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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K







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

For the fiscal year ended December 31, 2007

OR



| ̈ | 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

(Exact name of registrant as
specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|GEORGIA                                                        |  | 58-2005097                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |                 
|---------------------------------------- |  | ----------------
|3530 Wheeler Road Augusta, Georgia       |  | 30909 (Zip Code)
|(Address of principal executive offices) |  |                 

(706) 738-6990

(Registrants telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)





Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $3.00 par value per share





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
Yes   ̈    No  x

Indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ̈    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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



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

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

As of June 30, 2007, the aggregate market value of the registrants common stock held by non-affiliates of the registrant was $106,116,720 based on the closing sale price of $40.00 per share as reported on
the Over the Counter Bulletin Board.

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



|                                     |  |                             
|------------------------------------ |  | ----------------------------
|Class                                |  | Outstanding at March 3, 2008
|Common Stock, $3 par value per share |  | 5,414,888 shares            

DOCUMENTS INCORPORATED BY REFERENCE



|                                                                                 |  |                              
|-------------------------------------------------------------------------------- |  | -----------------------------
|Document                                                                         |  | Parts Into Which Incorporated
|Proxy Statement for the Annual Meeting of Shareholders to be held April 23, 2008 |  | Part III                     









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|Item 1. | Description of Business
|------- | -----------------------

General

Southeastern Bank Financial Corporation (the Company) is a Georgia corporation that is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the Federal Reserve) under the Bank Holding Company Act of 1956, as amended (the BHCA). The Company had total consolidated assets of $1.2 billion, total deposits of $952.2 million and
total stockholders equity of $89.8 million at December 31, 2007. The Company has two wholly-owned subsidiaries that primarily do business in the Augusta-Richmond County, GA-SC metropolitan area-Georgia Bank & Trust Company of
Augusta (GB&T) and Southern Bank & Trust (SB&T). GB&T, a Georgia state bank, operates nine full service branches in Augusta, Martinez, and Evans, Georgia, and one branch in Athens, Georgia, with mortgage
origination offices located in Augusta, Savannah and Athens, Georgia. SB&T Capital Corporation (the LPO) a wholly owned subsidiary of the Bank, was organized on August 16, 2007 and opened an office in Greenville, South Carolina.
On November 1, 2007, GB&T entered into an Operating Agreement with NMF Asset Management LLC (NMF) whereby GB&T became a 30% partner. NMF is an investment management firm that provides services to individuals, trusts,
pensions, nonprofit organizations as well as other institutions. SB&T, a federally chartered thrift, operates three full service branches in North Augusta and Aiken, South Carolina. The Companys operations campus is located in Martinez,
Georgia and services both subsidiaries.

The Company is community oriented and focuses primarily on offering real estate, commercial and
consumer loans and various deposit and other services to individuals, small to medium sized businesses and professionals in its market area. The Company is the largest locally owned and operated financial institution headquartered in Richmond and
Columbia Counties. Each member of the Companys management team is a banking professional with many years of experience in the Augusta or Aiken market with this and other banking organizations. A large percentage of Company management has
worked together for many years. The Company competes against the larger regional and super-regional banks operating in its market by emphasizing the stability and accessibility of its management, managements long-term familiarity with the
market, immediate local decision making and the pride of local ownership.

The Companys internet address is
www.georgiabankandtrust.com. It makes available free of charge through its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC.

The public may read and copy any materials that the Company files with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The Internet
address of the SEC website is www.sec.gov.

