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, 2010
 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
    
    58-2005097(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3530 Wheeler RoadAugusta, Georgia
    
    30909(Address of principal executive offices)
    
    (Zip Code)
 (706) 738-6990
 None
    Yes o No þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ(do not check if smaller reporting company)
 o þ
   Class
    
    Outstanding at February 17, 2011Common Stock, $3 par value per share
    
    6,675,851 shares
 DOCUMENTS INCORPORATED BY REFERENCE
 Document
    
    Parts Into Which IncorporatedProxy Statement for the Annual Meeting of Shareholders to be held
    
    Part IIIApril 27, 2011




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Introductory Note: Although the Company is classified as a smaller reporting company as
defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, it has elected to file a
report and attestation as to its internal controls over financial reporting in addition to
managements report on internal controls in this Annual Report on Form 10-K.
 Item 1.
    
    Description of Business
 General
    www.georgiabankandtrust.com
  2




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www.sec.gov
 History
  Employees
  Management Team
   3




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Market Area
  Competition
   4




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Lending Activities
  Real Estate Loans.
 Commercial Real Estate Loans.
  5




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Acquisition Development and Construction Loans (ADC loans)
     6




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December 31, 2010ReservesBalance
    
    
    Original
    
    
    Advanced
    
    
    Remaining(Dollars in thousands)Loan 1
    
    $
    4,166
    
    
    
    179
    
    
    
    179
    
    
    
    Loan 2
    
    
    10,135
    
    
    
    300
    
    
    
    300
    
    
    
    Loan 3
    
    
    2,234
    
    
    
    255
    
    
    
    255
    
    
    
    Loan 4
    
    
    452
    
    
    
    30
    
    
    
    30
    
    
    
    Loan 5
    
    
    162
    
    
    
    10
    
    
    
    10
    
    
    
    Loan 6
    
    
    1,114
    
    
    
    81
    
    
    
    81
    
    
    
    
 December 31, 2009ReservesBalance
    
    
    Original
    
    
    Advanced
    
    
    Remaining(Dollars in thousands)Loan 1
    
    $
    4,278
    
    
    
    179
    
    
    
    179
    
    
    
    Loan 2
    
    
    9,666
    
    
    
    300
    
    
    
    77
    
    
    
    223Loan 3
    
    
    2,598
    
    
    
    255
    
    
    
    255
    
    
    
    Loan 4
    
    
    455
    
    
    
    30
    
    
    
    30
    
    
    
    Loan 5
    
    
    166
    
    
    
    10
    
    
    
    10
    
    
    
    Loan 6
    
    
    1,133
    
    
    
    81
    
    
    
    81
    
    
    
    
  Residential Loans.
  7




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.
 Commercial Loans.
 Consumer Loans.
 Loan Approval and Review.
   8




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9




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Deposits
  Deposit Mix
 (Dollars in thousands)Noninterest-bearing
    
    $
    120,139
    
    
    
    8.51
    %NOW accounts
    
    
    356,267
    
    
    
    25.26
    %Money management accounts
    
    
    36,937
    
    
    
    2.62
    %Savings
    
    
    409,584
    
    
    
    29.03
    %Time depositsUnder $100
    
    
    141,089
    
    
    
    10.00
    %$100 and over
    
    
    346,721
    
    
    
    24.58
    %$
    1,410,737
    
    
    
    100.00
    %
 .
 Supervision and Regulation
  Legislation and regulations authorized by legislation influences, among other things:
 
    
    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.
   10




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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
 
    
    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.
   11




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Permitted Activities
  Capital Adequacy .
     12




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Payment of Dividends.
   13




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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.
      14




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Support of Subsidiary Institutions.
 Prompt Corrective Action .
   FDIC Insurance Assessments .
  15




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16




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Branching
 Community Reinvestment Act .
 Allowance for Loan and Lease Losses.
  17




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Commercial Real Estate Lending
 
    
    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.
 Enforcement Powers .
  The Consumer Financial Protection Bureau .
  18




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Limitations on Senior Executive Compensation.
 
    
    Incentive compensation arrangements should provide employees incentives
that appropriately balance risk and financial results in a manner that does not
encourage employees to expose the organization to imprudent risk;
 
    
    Incentive compensation arrangements should be compatible with effective
controls and risk management; and
 
    
    Incentive compensation arrangements should be supported by strong corporate
governance, including active and effective oversight by the board of directors.
 The Dodd-Frank Act.
  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;
  19




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
    
    National Flood Insurance Act and Flood Disaster Protection Act, requiring
flood insurance to extend or renew certain loans in flood plains;
    
    Real Estate Settlement Procedures Act, requiring certain disclosures
concerning loan closing costs and escrows, and governing transfers of loan servicing
and the amounts of escrows in connection with loans secured by one-to-four family
residential properties;
 
    
    Bank Secrecy Act, as amended by the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(the USA PATRIOT Act), imposing requirements and limitations on specific financial
transactions and account relationships, intended to guard against money laundering and
terrorism financing;
 
    
    sections 22(g) and 22(h) of the Federal Reserve Act which set lending
restrictions and limitations regarding loans and other extensions of credit made to
executive officers, directors, principal shareholders and other insiders;
 
    
    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,
 
    
    rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws.
  
    
    privacy and data security laws and regulations at both the federal and
state level; and
 
    
    anti-money laundering laws, including the USA Patriot Act.
 Proposed Legislation and Regulatory Action
   20




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Effect of Governmental Monetary Policies
  Item 1A.
    
    Risk Factors
  Risks Associated with our Business
 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.
   21




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Future impairment losses could be required on various investment securities, which may materially
reduce the Companys and the Banks regulatory capital levels.
     We could suffer loan losses from a decline in credit quality.
  Our results of operations and financial condition would be adversely affected if our allowance for
loan losses is not sufficient to absorb actual losses.
   22




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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.
   Our profitability is vulnerable to interest rate fluctuations.
   23




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An economic downturn, especially one affecting our market areas, could adversely affect our
financial condition, results of operations or cash flows.
  We will realize additional future losses if the proceeds we receive upon liquidation of
non-performing assets are less than the fair value of such assets.
  Our use of appraisals in deciding whether to make a loan on or secured by real property or how to
value such loan in the future may not accurately describe the net value of the real property
collateral that we can realize.
  Confidential customer information transmitted through our online banking service is vulnerable to
security breaches and computer viruses, which could expose us to litigation and adversely affect
our reputation and ability to generate deposits.
   24




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Our controls and procedures may fail or be circumvented .
  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.
    Environmental liability associated with lending activities could result in losses.
   25




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Risks Associated with our Common Stock
 We are not currently paying dividends on our common stock and we may be unable to pay future
dividends. As a result, capital appreciation, if any, of our common stock may represent the sole
opportunity for gains on an investment for the foreseeable future.
  Our stock price can be volatile.
  
    
    actual or anticipated variations in quarterly results of operations;
    
    recommendations by securities analysts;
    
    the operating and stock price performance of other companies that investors deem
comparable to the Company;
    
    perceptions in the marketplace regarding the Company and/or its competitors;
    
    new technology used, or services offered, by competitors;
    
    significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving the Company or its competitors;
    
    failure to integrate acquisitions or realize anticipated benefits from
acquisitions;
    
    changes in government regulations; and
    
    geopolitical conditions such as acts or threats of terrorism or military
conflicts.
   26




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The trading volume in our common stock is less than that of other larger financial services
companies
  Holders of our subordinated debentures have rights that are senior to those of our common
shareholders.
  Our directors and executive officers own a significant portion of our common stock and can
influence shareholder decisions.
  Item 1B.
    
    Unresolved Staff Comments
 None
  27




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Item 2.
    
    Properties
        Item 3.
    
    Legal Proceedings
   28




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Item 4.
    
    [Removed and Reserved]
  29




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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, 2009
    
    
    12.00
    
    
    
    19.50June 30, 2009
    
    
    13.05
    
    
    
    18.00September 30, 2009
    
    
    11.00
    
    
    
    15.50December 31, 2009
    
    
    10.00
    
    
    
    13.00Quarter endedMarch 31, 2010
    
    
    9.17
    
    
    
    11.75June 30, 2010
    
    
    10.50
    
    
    
    14.50September 30, 2010
    
    
    9.50
    
    
    
    13.00December 31, 2010
    
    
    8.00
    
    
    
    10.50Period endedFebruary 17, 2011
    
    
    8.77
    
    
    
    13.50
    30




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31




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Item 6.
    
    Selected Financial Data
   32




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Selected Consolidated Financial Data
    
    2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(Dollars in thousands, except per share data)EarningsTotal interest income
    
    $
    69,874
    
    
    $
    70,760
    
    
    $
    75,675
    
    
    $
    79,181
    
    
    $
    65,626Total interest expense
    
    
    23,998
    
    
    
    28,483
    
    
    
    35,489
    
    
    
    40,932
    
    
    
    31,423Net interest income
    
    
    45,876
    
    
    
    42,277
    
    
    
    40,186
    
    
    
    38,249
    
    
    
    34,203Provision for loan losses
    
    
    15,801
    
    
    
    30,904
    
    
    
    9,055
    
    
    
    3,823
    
    
    
    2,478Noninterest income
    
    
    21,086
    
    
    
    20,739
    
    
    
    16,705
    
    
    
    16,168
    
    
    
    14,040Noninterest expense
    
    
    41,815
    
    
    
    46,511
    
    
    
    36,752
    
    
    
    32,508
    
    
    
    28,932Net income (loss)
    
    
    6,856
    
    
    
    (7,985
    )
    
    
    7,578
    
    
    
    11,765
    
    
    
    11,160Per Share DataNet income (loss)- Diluted
    
    $
    1.03
    
    
    $
    (1.24
    )
    
    $
    1.26
    
    
    $
    1.95
    
    
    $
    1.89Book value
    
    
    14.97
    
    
    
    14.05
    
    
    
    15.81
    
    
    
    15.04
    
    
    
    13.21Cash dividends declared per common share
    
    
    0.00
    
    
    
    0.13
    
    
    
    0.52
    
    
    
    0.52
    
    
    
    0.52Weighted average common and common
equivalent shares outstanding
    
    
    6,674,224
    
    
    
    6,422,867
    
    
    
    6,011,689
    
    
    
    6,044,871
    
    
    
    5,908,659Selected Average BalancesAssets
    
    $
    1,575,360
    
    
    $
    1,476,887
    
    
    $
    1,318,384
    
    
    $
    1,133,064
    
    
    $
    951,115Total loans (net of unearned income)
    
    
    902,346
    
    
    
    965,111
    
    
    
    934,512
    
    
    
    800,852
    
    
    
    647,421Deposits
    
    
    1,367,416
    
    
    
    1,221,100
    
    
    
    1,057,198
    
    
    
    893,959
    
    
    
    735,128Stockholders equity
    
    
    100,719
    
    
    
    100,760
    
    
    
    89,337
    
    
    
    83,850
    
    
    
    69,317Selected Year-End BalancesAssets
    
    $
    1,607,105
    
    
    $
    1,491,119
    
    
    $
    1,411,039
    
    
    $
    1,212,980
    
    
    $
    1,041,202Loans (net of unearned income)
    
    
    874,095
    
    
    
    937,489
    
    
    
    986,831
    
    
    
    871,440
    
    
    
    735,112Allowance for loan losses
    
    
    26,657
    
    
    
    22,338
    
    
    
    14,742
    
    
    
    11,800
    
    
    
    9,777Deposits
    
    
    1,410,737
    
    
    
    1,280,534
    
    
    
    1,139,552
    
    
    
    952,166
    
    
    
    801,763Short-term borrowings
    
    
    8,818
    
    
    
    20,788
    
    
    
    62,553
    
    
    
    81,666
    
    
    
    76,020Long-term borrowings
    
    
    74,947
    
    
    
    82,947
    
    
    
    104,000
    
    
    
    79,000
    
    
    
    75,000Stockholders equity
    
    
    99,958
    
    
    
    93,744
    
    
    
    94,651
    
    
    
    89,758
    
    
    
    78,924Selected RatiosReturn on average total assets
    
    
    0.44
    %
    
    
    (0.54
    %)
    
    
    0.57
    %
    
    
    1.04
    %
    
    
    1.17
    %Return on average equity
    
    
    6.81
    %
    
    
    (7.92
    %)
    
    
    8.48
    %
    
    
    14.03
    %
    
    
    16.10
    %Average earning assets to average total assets
    
    
    91.73
    %
    
    
    91.54
    %
    
    
    94.11
    %
    
    
    93.66
    %
    
    
    93.67
    %Average loans to average deposits
    
    
    65.99
    %
    
    
    79.04
    %
    
    
    88.40
    %
    
    
    89.58
    %
    
    
    88.07
    %Average equity to average total assets
    
    
    6.39
    %
    
    
    6.82
    %
    
    
    6.78
    %
    
    
    7.40
    %
    
    
    7.29
    %Net interest margin
    
    
    3.18
    %
    
    
    3.12
    %
    
    
    3.24
    %
    
    
    3.60
    %
    
    
    3.84
    %Operating efficiency
    
    
    63.59
    %
    
    
    75.66
    %
    
    
    64.52
    %
    
    
    60.64
    %
    
    
    60.20
    %Net charge-offs to average loans
    
    
    1.27
    %
    
    
    2.42
    %
    
    
    0.65
    %
    
    
    0.22
    %
    
    
    0.17
    %Allowance for loan losses to net loans (year-end)
    
    
    3.05
    %
    
    
    2.38
    %
    
    
    1.49
    %
    
    
    1.35
    %
    
    
    1.33
    %Risk-based capitalTier 1 capital
    
    
    12.14
    %
    
    
    11.06
    %
    
    
    10.45
    %
    
    
    11.38
    %
    
    
    12.09
    %Total capital
    
    
    13.59
    %
    
    
    12.55
    %
    
    
    11.70
    %
    
    
    12.61
    %
    
    
    13.29
    %Tier 1 leverage ratio
    
    
    7.39
    %
    
    
    7.51
    %
    
    
    8.14
    %
    
    
    9.08
    %
    
    
    9.78
    %
  33




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Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
     34




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Critical Accounting Estimates
  Allowance for Loan Losses
   35




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Fair Value of Financial Instruments
  Other Real Estate Owned
  Investment Securities
   36




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Results of Operations
       37




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##### 



Net Interest Income
  Average Balances, Income and Expenses, Yields and Rates
 Year Ended Dec. 31, 2010
    
    
    Year Ended Dec. 31, 2009
    
    
    Year Ended Dec. 31, 2008Average
    
    
    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
    
    $
    925,923
    
    
    
    5.80
    %
    
    $
    53,707
    
    
    $
    986,305
    
    
    
    5.70
    %
    
    $
    56,196
    
    
    $
    952,800
    
    
    
    6.46
    %
    
    $
    61,568InvestmentsTaxable
    
    
    420,774
    
    
    
    3.49
    %
    
    
    14,680
    
    
    
    273,834
    
    
    
    4.88
    %
    
    
    13,376
    
    
    
    239,253
    
    
    
    5.38
    %
    
    
    12,875Tax-exempt
    
    
    26,402
    
    
    
    4.17
    %
    
    
    1,101
    
    
    
    20,969
    
    
    
    4.32
    %
    
    
    906
    
    
    
    16,266
    
    
    
    4.40
    %
    
    
    716Federal funds sold
    
    
    4,847
    
    
    
    0.19
    %
    
    
    9
    
    
    
    22,322
    
    
    
    0.13
    %
    
    
    29
    
    
    
    29,916
    
    
    
    1.57
    %
    
    
    470Interest-bearing deposits in other
banks
    
    
    67,121
    
    
    
    0.56
    %
    
    
    377
    
    
    
    48,509
    
    
    
    0.52
    %
    
    
    253
    
    
    
    2,557
    
    
    
    1.80
    %
    
    
    46Total interest-earning assets
    
    
    1,445,067
    
    
    
    4.84
    %
    
    $
    69,874
    
    
    
    1,351,939
    
    
    
    5.23
    %
    
    $
    70,760
    
    
    
    1,240,792
    
    
    
    6.10
    %
    
    $
    75,675Cash and due from banks
    
    
    59,370
    
    
    
    
    
    
    
    
    
    
    
    49,848
    
    
    
    
    
    
    
    
    
    
    
    22,846Premises and equipment
    
    
    30,473
    
    
    
    
    
    
    
    
    
    
    
    32,894
    
    
    
    
    
    
    
    
    
    
    
    33,584Other
    
    
    65,110
    
    
    
    
    
    
    
    
    
    
    
    58,036
    
    
    
    
    
    
    
    
    
    
    
    34,581Allowance for loan losses
    
    
    (24,660
    )
    
    
    
    
    
    
    
    
    
    
    (15,830
    )
    
    
    
    
    
    
    
    
    
    
    (13,419
    )Total assets
    
    $
    1,575,360
    
    
    
    
    
    
    
    
    
    
    $
    1,476,887
    
    
    
    
    
    
    
    
    
    
    $
    1,318,384LIABILITIES AND STOCKHOLDERS EQUITYInterest-bearing liabilities:NOW accounts
    
    $
    307,820
    
    
    
    0.99
    %
    
    $
    3,058
    
    
    $
    187,250
    
    
    
    0.95
    %
    
    $
    1,777
    
    
    $
    147,227
    
    
    
    1.46
    %
    
    $
    2,149Savings and money management
accounts
    
    
    425,872
    
    
    
    1.43
    %
    
    
    6,077
    
    
    
    341,118
    
    
    
    1.71
    %
    
    
    5,842
    
    
    
    353,719
    
    
    
    2.52
    %
    
    
    8,912Time deposits
    
    
    514,798
    
    
    
    2.20
    %
    
    
    11,330
    
    
    
    577,897
    
    
    
    2.88
    %
    
    
    16,630
    
    
    
    446,434
    
    
    
    4.25
    %
    
    
    18,956Federal funds purchased / securities sold
under repurchase agreements
        
    1,468
    
    
    
    1.36
    %
    
    
    20
    
    
    
    40,823
    
    
    
    0.80
    %
    
    
    327
    
    
    
    60,629
    
    
    
    2.17
    %
    
    
    1,317Other borrowings
    
    
    93,951
    
    
    
    3.74
    %
    
    
    3,513
    
    
    
    103,238
    
    
    
    3.78
    %
    
    
    3,907
    
    
    
    98,741
    
    
    
    4.21
    %
    
    
    4,155Total interest-bearing
liabilities
    
    
    1,343,909
    
    
    
    1.79
    %
    
    
    23,998
    
    
    
    1,250,326
    
    
    
    2.28
    %
    
    
    28,483
    
    
    
    1,106,750
    
    
    
    3.21
    %
    
    
    35,489Noninterest-bearing demand deposits
    
    
    118,926
    
    
    
    
    
    
    
    
    
    
    
    114,835
    
    
    
    
    
    
    
    
    
    
    
    109,818Other liabilities
    
    
    11,806
    
    
    
    
    
    
    
    
    
    
    
    10,966
    
    
    
    
    
    
    
    
    
    
    
    12,479Stockholders equity
    
    
    100,719
    
    
    
    
    
    
    
    
    
    
    
    100,760
    
    
    
    
    
    
    
    
    
    
    
    89,337Total liabilities and
stockholders
equity
    
    $
    1,575,360
    
    
    
    
    
    
    
    
    
    
    $
    1,476,887
    
    
    
    
    
    
    
    
    
    
    $
    1,318,384Net interest spread
    
    
    
    
    
    
    3.05
    %
    
    
    
    
    
    
    
    
    
    
    2.95
    %
    
    
    
    
    
    
    
    
    
    
    2.89
    %Benefit of noninterest sources
    
    
    
    
    
    
    0.13
    %
    
    
    
    
    
    
    
    
    
    
    0.17
    %
    
    
    
    
    
    
    
    
    
    
    0.35
    %Net interest margin/income
    
    
    
    
    
    
    3.18
    %
    
    $
    45,876
    
    
    
    
    
    
    
    3.12
    %
    
    $
    42,277
    
    
    
    
    
    
    
    3.24
    %
    
    $
    40,186
  38




---



##### 



2010 compared with 2009:
       39




---



##### 



2009 compared with 2008:
      40




---



##### 



Analysis of Changes in Net Interest Income
 2010 vs. 2009
    
    
    2009 vs. 2008Increase (Decrease)
    
    
    Increase (Decrease)Average
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    AverageVolume
    
    
    Rate
    
    
    Combined
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Combined
    
    
    Total(Dollars in thousands)
    
    
    (Dollars in thousands)Interest-earning assets:Loans
    
    $
    (3,440
    )
    
    $
    1,013
    
    
    $
    (62
    )
    
    $
    (2,489
    )
    
    $
    2,164
    
    
    $
    (7,264
    )
    
    $
    (272
    )
    
    $
    (5,372
    )Investments, taxable
    
    $
    7,177
    
    
    $
    (3,822
    )
    
    $
    (2,051
    )
    
    
    1,304
    
    
    
    1,860
    
    
    
    (1,185
    )
    
    
    (174
    )
    
    
    501Investments, tax-exempt
    
    $
    235
    
    
    $
    (32
    )
    
    $
    (8
    )
    
    
    195
    
    
    
    207
    
    
    
    (13
    )
    
    
    (4
    )
    
    
    190Federal funds sold
    
    $
    (23
    )
    
    $
    13
    
    
    $
    (10
    )
    
    
    (20
    )
    
    
    (119
    )
    
    
    (342
    )
    
    
    86
    
    
    
    (375
    )Interest-bearing deposits in
other banks
    
    $
    97
    
    
    $
    19
    
    
    $
    8
    
    
    
    124
    
    
    
    827
    
    
    
    (36
    )
    
    
    (650
    )
    
    
    141Total
    
    $
    4,046
    
    
    $
    (2,809
    )
    
    $
    (2,123
    )
    
    $
    (886
    )
    
    $
    4,939
    
    
    $
    (8,840
    )
    
    $
    (1,014
    )
    
    $
    (4,915
    )Interest-bearing liabilities:NOW accounts
    
    $
    1,144
    
    
    $
    83
    
    
    $
    54
    
    
    $
    1,281
    
    
    $
    584
    
    
    $
    (752
    )
    
    $
    (204
    )
    
    $
    (372
    )Savings and money
management accounts
    
    $
    1,451
    
    
    $
    (974
    )
    
    $
    (242
    )
    
    
    235
    
    
    
    (318
    )
    
    
    (2,857
    )
    
    
    104
    
    
    
    (3,071
    )Time deposits
    
    $
    (1,816
    )
    
    $
    (3,911
    )
    
    $
    427
    
    
    
    (5,300
    )
    
    
    5,587
    
    
    
    (6,127
    )
    
    
    (1,785
    )
    
    
    (2,325
    )Federal funds purchased /
securities sold under
repurchase agreements
    
    $
    (315
    )
    
    $
    229
    
    
    $
    (221
    )
    
    
    (307
    )
    
    
    (430
    )
    
    
    (829
    )
    
    
    269
    
    
    
    (990
    )Other borrowings
    
    $
    (351
    )
    
    $
    (47
    )
    
    $
    4
    
    
    
    (394
    )
    
    
    189
    
    
    
    (420
    )
    
    
    (17
    )
    
    
    (248
    )Total
    
    $
    113
    
    
    $
    (4,620
    )
    
    $
    22
    
    
    $
    (4,485
    )
    
    $
    5,612
    
    
    $
    (10,985
    )
    
    $
    (1,633
    )
    
    $
    (7,006
    )Change in net interest
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,091
   41




