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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-24172
 SOUTHEASTERN BANK FINANCIAL CORPORATION
  GEORGIA
(State or other jurisdiction of 
incorporation or organization)
    
    58-2005097
(I.R.S. Employer
Identification No.)3530 Wheeler Road 
Augusta, Georgia
(Address of principal executive offices)
    
    30909
(Zip Code)
 (706) 738-6990
 None
     o þ
  o þ
 þ o
 þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ
   Class
    
    Outstanding at March 2, 2009Common Stock, $3 par value per share
    
    5,987,785 shares
 DOCUMENTS INCORPORATED BY REFERENCE
 Document
    
    Parts Into Which IncorporatedProxy Statement for the Annual Meeting of Shareholders to be held
April 22, 2009
    
    Part III




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TABLE OF CONTENTS  Item 1. Description of BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of ShareholdersPART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits and Financial Statement SchedulesSIGNATURESEXHIBIT INDEXEX-3.1EX-10.3EX-10.6EX-10.18EX-10.19EX-10.20EX-10.22EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1    Table of Contents  
 Item 1. Description of Business
 General
   www.georgiabankandtrust.com
 www.sec.gov
 History
  2




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Management Team
   Market Area
  3




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4




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Lending Activities
  Real Estate Loans.
 Commercial Real Estate Loans.
 Construction and Development Loans
  5




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Residential Loans.
 . Amendment of Statement 133 on Derivative
Instruments and Hedging Activities,
 6




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Commercial Loans.
 Consumer Loans.
 Loan Approval and Review.
  7




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Deposits
  Deposit Mix
 (Dollars in Thousands)Noninterest-bearing
    
    $
    111,291
    
    
    
    9.77
    %NOW accounts
    
    
    166,561
    
    
    
    14.62
    %Money management accounts
    
    
    50,404
    
    
    
    4.42
    %Savings
    
    
    247,249
    
    
    
    21.70
    %Time deposits
    
    
    
    
    
    
    0.00
    %Under $100
    
    
    178,608
    
    
    
    15.67
    %$100 and over
    
    
    385,439
    
    
    
    33.82
    %$
    1,139,552
    
    
    
    100.00
    %
 .
 Competition
   8




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Employees
  Supervision and Regulation
   
    
    how, when and where the Company may expand geographically;
    
    into what product or service markets it may enter;
    
    how it must manage its assets; and
    
    under what circumstances money may or must flow between the Company and
its subsidiaries.
  The Company
  Acquisitions of Banks .
 
    
    acquiring direct or indirect ownership or control of any voting shares of any bank
if, after the acquisition, the bank holding company will directly or indirectly own or
control more than 5% of the banks voting shares;
    
    acquiring all or substantially all of the assets of any bank; or
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
    
    merging or consolidating with any other bank holding company.
   Change in Bank Control .
 
    
    the bank holding company has registered securities under Section 12 of the
Securities Act of 1934; or
    
    no other person owns a greater percentage of that class of voting securities
immediately after the transaction.
  Permitted Activities
  10




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Capital Adequacy .
     11




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Payment of Dividends
    Restrictions on Transactions with Affiliates
  
    
    a banks loans or extensions of credit to affiliates;
    
    a banks investment in affiliates;
    
    assets a bank may purchase from affiliates, except for real and personal property
exempted by the Federal Reserve Board;
    
    loans or extensions of credit made by a bank to third parties collateralized by the
securities or obligations of affiliates; and
    
    a banks guarantee, acceptance or letter of credit issued on behalf of an affiliate.
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
    
    Ensure that senior executive incentive compensation packages do not encourage excessive
risk;
    
    Subject senior executive compensation to clawback if the compensation was based on
inaccurate financial information or performance metrics;
    
    Prohibit any golden parachute payments to senior executive officers; and
    
    Agree not to deduct more than $500,000 for a senior executive officers compensation.
 Support of Subsidiary Institutions.
 Prompt Corrective Action .
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FDIC Insurance Assessments .
    FDIC Temporary Liquidity Guarantee Program.
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Community Reinvestment Act .
 Allowance for Loan and Lease Losses.
 Commercial Real Estate Lending
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
    
    total reported loans for construction, land development and other land represent
100% or more of the institutions total capital, or
    
    total commercial real estate loans represent 300% or more of the institutions total
capital, and the outstanding balance of the institutions commercial real estate loan
portfolio has increased by 50% or more.
 Other Regulations .
  
    
    Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
    
    Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves;
    
    Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit;
    
    Fair Credit Reporting Act of 1978, governing the use and provision of information to
credit reporting agencies, certain identity theft protections, and certain credit and
other disclosures;
    
    Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies;
    
    Soldiers and Sailors Civil Relief Act of 1940, as amended, governing the repayment
terms of, and property rights underlying, secured obligations of persons currently on
active duty with the U.S. military;
    
    Talent Amendment in the 2007 Defense Authorization Act, establishing a 36% annual
percentage rate ceiling, which includes a variety of charges including late fees, for
certain types of consumer loans to military service members and their dependents; and
    
    rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws.
  
    
    Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;
    
    Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records;
    
    Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to
implement that act, which govern automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from the use of automated teller
machines and other electronic banking services; and,
 16




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
    
    rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws.
 Georgia Bank & Trust Company
  Branching .
  Southern Bank & Trust
  Qualified Thrift Lender Status.
  17




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
    
    Loans to purchase, refinance, construct, improve or repair domestic residential or
manufactured housing;
    
    Home equity loans;
    
    Educational loans;
    
    Small business loans;
    
    Loans made through credit card or credit card accounts;
    
    Securities backed by or representing an interest in mortgages on domestic
residential or manufactured housing;
    
    Federal Home Loan Bank stock; and
    
    Obligations of the FDIC, FSLIC, RTC, and the FSLIC Resolution Fund.
  
    
    Fifty percent of the amount of domestic residential housing mortgage loans
originated and sold within 90 days. An institution may, on a consistent basis, include
as QTI either the sales amounts from a previous quarter or the previous rolling 90 days
or three-month period;
    
    Investments in a service corporation that derives at least 80% of its gross revenues
from activities related to domestic or manufactured residential housing;
    
    Two hundred percent of the amount of loans and investments in starter homes;
    
    Two hundred percent of the amount of certain loans in credit-needy areas;
    
    Loans for the purchase, construction, development, or improvements of community
service facilities not in credit-needy areas;
    
    Loans for personal, family, or household purposes (other than those reported in the
assets includable without limit category); and
    
    FNMA and FHLMC stock.
 Lending Limit.
   
    
    Commercial loans up to 20% of assets (50% of which must be in small business loans).
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
    
    Nonresidential real property loans up to 400% of capital (the OTS may grant
increased authority if it is determined that the increased authority poses no
significant threat to the safe and sound operation of the institution and is consistent
with prudent operating practices).
    
    Consumer loans up to 35% of assets (all loans in excess of 30% of assets must be
direct loans).
    
    Education loans up to 5% of assets.
    
    Non-conforming loans up to 5% of assets.
    
    Construction loans (residential) without security up to 5% of assets.
 Other Regulations.
 
    
    SB&T must submit independent audit reports to the Regional Director for its first
three years of operations;
    
    SB&T must operate within the parameters of the business plan submitted with the
application and submit any proposed major deviations or material changes from the plan
for the prior, written non-objection of the Regional Director. The request for change
must be submitted no later than 60 calendar days prior to the desired implementation
date with a copy sent to the FDIC Regional Officer;
    
    During the first two years of operation, SB&T must receive prior written
non-objection of the Regional Director for any proposed new directors or senior
executive officers or any significant change in responsibilities of any senior
executive officer; and
    
    During the first eighteen months of operation, any contracts or agreements
pertaining to transactions with affiliates, not yet submitted to the OTS for review,
must be provided to the Regional Director, at least 30 days prior to execution and must
receive the Regional Directors written non-objection prior to implementation.
  Proposed Legislation and Regulatory Action
  Effect of Governmental Monetary Policies
  19




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Item 1A. Risk Factors
  The amount of other real estate owned (OREO) may increase significantly, resulting in
additional losses, and costs and expenses that will negatively affect our operations
  The deterioration in the residential mortgage market may continue to spread to commercial credits,
which may result in greater losses and non-performing assets, adversely affecting our business
operations.
  The FDIC Deposit Insurance assessments that we are required to pay may materially increase in the
future, which would have an adverse effect on our earnings.
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Future impairment losses could be required on various investment securities, which may materially
reduce the Companys and the Banks regulatory capital levels.
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We could suffer loan losses from a decline in credit quality.
  As a community financial institution, we have different lending risks than larger banks.
   If the value of real estate in our core market were to decline materially, a significant portion of
our loan portfolio could become under-collateralized, which could have a material adverse effect on
our business, financial condition and results of operations.
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We make and hold in our portfolio a significant number of land acquisition and development and
construction loans, which pose more credit risk than other types of loans typically made by
financial institutions.
  Our recent results may not be indicative of our future results, and may not provide guidance to
assess the risk of an investment in our common stock.
  Our profitability is vulnerable to interest rate fluctuations.
  23




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Our allowance for loan losses may not be adequate to cover actual loan losses, which may require us
to take a charge to our earnings and adversely impact our financial condition and results of
operations.
  An economic downturn, especially one affecting our market areas, could adversely affect our
financial condition, results of operations or cash flows.
  Ongoing deterioration in the housing market and the homebuilding industry may lead to increased
losses and further worsening of delinquencies and non-performing assets in our loan portfolios.
Consequently, our results of operations may be adversely impacted.
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We face intense competition in all of our current and planned markets.
   
    
    the ability to develop, maintain, and build upon long-term customer relationships
based on top quality service and high ethical standards;
    
    the scope, relevance, and pricing of products and services offered to meet customer
needs and demands;
    
    the rate at which we introduce new products and services relative to our
competitors;
    
    customer satisfaction with our level of service; and
    
    industry and general economic trends.
  Our business strategy includes the continuation of growth plans, and our financial condition and
results of operations could be negatively affected if we fail to grow or fail to manage our growth
effectively.
  25




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Additional growth may require us to raise additional capital in the future, but that capital may
not be available when it is needed, which could adversely affect our financial condition and
results of operations.
   Our ability to pay dividends is limited and we may be unable to pay future dividends. As a result,
capital appreciation, if any, of our common stock may be your sole opportunity for gains on your
investment for the foreseeable future.
  We are subject to extensive regulation that could limit or restrict our activities and impose
financial requirements or limitations on the conduct of our business, which limitations or
restrictions could adversely affect our profitability.
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Environmental liability associated with lending activities could result in losses.
  Holders of our subordinated debentures have rights that are senior to those of our common
shareholders.
  If we are unable to increase our share of deposits in our market, we may accept out of market and
brokered deposits, the costs of which may be higher than expected.
  27




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Opening new offices may not result in increased assets or revenues for us.
  Changes in monetary policies may have an adverse effect on our business, financial condition and
results of operations.
  Our directors and executive officers own a significant portion of our common stock and can
influence shareholder decisions.
  
 Item 1B. Unresolved Staff Comments
  28




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Item 2. Properties
        
 Item 3. Legal Proceedings
  29




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Item 4. Submission of Matters to a Vote of Shareholders
 (a)
    
    A special meeting of shareholders was held December 17, 2008 at the Companys
Cotton Exchange office located at 32 8th Street, Augusta, GA.(b)
    
    No election of directors took place during this meeting.(c)
    
    The following matters were voted on at the meeting as was previously identified
in the proxy materials forwarded to each shareholder:
 1.
    
    Proposal to approve a proposed amendment to the Companys
Articles of Incorporation authorizing a class of 10,000,000 shares of preferred
stock, no par value, as set forth in Appendix A to the proxy statement.Votes were cast as follows:For: 4,418,418 Against: 143,665 Abstain: 82 Broker non-votes: 02.
    
    Proposal to authorize management of the Company to adjourn the
meeting to another time and date in order to allow the Board of Directors to
solicit additional proxies or attendance at the meeting.Votes were cast as follows:For: 4,441,411 Against: 120,754 Abstain: 0 Broker non-votes: 0
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PART II
 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
  Southeastern Bank Financial Corporation Stock Price
 Low
    
    HighQuarter endedMarch 31, 2007
    
    
    32.95
    
    
    
    37.27June 30, 2007
    
    
    31.14
    
    
    
    36.36September 30, 2007
    
    
    30.55
    
    
    
    36.36December 31, 2007
    
    
    27.27
    
    
    
    32.73Quarter endedMarch 31, 2008
    
    
    23.64
    
    
    
    31.82June 30, 2008
    
    
    24.68
    
    
    
    32.05September 30, 2008
    
    
    25.55
    
    
    
    30.00December 31, 2008
    
    
    14.55
    
    
    
    28.00Period endedMarch 2, 2009
    
    
    15.15
    
    
    
    19.50
    31




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Item 6. Selected Financial Data
  Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108),
  33




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Selected Consolidated Financial Data
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004(Dollars in thousands, except per share data)EarningsTotal interest income
    
    $
    75,675
    
    
    $
    79,181
    
    
    $
    65,626
    
    
    $
    47,277
    
    
    $
    35,350Total interest expense
    
    
    35,489
    
    
    
    40,932
    
    
    
    31,423
    
    
    
    17,885
    
    
    
    9,670Net interest income
    
    
    40,186
    
    
    
    38,249
    
    
    
    34,203
    
    
    
    29,392
    
    
    
    25,680Provision for loan losses
    
    
    9,055
    
    
    
    3,823
    
    
    
    2,478
    
    
    
    1,842
    
    
    
    1,588Noninterest income
    
    
    16,705
    
    
    
    16,168
    
    
    
    14,040
    
    
    
    12,371
    
    
    
    12,461Noninterest expense
    
    
    36,752
    
    
    
    32,508
    
    
    
    28,932
    
    
    
    25,012
    
    
    
    23,744Net income
    
    
    7,578
    
    
    
    11,765
    
    
    
    11,160
    
    
    
    9,954
    
    
    
    8,704Per Share DataNet income  Diluted
    
    $
    1.26
    
    
    $
    1.95
    
    
    $
    1.89
    
    
    $
    1.69
    
    
    $
    1.49Book value
    
    
    15.81
    
    
    
    15.04
    
    
    
    13.21
    
    
    
    10.98
    
    
    
    10.21Cash dividends declared per common share
    
    
    0.52
    
    
    
    0.52
    
    
    
    0.52
    
    
    
    0.52
    
    
    
    0.52Weighted average common and common
equivalent shares outstanding
    
    
    6,011,689
    
    
    
    6,044,871
    
    
    
    5,908,659
    
    
    
    5,885,261
    
    
    
    5,856,155Selected Average BalancesAssets
    
    $
    1,318,384
    
    
    $
    1,133,064
    
    
    $
    951,115
    
    
    $
    785,081
    
    
    $
    673,805Loans (net of unearned income)
    
    
    952,800
    
    
    
    811,509
    
    
    
    664,101
    
    
    
    547,414
    
    
    
    464,769Deposits
    
    
    1,057,198
    
    
    
    893,959
    
    
    
    735,128
    
    
    
    611,029
    
    
    
    528,167Stockholders equity
    
    
    89,337
    
    
    
    83,850
    
    
    
    69,317
    
    
    
    61,655
    
    
    
    56,162Selected Year-End BalancesAssets
    
    $
    1,411,039
    
    
    $
    1,212,980
    
    
    $
    1,041,202
    
    
    $
    864,277
    
    
    $
    706,517Loans (net of unearned income)
    
    
    1,005,786
    
    
    
    882,743
    
    
    
    749,969
    
    
    
    601,235
    
    
    
    494,170Allowance for loan losses
    
    
    14,742
    
    
    
    11,800
    
    
    
    9,777
    
    
    
    9,125
    
    
    
    7,930Deposits
    
    
    1,139,552
    
    
    
    952,166
    
    
    
    801,763
    
    
    
    663,655
    
    
    
    556,785Short-term borrowings
    
    
    62,553
    
    
    
    81,666
    
    
    
    76,020
    
    
    
    73,013
    
    
    
    45,481Long-term borrowings
    
    
    104,000
    
    
    
    79,000
    
    
    
    75,000
    
    
    
    57,000
    
    
    
    40,000Stockholders equity
    
    
    94,651
    
    
    
    89,758
    
    
    
    78,924
    
    
    
    63,583
    
    
    
    58,980Selected RatiosReturn on average total assets
    
    
    0.57
    %
    
    
    1.04
    %
    
    
    1.17
    %
    
    
    1.27
    %
    
    
    1.29
    %Return on average equity
    
    
    8.48
    %
    
    
    14.03
    %
    
    
    16.10
    %
    
    
    16.15
    %
    
    
    15.50
    %Average earning assets to average total assets
    
    
    94.11
    %
    
    
    93.66
    %
    
    
    93.67
    %
    
    
    93.90
    %
    
    
    93.56
    %Average loans to average deposits
    
    
    90.13
    %
    
    
    90.78
    %
    
    
    90.34
    %
    
    
    89.59
    %
    
    
    88.00
    %Average equity to average total assets
    
    
    6.78
    %
    
    
    7.40
    %
    
    
    7.29
    %
    
    
    7.85
    %
    
    
    8.33
    %Net interest margin
    
    
    3.24
    %
    
    
    3.60
    %
    
    
    3.84
    %
    
    
    3.98
    %
    
    
    4.08
    %Operating efficiency
    
    
    64.52
    %
    
    
    60.64
    %
    
    
    60.20
    %
    
    
    59.78
    %
    
    
    62.09
    %Net charge-offs to average loans
    
    
    0.64
    %
    
    
    0.22
    %
    
    
    0.17
    %
    
    
    0.12
    %
    
    
    0.20
    %Allowance for loan losses to net loans (year-end)
    
    
    1.47
    %
    
    
    1.34
    %
    
    
    1.30
    %
    
    
    1.52
    %
    
    
    1.60
    %Risk-based capitalTier 1 capital
    
    
    10.45
    %
    
    
    11.38
    %
    
    
    12.09
    %
    
    
    11.10
    %
    
    
    10.33
    %Total capital
    
    
    11.70
    %
    
    
    12.61
    %
    
    
    13.29
    %
    
    
    12.35
    %
    
    
    11.58
    %Tier 1 leverage ratio
    
    
    8.14
    %
    
    
    9.08
    %
    
    
    9.78
    %
    
    
    9.01
    %
    
    
    8.38
    %Proforma data to illustrate the effect of SAB 108Allowance for loan losses to net loans excluding amount
applicable to unfunded lines, commitments and standby letters of
credit(year-end)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.40
    %
    
    
    1.49
    %Provision for loan losses excluding amount applicable to
unfunded lines, commitments and standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,723
    
    
    
    1,584Allowance for loan losses excluding amount applicable to
unfunded lines, commitments and standby letters of credit(year-
end)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,431
    
    
    
    7,355
 34




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
    35




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Critical Accounting Estimates
    36




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Results of Operations
  37




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Net Interest Income
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Average Balances, Income and Expenses, Yields and RatesYear Ended Dec. 31, 2008
    
    
    Year Ended Dec. 31, 2007
    
    
    Year Ended Dec. 31, 2006Average
    
    
    Amount
    
    
    
    
    
    
    Average
    
    
    Amount
    
    
    
    
    
    
    Average
    
    
    AmountAverage
    
    
    Yield or
    
    
    Paid or
    
    
    Average
    
    
    Yield or
    
    
    Paid or
    
    
    Average
    
    
    Yield or
    
    
    Paid orAmount
    
    
    Rate
    
    
    Earned
    
    
    Amount
    
    
    Rate
    
    
    Earned
    
    
    Amount
    
    
    Rate
    
    
    Earned(Dollars in thousands)ASSETSInterest-earning assets:Loans
    
    $
    952,800
    
    
    