History

GB&T was organized by a group of local citizens from Richmond and Columbia Counties and commenced business from the main office location at 3530 Wheeler Road in Augusta on August 28, 1989. GB&T opened its
first Augusta branch at 3111 Peach Orchard Road in December 1991 and its



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second Augusta branch at 1530 Walton Way in December 1992. GB&T became a subsidiary of the Company in February 1992 as a result of its holding company
reorganization. The Company acquired FCS Financial Corporation and First Columbia Bank (First Columbia) on December 31, 1992. This allowed the Company to expand into neighboring Columbia County. In July 1993, First Columbia merged
into GB&T, and GB&T now operates the former main office of First Columbia at 4105 Columbia Road, Martinez, Georgia as a branch. GB&T opened a second branch in Columbia County in November 1994 that is located in Evans, Georgia. In October
1995, GB&T opened its sixth banking office at 3133 Washington Road. GB&T opened a full service branch in May 2001 in Martinez, Georgia, the third Columbia County branch. In September 2004, GB&T opened its eighth banking office located in
the Cotton Exchange historic building in downtown Augusta, Georgia. In December 2005, GB&T opened its ninth banking office and first full service branch outside of the Augusta market in Athens, Georgia. GB&T opened a full service branch in
July 2007, the fourth branch to be opened in Columbia County. On August 16, 2007, SB&T Capital Corporation, a wholly owned subsidiary of GB&T, was organized in South Carolina and opened their first loan production office November 2007
in Greenville, South Carolina. On November 1, 2007 GB&T entered into an Operating Agreement with NMF Asset Management LLC (NMF) whereby GB&T became a 30% partner. The principal office of NMF is located at 815 Colorado Avenue
in Stuart, Florida. SB&T was organized by the Company during 2005 and 2006, opening its main office in Aiken, South Carolina on September 12, 2006. SB&T opened its first North Augusta branch at 336 Georgia Avenue in August 2007.
SB&T opened its second Aiken branch at 149 Laurens Street on January 10, 2008.

Management Team

GB&T was founded with an experienced management team, and that team has continued to expand with the growth of the bank. GB&Ts President and
Chief Executive Officer, R. Daniel Blanton, was involved in the organization of GB&T in 1988 and previously served with a predecessor to First Union National Bank, Georgia State Bank, for over thirteen years. With the acquisition of First
Columbia, GB&T obtained its Executive Vice President and Chief Operating Officer, Ronald L. Thigpen, who had served as Chief Executive Officer of First Columbia since 1991, and before that served in various capacities with First Union National
Bank and its predecessors. GB&Ts senior loan officer and Group Vice President, Tom C. McLaughlin, has been associated with GB&T for fifteen years, and worked previously with Mr. Blanton at Georgia State Bank. Regina W. Mobley,
Group Vice President, Bank Operations, has been with GB&T since the acquisition of First Columbia Bank. With over 30 years of bank operations experience, she previously served First Columbia Bank and C & S National Bank, as predecessor of
Bank of America. GB&Ts senior credit officer and Group Vice President, James R. Riordan, Jr., joined the team in 2002. For the prior ten years, he served in various capacities with SunTrust Bank, Augusta, N. A., most recently as senior
lending officer. He has 21 years of bank lending and credit administration experience. Jay Forrester, Group Vice President, Retail Banking, has been associated with GB&T since 1995. He previously served as Vice President, Commercial Lending for
C & S National Bank and NationsBank, predecessors of Bank of America. In September 2004, Robert C. Osborne, Jr., joined GB&T as Executive Vice President and head of Wealth Management. For the prior 28 years, he was associated with
Wachovia Corporation in Atlanta and Augusta, most recently as head of their Wealth Management unit in Augusta.

The Company opened SB&T
with a management team that has extensive experience in the Aiken, South Carolina market. In 2005, both Frank Townsend and Darrell Rains joined GB&T with the responsibility of organizing SB&T. Frank Townsend became President and Chief
Executive Officer of SB&T upon its opening in September 2006. Prior to joining GB&T, Mr. Townsend spent eleven years with Regions Bank and was the Commercial Sales Manager for the Central Carolina Bank in Aiken. He has 22
years experience in both banking and insurance. Darrell Rains, Group Vice President and Chief Financial Officer, has over 27 years of financial experience, including service at Regions Bank as



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Regional Financial Officer for the Mid-Atlantic Region and at Palmetto Federal, a predecessor to Regions Bank in Aiken, S.C., as Chief Financial Officer. He
serves as Chief Financial Officer for the Company, GB&T and SB&T.