---



##### 



Provision for Loan Losses
  Noninterest Income
  2010 compared with 2009:
  2009 compared with 2008:
   42




---



##### 



Noninterest Income
 Year Ended December 31,2010
    
    
    2009
    
    
    2008(Dollars in thousands)Service charges and fees on deposits
    
    $
    6,926
    
    
    $
    7,051
    
    
    $
    7,291Gain on sales of loans
    
    
    8,624
    
    
    
    8,493
    
    
    
    5,747Gain (loss) on sale of fixed assets, net
    
    
    26
    
    
    
    (15
    )
    
    
    8Investment securities gains (losses), net of OTTI
    
    
    1,175
    
    
    
    1,557
    
    
    
    (77
    )Retail investment income
    
    
    1,662
    
    
    
    1,175
    
    
    
    1,096Trust service fees
    
    
    1,128
    
    
    
    1,040
    
    
    
    1,134Increase in cash surrender value of bank-owned
life insurance
    
    
    931
    
    
    
    880
    
    
    
    708Miscellaneous income
    
    
    614
    
    
    
    558
    
    
    
    798Total noninterest income
    
    $
    21,086
    
    
    $
    20,739
    
    
    $
    16,705Noninterest income as a percentage of total
average assets
    
    
    1.34
    %
    
    
    1.40
    %
    
    
    1.27
    %Noninterest income as a percentage of total
income
    
    
    23.18
    %
    
    
    22.67
    %
    
    
    18.08
    %
 Noninterest Expense
 2010 compared with 2009:
     2009 compared with 2008:
   43




---



##### 



Noninterest Expense
 Year Ended December 31,2010
    
    
    2009
    
    
    2008(Dollars in thousands)Salaries and other personnel expense
    
    $
    23,462
    
    
    $
    22,534
    
    
    $
    20,852Occupancy expense
    
    
    4,581
    
    
    
    4,691
    
    
    
    4,373Marketing & business development
    
    
    1,237
    
    
    
    1,451
    
    
    
    1,668Processing expense
    
    
    1,540
    
    
    
    1,733
    
    
    
    1,917Legal and professional fees
    
    
    1,657
    
    
    
    1,552
    
    
    
    1,763Data processing expense
    
    
    1,401
    
    
    
    1,265
    
    
    
    1,203FDIC insurance
    
    
    2,268
    
    
    
    2,723
    
    
    
    898(Gain) loss on sale of other real estate
    
    
    (299
    )
    
    
    5,741
    
    
    
    (63
    )Other real estate valuation allowance
    
    
    1,909
    
    
    
    588
    
    
    
    Loan costs
    
    
    954
    
    
    
    917
    
    
    
    658Supplies expense
    
    
    660
    
    
    
    604
    
    
    
    763Other expense
    
    
    2,445
    
    
    
    2,712
    
    
    
    2,720Total noninterest expense
    
    $
    41,815
    
    
    $
    46,511
    
    
    $
    36,752Noninterest expense as a percentage
of total average assets
    
    
    2.65
    %
    
    
    3.15
    %
    
    
    2.79
    %Operating efficiency ratio
    
    
    63.59
    %
    
    
    75.66
    %
    
    
    64.52
    %
   44




---



##### 



Income Taxes
     Financial Condition
 Composition of the Loan Portfolio
     45




---



##### 



st st
 Loan Portfolio Composition
 December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial financial and
agricultural
    
    $
    189,128
    
    
    
    21.64
    %
    
    $
    173,974
    
    
    
    18.56
    %
    
    
    171,883
    
    
    
    17.42
    %
    
    $
    144,167
    
    
    
    16.54
    %
    
    $
    128,661
    
    
    
    17.50
    %Real estateCommercial
    
    
    327,458
    
    
    
    37.46
    %
    
    
    322,864
    
    
    
    34.44
    %
    
    
    266,362
    
    
    
    26.99
    %
    
    
    236,358
    
    
    
    27.12
    %
    
    
    198,453
    
    
    
    27.00
    %Residential
    
    
    157,680
    
    
    
    18.04
    %
    
    
    147,403
    
    
    
    15.72
    %
    
    
    150,724
    
    
    
    15.27
    %
    
    
    139,764
    
    
    
    16.05
    %
    
    
    110,705
    
    
    
    15.06
    %Acquisition, development
and construction
    
    
    182,412
    
    
    
    20.87
    %
    
    
    270,062
    
    
    
    28.81
    %
    
    
    369,731
    
    
    
    37.47
    %
    
    
    318,438
    
    
    
    36.54
    %
    
    
    266,875
    
    
    
    36.30
    %Total real estate
    
    
    667,550
    
    
    
    76.37
    %
    
    
    740,329
    
    
    
    78.97
    %
    
    
    786,817
    
    
    
    79.73
    %
    
    
    694,560
    
    
    
    79.71
    %
    
    
    576,033
    
    
    
    78.36
    %Lease financing
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    33
    
    
    
    0.00
    %
    
    
    37
    
    
    
    0.00
    %
    
    
    116
    
    
    
    0.02
    %ConsumerDirect
    
    
    15,643
    
    
    
    1.79
    %
    
    
    20,507
    
    
    
    2.19
    %
    
    
    24,272
    
    
    
    2.46
    %
    
    
    25,569
    
    
    
    2.93
    %
    
    
    24,146
    
    
    
    3.28
    %Indirect
    
    
    899
    
    
    
    0.10
    %
    
    
    1,898
    
    
    
    0.20
    %
    
    
    3,319
    
    
    
    0.34
    %
    
    
    4,237
    
    
    
    0.49
    %
    
    
    6,232
    
    
    
    0.85
    %Revolving
    
    
    870
    
    
    
    0.10
    %
    
    
    836
    
    
    
    0.09
    %
    
    
    905
    
    
    
    0.09
    %
    
    
    3,819
    
    
    
    0.44
    %
    
    
    843
    
    
    
    0.12
    %Total consumer
    
    
    17,412
    
    
    
    1.99
    %
    
    
    23,241
    
    
    
    2.48
    %
    
    
    28,496
    
    
    
    2.89
    %
    
    
    33,625
    
    
    
    3.86
    %
    
    
    31,221
    
    
    
    4.25
    %Deferred loan origination costs (fees)
    
    
    5
    
    
    
    0.00
    %
    
    
    (55
    )
    
    
    (0.01
    %)
    
    
    (398
    )
    
    
    (0.04
    %)
    
    
    (949
    )
    
    
    (0.11
    %)
    
    
    (919
    )
    
    
    (0.13
    %)Total
    
    $
    874,095
    
    
    
    100.00
    %
    
    $
    937,489
    
    
    
    100.00
    %
    
    $
    986,831
    
    
    
    100.00
    %
    
    $
    871,440
    
    
    
    100.00
    %
    
    $
    735,112
    
    
    
    100.00
    %
  Loan Maturity Schedule
At December 31, 2010
 Within
    
    
    One to Five
    
    
    After FiveOne Year
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in thousands)Commercial, financial and agricultural
    
    $
    113,399
    
    
    $
    69,087
    
    
    $
    6,642
    
    
    $
    189,128Real EstateCommercial
    
    
    125,022
    
    
    
    195,278
    
    
    
    7,158
    
    
    
    327,458Residential
    
    
    61,914
    
    
    
    77,728
    
    
    
    18,038
    
    
    
    157,680Acquisition, development and
construction
    
    
    146,052
    
    
    
    35,256
    
    
    
    1,104
    
    
    
    182,412Consumer
    
    
    8,964
    
    
    
    8,227
    
    
    
    221
    
    
    
    17,412Deferred loan origination fees
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Total loans
    
    $
    455,356
    
    
    $
    385,576
    
    
    $
    33,163
    
    
    $
    874,095
   46




---



##### 



Sensitivity of Loans to Changes in Interest Rates
At December 31, 2010
 Within
    
    
    One to Five
    
    
    After FiveOne year
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in thousands)Loans maturing or repricing with:Predetermined interest rates
    
    $
    224,090
    
    
    $
    304,679
    
    
    $
    12,339
    
    
    $
    541,108Floating or adjustable interest rates
    
    
    322,126
    
    
    
    9,916
    
    
    
    945
    
    
    
    332,987Total loans
    
    $
    546,216
    
    
    $
    314,595
    
    
    $
    13,284
    
    
    $
    874,095
 Non-Performing Assets
    st
  47




---



##### 



Non-Performing Assets
 Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(Dollars in thousands)Nonaccrual loans:Commercial, financial and agricultural
    
    $
    2,924
    
    
    $
    962
    
    
    $
    449
    
    
    $
    359
    
    
    $
    112Real Estate:Commercial
    
    
    3,793
    
    
    
    2,932
    
    
    
    3,491
    
    
    
    1,440
    
    
    
    1,028Residential
    
    
    4,734
    
    
    
    4,277
    
    
    
    2,627
    
    
    
    887
    
    
    
    776Acquisition, development and construction
    
    
    11,953
    
    
    
    23,755
    
    
    
    27,908
    
    
    
    2,261
    
    
    
    205Consumer
    
    
    301
    
    
    
    331
    
    
    
    306
    
    
    
    548
    
    
    
    230Total Nonaccrual loans
    
    $
    23,705
    
    
    $
    32,257
    
    
    $
    34,781
    
    
    $
    5,495
    
    
    $
    2,351Restructured loans (1)
    
    $
    2,544
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Other real estate owned
    
    
    7,751
    
    
    
    7,974
    
    
    
    5,734
    
    
    
    
    
    
    
    Total Nonperforming assets
    
    $
    34,000
    
    
    $
    40,231
    
    
    $
    40,515
    
    
    $
    5,495
    
    
    $
    2,351Loans past due 90 days or more and still
accruing interest
    
    $
    69
    
    
    $
    
    
    
    $
    7,298
    
    
    $
    
    
    
    $
    Allowance for loan losses to period end total
loans
    
    
    3.05
    %
    
    
    2.38
    %
    
    
    1.49
    %
    
    
    1.35
    %
    
    
    1.33
    %Allowance for loan losses to period end
nonaccrual loans
    
    
    112.45
    %
    
    
    69.25
    %
    
    
    42.39
    %
    
    
    214.74
    %
    
    
    415.87
    %Net charge-offs to average loans
    
    
    1.27
    %
    
    
    2.42
    %
    
    
    0.65
    %
    
    
    0.22
    %
    
    
    0.17
    %Nonperforming assets to period end loans
    
    
    3.89
    %
    
    
    4.29
    %
    
    
    4.11
    %
    
    
    0.63
    %
    
    
    0.32
    %Nonperforming assets to period end loans
and other real estate owned
    
    
    3.86
    %
    
    
    4.26
    %
    
    
    4.08
    %
    
    
    0.63
    %
    
    
    0.32
    %
 (1)
    
    Restructured loans on nonaccrual status at year end are included under nonaccrual loans in
the table.  48




---



##### 



Nonaccrual
    
    
    
    
    
    
    
    
    
    
    
    Appraisal
    
    AppraisedBalance
    
    
    Originated
    
    Date
    
    Trigger
    
    Collateral
    
    Allowance
    
    
    Method
    
    Date
    
    Value(Dollars in thousands)Commercial Real Estate
    
    $
    1,268
    
    
    04/08/08
    
    03/30/10
    
    delinquency
    
    equipment, land & stock
    
    $
    175
    
    
    collateral value
    
    05/10
    
    $
    1,2771-4 Family Residential
    
    
    1,086
    
    
    05/08-06/08
    
    12/14/10
    
    financial condition
    
    houses & land
    
    
    
    
    
    collateral value
    
    In Process
    
    
    1,828ADC Loan  Savannah, Georgia
    
    
    1,568
    
    
    09/30/08
    
    05/06/10
    
    delinquency
    
    lots & land
    
    
    175
    
    
    collateral value
    
    06/10
    
    
    1,650ADC Loan  CSRA
    
    
    1,009
    
    
    03/07-04/08
    
    11/30/09
    
    delinquency
    
    lots & land
    
    
    
    
    
    collateral value
    
    03/10
    
    
    1,2011-4 Family Residential
    
    
    982
    
    
    01/08-09/08
    
    11/09-09/10
    
    delinquency
    
    houses
    
    
    
    
    
    collateral value
    
    03/10
    
    
    2,348Farmland & Equity lines
    
    
    1,158
    
    
    09/18/08
    
    11/10-12/10
    
    financial condition
    
    house & land
    
    
    
    
    
    collateral value
    
    11/10 - 12/10
    
    
    2,3281-4 Family Residential
    
    
    805
    
    
    04/19/07
    
    06/21/10
    
    financial condition
    
    house
    
    
    
    
    
    collateral value
    
    08/10
    
    
    895ADC Loan  CSRA
    
    
    3,157
    
    
    8/06 - 11/07
    
    08/17/09
    
    delinquency
    
    lots & land
    
    
    
    
    
    collateral value
    
    09/09 - 09/10
    
    
    5,586ADC Loan  Athens, Georgia
    
    
    1,130
    
    
    09/07/07
    
    12/16/10
    
    financial condition
    
    lots & land
    
    
    
    
    
    collateral value
    
    03/10
    
    
    2,079ADC Loan  Athens, Georgia
    
    
    1,940
    
    
    08/06-01/07
    
    01/28/09
    
    delinquency
    
    land & townhomes
    
    
    
    
    
    collateral value
    
    02/09 - 09/10
    
    
    2,415$
    14,103Other, net
    
    
    9,602Nonaccrual loans at December 31, 2010
    
    $
    23,705
  Other Real Estate Owned
 2010
    
    
    2009(Dollars in thousands)Beginning balance, January 1
    
    $
    7,974
    
    
    $
    5,734Additions
    
    
    9,395
    
    
    
    20,752Increase in valuation allowance
    
    
    (1,909
    )
    
    
    (588
    )Sales
    
    
    (8,008
    )
    
    
    (12,183
    )Gain (loss) on sale of OREO
    
    
    299
    
    
    
    (5,741
    )Ending balance, December 31
    
    $
    7,751
    
    
    $
    7,974
  2010
    
    
    2009(Dollars in thousands)Other Real Estate:Single family developed lots
    
    $
    2,109
    
    
    $
    724Residential land
    
    
    196
    
    
    
    1-4 Family residential
    
    
    1,608
    
    
    
    484Commercial real estate
    
    
    3,126
    
    
    
    4,468Condominums
    
    
    2,827
    
    
    
    2,8869,866
    
    
    
    8,562Valuation allowance
    
    
    (2,115
    )
    
    
    (588
    )$
    7,751
    
    
    $
    7,974
   49




---



##### 



Potential Problem Loans
  Allowance for Loan Losses
      
    
    Loans are grouped accordingly in categories of similar risk
characteristics (Portfolio segments).
  50




---



##### 




    
    For each loan category, a four year average rolling historical net loss
rate is calculated, with the loss rate more heavily weighted to the most recent two
years loss history. An emergence factor is then applied to the average historical
net loss rate.
 
    
    The historical loss ratios are adjusted for internal and external
qualitative factors within each loan category. The qualitative factor adjustment
may be further increased for loan classifications of watch rated and substandard
within each category. Factors include:
 
    
    levels and trends in delinquencies and impaired/classified/graded loans;
    
    changes in the quality of the loan review system;
    
    trends in volume and terms of loans;
    
    effects of changes in risk selection and underwriting standards, and other
changes in lending policies, procedures and practices;
    
    experience, ability, and depth of lending management and other relevant staff;
    
    national and local economic trends and conditions;
    
    changes in the value of underlying collateral;
    
    other external factors-competition, legal and regulatory requirements;
    
    effects of changes in credit concentrations
 
    
    The resultant loss factor is applied to each loan pool to calculate the
ALLL for each loan pool.
  Allocation of the Allowance for Loan Loss
 December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Amount
    
    
    Percent(1)
    
    
    Amount
    
    
    Percent(1)
    
    
    Amount
    
    
    Percent(1)
    
    
    Amount
    
    
    Percent(1)
    
    
    Amount
    
    
    Percent(1)(Dollars in thousands)Balance at end of year
Applicable to:Commercial, financial,
and agricultural
    
    $
    3,463
    
    
    
    21.73
    %
    
    $
    1,442
    
    
    
    18.21
    %
    
    $
    1,964
    
    
    
    18.93
    %
    
    $
    1,760
    
    
    
    17.73
    %
    
    $
    1,713
    
    
    
    18.91
    %Real estateCommercial
    
    
    8,698
    
    
    
    37.50
    %
    
    
    5,709
    
    
    
    33.10
    %
    
    
    2,565
    
    
    
    26.92
    %
    
    
    2,483
    
    
    
    28.67
    %
    
    
    2,547
    
    
    
    25.04
    %Residential
    
    
    5,372
    
    
    
    18.00
    %
    
    
    5,322
    
    
    
    16.68
    %
    
    
    2,048
    
    
    
    14.11
    %
    
    
    2,198
    
    
    
    15.37
    %
    
    
    1,382
    
    
    
    16.42
    %Acquisition, development
and construction
    
    
    8,493
    
    
    
    20.87
    %
    
    
    8,876
    
    
    
    29.51
    %
    
    
    7,050
    
    
    
    37.13
    %
    
    
    4,344
    
    
    
    34.38
    %
    
    
    3,191
    
    
    
    36.33
    %Consumer loans to
individuals
    
    
    631
    
    
    
    1.90
    %
    
    
    989
    
    
    
    2.50
    %
    
    
    1,115
    
    
    
    2.91
    %
    
    
    1,015
    
    
    
    3.85
    %
    
    
    944
    
    
    
    3.30
    %Balance at end of year
    
    $
    26,657
    
    
    
    100.00
    %
    
    $
    22,338
    
    
    
    100.00
    %
    
    $
    14,742
    
    
    
    100.00
    %
    
    $
    11,800
    
    
    
    100.00
    %
    
    $
    9,777
    
    
    
    100.00
    %
 (1)
    
    Percent of gross loans in each category to total loans adjusted for loans recorded at fair
value   51




---



##### 



52




---



##### 



Acquisition Development and Construction Loans
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)CSRA  primary market areaPeriod-end loans
    
    
    148,570
    
    
    
    195,394
    
    
    
    247,053Impaired loans
    
    
    4,492
    
    
    
    11,278
    
    
    
    5,187Classified/watch rated loans
    
    
    27,719
    
    
    
    27,237
    
    
    
    9,879Charge-offs % (annual)
    
    
    2.20
    %
    
    
    0.44
    %
    
    
    0.19
    %Specific reserve allowance / Impaired loans
    
    
    3.47
    %
    
    
    10.29
    %
    
    
    0.00
    %General reserve allowance / Loans not impaired %
    
    
    3.43
    %
    
    
    2.10
    %
    
    
    0.67
    %Allowance / Charge-offs
    
    
    1.56
    
    
    
    6.94
    
    
    
    4.78Savannah, GeorgiaPeriod-end loans
    
    
    10,985
    
    
    
    19,666
    
    
    
    28,300Impaired loans
    
    
    2,066
    
    
    
    1,300
    
    
    
    2,645Classified/watch rated loans
    
    
    638
    
    
    
    4,064
    
    
    
    5,060Charge-offs % (annual)
    
    
    13.32
    %
    
    
    11.21
    %
    
    
    3.18
    %Specific reserve allowance / Impaired loans
    
    
    8.47
    %
    
    
    8.62
    %
    
    
    6.62
    %General reserve allowance / Loans not impaired %
    
    
    3.12
    %
    
    
    3.42
    %
    
    
    4.20
    %Allowance / Charge-offs
    
    
    0.31
    
    
    
    0.34
    
    
    
    1.39Athens, GeorgiaPeriod-end loans
    
    
    11,178
    
    
    
    20,031
    
    
    
    31,806Impaired loans
    
    
    4,193
    
    
    
    8,457
    
    
    
    8,772Classified/watch rated loans
    
    
    1,439
    
    
    
    2,742
    
    
    
    13,667Charge-offs % (annual)
    
    
    3.38
    %
    
    
    47.59
    %
    
    
    1.78
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    12.04
    %General reserve allowance / Loans not impaired %
    
    
    11.40
    %
    
    
    10.68
    %
    
    
    3.97
    %Allowance / Charge-offs
    
    
    2.11
    
    
    
    0.13
    
    
    
    2.55ADC Participations  GeorgiaPeriod-end loans
    
    
    6,500
    
    
    
    9,893
    
    
    
    21,676Impaired loans
    
    
    
    
    
    
    3,393
    
    
    
    10,637Classified/watch rated loans
    
    
    6,500
    
    
    
    6,500
    
    
    
    48Charge-offs % (annual)
    
    
    22.52
    %
    
    
    47.41
    %
    
    
    8.88
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    20.81
    %
    
    
    4.09
    %General reserve allowance / Loans not impaired %
    
    
    15.00
    %
    
    
    9.50
    %
    
    
    9.55
    %Allowance / Charge-offs
    
    
    0.67
    
    
    
    0.28
    
    
    
    0.77ADC Loans  GreenvillePeriod-end loans
    
    
    1,673
    
    
    
    20,584
    
    
    
    19,103Impaired loans
    
    
    150
    
    
    
    
    
    
    
    Classified/watch rated loans
    
    
    821
    
    
    
    2,351
    
    
    
    Charge-offs % (annual)
    
    
    17.33
    %
    
    
    0.00
    %
    
    
    0.00
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %General reserve allowance / Loans not impaired %
    
    
    18.65
    %
    
    
    1.18
    %
    
    
    0.65
    %Allowance / Charge-offs
    
    
    0.21
    
    
    
    
    
    
    
    ADC Participations  FloridaPeriod-end loans
    
    
    3,506
    
    
    
    4,034
    
    
    
    8,005Impaired loans
    
    
    3,506
    
    
    
    1,034
    
    
    
    3,650Classified/watch rated loans
    
    
    
    
    
    
    
    
    
    
    704Charge-offs % (annual)
    
    
    5.56
    %
    
    
    10.26
    %
    
    
    0.19
    %Specific reserve allowance / Impaired loans
    
    
    25.33
    %
    
    
    0.00
    %
    
    
    11.34
    %General reserve allowance / Loans not impaired %
    
    
    0.00
    %
    
    
    10.00
    %
    
    
    4.27
    %Allowance / Charge-offs
    
    
    4.55
    
    
    
    0.72
    
    
    
    2.00
  53




---



##### 



Allowances for Loan Losses
 At December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(Dollars in thousands)Total loans outstanding at end of period,
net of unearned income
    
    $
    874,095
    
    
    $
    937,489
    
    
    $
    986,831
    
    
    $
    871,440
    
    
    $
    735,112Average loans outstanding, net of
unearned income
    
    $
    902,346
    
    
    $
    965,111
    
    
    $
    934,512
    
    
    $
    800,852
    
    
    $
    647,421Balance of allowance for loan losses at
beginning of year
    
    $
    22,338
    
    
    $
    14,742
    
    
    $
    11,800
    
    
    $
    9,777
    
    
    $
    8,431
    (1)Charge-offs:Commercial, financial and agricultural
    
    
    1,139
    
    
    
    1,120
    
    
    
    885
    
    
    
    146
    
    
    
    652Real estate  commercial
    
    
    1,048
    
    
    
    1,082
    
    
    
    279
    
    
    
    219
    
    
    
    130Real estate  residential mortgage
    
    
    1,306
    
    
    
    3,742
    
    
    
    596
    
    
    
    210
    
    
    
    672Real estate  acquisition, development
and construction
    
    
    8,656
    
    
    