    6.46
    %
    
    $
    61,568
    
    
    $
    811,509
    
    
    
    8.16
    %
    
    $
    66,219
    
    
    $
    664,101
    
    
    
    8.18
    %
    
    $
    54,338InvestmentsTaxable
    
    
    239,253
    
    
    
    5.38
    %
    
    
    12,875
    
    
    
    209,082
    
    
    
    5.27
    %
    
    
    11,023
    
    
    
    189,321
    
    
    
    5.09
    %
    
    
    9,633Tax-exempt
    
    
    16,266
    
    
    
    4.40
    %
    
    
    716
    
    
    
    18,734
    
    
    
    4.27
    %
    
    
    800
    
    
    
    24,658
    
    
    
    4.18
    %
    
    
    1,030Federal funds sold
    
    
    29,916
    
    
    
    1.57
    %
    
    
    470
    
    
    
    21,434
    
    
    
    5.19
    %
    
    
    1,112
    
    
    
    12,248
    
    
    
    4.90
    %
    
    
    600Interest-bearing deposits in other
banks
    
    
    2,557
    
    
    
    1.80
    %
    
    
    46
    
    
    
    506
    
    
    
    5.34
    %
    
    
    27
    
    
    
    612
    
    
    
    4.08
    %
    
    
    25Total interest-earning assets
    
    
    1,240,792
    
    
    
    6.10
    %
    
    $
    75,675
    
    
    
    1,061,265
    
    
    
    7.46
    %
    
    $
    79,181
    
    
    
    890,940
    
    
    
    7.37
    %
    
    $
    65,626Cash and due from banks
    
    
    22,846
    
    
    
    
    
    
    
    
    
    
    
    25,624
    
    
    
    
    
    
    
    
    
    
    
    19,977Premises and equipment
    
    
    33,584
    
    
    
    
    
    
    
    
    
    
    
    26,676
    
    
    
    
    
    
    
    
    
    
    
    22,242Other
    
    
    34,581
    
    
    
    
    
    
    
    
    
    
    
    30,527
    
    
    
    
    
    
    
    
    
    
    
    27,486Allowance for loan losses
    
    
    (13,419
    )
    
    
    
    
    
    
    
    
    
    
    (11,029
    )
    
    
    
    
    
    
    
    
    
    
    (9,530
    )Total assets
    
    $
    1,318,384
    
    
    
    
    
    
    
    
    
    
    $
    1,133,063
    
    
    
    
    
    
    
    
    
    
    $
    951,115LIABILITIES AND STOCKHOLDERS EQUITYInterest-bearing liabilities:NOW accounts
    
    $
    147,227
    
    
    
    1.46
    %
    
    $
    2,149
    
    
    $
    127,093
    
    
    
    2.30
    %
    
    $
    2,926
    
    
    $
    114,021
    
    
    
    2.00
    %
    
    $
    2,277Savings and money management
accounts
    
    
    353,719
    
    
    
    2.52
    %
    
    
    8,912
    
    
    
    341,097
    
    
    
    4.04
    %
    
    
    13,788
    
    
    
    305,186
    
    
    
    3.93
    %
    
    
    11,996Time deposits
    
    
    446,434
    
    
    
    4.25
    %
    
    
    18,956
    
    
    
    317,298
    
    
    
    5.18
    %
    
    
    16,433
    
    
    
    213,889
    
    
    
    4.59
    %
    
    
    9,826Federal funds purchased / securities
sold under repurchase agreements
    
    
    60,629
    
    
    
    2.17
    %
    
    
    1,317
    
    
    
    65,735
    
    
    
    5.03
    %
    
    
    3,305
    
    
    
    62,451
    
    
    
    4.93
    %
    
    
    3,079Other borrowings
    
    
    98,741
    
    
    
    4.21
    %
    
    
    4,155
    
    
    
    79,250
    
    
    
    5.65
    %
    
    
    4,480
    
    
    
    75,034
    
    
    
    5.66
    %
    
    
    4,245Total interest-bearing liabilities
    
    
    1,106,750
    
    
    
    3.21
    %
    
    
    35,489
    
    
    
    930,473
    
    
    
    4.40
    %
    
    
    40,932
    
    
    
    770,581
    
    
    
    4.08
    %
    
    
    31,423Noninterest-bearing demand deposits
    
    
    109,818
    
    
    
    
    
    
    
    
    
    
    
    108,470
    
    
    
    
    
    
    
    
    
    
    
    102,032Other liabilities
    
    
    12,479
    
    
    
    
    
    
    
    
    
    
    
    10,270
    
    
    
    
    
    
    
    
    
    
    
    9,185Stockholders equity
    
    
    89,337
    
    
    
    
    
    
    
    
    
    
    
    83,850
    
    
    
    
    
    
    
    
    
    
    
    69,317Total liabilities and stockholders
equity
    
    $
    1,318,384
    
    
    
    
    
    
    
    
    
    
    $
    1,133,063
    
    
    
    
    
    
    
    
    
    
    $
    951,115Net interest spread
    
    
    
    
    
    
    2.89
    %
    
    
    
    
    
    
    
    
    
    
    3.06
    %
    
    
    
    
    
    
    
    
    
    
    3.29
    %Benefit of noninterest sources
    
    
    
    
    
    
    0.35
    %
    
    
    
    
    
    
    
    
    
    
    0.54
    %
    
    
    
    
    
    
    
    
    
    
    0.55
    %Net interest margin/income
    
    
    
    
    
    
    3.24
    %
    
    $
    40,186
    
    
    
    
    
    
    
    3.60
    %
    
    $
    38,249
    
    
    
    
    
    
    
    3.84
    %
    
    $
    34,203
   39




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40




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Analysis of Changes in Net Interest Income2008 vs. 2007
    
    
    2007 vs. 2006Increase (Decrease)
    
    
    Increase (Decrease)Average
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    AverageVolume
    
    
    Rate
    
    
    Combined
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Combined
    
    
    Total(Dollars in thousands)
    
    
    (Dollars in thousands)Interest income from in
terest-earning assets:Loans
    
    $
    11,529
    
    
    $
    (13,781
    )
    
    $
    (2,399
    )
    
    $
    (4,651
    )
    
    $
    12,058
    
    
    $
    (133
    )
    
    $
    (44
    )
    
    $
    11,881Investments, taxable
    
    
    1,590
    
    
    
    233
    
    
    
    29
    
    
    
    1,852
    
    
    
    1,006
    
    
    
    341
    
    
    
    43
    
    
    
    1,390Investments, tax-exempt
    
    
    (105
    )
    
    
    24
    
    
    
    (3
    )
    
    
    (84
    )
    
    
    (248
    )
    
    
    42
    
    
    
    (24
    )
    
    
    (230
    )Federal funds sold
    
    
    440
    
    
    
    (726
    )
    
    
    (356
    )
    
    
    (642
    )
    
    
    450
    
    
    
    36
    
    
    
    26
    
    
    
    512Interest-bearing deposits in
other banks
    
    
    109
    
    
    
    (19
    )
    
    
    (71
    )
    
    
    19
    
    
    
    (4
    )
    
    
    7
    
    
    
    (1
    )
    
    
    2Total
    
    $
    13,563
    
    
    $
    (14,269
    )
    
    $
    (2,800
    )
    
    $
    (3,506
    )
    
    $
    13,262
    
    
    $
    293
    
    
    $
    0
    
    
    $
    13,555Interest expense on interest-
bearing liabilities:NOW accounts
    
    $
    463
    
    
    $
    (1,068
    )
    
    $
    (172
    )
    
    $
    (777
    )
    
    $
    261
    
    
    $
    343
    
    
    $
    45
    
    
    $
    649Savings and money
management accounts
    
    
    510
    
    
    
    (5,186
    )
    
    
    (200
    )
    
    
    (4,876
    )
    
    
    1,411
    
    
    
    336
    
    
    
    45
    
    
    
    1,792Time deposits
    
    
    6,689
    
    
    
    (2,963
    )
    
    
    (1,203
    )
    
    
    2,523
    
    
    
    4,746
    
    
    
    1,262
    
    
    
    599
    
    
    
    6,607Federal funds purchased /
securities sold under
repurchase agreements
    
    
    (257
    )
    
    
    (1,878
    )
    
    
    147
    
    
    
    (1,988
    )
    
    
    162
    
    
    
    62
    
    
    
    2
    
    
    
    226Other borrowings
    
    
    1,101
    
    
    
    (1,143
    )
    
    
    (283
    )
    
    
    (325
    )
    
    
    239
    
    
    
    (8
    )
    
    
    4
    
    
    
    235Total
    
    $
    8,506
    
    
    $
    (12,238
    )
    
    $
    (1,711
    )
    
    $
    (5,443
    )
    
    $
    6,819
    
    
    $
    1,995
    
    
    $
    695
    
    
    $
    9,509Change in net interest income
    
    $
    1,937
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,046
  Noninterest Income
   41




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Noninterest Income
 Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Service charges and fees on deposit accounts
    
    $
    7,291
    
    
    $
    6,409
    
    
    $
    5,742Gain on sales of loans
    
    
    5,747
    
    
    
    5,185
    
    
    
    5,154Gain on sale of fixed assets
    
    
    8
    
    
    
    1,049
    
    
    
    47Investment securities gains (losses), net
    
    
    (77
    )
    
    
    (237
    )
    
    
    213Retail investment income
    
    
    1,096
    
    
    
    1,267
    
    
    
    788Trust service fees
    
    
    1,134
    
    
    
    1,132
    
    
    
    860Increase in cash surrender value of life insurance
    
    
    708
    
    
    
    678
    
    
    
    605Other
    
    
    798
    
    
    
    685
    
    
    
    631Total noninterest income
    
    $
    16,705
    
    
    $
    16,168
    
    
    $
    14,040Noninterest income as a percentage of total
average assets
    
    
    1.27
    %
    
    
    1.43
    %
    
    
    1.48
    %Noninterest income as a percentage of total
income
    
    
    18.08
    %
    
    
    16.96
    %
    
    
    17.62
    %
 Noninterest Expense
  42




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43




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##### Table of Contents



Noninterest Expense
 Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Salaries and employee benefits
    
    $
    20,852
    
    
    $
    19,343
    
    
    $
    17,806Occupancy expense
    
    
    4,373
    
    
    
    3,457
    
    
    
    2,847Marketing & business development expense
    
    
    1,668
    
    
    
    1,586
    
    
    
    1,405Processing expense
    
    
    1,917
    
    
    
    1,750
    
    
    
    1,480Legal and professional fees
    
    
    1,763
    
    
    
    1,508
    
    
    
    1,369Data processing expense
    
    
    1,203
    
    
    
    942
    
    
    
    667FDIC insurance
    
    
    898
    
    
    
    113
    
    
    
    87Loan costs
    
    
    595
    
    
    
    460
    
    
    
    442Supplies expense
    
    
    763
    
    
    
    704
    
    
    
    660Other expense
    
    
    2,720
    
    
    
    2,645
    
    
    
    2,169Total noninterest expense
    
    $
    36,752
    
    
    $
    32,508
    
    
    $
    28,932Noninterest expense as a percentage
of total average assets
    
    
    2.79
    %
    
    
    2.87
    %
    
    
    3.04
    %Operating efficiency ratio
    
    
    64.52
    %
    
    
    60.64
    %
    
    
    60.20
    %
  Income Taxes
   Provision for Loan Losses, Net Charge-offs and Allowance for Loan Losses
  44




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45




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##### Table of Contents



Allocation of the Allowance for Loan LossDecember 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Amount
    
    
    Percent(1)
    
    
    Amount
    
    
    Percent(1)
    
    
    Amount
    
    
    Percent(1)
    
    
    Amount
    
    
    Percent(1)
    
    
    Amount
    
    
    Percent(1)(Dollars in thousands)Balance at end of yearApplicable to:Commercial, financial,
agricultural
    
    $
    4,529
    
    
    
    10.91
    %
    
    $
    1,760
    
    
    
    10.72
    %
    
    $
    1,254
    
    
    
    10.78
    %
    
    
    1,060
    
    
    
    10.71
    %
    
    
    1,164
    
    
    
    12.09
    %Real estate-construction
    
    
    7,050
    
    
    
    36.76
    %
    
    
    4,344
    
    
    
    36.54
    %
    
    
    3,139
    
    
    
    35.58
    %
    
    
    2,288
    
    
    
    30.74
    %
    
    
    1,648
    
    
    
    25.76
    %Real estate-mortgage
    
    
    2,048
    
    
    
    49.54
    %
    
    
    4,681
    
    
    
    49.00
    %
    
    
    4,835
    
    
    
    49.58
    %
    
    
    4,441
    
    
    
    52.85
    %
    
    
    3,648
    
    
    
    53.84
    %Consumer loans to
individuals
    
    
    1,115
    
    
    
    2.83
    %
    
    
    1,015
    
    
    
    3.85
    %
    
    
    549
    
    
    
    4.16
    %
    
    
    642
    
    
    
    5.78
    %
    
    
    895
    
    
    
    8.34
    %Lease financing
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.02
    %
    
    
    
    
    
    
    0.02
    %
    
    
    
    
    
    
    0.00
    %Deferred loan origination
fees
    
    
    
    
    
    
    (0.02
    %)
    
    
    
    
    
    
    (0.11
    %)
    
    
    
    
    
    
    (0.12
    %)
    
    
    
    
    
    
    (0.10
    %)
    
    
    
    
    
    
    (0.03
    %)Unfunded lines, commitments
and standby letters of credit
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    694
    
    
    
    0.00
    %
    
    
    575
    
    
    
    0.00
    %Other
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Balance at end of year
    
    $
    14,742
    
    
    
    100.00
    %
    
    $
    11,800
    
    
    
    100.00
    %
    
    $
    9,777
    
    
    
    100.00
    %
    
    $
    9,125
    
    
    
    100.00
    %
    
    $
    7,930
    
    
    
    100.00
    %Proforma excluding unfunded
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (694
    )
    
    
    
    
    
    
    (575
    )lines, commitments and
standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,431
    
    
    
    
    
    
    $
    7,355
 
 (1)
    
    Percent of loans in each category to total loans   46




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##### Table of Contents



(Dollars in thousands)
    
    2008
    
    2007Acquisition Development and Construction Loans
    
    
    355,943
    
    
    
    282,989CSRA  primary market areaPeriod-end loans
    
    
    266,156
    
    
    
    191,506FAS 114 Impaired loans
    
    
    5,187
    
    
    
    1,858Classified/watch rated loans
    
    
    9,879
    
    
    
    2,569Charge-offs % (annual)
    
    
    0.19
    %
    
    
    -0.01
    %FAS 114 allowance / Impaired loans
    
    
    0.00
    %FAS 5 Allowance / Loans not impaired %
    
    
    0.67
    %
    
    
    n/aAllowance / Charge-offs
    
    
    4.78
    
    
    
    n/aSavannah, GeorgiaPeriod-end loans
    
    
    28,300
    
    
    
    32,031FAS 114 Impaired loans
    
    
    2,645
    
    
    
    536Classified/watch rated loans
    
    
    5,060
    
    
    
    2,277Charge-offs % (annual)
    
    
    3.18
    %
    
    
    0.00
    %FAS 114 allowance / Impaired loans
    
    
    6.62
    %FAS 5 Allowance / Loans not impaired %
    
    
    4.20
    %
    
    
    n/aAllowance / Charge-offs
    
    
    1.39
    
    
    
    n/aAthens, GeorgiaPeriod-end loans
    
    
    31,806
    
    
    
    30,883FAS 114 Impaired loans
    
    
    8,772
    
    
    
    Classified/watch rated loans
    
    
    13,667
    
    
    
    3,628Charge-offs % (annual)
    
    
    1.78
    %
    
    
    0.00
    %FAS 114 allowance / Impaired loans
    
    
    12.04
    %FAS 5 Allowance / Loans not impaired %
    
    
    3.97
    %
    
    
    n/aAllowance / Charge-offs
    
    
    2.55
    
    
    
    n/aADC Participations  GeorgiaPeriod-end loans
    
    
    21,676
    
    
    
    20,730FAS 114 Impaired loans
    
    
    10,637
    
    
    
    Classified/watch rated loans
    
    
    48
    
    
    
    89Charge-offs % (annual)
    
    
    8.88
    %
    
    
    4.41
    %FAS 114 allowance / Impaired loans
    
    
    4.09
    %FAS 5 Allowance / Loans not impaired %
    
    
    9.55
    %
    
    
    n/aAllowance / Charge-offs
    
    
    0.77
    
    
    
    n/aADC Participations  FloridaPeriod-end loans
    
    
    8,005
    
    
    
    7,839FAS 114 Impaired loans
    
    
    3,650
    
    
    
    Classified/watch rated loans
    
    
    704
    
    
    
    2,979Charge-offs % (annual)
    
    
    0.19
    %
    
    
    0.00
    %FAS 114 allowance / Impaired loans
    
    
    11.34
    %FAS 5 Allowance / Loans not impaired %
    
    
    4.27
    %
    
    
    n/aAllowance / Charge-offs
    
    
    2.00
    
    
    
    n/a
  47




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##### Table of Contents



Allowances for Loan LossesAt December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Total loans outstanding at end of period,
net of unearned income
    
    $
    1,005,786
    
    
    $
    882,743
    
    
    $
    749,969
    
    
    $
    601,235
    
    
    $
    494,170Average loans outstanding, net of
unearned income
    
    $
    952,800
    
    
    $
    811,509
    
    
    $
    664,101
    
    
    $
    547,414
    
    
    $
    464,769Balance of allowance for loan losses at
beginning of year
    
    $
    11,800
    
    
    $
    9,777
    
    
    $
    8,431
    (1)
    
    $
    7,930
    
    
    $
    7,278Charge-offs:Commercial, financial and agricultural
    
    
    816
    
    
    
    98
    
    
    
    648
    
    
    
    694
    
    
    
    458Real estate  construction
    
    
    4,265
    
    
    
    915
    
    
    
    100
    
    
    
    80
    
    
    
    18Real estate  mortgage
    
    
    944
    
    
    
    477
    
    
    
    806
    
    
    
    95
    
    
    
    52Consumer
    
    
    711
    
    
    
    1,086
    
    
    
    386
    
    
    
    736
    
    
    
    1,165Total charge-offs
    
    
    6,736
    
    
    
    2,576
    
    
    
    1,940
    
    
    
    1,605
    
    
    
    1,693Recoveries of previous loan losses:Commercial, financial and agricultural
    
    
    348
    
    
    
    21
    
    
    
    287
    
    
    
    307
    
    
    
    175Real estate  construction
    
    
    2
    
    
    
    12
    
    
    
    6
    
    
    
    5
    
    
    
    4Real estate  mortgage
    
    
    41
    
    
    
    125
    
    
    
    31
    
    
    
    52
    
    
    
    8Consumer
    
    
    232
    
    
    
    618
    
    
    
    484
    
    
    
    594
    
    
    
    570Total recoveries
    
    
    623
    
    
    
    776
    
    
    
    808
    
    
    
    958
    
    
    
    757Net loan losses
    
    
    6,113
    
    
    
    1,800
    
    
    
    1,132
    
    
    
    647
    
    
    
    936Provision for loan losses
    
    
    9,055
    
    
    
    3,823
    
    
    
    2,478
    
    
    
    1,842
    
    
    
