	%	2,092,646		7,118		1.38	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits	300,704						230,987
Other liabilities	43,652						41,728
Shareholders’ equity	407,101						364,524
Total liabilities and shareholders’ equity	$	2,660,418					$	2,729,885
Net interest income			$	35,533					$	27,735
Net interest spread					7.00	%					5.71	%
Net interest margin					7.03	%					5.65	%

(1) Annualized for the applicable period.

(2) Reflects taxable equivalent adjustments using the statutory tax rate of 35% in adjusting interest on tax-exempt securities to a fully taxable basis. The taxable equivalent adjustments included above amounts to $56,000 for 2012 and $55,000 for 2011.

(3) Includes nonaccruing loans on noncovered loans receivable. There are no nonaccrual covered loans.

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Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table reflects the effect that varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.



	Three Months Ended
	March 31, 2012
	vs. March 31, 2011
	Increase (Decrease) Due to
(in thousands)	Volume			Rate			Net Change
Interest income:
Noncovered loans	$	6,948		$	(1,853	)	$	5,095
Covered loans	(3,380		)	1,388			(1,992		)
Taxable investment securities	(2,653		)	3,174			521
Nontaxable investment securities	(7		)	10			3
Interest-bearing deposits in other financial institutions	(85		)	(10		)	(95		)
Total interest income	823			2,709			3,532

Interest expense:
Total deposits	(290		)	(3,947		)	(4,237		)
Notes payable	(1		)	(16		)	(17		)
Securities sold under repurchase agreements and federal funds purchased	—			(12		)	(12		)
Total interest expense	(291		)	(3,975		)	(4,266		)
Net interest income	$	1,114		$	6,684		$	7,798

Provision for Loan Losses

We have established an allowance for loan losses on both noncovered and covered loans through a provision for loan losses charged as an expense on our statement of income.

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

There was no allowance for loan losses at the date of acquisition on the covered loans in our loan portfolio that we acquired under the loss share agreements with the FDIC because we recorded these loans at fair value at the time of each respective acquisition. We periodically evaluate the recorded investment on our covered loans and compare our actual losses to estimated losses to determine whether additional provision expense is necessary. This re-estimation of cash flows expected to be collected are updated based on updates to assumptions regarding default rates, loss severities and other factors that are reflective of current market conditions. If our actual losses exceed the estimated losses, we will record a provision expense adjustment charged as an expense on our statement of income. In that event, due to the FDIC loss share agreements, we would usually expense between 5% and 20% of the estimated loss, depending upon the applicable acquisition and loss share agreement to which the loss is related. Conversely, if expected cash flows improve from original estimates, an adjustment to yield is to be recognized over the life of the loans. Our covered loan provision expense for the three months ended March 31, 2012 was a negative $1.3 million as a result of re-estimated cash flows that resulted in recoveries of previous provisions on certain covered loans both individually and collectively evaluated for impairment. No additional provision for loan losses on covered loans was required for the three months ended March 31, 2011.

For the three months ended March 31, 2012, our provision for loan losses on noncovered loans was $1.5 million compared to $961,000 recorded for the three months ended March 31, 2011. The change in the noncovered loan

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loss provision recorded during the 2012 period compared to the 2011 period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in management’s opinion, to sufficiently cover probable losses in the noncovered loan portfolio and is mostly attributed to an increase resulting from noncovered loan growth. The allowance for loan losses was approximately $11.7 million for the 2012 period and $6.2 million for the 2011 period. Our allowance for loan losses on noncovered loans as a percentage of gross noncovered loans was 1.55% at March 31, 2012, compared to 1.50% at March 31, 2011. The increase in the allowance for loan losses as a percentage of gross noncovered loans is predominantly due to the refinement of the standard allowance calculation during 2011 to more adequately reflect our lower than peer historical losses and management's assumptions on qualitative risk factors.

Noninterest Income

Noninterest income totaled a negative $3.8 million for the three months ended March 31, 2012, compared to $8.1 million for the 2011 period. The amortization of the FDIC receivable of $7.0 million comprised the most significant change to noninterest income for the three months ended March 31, 2012. Comparatively, accretion income was $5.0 million, or 61.7% of our noninterest income for the 2011 period. The amortization recognized during the three months ended March 31, 2012 resulted from improved credit quality in the covered loan portfolio. We expect to continue to experience amortization of the FDIC receivable in future quarters, but such amounts are expected to decline over time unless asset quality trends further improve. Service charges on deposits of $1.2 million comprised 32.1% of our noninterest income for the three months ended March 31, 2012, compared to $1.4 million, or 17.5% of our noninterest income, for the 2011 period. These service charges are primarily from fees related to insufficient funds checks and the Bank’s bounce protection product.