    17,573
    
    
    
    4,265
    
    
    
    915
    
    
    
    100Consumer
    
    
    439
    
    
    
    616
    
    
    
    711
    
    
    
    1,086
    
    
    
    386Total charge-offs
    
    
    12,588
    
    
    
    24,133
    
    
    
    6,736
    
    
    
    2,576
    
    
    
    1,940Recoveries of previous loan losses:Commercial, financial and agricultural
    
    
    234
    
    
    
    363
    
    
    
    348
    
    
    
    23
    
    
    
    292Real estate  commercial
    
    
    13
    
    
    
    15
    
    
    
    
    
    
    
    32
    
    
    
    20Real estate  residential mortgage
    
    
    58
    
    
    
    169
    
    
    
    41
    
    
    
    91
    
    
    
    6Real estate  acquisition, development
and construction
    
    
    543
    
    
    
    6
    
    
    
    2
    
    
    
    12
    
    
    
    6Consumer
    
    
    258
    
    
    
    272
    
    
    
    232
    
    
    
    618
    
    
    
    484Total recoveries
    
    
    1,106
    
    
    
    825
    
    
    
    623
    
    
    
    776
    
    
    
    808Net loan losses
    
    
    11,482
    
    
    
    23,308
    
    
    
    6,113
    
    
    
    1,800
    
    
    
    1,132Provision for loan losses
    
    
    15,801
    
    
    
    30,904
    
    
    
    9,055
    
    
    
    3,823
    
    
    
    2,478Balance of allowance for loan losses at
end of period
    
    $
    26,657
    
    
    $
    22,338
    
    
    $
    14,742
    
    
    $
    11,800
    
    
    
    9,777Allowance for loan losses to period end
loans
    
    
    3.05
    %
    
    
    2.38
    %
    
    
    1.49
    %
    
    
    1.35
    %
    
    
    1.33
    %Net charge-offs to average loans
    
    
    1.27
    %
    
    
    2.42
    %
    
    
    0.65
    %
    
    
    0.22
    %
    
    
    0.17
    %
 (1)
    
    Includes adjustment of $694 for estimated overstatement of allowance for loan loss as of
12/31/05 as required by SAB 108.   54




---



##### 



Investment Securities
   55




---



##### 



Investment Securities
 December 31,2010
    
    
    2009
    
    
    2008(Dollars in thousands)Available for sale:U.S. Government Agencies
    
    $
    202,153
    
    
    $
    67,290
    
    
    $
    109,256Obligations of states and political subdivisions
    
    
    67,137
    
    
    
    26,402
    
    
    
    17,384Mortgage-backed securitiesU.S. GSEs MBS  residential
    
    
    141,524
    
    
    
    87,113
    
    
    
    117,373U.S. GSEs CMO
    
    
    139,208
    
    
    
    107,153
    
    
    
    28,179Other CMO
    
    
    3,382
    
    
    
    7,834
    
    
    
    11,997Corporate bonds
    
    
    36,551
    
    
    
    12,591
    
    
    
    15,032Equity securities
    
    
    2
    
    
    
    4
    
    
    
    46Total
    
    $
    589,957
    
    
    $
    308,387
    
    
    $
    299,267
 December 31,2010
    
    
    2009
    
    
    2008Held to maturity:Obligations of states and political subdivisions
    
    $
    310
    
    
    $
    490
    
    
    $
    689Total
    
    $
    310
    
    
    $
    490
    
    
    $
    689
   56




---



##### 



Maturity Distribution and Yields of Investment Securities
 December 31, 2010Amortized Cost
    
    
    Yield(Dollars in thousands)Available for SaleObligations of U.S. Government agenciesOver one through five years
    
    
    8,000
    
    
    
    0.81
    %Over five through ten years
    
    
    64,081
    
    
    
    2.14
    %Over ten years
    
    
    130,072
    
    
    
    2.69
    %Total
    
    $
    202,153
    
    
    
    2.44
    %Obligations of states and political
subdivisions(1)Over one through five years
    
    $
    2,258
    
    
    
    3.99
    %Over five through ten years
    
    
    7,860
    
    
    
    5.11
    %Over ten years
    
    
    57,019
    
    
    
    5.34
    %Total
    
    $
    67,137
    
    
    
    5.27
    %Corporate bondsOver one through five years
    
    $
    8,454
    
    
    
    4.08
    %Over five through ten years
    
    $
    12,478
    
    
    
    3.43
    %Over ten years
    
    
    15,619
    
    
    
    5.18
    %Total
    
    $
    36,551
    
    
    
    4.32
    %U.S. GSEs MBS  residentialOver five through ten years
    
    $
    4,855
    
    
    
    4.45
    %Over ten years
    
    
    136,669
    
    
    
    2.84
    %Total
    
    $
    141,524
    
    
    
    2.90
    %U.S. GSEs CMOOver one through five years
    
    $
    1,054
    
    
    
    5.26
    %Over five through ten years
    
    $
    3,933
    
    
    
    4.80
    %Over ten years
    
    
    134,221
    
    
    
    2.56
    %Total
    
    $
    139,208
    
    
    
    2.64
    %Other CMOOver five through ten years
    
    $
    516
    
    
    
    4.90
    %Over ten years
    
    
    2,866
    
    
    
    12.60
    %Total
    
    $
    3,382
    
    
    
    11.73
    %Equity securities
    
    $
    2
    
    
    
    0.00
    %Total Available for Sale
    
    $
    589,957
    
    
    
    3.09
    %Held to MaturityObligations of states and political
subdivisions(1)Over one through five years
    
    $
    310
    
    
    
    7.87
    %Total
    
    $
    310
    
    
    
    7.87
    %Total Held to Maturity
    
    $
    310
    
    
    
    7.87
    %Total Investment Securities
    
    $
    590,267
    
    
    
    3.09
    %
 (1)
    
    Tax-equivalent yield  57




---



##### 



Deposits
    Average Deposit and Borrowing Balances and Rates
 Year ended December 31,2010
    
    
    2009
    
    
    2008Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in thousands)Noninterest-bearing demand deposits
    
    $
    118,926
    
    
    
    0.00
    %
    
    $
    114,835
    
    
    
    0.00
    %
    
    $
    109,818
    
    
    
    0.00
    %Interest-bearing liabilities:NOW accounts
    
    
    307,820
    
    
    
    0.99
    %
    
    
    187,250
    
    
    
    0.95
    %
    
    
    147,227
    
    
    
    1.46
    %Savings, money management accounts
    
    
    425,872
    
    
    
    1.43
    %
    
    
    341,118
    
    
    
    1.71
    %
    
    
    353,719
    
    
    
    2.52
    %Time deposits
    
    
    514,798
    
    
    
    2.20
    %
    
    
    577,897
    
    
    
    2.88
    %
    
    
    446,434
    
    
    
    4.25
    %Federal funds purchased / securities
sold under repurchase agreements
    
    
    1,468
    
    
    
    1.36
    %
    
    
    40,823
    
    
    
    0.80
    %
    
    
    60,629
    
    
    
    2.17
    %Other borrowings
    
    
    93,951
    
    
    
    3.74
    %
    
    
    103,238
    
    
    
    3.78
    %
    
    
    98,741
    
    
    
    4.21
    %Total interest-bearing liabilities
    
    $
    1,343,909
    
    
    
    1.79
    %
    
    $
    1,250,326
    
    
    
    2.28
    %
    
    $
    1,106,750
    
    
    
    3.21
    %Total noninterest & interest-bearing liabilities
    
    $
    1,462,835
    
    
    
    
    
    
    $
    1,365,161
    
    
    
    
    
    
    $
    1,216,568
  Maturities of Time Deposits
 Time Certificatesof Deposit of$100 or More(Dollars in thousands)Months to MaturityWithin 3 months
    
    $
    79,527After 3 through 6 months
    
    
    59,674After 6 through 12 months
    
    
    75,391Within one year
    
    
    214,592After 12 months
    
    
    132,129Total
    
    $
    346,721
  58




---



##### 



Off-Balance Sheet Arrangements
     Commitments and Contractual Obligations
 Less than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than1 Year
    
    
    Years
    
    
    Years
    
    
    5 Years(Dollars in thousands)Lines of credit
    
    $
    136,194
    
    
    
    
    
    
    
    
    
    
    
    Lease agreements
    
    
    310
    
    
    
    233
    
    
    
    86
    
    
    
    26Deposits
    
    
    1,238,875
    
    
    
    144,777
    
    
    
    25,566
    
    
    
    1,519Securities sold under
repurchase agreements
    
    
    818
    
    
    
    
    
    
    
    
    
    
    
    FHLB advances
    
    
    8,000
    
    
    
    13,000
    
    
    
    
    
    
    
    39,000Other borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    2,947
    
    
    
    20,000Total commitments and
contractual obligations
    
    $
    1,384,197
    
    
    
    158,010
    
    
    
    28,599
    
    
    
    60,545
  59




---



##### 



Asset/Liability Management, Interest Rate Sensitivity and Liquidity
 General.
  Interest Rate Sensitivity.
     60




---



##### 



61




---



##### 



Interest Sensitivity Analysis  At December 31, 2010
 After SixWithin
    
    
    After Three
    
    
    Through
    
    
    
    
    
    
    One YearThree
    
    
    Through
    
    
    Twelve
    
    
    Within
    
    
    Through
    
    
    Over FiveMonths
    
    
    Six Months
    
    
    Months
    
    
    One Year
    
    
    Five Years
    
    
    Years
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    392,756
    
    
    
    49,871
    
    
    
    103,589
    
    
    
    546,216
    
    
    
    314,595
    
    
    
    13,284
    
    
    
    874,095Investment securities (including
restricted equity securities)
    
    
    159,737
    
    
    
    11,763
    
    
    
    16,206
    
    
    
    187,706
    
    
    
    160,570
    
    
    
    244,043
    
    
    
    592,319Federal funds sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest-bearing deposits in other
banks
    
    
    22,810
    
    
    
    
    
    
    
    
    
    
    
    22,810
    
    
    
    
    
    
    
    
    
    
    
    22,810Total interest-earning assets
    
    $
    575,303
    
    
    $
    61,634
    
    
    $
    119,795
    
    
    $
    756,732
    
    
    $
    475,165
    
    
    $
    257,327
    
    
    $
    1,489,224Interest-bearing liabilities:Money management accounts
    
    $
    36,937
    
    
    
    
    
    
    
    
    
    
    
    36,937
    
    
    
    
    
    
    
    
    
    
    
    36,937Savings accounts
    
    
    409,584
    
    
    
    
    
    
    
    
    
    
    
    409,584
    
    
    
    
    
    
    
    
    
    
    
    409,584NOW accounts
    
    
    356,267
    
    
    
    
    
    
    
    
    
    
    
    356,267
    
    
    
    
    
    
    
    
    
    
    
    356,267Time deposits
    
    
    119,555
    
    
    
    98,467
    
    
    
    104,824
    
    
    
    322,846
    
    
    
    164,963
    
    
    
    1
    
    
    
    487,810Securities sold under repurchase
ageements
    
    
    818
    
    
    
    
    
    
    
    
    
    
    
    818
    
    
    
    
    
    
    
    
    
    
    
    818Federal Home Loan Bank advances
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    8,000
    
    
    
    13,000
    
    
    
    39,000
    
    
    
    60,000Notes and bonds payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debentures
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    2,947
    
    
    
    
    
    
    
    22,947Total interest-bearing
liabilities
    
    $
    943,161
    
    
    $
    106,467
    
    
    $
    104,824
    
    
    $
    1,154,452
    
    
    $
    180,910
    
    
    $
    39,001
    
    
    $
    1,374,363Period gap
    
    $
    (367,858
    )
    
    $
    (44,833
    )
    
    $
    14,971
    
    
    $
    (397,720
    )
    
    $
    294,255
    
    
    $
    218,326Cumulative gap
    
    $
    (367,858
    )
    
    $
    (412,691
    )
    
    $
    (397,720
    )
    
    $
    (397,720
    )
    
    $
    (103,465
    )
    
    $
    114,861Ratio of cumulative gap to total
interest-earning assets
    
    
    (24.70
    %)
    
    
    (27.71
    %)
    
    
    (26.71
    %)
    
    
    (26.71
    %)
    
    
    (6.95
    %)
    
    
    7.71
    %
 Liquidity
   62




---



##### 



Capital
    Return on Equity and Assets
 Years ended December 31,2010
    
    
    2009
    
    
    2008Return on average total assets
    
    
    0.44
    %
    
    
    (0.54
    %)
    
    
    0.57
    %Return on average equity
    
    
    6.81
    %
    
    
    (7.92
    %)
    
    
    8.48
    %Average equity to average assets ratio
    
    
    6.39
    %
    
    
    6.82
    %
    
    
    6.78
    %
   63




---



##### 



ANALYSIS OF CAPITAL
 Required
    
    
    Actual
    
    
    ExcessAmount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Southeastern Bank Financial Corporation12/31/2010Risk-based capital:Tier 1 capital
    
    $
    40,224
    
    
    
    4.00
    %
    
    $
    122,052
    
    
    
    12.14
    %
    
    $
    81,828
    
    
    
    8.14
    %Total capital
    
    
    80,448
    
    
    
    8.00
    %
    
    
    136,564
    
    
    
    13.59
    %
    
    
    56,116
    
    
    
    5.59
    %Tier 1 leverage ratio
    
    
    66,092
    
    
    
    4.00
    %
    
    
    122,052
    
    
    
    7.39
    %
    
    
    55,960
    
    
    
    3.39
    %12/31/2009Risk-based capital:Tier 1 capital
    
    $
    41,573
    
    
    
    4.00
    %
    
    $
    114,930
    
    
    
    11.06
    %
    
    $
    73,357
    
    
    
    7.06
    %Total capital
    
    
    83,146
    
    
    
    8.00
    %
    
    
    130,395
    
    
    
    12.55
    %
    
    
    47,249
    
    
    
    4.55
    %Tier 1 leverage ratio
    
    
    61,177
    
    
    
    4.00
    %
    
    
    114,930
    
    
    
    7.51
    %
    
    
    53,753
    
    
    
    3.51
    %Georgia Bank & Trust Company12/31/2010Risk-based capital:Tier 1 capital
    
    $
    35,363
    
    
    
    4.00
    %
    
    $
    106,962
    
    
    
    12.10
    %
    
    $
    71,599
    
    
    
    8.10
    %Total capital
    
    
    70,726
    
    
    
    8.00
    %
    
    
    118,175
    
    
    
    13.37
    %
    
    
    47,449
    
    
    
    5.37
    %Tier 1 leverage ratio
    
    
    66,500
    
    
    
    4.50
    %
    
    
    106,962
    
    
    
    7.24
    %
    
    
    40,462
    
    
    
    2.74
    %12/31/2009Risk-based capital:Tier 1 capital
    
    $
    36,391
    
    
    
    4.00
    %
    
    $
    99,984
    
    
    
    10.99
    %
    
    $
    63,593
    
    
    
    6.99
    %Total capital
    
    
    72,782
    
    
    
    8.00
    %
    
    
    111,465
    
    
    
    12.25
    %
    
    
    38,683
    
    
    
    4.25
    %Tier 1 leverage ratio
    
    
    61,301
    
    
    
    4.50
    %
    
    
    99,984
    
    
    
    7.34
    %
    
    
    38,683
    
    
    
    2.84
    %Southern Bank & Trust12/31/2010Risk-based capital:Tier 1 capital
    
    $
    4,889
    
    
    
    4.00
    %
    
    $
    14,475
    
    
    
    11.84
    %
    
    $
    9,586
    
    
    
    7.84
    %Total capital
    
    
    9,779
    
    
    
    8.00
    %
    
    
    16,015
    
    
    
    13.10
    %
    
    
    6,236
    
    
    
    5.10
    %Tier 1 leverage ratio
    
    
    7,381
    
    
    
    4.00
    %
    
    
    14,475
    
    
    
    7.84
    %
    
    
    7,094
    
    
    
    3.84
    %12/31/2009Risk-based capital:Tier 1 capital
    
    $
    5,091
    
    
    
    4.00
    %
    
    $
    14,136
    
    
    
    11.11
    %
    
    $
    9,045
    
    
    
    7.11
    %Total capital
    
    
    10,183
    
    
    
    8.00
    %
    
    
    15,734
    
    
    
    12.36
    %
    
    
    5,551
    
    
    
    4.36
    %Tier 1 leverage ratio
    
    
    6,640
    
    
    
    4.00
    %
    
    
    14,136
    
    
    
    8.52
    %
    
    
    7,496
    
    
    
    4.52
    %
 Cash Flows from Operating, Investing and Financing Activities
    64




---



##### 



Forward-Looking Statements
  Adoption of New Accounting Standards
    65




---



##### 



Effects of Inflation and Changing Prices
   Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    66




---



##### 



Amount
    
    
    Dollar Change
    
    
    Percent Change(Dollars in thousands)December 31, 2010-300 basis points
    
    $
    44,178
    
    
    $
    (6,858
    )
    
    
    (13.44
    %)-200 basis points
    
    
    44,967
    
    
    
    (6,069
    )
    
    
    (11.89
    %)-100 basis points
    
    
    47,533
    
    
    
    (3,503
    )
    
    
    (6.86
    %)Base
    
    
    51,036+100 basis points
    
    
    50,824
    
    
    
    (212
    )
    
    
    (0.42
    %)+200 basis points
    
    
    50,465
    
    
    
    (571
    )
    
    
    (1.12
    %)+300 basis points
    
    
    51,357
    
    
    
    321
    
    
    
    0.63
    %December 31, 2009-200 basis points
    
    $
    43,426
    
    
    $
    957
    
    
    
    2.25
    %-100 basis points
    
    
    42,862
    
    
    
    393
    
    
    
    0.93
    %Base
    
    
    42,469+100 basis points
    
    
    42,372
    
    
    
    (97
    )
    
    
    (0.23
    %)+200 basis points
    
    
    43,701
    
    
    
    1,232
    
    
    
    2.90
    %
  67




---



##### 



Item 8.
    
    Financial Statements and Supplementary Data
  68




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Table of Contents
 PageReport of Independent Registered Public Accounting Firm
    
    
    70Consolidated Balance Sheets
    
    
    71Consolidated Statements of Income (Loss)
    
    
    73Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
    
    
    75Consolidated Statements of Cash Flows
    
    
    77Notes to Consolidated Financial Statements
    
    
    79
   69




---



##### 



Internal Control
- Integrated Framework
  
  70




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 
 2010
    
    
    2009(Dollars in thousands)AssetsCash and due from banks
    
    $
    42,305
    
    
    
    123,661Federal funds sold
    
    
    
    
    
    
    7,300Interest-bearing deposits in other banks
    
    
    22,810
    
    
    
    17,033Cash and cash equivalents
    
    
    65,115
    
    
    
    147,994Investment securities:Available-for-sale
    
    
    586,302
    
    
    
    306,216Held-to-maturity, at cost (fair values of $311
and $492 at December 31, 2010 and 2009,
respectively)
    
    
    310
    
    
    
    490Loans held for sale
    
    
    12,775
    
    
    
    19,157Loans
    
    
    874,095
    
    
    
    937,489Less allowance for loan losses
    
    
    26,657
    
    
    
    22,338Loans, net
    
    
    847,438
    
    
    
    915,151Premises and equipment, net
    
    
    29,416
    
    
    
    31,702Accrued interest receivable
    
    
    6,382
    
    
    
    6,091Goodwill, net
    
    
    140
    
    
    
    140Bank-owned life insurance
    
    
    24,178
    
    
    
    23,248Restricted equity securities
    
    
    5,707
    
    
    
    6,338Other real estate owned
    
    
    7,751
    
    
    
    7,974Prepaid FDIC assessment
    
    
    4,784
    
    
    
    6,886Deferred tax asset
    
    
    14,595
    
    
    
    11,160Other assets
    
    
    2,212
    
    
    
    8,572$
    1,607,105
    
    
    
    1,491,119
   71




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2010
    
    
    2009Liabilities and Stockholders EquityDeposits:Noninterest-bearing
    
    $
    120,139
    
    
    
    114,780Interest-bearing:NOW accounts
    
    
    356,267
    
    
    
    210,438Savings
    
    
    409,584
    
    
    
    343,740Money management accounts
    
    
    36,937
    
    
    
    44,781Time deposits of $100 or more
    
    
    346,721
    
    
    
    418,751Other time deposits
    
    
    141,089
    
    
    
    148,0441,410,737
    
    
    
    1,280,534Securities sold under repurchase agreements
    
    
    818
    
    
    
    3,188Advances from Federal Home Loan Bank
    
    
    60,000
    
    
    
    77,000Other borrowed funds
    
    
    
    
    
    
    600Accrued interest payable and other liabilities
    
    
    12,645
    
    
    
    13,106Subordinated debentures
    
    
    22,947
    
    
    
    22,947Total liabilities
    
    
    1,507,147
    
    
    
    1,397,375Stockholders equity:Preferred stock, no par value; 10,000,000 shares
authorized; 0 shares outstanding in 2010
and 2009, respectively
    
    
    
    
    
    
    Common stock, $3.00 par value; 10,000,000 shares
authorized; 6,675,147 and 6,672,826 shares issued and
outstanding in 2010 and 2009, respectively
    
    
    20,025
    
    
    
    20,018Additional paid-in capital
    
    
    62,618
    
    
    
    62,360Retained earnings
    
    
    19,548
    
    
    
    12,692Accumulated other comprehensive loss, net
    
    
    (2,233
    )
    
    
    (1,326
    )Total stockholders equity
    
    
    99,958
    
    
    
    93,744$
    1,607,105
    
    
    
    1,491,119
   72




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 
 2010
    
    
    2009
    
    
    2008(Dollars in thousands, except per share data)Interest income:Loans, including fees
    
    $
    53,707
    
    
    
    56,196
    
    
    
    61,568Investment securities:Taxable
    
    
    14,680
    
    
    
    13,376
    
    
    
    12,875Tax-exempt
    
    
    1,101
    
    
    
    906
    
    
    
    716Federal funds sold
    
    
    9
    
    
    
    29
    
    
    
    470Interest-bearing deposits in other banks
    
    
    377
    
    
    
    253
    
    
    
    46Total interest income
    
    
    69,874
    
    
    
    70,760
    
    
    
    75,675Interest expense:Deposits
    
    
    20,465
    
    
    
    24,249
    
    
    
    30,017Federal funds purchased and securities sold
under repurchase agreements
    
    
    20
    
    
    
    327
    
    
    
    1,317Other borrowings
    
    
    3,513
    
    
    
    3,907
    
    
    
    4,155Total interest expense
    
    
    23,998
    
    
    
    28,483
    
    
    
    35,489Net interest income
    
    
    45,876
    
    
    
    42,277
    
    
    
    40,186Provision for loan losses
    
    
    15,801
    
    
    
    30,904
    
    
    
    9,055Net interest income after provision
for loan losses
    
    
    30,075
    
    
    
    11,373
    
    
    
    31,131Noninterest income:Service charges and fees on deposits
    
    
    6,926
    
    
    
    7,051
    
    
    
    7,291Gain on sales of loans
    
    
    8,624
    
    
    
    8,493
    
    
    
    5,747Gain (loss) on sale of fixed assets, net
    
    
    26
    
    
    
    (15
    )
    
    
    8Investment securities gains (losses), net
    
    
    1,271
    
    
    
    2,532
    
    
    
    (77
    )Other-than-temporary lossTotal impairment loss
    
    
    (96
    )
    