    1,588Balance of allowance for loan losses at
end of period
    
    $
    14,742
    
    
    $
    11,800
    
    
    $
    9,777
    
    
    
    9,125
    
    
    
    7,930Allowance for loan losses to period end
loans
    
    
    1.47
    %
    
    
    1.34
    %
    
    
    1.30
    %
    
    
    1.52
    %
    
    
    1.60
    %Net charge-offs to average loans
    
    
    0.64
    %
    
    
    0.22
    %
    
    
    0.17
    %
    
    
    0.12
    %
    
    
    0.20
    %Proforma ALLL at end of period (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,431
    
    
    $
    7,355Proforma ALLL to period end loans(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.40
    %
    
    
    1.49
    %
 
 (1)
    
    Includes adjustment of $694 for estimated overstatement of allowance for loan loss as of
12/31/05 as required by SAB 108.(2)
    
    Proforma assumes adjustment to prior periods of amounts corrected pursuant to SAB108 under the
iron curtain method.   48




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Financial Condition
 Composition of the Loan Portfolio
     49




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##### Table of Contents



Loan Portfolio CompositionAt December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial financial and
agricultural
    
    
    109,751
    
    
    
    10.91
    %
    
    $
    93,318
    
    
    
    10.57
    %
    
    $
    80,823
    
    
    
    10.78
    %
    
    $
    64,398
    
    
    
    10.71
    %
    
    $
    59,763
    
    
    
    12.09
    %Real estateCommercial
    
    $
    266,362
    
    
    
    26.49
    %
    
    $
    236,358
    
    
    
    26.78
    %
    
    $
    198,453
    
    
    
    26.46
    %
    
    $
    156,896
    
    
    
    26.10
    %
    
    $
    139,616
    
    
    
    28.25
    %Residential
    
    
    212,856
    
    
    
    21.16
    %
    
    
    190,613
    
    
    
    21.59
    %
    
    
    158,543
    
    
    
    21.14
    %
    
    
    138,716
    
    
    
    23.07
    %
    
    
    111,635
    
    
    
    22.59
    %Residential held for sale
    
    
    18,955
    
    
    
    1.88
    %
    
    
    11,303
    
    
    
    1.28
    %
    
    
    14,857
    
    
    
    1.98
    %
    
    
    22,147
    
    
    
    3.68
    %
    
    
    14,779
    
    
    
    2.99
    %Construction and
development
    
    
    369,731
    
    
    
    36.76
    %
    
    
    318,438
    
    
    
    36.07
    %
    
    
    266,875
    
    
    
    35.58
    %
    
    
    184,826
    
    
    
    30.74
    %
    
    
    127,303
    
    
    
    25.76
    %Total real estate
    
    
    867,904
    
    
    
    86.29
    %
    
    
    756,712
    
    
    
    85.72
    %
    
    
    638,728
    
    
    
    85.17
    %
    
    
    502,585
    
    
    
    83.59
    %
    
    
    393,333
    
    
    
    79.59
    %Lease financing
    
    
    33
    
    
    
    0.00
    %
    
    
    37
    
    
    
    0.00
    %
    
    
    116
    
    
    
    0.02
    %
    
    
    111
    
    
    
    0.02
    %
    
    
    0
    
    
    
    0.00
    %ConsumerDirect
    
    
    24,272
    
    
    
    2.41
    %
    
    
    25,569
    
    
    
    2.90
    %
    
    
    24,146
    
    
    
    3.22
    %
    
    
    24,343
    
    
    
    4.05
    %
    
    
    24,185
    
    
    
    4.89
    %Indirect
    
    
    3,319
    
    
    
    0.33
    %
    
    
    4,237
    
    
    
    0.48
    %
    
    
    6,232
    
    
    
    0.83
    %
    
    
    9,752
    
    
    
    1.62
    %
    
    
    16,436
    
    
    
    3.33
    %Revolving
    
    
    905
    
    
    
    0.09
    %
    
    
    3,819
    
    
    
    0.43
    %
    
    
    843
    
    
    
    0.11
    %
    
    
    656
    
    
    
    0.11
    %
    
    
    600
    
    
    
    0.12
    %Total consumer
    
    
    28,496
    
    
    
    2.83
    %
    
    
    33,625
    
    
    
    3.81
    %
    
    
    31,221
    
    
    
    4.16
    %
    
    
    34,751
    
    
    
    5.78
    %
    
    
    41,221
    
    
    
    8.34
    %Deferred loan origination fees
    
    
    (398
    )
    
    
    -0.03
    %
    
    
    (949
    )
    
    
    -0.11
    %
    
    
    (919
    )
    
    
    -0.12
    %
    
    
    (610
    )
    
    
    -0.10
    %
    
    
    (147
    )
    
    
    -0.03
    %Total
    
    $
    1,005,786
    
    
    
    100.00
    %
    
    $
    882,743
    
    
    
    100.00
    %
    
    $
    749,969
    
    
    
    100.00
    %
    
    $
    601,235
    
    
    
    100.00
    %
    
    $
    494,170
    
    
    
    100.00
    %
  Loan Maturity Schedule
At December 31, 2008
 Within
    
    
    One to Five
    
    
    After Five($ in thousands)
    
    One Year
    
    
    Years
    
    
    Years
    
    
    TotalCommercial, financial and
agricultural
    
    $
    55,156
    
    
    $
    52,449
    
    
    $
    1,904
    
    
    $
    109,509Real EstateConstruction and development
    
    
    268,898
    
    
    
    90,826
    
    
    
    10,229
    
    
    
    369,953Mortgage
    
    
    206,126
    
    
    
    256,140
    
    
    
    35,446
    
    
    
    497,712Lease financing
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Consumer
    
    
    14,918
    
    
    
    13,508
    
    
    
    551
    
    
    
    28,977Deferred loan origination fees
    
    
    (398
    )
    
    
    
    
    
    
    
    
    
    
    (398
    )Total loans
    
    $
    544,733
    
    
    $
    412,923
    
    
    $
    48,130
    
    
    $
    1,005,786
  50




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##### Table of Contents



Sensitivity of Loans to Changes in Interest Rates
At December 31, 2008
 Within
    
    
    One to Five
    
    
    After Five($ in thousands)
    
    One year
    
    
    Years
    
    
    Years
    
    
    TotalLoans maturing or repricing with:Predetermined interest rates
    
    $
    172,402
    
    
    $
    272,203
    
    
    $
    22,167
    
    
    $
    466,772Floating or adjustable
interest rates
    
    
    506,002
    
    
    
    32,847
    
    
    
    165
    
    
    
    539,014Total loans
    
    $
    678,404
    
    
    $
    305,050
    
    
    $
    22,332
    
    
    $
    1,005,786
 Non-Performing Assets
     51




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##### Table of Contents



Non-Performing AssetsYear Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Nonaccrual loans
    
    $
    34,781
    
    
    $
    5,495
    
    
    $
    2,351
    
    
    $
    4,009
    
    
    $
    2,972Other real estate owned
    
    
    5,734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53Total nonperforming assets
    
    $
    40,515
    
    
    $
    5,495
    
    
    $
    2,351
    
    
    $
    4,009
    
    
    $
    3,025Loans past due 90 days or more and still
accruing interest
    
    $
    7,298
    
    
    $
    
    
    
    $
    
    
    
    $
    1
    
    
    $
    29Allowance for loan losses to period end total
loans
    
    
    1.49
    %
    
    
    1.34
    %
    
    
    1.30
    %
    
    
    1.52
    %
    
    
    1.60
    %Allowance for loan losses to period end
nonperforming loans
    
    
    42.39
    %
    
    
    214.74
    %
    
    
    415.87
    %
    
    
    227.56
    %
    
    
    262.15
    %Net charge-offs to average loans
    
    
    0.64
    %
    
    
    0.22
    %
    
    
    0.17
    %
    
    
    0.12
    %
    
    
    0.20
    %Nonperforming assets to period end loans
    
    
    4.11
    %
    
    
    0.62
    %
    
    
    0.31
    %
    
    
    0.67
    %
    
    
    0.61
    %Nonperforming assets to period end loans
and other real estate owned
    
    
    4.08
    %
    
    
    0.62
    %
    
    
    0.31
    %
    
    
    0.67
    %
    
    
    0.61
    %Proforma data to illustrate the effect of SAB 108Allowance for loan losses to period end net loans
excluding amount applicable to unfunded lines,
commitments and standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.40
    %
    
    
    1.49
    %Allowance for loan losses to period end
nonperforming loans excluding amount applicable
to unfunded lines, commitments and standby letters
of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210.30
    %
    
    
    243.14
    %
 52




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##### Table of Contents



Off-Balance Sheet Arrangements
     Commitments andContractual Obligations
    
    Less than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than($ in thousands)
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLines of credit
    
    $
    189,245
    
    
    
    
    
    
    
    
    
    
    
    Mortgage loan commitments
    
    
    13,335
    
    
    
    
    
    
    
    
    
    
    
    Lease agreements
    
    
    340
    
    
    
    577
    
    
    
    186
    
    
    
    96Deposits
    
    
    1,057,129
    
    
    
    74,135
    
    
    
    6,209
    
    
    
    2,079Federal funds purchased /
Securities
sold under repurchase
agreements
    
    
    62,553
    
    
    
    
    
    
    
    
    
    
    
    FHLB advances
    
    
    32,000
    
    
    
    32,000
    
    
    
    
    
    
    
    20,000Other borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000Total commitments and
contractual obligations
    
    $
    1,354,602
    
    
    
    106,712
    
    
    
    6,395
    
    
    
    42,175
  53




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##### Table of Contents



Investment Securities
  Investment Securities
 December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Available for sale:U.S. Government Agencies
    
    $
    109,256
    
    
    $
    96,166
    
    
    $
    77,717Obligations of states and political subdivisions
    
    
    17,384
    
    
    
    15,755
    
    
    
    15,391Mortgage-backed securities
    
    
    157,549
    
    
    
    118,179
    
    
    
    95,910Corporate bonds
    
    
    15,032
    
    
    
    15,036
    
    
    
    12,345Equity securities
    
    
    46
    
    
    
    250
    
    
    
    250Total
    
    $
    299,267
    
    
    $
    245,386
    
    
    $
    201,613
 December 31,2008
    
    
    2007
    
    
    2006Held to maturity:Obligations of states and political subdivisions
    
    $
    689
    
    
    $
    1,435
    
    
    $
    2,971Total
    
    $
    689
    
    
    $
    1,435
    
    
    $
    2,971
  54




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##### Table of Contents



Maturity Distribution and Yields of Investment Securities
 December 31, 2008Amortized Cost
    
    
    Yield(Dollars in thousands)Available for SaleU.S. Government AgenciesOne year or less
    
    $
    1,000
    
    
    
    3.75
    %Over one through five years
    
    
    1,456
    
    
    
    5.14
    %Over five through ten years
    
    
    28,673
    
    
    
    5.02
    %Over ten years
    
    
    78,127
    
    
    
    5.70
    %Total U. S. Government Agencies
    
    $
    109,256
    
    
    
    5.49
    %Municipal Securities(1)Over one through five years
    
    $
    1,042
    
    
    
    5.53
    %Over five through ten years
    
    
    3,116
    
    
    
    6.13
    %Over ten years
    
    
    13,226
    
    
    
    6.35
    %Total Municipal Securities
    
    $
    17,384
    
    
    
    6.26
    %CorporateOver one through five years
    
    $
    1,011
    
    
    
    6.41
    %Over five through ten years
    
    
    4,840
    
    
    
    6.13
    %Over ten years
    
    
    9,181
    
    
    
    6.82
    %Total Corporate Securities
    
    $
    15,032
    
    
    
    6.57
    %Mortgage Backed SecuritiesOver one through five years
    
    $
    4,723
    
    
    
    4.12
    %Over five through ten years
    
    
    16,177
    
    
    
    4.59
    %Over ten years
    
    
    136,649
    
    
    
    5.36
    %Total Mortgage Backed securities
    
    $
    157,549
    
    
    
    5.25
    %Total Equity securities
    
    $
    46
    
    
    
    0.00
    %Total Available for Sale
    
    $
    299,267
    
    
    
    5.46
    %Held to MaturityMunicipal Securities(1)Over one through five years
    
    $
    490
    
    
    
    8.30
    %Over five through ten years
    
    
    199
    
    
    
    6.84
    %Total Municipal Securities
    
    $
    689
    
    
    
    7.88
    %Total Held to Maturity
    
    $
    689
    
    
    
    7.88
    %Total Investment Securities
    
    $
    299,956
    
    
    
    5.47
    %
 
 (1)
    
    Tax-equivalent yield Asset/Liability Management, Interest Rate Sensitivity and Liquidity
 General.
 55




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##### Table of Contents



Interest Rate Sensitivity.
     56




---



##### Table of Contents



Interest Sensitivity AnalysisAt December 31, 2008After SixAfter Three
    
    
    Through
    
    
    
    
    
    
    One YearWithin Three
    
    
    Through Six
    
    
    Twelve
    
    
    Within
    
    
    Through Five
    
    
    Over FiveMonths
    
    
    Months
    
    
    Months
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    561,270
    
    
    $
    36,989
    
    
    $
    80,145
    
    
    $
    678,404
    
    
    $
    305,050
    
    
    $
    22,332
    
    
    $
    1,005,786Investment securities (including
restricted equity securities)
    
    
    15,447
    
    
    
    6,617
    
    
    
    14,485
    
    
    
    36,549
    
    
    
    142,696
    
    
    
    127,317
    
    
    
    306,562Federal funds sold
    
    
    9,780
    
    
    
    
    
    
    
    
    
    
    
    9,780
    
    
    
    
    
    
    
    
    
    
    
    9,780Interest-bearing deposits in other
banks
    
    
    3,128
    
    
    
    
    
    
    
    
    
    
    
    3,128
    
    
    
    
    
    
    
    
    
    
    
    3,128Total interest-earning assets
    
    $
    589,625
    
    
    $
    43,606
    
    
    $
    94,630
    
    
    $
    727,861
    
    
    $
    447,746
    
    
    $
    149,649
    
    
    $
    1,325,256Interest-bearing liabilities:Money management accounts
    
    $
    50,404
    
    
    $
    0
    
    
    $
    0
    
    
    $
    50,404
    
    
    $
    0
    
    
    $
    0
    
    
    $
    50,404Savings accounts
    
    
    247,249
    
    
    
    
    
    
    
    
    
    
    
    247,249
    
    
    
    
    
    
    
    
    
    
    
    247,249NOW accounts
    
    
    166,561
    
    
    
    
    
    
    
    
    
    
    
    166,561
    
    
    
    
    
    
    
    
    
    
    
    166,561Time deposits
    
    
    224,535
    
    
    
    103,596
    
    
    
    157,736
    
    
    
    485,867
    
    
    
    78,180
    
    
    
    
    
    
    
    564,047Federal funds purchased / securities
sold under repurchase ageements
    
    
    62,553
    
    
    
    
    
    
    
    
    
    
    
    62,553
    
    
    
    
    
    
    
    
    
    
    
    62,553Federal Home Loan Bank advances
    
    
    32,000
    
    
    
    
    
    
    
    
    
    
    
    32,000
    
    
    
    32,000
    
    
    
    20,000
    
    
    
    84,000Notes and bonds payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debentures
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    20,000Total interest-bearing liabilities
    
    $
    803,302
    
    
    $
    103,596
    
    
    $
    157,736
    
    
    $
    1,064,634
    
    
    $
    110,180
    
    
    $
    20,000
    
    
    $
    1,194,814Period gap
    
    ($
    213,677
    )
    
    ($
    59,990
    )
    
    ($
    63,106
    )
    
    ($
    336,773
    )
    
    $
    337,566
    
    
    $
    129,649Cumulative gap
    
    ($
    213,677
    )
    
    ($
    273,667
    )
    
    ($
    336,773
    )
    
    ($
    336,773
    )
    
    $
    793
    
    
    $
    130,442Ratio of cumulative gap to total
interest-earning assets
    
    
    -16.12
    %
    
    
    -20.65
    %
    
    
    -25.41
    %
    
    
    -25.41
    %
    
    
    0.06
    %
    
    
    9.84
    %
 57




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##### Table of Contents



Liquidity
  Deposits
    58




---



##### Table of Contents



Average Deposit and Borrowing Balances and RatesYear ended December 31,2008
    
    
    2007
    
    
    2006Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in thousands)Noninterest-bearing demand deposits
    
    $
    109,818
    
    
    
    0.00
    %
    
    $
    108,470
    
    
    
    0.00
    %
    
    $
    102,032
    
    
    
    0.00
    %Interest-bearing liabilities:NOW accounts
    
    
    147,227
    
    
    
    1.46
    %
    
    
    127,093
    
    
    
    2.30
    %
    
    
    114,021
    
    
    
    2.00
    %Savings, money management accounts
    
    
    353,719
    
    
    
    2.52
    %
    
    
    341,097
    
    
    
    4.04
    %
    
    
    305,186
    
    
    
    3.93
    %Time deposits
    
    
    446,434
    
    
    
    4.25
    %
    
    
    317,298
    
    
    
    5.18
    %
    
    
    213,889
    
    
    
    4.59
    %Federal funds purchased / securities
sold under repurchase agreements
    
    
    60,629
    
    
    
    2.17
    %
    
    
    65,735
    
    
    
    5.03
    %
    
    
    62,451
    
    
    
    4.93
    %Other borrowings
    
    
    98,741
    
    
    
    4.21
    %
    
    
    79,250
    
    
    
    5.65
    %
    
    
    75,034
    
    
    
    5.66
    %Total interest-bearing liabilities
    
    $
    1,106,750
    
    
    
    3.21
    %
    
    $
    930,473
    
    
    
    4.40
    %
    
    $
    770,581
    
    
    
    4.08
    %Total noninterest & interest-bearing liabilities
    
    $
    1,216,568
    
    
    
    
    
    
    $
    1,038,943
    
    
    
    
    
    
    $
    872,613
  Maturities of Time Deposits  (Dollars in thousands)
 Time Certificatesof Deposit of$100,000 or MoreMonths to MaturityWithin 3 months
    
    $
    126,350After 3 through 6 months
    
    
    78,293After 6 through 12 months
    
    
    117,754Within one year
    
    
    322,397After 12 months
    
    
    63,042Total
    
    $
    385,439
  Capital
  59




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##### Table of Contents



Series A Preferred Stock
 Series B Preferred Stock and Warrant:
 Provisions Applicable to Common Stock
 60




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##### Table of Contents



Return on Equity and Assets
 Years ended December 31,2008
    
    2007
    
    2006Return on average total assets
    
    
    0.57
    %
    
    
    1.04
    %
    
    
    1.17
    %Return on average equity
    
    
    8.48
    %
    
    
    14.03
    %
    
    
    16.10
    %Average equity to average assets ratio
    
    
    6.78
    %
    
    
    7.40
    %
    
    
    7.29
    %
  61




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##### Table of Contents



ANALYSIS OF CAPITAL
 Required
    
    Actual
    
    ExcessAmount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %(Dollars in thousands)Southeastern Bank
Financial
Corporation12/31/2008Risk-based capital:Tier 1 capital
    
    $
    43,829
    
    
    
    4.00
    %
    
    $
    114,467
    
    
    
    10.45
    %
    
    $
    70,638
    
    
    
    6.45
    %Total capital
    
    
    87,658
    
    
    
    8.00
    %
    
    
    128,177
    
    
    
    11.70
    %
    
    
    40,519
    
    
    
    3.70
    %Tier 1 leverage ratio
    
    
    56,231
    
    
    
    4.00
    %
    
    
    114,467
    
    
    