Market Area

The Companys primary market area includes Richmond and Columbia Counties in Georgia and Aiken County in South Carolina, all part of the
Augusta-Richmond County, GA-SC metropolitan statistical area (MSA). The 2006 population of the Augusta-Richmond County, GA-SC MSA was 523,249, the second largest in Georgia and fourth largest in South Carolina. The Augusta market area has a
diversified economy based principally on government, public utilities, health care, manufacturing, construction, and wholesale and retail trade. Augusta is one of the leading medical centers in the Southeast. Significant medical facilities include
the Medical College of Georgia, University Hospital, Veterans Administration Hospital, Dwight D. Eisenhower Hospital, Gracewood State School and Hospital, Doctors Hospital and Trinity Hospital. Other major employers in the Augusta market
area include Westinghouse Savannah River Site (nuclear defense), the Fort Gordon military installation, E-Z Go/Textron (golf car manufacturer), the Richmond County school system and the Columbia County school system. Major employers in the Aiken
market include Westinghouse Savannah River Site (nuclear defense), Aiken County Board of Education, Bechtel Savannah River Company (engineering construction firm), Wal-Mart Associates Inc., Kimberly Clark Corporation, and BFS North American Tire,
LLC. The area is served by Interstate 20, which connects it to Atlanta, 140 miles to the west and Columbia, South Carolina, 70 miles to the east. Augusta is also served by a major commercial airport (Bush Field) and a commuter airport (Daniel
Field). The average unemployment rate for the Augusta-Richmond County MSA was 5.9% in 2006. Between June 2006 and June 2007 (the latest date for which FDIC information is available), total commercial bank and thrift deposits in the Augusta-Richmond
County, GA-SC MSA increased 10.2% from $5.9 billion to $6.5 billion. Based on data reported as of June 30, 2007, GB&T has 12.87% of all deposits in the Augusta-Richmond County, GA-SC MSA and is the second largest depository institution. The
demographic information as presented above is based upon information and estimates provided by the U.S. Census Bureau, U.S. Department of Labor, the Federal Deposit Insurance Corporation (FDIC), Augusta Metro Chamber of Commerce, and the
South Carolina Employment Security Commission.

The Company entered the Athens, GA market in December 2005. The 2006 population for the
Athens-Clarke County, GA MSA was 185,479, ranked sixth in the state of Georgia. The Athens market area has a diversified economy based primarily on government, retail services, tourism, manufacturing, other services, and health care, with the
largest share of government jobs in the state. Major employers in the Athens area include the University of Georgia, Athens Regional Medical Center, Pilgrims Pride (poultry processing plant), St. Marys Hospital, Clarke County School
District, Gold Kist, Inc., and the Athens-Clarke County Unified Government. Athens is located 70 miles northeast of Atlanta and 120 miles northwest of Augusta. The average unemployment rate for the Athens-Clarke County MSA was 3.7% in 2006. Total
commercial bank and thrift deposits for the Athens-Clarke County MSA increased 7.7% from $2.6 billion to $2.8 billion between June 2006 and June 2007. The demographic information presented above is based upon information and estimates provided by
the U.S. Census Bureau, U.S. Department of Labor, the FDIC and the Athens Chamber of Commerce.

In August 2007 the Company entered the
Greenville, SC market. The 2006 population for the Greenville-Mauldin-Easley, SC MSA was 601,986, ranked third in the state of South Carolina. The Greenville market area has a diversified economy based primarily on government, manufacturing,
construction, retail services, and health care. There are over 250 international firms in the Upstate and Greenville is home to such corporations as Fluor and Michelin. Other major employers in the Greenville area include the Greenville Hospital
System, Greenville County School District, General



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Electric Co., St. Francis Health System, and the Greenville County Government. Greenville is located approximately halfway between the cities of Atlanta, GA
and Charlotte, NC along Interstate I-85. The average unemployment rate for the Greenville-Mauldin-Easley MSA was 5.7% in 2006. The demographic information presented above is based upon information and estimates provided by the U.S. Census Bureau,
U.S. Department of Labor, and the Greenville Chamber of Commerce.