    
    (991
    )
    
    
    Loss recognized in other comprehensive loss
    
    
    
    
    
    
    16
    
    
    
    Net impairment loss recognized in earnings
    
    
    (96
    )
    
    
    (975
    )
    
    
    Retail investment income
    
    
    1,662
    
    
    
    1,175
    
    
    
    1,096Trust services fees
    
    
    1,128
    
    
    
    1,040
    
    
    
    1,134Increase in cash surrender value of bank-owned
life insurance
    
    
    931
    
    
    
    880
    
    
    
    708Miscellaneous income
    
    
    614
    
    
    
    558
    
    
    
    798Total noninterest income
    
    
    21,086
    
    
    
    20,739
    
    
    
    16,705Noninterest expense:Salaries and other personnel expense
    
    
    23,462
    
    
    
    22,534
    
    
    
    20,852Occupancy expenses
    
    
    4,581
    
    
    
    4,691
    
    
    
    4,373Other real estate losses (gains)
    
    
    1,610
    
    
    
    6,329
    
    
    
    (63
    )Other operating expenses
    
    
    12,162
    
    
    
    12,957
    
    
    
    11,590Total noninterest expense
    
    
    41,815
    
    
    
    46,511
    
    
    
    36,752Income (loss) before income taxes
    
    
    9,346
    
    
    
    (14,399
    )
    
    
    11,084Income tax expense (benefit)
    
    
    2,490
    
    
    
    (6,414
    )
    
    
    3,506Net income (loss)
    
    $
    6,856
    
    
    
    (7,985
    )
    
    
    7,578
   73




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2010
    
    
    2009
    
    
    2008Basic net income (loss) per share
    
    $
    1.03
    
    
    
    (1.24
    )
    
    
    1.27Diluted net income (loss) per share
    
    
    1.03
    
    
    
    (1.24
    )
    
    
    1.26Weighted average common shares outstanding
    
    
    6,674,224
    
    
    
    6,422,867
    
    
    
    5,972,429Weighted average number of common and
common equivalent shares outstanding
    
    
    6,674,224
    
    
    
    6,422,867
    
    
    
    6,011,689
   74




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 
 AccumulatedCommon stock
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    other
    
    
    TotalComprehensive
    
    
    Number
    
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    stockholdersincome (loss)
    
    
    of shares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    stock
    
    
    income (loss), net
    
    
    equityBalance, 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
    )
    
    
    
    
    
    
    
    
    
    
    Directors stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    36Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )
    
    
    
    
    
    
    (445
    )Balance, December 31, 2008
    
    
    
    
    
    
    5,988
    
    
    $
    17,963
    
    
    
    55,189
    
    
    
    21,455
    
    
    
    
    
    
    
    44
    
    
    
    94,651Comprehensive income (loss):Net loss
    
    $
    (7,985
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,985
    )
    
    
    
    
    
    
    
    
    
    
    (7,985
    )Other
comprehensive loss  unrealized loss on investment securities
available for sale, net of income tax effect of $873
    
    
    (1,370
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,370
    )
    
    
    (1,370
    )Total comprehensive loss
    
    $
    (9,355
    )Cash dividends ($0.13 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (778
    )
    
    
    
    
    
    
    
    
    
    
    (778
    )Stock options compensation cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188Issuance of common stock
    
    
    
    
    
    
    683
    
    
    
    2,049
    
    
    
    6,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,010Directors stock purchase plan
    
    
    
    
    
    
    2
    
    
    
    6
    
    
    
    22
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    33Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Balance, December 31, 2009
    
    
    
    
    
    
    6,673
    
    
    $
    20,018
    
    
    
    62,360
    
    
    
    12,692
    
    
    
    
    
    
    
    (1,326
    )
    
    
    93,744Comprehensive income:Net income
    
    $
    6,856
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,856
    
    
    
    
    
    
    
    
    
    
    
    6,856Other comprehensive loss  unrealized loss on investment securities available for sale,
net of income tax effect of $577
    
    
    (907
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (907
    )
    
    
    (907
    )Total comprehensive income
    
    $
    5,949Stock options compensation cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    241
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    241Directors stock purchase plan
    
    
    
    
    
    
    2
    
    
    
    7
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Balance, December 31, 2010
    
    
    
    
    
    
    6,675
    
    
    $
    20,025
    
    
    
    62,618
    
    
    
    19,548
    
    
    
    
    
    
    
    (2,233
    )
    
    
    99,958
   75




---



##### 



Disclosure of reclassification amount2010
    
    
    2009
    
    
    2008Unrealized holding losses arising
during period, net of taxes
    
    $
    (309
    )
    
    
    (686
    )
    
    
    (48
    )Reclassification adjustment for (gains) losses
included in net income (loss)
    
    
    (1,175
    )
    
    
    (1,557
    )
    
    
    77Tax effect
    
    
    577
    
    
    
    873
    
    
    
    (13
    )Net unrealized (losses) gains in securities
    
    $
    (907
    )
    
    
    (1,370
    )
    
    
    16
   76




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    6,856
    
    
    
    (7,985
    )
    
    
    7,578Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    2,651
    
    
    
    2,718
    
    
    
    2,343Deferred income tax benefit
    
    
    (2,857
    )
    
    
    (3,945
    )
    
    
    (929
    )Provision for loan losses
    
    
    15,801
    
    
    
    30,904
    
    
    
    9,055Investment securities (gains) losses, net
    
    
    (1,271
    )
    
    
    (2,532
    )
    
    
    77Other-than-temporary impairment losses
    
    
    96
    
    
    
    975
    
    
    
    Net amortization of premium (accretion of discount)
on investment securities
    
    
    2,090
    
    
    
    366
    
    
    
    (147
    )Increase in cash surrender value of bank-owned
life insurance
    
    
    (931
    )
    
    
    (880
    )
    
    
    (708
    )Stock options compensation cost
    
    
    241
    
    
    
    188
    
    
    
    209(Gain) loss on disposal of premises and equipment
    
    
    (26
    )
    
    
    15
    
    
    
    (8
    )(Gain) loss on the sale of other real estate
    
    
    (299
    )
    
    
    5,741
    
    
    
    (63
    )Provision for other real estate valuation allowance
    
    
    1,909
    
    
    
    588
    
    
    
    Gain on sales of loans
    
    
    (8,624
    )
    
    
    (8,493
    )
    
    
    (5,747
    )Real estate loans originated for sale
    
    
    (328,098
    )
    
    
    (367,532
    )
    
    
    (258,946
    )Proceeds from sales of real estate loans
    
    
    343,104
    
    
    
    375,823
    
    
    
    257,042(Increase) decrease in accrued interest receivable
    
    
    (291
    )
    
    
    994
    
    
    
    331Decrease (increase) in other assets
    
    
    8,461
    
    
    
    (10,458
    )
    
    
    (2,199
    )(Decrease) increase in accrued interest payable and other liabilities
    
    
    (461
    )
    
    
    2,823
    
    
    
    (107
    )Net cash provided by operating activities
    
    
    38,351
    
    
    
    19,310
    
    
    
    7,781Cash flows from investing activities:Proceeds from sales of available for sale securities
    
    
    72,296
    
    
    
    127,524
    
    
    
    27,285Proceeds from maturities of available for sale securities
    
    
    198,747
    
    
    
    128,193
    
    
    
    68,665Proceeds from maturities of held to maturity securities
    
    
    180
    
    
    
    203
    
    
    
    765Purchase of available for sale securities
    
    
    (553,527
    )
    
    
    (263,117
    )
    
    
    (149,781
    )Purchase of restricted equity securities
    
    
    
    
    
    
    (322
    )
    
    
    (1,511
    )Proceeds from redemption of FHLB stock
    
    
    631
    
    
    
    23
    
    
    
    Purchase of loans
    
    
    
    
    
    
    (1,809
    )
    
    
    Net decrease (increase) in loans
    
    
    42,517
    
    
    
    7,090
    
    
    
    (127,889
    )Purchase of Bank-owned life insurance
    
    
    
    
    
    
    (5,000
    )
    
    
    Additions to premises and equipment
    
    
    (368
    )
    
    
    (747
    )
    
    
    (5,196
    )Proceeds from sale of other real estate
    
    
    8,008
    
    
    
    12,183
    
    
    
    715Proceeds from sale of premises and equipment
    
    
    29
    
    
    
    271
    
    
    
    1,513Net cash (used in) provided by investing activities
    
    
    (231,487
    )
    
    
    4,492
    
    
    
    (185,434
    )
   77




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2010
    
    
    2009
    
    
    2008Cash flows from financing activities:Net increase in deposits
    
    
    130,203
    
    
    
    140,982
    
    
    
    187,386Net decrease in federal funds purchased
and securities sold under repurchase agreements
    
    
    (2,370
    )
    
    
    (59,365
    )
    
    
    (18,613
    )Advances from Federal Home Loan Bank
    
    
    
    
    
    
    
    
    
    
    25,000Payments of Federal Home Loan Bank advances
    
    
    (17,000
    )
    
    
    (7,000
    )
    
    
    Proceeds from subordinated debentures
    
    
    
    
    
    
    2,947
    
    
    
    Proceeds from other borrowed funds
    
    
    
    
    
    
    600
    
    
    
    Principal payments on other borrowed funds
    
    
    (600
    )
    
    
    
    
    
    
    (500
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    9,010
    
    
    
    Proceeds from directors stock purchase plan
    
    
    24
    
    
    
    33
    
    
    
    36Purchase of treasury stock
    
    
    
    
    
    
    (5
    )
    
    
    (445
    )Payment of cash dividends
    
    
    
    
    
    
    (778
    )
    
    
    (2,968
    )Proceeds from stock options exercised, net of stock redeemed
    
    
    
    
    
    
    
    
    
    
    467Net cash provided by financing activities
    
    
    110,257
    
    
    
    86,424
    
    
    
    190,363Net (decrease) increase in cash and
cash equivalents
    
    
    (82,879
    )
    
    
    110,226
    
    
    
    12,710Cash and cash equivalents at beginning of year
    
    
    147,994
    
    
    
    37,768
    
    
    
    25,058Cash and cash equivalents at end of year
    
    $
    65,115
    
    
    
    147,994
    
    
    
    37,768Supplemental disclosures of cash paid during the year for:Interest
    
    $
    24,190
    
    
    
    29,620
    
    
    
    35,729Income taxes, net of refunds
    
    
    822
    
    
    
    628
    
    
    
    4,092Supplemental information on noncash investing activities:Loans transferred to other real estate
    
    $
    9,395
    
    
    
    20,752
    
    
    
    6,386
   78




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 
 (1)
    
    Summary of Significant Accounting Policies
 Southeastern 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 (GB&T), and Southern Bank and Trust Company of Aiken,
South Carolina (SB&T), 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 and Columbia Counties of Georgia, and Aiken County, South Carolina.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 and 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 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, other real estate
owned and other than temporary impairment of debt securities.(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.
  79




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 (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 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. Management evaluates securities for
other-than-temporary impairment at least on a quarterly basis and more frequently when
economic or market conditions warrant such an evaluation. In estimating
other-than-temporary impairment, 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, whether the market decline was affected by macroeconomic conditions, and
whether the Company has the intent to sell the security or more likely than not will be
required to sell the security before its anticipated recovery. If either of the
criteria regarding intent or requirement to sell is met, the OTTI shall be recognized in
earnings equal to the entire difference between the investments amortized cost basis
and its fair value at the balance sheet date. For debt securities that do not meet the
aforementioned criteria, the OTTI shall be separated into the amount representing the
credit loss and the amount related to all other factors. The amount of the total OTTI
related to the credit loss is determined based on the present value of cash flows
expected to be collected and is recognized in earnings. The amount of the total OTTI
related to other factors is recognized in other comprehensive income or loss, net of
applicable taxes. For equity securities, the entire amount of impairment is recognized
through earnings.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. 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.
  80




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 (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. When a loan is placed on nonaccrual status, all
interest accrued but not received 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.Certain Purchased Loans:The Company purchases individual loans; some of which have shown evidence of credit
deterioration since origination. These purchased loans are recorded at the
amount paid, such that there is no carryover of the sellers allowance for loan losses.
After acquisition, losses are recognized by an increase in the allowance for loan
losses.Such purchased loans are accounted for individually based on common risk characteristics
such as, credit score, loan type, and date of origination. The Company estimates the
amount and timing of expected cash flows for each purchased loan, and the expected cash
flows in excess of amount paid is recorded as interest income over the remaining life of
the loan (accretable yield). The excess of the loans contractual principal and
interest over expected cash flows is not recorded (nonaccretable difference).Over the life of the loan, expected cash flows continue to be estimated. If the present
value of expected cash flows is less than the carrying amount, a loss is recorded. If
the present value of expected cash flows is greater than the carrying amount, it is
recognized as part of future interest income.
  81




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Allowance for Loan Losses:The allowance for loan losses is a valuation allowance for probable incurred credit
losses. The allowance for loan losses is established through a provision for loan
losses charged to expense. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the allowance
balance required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated collateral
values, economic conditions, and other factors. Allocations of the allowance may be
made for specific loans, but the entire allowance is available for any loan that, in
managements judgment, should be charged off. The allowance consists of specific and
general components. The specific component relates to loans that are individually
classified as impaired.A loan is impaired when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to the contractual terms
of the loan agreement. Loans for which the terms have been modified resulting in a
concession, and for which the borrower is experiencing financial difficulties, are
considered troubled debt restructurings and classified as impaired. Factors considered
by management in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments when due. Loans
that experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment delays and
payment shortfalls on case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrowers prior payment record, and the amount of the
shortfall in relation to the principal and interest owed.Commercial and commercial real estate loans over $500 are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so that the
loan is reported, net, at the present value of estimated future cash flows using the
loans existing rate or at the fair value of collateral if repayment is expected solely
from the collateral. Large groups of smaller balance homogeneous loans, such as
consumer and residential real estate loans, are collectively evaluated for impairment,
and accordingly, they are not separately identified for impairment disclosures.
Troubled debt restructurings are separately identified for impairment disclosures and
are measured at the present value of estimated future cash flows using the loans
effective rate at inception. If a troubled debt restructuring is considered to be a
collateral dependent loan, the loan is reported, net, at the fair value of the
collateral. For troubled debt restructurings that subsequently default, the Company
determines the amount of reserve in accordance with the accounting policy for the
allowance for loan losses.
  82




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 The historical loss experience is determined by portfolio segment and is based on the
actual loss history experienced by the Company over the most recent 4 years. The
following portfolio segments have been identified:
 
    
    Acquisition Development and Construction (ADC)  CSRA
    
    ADC  Savannah, Georgia
    
    ADC  Greenville, South Carolina
    
    ADC-Athens, Georgia
    
    ADC Participations  Florida
    
    ADC Participations  Georgia
    
    Commercial Real Estate  Non owner occupied
    
    Commercial Real Estate  Owner occupied
    
    1-4 Family
    
    Consumer
    
    All other
 The following is a discussion of the risks characteristics of these portfolio segments.Acquisition, Development & Construction (ADC)  CSRA (Primary Market) ADC lending
carries all of the normal risks involved in lending including the changing nature of
borrower and guarantor financial conditions and the knowledge that the sale of the
completed lots and/or structures is likely the sole source of repayment as opposed to
other forms of borrower cash flow. In addition, this type of lending carries several
additional risk factors including: (1) timely project completion (contractor financial
condition, commodity prices, weather delays, prospective tenant financial condition);
(2) market factors (changing economic conditions, unemployment rates, end-user financing
availability, interest rates); (3) competition (similar product availability, bank
foreclosed properties); (4) end-product price stability.ADC  Savannah, Georgia ADC lending in the Savannah market carries all of the ADC
risks outlined for the CSRA plus the additional risk of lending outside of the Companys
traditional market area where our knowledge of that market is not as well
developed. Additionally, the Savannah market has additional economic factors at play
including the impacts of the port, tourism and secondary (vacation) properties.
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 ADC  Greenville, South Carolina ADC lending in the Greenville market carries all of
the risks outlined for the CSRA plus the additional risk of lending outside the
Companys traditional market area. However, since the Company has made the strategic
decision to cease operations in this market, the risk remaining in this segment should
diminish.ADC  Athens, Georgia ADC lending in the Athens market carries all of the risks
outlined for the CSRA. Also, Athens continues to operate as a suburb of the greater
Atlanta market. As such, it has been more susceptible to the recent significant price
declines and project slowdowns caused by the recent recessions. However, since the
Company has made the strategic decision to cease operations in this market, the risk
remaining in this segment should diminish.ADC Participations  Florida ADC participation lending on projects located in
Florida carries the ADC CSRA risks outlined above. Additionally, these loans also have
the risk of lending out of state (market, legal, etc.) and the risk of loss of control
as a junior participant subject to the direction/financial condition of the lead lender.
The bank has made the strategic decision to exit this portfolio segment and is not
actively seeking or originating new participations in the Florida geography. At
December 31, 2010, this portfolio segment has been reduced to two participation loans,
both of which have been individually analyzed for impairment and reserved accordingly.ADC Participations  Georgia- ADC participation lending on projects located in Georgia
outside the CSRA carries the ADC CSRA risks outlined above. Additionally, these loans
also have the risk of lending out of market and the risk of loss of control as a junior
participant subject to the direction/financial condition of the lead lender. The bank
has made the strategic decision to exit this portfolio segment and is not actively
seeking or originating new participations in the Georgia geography outside of our normal
market area. At December 31, 2010, this portfolio segment has been reduced to one
participation loan in the FAS 5 category.
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Commercial Real Estate  Non Owner Occupied This lending category includes loans for
multi-family, office, warehouse, retail, hotel/motel and other non-owner
occupied properties. Loans in this category carry more risk than owner-occupied
properties because the propertys cash flow is not derived from the owner of the
propertys business, but from unrelated tenants. These outside tenants are each subject
to their own set of business risks depending upon their own financial situation,
competitors, industry segment and general economic conditions. Therefore, the cash flow
from the property in the form of rent may not be as stable as a one-user, owner-occupied
property.The allowance is an amount that management believes will be adequate to absorb probable
incurred 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.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.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 probable 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 the allowance for loan losses.ALLL MethodologyThe Companys approach to ALLL reserve calculation uses two distinct perspectives, the
guidelines of using Financial Accounting Standards ASC 450 (Accounting for
Contingencies) and ASC 310 (Accounting by Creditors for Impairment of a Loan, for
individual loans). The process is generally as follows:
 
    
    Loans are grouped according in categories of similar risk
characteristics.(Portfolio segments)
    
    For each loan category, a four year average rolling historical net
loss rate is calculated, with the loss rate more heavily weighted to the most
recent two years loss history. An emergence factor is then applied to the average
historical net loss rate.
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 
    
    The historical loss ratios are adjusted for internal and external
qualitative factors within each loan category. The qualitative factor adjustment
may be further increased for loan classifications of watch rated and substandard
within each category. Factors include:
 
    
    levels and trends in delinquencies and impaired/classified/graded loans;
    
    changes in the quality of the loan review system;
    
    trends in volume and terms of loans;
    
    effects of changes in risk selection and underwriting standards, and other
changes in lending policies, procedures and practices;
    
    experience, ability, and depth of lending management and other relevant staff;
    
    national and local economic trends and conditions;
    
    changes in the value of underlying collateral;
    
    other external factors-competition, legal and regulatory requirements;
    
    effects of changes in credit concentrations
 
    
    The resultant loss factor is applied to each loan pool to calculate
the ALLL for each loan pool.
    
    The total of each loan pool is then added to the ALLL determined for
individual loans evaluated for impairment in accordance with ASC 310.
 Loans Held for Sale:Mortgage loans held for sale are generally sold with servicing rights released. 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 fair value, as determined by outstanding
commitments from investors.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.
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary
market and forward commitments for the future delivery of these mortgage loans are
accounted for as free standing derivatives. Fair values of these mortgage derivatives
are estimated based on changes in mortgage interest rates from the date the interest on
the loan is locked. The Company enters into forward commitments for the future delivery
of mortgage loans when interest rate locks are entered into, in order to hedge the
change in interest rates resulting from its commitments to fund the loans. Changes in
the fair values of these derivatives are included in net gains on sales of loans. Fair
values of these derivatives were $2 and $182 as of December 31, 2010 and 2009,
respectively.
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 (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.(f)
    
    Other Real EstateAssets acquired through or instead of loan foreclosure are initially recorded at lower
of cost or 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.(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, 2010.(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.
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 (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 recognizes interest related to income tax matters as interest expense and
penalties related to income tax matters as other expense.(j)
    
    Income (Loss) Per ShareBasic net income (loss) per share is net income (loss) divided by the weighted average
number of common shares outstanding during the period. Diluted net income (loss) per
share includes the dilutive effect of additional potential common shares issuable under
stock options. The calculation of diluted earnings (loss) per share for 2010 and 2009
excludes the dilutive effect of stock options outstanding as the effect is
anti-dilutive. Income per share is restated for all stock dividends through the date of
issuance of the financial statements.
 December 31,2010
    
    
    2009
    
    
    2008Weighted average common shares outstanding
for basic earnings per common share
    
    
    6,674,224
    
    
    
    6,422,867
    
    
    
    5,972,429Add: Dilutive effects of assumed exercises of
stock options
    
    
    
    
    
    
    
    
    
    
    39,260Weighted average number of common and
common equivalent shares outstanding
    
    
    6,674,224
    
    
    
    6,422,867
    
    
    
    6,011,689
 (k)
    
    Other Comprehensive Income (Loss)Comprehensive income (loss) consists of net income (loss) and other comprehensive income
(loss). 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 DisclosuresWhile the chief decision-makers monitor the revenue streams of the various products and
services, operations are managed and financial performance is evaluated on a Company
wide basis. Discrete financial information is not available other than on a Company
wide basis. Accordingly, all of the financial service operations are considered by
management to be aggregated in one reportable operating segment.
  88




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 (m)
    
    Adoption of New Accounting StandardsIn July 2010, the FASB amended existing guidance related to financing receivables and
the allowance for credit losses, which requires further disaggregated disclosures that
improve financial statement users understanding of 1) the nature of an entitys credit
risk associated with its financing receivables and 2) the entitys assessment of that
risk in estimating its allowance for credit losses as well as changes in the allowance
and the reasons for those changes. The new and amended disclosures as of the end of a
reporting period are effective for interim and annual reporting periods ending on or
after December 15, 2010. The disclosures about activity that occurs during a reporting
period are effective for interim and annual reporting periods beginning on or after
December 15, 2010. The adoption of this standard is not expected to have a material
effect on the Companys result of operations or financial position but it does require
expansion of the Companys disclosures.In January 2010, the FASB amended previous guidance related to fair value measurements
and disclosures, which requires new disclosures for transfers in and out of Levels 1 and
2 and requires a reconciliation to be provided for the activity in Level 3 fair value
measurements. A reporting entity should disclose separately the amounts of significant
transfers in and out of Levels 1 and 2 and provide an explanation for the transfers.
This guidance is effective for interim periods beginning after December 15, 2009, and
did not have a material effect on the Companys results of operations or financial
position.In the reconciliation for fair value measurements using unobservable inputs (Level 3) a
reporting entity should present separately information about purchases, sales,
issuances, and settlements on a gross basis rather than a net basis. Disclosures
relating to purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurement will become effective beginning after
December 15, 2010, and for interim periods within those fiscal years. The
adoption of this standard is not expected to have a material effect on the Companys
results of operations or financial position but it will require expansion of the
Companys future disclosures about fair value measurements.
  89