    8.14
    %
    
    
    58,236
    
    
    
    4.14
    %12/31/2007Risk-based capital:Tier 1 capital
    
    $
    38,531
    
    
    
    4.00
    %
    
    $
    109,589
    
    
    
    11.38
    %
    
    $
    71,058
    
    
    
    7.38
    %Total capital
    
    
    77,062
    
    
    
    8.00
    %
    
    
    121,463
    
    
    
    12.61
    %
    
    
    44,401
    
    
    
    4.61
    %Tier 1 leverage ratio
    
    
    48,307
    
    
    
    4.00
    %
    
    
    109,589
    
    
    
    9.07
    %
    
    
    61,282
    
    
    
    5.07
    %Georgia Bank & Trust
Company12/31/2008Risk-based capital:Tier 1 capital
    
    $
    39,246
    
    
    
    4.00
    %
    
    $
    95,546
    
    
    
    9.74
    %
    
    $
    56,300
    
    
    
    5.74
    %Total capital
    
    
    78,491
    
    
    
    8.00
    %
    
    
    107,821
    
    
    
    10.99
    %
    
    
    29,330
    
    
    
    2.99
    %Tier 1 leverage ratio
    
    
    51,156
    
    
    
    4.50
    %
    
    
    95,546
    
    
    
    7.47
    %
    
    
    44,390
    
    
    
    2.97
    %12/31/2007Risk-based capital:Tier 1 capital
    
    $
    35,154
    
    
    
    4.00
    %
    
    $
    88,095
    
    
    
    10.02
    %
    
    $
    52,941
    
    
    
    6.02
    %Total capital
    
    
    70,308
    
    
    
    8.00
    %
    
    
    98,790
    
    
    
    11.24
    %
    
    
    28,482
    
    
    
    3.24
    %Tier 1 leverage ratio
    
    
    50,313
    
    
    
    4.50
    %
    
    
    88,095
    
    
    
    7.88
    %
    
    
    37,782
    
    
    
    3.38
    %Southern Bank & Trust12/31/2008Risk-based capital:Tier 1 capital
    
    $
    4,528
    
    
    
    4.00
    %
    
    $
    13,939
    
    
    
    12.31
    %
    
    $
    9,411
    
    
    
    8.31
    %Total capital
    
    
    9,055
    
    
    
    8.00
    %
    
    
    15,356
    
    
    
    13.57
    %
    
    
    6,301
    
    
    
    5.57
    %Tier 1 leverage ratio
    
    
    4,943
    
    
    
    4.00
    %
    
    
    13,939
    
    
    
    11.28
    %
    
    
    8,996
    
    
    
    7.28
    %12/31/2007Risk-based capital:Tier 1 capital
    
    $
    3,248
    
    
    
    4.00
    %
    
    $
    14,101
    
    
    
    17.37
    %
    
    $
    10,853
    
    
    
    13.37
    %Total capital
    
    
    6,495
    
    
    
    8.00
    %
    
    
    15,117
    
    
    
    18.62
    %
    
    
    8,622
    
    
    
    10.62
    %Tier 1 leverage ratio
    
    
    3,389
    
    
    
    4.00
    %
    
    
    14,101
    
    
    
    16.64
    %
    
    
    10,712
    
    
    
    12.64
    %
 Cash Flows from Operating, Investing and Financing Activities
  62




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##### Table of Contents



Forward-Looking Statements
  Recent Accounting Pronouncements
  63




---



##### Table of Contents



Effect of Newly Issued But Not Yet Effective Accounting Standards
  64




---



##### Table of Contents



Effects of Inflation and Changing Prices
   65




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    66




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##### Table of Contents



Market Risk at December 31, 2008  (Dollars in thousands)
 Fair2009
    
    2010
    
    2011
    
    2012
    
    2013
    
    Thereafter
    
    Total
    
    ValueRate Sensitive Assets:Fixed interest rate loans
    
    
    172,617
    
    
    
    96,837
    
    
    
    113,054
    
    
    
    23,316
    
    
    
    27,549
    
    
    
    33,105
    
    
    
    466,478
    
    
    
    472,771Average interest rate
    
    
    6.36
    %
    
    
    7.01
    %
    
    
    6.46
    %
    
    
    7.13
    %
    
    
    6.56
    %
    
    
    7.02
    %
    
    
    6.61
    %Variable interest rate loans
    
    
    505,786
    
    
    
    15,774
    
    
    
    7,869
    
    
    
    6,474
    
    
    
    2,656
    
    
    
    749
    
    
    
    539,308
    
    
    
    539,308Average interest rate
    
    
    5.30
    %
    
    
    5.48
    %
    
    
    6.43
    %
    
    
    5.64
    %
    
    
    5.04
    %
    
    
    5.86
    %
    
    
    5.32
    %Fixed interest rate securities
    
    
    26,037
    
    
    
    27,086
    
    
    
    25,713
    
    
    
    27,443
    
    
    
    28,628
    
    
    
    154,353
    
    
    
    289,260
    
    
    
    289,268Average interest rate
    
    
    5.64
    %
    
    
    5.39
    %
    
    
    5.23
    %
    
    
    5.30
    %
    
    
    5.03
    %
    
    
    5.37
    %
    
    
    5.34
    %Variable interest rate securities
    
    
    3,932
    
    
    
    1,431
    
    
    
    2,453
    
    
    
    1,431
    
    
    
    1,431
    
    
    
    90
    
    
    
    10,768
    
    
    
    10,768Average interest rate
    
    
    5.93
    %
    
    
    5.00
    %
    
    
    4.87
    %
    
    
    5.61
    %
    
    
    5.54
    %
    
    
    5.54
    %
    
    
    5.47
    %Variable federal funds sold
    
    
    9,780
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,780
    
    
    
    9,780Average interest rate
    
    
    0.04
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.04
    %Fixed interest-bearing deposits
in other banks
    
    
    3,128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,128
    
    
    
    3,124Average interest rate
    
    
    1.48
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    1.48
    %Rate Sensitive Liabilities:Noninterest-bearing deposits
    
    
    111,291
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,291
    
    
    
    111,291Average interest rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Money market accounts
    
    
    50,404
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,404
    
    
    
    50,404Average interest rate
    
    
    2.70
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    2.70
    %Savings accounts
    
    
    247,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247,249
    
    
    
    247,249Average interest rate
    
    
    1.94
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    1.94
    %NOW accounts
    
    
    166,561
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166,561
    
    
    
    166,561Average interest rate
    
    
    1.18
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    1.18
    %Fixed interest rate time
deposits < $100M
    
    
    161,189
    
    
    
    11,185
    
    
    
    1,920
    
    
    
    567
    
    
    
    1,465
    
    
    
    
    
    
    
    176,326
    
    
    
    176,474Average interest rate
    
    
    3.38
    %
    
    
    3.53
    %
    
    
    4.51
    %
    
    
    4.21
    %
    
    
    3.61
    %
    
    
    0.00
    %
    
    
    3.41
    %Variable interest rate time
deposits < $100M
    
    
    2,282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,282
    
    
    
    2,282Average interest rate
    
    
    4.16
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    4.16
    %Fixed interest rate time
deposits > $100M
    
    
    321,219
    
    
    
    57,354
    
    
    
    1,511
    
    
    
    3,552
    
    
    
    626
    
    
    
    
    
    
    
    384,262
    
    
    
    384,347Average interest rate
    
    
    3.60
    %
    
    
    3.97
    %
    
    
    4.88
    %
    
    
    4.48
    %
    
    
    4.47
    %
    
    
    0.00
    %
    
    
    3.67
    %Variable interest rate time
deposits > $100M
    
    
    1,177
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,177
    
    
    
    1,177Average interest rate
    
    
    4.16
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    4.16
    %Securities sold under repurchase
agreements
    
    
    62,553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,553
    
    
    
    62,553Average interest rate
    
    
    0.54
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.54
    %Fixed Federal Home Loan Bank
borrowings
    
    
    
    
    
    
    24,000
    
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    52,000
    
    
    
    47,720Average interest rate
    
    
    0.00
    %
    
    
    5.86
    %
    
    
    4.47
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    3.44
    %
    
    
    4.72
    %Variable Federal Home Loan Bank
borrowings
    
    
    32,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,000
    
    
    
    28,370Average interest rate
    
    
    2.73
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    2.73
    %TT&L note borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average interest rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000Average interest rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    3.40
    %
    
    
    3.40
    %
 67




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##### Table of Contents



Market Risk at December 31, 2007  (Dollars in thousands)
 Fair2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    Thereafter
    
    Total
    
    ValueRate Sensitive Assets:Fixed interest rate loans
    
    
    149,764
    
    
    
    99,402
    
    
    
    97,257
    
    
    
    18,330
    
    
    
    19,254
    
    
    
    25,654
    
    
    
    409,661
    
    
    
    406,384Average interest rate
    
    
    6.88
    %
    
    
    7.65
    %
    
    
    7.49
    %
    
    
    7.53
    %
    
    
    7.41
    %
    
    
    7.26
    %
    
    
    7.29
    %Variable interest rate loans
    
    
    353,652
    
    
    
    46,882
    
    
    
    15,806
    
    
    
    8,544
    
    
    
    5,897
    
    
    
    42,300
    
    
    
    474,081
    
    
    
    474,081Average interest rate
    
    
    7.71
    %
    
    
    7.16
    %
    
    
    7.13
    %
    
    
    7.00
    %
    
    
    7.01
    %
    
    
    6.87
    %
    
    
    7.54
    %Fixed interest rate securities
    
    
    20,690
    
    
    
    18,936
    
    
    
    24,162
    
    
    
    20,726
    
    
    
    26,603
    
    
    
    119,038
    
    
    
    230,155
    
    
    
    230,186Average interest rate
    
    
    5.64
    %
    
    
    5.38
    %
    
    
    5.03
    %
    
    
    4.87
    %
    
    
    4.81
    %
    
    
    5.40
    %
    
    
    5.27
    %Variable interest rate securities
    
    
    2,429,291
    
    
    
    2,429
    
    
    
    2,429
    
    
    
    2,429
    
    
    
    2,429
    
    
    
    4,564
    
    
    
    16,710
    
    
    
    16,710Average interest rate
    
    
    5.67
    %
    
    
    5.58
    %
    
    
    5.03
    %
    
    
    4.47
    %
    
    
    4.15
    %
    
    
    5.94
    %
    
    
    5.24
    %Variable federal funds sold
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    Average interest rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Fixed interest-bearing deposits
in other banks
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    500Average interest rate
    
    
    5.30
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    4.50
    %Rate Sensitive Liabilities:Noninterest-bearing deposits
    
    
    101,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,272
    
    
    
    101,272Average interest rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Money market accounts
    
    
    73,609
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,609
    
    
    
    73,609Average interest rate
    
    
    3.93
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    3.93
    %Savings accounts
    
    
    289,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    289,731
    
    
    
    289,731Average interest rate
    
    
    3.58
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    3.58
    %NOW accounts
    
    
    132,186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132,186
    
    
    
    132,186Average interest rate
    
    
    2.04
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    2.04
    %Fixed interest rate time
deposits < $100M
    
    
    91,348
    
    
    
    9,007
    
    
    
    1,286
    
    
    
    947
    
    
    
    434
    
    
    
    0
    
    
    
    103,022
    
    
    
    103,130Average interest rate
    
    
    5.01
    %
    
    
    4.62
    %
    
    
    4.42
    %
    
    
    4.73
    %
    
    
    4.47
    %
    
    
    0.00
    %
    
    
    4.97
    %Variable interest rate time
deposits < $100M
    
    
    6,686
    
    
    
    2,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,845
    
    
    
    8,846Average interest rate
    
    
    4.45
    %
    
    
    4.45
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    4.45
    %Fixed interest rate time
deposits > $100M
    
    
    208,695
    
    
    
    23,249
    
    
    
    575
    
    
    
    867
    
    
    
    3,541
    
    
    
    0
    
    
    
    236,927
    
    
    
    237,188Average interest rate
    
    
    5.12
    %
    
    
    4.90
    %
    
    
    4.84
    %
    
    
    5.03
    %
    
    
    4.52
    %
    
    
    0.00
    %
    
    
    5.09
    %Variable interest rate time
deposits > $100M
    
    
    5,421
    
    
    
    1,153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,574
    
    
    
    6,575Average interest rate
    
    
    4.47
    %
    
    
    4.45
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    4.47
    %Securities sold under repurchase
agreements
    
    
    81,165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,165
    
    
    
    81,165Average interest rate
    
    
    3.54
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    3.54
    %Fixed Federal Home Loan Bank
borrowings
    
    
    
    
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    16,000
    
    
    
    40,000
    
    
    
    38,136Average interest rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    5.86
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    4.55
    %
    
    
    5.34
    %Variable Federal Home Loan Bank
borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,000
    
    
    
    19,000
    
    
    
    18,641Average interest rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    4.67
    %
    
    
    4.67
    %TT&L note borrowings
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    500Average interest rate
    
    
    6.47
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    6.47
    %Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000Average interest rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    7.09
    %
    
    
    7.09
    %
 68




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 69




---



##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Table of Contents
 PageReport
of Independent Registered Public Accounting Firm
    
    
    71Consolidated
Balance Sheets
    
    
    72Consolidated Statements of Income
    
    
    74Consolidated Statements of Stockholders Equity and Comprehensive Income
    
    
    75Consolidated Statements of Cash Flows
    
    
    77Notes
to Consolidated Financial Statements
    
    
    79
 70




---



##### Table of Contents



Internal Control  Integrated
Framework
  
 71




---



##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
   2008
    
    
    2007(Dollars in thousands)AssetsCash and due from banks
    
    $
    24,860
    
    
    
    24,558Federal funds sold
    
    
    9,780
    
    
    
    Interest-bearing deposits in other banks
    
    
    3,128
    
    
    
    500Cash and cash equivalents
    
    
    37,768
    
    
    
    25,058Investment securities:Available-for-sale
    
    
    299,339
    
    
    
    245,429Held-to-maturity, at cost (fair values of $698
and $1,467 at December 31, 2008 and 2007,
respectively)
    
    
    689
    
    
    
    1,435Loans held for sale
    
    
    18,955
    
    
    
    11,303Loans
    
    
    986,831
    
    
    
    871,440Less allowance for loan losses
    
    
    14,742
    
    
    
    11,800Loans, net
    
    
    972,089
    
    
    
    859,640Premises and equipment, net
    
    
    33,960
    
    
    
    32,612Accrued interest receivable
    
    
    7,085
    
    
    
    7,416Goodwill, net
    
    
    140
    
    
    
    140Bank-owned life insurance
    
    
    17,368
    
    
    
    16,660Restricted equity securities
    
    
    6,571
    
    
    
    5,060Other real estate owned
    
    
    5,734
    
    
    
    Other assets
    
    
    11,341
    
    
    
    8,227$
    1,411,039
    
    
    
    1,212,980
   72




---



##### Table of Contents



2008
    
    
    2007Liabilities and Stockholders EquityDeposits:Noninterest-bearing
    
    $
    111,291
    
    
    
    101,272Interest-bearing:NOW accounts
    
    
    166,561
    
    
    
    132,186Savings
    
    
    247,249
    
    
    
    289,731Money management accounts
    
    
    50,404
    
    
    
    73,609Time deposits of $100 or more
    
    
    385,439
    
    
    
    243,501Other time deposits
    
    
    178,608
    
    
    
    111,8671,139,552
    
    
    
    952,166Federal funds purchased and securities sold under
repurchase agreements
    
    
    62,553
    
    
    
    81,166Advances from Federal Home Loan Bank
    
    
    84,000
    
    
    
    59,000Other borrowed funds
    
    
    
    
    
    
    500Accrued interest payable and other liabilities
    
    
    10,283
    
    
    
    10,390Subordinated debentures
    
    
    20,000
    
    
    
    20,000Total liabilities
    
    
    1,316,388
    
    
    
    1,123,222Stockholders equity:Common stock, $3.00 par value; 10,000,000 shares
authorized; 5,987,674 and 5,433,614 shares issued in
2008 and 2007, respectively; 5,987,674 and 5,425,182
shares outstanding in 2008 and 2007, respectively
    
    
    17,963
    
    
    
    16,301Preferred stock, no par value; 10,000,000 and 0 shares
authorized in 2008 and 2007, respectively; 0 shares
outstanding in 2008 and 2007
    
    
    
    
    
    
    Additional paid-in capital
    
    
    55,189
    
    
    
    39,518Retained earnings
    
    
    21,455
    
    
    
    34,228Treasury stock, at cost; 0 and 8,432 shares
in 2008 and 2007, respectively
    
    
    
    
    
    
    (317
    )Accumulated other comprehensive income, net
    
    
    44
    
    
    
    28Total stockholders equity
    
    
    94,651
    
    
    
    89,758$
    1,411,039
    
    
    
    1,212,980
  73




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2008
    
    
    2007
    
    
    2006(Dollars in thousands, except per share data)Interest income:Loans, including fees
    
    $
    61,568
    
    
    
    66,219
    
    
    
    54,338Investment securities:Taxable
    
    
    12,875
    
    
    
    11,023
    
    
    
    9,633Tax-exempt
    
    
    716
    
    
    
    800
    
    
    
    1,030Federal funds sold
    
    
    470
    
    
    
    1,112
    
    
    
    600Interest-bearing deposits in other banks
    
    
    46
    
    
    
    27
    
    
    
    25Total interest income
    
    
    75,675
    
    
    
    79,181
    
    
    
    65,626Interest expense:Deposits (including interest on time deposits over
$100 of $13,342, $11,529, and
$7,184 in 2008, 2007, and 2006, respectively)
    
    
    30,017
    
    
    
    33,147
    
    
    
    24,099Federal funds purchased and securities sold
under repurchase agreements
    
    
    1,317
    
    
    
    3,305
    
    
    
    3,079Other borrowings
    
    
    4,155
    
    
    
    4,480
    
    
    
    4,245Total interest expense
    
    
    35,489
    
    
    
    40,932
    
    
    
    31,423Net interest income
    
    
    40,186
    
    
    
    38,249
    
    
    
    34,203Provision for loan losses
    
    
    9,055
    
    
    
    3,823
    
    
    
    2,478Net interest income after provision
for loan losses
    
    
    31,131
    
    
    
    34,426
    
    
    
    31,725Noninterest income:Service charges and fees on deposits
    
    
    7,291
    
    
    
    6,409
    
    
    
    5,742Gain on sales of loans
    
    
    5,747
    
    
    
    5,185
    
    
    
    5,154Gain on sale of fixed assets, net
    
    
    8
    
    
    
    1,049
    
    
    
    47Investment securities (losses) gains, net
    
    
    (77
    )
    
    
    (237
    )
    
    
    213Retail investment income
    
    
    1,096
    
    
    
    1,267
    
    
    
    788Trust services fees
    
    
    1,134
    
    
    
    1,132
    
    
    
    860Increase in cash surrender value of bank-owned
life insurance
    
    
    708
    
    
    
    678
    
    
    
    605Miscellaneous income
    
    
    798
    
    
    
    685
    
    
    
    631Total noninterest income
    
    
    16,705
    
    
    
    16,168
    
    
    
    14,040Noninterest expense:Salaries and other personnel expense
    
    
    20,852
    
    
    
    19,343
    
    
    
    17,806Occupancy expenses
    
    
    4,373
    
    
    
    3,457
    
    
    
    2,847Other operating expenses
    
    
    11,527
    
    
    
    9,708
    
    
    
    8,279Total noninterest expense
    
    
    36,752
    
    
    
    32,508
    
    
    