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Noninterest Expense

Noninterest expense totaled $23.2 million for the three months ended March 31, 2012. Salaries and employee benefits were our most significant expense totaling $13.0 million, or 55.8% of noninterest expense, for the three months ended March 31, 2012. Noninterest expense totaled $21.4 million for the three months ended March 31, 2011. Salaries and employee benefits were our most significant expense totaling $11.7 million, or 54.5% of noninterest expense, for the 2011 period. We currently have higher than normal expenses for a typical commercial bank of like size as a result of expenses associated with (a) the operation of our Special Assets Division, which services the problem assets acquired under the loss share agreements with the FDIC, (b) our Regulatory Relations Department, which manages our compliance with the FDIC loss share agreements, and (c) legal and professional fees related to our acquisitions and remediation of failed bank assets.

Occupancy and equipment expenses were $2.5 million, or 10.6% of noninterest expense, for the three months ended March 31, 2012, compared to $1.9 million, or 8.8% of noninterest expense for the 2011 period. The primary driver surrounding the increase in occupancy and equipment expense is a result of a newly executed lease agreement for office space in metro Atlanta covering 56,000 square feet over 11 years.

Legal and professional expenses were $1.5 million, or 6.5% of noninterest expense, for the three months ended March 31, 2012, comprised of $66,000 in legal fees, $693,000 in accounting and audit fees and $758,000 of consulting and other professional fees. Legal and professional expenses were $1.8 million, or 8.6% of noninterest expense, for the three months ended March 31, 2011, comprised of $277,000 in legal fees, $368,000 in accounting and audit fees and $1.2 million of consulting and other professional fees. Our resolution efforts with respect to our covered assets and our acquisition activity resulting in increased legal and professional expenses has leveled out during 2012. In addition, the Company engaged a consulting company during 2011, which continues to significantly affect accounting and audit fees in 2012, to implement a sophisticated cash flow projection model as a tool in calculating fair values and future cash flows on the covered loans acquired in the FDIC-assisted acquisitions. Also surrounding accounting and auditing fees is due diligence work surrounding recent FDIC-assisted acquisitions and ongoing review of the cash flow projection model.

Federal deposit insurance premiums and fees were $418,000, or 1.8% of noninterest expense for the three months ended March 31, 2012, compared to $649,000, or 3.0% of noninterest expense, for the 2011 period. The decrease in deposit insurance premiums is a result of a change in the calculation of the FDIC assessment resulting from a continued decline in total assets.

Net costs of operations of other real estate owned were $2.1 million, or 9.0% of noninterest expense, for the three months ended March 31, 2012, and primarily related to other real estate owned covered by loss share agreements with the FDIC. These costs include losses on sales of other real estate of $941,000 and expenses related to the management and collection of other real estate of $1.2 million. Net costs of operations of other real estate owned were $1.9 million, or 9.0% of noninterest expense, for the 2011 period. These costs include losses on sales of other real estate of $1.0 million and expenses related to the management and collection of other real estate of $882,000. The decrease in other real estate owned expense is directly related to a reduction in covered other real estate owned volumes from one period to the next. As management continues to work through and dispose of these covered assets, the expense should continue to decline at a steady rate, absent additional acquisitions. Under the loss share agreements, we record a portion of these losses and expenses in our statements of income (generally 20%) and we record the remaining balance in an FDIC receivable. Noninterest expense related to our noncovered other real estate owned continued to be a very small portion of our net costs of operations of other real estate owned.

Capital Resources

We strive to maintain an adequate capital base to support our activities in a safe manner while at the same time maximizing shareholder returns. At March 31, 2012, we exceeded all minimum regulatory capital requirements as shown in the table below. At March 31, 2012, our shareholders' equity was $408.5 million, or 15.3% of total assets, compared to $397.3 million, or 14.3% of total assets, at December 31, 2011. The primary factors affecting changes in shareholder's equity were our net income and increases in accumulated other comprehensive income during the first three months of 2012.

Federal regulations impose minimum regulatory capital requirements on all institutions with deposits insured by the FDIC. The Federal Reserve Board ("FRB") imposes similar capital regulations on bank holding companies. To be considered "well capitalized" under capital guidelines, the Bank must maintain total risk-based capital, Tier I

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capital and leverage ratios of 10%, 6%, and 5%, respectively. To be considered "adequately capitalized" under capital guidelines, the Company must maintain total risk-based capital of 8% and Tier I and leverage ratios of 4%.