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 (n)
    
    Bank Owned Life InsuranceThe Company has purchased life insurance policies on certain key executives. Bank owned
life insurance is recorded at the amount that can be realized under the insurance
contract at the balance sheet date, which is the cash surrender value adjusted for other
charges or other amounts due that are probable at settlement.(o)
    
    Loss ContingenciesLoss contingencies, including claims and legal actions arising in the ordinary course of
business, are reported as liabilities when the likelihood of loss is probable and an
amount or range of loss can be reasonably estimated. Management does not believe there
now are such matters that will have a material effect on the consolidated financial
statements.(p)
    
    ReclassificationsSome items in the prior period financial statements were reclassified to conform to the
current presentation.(q)
    
    RoundingDollar amounts are rounded to thousands except share and per share data unless otherwise
noted.
 (2)
    
    Cash and Due From Banks
 The Companys subsidiaries are required by the Federal Reserve Bank to maintain average daily
cash balances. These required balances were $3,519 at December 31, 2010 and $5,199 at
December 31, 2009.
 (3)
    
    Investment Securities
 The following tables summarize the amortized cost and fair value of the available-for-sale and
held-to-maturity investment securities portfolio at December 31, 2010 and 2009 and the
corresponding amounts of unrealized gains and losses therein:
  90




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2010Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair value(Dollars in thousands)Available-for-sale:Obligations
of U.S. Government agencies
    
    $
    202,153
    
    
    
    527
    
    
    
    (1,763
    )
    
    
    200,917Obligations of states and
political subdivisions
    
    
    67,137
    
    
    
    318
    
    
    
    (3,337
    )
    
    
    64,118Mortgage-backed securitiesU.S. GSEs* MBS - residential
    
    
    141,524
    
    
    
    1,880
    
    
    
    (1,679
    )
    
    
    141,725U.S. GSEs CMO
    
    
    139,208
    
    
    
    1,756
    
    
    
    (630
    )
    
    
    140,334Other CMO
    
    
    3,382
    
    
    
    50
    
    
    
    (359
    )
    
    
    3,073Corporate bonds
    
    
    36,551
    
    
    
    467
    
    
    
    (885
    )
    
    
    36,133Equity securities
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2$
    589,957
    
    
    
    4,998
    
    
    
    (8,653
    )
    
    
    586,302Held-to-maturity:Obligations of states and
political subdivisions
    
    $
    310
    
    
    
    1
    
    
    
    
    
    
    
    311$
    310
    
    
    
    1
    
    
    
    
    
    
    
    311
 *
    
    Government sponsored entities 2009Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair value(Dollars in thousands)Available-for-sale:Obligations
of U.S. Government agencies
    
    $
    67,290
    
    
    
    43
    
    
    
    (1,003
    )
    
    
    66,330Obligations of states and
political subdivisions
    
    
    26,402
    
    
    
    299
    
    
    
    (521
    )
    
    
    26,180Mortgage-backed securitiesU.S. GSEs MBS -
residential
    
    
    87,113
    
    
    
    2,245
    
    
    
    (205
    )
    
    
    89,153U.S. GSEs CMO
    
    
    107,153
    
    
    
    1,116
    
    
    
    (1,427
    )
    
    
    106,842Other CMO
    
    
    7,834
    
    
    
    142
    
    
    
    (301
    )
    
    
    7,675Corporate bonds
    
    
    12,591
    
    
    
    35
    
    
    
    (2,594
    )
    
    
    10,032Equity securities
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4$
    308,387
    
    
    
    3,880
    
    
    
    (6,051
    )
    
    
    306,216Held-to-maturity:Obligations of states and
political subdivisions
    
    $
    490
    
    
    
    2
    
    
    
    
    
    
    
    492$
    490
    
    
    
    2
    
    
    
    
    
    
    
    492
  91




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 As of December 31, 2010, except for the U.S. Government agencies and government sponsored
entities, there was no issuer who represented 10% or more of stockholders equity within the
investment portfolio.Proceeds from sales of securities available-for-sale and the associated gains (losses) during
2010, 2009 and 2008 were as follows:
 December 31,2010
    
    
    2009
    
    
    2008(Dollars in thousands)Proceeds
    
    $
    72,296
    
    
    $
    127,524
    
    
    $
    27,285Gross Gains
    
    
    1,610
    
    
    
    3,132
    
    
    
    211Gross Losses
    
    
    339
    
    
    
    603
    
    
    
    288
 Investment securities with a carrying amount of approximately $298,254 and $161,449 at
December 31, 2010 and 2009, respectively, were pledged to secure public and trust deposits,
and for other purposes required or permitted by law.The amortized cost and fair value of the investment securities portfolio excluding equity
securities are shown below by contractual maturity. Expected maturities may differ from
contractual maturities if borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
 Amorized
    
    
    Estimatedcost
    
    
    fair value(Dollars in thousands)Available-for-sale:After one year through five years
    
    $
    19,766
    
    
    
    19,758After five years through ten years
    
    
    93,723
    
    
    
    93,806After ten years
    
    
    476,466
    
    
    
    472,736$
    589,955
    
    
    
    586,300Held-to-maturity:After one year through five years
    
    $
    310
    
    
    
    311$
    310
    
    
    
    311
  92




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 The following tables summarize the investment securities with unrealized losses at year-end
2010 and 2009, aggregated by investment category and length of time the individual securities
have been in a continuous unrealized loss position.
 December 31, 2010Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealizedfair value
    
    
    loss
    
    
    fair value
    
    
    loss
    
    
    fair value
    
    
    loss(Dollars in thousands)Temporarily impairedObligations
of U.S. Government agencies
    
    $
    99,306
    
    
    
    1,763
    
    
    
    
    
    
    
    
    
    
    
    99,306
    
    
    
    1,763Obligations of states and
political subdivisions
    
    
    45,906
    
    
    
    3,245
    
    
    
    2,309
    
    
    
    92
    
    
    
    48,215
    
    
    
    3,337Mortgage-backed securitiesU.S. GSEs MBS
- residential
    
    
    81,783
    
    
    
    1,538
    
    
    
    509
    
    
    
    141
    
    
    
    82,292
    
    
    
    1,679U.S. GSEs CMO
    
    
    46,776
    
    
    
    630
    
    
    
    
    
    
    
    
    
    
    
    46,776
    
    
    
    630Other CMO
    
    
    
    
    
    
    
    
    
    
    2,085
    
    
    
    359
    
    
    
    2,085
    
    
    
    359Corporate bonds
    
    
    22,385
    
    
    
    481
    
    
    
    3,880
    
    
    
    404
    
    
    
    26,265
    
    
    
    885$
    296,156
    
    
    
    7,657
    
    
    
    8,783
    
    
    
    996
    
    
    
    304,939
    
    
    
    8,653
 December 31, 2009Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealizedfair value
    
    
    loss
    
    
    fair value
    
    
    loss
    
    
    fair value
    
    
    loss(Dollars in thousands)Temporarily impairedObligations
of U.S. Government agencies
    
    $
    43,528
    
    
    
    1,003
    
    
    
    
    
    
    
    
    
    
    
    43,528
    
    
    
    1,003Obligations of states and
political subdivisions
    
    
    8,644
    
    
    
    220
    
    
    
    4,457
    
    
    
    301
    
    
    
    13,101
    
    
    
    521Mortgage-backed securitiesU.S. GSEs MBS
- residential
    
    
    21,996
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    21,996
    
    
    
    205U.S. GSEs CMO
    
    
    61,373
    
    
    
    1,408
    
    
    
    665
    
    
    
    19
    
    
    
    62,038
    
    
    
    1,427Other CMO
    
    
    
    
    
    
    
    
    
    
    4,243
    
    
    
    285
    
    
    
    4,243
    
    
    
    285Corporate bonds
    
    
    733
    
    
    
    267
    
    
    
    6,291
    
    
    
    2,327
    
    
    
    7,024
    
    
    
    2,594$
    136,274
    
    
    
    3,103
    
    
    
    15,656
    
    
    
    2,932
    
    
    
    151,930
    
    
    
    6,035Other-than-temporarily
impairedMortgage-backed securitiesOther CMO
    
    $
    
    
    
    
    
    
    
    
    748
    
    
    
    16
    
    
    
    748
    
    
    
    16$
    136,274
    
    
    
    3,103
    
    
    
    16,404
    
    
    
    2,948
    
    
    
    152,678
    
    
    
    6,051
 Other-Than-Temporary Impairment  December 31, 2010Management evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an
evaluation. Investment securities classified as available-for-sale or held-to-maturity are
generally evaluated for OTTI under the provisions of ASC 320-10, Investments  Debt and
Equity Securities.In determining OTTI, management considers many factors, including: (1) the
length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, (3) whether the market decline was
affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the
debt security or more likely than not will be required to sell the debt security before its
anticipated recovery. The assessment of whether an other-than-temporary decline exists
involves a high degree of subjectivity and judgment and is based on the information available
to management at a point in time.
  93




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell the security or it is more likely than not it will be required to sell the
security before recovery of its amortized cost basis. If an entity intends to sell or it is
more likely than not it will be required to sell the security before recovery of its amortized
cost basis, the OTTI shall be recognized in earnings equal to the entire difference between
the investments amortized cost basis and its fair value at the balance sheet date. If an
entity does not intend to sell the security and it is not more likely than not that the entity
will be required to sell the security before recovery of its amortized cost basis, the OTTI
shall be separated into the amount representing the credit loss and the amount related to all
other factors. The amount of the total OTTI related to the credit loss is determined based on
the
present value of cash flows expected to be collected and is recognized in earnings. The
amount of the total OTTI related to other factors is recognized in other comprehensive income
or loss, net of applicable taxes. The previous amortized cost basis less the OTTI recognized
in earnings becomes the new amortized cost basis of the investment.As of December 31, 2010, the Companys security portfolio consisted of 329 securities, 160 of
which were in an unrealized loss position. Of these securities with unrealized losses, 41.06%
were related to the Companys mortgage backed and corporate securities as discussed below.Mortgage-backed SecuritiesAt December 31, 2010, $282,059 or approximately 98.92% of the Companys mortgage-backed
securities were issued by U.S. government-sponsored entities and agencies, primarily the
Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage
Corporation (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae),
institutions which the government has affirmed its commitment to support. Because the decline
in fair value is attributable to changes in interest rates and illiquidity, and not credit
quality, and because the Company does not have the intent to sell these mortgage-backed
securities and it is likely that it will not be required to sell the securities before their
anticipated recovery, the Company does not consider these securities to be
other-than-temporarily impaired at December 31, 2010.The Companys mortgage-backed securities portfolio also includes five non-agency
collateralized mortgage obligations with a market value of $3,073, of which four had
unrealized losses of approximately $359 at December 31, 2010. These non-agency securities
were rated AAA at purchase.
  94




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 At December 31, 2010, four of these non-agency securities were rated below investment grade
and a cash flow analysis was performed to evaluate OTTI. The assumptions used in the model
include expected future default rates, loss severity and prepayments. The model also takes
into account the structure of the security including credit support. Based on these
assumptions, the model calculates and projects the timing and amount of interest and principal
payments expected for the security. In addition, the model was used to stress each
security, or make assumptions more severe than expected activity, to determine the degree to
which assumptions could deteriorate before the security could no longer fully support
repayment. During 2009, two of these securities were considered to be other-than-temporarily
impaired. Upon completion of the December 31, 2010 analysis, our model indicated that none of
these securities had additional other-than-temporary impairment. During the third quarter of
2010, one of these securities was considered other-than-temporarily impaired and an OTTI loss
of $96 was recorded. At December 31, 2010 this security is now in an unrealized gain position
and it remains classified as available-for-sale, based on an improvement in underlying
assumptions during the fourth quarter.At December 31, 2010, the fair values of three collateralized mortgage obligations totaling
$2,410 were measured using Level 3 inputs because the market for them has become illiquid, as
indicated by few, if any, trades during the period. The discount rates used in the valuation
model were based on a yield of 10% over 1 month libor that the market would require for
collateralized mortgage obligations with maturities and risk characteristics similar to the
securities being measured.Corporate SecuritiesThe Company holds twenty corporate securities totaling $36,133, of which thirteen had an
unrealized loss of $885 at December 31, 2010. The Companys unrealized losses on corporate
securities relate primarily to its investment in single issuer corporate and corporate trust
preferred securities. At December 31, 2010, two of the corporate securities were rated below
Investment grade and five securities to two issuers were not rated. None of the issuers were
in default at December 31, 2010 but in January of 2011 the Company was notified that two trust
preferred securities to the two issuers not rated had elected to defer interest payments. The
issuers are both bank holding companies with operations in the Southeast. The Company
considered several factors including the financial condition and near term prospects of the
issuers and concluded that the decline in fair value was primarily attributable to temporary
illiquidity and the financial crisis affecting these markets and not necessarily the expected
cash flows of the individual securities. Although these issuers have indicated they will
defer payments going forward, the Company has considered the capital position of the
subsidiary banks, the liquidity of the holding company, the existence and severity of publicly
available regulatory agreements, and the fact that these deferrals are coming after the most
severe impact of the national and regional recession. The prospect of capital formation in
the current market, improving operating results of the industry overall have caused the
Company to conclude that a return to normal subsidiary dividends and thus interest payments on
the debt for these issuers is reasonably assured at this time. Because the Company does not
have the intent to sell these securities and it is likely that it will not be required to sell
the securities before their anticipated recovery, the Company does not consider these
securities to be other-than-temporarily impaired at December 31, 2010.
  95




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 At December 31, 2010, the fair values of twelve corporate securities totaling $10,741 were
measured using Level 3 inputs because the market for them has become illiquid, as indicated by
few, if any, trades during the period. The discount rates used in the valuation model were
based on current spreads to U.S. Treasury rates of long-term corporate debt obligations with
maturities and risk characteristics similar to the subordinated debentures being measured. An
additional adjustment to the discount rate for illiquidity in the market for subordinated
debentures was not considered necessary based on the illiquidity premium already present in
the spreads used to estimate the discount rate.The table below presents a rollforward of the credit losses recognized in earnings for the
twelve month period ended December 31, 2010:
 Beginning balance, January 1, 2010
    
    $
    475Amounts related to credit loss for which
an other-than-temporary impairment
was not previously recognized
    
    
    96Additions/SubtractionsAmounts realized for securities sold during the period
    
    
    Amounts related to securities for which the company
intends to sell or that it will
be more likely than not
that the company will be required
to sell prior to
recovery of amortized cost basis
    
    
    Reductions for increase in cash flows expected to be
collected that are recognized
over the remaining
life of the security
    
    
    Increases to the amount related to the credit
loss for which
other-than-temporary impairment
was previously recognized
    
    
    Ending balance, December 31, 2010
    
    $
    571
  96




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Total other-than-temporary impairment recognized in accumulated other comprehensive loss at
December 31, 2010 was not material.Other-Than-Temporary Impairment  December 31, 2009As of December 31, 2009, the Companys security portfolio consisted of 247 securities, 100 of
which were in an unrealized loss position. The majority of unrealized losses were related to
the Companys mortgage-backed and corporate securities, as discussed below.Mortgage-backed SecuritiesAt December 31, 2009, $195,995 or approximately 96.23% of the Companys mortgage-backed
securities totaling $203,670 were issued by U.S. government-sponsored entities and agencies,
primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has
affirmed its commitment to support. Because the decline in fair value is
attributable to changes in interest rates and illiquidity, and not credit quality, and because
the Company does not have the intent to sell these mortgage-backed securities and it is likely
that it will not be required to sell the securities before their anticipated recovery, the
Company does not consider these securities to be other-than-temporarily impaired at December
31, 2009.The Companys mortgage-backed securities portfolio also includes eleven non-agency
collateralized mortgage obligations with a market value of $7,675, seven of which had
unrealized losses of approximately $301 at December 31, 2009. These non-agency securities
were rated AAA at purchase.At December 31, 2009, five of these non-agency securities were rated below investment grade
and a cash flow analysis was performed to evaluate OTTI. The assumptions used in the model
include expected future default rates, loss severity and prepayments. The model also takes
into account the structure of the security including credit support. Based on these
assumptions, the model calculates and projects the timing and amount of interest and principal
payments expected for the security. In addition, the model was used to stress each
security, or make assumptions more severe than expected activity, to determine the degree to
which assumptions could deteriorate before the security could no longer fully support
repayment. In 2009 two of these securities had OTTI losses of $491, of which $475 was
recorded as expense and $16 was recorded in other comprehensive income or loss. These two
securities remained classified as available-for-sale at December 31, 2009.At December 31, 2009, the fair values of three collateralized mortgage obligations totaling
$3,780 were measured using Level 3 inputs because the market for them has become illiquid, as
indicated by few, if any, trades during the period. These securities were previously measured
using Level 2 inputs. The discount rates used in the valuation model were based on a yield
that the market would require for collateralized mortgage obligations with maturities and risk
characteristics similar to the securities being measured.
  97




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Corporate SecuritiesThe Company held thirteen corporate securities to eight issuers totaling $10,032, of which ten
had an unrealized loss of $2,594 at December 31, 2009. The Companys unrealized losses on
corporate securities relate primarily to its investment in single issuer corporate and
corporate trust preferred securities. At December 31, 2009, three of the corporate securities
were rated Speculative and three were rated Investment grade by at least one of the major
rating agencies, (Moodys, S&P and Fitch). Seven of the securities to three issuers were not
rated. None of the issuers were in default and to date all interest payments have been made as
contracted. The Company considered several factors including the financial condition and near
term prospects of the issuers and concluded that the decline in fair value was primarily
attributable to temporary illiquidity and an increase in credit spreads for financial
institution debt issuers due to the financial crisis affecting these
markets and not necessarily the expected cash flows of the individual securities. Because the
Company does not have the intent to sell these securities and it is likely that it will not be
required to sell the securities before their anticipated recovery, the Company does not
consider these securities to be other-than-temporarily impaired at December 31, 2009.At December 31, 2009, the fair values of all thirteen corporate securities were measured using
Level 3 inputs because the market for them has become illiquid, as indicated by few, if any,
trades during the period. These securities, eight of which totaled $4,307 were previously
measured using Level 2 inputs. The discount rates used in the valuation model were based on
current spreads to U.S. Treasury rates of long-term corporate debt obligations with maturities
and risk characteristics similar to the subordinated debentures being measured. An additional
adjustment to the discount rate for illiquidity in the market for subordinated debentures was
not considered necessary based on the illiquidity premium already present in the spreads used
to estimate the discount rate.In addition to the securities discussed above, the Company had an investment in the senior
debt of Silverton Financial Services, Inc. of $500 for which an other-than-temporary
impairment charge was taken in the first half of 2009.
  98




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 The table below presents a rollforward of the credit losses recognized in earnings for the
twelve month period ended December 31, 2009:
 Beginning balance, January 1, 2009
    
    $
    Amounts related to credit loss for which
an other-than-temporary impairment
was not previously recognized
    
    
    975Additions/SubtractionsAmounts realized for securities sold during the period
    
    
    Amounts related to securities for which the company
intends to sell or that it will
be more likely than not
that the company will be required
to sell prior to
recovery of amortized cost basis
    
    
    Reductions for previous credit losses on securities
charged off
    
    
    (500
    )Reductions for increase in cash flows expected to be
collected that are recognized
over the remaining
life of the security
    
    
    Increases to the amount related to the credit
loss for which
other-than-temporary was
previously
recognized
    
    
    Ending balance, December 31, 2009
    
    $
    475
 The following details the two mortgage-backed securities and one single issuer corporate debt
security with OTTI at December 31, 2009 and the related credit losses recognized in earnings:
 SilvertonFinancialServices, Inc
    
    
    CMO 1
    
    
    CMO 2
    
    
    Total(Dollars in thousands)Amount of
other-than temporary-impairment related to credit losses at January 1, 2009
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Addition for credit losses recognized in earnings
    
    
    500
    
    
    
    155
    
    
    
    320
    
    
    
    975Amount of other-than temporary-impairment
 related to credit losses at December 31, 2009
    
    $
    500
    
    
    $
    155
    
    
    $
    320
    
    
    $
    975
 Further deterioration in economic conditions could cause the Company to record additional
impairment charges related to credit losses of up to $2,034 which is the carrying amount of
these securities.
  99




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Total other-than-temporary impairment recognized in accumulated other comprehensive loss was
$16 for securities available-for-sale at December 31, 2009.The following table details the credit ratings and the total impairment loss related to all
other factors recorded as a component of accumulated other comprehensive income or loss for
the Companys mortgage-backed securities.
 EstimatedAmortized
    
    
    Fair
    
    
    Unrealized
    
    
    Ratings as of Dec. 31, 2009(Dollars in thousands)
    
    cost
    
    
    Value
    
    
    Gains (Losses)
    
    
    S&P
    
    
    Fitch
    
    
    MoodysSilverton Financial
Services, Inc.
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    NR
    
    NR
    
    NRCMO 1
    
    
    764
    
    
    
    748
    
    
    
    (16
    )
    
    CCC
    
    C
    
    NRCMO 2
    
    
    1,270
    
    
    
    1,399
    
    
    
    129
    
    
    CCC
    
    NR
    
    Caa2Total
    
    $
    2,034
    
    
    $
    2,147
    
    
    $
    113
 CMO 2 was in an unrealized loss position during 2009 and an OTTI charge of $320 was
recognized. As of December 31, 2009, the fair value increased to result in an unrealized gain
position.
  100




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (4)
    
    LoansLoans at year end were as follows:
 2010
    
    
    2009(Dollars in thousands)Commercial, financial, and
agricultural
    
    $
    189,128
    
    
    $
    173,974Real estate:Commercial
    
    
    327,458
    
    
    
    322,864Residential
    
    
    157,680
    
    
    
    147,403Acquisition, development and construction
    
    
    182,412
    
    
    
    270,062Consumer installment
    
    
    17,412
    
    
    
    23,241874,090
    
    
    
    937,544Less allowance for loan losses
    
    
    26,657
    
    
    
    22,338Less deferred loan origination fees
(costs)
    
    
    (5
    )
    
    
    55$
    847,438
    
    
    $
    915,151
 Activity in the allowance for loan losses was as follows:
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)Balance, beginning
of year
    
    $
    22,338
    
    
    
    14,742
    
    
    
    11,800Provision for loan losses
    
    
    15,801
    
    
    
    30,904
    
    
    
    9,055Charge-offs
    
    
    (12,588
    )
    
    
    (24,133
    )
    
    
    (6,736
    )Recoveries
    
    
    1,106
    
    
    
    825
    
    
    
    623Balance, end of year
    
    $
    26,657
    
    
    
    22,338
    
    
    
    14,742
  101




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 The following table presents the balance in the allowance for loan losses and the recorded
investment in loans by portfolio segment and based on impairment method as of December 31,
2010.
 Commercial,Financial, and
    
    
    CRE - Owner
    
    
    CRE - Non Owner
    
    
    Residential
    
    
    ADC
    
    
    ADC
    
    
    ADC
    
    
    ADC
    
    
    ADC
    
    
    ADCAgricultural
    
    
    Occupied
    
    
    Occupied
    
    
    Real Estate
    
    
    CSRA
    
    
    Savannah
    
    
    Greenville
    
    
    Athens
    
    
    Participations - FL
    
    
    Participations - GA
    
    
    Consumer(Dollars in thousands)Allowance for loan losses:Ending balance attributable to loans:Individually evaluated for impairment
    
    $
    
    
    
    
    3
    
    
    
    210
    
    
    