    28,932Income before income taxes
    
    
    11,084
    
    
    
    18,086
    
    
    
    16,833Income tax expense
    
    
    3,506
    
    
    
    6,321
    
    
    
    5,673Net income
    
    $
    7,578
    
    
    
    11,765
    
    
    
    11,160Basic net income per share
    
    $
    1.27
    
    
    
    1.97
    
    
    
    1.91Diluted net income per share
    
    
    1.26
    
    
    
    1.95
    
    
    
    1.89Weighted average common shares outstanding
    
    
    5,972,429
    
    
    
    5,972,793
    
    
    
    5,856,853Weighted average number of common and
common equivalent shares outstanding
    
    
    6,011,689
    
    
    
    6,044,871
    
    
    
    5,908,659
  74




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 AccumulatedCommon stock
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    other
    
    
    TotalComprehensive
    
    
    Number
    
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    stockholdersincome
    
    
    of shares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    stock
    
    
    income (loss), net
    
    
    equityBalance, December 31, 2005
    
    
    
    
    
    
    5,279
    
    
    $
    15,838
    
    
    
    34,138
    
    
    
    16,100
    
    
    
    (234
    )
    
    
    (2,259
    )
    
    
    63,583Cumulative catch-up adjustment in accordance with SAB 108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    794
    
    
    
    
    
    
    
    
    
    
    
    794Comprehensive income:Net income
    
    $
    11,160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,160
    
    
    
    
    
    
    
    
    
    
    
    11,160Other comprehensive loss  unrealized
loss on investment securities available for sale,
net of income tax effect of $321
    
    
    624
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    624
    
    
    
    624Total comprehensive
income
    
    $
    11,784Cash dividends ($0.52 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,767
    )
    
    
    
    
    
    
    
    
    
    
    (2,767
    )Stock options exercised
    
    
    
    
    
    
    6
    
    
    
    17
    
    
    
    (36
    )
    
    
    
    
    
    
    265
    
    
    
    
    
    
    
    246Stock options compensation cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    415Issuance of common stock
    
    
    
    
    
    
    150
    
    
    
    450
    
    
    
    4,536
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    5,000Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (62
    )Retirement of common stock
    
    
    
    
    
    
    (2
    )
    
    
    (5
    )
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69
    )Balance, December 31, 2006
    
    
    
    
    
    
    5,433
    
    
    $
    16,300
    
    
    
    38,989
    
    
    
    25,287
    
    
    
    (17
    )
    
    
    (1,635
    )
    
    
    78,924Comprehensive income:Net income
    
    $
    11,765
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,765
    
    
    
    
    
    
    
    
    
    
    
    11,765Other comprehensive loss  unrealized
loss on investment securities available for sale,
net of income tax effect of $857
    
    
    1,663
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,663
    
    
    
    1,663Total comprehensive
income
    
    $
    13,428Cash dividends ($0.52 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,824
    )
    
    
    
    
    
    
    
    
    
    
    (2,824
    )Stock options exercised
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    (17
    )
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    1Stock options compensation cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    546
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    546Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (317
    )
    
    
    
    
    
    
    (317
    )Balance, December 31, 2007
    
    
    
    
    
    
    5,434
    
    
    $
    16,301
    
    
    
    39,518
    
    
    
    34,228
    
    
    
    (317
    )
    
    
    28
    
    
    
    89,758Comprehensive income:Net income
    
    $
    7,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,578
    
    
    
    
    
    
    
    
    
    
    
    7,578Other comprehensive income  unrealized
gain on investment securities available for sale,
net of income tax effect of $13
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    16Total comprehensive
income
    
    $
    7,594Cash dividends ($0.52 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,968
    )
    
    
    
    
    
    
    
    
    
    
    (2,968
    )Stock options exercised
    
    
    
    
    
    
    11
    
    
    
    32
    
    
    
    (291
    )
    
    
    
    
    
    
    726
    
    
    
    
    
    
    
    467Stock options compensation cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209Stock dividend
    
    
    
    
    
    
    543
    
    
    
    1,630
    
    
    
    15,753
    
    
    
    (17,383
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    36Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )
    
    
    
    
    
    
    (445
    )Balance, December 31, 2008
    
    
    
    
    
    
    5,988
    
    
    $
    17,963
    
    
    
    55,189
    
    
    
    21,455
    
    
    
    
    
    
    
    44
    
    
    
    94,651
  75




---



##### Table of Contents



Disclosure of reclassification amount2008
    
    
    2007
    
    
    2006Unrealized holding gains (losses) arising
during period, net of taxes
    
    $
    (32
    )
    
    
    1,509
    
    
    
    765Reclassification adjustment for (gains) losses
included in net income
    
    
    77
    
    
    
    237
    
    
    
    (213
    )Tax effect
    
    
    (29
    )
    
    
    (83
    )
    
    
    72Net unrealized gains (losses) in securities
    
    $
    16
    
    
    
    1,663
    
    
    
    624
  76




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2008
    
    
    2007
    
    
    2006(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    7,578
    
    
    
    11,765
    
    
    
    11,160Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    2,343
    
    
    
    1,606
    
    
    
    1,367Deferred income tax benefit
    
    
    (929
    )
    
    
    (825
    )
    
    
    (885
    )Provision for loan losses
    
    
    9,055
    
    
    
    3,823
    
    
    
    2,478Net investment securities (gains) losses
    
    
    77
    
    
    
    237
    
    
    
    (213
    )Net (accretion of discount) amortization of
premium on investment securities
    
    
    (147
    )
    
    
    (151
    )
    
    
    (368
    )Increase in cash surrender value of bank-owned
life insurance
    
    
    (708
    )
    
    
    (678
    )
    
    
    (605
    )Stock options compensation cost
    
    
    209
    
    
    
    546
    
    
    
    415Gain on disposal of premises and equipment
    
    
    (8
    )
    
    
    (1,049
    )
    
    
    (47
    )(Gain) loss on the sale of other real estate
    
    
    (63
    )
    
    
    29
    
    
    
    16Gain on sales of loans
    
    
    (5,747
    )
    
    
    (5,185
    )
    
    
    (5,154
    )Real estate loans originated for sale
    
    
    (258,946
    )
    
    
    (252,114
    )
    
    
    (265,026
    )Proceeds from sales of real estate loans
    
    
    257,042
    
    
    
    260,853
    
    
    
    277,470Decrease (increase) in accrued interest receivable
    
    
    331
    
    
    
    (1,433
    )
    
    
    (1,359
    )Increase in other assets
    
    
    (2,199
    )
    
    
    (710
    )
    
    
    (1,283
    )(Decrease) increase in accrued interest payable and other liabilities
    
    
    (107
    )
    
    
    895
    
    
    
    2,885Net cash provided by operating activities
    
    
    7,781
    
    
    
    17,609
    
    
    
    20,851Cash flows from investing activities:Proceeds from sales of available for sale securities
    
    
    27,285
    
    
    
    20,712
    
    
    
    42,346Proceeds from maturities of available for sale securities
    
    
    68,665
    
    
    
    52,200
    
    
    
    94,487Proceeds from maturities of held to maturity securities
    
    
    765
    
    
    
    1,555
    
    
    
    805Purchase of available for sale securities
    
    
    (149,781
    )
    
    
    (116,790
    )
    
    
    (136,887
    )Purchase of restricted equity securities
    
    
    (1,511
    )
    
    
    (619
    )
    
    
    (874
    )Proceeds from redemption of FHLB stock
    
    
    
    
    
    
    495
    
    
    
    225Net increase in loans
    
    
    (127,889
    )
    
    
    (138,469
    )
    
    
    (157,330
    )Purchase of Bank-owned life insurance
    
    
    
    
    
    
    
    
    
    
    (3,500
    )Additions to premises and equipment
    
    
    (5,196
    )
    
    
    (12,783
    )
    
    
    (5,185
    )Proceeds from sale of other real estate
    
    
    715
    
    
    
    312
    
    
    
    157Proceeds from sale of premises and equipment
    
    
    1,513
    
    
    
    3,016
    
    
    
    1,791Net cash used in investing activities
    
    
    (185,434
    )
    
    
    (190,371
    )
    
    
    (163,965
    )
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2008
    
    
    2007
    
    
    2006(Dollars in thousands)Cash flows from financing activities:Net increase in deposits
    
    
    187,386
    
    
    
    150,403
    
    
    
    138,109Net (decrease) increase in federal funds purchased
and securities sold under repurchase agreements
    
    
    (18,613
    )
    
    
    11,146
    
    
    
    3,006Advances from Federal Home Loan Bank
    
    
    25,000
    
    
    
    10,000
    
    
    
    24,000Payments of Federal Home Loan Bank advances
    
    
    
    
    
    
    (11,000
    )
    
    
    (16,000
    )Proceeds from subordinated debentures
    
    
    
    
    
    
    
    
    
    
    10,000Proceeds from issuance of common stock
    
    
    36
    
    
    
    
    
    
    
    5,000Principal payments on other borrowed funds
    
    
    (500
    )
    
    
    (500
    )
    
    
    Purchase of treasury stock
    
    
    (445
    )
    
    
    (317
    )
    
    
    (62
    )Payment of cash dividends
    
    
    (2,968
    )
    
    
    (2,824
    )
    
    
    (2,767
    )Proceeds from stock options exercised, net of stock redeemed
    
    
    467
    
    
    
    1
    
    
    
    176Net cash provided by financing activities
    
    
    190,363
    
    
    
    156,909
    
    
    
    161,462Net increase (decrease) in cash and
cash equivalents
    
    
    12,710
    
    
    
    (15,853
    )
    
    
    18,348Cash and cash equivalents at beginning of year
    
    
    25,058
    
    
    
    40,911
    
    
    
    22,563Cash and cash equivalents at end of year
    
    $
    37,768
    
    
    
    25,058
    
    
    
    40,911Supplemental disclosures of cash paid during the year for:Interest
    
    $
    35,729
    
    
    
    40,285
    
    
    
    29,988Income taxes
    
    
    4,092
    
    
    
    7,394
    
    
    
    6,265Supplemental information on noncash investing activities:Loans transferred to other real estate
    
    $
    6,386
    
    
    
    341
    
    
    
    173
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (1)
    
    Summary of Significant Accounting PoliciesSoutheastern Bank Financial Corporation and its wholly owned subsidiaries (collectively the
Company), consisting of Southeastern Bank Financial Corporation (the Parent), Georgia Bank &
Trust Company of Augusta, Georgia (the Bank), and Southern Bank and Trust Company of Aiken,
South Carolina (the Thrift), offer a wide range of lending services, including real estate,
commercial, and consumer loans to individuals and small to medium-sized businesses and
professionals that are located in, or conduct a substantial portion of their business in, the
Richmond, Columbia, and Clarke Counties area of Georgia, and Aiken and Greenville Counties
area of South Carolina. On August 16, 2007, Georgia Bank & Trust Company organized SB&T
Capital Corporation (the LPO). SB&T Capital Corporation is a loan production office located
in Greenville, SC. On November 1, 2007 GB&T entered into an Operating Agreement with NMF
Asset Management LLC (NMF) whereby GB&T became a 30% partner. NMF Corporation, LLC is a
Delaware Limited Liability Corporation and provides investment advisory services. Georgia
Bank and Trust Company provides all accounting services and client billings and collection of
these billings for NMF Corporation, LLC. NMF reimburses the Bank for the expenses incurred
for these services. Georgia Bank & Trust accounts for the NMF investment using the equity
method of accounting.The Company is subject to competition from other financial institutions and is also subject to
the regulations of certain Federal and state agencies and undergoes periodic examinations by
those regulatory authorities. The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America and to general
practices within the banking industry. The following is a description of the more significant
of those policies the Company follows in preparing and presenting its consolidated financial
statements.
 (a)
    
    Basis of PresentationThe consolidated financial statements include the accounts of Southeastern Bank
Financial Corporation and its wholly owned subsidiaries, Georgia Bank & Trust Company of
Augusta, Georgia, Southern Bank and Trust Company of Aiken, South Carolina. Significant
intercompany transactions and accounts are eliminated in consolidation.The consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the balance
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates.Material estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses. In connection with
the determination of the allowance for loan losses, management obtains independent
appraisals for significant properties.A substantial portion of the Companys loans are secured by real estate in Augusta,
Georgia, and the surrounding area. Accordingly, the ultimate collectability of a
substantial portion of the Companys loan portfolio is susceptible to changes in real
estate market conditions in the Augusta, Georgia, and surrounding area.
 (b)
    
    Cash and Cash EquivalentsCash and cash equivalents include cash and due from banks, Federal funds sold, and
short-term interest-bearing deposits in other banks. Generally, Federal funds are sold
for one-day periods. Net cash flows are reported for loan and deposit transactions and
for short term borrowings with an original maturity of 90 days or less.(c)
    
    Investment SecuritiesThe Company classifies its investment securities into one of two categories: available
for sale and held to maturity. Held to maturity securities are those debt securities
for which the Company has the ability and intent to hold the security until maturity.
All other securities are classified as available for sale.Held to maturity securities are recorded at cost adjusted for the amortization or
accretion of premiums or discounts. Available for sale securities are recorded at fair
value. Unrealized holding gains and losses, net of related tax effects, on securities
available for sale are excluded from net income and are reported within stockholders
equity as a component of comprehensive income and accumulated other comprehensive income
(loss) until realized.A decline in the fair value of securities below their cost that are other than temporary
are reflected as realized losses. In estimating other-than-temporary losses, management
considers: the length of time and extent that fair value has been less than cost, the
financial condition and near term prospects of the issuer, and the Companys ability and
intent to hold the security for a period sufficient to allow for any anticipated
recovery in fair value.Premiums and discounts are amortized or accreted over the life of the related investment
security as an adjustment to yield using a method which approximates the effective
interest method and takes into consideration prepayment assumptions.
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Dividends and interest income are recognized when earned. Realized gains and losses for
investment securities available for sale which are sold are included in earnings and are
derived using the specific identification method for determining the cost of securities
sold.(d)
    
    Loans and Allowance for Loan LossesLoans are stated at the amount of unpaid principal outstanding less unearned loan fees,
reduced by an allowance for loan losses. Interest on loans is calculated using the
simple interest method. Loan origination fees, net of certain direct origination costs,
are deferred and recognized in interest income using the straight line method without
anticipating prepayments. Accrual of interest is generally discontinued on loans that
become past due 90 days or more. These loans are classified as nonaccrual, even though
the presence of collateral or the borrowers financial strength may be sufficient to
provide for ultimate repayment. All interest accrued but not received for loans placed
on nonaccrual is reversed against interest income. Interest received on such loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably
assured.Concentration of Credit Risk:Most of the Companys business activity is with customers located within the
Augusta-Richmond County, GA-SC metropolitan statistical area. Therefore, the Companys
exposure to credit risk is significantly affected by changes in the economy in this
area. The Company also has a significant concentration of loans with real estate
developers.Allowance for Loan Losses:The allowance for loan losses is established through a provision for loan losses charged
to expense. Loans are charged against the allowance for loan losses when management
believes that the collectability of the principal is unlikely. Subsequent recoveries
are added to the allowance. The allowance is an amount that management believes will be
adequate to absorb losses on existing loans that become uncollectible, based on
evaluations of the collectability of loans. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, historical loss
rates, overall portfolio quality, review of specific problem loans, and current economic
conditions and trends that may affect a borrowers ability to pay. The allowance is
evaluated on a regular basis utilizing estimated loss factors for specific types of
loans. Such loss factors are periodically reviewed and adjusted as necessary based on
actual losses.
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Management believes that the allowance for loan losses is adequate. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses. Such agencies may advise
the Company to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.Management, considering current information and events regarding a borrowers ability to
repay its obligations, considers a loan to be impaired if it is probable that the
Company will be unable to collect all amounts due according to the contractual terms of
the loan agreement. The amount of impairment is generally measured based on the present
value of expected future cash flows discounted at the loans effective interest rate.
If the loan is collateral-dependent, the fair value of the collateral less estimated
selling costs is used to determine the amount of impairment. Specific guidance from
bank regulators is also considered. Impairment losses are included in the allowance for
loan losses through a charge to the provision for losses on loans. The accounting for
impaired loans described above applies to all loans, except for large pools of
smaller-balance, homogeneous loans that are collectively evaluated for impairment and
loans that are measured at fair value or at the lower of cost or fair value. The
allowance for loan losses for loans not considered impaired and for large pools of
smaller-balance, homogeneous loans is established through consideration of such factors
as changes in the nature and volume of the portfolio, overall portfolio quality,
individual risk rating, adequacy of the underlying collateral, loan concentrations,
historical charge-off trends, and economic conditions that may affect the borrowers
ability to pay. Cash receipts on impaired loans for which the accrual of interest has
been discontinued are applied first to reduce the principal amount of such loans until
all contractual principal payments have been brought current.The process of assessing the adequacy of the allowance is necessarily subjective.
Further, and particularly in terms of economic downturns, it is reasonably possible that
future credit losses may exceed historical loss levels and may also exceed managements
current estimates of incurred credit losses inherent within the loan portfolio. As
such, there can be no assurance that future loan charge-offs will not exceed
managements current estimate of what constitutes a reasonable allowance for loan
losses.Mortgage loans held for sale are generally sold with servicing rights released. The
carrying value of mortgage loans sold is reduced by the amount allocated to the
servicing right. Gains and losses on sales of mortgage loans are based on the difference
between the selling price and the carrying value of the related loan sold.
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 The Company originates mortgages to be held for sale only for loans that have been
individually pre-approved by the investor. Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of aggregate cost or market, as
determined by outstanding commitments from investors. Net unrealized losses, if any, are
recorded as a valuation allowance and charged to earnings.Gains and losses on sales of mortgage loans are based on the difference between the
selling price and the carrying value of the related loan sold.The Company bears minimal interest rate risk on these loans and only holds the loans
temporarily until documentation can be completed to finalize the sale to the investor.
Under SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities,loan commitments that relate to the origination of mortgage loans that will
be held for sale, commonly referred to as interest rate lock commitments, must be
accounted for as derivatives by the issuer of the commitment. SEC Staff Accounting
Bulletin No. 109 Written Loan Commitments Recorded at Fair Value through Earnings (SAB
109) became effective during 2008 and requires that fair value of these include the net
future cash flows associated with the servicing of the loan. These net future cash flows
include the servicing premium received by the Company when the servicing is sold with
the loan, as is customary in the Companys sale transactions.Forward sales commitments to the investor are made at the same time as the loan
commitment and have identical terms as the mortgage loan commitments to the customers.
These forward sales commitments are also derivatives. Upon closing of the loan with the
customer, Georgia Bank & Trust accounts for the forward sales commitments on loans held
for sale as a hedge. Once a loan is closed with the customer, it is funded by the
investor, generally within fifteen days. We have determined this hedge is effective
because the gain that is unrealized, but embedded, upon closing the loan with the
customer is highly correlated with the gain realized upon funding from the investor.
Fair values of these derivatives as of December 31, 2008 and 2007 were insignificant and
have not been recorded.
 (e)
    
    Premises and EquipmentPremises and equipment are stated at cost less accumulated depreciation. Depreciation is
provided on the straight-line basis over the estimated useful lives of the related
assets, which range from three to forty years. Premises and equipment and other long
term assets are reviewed for impairment when events indicate their carrying amounts may
not be recoverable from future undiscounted cash flows. If impaired, the assets are
recorded at fair value.
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (f)
    