The decrease in Tier I risk-based capital and total risk-based capital from December 31, 2011 to March 31, 2012, reflected increases in Tier I, total regulatory capital, and total risk-weighted assets used in the ratio calculations. The increase in the Tier I capital was mainly a result of net income retained in the first quarter of 2012. Total regulatory capital increase was a result of the increase in the allowance for loan losses on both covered and noncovered loans during 2011 and 2012. The increase in risk-weighted assets from December 31, 2011 is due in large part to the increase in our noncovered loan portfolio and the higher risk-weights applied to these loans compared to the covered loan portfolio, which continues to decline and carries lower risk-weights.

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



	Bank		Company		Bank		Company
	March 31, 2012		March 31, 2012		December 31, 2011		December 31, 2011
Leverage ratio	14.45	%	15.06	%	13.23	%	13.76	%
Tier 1 risk-based capital ratio	31.59	%	32.92	%	32.47	%	33.84	%
Total risk-based capital ratio	32.90	%	34.22	%	33.78	%	35.15	%

For all periods, the Bank was considered "well capitalized" and we intend to maintain a capital level for the Bank that exceeds the FDIC requirements to be classified as a "well capitalized" bank. In addition, as a condition to the FDIC's approval of the Notice of Change in Control filing of Mr. Evans, Mr. Speight and Mr. Childers, each an executive officer, in connection with the July 2009 recapitalization and acquisition, the Bank was required to execute a Capital Maintenance Agreement with the FDIC. Under the terms of the agreement, the Bank must at all times maintain a leverage ratio of at least 10% and a total risk-based capital ratio of at least 12%. The agreement terminates on December 31, 2013. At March 31, 2012 and December 31, 2011, the Bank was in compliance with the Capital Maintenance Agreement.

Off-Balance Sheet Arrangements

Commitments to extend credit are agreements to lend to a customer as long as the customer has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At March 31, 2012, unfunded commitments to extend credit were $178.5 million. A significant portion of the unfunded commitments related to commercial real estate and land development and consumer equity lines of credit. Based on experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

At March 31, 2012, there were commitments totaling approximately $3.5 million under letters of credit. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Because most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

We have entered into interest rate swap contracts with notional amounts totaling $57.9 million as of March 31, 2012, for the purpose of converting fixed rate loans to variable rates. The fair value of the swaps amounted to $905 thousand as of March 31, 2012 and was recorded as a liability, compared to the fair value of $1.0 million recorded as a liability as of December 31, 2011. Note 9 to the consolidated financial statements located in Item I of this Quarterly Report on Form 10-Q provides additional information on these contracts.

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

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Contractual Obligations

In the normal course of business, we have various outstanding contractual obligations that will require future cash outflows. The following table presents our largest contractual obligations as of March 31, 2012.



	Payments Due by Period
(in thousands)	Total		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years
Operating lease obligations	$	19,584	$	1,085	$	3,559	$	3,341	$	11,599

Operating lease obligations increased as a result of a newly executed lease agreement for office space in metro Atlanta. The lease covers 56,000 square feet of office space with a term of 11 years.

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds to meet the operating, capital and strategic needs of the Company and the Bank. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control when we make investment decisions. Net deposit inflows and outflows, however, are far less predictable and are not subject to the same degree of certainty.

The asset portion of the balance sheet provides liquidity primarily through scheduled payments, maturities and repayments of loans and investment securities. Cash and short-term investments such as federal funds sold and maturing interest-bearing deposits with other banks are also sources of funding. As we dispose of our covered loans and assets, the collection of the FDIC receivable provides an additional source of funding.

At March 31, 2012, our liquid assets, which consist of cash and amounts due from banks, interest-bearing deposits in other financial institutions and federal funds sold, amounted to $210.3 million, or 7.9% of total assets. Our available-for-sale securities at March 31, 2012 amounted to $322.8 million, or 12.1% of total assets. Investment securities and lines of credit traditionally provide a secondary source of liquidity because they can be converted into cash in a timely manner.

The liability portion of the balance sheet serves as our primary source of liquidity. We plan to meet our future cash needs through the generation of deposits. We maintain eight federal funds lines of credit with correspondent banks totaling $170.0 million. We are also a member of the Federal Home Loan Bank of Atlanta (FHLB), from which we can borrow for leverage or liquidity purposes. The FHLB requires that securities and qualifying loans be pledged to secure any advances. At March 31, 2012, we had no advances from the FHLB and a remaining credit availability of $52.6 million. In addition, we maintain a line with the Federal Reserve Bank's discount window of $44.7 million secured by certain loans in our loan portfolio.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

At March 31, 2012, approximately 80.6% of our noncovered and covered loans will reprice or mature within one year. Approximately 94.4% of our interest-bearing liabilities reprice or mature within one year. However,

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interest rate movements typically result in changes in interest rates on assets that are different in magnitude from the corresponding changes in rates paid on liabilities. While a substantial portion of our loans reprice within the next three months a large majority of our deposits will also reprice within the same three-month period. Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable timeframe that minimizes the changes in net interest income.