    42
    
    
    
    156
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    888
    
    
    
    
    
    
    
    Collectively evaluated for impairment
    
    
    3,463
    
    
    
    3,918
    
    
    
    4,567
    
    
    
    5,330
    
    
    
    4,941
    
    
    
    278
    
    
    
    284
    
    
    
    796
    
    
    
    
    
    
    
    975
    
    
    
    631$
    3,463
    
    
    
    3,921
    
    
    
    4,777
    
    
    
    5,372
    
    
    
    5,097
    
    
    
    453
    
    
    
    284
    
    
    
    796
    
    
    
    888
    
    
    
    975
    
    
    
    631Loans:Individually evaluated for impairment
    
    
    1,744
    
    
    
    519
    
    
    
    3,407
    
    
    
    4,971
    
    
    
    4,492
    
    
    
    2,066
    
    
    
    150
    
    
    
    4,193
    
    
    
    3,506
    
    
    
    
    
    
    
    Collectively evaluated for impairment
    
    
    187,384
    
    
    
    183,944
    
    
    
    139,588
    
    
    
    152,709
    
    
    
    144,078
    
    
    
    8,919
    
    
    
    1,523
    
    
    
    6,985
    
    
    
    
    
    
    
    6,500
    
    
    
    17,412$
    189,128
    
    
    
    184,463
    
    
    
    142,995
    
    
    
    157,680
    
    
    
    148,570
    
    
    
    10,985
    
    
    
    1,673
    
    
    
    11,178
    
    
    
    3,506
    
    
    
    6,500
    
    
    
    17,412
  102




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Individually impaired loans were as follows:
 2010
    
    
    2009(Dollars in thousands)Year end loans with no allocated
allowance
for loan losses
    
    $
    10,679
    
    
    $
    10,391Year end loans with allocated allowance
for loan losses
    
    
    14,369
    
    
    
    24,276$
    25,048
    
    
    $
    34,667Amount of the allowance for loan loss
allocated
    
    $
    1,474
    
    
    $
    1,979
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)Average of individually impaired loans
during year
    
    $
    25,580
    
    
    $
    37,212
    
    
    $
    29,397Interest income recognized during impairment
    
    
    399
    
    
    
    784
    
    
    
    702Cash-basis interest income recognized
    
    
    399
    
    
    
    784
    
    
    
    702
  103




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 The following table presents loans individually evaluated for impairment by class of loans as
of December 31, 2010.
 Allowance forUnpaid Principal
    
    
    Recorded
    
    
    Loan LossesBalance
    
    
    Investment
    
    
    Allocated(Dollars in thousands)With no related allowance recorded:Commercial, financial, and
agricultural:Commerical
    
    $
    8
    
    
    
    8
    
    
    
    Financial
    
    
    
    
    
    
    
    
    
    
    Agricultural
    
    
    1,016
    
    
    
    1,016
    
    
    
    Equity lines
    
    
    720
    
    
    
    720
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Commercial real estate:Owner occupied
    
    
    390
    
    
    
    390
    
    
    
    Non Owner occupied
    
    
    180
    
    
    
    180
    
    
    
    Residential real estate:Secured by first liens
    
    
    1,742
    
    
    
    1,742
    
    
    
    Secured by junior liens
    
    
    
    
    
    
    
    
    
    
    Acquisition, development and
construction:Residential
    
    
    636
    
    
    
    636
    
    
    
    Other
    
    
    5,987
    
    
    
    5,987
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    With an allowance recorded:Commercial, financial, and
agricultural:Commerical
    
    
    
    
    
    
    
    
    
    
    Financial
    
    
    
    
    
    
    
    
    
    
    Agricultural
    
    
    
    
    
    
    
    
    
    
    Equity lines
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Commercial real estate:Owner occupied
    
    
    129
    
    
    
    129
    
    
    
    3Non Owner occupied
    
    
    3,227
    
    
    
    3,230
    
    
    
    210Residential real estate:Secured by first liens
    
    
    3,229
    
    
    
    3,234
    
    
    
    42Secured by junior liens
    
    
    
    
    
    
    
    
    
    
    Acquisition, development and
construction:Residential
    
    
    156
    
    
    
    156
    
    
    
    Other
    
    
    7,628
    
    
    
    7,638
    
    
    
    1,219Consumer
    
    
    
    
    
    
    
    
    
    
    $
    25,048
    
    
    
    25,066
    
    
    
    1,474
  104




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance
homogeneous loans that are collectively evaluated for impairment and individually classified
impaired loans.The following table presents the recorded investment in nonaccrual and loans past due over 90
days still on accrual by class of loans as of December 31, 2010.
 Loans Past Due90 Days or MoreNonaccrual
    
    
    Still Accruing(Dollars in thousands)Commercial, financial, and
agricultural:Commerical
    
    $
    190
    
    
    
    Financial
    
    
    
    
    
    
    Agricultural
    
    
    1,250
    
    
    
    Equity lines
    
    
    1,136
    
    
    
    Other
    
    
    348
    
    
    
    Commercial real estate:Owner occupied
    
    
    1,207
    
    
    
    Non Owner occupied
    
    
    2,586
    
    
    
    Residential real estate:Secured by first liens
    
    
    4,551
    
    
    
    69Secured by junior liens
    
    
    183
    
    
    
    Acquisition, development and
construction:Residential
    
    
    1,275
    
    
    
    Other
    
    
    10,678
    
    
    
    Consumer
    
    
    301
    
    
    
    $
    23,705
    
    
    
    69
  105




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 The following table presents the aging of the recorded investment in past due loans as of
December 31, 2010 by class of loans.
 30 - 89 Days
    
    
    90 Days or
    
    
    Nonaccrual
    
    
    Total
    
    
    Loans NotPast Due
    
    
    More Past Due
    
    
    Loans
    
    
    Past Due
    
    
    Past Due
    
    
    Total(Dollars in thousands)Commercial, financial, and
agricultural:Commerical
    
    $
    170
    
    
    
    
    
    
    
    190
    
    
    
    360
    
    
    
    117,786
    
    
    
    118,146Financial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,588
    
    
    
    3,588Agricultural
    
    
    
    
    
    
    
    
    
    
    1,250
    
    
    
    1,250
    
    
    
    12,940
    
    
    
    14,190Equity lines
    
    
    214
    
    
    
    
    
    
    
    1,136
    
    
    
    1,350
    
    
    
    41,687
    
    
    
    43,037Other
    
    
    
    
    
    
    
    
    
    
    348
    
    
    
    348
    
    
    
    9,819
    
    
    
    10,167Commercial real estate:Owner occupied
    
    
    317
    
    
    
    
    
    
    
    1,207
    
    
    
    1,524
    
    
    
    182,939
    
    
    
    184,463Non Owner occupied
    
    
    521
    
    
    
    
    
    
    
    2,586
    
    
    
    3,107
    
    
    
    139,888
    
    
    
    142,995Residential real estate:Secured by first liens
    
    
    2,417
    
    
    
    69
    
    
    
    4,551
    
    
    
    7,037
    
    
    
    140,238
    
    
    
    147,275Secured by junior
liens
    
    
    155
    
    
    
    
    
    
    
    183
    
    
    
    338
    
    
    
    10,067
    
    
    
    10,405Acquisition, development and
construction:Residential
    
    
    
    
    
    
    
    
    
    
    1,275
    
    
    
    1,275
    
    
    
    41,538
    
    
    
    42,813Other
    
    
    121
    
    
    
    
    
    
    
    10,678
    
    
    
    10,799
    
    
    
    128,800
    
    
    
    139,599Consumer
    
    
    31
    
    
    
    
    
    
    
    301
    
    
    
    332
    
    
    
    17,080
    
    
    
    17,412$
    3,946
    
    
    
    69
    
    
    
    23,705
    
    
    
    27,720
    
    
    
    846,370
    
    
    
    874,090
 Troubled Debt Restructurings:The Company had troubled debt restructurings with a balance of $3,514 and $1,656 included in
impaired loans for 2010 and 2009. The Company has allocated $80 and $0 of specific reserves
to customers whose loan terms have been modified in troubled debt restructurings as of
December 31, 2010 and 2009. The Company is not committed to lend additional amounts as of
December 31, 2010 and 2009 to customers with outstanding loans that are classified as troubled
debt restructurings.Credit Quality Indicators:The Company categorizes loans into risk categories based on relevant information about the
ability of borrowers to service their debt such as: current financial information, historical
payment experience, credit documentation, public information, and current economic trends,
among other factors. The Company, through its originating account officer, places an initial
credit risk rating on every loan. An annual review and analysis of loan relationships
(irrespective of loan types included in the overall relationship) with total related exposure
of $500 or greater is performed by the Credit Administration department in order to update
risk ratings given current available information. The Company uses the following definitions
for risk ratings.
  106




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Watch: Loans classified as watch have a potential weakness that deserves
managements close attention. If left uncorrected, these potential weaknesses may
result in deterioration of the repayment prospects for the loan or of the
institutions credit position at some future date.Substandard: Loans classified as substandard are inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral pledged,
if any. Loans so classified have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are not
corrected.Doubtful: Loans classified as doubtful have all the weaknesses inherent in those
classified as substandard, with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
 Loans not meeting the criteria above that are analyzed individually as part of the above
described process are considered to be pass rated loans. As of December 31, 2010, and based
on the most recent analysis performed, the risk category of loans by class of loans is as
follows.
  107




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Pass
    
    
    Watch
    
    
    Substandard
    
    
    Doubtful(Dollars in thousands)Commercial, financial, and
agricultural:Commerical
    
    $
    103,337
    
    
    
    8,074
    
    
    
    6,735
    
    
    
    Financial
    
    
    1,103
    
    
    
    2,485
    
    
    
    
    
    
    
    Agricultural
    
    
    9,343
    
    
    
    2,609
    
    
    
    2,238
    
    
    
    Equity lines
    
    
    39,144
    
    
    
    1,915
    
    
    
    1,978
    
    
    
    Other
    
    
    8,893
    
    
    
    926
    
    
    
    348
    
    
    
    Commercial real estate:Owner occupied
    
    
    157,155
    
    
    
    22,329
    
    
    
    4,979
    
    
    
    Non Owner occupied
    
    
    119,160
    
    
    
    16,579
    
    
    
    7,256
    
    
    
    Residential real estate:Secured by first
liens
    
    
    124,261
    
    
    
    14,837
    
    
    
    8,177
    
    
    
    Secured by junior
liens
    
    
    9,418
    
    
    
    708
    
    
    
    279
    
    
    
    Acquisition, development and
construction:Residential
    
    
    38,374
    
    
    
    2,721
    
    
    
    1,718
    
    
    
    Other
    
    
    92,514
    
    
    
    23,285
    
    
    
    23,800
    
    
    
    Consumer
    
    
    16,247
    
    
    
    567
    
    
    
    598
    
    
    
    $
    718,949
    
    
    
    97,035
    
    
    
    58,106
    
    
    
    
 The Company considers the performance of the loan portfolio and its impact on the
allowance for loan losses. For residential and consumer loan classes, the Company also
evaluates credit quality based on the aging status of the loan, which was previously
presented, and by payment activity. The following table presents the recorded investment in
residential and consumer loans based on payment activity as of December 31, 2010.
 Residential Real EstateSecured by
    
    
    Secured byFirst Liens
    
    
    Junior Liens
    
    
    Consumer(Dollars in thousands)Performing
    
    $
    141,712
    
    
    
    10,222
    
    
    
    17,111Nonperforming
    
    
    5,563
    
    
    
    183
    
    
    
    301Total
    
    $
    147,275
    
    
    
    10,405
    
    
    
    17,412
  108




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Purchased Loans:There were no purchased loans in 2010 and 2008. Loans purchased in 2009 totaled $2,121 with
an allowance of $706 resulting in a carrying amount of $1,415.Related Party Loans:The Company has direct and indirect loans outstanding to certain executive officers and
directors, including affiliates, and principal holders of the Companys securities.The following is a summary of the activity in loans outstanding to executive officers and
directors, including affiliates, and principal holders of the Companys securities for the
year ended December 31, 2010:
 Dollars in thousandsBalance at beginning of year
    
    $
    35,854New loans
    
    
    59,005Effect of changes in composition of related parties
    
    
    (25
    )Principal repayments
    
    
    (60,908
    )Balance at end of year
    
    $
    33,926
 The Company is also committed to extend credit to certain directors and executives of the
Company, including companies in which they are principal owners, through personal lines of
credit, letters of credit, and other loan commitments. As of December 31, 2010, available
balances on these commitments to these persons aggregated approximately $10,728.
 (5)
    
    Real Estate Owned
 The following table presents a roll forward of other real estate owned as of December 31,
2010, 2009 and 2008, respectively.
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)Beginning balance, January 1
    
    $
    7,974
    
    
    $
    5,734
    
    
    $
    Additions
    
    
    9,395
    
    
    
    20,752
    
    
    
    6,386Provision charged to expense
    
    
    (1,909
    )
    
    
    (588
    )
    
    
    Sales
    
    
    (8,008
    )
    
    
    (12,183
    )
    
    
    (715
    )Gain (loss) on sale of OREO
    
    
    299
    
    
    
    (5,741
    )
    
    
    63Ending balance, December 31
    
    $
    7,751
    
    
    $
    7,974
    
    
    $
    5,734
  109




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Activity in the valuation allowance was as follows:
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)Beginning balance
    
    $
    588
    
    
    $
    
    
    
    $
    Provision charged to expense
    
    
    1,909
    
    
    
    588
    
    
    
    Sales
    
    
    (382
    )
    
    
    
    
    
    
    Ending balance
    
    $
    2,115
    
    
    $
    588
    
    
    $
    
 Expenses related to foreclosed assets include:
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)(Gain) loss on sale of OREO
    
    $
    (299
    )
    
    $
    5,741
    
    
    $
    (63
    )OREO expenses, net of
rental income
    
    
    363
    
    
    
    248
    
    
    
    72Provision charged to expense
    
    
    1,909
    
    
    
    588
    
    
    
    $
    1,973
    
    
    $
    6,577
    
    
    $
    9
 (6)
    
    Fair Value Measurements
 Fair value is the exchange price that would be received to sell an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard describes
three levels of inputs that may be used to measure fair values:
 Level 1:
    
    Quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement date.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, or other inputs that are observable or can be corroborated by observable
market data.Level 3:
    
    Significant unobservable inputs that reflect a companys own assumptions about
the assumptions that market participants would use in pricing an asset or liability.
  110




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 In determining the appropriate levels, the Company used the following methods and significant
assumptions to estimate the fair value of each type of financial instrument:
 Investment Securities: The fair values for investment securities are determined by
quoted market prices, if available (Level 1). For securities where quoted prices are not
available, fair values are calculated based on market prices of similar securities (Level 2).
For securities where quoted prices or market prices of similar securities are not available,
fair values are calculated using discounted cash flows or other market indicators (Level 3) as
more fully discussed in Note 3. Discounted cash flows are calculated using spread to swap and
LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and
optionality. During times when trading is more liquid, broker quotes are used (if available)
to validate the model. Rating agency and industry research reports as well as defaults and
deferrals on individual securities are reviewed and incorporated into the calculations.
 Mortgage Banking Derivatives: The fair value of mortgage banking derivatives is
determined by individual third party sales contract prices for the specific loans held at each
reporting period end (Level 2 inputs). The fair value adjustment is included in other assets.
 Loans Held for Sale: Loans held for sale are carried at fair value, as determined by
outstanding commitments, from third party investors (Level 2).
 Impaired Loans: The fair value of impaired loans with specific allocations of the
allowance for loan losses is generally based on recent real estate appraisals. These
appraisals may utilize a single valuation approach or a combination of approaches including
comparable sales and the income approach. Adjustments are routinely made in the appraisal
process by the appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are typically significant and result in a Level 3
classification of the inputs for determining fair value.
 Investments in Tax Credits: The fair values for tax credits are measured on a
recurring basis and are based upon total credits and deductions remaining to be allocated and
total estimated credits and deductions to be allocated (Level 3 inputs).
 Other Real Estate Owned: The fair value of other real estate owned is generally based
on recent real estate appraisals. These appraisals may utilize a single valuation approach or
a combination of approaches including comparable sales and the income approach. Adjustments
are routinely made in the appraisal process by the appraisers to adjust for differences
between the comparable sales and income data available. Management may adjust the appraised
value for estimated costs to sell. Such adjustments are typically significant and result in a
Level 3 classification of the inputs for determining fair value.
  111




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Assets and Liabilities Measured on a Recurring Basis
 The following tables present the balances of assets and liabilities measured at fair value on
a recurring basis by level within the hierarchy as of December 31, 2010 and 2009:
 Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Inputs2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Available-for-sale securitiesObligations of U.S.
Government agencies
    
    $
    200,917
    
    
    
    31,405
    
    
    
    169,512
    
    
    
    Obligations of states and
political subdivisions
    
    
    64,118
    
    
    
    
    
    
    
    64,118
    
    
    
    Mortgage-backed securitiesU.S. GSEs MBS  residential
    
    
    141,725
    
    
    
    
    
    
    
    141,216
    
    
    
    509U.S. GSEs CMO
    
    
    140,334
    
    
    
    985
    
    
    
    139,349
    
    
    
    Other CMO
    
    
    3,073
    
    
    
    
    
    
    
    663
    
    
    
    2,410Corporate bonds
    
    
    36,133
    
    
    
    
    
    
    
    25,395
    
    
    
    10,738Equity securities
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    Total available-for-sale
securities
    
    $
    586,302
    
    
    
    32,392
    
    
    
    540,253
    
    
    
    13,657Tax credits
    
    
    356
    
    
    
    
    
    
    
    
    
    
    
    356Loans held for sale
    
    
    12,775
    
    
    
    
    
    
    
    12,775
    
    
    
    Mortgage banking derivatives
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Total
    
    $
    599,435
    
    
    
    32,392
    
    
    
    553,030
    
    
    
    14,013
  112




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Inputs2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Available-for-sale securitiesObligations
of U.S. Government agencies
    
    $
    66,330
    
    
    
    21,663
    
    
    
    44,667
    
    
    
    Obligations of states and
political subdivisions
    
    
    26,180
    
    
    
    
    
    
    
    26,180
    
    
    
    Mortgage-backed securitiesU.S. GSEs MBS  residential
    
    
    89,153
    
    
    
    
    
    
    
    88,601
    
    
    
    552U.S. GSEs CMO
    
    
    106,842
    
    
    
    10,510
    
    
    
    96,332
    
    
    
    Other CMO
    
    
    7,675
    
    
    
    
    
    
    
    3,894
    
    
    
    3,781Corporate bonds
    
    
    10,032
    
    
    
    
    
    
    
    
    
    
    
    10,032Equity securities
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    Total available-for-sale
securities
    
    $
    306,216
    
    
    
    32,177
    
    
    
    259,674
    
    
    
    14,365Tax credits
    
    
    435
    
    
    
    
    
    
    
    
    
    
    
    435Loans held for sale
    
    
    19,157
    
    
    
    
    
    
    
    19,157
    
    
    
    Mortgage banking derivatives
    
    
    182
    
    
    
    
    
    
    
    182
    
    
    
    Total
    
    $
    325,990
    
    
    
    32,177
    
    
    
    279,013
    
    
    
    14,800
 During the twelve months ended December 31, 2010, four U.S. agency securities with a
market value of $8,931 were transferred out of Level 2 and into Level 1. There were no
transfers in and out of Level 3. The tables below present a reconciliation and income
statement classification of gains and losses for all assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the years ended December
31, 2010 and 2009:
  113




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Fair Value Measurements Using Significant Unobservable Inputs(Level 3)Available-for-saleTax credits
    
    
    Securities
    
    
    Total(Dollars in thousands)Beginning balance, January 1, 2010
    
    $
    435
    
    
    
    14,365
    
    
    
    14,800Total gains or losses (realized/unrealized)Included in earningsGain (loss) on sales
    
    
    
    
    
    
    (122
    )
    
    
    (122
    )Other-than-temporary impairment
    
    
    
    
    
    
    (96
    )
    
    
    (96
    )Amortization of tax credit investment
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )Included in other comprehensive income
    
    
    
    
    
    
    1,300
    
    
    
    1,300Principal repayment
    
    
    
    
    
    
    (1,790
    )
    
    
    (1,790
    )Transfers in and/or out of Level 3
    
    
    
    
    
    
    
    
    
    
    Ending balance, December 31, 2010
    
    $
    356
    
    
    
    13,657
    
    
    
    14,013
 Fair Value Measurements Using Significant Unobservable Inputs(Level 3)Available-for-saleTax credits
    
    
    Securities
    
    
    Total(Dollars in thousands)Beginning balance, January 1, 2009
    
    $
    515
    
    
    
    4,130
    
    
    
    4,645Total gains or losses (realized/unrealized)Included in earningsOther-than-temporary impairment
    
    
    
    
    
    
    (975
    )
    
    
    (975
    )Amortization of tax credit investment
    
    
    (80
    )
    
    
    
    
    
    
    (80
    )Included in other comprehensive income (loss)
    
    
    
    
    
    
    1,595
    
    
    
    1,595Transfers in and/or out of Level 3
    
    
    
    
    
    
    9,615
    
    
    
    9,615Ending balance, December 31, 2009
    
    $
    435
    
    
    
    14,365
    
    
    
    14,800
 Assets and Liabilities Measured on a Non-Recurring Basis
 Assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2010
and 2009 are summarized below:
  114




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Inputs2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Assets:Impaired loansCommercial, financial, and
agricultural
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate:Commercial
    
    
    3,143
    
    
    
    
    
    
    
    
    
    
    
    3,143Residential
    
    
    3,187
    
    
    
    
    
    
    
    
    
    
    
    3,187Acquisition, development and
construction
    
    
    6,565
    
    
    
    
    
    
    
    
    
    
    
    6,565Consumer installment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    12,895
    
    
    
    
    
    
    
    
    
    
    
    12,895Other real estate owned
    
    
    7,751
    
    
    
    
    
    
    
    
    
    
    
    7,751Total
    
    $
    20,646
    
    
    
    
    
    
    
    
    
    
    
    20,646
 Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Inputs2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Assets:Impaired loansCommercial, financial, and
agricultural
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate:Commercial
    
    
    4,844
    
    
    
    
    
    
    
    
    
    
    
    4,844Residential
    
    
    1,129
    
    
    
    
    
    
    
    
    
    
    
    1,129Acquisition, development and
construction
    
    
    16,324
    
    
    
    
    
    
    
    
    
    
    
    16,324Consumer installment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    22,297
    
    
    
    
    
    
    
    
    
    
    
    22,297Other real estate owned
    
    
    7,974
    
    
    
    
    
    
    
    
    
    
    
    7,974Total
    
    $
    30,271
    
    
    
    
    
    
    
    
    
    
    
    30,271
 The following represents impairment charges recognized during the period:
 Impaired loans, which are measured for impairment using the fair value of the collateral for
collateral dependent loans, had a carrying amount of $14,369, with a valuation allowance of
$1,474, resulting in an additional provision for loan losses of $6,831 for the year ended
December 31, 2010. Impaired loans that are not carried at fair value had a carrying amount of
$10,679 at December 31, 2010.
  115