    Other Real EstateAssets acquired through or instead of loan foreclosure are initially recorded at fair
value less costs to sell when acquired, establishing a new cost basis. If fair value
declines subsequent to foreclosure, a valuation allowance is recorded through expense.
Operating costs after acquisition are expensed. Costs related to the development and
improvement of property are capitalized. Other real estate totaled $5,734 and $0 as of
December 31, 2008 and 2007, respectively.(g)
    
    GoodwillGoodwill results from business acquisitions and represents the excess of the purchase
price over the fair value of acquired tangible assets and liabilities and identifiable
intangible assets. Goodwill is assessed at least annually for impairment and any such
impairment will be recognized in the period identified. The Companys goodwill is not
considered impaired at December 31, 2008.(h)
    
    Stock-Based CompensationCompensation cost is recognized for stock options and restricted stock awards issued to
employees, based on the fair value of these awards at the date of grant. A Black-Scholes
model is utilized to estimate the fair value of stock options, while the market price of
the Corporations common stock at the date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service period, generally defined as
the vesting period. For awards with graded vesting, compensation cost is recognized on a
straight-line basis over the requisite service period for the entire award.(i)
    
    Income TaxesIncome tax expense is the total of the current year income tax due or refundable and the
change in deferred tax assets and liabilities. Deferred tax assets and liabilities are
the expected future tax amounts for the temporary differences between carrying amounts
and tax bases of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be realized.The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes
(FIN 48), as of January 1, 2007. A tax position is recognized as a benefit only if it
is more likely than not that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the largest
amount of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the more likely than not
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 test, no tax benefit is recorded. The adoption had no material affect on the Companys
consolidated financial statements.The Company recognizes interest related to income tax matters as interest expense and
penalties related to income tax matters as other expense.
 (j)
    
    Income Per ShareBasic net income per share is net income divided by the weighted average number of
common shares outstanding during the period. Diluted net income per share includes the
dilutive effect of additional potential common shares issuable under stock options.
Income per share is restated for all stock dividends through the date of issuance of the
financial statements.
 December 31,2008
    
    2007
    
    2006Weighted average common shares outstanding
for basic earnings per common share
    
    
    5,972,429
    
    
    
    5,972,793
    
    
    
    5,856,853Add: Dilutive effects of assumed exercises of
stock options
    
    
    39,260
    
    
    
    72,078
    
    
    
    51,806Weighted average number of common and
common equivalent shares outstanding
    
    
    6,011,689
    
    
    
    6,044,871
    
    
    
    5,908,659
 (k)
    
    Other Comprehensive Income (Loss)Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income (loss) includes unrealized gains and losses on securities available
for sale which are also recognized as separate components of equity.(l)
    
    Segment DisclosuresThe Company has one reportable segment, financial services. This segment provides
financial services including banking, mortgage services, retail investment services and
trust services through two subsidiary banks with offices located in Georgia and South
Carolina.(m)
    
    Recent Accounting PronouncementsIn September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157).
This Statement defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. This Statement
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 establishes a fair value hierarchy about the assumptions used to measure fair value and
clarifies assumptions about risk and the effect of a restriction on the sale or use of
an asset. The standard was effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of
FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years. The
impact of adoption was not material. In October 2008, the FASB issued Staff Position
(FSP) 157-3, Determining the Fair Value of a Financial Asset when the Market for That
Asset Is Not Active. This FSP clarifies the application of FAS 157 in a market that is
not active. The impact of adoption was not material.In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The standard provides companies with an option to
report selected financial assets and liabilities at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types of assets and
liabilities. The new standard was effective for the Company on January 1, 2008. The
Company did not elect the fair value option for any financial assets or financial
liabilities as of January 1, 2008.In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. This issue requires that a liability be
recorded during the service period when a split-dollar life insurance agreement
continues after participants employment or retirement. The required accrued liability
will be based on either the post-employment benefit cost for the continuing life
insurance or based on the future death benefit depending on the contractual terms of the
underlying agreement. This issue was effective for fiscal years beginning after
December 15, 2007. The impact of adoption was not material.On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value through Earnings (SAB 109). Previously, SAB 105,
Application of Accounting Principles to Loan Commitments, stated that in measuring the
fair value of a derivative loan commitment, a company should not incorporate the
expected net future cash flows related to the associated servicing of the loan. SAB 109
supersedes SAB 105 and indicates that the expected net future cash flows related to the
associated servicing of the loan should be included in measuring fair value for all
written loan commitments that are accounted for at fair value through earnings. SAB 105
also indicated that internally-developed intangible assets should not be recorded as
part of the fair value of a derivative loan
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 commitment, and SAB 109 retains that view. SAB 109 was effective for derivative loan
commitments issued or modified in fiscal quarters beginning after December 15, 2007.
The impact of adoption was not material.In December 2007, the SEC issued SAB No. 110, which expresses the views of the SEC
regarding the use of a simplified method, as discussed in SAB No. 107, in developing
an estimate of expected term of plain vanilla share options in accordance with SFAS
No. 123(R), Share-Based Payment. The SEC concluded that a company could, under certain
circumstances, continue to use the simplified method for share option grants after
December 31, 2007. The Company does not use the simplified method for share options and
therefore SAB No. 110 has no impact on the Companys consolidated financial statements.Effect of Newly Issued But Not Yet Effective Accounting Standards:In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations
(FAS 141(R)), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in an acquiree, including the
recognition and measurement of goodwill acquired in a business combination. FAS No.
141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier
adoption is prohibited. The adoption of this standard is not expected to have a
material effect on the Companys results of operations or financial position.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated
Financial Statements, an amendment of ARB No. 51 (SFAS No. 160), which will change
the accounting and reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity within the consolidated
balance sheets. FAS No. 160 is effective as of the beginning of the first fiscal year
beginning on or after December 15, 2008. The adoption of FAS No. 160 did not have a
significant impact on its results of operations or financial position.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133. FAS No. 161 amends and expands
the disclosure requirements of SFAS No. 133 for derivative instruments and hedging
activities. FAS No. 161 requires qualitative disclosure about objectives and strategies
for using derivative and hedging instruments, quantitative disclosures about fair value
amounts of the instruments and gains and losses on such instruments, as well as
disclosures about credit-risk features in derivative agreements. FAS No. 161 is
effective for financial statements issued for fiscal years and interim
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
  (n)
    
    Bank Owned Life Insurance
  (o)
    
    Loss Contingencies
  (p)
    
    Reclassifications
  (q)
    
    Rounding
  (2)
    
    Cash and Due From Banks
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (3)
    
    Investment Securities
  2008Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair value(Dollars in Thousands)Held to maturity:Obligations of states and
political subdivisions
    
    $
    689
    
    
    
    9
    
    
    
    
    
    
    
    698$
    689
    
    
    
    9
    
    
    
    
    
    
    
    698Available for sale:Obligations of U.S.
Government agencies
    
    $
    109,256
    
    
    
    1,448
    
    
    
    (29
    )
    
    
    110,675Obligations of states and
political subdivisions
    
    
    17,384
    
    
    
    131
    
    
    
    (559
    )
    
    
    16,956Mortgage-backed securities
    
    
    157,549
    
    
    
    3,786
    
    
    
    (1,300
    )
    
    
    160,035Corporate bonds
    
    
    15,032
    
    
    
    
    
    
    
    (3,405
    )
    
    
    11,627Equity securities
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46$
    299,267
    
    
    
    5,365
    
    
    
    (5,293
    )
    
    
    299,339
 2007Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair value(Dollars in Thousands)Held to maturity:Obligations of states and
political subdivisions
    
    $
    1,435
    
    
    
    32
    
    
    
    
    
    
    
    1,467$
    1,435
    
    
    
    32
    
    
    
    
    
    
    
    1,467Available for sale:Obligations of U.S.
Government agencies
    
    $
    96,166
    
    
    
    950
    
    
    
    (8
    )
    
    
    97,108Obligations of states and
political subdivisions
    
    
    15,755
    
    
    
    96
    
    
    
    (223
    )
    
    
    15,628Mortgage-backed securities
    
    
    118,179
    
    
    
    443
    
    
    
    (1,061
    )
    
    
    117,561Corporate bonds
    
    
    15,036
    
    
    
    73
    
    
    
    (392
    )
    
    
    14,717Equity securities
    
    
    250
    
    
    
    165
    
    
    
    
    
    
    
    415$
    245,386
    
    
    
    1,727
    
    
    
    (1,684
    )
    
    
    245,429
  89




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
  December 31, 2008Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealizedfair value
    
    
    loss
    
    
    fair value
    
    
    loss
    
    
    fair value
    
    
    loss(Dollars in Thousands)Obligations of U.S.
Government
agencies
    
    $
    6,462
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    6,462
    
    
    
    29Obligations of
states and
political
subdivisions
    
    
    5,556
    
    
    
    112
    
    
    
    5,619
    
    
    
    447
    
    
    
    11,175
    
    
    
    559Mortgage-backed
securities
    
    
    23,102
    
    
    
    753
    
    
    
    4,608
    
    
    
    547
    
    
    
    27,710
    
    
    
    1,300Corporate bonds
    
    
    6,995
    
    
    
    1,912
    
    
    
    4,632
    
    
    
    1,493
    
    
    
    11,627
    
    
    
    3,405$
    42,115
    
    
    
    2,806
    
    
    
    14,859
    
    
    
    2,487
    
    
    
    56,974
    
    
    
    5,293
 December 31, 2007Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealizedfair value
    
    
    loss
    
    
    fair value
    
    
    loss
    
    
    fair value
    
    
    loss(Dollars in Thousands)Obligations of U.S.
Government
agencies
    
    $
    1,500
    
    
    
    
    
    
    
    2,876
    
    
    
    8
    
    
    
    4,376
    
    
    
    8Obligations of
states and
political
subdivisions
    
    
    10,397
    
    
    
    215
    
    
    
    838
    
    
    
    8
    
    
    
    11,235
    
    
    
    223Mortgage-backed
securities
    
    
    16,242
    
    
    
    111
    
    
    
    49,352
    
    
    
    950
    
    
    
    65,594
    
    
    
    1,061Corporate bonds
    
    
    6,910
    
    
    
    392
    
    
    
    
    
    
    
    
    
    
    
    6,910
    
    
    
    392$
    35,049
    
    
    
    718
    
    
    
    53,066
    
    
    
    966
    
    
    
    88,115
    
    
    
    1,684
  90




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
   Securities
    
    
    Securitiesheld to maturity
    
    
    available for saleAmortized
    
    
    Estimated
    
    
    Amorized
    
    
    Estimatedcost
    
    
    fair value
    
    
    cost
    
    
    fair valueDollars in ThousandsOne year or less
    
    $
    
    
    
    
    
    
    
    
    1,000
    
    
    
    1,000After one year
through five years
    
    
    490
    
    
    
    496
    
    
    
    3,509
    
    
    
    3,535After five years
through ten years
    
    
    199
    
    
    
    202
    
    
    
    36,629
    
    
    
    36,453After ten years
    
    
    
    
    
    
    
    
    
    
    100,534
    
    
    
    98,271689
    
    
    
    698
    
    
    
    141,672
    
    
    
    139,259Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    157,549
    
    
    
    160,034$
    689
    
    
    
    698
    
    
    
    299,221
    
    
    
    299,293
   91




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (4)
    
    Loans
  2008
    
    
    2007Dollars in ThousandsCommercial, financial, and agricultural
    
    $
    109,784
    
    
    $
    93,355Real estate:Construction
    
    
    369,731
    
    
    
    318,438Residential
    
    
    212,856
    
    
    
    190,613Commercial
    
    
    266,362
    
    
    
    236,358Consumer installment
    
    
    28,496
    
    
    
    33,625987,229
    
    
    
    872,389Less allowance for loan losses
    
    
    14,742
    
    
    
    11,800Less deferred loan origination fees
    
    
    398
    
    
    
    949$
    972,089
    
    
    $
    859,640
  2008
    
    
    2007
    
    
    2006Dollars in ThousandsBalance, beginning of year
    
    $
    11,800
    
    
    
    9,777
    
    
    
    9,125Effects of *SAB 108
    
    
    
    
    
    
    
    
    
    
    (694
    )Provision for loan losses
    
    
    9,055
    
    
    
    3,823
    
    
    
    2,478Charge-offs
    
    
    (6,736
    )
    
    
    (2,576
    )
    
    
    (1,940
    )Recoveries
    
    
    623
    
    
    
    776
    
    
    
    808Balance, end of year
    
    $
    14,742
    
    
    
    11,800
    
    
    
    9,777
 
 *
    
    Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108).The allowance for
loan loss in 2006 was decreased $694 to remove the entire balance of the allowance for
unfunded lines and commitments and standby letters of credit. 92




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
  2008
    
    
    2007Dollars in ThousandsYear end loans with no allocated allowance
for loan losses
    
    $
    16,836
    
    
    $
    12,442Year end loans with allocated allowance
for loan losses
    
    
    16,944
    
    
    
    1,808$
    33,780
    
    
    $
    14,250Amount of the allowance for loan loss allocated
    
    $
    2,201
    
    
    $
    291
 2008
    
    
    2007
    
    
    2006Dollars in ThousandsArverage of individually impaired loans during year
    
    $
    29,397
    
    
    $
    5,022
    
    
    $
    2,223Interest income recognized during impairment
    
    
    702
    
    
    
    598
    
    
    
    76Cash-basis interest income recognized
    
    
    702
    
    
    
    598
    
    
    
    76
  2008
    
    
    2007Dollars in ThousandsLoans past due over 90 days still on accrual
    
    $
    7,298
    
    
    $
    Nonaccrual loans
    
    
    34,781
    
    
    
    5,495
   93




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
  Dollars in ThousandsBalance at beginning of year
    
    $
    36,294New loans
    
    
    65,493Principal repayments
    
    
    (62,427
    )Balance at end of year
    
    $
    39,360
  (5)
    
    Fair Value Measurements
  Level 1:
    
    Quoted prices in active markets for identical assets or liabilities.Level 2:
    
    Significant other observable inputs other than level 1 prices, such as
quoted market prices for similar assets or liabilities, quoted prices in markets that are
not active, and other inputs that are observable or can be corroborated by observable
market data.Observable market based inputs or unobservable inputs that are corroborated by
market data.Level 3:
    
    Unobservable inputs that are not corroborated by market data.
 94




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
  Securities:
   Impaired Loans
 Investments in tax credits:
 Assets and Liabilities Measured on a Recurring Basis
  95




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Available-for-sale securities
    
    $
    299,339
    
    
    
    46
    
    
    
    295,163
    
    
    
    4,130Tax credits
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    515Held-to-maturity securities
    
    
    698
    
    
    
    
    
    
    
    698
    
    
    
    Total
    
    $
    300,552
    
    
    
    46
    
    
    
    295,861
    
    
    
    4,645
  Fair Value Measurements Using Significant Unobservable Inputs(Level 3)Available-for-saleTax credits
    
    
    Securities
    
    
    TotalBeginning balance, January 1, 2008
    
    $
    594
    
    
    $
    
    
    
    $
    594Total gains or losses (realized/unrealized)
Included in earningsAmortization of tax credit investment
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )Included in other comprehensive income
    
    
    
    
    
    
    (282
    )
    
    
    (282
    )Transfers in and/or out of Level 3
    
    
    
    
    
    
    4,412
    
    
    
    4,412Ending balance, December 31, 2008
    
    $
    515
    
    
    $
    4,130
    
    
    $
    4,645
 Assets and Liabilities Measured on a Non-Recurring Basis
  96




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 QuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Impaired loans
    
    
    14,743
    
    
    
    
    
    
    
    
    
    
    
    14,743
  (6)
    
    Premises and Equipment
  2008
    
    
    2007Dollars in ThousandsLand
    
    $
    7,868
    
    
    
    5,031Buildings
    
    
    24,289
    
    
    
    26,232Furniture and equipment
    
    
    15,251
    
    
    
    12,62647,408
    
    
    
    43,889Less accumulated depreciation
    
    
    13,448
    
    
    
    11,277$
    33,960
    
    
    
    32,612
  97




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (7)
    
    Commitments
  (Dollars in Thousands)2009
    
    $
    3402010
    
    
    3222011
    
    
    2552012
    
    
    1512013
    
    
    352014 & Beyond
    
    
    96$
    1,199
     98




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (8)
    
    Deposits
  Dollars in Thousands2009
    
    $
    481,6242010
    
    
    70,7042011
    
    
    3,4312012
    
    
    4,1192013
    
    
    2,090Thereafter
    
    
    2,079Total
    
    $
    564,047
  (9) Borrowings
 Securities Sold Under Repurchase Agreements
  99




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2008
    
    
    2007
    
    
    2006Dollars in ThousandsSecurities Sold Under Repurchase Agreements
Weighted average borrowing rate at
year-end
    
    
    0.96
    %
    
    
    4.38
    %
    
    
    5.24
    %Weighted average borrowing rate during the year
    
    
    2.15
    %
    
    
    5.03
    %
    
    
    4.92
    %Average daily balance during the year
    
    $
    59,925
    
    
    
    64,501
    
    
    
    60,614Maximum month-end balance during
the year
    
    
    64,734
    
    
    
    74,525
    
    
    
    74,772Balance at year-end
    
    $
    62,553
    
    
    
    63,629
    
    
    
    70,020Federal Funds Purchased
    
    
    
    
    
    
    17,537
    
    
    
    $
    62,553
    
    
    
    81,166
    
    
    
    70,020
 Advances from Federal Home Loan BankThe Company has an available line of credit from the Federal Home Loan Bank of Atlanta (FHLB)
in an amount not to exceed 10% of total assets. The line of credit is reviewed annually by
the FHLB. The following advances were outstanding under this line at December 31, 2008 and
2007.
 