We regularly review our exposure to changes in interest rates. Among the factors we consider are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. Typically, the Financial Risk Committee reviews, on at least a quarterly basis, our interest rate risk position. The primary tool used to analyze our interest rate risk and interest rate sensitivity is an earnings simulation model.

This earnings simulation model projects a baseline net interest income (assuming no changes in interest rate levels) and estimates changes to that baseline net interest income resulting from changes in interest rate levels. We rely primarily on the results of this model in evaluating our interest rate risk. This model incorporates a number of additional factors including: (1) the expected exercise of call features on various assets and liabilities, (2) the expected rates at which various rate-sensitive assets and rate-sensitive liabilities will reprice, (3) the expected growth in various interest-earning assets and interest-bearing liabilities and the expected interest rates on new assets and liabilities, (4) the expected relative movements in different interest rate indexes which are used as the basis for pricing or repricing various assets and liabilities, (5) existing and expected contractual cap and floor rates on various assets and liabilities, (6) expected changes in administered rates on interest-bearing transaction, savings, money market and time deposit accounts and the expected impact of competition on the pricing or repricing of such accounts, (7) cash flow and accretion expectations from loans acquired in FDIC transactions, and (8) other relevant factors. Inclusion of these factors in the model is intended to more accurately project our expected changes in net interest income resulting from interest rate changes. We typically model our change in net interest income assuming interest rates go up 100 basis points, up 200 basis points, down 100 basis points and down 200 basis points. For purposes of this model, we have assumed that the change in interest rates phase in over a 12-month period. While we believe this model provides a reasonably accurate projection of our interest rate risk, the model includes a number of assumptions and predictions which may or may not be correct and may impact the model results. These assumptions and predictions include inputs to compute baseline net interest income, growth rates, expected changes in administered rates on interest-bearing deposit accounts, competition and a variety of other factors that are difficult to accurately predict. Accordingly, there can be no assurance the earnings simulation model will accurately reflect future results.

The following table presents the earnings simulation model's projected impact of a change in interest rates on the projected baseline net interest income for the 12-month period commencing April 1, 2012. This change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in the slope of the yield curve.



Shift in Interest Rates (in basis points)		% Change in Projected Baseline Net Interest Income
+200		(4.20)
+100		(2.22)
-100		1.71
-200		Not meaningful

In the event of a shift in interest rates, management may take certain actions intended to mitigate the negative impact to net interest income or to maximize the positive impact to net interest income. These actions may include, but are not limited to, restructuring of interest-earning assets and interest-bearing liabilities, seeking alternative funding sources or investment opportunities and modifying the pricing or terms of loans, leases and deposits.

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Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Based on our management’s evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, as of March 31, 2012, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

PART II

Item 1. Legal Proceedings.

We are not a party to any material pending legal proceedings, other than ordinary routine litigation incident to our business.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2011.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.



Exhibit No.		Description of Exhibit
31.1		Rule 13a-14(a) Certification of the Chief Executive Officer
31.2		Rule 13a-14(a) Certification of the Chief Financial Officer

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32.1		Section 1350 Certifications
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Statements of Financial Condition at March 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Income for the three months ended March 31, 2012 and 2011, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2012 and 2011, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (vi) Notes to Consolidated Financial Statements.(1)

(1) Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

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



		STATE BANK FINANCIAL CORPORATION

Date: May 10, 2012	By:	/s/ Joseph W. Evans
		Joseph W. Evans
		Chief Executive Officer (Principal Executive Officer)

Date: May 10, 2012	By:	/s/ Thomas L. Callicutt, Jr.
		Thomas L. Callicutt, Jr.
		Chief Financial Officer (Principal Financial and Accounting Officer)

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Exhibit List



31.1		Rule 13a-14(a) Certification of the Chief Executive Officer
31.2		Rule 13a-14(a) Certification of the Chief Financial Officer
32.1		Section 1350 Certifications
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Statements of Financial Condition at March 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Income for the three months ended March 31, 2012 and 2011, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2012 and 2011, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (vi) Notes to Consolidated Financial Statements.(1)