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 As of December 31, 2009 impaired loans had a carrying amount of $24,276 with a valuation
allowance of $1,979, resulting in an additional provision for loan losses of $11,761 for the
year ending 2009. Impaired loans that are not carried at fair value had a carrying amount of
$10,391 at December 31, 2009.
 Other real estate owned, which is carried at lower of cost or fair value, was $7,751 which
consisted of the outstanding balance of $9,866, less a valuation allowance of $2,115,
resulting in a write down of $1,909 for the year ending 2010.
 As of December 31, 2009, other real estate owned was $7,974 which consisted of the outstanding
balance of $8,562, less a valuation allowance of $588, resulting in a write down of $588 for
the year ending 2009.
 (7)
    
    Premises and Equipment
 Premises and equipment at December 31, 2010 and 2009 are summarized as follows:
 2010
    
    
    2009(Dollars in thousands)Land
    
    $
    7,847
    
    
    $
    7,819Buildings
    
    
    23,942
    
    
    
    23,876Furniture and equipment
    
    
    16,330
    
    
    
    16,15248,119
    
    
    
    47,847Less accumulated depreciation
    
    
    18,703
    
    
    
    16,145$
    29,416
    
    
    $
    31,702
 Depreciation expense amounted to $2,651, $2,718 and $2,343, in 2010, 2009 and 2008,
respectively.
  116




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (8)
    
    Commitments
 The Company is committed under various operating leases for office space and equipment. At
December 31, 2010, minimum future lease payments under non-cancelable real property and
equipment operating leases are as follows:
 (Dollars in thousands)2011
    
    $
    3102012
    
    
    1852013
    
    
    482014
    
    
    462015
    
    
    402016 & Beyond
    
    
    26$
    655
 Rent and lease expense for all building, equipment, and furniture rentals totaled $297, $320,
and $317, for the years ended December 31, 2010, 2009, and 2008, respectively.
 The Company is party to lines of credit with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. Lines of credit are unfunded
commitments to extend credit. These instruments involve, in varying degrees, exposure to
credit and interest rate risk in excess of the amounts recognized in the financial statements.
The Companys exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for unfunded commitments to extend credit is represented by the
contractual amount of those instruments. The Company follows the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet instruments.
 Unfunded commitments to extend credit where contract amounts represent potential credit risk
totaled $136,194 and $174,894, at December 31, 2010 and 2009, respectively. These commitments
are primarily at variable interest rates. Fixed rate commitments totaled $26,998 and $15,903
at December 31, 2010 and 2009, respectively. The rates on these commitments ranged from 2.75%
to 18.00% at December 31, 2010, and 3.50% to 16.00%
at December 31, 2009. Maturity dates ranged from 1/4/2011 to 12/19/2017, at December 31,
2010, and 1/8/2010 to 12/19/2017 at December 31, 2009.
 Lines of credit are legally binding contracts to lend to a customer, as long as there is no
violation of any condition established in the contract. These commitments have fixed
termination dates and generally require payment of a fee. As commitments often expire prior
to being drawn, the amounts above do not necessarily represent the future cash requirements of
the commitments. Credit worthiness is evaluated on a case by case basis, and if necessary,
collateral is obtained to support the commitment.
  117




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (9)
    
    Deposits
 At December 31, 2010, scheduled maturities of certificates of deposit are as follows:
 Dollars in thousands2011
    
    $
    315,9482012
    
    
    109,6412013
    
    
    35,1362014
    
    
    7,8992015
    
    
    17,667Thereafter
    
    
    1,519Total
    
    $
    487,810
 Brokered deposits as of December 31, 2010 and 2009 totaled $183,732 and $255,876,
respectively.
 (10)
    
    Borrowings
 Securities Sold Under Repurchase Agreements
 The securities sold under repurchase agreements are collateralized by obligations of the U.S.
Government or its corporations and agencies, state and municipal securities, corporate bonds,
or mortgage-backed securities. The aggregate carrying value of such agreements for corporate
customers at December 31, 2010 and 2009 were $2,997 and $3,167, respectively. At December 31,
2010, public funds agreements for deposit accounts and securities sold under repurchase
agreements for public funds customers were maintained by the Georgia Bankers Association
pooled pledging program. The total carrying value of investments in the pooled pledging
program at December 31, 2010 and 2009 was $267,335 and $133,837, respectively. The repurchase
agreements at December 31, 2010 mature on demand. The following table summarizes pertinent
data related to the securities sold under the agreements to repurchase as of and for the years
ended December 31, 2010, 2009 and 2008.
  118




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)Securities Sold Under Repurchase AgreementsWeighted average borrowing rate at
year-end
    
    
    1.00
    %
    
    
    1.50
    %
    
    
    0.96
    %Weighted average borrowing rate during
the year
    
    
    1.36
    %
    
    
    0.80
    %
    
    
    2.15
    %Average daily balance during the year
    
    $
    1,468
    
    
    
    40,820
    
    
    
    59,925Maximum month-end balance during
the year
    
    
    10,486
    
    
    
    61,378
    
    
    
    64,734Balance at year-end
    
    $
    818
    
    
    
    3,188
    
    
    
    62,553$
    818
    
    
    
    3,188
    
    
    
    62,553
 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, 2010 and
2009.
  119




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 2010
    
    
    Rate
    
    
    2009
    
    
    Rate(Dollars in thousands)Due March 30, 2010
    
    $
    
    
    
    
    
    
    
    $
    5,000
    
    
    
    6.020
    %Due September 29, 2010
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    5.820
    %Due October 18, 2010
    
    
    
    
    
    
    
    
    
    
    7,000
    
    
    
    5.460
    %Due April 29, 2011
    
    
    2,000
    
    
    
    3.455
    %
    
    
    2,000
    
    
    
    3.455
    %Due May 2, 2011
    
    
    6,000
    
    
    
    4.800
    %
    
    
    6,000
    
    
    
    4.800
    %Due April 4, 2013
convertible flipper
    
    
    10,000
    
    
    
    2.900
    %
    
    
    10,000
    
    
    
    2.900
    %Due July 18, 2013
convertible flipper
    
    
    3,000
    
    
    
    2.720
    %
    
    
    3,000
    
    
    
    2.720
    %Due July 26, 2017
    
    
    10,000
    
    
    
    4.406
    %
    
    
    10,000
    
    
    
    4.406
    %Due January 31, 2018
    
    
    10,000
    
    
    
    2.475
    %
    
    
    10,000
    
    
    
    2.475
    %Due January 27, 2019
convertible flipper
    
    
    5,000
    
    
    
    4.100
    %
    
    
    5,000
    
    
    
    4.100
    %Due April 22, 2019
convertible flipper
    
    
    8,000
    
    
    
    4.750
    %
    
    
    8,000
    
    
    
    4.750
    %Due May 22, 2019
convertible flipper
    
    
    6,000
    
    
    
    4.680
    %
    
    
    6,000
    
    
    
    4.680
    %$
    60,000
    
    
    
    
    
    
    $
    77,000Total weighted average rate
    
    
    3.80
    %
    
    
    
    
    
    
    4.23
    %
 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.
 A fixed rate advance due on March 22, 2010 was repaid on July 16, 2009 and resulted in a
prepayment penalty of $276. The convertible flipper advance maturing on April 4, 2013 was
indexed to the three month LIBOR based floating rate minus 50 basis points and converted to a
fixed rate of 2.90% on April 4, 2009. The convertible flipper advance maturing on January 27,
2019, was indexed to the one-month LIBOR-based floating rate minus 50 basis points for the
first three years and was converted 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, was indexed to the
three-month LIBOR-based floating rate minus 50 basis points for the first three years and then
converted to a fixed rate of 4.75% on April 22, 2009 for the last ten years. The flipper
advance maturing on May 22, 2019, was indexed to the three-month LIBOR-based floating rate
minus 50 basis points and then converted to a fixed rate of 4.68% on May 22, 2009. The
convertible flipper advance maturing on July 18, 2013 was indexed to the three month LIBOR
based floating rate minus 50 basis points and was converted to a fixed rate of 2.72% on July
18, 2009. At December 31, 2010, the Company has pledged, under a blanket floating lien,
eligible first mortgage loans with unpaid balances which, when discounted at approximately 63%
of such unpaid principal balances, total $67,168. The Company has also pledged for this lien
eligible commercial real estate loans with unpaid balances which, when discounted at
approximately 44% of such unpaid principal balances, total $31,248.
  120




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Other Borrowed FundsOther borrowed funds consist of a treasury, tax, and loan account with the Federal Reserve
Bank of $0 and $600 at December 31, 2010 and December 31, 2009 respectively.
 (11)
    
    Subordinated Debentures
 In December 2005 the Company issued $10,000 of unsecured subordinated debentures, which bear
interest at three-month LIBOR plus 1.40% (1.70% at December 31, 2010), adjusted quarterly, to
Southeastern Bank Financial Statutory Trust I. The Company used these funds to capitalize
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.
Southeastern Bank Financial Statutory Trust I acquired these debentures using the proceeds of
its offerings of $10,000 of Trust Preferred Securities to outside investors. The Trust
Preferred Securities qualify as Tier 1 capital under Federal Reserve Board guidelines up to
certain limits 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 at any time. 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.
 In March 2006 the Company issued $10,000 of unsecured subordinated debentures, which bear
interest at three-month LIBOR plus 1.40% (1.70% at December 31, 2010), adjusted quarterly, to
Southeastern Bank Financial Trust II. The Company used $5,000 of the proceeds to contribute
additional capital to Southern Bank & Trust on June 28, 2007. The remaining $5,000 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.
Southeastern Bank Financial Statutory Trust I acquired these debentures using the proceeds of
its offerings of $10,000 of Trust Preferred Securities to outside investors. The Trust
Preferred Securities qualify as Tier 1 capital under Federal Reserve Board guidelines up to
certain limits 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.
  121




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 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, 2011, 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 100.785% of the
principal amount of the debentures. Thereafter, an amount equal in cash the principal amount
of the debentures plus unpaid interest will be redeemed at 100.00%.
 In May 2009 the Company issued a $2,947 unsecured subordinated debenture, which bears interest
at a rate of 8.0% per annum, to a related party, R.W. Pollard Enterprises, LLP. The Company
used the proceeds to increase capital at the Bank. The debenture matures on May 14, 2014 and
the Company has the right to redeem the debenture, in whole or in part, at any time after May
14, 2012. As specified in the indenture, if the debenture is redeemed prior to maturity, the
redemption price will be the principal amount plus any accrued and unpaid interest.
 (12)
    
    Income Taxes
 Income tax (benefit) expense for the years ended December 31, 2010, 2009 and 2008 consists of
the following:
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)Current tax (benefit) expense:Federal
    
    $
    4,714
    
    
    $
    (2,469
    )
    
    $
    4,268State
    
    
    634
    
    
    
    
    
    
    
    167Total current
    
    
    5,348
    
    
    
    (2,469
    )
    
    
    4,435Deferred tax benefitFederal
    
    
    (2,264
    )
    
    
    (2,500
    )
    
    
    (800
    )State
    
    
    (594
    )
    
    
    (1,445
    )
    
    
    (129
    )Total deferred
    
    
    (2,858
    )
    
    
    (3,945
    )
    
    
    (929
    )Total income tax
(benefit) expense
    
    $
    2,490
    
    
    $
    (6,414
    )
    
    $
    3,506
  122




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Income tax (benefit) expense differed from the amount computed by applying the statutory
Federal corporate tax rate of 35% in 2010, 34% in 2009 and 35% in 2008 to income before income
taxes as follows:
 Years ended December 312010
    
    
    2009
    
    
    2008(Dollars in thousands)Computed expected tax (benefit) expense
    
    $
    3,271
    
    
    $
    (4,896
    )
    
    $
    3,879Increase (decrease) resulting from:Tax-exempt interest income
    
    
    (441
    )
    
    
    (370
    )
    
    
    (326
    )Nondeductible interest expense
    
    
    34
    
    
    
    33
    
    
    
    40State income tax, net of Federal tax
effect
    
    
    26
    
    
    
    (966
    )
    
    
    25Earnings on cash surrender value of
life insurance
    
    
    (326
    )
    
    
    (299
    )
    
    
    (248
    )Nondeductible stock compensation expense
    
    
    84
    
    
    
    64
    
    
    
    73Meals, entertainment, and club dues
    
    
    63
    
    
    
    58
    
    
    
    59Other, net
    
    
    (221
    )
    
    
    (38
    )
    
    
    4$
    2,490
    
    
    $
    (6,414
    )
    
    $
    3,506
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2010 and 2009 are presented
below:
 2010
    
    
    2009(Dollars in thousands)Deferred tax assets:Allowance for loan losses
    
    $
    10,227
    
    
    $
    8,556Deferred compensation
    
    
    2,628
    
    
    
    2,177Writedowns of Other Real Estate
    
    
    812
    
    
    
    225State net operating loss and other carryovers
    
    
    302
    
    
    
    982Unrealized loss on investment securities available for sale
    
    
    1,422
    
    
    
    845Other
    
    
    404
    
    
    
    231Total deferred tax assets
    
    
    15,795
    
    
    
    13,016Deferred tax liabilities:Depreciation
    
    
    (846
    )
    
    
    (1,198
    )Prepaid assets and other
    
    
    (352
    )
    
    
    (658
    )Other
    
    
    (2
    )
    
    
    Total deferred tax liabilities
    
    
    (1,200
    )
    
    
    (1,856
    )Net deferred tax asset
    
    $
    14,595
    
    
    $
    11,160
  123




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 ASC 740-30-25 provides accounting guidance for determining when a company is required to
record a valuation allowance on its deferred tax assets. A valuation allowance is required
for deferred tax assets if, based on available evidence, it is more likely than not that all
or some portion of the asset may not be realized due to the inability to generate sufficient
taxable income in the period and/or of the character necessary to utilize the benefit of the
deferred tax asset. In making this assessment, all sources of taxable income available to
realize the deferred tax asset are considered including taxable income in prior carry-back
years, future reversals of existing temporary differences, tax planning strategies and future
taxable income exclusive of reversing temporary differences and carryforwards. Based on
managements assessment, no valuation allowance was deemed necessary at December 31, 2010.
 The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax
of the state of Georgia and South Carolina. The Company is no longer subject to examination
by federal and state taxing authorities for years before 2007.
 The total amount of interest and penalties recorded in the consolidated statements of income
or loss for the year ended December 31, 2010, 2009 and 2008 was not material.
 (13)
    
    Related Party Transactions
 Deposits include accounts with certain directors and executives of the Company, including
affiliates, and principal holders of the Companys securities. As of December 31, 2010 and
2009, these deposits totaled approximately $22,292, and $20,344, respectively. See note 4 for
discussion of related party loans and note 11 for discussion of related party debt.
 (14)
    
    Regulatory Capital Requirements
 The 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, 2010, that the Company
meets all capital adequacy requirements to which it is subject.
  124




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 As of December 31, 2010, 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, 2010 which would affect the Banks well capitalized classification.
 Actual capital amounts and ratios for the Company are presented in the table below as of
December 31, 2010 and 2009, on a consolidated basis and for GB&T and SB&T individually:
 To be well capitalizedFor capital adequacy
    
    
    under prompt correctiveActual
    
    
    purposes
    
    
    action provisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Southeastern Bank Financial Corporation
and subsidiaries consolidated:As of December 31, 2010:Total Capital (to risk-
weighted assets)
    
    $
    136,564
    
    
    
    13.59
    %
    
    $
    80,448
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ATier I Capital  risk-based
(to risk-weighted assets)
    
    
    122,052
    
    
    
    12.14
    %
    
    
    40,224
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ATier I Capital  leverage
(to qtrly average assets)
    
    
    122,052
    
    
    
    7.39
    %
    
    
    66,092
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AAs of December 31, 2009:Total Capital (to risk-
weighted assets)
    
    $
    130,395
    
    
    
    12.55
    %
    
    $
    83,146
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ATier I Capital  risk-based
(to risk-weighted assets)
    
    
    114,930
    
    
    
    11.06
    %
    
    
    41,573
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ATier I Capital  leverage
(to qtrly average assets)
    
    
    114,930
    
    
    
    7.51
    %
    
    
    61,177
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/A
  125




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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
    
    
    Ratio(Dollars in thousands)Georgia Bank & Trust Company:As of December 31, 2010:Total Capital (to risk-
weighted assets)
    
    $
    118,175
    
    
    
    13.37
    %
    
    $
    70,726
    
    
    
    8.00
    %
    
    $
    88,407
    
    
    
    10.00
    %Tier I Capital  risk-based
(to risk-weighted assets)
    
    
    106,962
    
    
    
    12.10
    %
    
    
    35,363
    
    
    
    4.00
    %
    
    
    53,044
    
    
    
    6.00
    %Tier I Capital  leverage
(to qtrly average assets)
    
    
    106,962
    
    
    
    7.24
    %
    
    
    66,500
    
    
    
    4.50
    %
    
    
    73,888
    
    
    
    5.00
    %As of December 31, 2009:Total Capital (to risk-
weighted assets)
    
    $
    111,465
    
    
    
    12.25
    %
    
    $
    72,782
    
    
    
    8.00
    %
    
    $
    90,978
    
    
    
    10.00
    %Tier I Capital  risk-based
(to risk-weighted assets)
    
    
    99,984
    
    
    
    10.99
    %
    
    
    36,391
    
    
    
    4.00
    %
    
    
    54,587
    
    
    
    6.00
    %Tier I Capital  leverage
(to qtrly average assets)
    
    
    99,984
    
    
    
    7.34
    %
    
    
    61,301
    
    
    
    4.50
    %
    
    
    68,112
    
    
    
    5.00
    %
 To be well capitalizedFor capital adequacy
    
    
    under prompt correctiveActual
    
    
    purposes
    
    
    action provisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Southern Bank & Trust:As of December 31, 2010:Total Capital (to risk-
weighted assets)
    
    $
    16,015
    
    
    
    13.10
    %
    
    $
    9,779
    
    
    
    8.00
    %
    
    $
    12,224
    
    
    
    10.00
    %Tier I Capital  risk-based
(to risk-weighted assets)
    
    
    14,475
    
    
    
    11.84
    %
    
    
    4,889
    
    
    
    4.00
    %
    
    
    7,334
    
    
    
    6.00
    %Tier I Capital  leverage
(to qtrly average assets)
    
    
    14,475
    
    
    
    7.84
    %
    
    
    7,381
    
    
    
    4.00
    %
    
    
    9,227
    
    
    
    5.00
    %As of December 31, 2009:Total Capital (to risk-
weighted assets)
    
    $
    15,734
    
    
    
    12.36
    %
    
    $
    10,183
    
    
    
    8.00
    %
    
    $
    12,729
    
    
    
    10.00
    %Tier I Capital  risk-based
(to risk-weighted assets)
    
    
    14,136
    
    
    
    11.11
    %
    
    
    5,091
    
    
    
    4.00
    %
    
    
    7,637
    
    
    
    6.00
    %Tier I Capital  leverage
(to qtrly average assets)
    
    
    14,136
    
    
    
    8.52
    %
    
    
    6,640
    
    
    
    4.00
    %
    
    
    8,300
    
    
    
    5.00
    %
 Southeastern Bank Financial Corporation and Georgia Bank and Trust Company are regulated
by the Department of Banking and Finance of the State of Georgia (DBF). The DBF requires that
state banks in Georgia generally maintain a minimum ratio of Tier 1 capital to total assets of
four and one-half percent (4.5%) for banks and four percent (4%) for holding companies. These
ratios are shown in the preceding tables as Tier 1 Capital  leverage (to qtrly average
assets). The Companys ratio at 7.39% and the Banks ratio at 7.24% exceed the minimum
required, at December 31, 2010.
 Banking regulations limit the amount of dividends that may be paid without prior approval of
regulatory agencies to 50% of the preceding years earnings. Based on this limitation, the
amount of cash dividends available for payment in 2011 from GB&T is approximately $3,413 and
from SB&T is approximately $203, subject to maintenance of the minimum capital requirements.
  126




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (15)
    
    Employee Benefit Plans
 The Company has an employee savings plan (the Plan) that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the Plan, participating
employees may defer a portion of their pretax earnings, up to the Internal Revenue Service
annual contribution limit. The Company has the option to make discretionary payments to the
Plan. For the years ended December 31, 2010, 2009 and 2008, the Company contributed $877, $527
and $753, respectively, to the Plan, which is
5% of the annual salary of all eligible employees for 2010, 3% of the annual salary of all
eligible employees for 2009 and 5% of the annual salary of all eligible employees for 2008.
 In 1997, the Company established a nonqualified Long-Term Incentive Plan designed to motivate
and sustain high levels of individual performance and align the interests of key officers with
those of shareholders by rewarding capital appreciation and earnings growth. Stock
appreciation rights may be awarded annually to those key officers whose performance during the
year has made a significant contribution to the Companys growth. Such stock appreciation
rights are granted at a strike price equal to the trading price of the Companys stock at date
of grant, and are earned over a five-year appreciation period. Officers vest in such rights
over a 10-year period. The Company recognized expense of $15, $15 and $57, during 2010, 2009
and 2008, respectively, related to this plan. The total amount accrued for both December 31,
2010 and 2009 was $15 and $15, respectively.
 The Company also has salary continuation agreements in place with certain key officers. Such
agreements are structured with differing benefits based on the participants overall position
and responsibility. These agreements provide the participants with a supplemental income upon
retirement at age 65, additional incentive to remain with the Company in order to receive
these deferred retirement benefits and a compensation package that is competitive in the
market. These agreements vest over a ten year period, require a minimum number of years
service, and contain change of control provisions. All benefits would cease in the event of
termination for cause, and if the participants employment were to end due to disability,
voluntary termination or termination without cause, the participant would be entitled to
receive certain reduced benefits based on vesting and other conditions. The estimated cost of
an annuity to pay this obligation is being accrued over the vesting period for each officer.
The Company recognized expense of $1,295, $1,512, and $717, during 2010, 2009 and 2008,
respectively, related to these agreements. The total amount accrued at December 31, 2010 and
2009 was $6,850 and $5,627, respectively.
  127




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (16)
    
    Stock Option Plan
 During 2000, the Company adopted the 2000 Long-Term Incentive Plan (the 2000 Plan) which
allows for stock option awards for up to 278,300 shares of the Companys common stock to
employees and officers of the Company. The Company believes that such awards better align the
interests of its employees with those of its shareholders. Under the provisions of the 2000
Plan, the option price is determined by a committee of the board of directors at the time of
grant and may not be less than 100% of the fair value of the common stock on the date of the
grant of such option. Generally, when granted, these options vest over a five-year period.
However, there were 11,000 options granted in 2005, that vest based on specific loan growth
performance targets. All options must be exercised within a ten-year period. As of December
31, 2007, all options under this plan had been issued. As of December 31, 2010, due to
employee terminations, 2,750 options have reverted back to the option pool and are available
for re-granting under the 2000 Plan.
 During 2006, the Company adopted the 2006 Long-Term Incentive Plan (the 2006 Plan), approved
by shareholders at the annual meeting, which allows for stock options awards for up to 275,000
shares of the Companys common stock to key employees, officers, directors and independent
contractors providing material services to the Company. The purpose of the Plan is to enhance
stockholder investment by attracting, retaining and motivating key employees, officers,
directors and independent contractors of the Company, and to encourage stock ownership by such
persons by providing them with a means to acquire a proprietary interest in the Companys
success, and to align the interests of management with those of stockholders. Under the
provisions of the 2006 Plan, the option price is determined by a committee of the board of
directors at the time of grant and may not be less than 100% of the fair value of the common
stock on the date of the grant of such option. Notwithstanding the foregoing, in the case of
an Incentive Stock Option granted to a Participant who is a Ten Percent or more Stockholder,
the Option Price shall not be less than one hundred and ten percent (110%) of the Fair Market
Value of the Common Stock on the Date of Grant. Generally, when granted, these options vest
over a five-year period. All options must be exercised within a ten year period from the date
of the grant; however, options issued to a ten percent or more stockholder must be exercised
within a five year period from its date of grant. As of December 31, 2010 and 2009, total
options granted under this Plan were 100,517. As of December 31, 2010, 174,483 shares remain
available for future grants under this Plan.
 The Company periodically purchases treasury stock and uses it for stock option exercises, when
available. If treasury stock is not available, additional stock is issued. The Company
repurchased no treasury stock during 2010 and repurchased 302 shares during 2009. The Company
issued no treasury stock in 2010 and 302 shares of treasury stock in 2009 for the Director
Stock Purchase Plan.
  128