 100




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2008
    
    
    Rate
    
    
    2007
    
    
    RateDollars in ThousandsDue March 22, 2010
    
    $
    7,000
    
    
    
    6.180
    %
    
    $
    7,000
    
    
    
    6.180
    %Due March 30, 2010
    
    
    5,000
    
    
    
    6.020
    %
    
    
    5,000
    
    
    
    6.020
    %Due September 29, 2010
    
    
    5,000
    
    
    
    5.820
    %
    
    
    5,000
    
    
    
    5.820
    %Due October 18, 2010
    
    
    7,000
    
    
    
    5.460
    %
    
    
    7,000
    
    
    
    5.460
    %Due May 2, 2011
    
    
    6,000
    
    
    
    4.800
    %
    
    
    6,000
    
    
    
    4.800
    %Due April 4, 2013 convertible flipper
    
    
    10,000
    
    
    
    3.708
    %
    
    
    Due January 27, 2019 convertible flipper
    
    
    5,000
    
    
    
    0.000
    %
    
    
    5,000
    
    
    
    4.355
    %Due April 22, 2019 convertible flipper
    
    
    8,000
    
    
    
    3.559
    %
    
    
    8,000
    
    
    
    4.680
    %Due May 22, 2019
flipper
    
    
    6,000
    
    
    
    1.653
    %
    
    
    6,000
    
    
    
    4.515
    %Due July 26, 2017
    
    
    10,000
    
    
    
    4.406
    %Due July 31, 2018
    
    
    10,000
    
    
    
    2.475
    %
    
    
    10,000
    
    
    
    4.406
    %Due April 29, 2011
    
    
    2,000
    
    
    
    3.455
    %Due July 18, 2013 convertible flipper
    
    
    3,000
    
    
    
    4.003
    %$
    84,000
    
    
    
    
    
    
    $
    59,000Total weighted average rate
    
    
    3.96
    %
    
    
    
    
    
    
    5.08
    %
 The FHLB has the option to convert the fixed-rate advances and convertible advances to
three-month, LIBOR-based floating-rate advances at various dates throughout the terms of the
advances.The convertible flipper advance maturing on April 4, 2013 is indexed to the three month LIBOR
based floating rate minus 50 basis points and may be converted to a fixed rate of 2.90% or an
adjustable rate credit on April 4, 2009. The convertible flipper advance maturing on January
27, 2019, is indexed to the one-month LIBOR-based floating rate minus 50 basis points for the
first three years and then converts to a fixed rate of 4.10% on January 27, 2009 for the last
ten years. The convertible flipper advance maturing on April 22, 2019, is indexed to the
three-month LIBOR-based floating rate minus 50 basis points for the first three years and then
converts to a fixed rate of 4.75% for the last ten years. The flipper advance maturing on May
22, 2019, is indexed to the three-month LIBOR-based floating rate minus 50 basis points. The
convertible flipper advance maturing on July 18, 2013 is indexed to the three month LIBOR
based floating rate minus 50 basis points and may be converted to a fixed rate of 2.72% or an
adjustable rate credit on July 18, 2009. At December 31, 2008, the Company has pledged, under
a blanket floating lien,
 101




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 eligible first mortgage loans with unpaid balances which, when
discounted at approximately 75% of such unpaid principal balances, total $77,044. The Company
has also pledged for this lien eligible commercial real estate loans with unpaid balances
which, when discounted at approximately 50% of such unpaid principal balances, total $12,998.Other Borrowed FundsOther borrowed funds consist of a treasury, tax, and loan account with the Federal Reserve
Bank of $0 and $500 at December 31, 2008 and December 31, 2007 respectively.(10)
    
    Subordinated DebenturesIn December 2005 the Company issued $10.0 million of unsecured subordinated debentures, which
bear interest at three-month LIBOR plus 1.40%, adjusted quarterly, to Southeastern Bank
Financial Statutory Trust I. The Company used these funds to capitalize a new federally
chartered thrift subsidiary, Southern Bank and Trust. Southeastern Bank Financial Statutory
Trust I is a wholly owned subsidiary of the Company which is not consolidated in these
financial statements pursuant to FIN 46R. Southeastern Bank Financial Statutory Trust I
acquired these debentures using the proceeds of its offerings of $10.0 million of Trust
Preferred Securities to outside investors. The Trust Preferred Securities qualify as Tier 1
capital under Federal Reserve Board guidelines and accrue and pay distributions quarterly at a
variable per annum rate of interest, reset quarterly, equal to LIBOR plus 1.40% of the stated
liquidation amount of $1 thousand dollars per Capital Security. The Company has entered into
contractual arrangements
which constitute a full, irrevocable and unconditional guarantee on a subordinated basis by
the Company of the obligations of Southeastern Bank Financial Statutory Trust I under the
Trust Preferred Securities.The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on
December 15, 2035, or upon earlier redemption as provided in the indenture. The Company has
the right to redeem the debentures purchased by Southeastern Bank Financial Statutory Trust I
in whole or in part, on or after December 15, 2010 and in whole or in part at any time within
90 days following the occurrence of a Tax Event, an Investment Company Event or a Capital
Treatment Event. As specified in the indenture, if the debentures are redeemed prior to
maturity, the redemption price will be 100% of their principal amount plus accrued but unpaid
interest. Prior to December 15, 2008, the redemption of any debenture following a Tax Event,
an Investment Company Event or a Capital Treatment Event, will be an amount in cash equal to
102.355% of the principal amount of the debentures. Thereafter, an amount equal in cash to
the percentage of the principal amount of the debentures plus unpaid interest will be redeemed
as specified below.
 102




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Special Redemption During the12-Month Period Beginning December 15
    
    Percentage of Principal Amount2008
    
    
    101.570
    %2009
    
    
    100.785
    %2010 and thereafter
    
    
    100.000
    %
 In March 2006 the Company issued $10.0 million of unsecured subordinated debentures, which
bear interest at three-month LIBOR plus 1.40%, adjusted quarterly, to Southeastern Bank
Financial Trust II. The Company used $5.0 million of the proceeds to contribute additional
capital to Southern Bank & Trust on June 28, 2007. The remaining $5.0 million has been used
for general corporate purposes. Southeastern Bank Financial Trust II is a wholly owned
subsidiary of the Company which is not consolidated in these financial statements pursuant to
FIN 46R. Southeastern Bank Financial Statutory Trust I acquired these debentures using the
proceeds of its offerings of $10.0 million of Trust Preferred Securities to outside investors.
The Trust Preferred Securities qualify as Tier 1 capital under Federal Reserve Board
guidelines and accrue and pay distributions quarterly at a variable per annum rate of
interest, reset quarterly, equal to LIBOR plus 1.40% of the stated liquidation amount of $1
thousand dollars per Capital Security. The Company has entered into contractual arrangements
which constitute a full, irrevocable and unconditional guarantee on a subordinated basis by
the Company of the obligations of Southeastern Bank Financial Trust II under the Trust
Preferred Securities.The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on
June 15, 2036, or upon earlier redemption as provided in the indenture. The Company has the
right to redeem the debentures purchased by Southeastern Bank Financial Trust II
in whole or in part, on or after June 15, 2011 and in whole or in part at any time within 90
days following the occurrence of a Tax Event, an Investment Company Event or a Capital
Treatment Event. As specified in the indenture, if the debentures are redeemed prior to
maturity, the redemption price will be 100% of their principal amount plus accrued but unpaid
interest. Prior to June 15, 2009, the redemption of any debenture following a Tax Event, an
Investment Company Event or a Capital Treatment Event, will be an amount in cash equal to
102.355% of the principal amount of the debentures. Thereafter, an amount equal in cash to
the percentage of the principal amount of the debentures plus unpaid interest will be redeemed
as specified below.
 Special Redemption During the12-Month Period Beginning June 15
    
    Percentage of Principal Amount2009
    
    
    101.570
    %2010
    
    
    100.785
    %2011 and thereafter
    
    
    100.000
    %
 103




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (11)
    
    Income TaxesIncome tax expense for the years ended December 31, 2008, 2007 and 2006 consists of the
following:
 2008
    
    
    2007
    
    
    2006Dollars in ThousandsCurrent tax expense:Federal
    
    $
    4,268
    
    
    
    6,543
    
    
    
    5,966State
    
    
    167
    
    
    
    603
    
    
    
    592Total current
    
    
    4,435
    
    
    
    7,146
    
    
    
    6,558Deferred tax benefitFederal
    
    
    (800
    )
    
    
    (681
    )
    
    
    (770
    )State
    
    
    (129
    )
    
    
    (144
    )
    
    
    (115
    )Total deferred
    
    
    (929
    )
    
    
    (825
    )
    
    
    (885
    )Total income tax expense
    
    $
    3,506
    
    
    
    6,321
    
    
    
    5,673
 Income tax expense differed from the amount computed by applying the statutory Federal
corporate tax rate of 35% in 2008, 2007 and 2006 to income before income taxes as follows:
 Years ended December 312008
    
    
    2007
    
    
    2006Dollars in ThousandsComputed expected tax expense
    
    $
    3,879
    
    
    
    6,330
    
    
    
    5,892Increase (decrease) resulting from:Tax-exempt interest income
    
    
    (326
    )
    
    
    (368
    )
    
    
    (479
    )Nondeductible interest expense
    
    
    40
    
    
    
    53
    
    
    
    69State income tax, net of Federal tax
effect
    
    
    25
    
    
    
    298
    
    
    
    310Earnings on cash surrender value of
life insurance
    
    
    (248
    )
    
    
    (237
    )
    
    
    (210
    )Nondeductible stock compensation expense
    
    
    73
    
    
    
    191
    
    
    
    144Meals, entertainment, and club dues
    
    
    59
    
    
    
    51
    
    
    
    48Impact of graduated rate
    
    
    
    
    
    
    
    
    
    
    (49
    )Other, net
    
    
    4
    
    
    
    3
    
    
    
    (52
    )$
    3,506
    
    
    
    6,321
    
    
    
    5,673
 104




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007 are presented
below:
 2008
    
    
    2007Dollars in ThousandsDeferred tax assets:Allowance for loan losses
    
    $
    5,678
    
    
    
    4,518Deferred compensation
    
    
    1,611
    
    
    
    1,356Other
    
    
    911
    
    
    
    578Total deferred tax assets
    
    
    8,200
    
    
    
    6,452Deferred tax liabilities:Depreciation
    
    
    (1,225
    )
    
    
    (565
    )Prepaid assets and other
    
    
    (605
    )
    
    
    (446
    )Unrealized gain on investment securities
available for sale
    
    
    (28
    )
    
    
    (15
    )Total deferred tax liabilities
    
    
    (1,858
    )
    
    
    (1,026
    )Net deferred tax asset
    
    $
    6,342
    
    
    
    5,426
 In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers taxes paid in the carryback period, the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projection for future
taxable income over the periods which the temporary differences resulting in the deferred tax
assets are deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences.The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax
of the state of Georgia. The Company is no longer subject to examination by federal and state
taxing authorities for years before 2005.The amount of the accrued income tax liability for uncertainties related to tax benefits was
not material to the Companys consolidated balance sheets as of December 31, 2008 or 2007.
Additionally, the total amount of interest and penalties recorded in the consolidated
statements of income for the year ended December 31, 2008, 2007 and 2006 was not material.
 105




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (12)
    
    Related Party TransactionsDeposits include accounts with certain directors and executives of the Company, including
affiliates, and principal holders of the Companys securities. As of December 31, 2008 and
2007, these deposits totaled approximately $21,571, and $36,889, respectively. See note 4 for
discussion of related party loans.(13)
    
    Regulatory Capital RequirementsThe Company and its subsidiaries are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory  and possibly additional discretionary  actions by regulators
that, if undertaken, could have a direct material effect on the consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that involve quantitative
measures of the Companys assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Companys capital amounts and
classification are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.Quantitative measures established by regulation to ensure capital adequacy require minimum
amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2008, that the Company
meets all capital adequacy requirements to which it is subject.As of December 31, 2008, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table
below. Management is not aware of the existence of any conditions or events occurring
subsequent to December 31, 2008 which would affect the Banks well capitalized classification.
 106




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Actual capital amounts and ratios for the Company are presented in the table below as of
December 31, 2008 and 2007, on a consolidated basis and for the Bank and Thrift individually :
 To be well capitalizedFor capital adequacy
    
    under prompt correctiveActual
    
    purposes
    
    action provisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioDollars in ThousandsSoutheastern Bank Financial Corporation
and subsidiaries consolidated:As of December 31, 2008:Total
Capital (to risk -
weighted assets)
    
    $
    128,177
    
    
    
    11.70
    %
    
    $
    87,658
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ATier I Capital  risk-based
(to risk-weighted assets)
    
    
    114,467
    
    
    
    10.45
    %
    
    
    43,829
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ATier I Capital  leverage
(to average assets)
    
    
    114,467
    
    
    
    8.14
    %
    
    
    56,231
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AAs of December 31, 2007:Total
Capital (to risk -
weighted assets)
    
    
    121,463
    
    
    
    12.61
    %
    
    $
    77,062
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ATier I Capital  risk-based
(to risk-weighted assets)
    
    
    109,589
    
    
    
    11.38
    %
    
    
    38,531
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ATier I Capital  leverage
(to average assets)
    
    
    109,589
    
    
    
    9.07
    %
    
    
    48,307
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/A
 To be well capitalizedFor capital adequacy
    
    under prompt correctiveActual
    
    purposes
    
    action provisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioDollars in ThousandsGeorgia Bank & Trust Company:As of December 31, 2008:Total
Capital (to risk -
weighted assets)
    
    $
    107,821
    
    
    
    10.99
    %
    
    $
    78,491
    
    
    
    8.00
    %
    
    $
    98,114
    
    
    
    10.00
    %Tier I Capital  risk-based
(to risk-weighted
assets)
    
    
    95,546
    
    
    
    9.74
    %
    
    
    39,246
    
    
    
    4.00
    %
    
    
    58,869
    
    
    
    6.00
    %Tier I Capital  leverage
(to average assets)
    
    
    95,546
    
    
    
    7.47
    %
    
    
    51,156
    
    
    
    4.50
    %
    
    
    63,945
    
    
    
    5.00
    %As of December 31, 2007:Total
Capital (to risk -
weighted assets)
    
    
    98,790
    
    
    
    11.24
    %
    
    $
    70,308
    
    
    
    8.00
    %
    
    $
    87,885
    
    
    
    10.00
    %Tier I Capital  risk-based
(to risk-weighted
assets)
    
    
    88,095
    
    
    
    10.02
    %
    
    
    35,154
    
    
    
    4.00
    %
    
    
    52,731
    
    
    
    6.00
    %Tier I Capital  leverage
(to average assets)
    
    
    88,095
    
    
    
    7.88
    %
    
    
    50,313
    
    
    
    4.50
    %
    
    
    55,904
    
    
    
    5.00
    %
 107




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 To be well capitalizedFor capital adequacy
    
    under prompt correctiveActual
    
    purposes
    
    action provisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioDollars in ThousandsSouthern Bank & Trust:As of December 31, 2008:Total
Capital (to risk -
weighted assets)
    
    $
    15,356
    
    
    
    13.57
    %
    
    $
    9,055
    
    
    
    8.00
    %
    
    $
    11,319
    
    
    
    10.00
    %Tier I Capital  risk-based
(to risk-weighted
assets)
    
    
    13,939
    
    
    
    12.31
    %
    
    
    4,528
    
    
    
    4.00
    %
    
    
    6,792
    
    
    
    6.00
    %Tier I Capital  leverage
(to average assets)
    
    
    13,939
    
    
    
    11.28
    %
    
    
    4,943
    
    
    
    4.00
    %
    
    
    6,179
    
    
    
    5.00
    %As of December 31, 2007:Total
Capital (to risk -
weighted assets)
    
    
    15,117
    
    
    
    18.62
    %
    
    $
    6,495
    
    
    
    8.00
    %
    
    $
    8,119
    
    
    
    10.00
    %Tier I Capital  risk-based
(to risk-weighted
assets)
    
    
    14,101
    
    
    
    17.37
    %
    
    
    3,248
    
    
    
    4.00
    %
    
    
    4,871
    
    
    
    6.00
    %Tier I Capital  leverage
(to average assets)
    
    
    14,101
    
    
    
    16.64
    %
    
    
    3,389
    
    
    
    4.00
    %
    
    
    4,236
    
    
    
    5.00
    %
     (14) Employee Benefit Plans
  108




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
    (15) Stock Option Plan
  109




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
    Share-based Payment
  110




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
  2008
    
    2007
    
    2006Options granted
    
    
    19,300
    
    
    
    30,250
    
    
    
    63,250Risk-free interest rate
    
    
    3.23
    %
    
    
    4.74
    %
    
    
    5.01
    %Dividend yield
    
    
    2.00
    %
    
    
    2.00
    %
    
    
    2.00
    %Expected life at date of grant
    
    8.01 years
    
    
    7.86 years
    
    
    7.92 yearsVolatility
    
    
    21.96
    %
    
    
    17.50
    %
    
    
    17.38
    %
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOptions outstanding  December
31, 2007
    
    
    293,245
    
    
    $
    25.36Granted in 2008
    
    
    19,300
    
    
    
    31.24Options exercised in 2008
    
    
    (33,632
    )
    
    
    14.40Options lapsed in 2008
    
    
    (1,650
    )
    
    
    14.40Options Outstanding  December
31, 2008
    
    
    277,263
    
    
    $
    27.02
    
    
    
    5.99
    
    
    
    (2,086
    )Fully vested or expected to vest
    
    
    177,553
    
    
    $
    23.17
    
    
    
    5.11
    
    
    
    (651
    )Exercisable at December 31, 2008
    
    
    177,553
    
    
    $
    23.17
    
    
    
    5.11
    
    
    
    (651
    )
  (Dollars in Thousands, except per share data)2008
    
    2007
    
    2006Intrinsic value of options exercised
    
    $
    423
    
    
    $
    27
    
    
    $
    653Intrinsic value of options lapsed
    
    
    (25
    )
    
    
    
    
    
    
    Cash received from option exercises
    
    
    466
    
    
    
    1
    
    
    
    176Fair market value of stock received
from option exercises
    
    
    
    
    
    
    17
    
    
    
    69Weighted average grant-date fair value
    
    
    7.36
    
    
    
    15.12
    
    
    
    16.23
   111




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOptions outstanding  December
31, 2007
    
    
    11,000
    
    
    $
    34.30Granted in 2008
    
    
    
    
    
    
    Options exercised in 2008
    
    
    
    
    
    
    Options Outstanding  December
31, 2008
    
    
    11,000
    
    
    $
    34.30
    
    
    
    6.5
    
    
    $
    (163
    )Exercisable at December 31, 2008
    
    
    8,250
    
    
    $
    34.30
    
    
    
    6.5
    
    
    $
    (122
    )
  (16) Other Operating Expenses
  2008
    
    
    2007
    
    
    2006(Dollars in Thousands)Marketing and business development
    
    $
    1,668
    
    
    $
    1,586
    
    
    $
    1,405Processing expense
    
    
    1,917
    
    
    
    1,750
    
    
    
    1,480Legal and professional fees
    
    
    1,763
    
    
    
    1,508
    
    
    
    1,370Data processing expense
    
    
    1,203
    
    
    
    942
    
    
    
    667Other expense
    
    
    4,976
    
    
    
    3,922
    
    
    
    3,357Total other operating expense
    
    $
    11,527
    
    
    $
    9,708
    
    
    $
    8,279
 (17) Fair Value of Financial Instruments
 Disclosures About Fair Value of Financial Instruments
 112




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
      (a) Cash and Cash Equivalents
  (b) Investment Securities
  113




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (c) Loans
 Disclosures about Fair Values of Financial
Instruments
 (d) Deposits
  (e) Federal Funds Sold and Securities Sold Under Repurchase Agreements
  (f) Other Borrowed Funds
  (g) Advances from FHLB
  (h) Subordinated debentures
  (i) Commitments
  114




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
  December 312008
    
    2007Carrying
    
    Estimated
    
    Carrying
    
    Estimatedamount
    
    fair value
    
    amount
    
    fair value(Dollars in Thousands)Financial assets:Cash and cash
equivalents
    
    $
    37,768
    
    
    
    37,768
    
    
    $
    25,058
    
    
    
    25,058Investment securities
    
    
    300,028
    
    
    
    300,037
    
    
    
    246,864
    
    
    
    246,896Loans, net
    
    
    991,044
    
    
    
    997,338
    
    
    
    870,943
    
    
    
    868,603Financial liabilities:Deposits
    
    
    1,139,552
    
    
    
    1,141,627
    
    
    
    952,166
    
    
    
    952,537Federal funds purchased
and securities sold under
repurchase
agreements
    
    
    62,553
    
    
    
    62,553
    
    
    
    81,166
    
    
    
    81,166Other borrowed funds
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    500Advances from FHLB
    
    
    84,000
    
    
    
    76,090
    
    
    
    59,000
    
    
    
    56,777Subordinated debentures
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000
 115




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (18) Condensed Financial Statements of Southeastern Bank Financial Corporation (Parent Only)
  Condensed Balance Sheets
 December 312008
    
    
    2007(Dollars in Thousands)AssetsCash and due from banks
    
    $
    1,921
    
    
    
    1,519Investment securities available for sale
    
    
    2,042
    
    
    
    3,430Investment in banking subsidiaries
    
    
    109,671
    
    
    
    102,247Premises and equipment, net
    
    
    856
    
    
    
    2,519Accrued interest receivable
    
    
    20
    
    
    