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 The Company is required to compute the fair value of options at the date of grant and to
recognize such costs as compensation expense ratably over the vesting period of the options.
For the year ended December 31, 2010, 2009 and 2008, the Company recognized $241, $188 and
$209, respectively, as compensation expense resulting from all stock options.
 The fair value of each option is estimated on the date of grant using the Black-Scholes
valuation model that uses the assumptions noted in the following table. Expected volatility
is the measure of the amount by which the share price is expected to fluctuate during a
period. The method used to calculate historical average annualized volatility is based on
the closing price of the first trade of each month. Expected dividends are based on the
Companys historical pattern of dividend payments. The Company uses historical data to
estimate option exercise and employee termination within the valuation model. The risk-free
rate is the U.S. Treasury note at the time of grant for the expected term of the option.
 The fair value of all options granted was determined using the following weighted average
assumptions as of grant date in 2008. There were no stock option grants during 2010 and 2009.
 2010
    
    
    2009
    
    
    2008Options granted
    
    
    n/a
    
    
    
    n/a
    
    
    
    19,300Risk-free interest rate
    
    
    n/a
    
    
    
    n/a
    
    
    
    3.23
    %Dividend yield
    
    
    n/a
    
    
    
    n/a
    
    
    
    2.00
    %Expected life at date of grant
    
    
    n/a
    
    
    
    n/a
    
    
    8.01 yearsVolatility
    
    
    n/a
    
    
    
    n/a
    
    
    
    21.96
    %Weighted average fair value of
options granted
    
    
    n/a
    
    
    
    n/a
    
    
    $
    7.36
  129




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 A summary of activity for stock options with a specified vesting period follows:
 WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (Years)
    
    
    ValueOptions outstanding  December 31, 2009
    
    
    275,063
    
    
    $
    26.94
    
    
    
    Options lapsed in 2010
    
    
    
    
    
    
    
    
    
    
    Options Outstanding  December 31, 2010
    
    
    275,063
    
    
    $
    26.94
    
    
    
    3.97
    
    
    
    Fully vested or expected to vest
    
    
    275,063
    
    
    $
    26.94
    
    
    
    3.97
    
    
    
    Exercisable at December 31, 2010
    
    
    239,173
    
    
    $
    25.92
    
    
    
    3.32
    
    
    
    
 Information related to the stock options that vest over a specified period follows:
 2010
    
    
    2009
    
    
    2008(Dollars in thousands, except per share data)Intrinsic value of options exercised
    
    $
    
    
    
    
    
    
    
    
    423Intrinsic value of options forfeit
    
    
    
    
    
    
    
    
    
    
    Intrinsic value of options lapsed
    
    
    
    
    
    
    
    
    
    
    Cash received from option exercises
    
    
    
    
    
    
    
    
    
    
    466Fair market value of stock received from
option exercises
    
    
    
    
    
    
    
    
    
    
    
 All stock options issued are incentive stock options and therefore, no tax benefit is
realized.
 As of December 31, 2010, there was $170 of total unrecognized compensation cost related to
nonvested options that vest over a five year period. That cost is expected to be recognized
over a weighted average period of 1.3 years.
 The following table provides information for stock options that vest based on specific loan
growth performance targets.
 WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (Years)
    
    
    ValueOptions outstanding  December 31, 2009
    
    
    11,000
    
    
    $
    31.18
    
    
    
    
    
    
    
    Options Outstanding  December 31, 2010
    
    
    11,000
    
    
    $
    31.18
    
    
    
    4.50
    
    
    $
    Exercisable at December 31, 2010
    
    
    8,250
    
    
    $
    31.18
    
    
    
    4.50
    
    
    $
    
  130




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 As of December 31, 2010, there was no unrecognized compensation cost related to nonvested
options granted based on performance. As of December 31, 2009, there was $8 of total
unrecognized compensation cost related to nonvested options granted based on performance.(17)
    
    Other Operating Expenses
 Components of other operating expenses exceeding 1% of total revenues include the
following for the years ended December 31, 2010, 2009, and 2008:
 2010
    
    
    2009
    
    
    2008(Dollars in thousands)Marketing and business
development
    
    $
    1,237
    
    
    $
    1,451
    
    
    $
    1,668Processing expense
    
    
    1,540
    
    
    
    1,733
    
    
    
    1,917Legal and professional fees
    
    
    1,657
    
    
    
    1,552
    
    
    
    1,763Data processing expense
    
    
    1,401
    
    
    
    1,265
    
    
    
    1,203FDIC Insurance
    
    
    2,268
    
    
    
    2,723
    
    
    
    898Loan costs (excluding ORE)
    
    
    954
    
    
    
    917
    
    
    
    658Other expense
    
    
    3,105
    
    
    
    3,316
    
    
    
    3,483Total other operating expense
    
    $
    12,162
    
    
    $
    12,957
    
    
    $
    11,590
 (18)
    
    Fair Value of Financial Instruments
 Disclosure of fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value is required. Fair value
estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Companys entire holdings of
a particular financial instrument.
 Because no market exists for a portion of the Companys financial instruments, fair value
estimates are based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
 Fair value estimates are based on existing on and off-balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any of the
estimates.
  131




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 The assumptions used in the estimation of the fair value of the Companys financial
instruments are explained below. Where quoted market prices are not available, fair values
are based on estimates using discounted cash flow and other valuation techniques. Discounted
cash flows can be significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. The following fair value estimates cannot be
substantiated by comparison to independent markets and should not be considered representative
of the liquidation value of the Companys financial instruments, but rather a good-faith
estimate of the fair value of financial instruments held by the Company. Certain financial
instruments and all nonfinancial instruments are excluded from disclosure requirements.
 The following methods and assumptions were used by the Company in estimating the fair value of
its financial instruments:
 (a)
    
    Cash and Cash EquivalentsFair value equals the carrying value of such assets due to their nature.(b)
    
    Investment SecuritiesAs discussed in more detail in Note 6, the fair value of investment securities is based
on quoted market prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments. The carrying
amount of related accrued interest receivable approximates its fair value and is not
disclosed.(c)
    
    Loans, netThe fair value of loans is calculated using discounted cash flows by loan type. The
discount rate used to determine the present value of the loan portfolio is an estimated
market rate that reflects the credit and interest rate risk inherent in the loan
portfolio without considering widening credit spreads due to market illiquidity. The
estimated maturity is based on the Companys historical experience with repayments
adjusted to estimate the effect of current market conditions. The carrying amount of
related accrued interest receivable approximates its fair value and is not disclosed.
The carrying amount of real estate loans originated for sale approximates their fair
value. The allowance for loan losses is considered a reasonable discount for credit
risk.
  132




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (d)
    
    DepositsFair values for certificates of deposit have been determined using discounted cash
flows. The discount rate used is based on estimated market rates for deposits of
similar remaining maturities. The carrying amounts of all other deposits, due to their
short-term nature, approximate their fair values. The carrying amount of related
accrued interest payable approximates its fair value and is not disclosed.(e)
    
    Securities Sold Under Repurchase AgreementsFair value approximates the carrying value of such liabilities due to their short-term
nature.(f)
    
    Other Borrowed FundsFair value approximates the carrying value of such liabilities as the borrowings are at
a variable rate of interest.(g)
    
    Advances from FHLBThe fair value of the FHLB advances is obtained from the FHLB and is calculated by
discounting contractual cash flows using an estimated interest rate based on the current
rates available to the Company for debt of similar remaining maturities and collateral
terms.(h)
    
    Subordinated debenturesThe fair value for subordinated debentures is calculated based upon current market
spreads to LIBOR for debt of similar remaining maturities and collateral terms.(i)
    
    CommitmentsThe difference between the carrying values and fair values of commitments to extend
credit are not significant and are not disclosed.
  133




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 The carrying amounts and estimated fair values of the Companys financial instruments at
December 31, 2010 and 2009 are as follows:
 December 312010
    
    
    2009Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    Estimatedamount
    
    
    fair value
    
    
    amount
    
    
    fair value(Dollars in thousands)Financial assets:Cash and cash
equivalents
    
    $
    65,115
    
    
    
    65,115
    
    
    $
    147,994
    
    
    
    147,994Investment securities
    
    
    586,612
    
    
    
    586,613
    
    
    
    306,706
    
    
    
    306,708Loans, net
    
    
    860,213
    
    
    
    858,505
    
    
    
    934,308
    
    
    
    943,885Financial liabilities:Deposits with stated maturities
    
    
    487,810
    
    
    
    491,867
    
    
    
    566,795
    
    
    
    570,791Deposits without stated maturities
    
    
    922,927
    
    
    
    922,927
    
    
    
    713,739
    
    
    
    713,739Securities sold under
repurchase agreements
    
    
    818
    
    
    
    818
    
    
    
    3,188
    
    
    
    3,188Other borrowed funds
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    600Advances from FHLB
    
    
    60,000
    
    
    
    64,615
    
    
    
    77,000
    
    
    
    80,670Subordinated debentures
    
    
    22,947
    
    
    
    14,978
    
    
    
    22,947
    
    
    
    14,793
  134




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (19)
    
    Condensed Financial Statements of Southeastern Bank Financial Corporation (Parent Only)
 The following represents Parent Company only condensed financial information of Southeastern
Bank Financial Corporation:
 Condensed Balance Sheets
 December 312010
    
    
    2009(Dollars in thousands)AssetsCash and due from banks
    
    $
    2,299
    
    
    
    564Investment securities available for sale
    
    
    2
    
    
    
    2,005Investment in banking subsidiaries
    
    
    119,523
    
    
    
    112,932Premises and equipment, net
    
    
    766
    
    
    
    811Accrued interest receivable
    
    
    
    
    
    
    20Deferred tax asset, net
    
    
    58
    
    
    
    12Income tax receivable
    
    
    501
    
    
    
    1,178Other assets
    
    
    6
    
    
    
    5$
    123,155
    
    
    
    117,527Liabilities and Stockholders EquityLiabilities:Accrued interest and other liabilities
    
    $
    250
    
    
    
    836Subordinated debentures
    
    
    22,947
    
    
    
    22,947Total liabilities
    
    
    23,197
    
    
    
    23,783Stockholders equity
    
    
    99,958
    
    
    
    93,744$
    123,155
    
    
    
    117,527
  135




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Condensed Statements of Income (Loss)
 Years ended December 312010
    
    
    2009
    
    
    2008(Dollars in thousands)Income:Dividend income
    
    $
    11
    
    
    
    15
    
    
    
    1,481Interest income on investment securities
    
    
    53
    
    
    
    110
    
    
    
    143Investment securities losses, net
    
    
    (2
    )
    
    
    (35
    )
    
    
    (204
    )Miscellaneous income
    
    
    102
    
    
    
    102
    
    
    
    102164
    
    
    
    192
    
    
    
    1,522Expense:Interest expense
    
    
    607
    
    
    
    647
    
    
    
    960Salaries and other personnel expense
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Occupancy expense
    
    
    59
    
    
    
    45
    
    
    
    60Other operating expense
    
    
    102
    
    
    
    139
    
    
    
    187768
    
    
    
    825
    
    
    
    1,201Income (loss) before equity in
undistributed (excess distributed)
earnings of banking subsidiaries
    
    
    (604
    )
    
    
    (633
    )
    
    
    321Equity in undistributed (excess distributed)
earnings of banking subsidiaries
    
    
    7,232
    
    
    
    (7,593
    )
    
    
    6,818Income tax benefit
    
    
    (228
    )
    
    
    (241
    )
    
    
    (439
    )Net income (loss)
    
    $
    6,856
    
    
    
    (7,985
    )
    
    
    7,578
  136




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 Condensed Statements of Cash Flows
 Year Ended December 312010
    
    
    2009
    
    
    2008(Dollars in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    6,856
    
    
    
    (7,985
    )
    
    
    7,578Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activitiesDepreciation
    
    
    45
    
    
    
    45
    
    
    
    45Deferred income tax benefit
    
    
    (46
    )
    
    
    (12
    )
    
    
    Equity in (undistributed) excess distributed
earnings of banking subsidiaries
    
    
    (7,232
    )
    
    
    7,593
    
    
    
    (6,818
    )Investment securities losses, net
    
    
    2
    
    
    
    35
    
    
    
    204Stock options compensation cost
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Decrease in accrued interest receivable
    
    
    20
    
    
    
    
    
    
    
    20(Decrease) increase in accrued interest payable
and other liabilities
    
    
    (586
    )
    
    
    803
    
    
    
    (31
    )Decrease (increase) in other assets
    
    
    676
    
    
    
    (1,011
    )
    
    
    (44
    )Net cash (used in) provided by
operating activities
    
    
    (265
    )
    
    
    (538
    )
    
    
    948Cash flows from investing activities:Proceeds from sales and maturities of investment securities
    
    
    2,000
    
    
    
    7
    
    
    
    4,000Purchase of investment securities
    
    
    
    
    
    
    
    
    
    
    (3,000
    )Investment in banking subsidiary
    
    
    
    
    
    
    (12,000
    )
    
    
    Proceeds from sale of premises and equipment
    
    
    
    
    
    
    
    
    
    
    1,400Net cash provided by (used in)
investing activities
    
    
    2,000
    
    
    
    (11,993
    )
    
    
    2,400Cash flows from financing activities:Proceeds from subordinated debentures
    
    
    
    
    
    
    2,947
    
    
    
    Proceeds from issuance of common stock
    
    
    
    
    
    
    9,010
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (5
    )
    
    
    (445
    )Payment of cash dividends
    
    
    
    
    
    
    (778
    )
    
    
    (2,968
    )Proceeds from stock options exercised,
net of stock redeemed
    
    
    
    
    
    
    
    
    
    
    467Net cash provided by (used in)
financing activities
    
    
    
    
    
    
    11,174
    
    
    
    (2,946
    )Net increase (decrease) in cash
and cash equivalents
    
    
    1,735
    
    
    
    (1,357
    )
    
    
    402Cash and cash equivalents at beginning of year
    
    
    564
    
    
    
    1,921
    
    
    
    1,519Cash and cash equivalents at end of year
    
    $
    2,299
    
    
    
    564
    
    
    
    1,921
  137




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 (20)
    
    Quarterly Financial Data (Unaudited)
 The supplemental quarterly financial data for the years ended December 31, 2010 and 2009 is
summarized as follows:
 Quarters endedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2010
    
    
    2010
    
    
    2010
    
    
    2010(Dollars in thousands)Interest income
    
    $
    16,854
    
    
    
    17,569
    
    
    
    17,894
    
    
    
    17,557Interest expense
    
    
    6,332
    
    
    
    6,215
    
    
    
    6,101
    
    
    
    5,350Net interest income
    
    
    10,522
    
    
    
    11,354
    
    
    
    11,793
    
    
    
    12,207Provision for loan losses
    
    
    3,288
    
    
    
    3,794
    
    
    
    4,759
    
    
    
    3,960Noninterest income
    
    
    4,000
    
    
    
    5,205
    
    
    
    6,536
    
    
    
    5,345Noninterest expense
    
    
    9,432
    
    
    
    10,562
    
    
    
    10,983
    
    
    
    10,838Net income
    
    
    1,255
    
    
    
    1,620
    
    
    
    1,835
    
    
    
    2,146Net income per share  basic
    
    
    0.19
    
    
    
    0.24
    
    
    
    0.27
    
    
    
    0.32Net income per share  diluted
    
    
    0.19
    
    
    
    0.24
    
    
    
    0.27
    
    
    
    0.32
 Quarters endedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2009
    
    
    2009
    
    
    2009
    
    
    2009(Dollars in thousands)Interest income
    
    $
    17,907
    
    
    
    17,835
    
    
    
    17,602
    
    
    
    17,416Interest expense
    
    
    7,808
    
    
    
    7,127
    
    
    
    6,781
    
    
    
    6,767Net interest income
    
    
    10,099
    
    
    
    10,708
    
    
    
    10,821
    
    
    
    10,649Provision for loan losses
    
    
    4,749
    
    
    
    5,114
    
    
    
    4,879
    
    
    
    16,162Noninterest income
    
    
    4,545
    
    
    
    5,912
    
    
    
    4,808
    
    
    
    5,474Noninterest expense
    
    
    9,833
    
    
    
    10,808
    
    
    
    10,264
    
    
    
    15,606Net income
    
    
    56
    
    
    
    637
    
    
    
    740
    
    
    
    (9,418
    )Net income per share  basic
    
    
    0.01
    
    
    
    0.10
    
    
    
    0.11
    
    
    
    (1.41
    )Net income per share  diluted
    
    
    0.01
    
    
    
    0.10
    
    
    
    0.11
    
    
    
    (1.41
    )
  138




---



##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
  Item 9A. Controls and Procedures
   139




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##### 



Managements Report on Internal Control over Financial Reporting
  Internal Control-Integrated Framework
 /s/ R. Daniel BlantonChief Executive Officer(principal executive officer)/s/ Ronald L. ThigpenChief Operating Officer/s/ Darrell R. RainsChief Financial Officer(principal financial officer)   140




---



##### 



Internal Control  Integrated Framework
    Internal Control  Integrated Framework
  141




---



##### 



142




---



##### 



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
   143




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##### 



(a)
    
    
    (b)
    
    
    (c)Number of securities to
    
    
    Weighted average
    
    
    Number of securities remaining availablebe issued upon exercise of
    
    
    exercise price of
    
    
    for future issuance under equityoutstanding options,
    
    
    outstanding options,
    
    
    compensation plans (excluding securitiesPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    275,063
    
    
    $
    26.94
    
    
    
    177,233Equity compensation
plans not approved
by security holders
    
    
    0
    
    
    
    0
    
    
    
    0TOTAL
    
    
    275,063
    
    
    $
    26.94
    
    
    
    177,233
  Item 13. Certain Relationships and Related Transactions, and Director Independence
  Item 14. Principal Accountant Fees and Services
   144




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##### 



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 Company (Incorporated by
reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.)
 3.2
    
    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.)
 4.3
    
    8% Subordinated Debenture due 2014 (Incorporated by reference
to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on May 20,
2009.)
 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.)*
  145




---



##### 



10.3
    
    Second Amendment dated December 31, 2008 to Key Officer
Compensation Agreement dated January 1, 2000 between the Bank and R. Daniel
Blanton (Incorporated by reference to Exhibit 10.3 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2008.)*
 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 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 (Incorporated by reference to Exhibit 10.6 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2008.)*
 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.)*
  146




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##### 



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.)*
 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 (Incorporated by
reference to Exhibit 10.18 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.)*
 10.19
    
    Supplemental Executive Retirement Benefits Agreement dated
December 31, 2008 between the Bank and Ronald L. Thigpen (Incorporated by
reference to Exhibit 10.19 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.)*
 10.20
    
    Supplemental Executive Retirement Benefits Agreement dated
December 31, 2008 between the Bank and Darrell R. Rains (Incorporated by
reference to Exhibit 10.20 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.)*
  147




---



##### 



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
(Incorporated by reference to Exhibit 10.22 to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2008.)*
 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 Company (Incorporated by reference to
Exhibit 21.1 to the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2008.)
 23.1
    
    Consent of Independent Registered Public Accounting Firm
 31.1
    
    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.
  148




---



##### 



SOUTHEASTERN BANK FINANCIAL CORPORATIONBy:
    /s/ Robert W. Pollard, Jr.Robert W. Pollard, Jr.Chairman of the Board    SIGNATURE
    
    TITLE/s/ Robert W. Pollard, Jr.

Robert W. Pollard, Jr.
    
    Chairman of the Board and Director/s/ Edward G. Meybohm

Edward G. Meybohm
    
    Vice Chairman of the Board and Director/s/ R. Daniel Blanton

R. Daniel Blanton
    
    President, Chief Executive Officer and Director (Principal
Executive Officer)/s/ Ronald L. Thigpen

Ronald L. Thigpen
    
    Executive Vice President, Chief Operating
Officer and Director/s/ Darrell R. Rains

Darrell R. Rains
    
    Group Vice President and Chief Financial
Officer (Principal Financial Officer)
  149




---



##### 



SIGNATURE
    
    TITLE/s/ William J. Badger

William J. Badger
    
    Director/s/ Warren A. Daniel

Warren A. Daniel
    
    Director/s/ Randolph R. Smith, M.D.

Randolph R. Smith, M.D.
    
    Director/s/ John W. Trulock, Jr.

John W. Trulock, Jr.
    
    Director/s/ Patrick D. Cunning

Patrick D. Cunning
    
    Director/s/ Larry S. Prather, Sr.

Larry S. Prather, Sr.
    
    Director/s/ W. Marshall Brown

W. Marshall Brown
    
    Director
  150




---



##### 



EXHIBIT INDEX
 (a) Exhibits

    
    
    
    Page3.1
    
    
    Articles of Incorporation of the
Company (Incorporated by reference to Exhibit 3.1 to
the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.)3.2
    
    
    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 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.)4.3
    
    
    8% Subordinated Debenture due 2014
(Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on May 20,
2009.)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.)*
  151




---



##### 



(a) Exhibits

    
    
    
    Page10.3
    
    
    Second Amendment dated December 31,
2008 to Key Officer Compensation Agreement dated
January 1, 2000 between the Bank and R. Daniel Blanton
(Incorporated by reference to Exhibit 10.3 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.)*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
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
(Incorporated by reference to Exhibit 10.6 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.)*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.)*
  152




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##### 



(a) Exhibits

    
    
    
    Page10.12
    
    
    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.)*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 (Incorporated by reference
to Exhibit 10.18 to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2008.)*
  153




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##### 



(a) Exhibits

    
    
    
    Page10.19
    
    
    Supplemental Executive Retirement
Benefits Agreement dated December 31, 2008 between the
Bank and Ronald L. Thigpen (Incorporated by reference
to Exhibit 10.19 to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2008.)*10.20
    
    
    Supplemental Executive Retirement
Benefits Agreement dated December 31, 2008 between the
Bank and Darrell R. Rains (Incorporated by reference to
Exhibit 10.20 to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2008.)*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 (Incorporated by
reference to Exhibit 10.22 to the Companys Annual
Report on Form 10-K for the fiscal year ended December
31, 2008.)*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
(Incorporated by reference to Exhibit 21.1 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.)23.1
    
    
    Consent of Independent Registered Public
Accounting Firm
    
    
    146
  154




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##### 



(a) Exhibits

    
    
    
    Page31.1
    
    
    Certification by the Chief Executive
Officer (principal executive officer)
    
    
    14731.2
    
    
    Certification by the Chief Financial
Officer (principal financial officer)
    
    
    14932.1
    
    
    Certification by the Chief Executive
Officer and Chief Financial Officer
    
    
    151
 *
    
    Denotes a management compensatory agreement or arrangement.
  155