    40Deferred tax asset, net
    
    
    2
    
    
    
    Other assets
    
    
    172
    
    
    
    130$
    114,684
    
    
    
    109,885Liabilities and Stockholders EquityLiabilities:Accrued interest and other liabilities
    
    $
    33
    
    
    
    127Subordinated debentures
    
    
    20,000
    
    
    
    20,000Total liabilities
    
    
    20,033
    
    
    
    20,127Stockholders equity
    
    
    94,651
    
    
    
    89,758$
    114,684
    
    
    
    109,885
 116




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Condensed Statements of Income
 Years ended December 312008
    
    
    2007
    
    
    2006(Dollars in Thousands)Income:Dividend income
    
    $
    1,481
    
    
    
    43
    
    
    
    535Interest income on investment securities
    
    
    143
    
    
    
    294
    
    
    
    688Investment securities (losses) gains, net
    
    
    (204
    )
    
    
    23
    
    
    
    526Miscellaneous income
    
    
    102
    
    
    
    102
    
    
    
    1071,522
    
    
    
    462
    
    
    
    1,856Expense:Interest expense
    
    
    960
    
    
    
    1,435
    
    
    
    1,247Salaries and other personnel expense
    
    
    (6
    )
    
    
    24
    
    
    
    138Occupancy expense
    
    
    60
    
    
    
    52
    
    
    
    55Other operating expense
    
    
    187
    
    
    
    166
    
    
    
    3751,201
    
    
    
    1,677
    
    
    
    1,815Income (loss) before equity in
undistributed earnings
of subsidiaries
    
    
    321
    
    
    
    (1,215
    )
    
    
    41Equity in undistributed earnings of subsidiaries
    
    
    6,818
    
    
    
    12,494
    
    
    
    10,995Income tax benefit
    
    
    (439
    )
    
    
    (486
    )
    
    
    (124
    )Net income
    
    $
    7,578
    
    
    $
    11,765
    
    
    $
    11,160
 117




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Condensed Statements of Cash Flows
 Year Ended December 312008
    
    
    2007
    
    
    2006(Dollars in Thousands)Cash flows from operating activities:Net income
    
    $
    7,578
    
    
    $
    11,765
    
    
    $
    11,160Adjustments to reconcile net income to
net cash provided by (used in) operating activitiesDepreciation
    
    
    45
    
    
    
    45
    
    
    
    45Equity in undistributed earnings of subsidiaries
    
    
    (6,818
    )
    
    
    (12,494
    )
    
    
    (10,995
    )Investment securities losses (gains), net
    
    
    204
    
    
    
    (23
    )
    
    
    (526
    )Stock options compensation cost
    
    
    (6
    )
    
    
    24
    
    
    
    137Loss on disposal of premises and equipment
    
    
    
    
    
    
    
    
    
    
    47Accretion on investment securities
    
    
    
    
    
    
    (113
    )
    
    
    (453
    )Decrease (increase) in accrued interest receivable
    
    
    20
    
    
    
    (33
    )
    
    
    (7
    )(Decrease) increase in accrued interest payable
and other liabilities
    
    
    (31
    )
    
    
    (3
    )
    
    
    66(Increase) decrease in other assets
    
    
    (42
    )
    
    
    5
    
    
    
    (135
    )Net cash provided by (used in) operating activities
    
    
    950
    
    
    
    (827
    )
    
    
    (661
    )Cash flows from investing activities:Proceeds from sales and maturities of investment securities
    
    
    4,000
    
    
    
    18,023
    
    
    
    65,776Purchase of investment securities
    
    
    (3,000
    )
    
    
    (10,941
    )
    
    
    (64,611
    )Investment in subsidiary
    
    
    
    
    
    
    (5,000
    )
    
    
    (10,002
    )Additions to premises and equipment
    
    
    
    
    
    
    (1,700
    )
    
    
    (434
    )Proceeds from sale of premises and equipment
    
    
    1,400
    
    
    
    
    
    
    
    1,950Net cash provided by (used in) investing activities
    
    
    2,400
    
    
    
    382
    
    
    
    (7,321
    )Cash flows from financing activities:Proceeds from subordinated debentures
    
    
    
    
    
    
    
    
    
    
    10,000Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    5,000Purchase of treasury stock
    
    
    (445
    )
    
    
    (317
    )
    
    
    (62
    )Payment of cash dividends
    
    
    (2,964
    )
    
    
    (2,824
    )
    
    
    (2,767
    )Payment of cash for fractional shares
    
    
    (5
    )
    
    
    
    
    
    
    Proceeds from stock options exercised,
net of stock redeemed
    
    
    466
    
    
    
    1
    
    
    
    176Net cash (used in) provided by financing activities
    
    
    (2,948
    )
    
    
    (3,140
    )
    
    
    12,347Net increase (decrease) in cash
and cash equivalents
    
    
    402
    
    
    
    (3,585
    )
    
    
    4,365Cash and cash equivalents at beginning of year
    
    
    1,519
    
    
    
    5,104
    
    
    
    739Cash and cash equivalents at end of year
    
    $
    1,921
    
    
    $
    1,519
    
    
    $
    5,104
 118




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (19) Quarterly Financial Data (Unaudited)
  Quarters endedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2008
    
    2008
    
    2008
    
    2008(Dollars in Thousands)Interest income
    
    $
    19,751
    
    
    
    18,526
    
    
    
    18,543
    
    
    
    18,855Interest expense
    
    
    9,486
    
    
    
    8,483
    
    
    
    8,801
    
    
    
    8,719Net interest income
    
    
    10,265
    
    
    
    10,043
    
    
    
    9,742
    
    
    
    10,136Provision for loan losses
    
    
    1,271
    
    
    
    1,652
    
    
    
    2,073
    
    
    
    4,059Noninterest income
    
    
    3,931
    
    
    
    4,452
    
    
    
    4,437
    
    
    
    3,886Noninterest expense
    
    
    8,921
    
    
    
    9,265
    
    
    
    9,365
    
    
    
    9,201Net income
    
    
    2,635
    
    
    
    2,408
    
    
    
    1,875
    
    
    
    660Net income per share  basic
    
    
    0.45
    
    
    
    0.40
    
    
    
    0.31
    
    
    
    0.11Net income per share  diluted
    
    
    0.44
    
    
    
    0.40
    
    
    
    0.31
    
    
    
    0.11
  Quarters endedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2007
    
    2007
    
    2007
    
    2007(Dollars in Thousands)Interest income
    
    $
    18,488
    
    
    
    19,643
    
    
    
    20,381
    
    
    
    20,669Interest expense
    
    
    9,434
    
    
    
    10,157
    
    
    
    10,645
    
    
    
    10,696Net interest income
    
    
    9,054
    
    
    
    9,486
    
    
    
    9,736
    
    
    
    9,973Provision for loan losses
    
    
    576
    
    
    
    1,030
    
    
    
    1,001
    
    
    
    1,216Noninterest income
    
    
    3,592
    
    
    
    3,773
    
    
    
    4,746
    
    
    
    4,057Noninterest expense
    
    
    7,771
    
    
    
    7,583
    
    
    
    8,308
    
    
    
    8,846Net income
    
    
    2,760
    
    
    
    2,971
    
    
    
    3,356
    
    
    
    2,678Net income per share  basic
    
    
    0.46
    
    
    
    0.50
    
    
    
    0.56
    
    
    
    0.45Net income per share  diluted
    
    
    0.45
    
    
    
    0.49
    
    
    
    0.56
    
    
    
    0.45
 119




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
  120




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Managements Report on Internal Control over Financial Reporting
  Internal Control-Integrated Framework"
 /s/ R. Daniel Blanton

Chief Executive Officer(principal executive officer)/s/ Ronald L. Thigpen

Chief Operating Officer/s/ Darrell R. Rains

Chief Financial Officer(principal financial officer)Date: March 13, 2009
 121




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##### Table of Contents



Internal Control  Integrated Framework
    Internal Control  Integrated Framework
 122




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##### Table of Contents



/s/ Crowe Horwath LLP 
 123




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##### Table of Contents



Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  124




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##### Table of Contents



Equity Compensation Plan Table(a)
    
    (b)

    
    (c)Number of securities remainingNumber of securities to
    
    Weighted average
    
    available for future issuancebe issued upon exercise
    
    exercise price of
    
    under equity compensationof outstanding options,
    
    outstanding options,
    
    plans (excluding securitiesPlan Category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    276,585
    
    
    $
    27.90
    
    
    
    177,666Equity compensation
plans not approved
by security holders
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    
    276,585
    
    
    $
    27.90
    
    
    
    177,666
 
 
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  125




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)(1)
    
    See Item 8 for a list of the financial statements as filed as a part of this report.(2)
    
    No financial statement schedules are applicable as the required information is
included in the financial statements in Item 8.(3)
    
    The following exhibits are filed as part of this report. Documents incorporated
by reference have been filed with the Securities and Exchange Commission. The Companys
Commission file number is: 0-24172. See Item 1  Description of Business  General for
additional information regarding the Companys filings with the Commission.
 Exhibit No. and Document
 3.1
    
    Articles of Incorporation of the Company3.2
    
    Bylaws of the Company (Incorporated by reference to Exhibit
3.2 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.)4.1
    
    Indenture dated December 5, 2005 between the Company and U.S.
Bank
National Association (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on December 8, 2005.)4.2
    
    Indenture dated March 31, 2006 between the Company and La
Salle Bank National Association (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on April 6, 2006.)10.1
    
    Key Officer Compensation Agreement dated January 1, 2000
between the Bank & R. Daniel Blanton (Incorporated by reference to Exhibit 10.1
to the Companys Annual Report on Form 10-K for the fiscal year ended December
31, 2000.)*10.2
    
    First Amendment dated October 15, 2003 to Key Officer
Compensation Agreement dated January 1, 2000 between the Bank and R. Daniel
Blanton. (Incorporated by reference to Exhibit 10.2 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2006.)*10.3
    
    Second Amendment dated December 31, 2008 to Key Officer Compensation Agreement
dated January 1, 2000 between the Bank and R. Daniel Blanton*10.4
    
    Key Officer Compensation Agreement dated January 1, 2000
between the Bank & Ronald L. Thigpen (Incorporated by reference to Exhibit 10.2
to the Companys Annual Report on Form 10-K for the fiscal year ended December
31, 2000.)*
 126




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##### Table of Contents



10.5
    
    First Amendment dated October 15, 2003 to Key Officer
Compensation Agreement dated January 1, 2000 between the Bank and Ronald L.
Thigpen. (Incorporated by reference to Exhibit 10.4 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2006.)*10.6
    
    Second Amendment dated December 31, 2008 to Key Officer Compensation Agreement
dated January 1, 2000 between the Bank and Ronald L. Thigpen*10.7
    
    2006 Long-term Incentive Plan (Incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2006.)*10.8
    
    Form of incentive stock option agreement under the 2006
Long-term Incentive Plan (Incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)*10.9
    
    Form of non-qualified stock option agreement under the 2006
Long-term Incentive Plan (Incorporated by reference to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)*10.10
    
    2000 Long Term Incentive Plan (Incorporated by reference to
Appendix A to the Companys definitive Proxy Statement, filed on March 29,
2001.)*10.11
    
    Form of option agreement under 2000 Long Term Incentive Plan.
(Incorporated by reference to Exhibit 10.4 to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2004.)*10.12
    
    1997 Long-term Incentive Plan. (Incorporated by reference to
Exhibit 10.5 to the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2004.)*10.13
    
    Form of stock appreciation rights agreement under 1997
Long-term Incentive Plan. (Incorporated by reference to Exhibit 10.6 to the
Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2004.)*10.14
    
    Non-Qualified Defined Benefit Plan dated October 1, 2000.
(Incorporated by reference to Exhibit 10.7 to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2005.)*10.15
    
    Salary Continuation Agreement dated October 1, 2000 between
the Company, the Bank and R. Daniel Blanton. (Incorporated by reference to
Exhibit 10.8 to the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.)*
 127




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##### Table of Contents



10.16
    
    First Amendment dated as of October 15, 2003 to Salary
Continuation Agreement dated October 1, 2000 between the Company, the Bank and
R. Daniel Blanton. (Incorporated by reference to Exhibit 10.14 to the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)*10.17
    
    Salary continuation agreement dated October 15, 2003 between
the Company, the Bank and Ronald L. Thigpen. (Incorporated by reference to
Exhibit 10.11 to the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.)*10.18
    
    Supplemental Executive Retirement Benefits Agreement dated December 31, 2008
between the Bank and R. Daniel Blanton*10.19
    
    Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between
the Bank and Ronald L. Thigpen*10.20
    
    Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between
the Bank and Darrell R. Rains*10.21
    
    Employment Agreement dated April 30, 2007 between the Bank and
Darrell R. Rains. (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on May 4, 2007.)*10.22
    
    First Amendment dated December 31, 2008 to Employment Agreement dated
April 30, 2007 between the Bank and Darrell R. Rains*
 128




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##### Table of Contents



10.23
    
    Southeastern Bank Financial Corporation Director Stock Purchase Plan
(Incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on December 27, 2007.)14.1
    
    Code of Ethics (Incorporated by reference to Exhibit 14.2 to
the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2003.)21.1
    
    Subsidiaries of the Company23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification by the Chief Executive Officer (principal
executive officer)31.2
    
    Certification by the Chief Financial Officer (principal
financial officer)32.1
    
    Certification by the Chief Executive Officer and Chief
Financial Officer
 
 *
    
    Denotes a management compensatory agreement or arrangement. 129




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SOUTHEASTERN BANK FINANCIAL CORPORATIONBy:
    /s/ Robert W. Pollard, Jr.Robert W. Pollard, Jr.Chairman of the Board    SIGNATURE
    
    TITLE/s/ Robert W. Pollard, Jr.
    
    Chairman of the BoardRobert W. Pollard, Jr.
    
    and Director/s/ Edward G. Meybohm
    
    Vice Chairman of the BoardEdward G. Meybohm
    
    and Director/s/ R. Daniel Blanton
    
    President, Chief Executive Officer and DirectorDaniel Blanton
    
    (Principal Executive Officer)/s/ Ronald L. Thigpen
    
    Executive Vice President, Chief Operating OfficerRonald L. Thigpen
    
    and Director/s/ Darrell R. Rains
    
    Group Vice President and Chief Financial OfficerDarrell R. Rains
    
    (Principal Financial Officer)
 130




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##### Table of Contents



SIGNATURE
    
    TITLE/s/ William J. Badger
    
    DirectorWilliam J. Badger/s/ Warren A. Daniel
    
    DirectorWarren A. Daniel/s/ Randolph R. Smith, M.D.
    
    DirectorRandolph R. Smith, M.D./s/ John W. Trulock, Jr.
    
    DirectorJohn W. Trulock, Jr./s/ Patrick D. Cunning
    
    DirectorPatrick D. Cunning/s/ Larry S. Prather, Sr.
    
    DirectorLarry S. Prather, Sr./s/ W. Marshall Brown
    
    DirectorW. Marshall Brown
 131




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##### Table of Contents



EXHIBIT INDEX
 (a)     Exhibits
    
    Page
 3.1
    
    Articles of Incorporation of the
Company3.2
    
    Bylaws of the Company (Incorporated
by reference to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2004.)4.1
    
    Indenture dated December 5, 2005
between the
Company and U.S. Bank National Association
(Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on
December 8, 2005.)4.2
    
    Indenture dated March 31, 2006 between the Companyand La Salle Bank National Association (Incorporated by
reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K filed on April 6, 2006.)10.1
    
    Key Officer Compensation Agreement
dated January 1, 2000 between the Bank & R. Daniel
Blanton (Incorporated by reference to Exhibit 10.1 to
the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.)*10.2
    
    First Amendment dated October 15, 2003
to Key Officer Compensation Agreement dated January 1,
2000 between the Bank and R. Daniel Blanton.
(Incorporated by reference to Exhibit 10.2 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2006)*10.3
    
    Second Amendment dated December
31, 2008 to Key Officer
Compensation Agreement dated January 1, 2000 between the Bank and R. Daniel Blanton*10.4
    
    Key Officer Compensation Agreement
dated January 1, 2000 between the Bank & Ronald L.
Thigpen (Incorporated by reference to Exhibit 10.2 to
the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.)*10.5
    
    First Amendment dated October 15, 2003
to Key Officer Compensation Agreement dated January 1,
2000 between the Bank and Ronald L. Thigpen.
(Incorporated by reference to Exhibit 10.4 to the
 132




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##### Table of Contents



Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2006.)*10.6
    
    Second Amendment dated December
31, 2008 to Key Officer
Compensation Agreement dated January 1, 2000 between the Bank and Ronald L. Thigpen*10.7
    
    2006 Long-term Incentive Plan
(Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2006.)*10.8
    
    Form of incentive stock option
agreement under the 2006 Long-term Incentive Plan
(Incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2006.)*10.9
    
    Form of non-qualified stock option
agreement under the 2006 Long-term Incentive Plan
(Incorporated by reference to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2006.)*10.10
    
    2000 Long Term Incentive Plan
(Incorporated by reference to Appendix A to the
Companys definitive Proxy Statement, filed on March
29, 2001)*10.11
    
    Form of option agreement under 2000
Long Term Incentive Plan. (Incorporated by reference to
Exhibit 10.4 to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2004.)*10.12
    
    1997 Long-term Incentive Plan.
(Incorporated by reference to Exhibit 10.5 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2004.)*10.13
    
    Form of stock appreciation rights
agreement under 1997 Long-term Incentive Plan.
(Incorporated by reference to Exhibit 10.6 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2004.)*10.14
    
    Non-Qualified Defined Benefit Plan
dated October 1, 2000. (Incorporated by reference to
Exhibit 10.7 to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2005.)*
 133




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##### Table of Contents



10.15
    
    Salary continuation agreement dated
October 1, 2000 between the Company, the Bank and R.
Daniel Blanton. (Incorporated by reference to Exhibit
10.8 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2005.)*10.16
    
    First Amendment dated as of October
15, 2003 to Salary Continuation Agreement dated October
1, 2000 between the Company, the Bank and R. Daniel
Blanton. (Incorporated by reference to Exhibit 10.14 to
the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2006.)*10.17
    
    Salary continuation agreement dated
October 15, 2003 between the Company, the Bank and
Ronald L. Thigpen. (Incorporated by reference to
Exhibit 10.11 to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2005.)*10.18
    
    Supplemental Executive Retirement Benefits Agreement dated December 31, 2008
between the Bank and R. Daniel Blanton*10.19
    
    Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between
the Bank and Ronald L. Thigpen*10.20
    
    Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between
the Bank and Darrell R. Rains*
 134




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##### Table of Contents



10.21
    
    Employment Agreement dated April 30, 2007 between
the Bank and Darrell R. Rains. (Incorporated by
reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on May 4, 2007.)*10.22
    
    First Amendment dated December 31, 2008 to Employment
Agreement dated April 30, 2007 between the Bank and Darrell R. Rains*10.23
    
    Southeastern Bank Financial Corporation Director Stock
Purchase Plan (Incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on
December 27, 2007).14.1
    
    Code of Ethics (Incorporated by
reference to the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2003)21.1
    
    Subsidiaries of the Company
    
    
    13723.1
    
    Consent of Independent Registered Public
Accounting Firm
    
    
    13831.1
    
    Certification by the Chief Executive
Officer (principal executive officer)
    
    
    13931.2
    
    Certification by the Chief Financial
Officer (principal financial officer)
    
    
    14132.1
    
    Certification by the Chief Executive
Officer and Chief Financial Officer
    
    
    143
 
  135