Lending Activities

The Company offers a wide range of lending services, including real estate, commercial and consumer loans, to individuals, small to medium-sized
businesses and professionals that are located in, or conduct a substantial portion of their business in, the Companys market area. The Companys total loans at December 31, 2007, were $882.7 million, or 77.8% of total
interest-earning assets. An analysis of the composition of the Companys loan portfolio is set forth under Managements Discussion and Analysis of Financial Condition and Results of OperationsComposition of the Loan
Portfolio.

Real Estate Loans. Loans secured by real estate are the primary component of the Companys loan portfolio,
constituting $756.7 million, or 85.7% of the Companys total loans, at December 31, 2007. These loans consist of commercial real estate loans, construction and development loans, residential real estate loans, and home equity loans.

Commercial Real Estate Loans.At December 31, 2007, the Company held $236.4 million of commercial real estate loans of various
sizes secured by office buildings, retail establishments, and other types of property. These commercial real estate loans represented 26.8% of the Companys total loans at December 31, 2007. Loan terms are generally limited to five years
and often do not exceed three years, although the installment payments may be structured on a 20-year amortization basis with a balloon payment at maturity. Interest rates may be fixed or adjustable. The Company generally charges an origination fee.
Management attempts to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 80%. In
addition, the Company requires personal guarantees from the principal owners of the property supported with an analysis by the Company of the guarantors personal financial statements in connection with a substantial majority of such loans. The
Company experienced $186,000 in net charge-offs on commercial real estate loans during 2007. A number of the loans classified as commercial real estate loans are, in fact, commercial loans for which a security interest in real estate has been taken
as additional collateral. These loans are subject to underwriting as commercial loans as described below.

Construction and Development
Loans. Construction and development real estate loans comprise $318.4 million, or 36.1% of the Companys total loans at December 31, 2007. A construction and development loan portfolio presents special problems and risks, requiring
additional administration and monitoring. This is necessary since most loans are originated as lines of credit and draws under the line require specific activities which add value to the asset, such as progress on the completion of a building
or the placement of utilities and roads in a development. This requires specialized knowledge on the part of our personnel to appraise and evaluate that progress, hence the higher level of administration and monitoring. The level of
construction and development loans are representative of the character of the Companys market. The Company subjects this type of loan to underwriting criteria that include: certified appraisal and valuation of collateral; loan-to-value margins
(typically not exceeding 75%); cash equity requirements; evaluations of borrowers cash flows and alternative sources of repayment; and a determination that the market is able to absorb the project on schedule.

To further reduce the risk related to construction and development loans, the Company generally relies upon the long-standing relationships between its
loan officers and the



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developer/contractor borrowers. In most cases, these relationships exceed ten years. The Company targets seasoned developers and contractors who have
experience in the local market. Various members of the Companys Board of Directors have close contacts with the construction industry: Robert W. Pollard, Jr. owns and operates a lumber manufacturing company; E. G. Meybohm owns the largest
local real estate brokerage firm; William J. Badger owns and operates a building supply company; and Larry S. Prather owns a utility and grading company. Through these connections to the industry, the Company attempts to monitor current economic
conditions in the marketplace for residential real estate, and the financial standing and ongoing reputation of its construction and development borrowers.

Infrastructure development loans are generally made with an initial maturity of one year, although the Company may renew the loan for up to two additional one-year terms to allow the developer to complete the sale of
the lots comprising the property before requiring the payment of the related loan. These loans typically bear interest at a floating rate and the Company typically charges an origination fee. These loans are repaid, interest only, on a monthly or
quarterly basis until sales of lots begin, and then principal payments are made as each lot is sold at a rate allowing the Company to be repaid in full by the time 75% of the lots have been sold. In order to reduce the credit risk associated with
these loans, the Company requires the projects loan to value ratio (on an as completed basis) to be not more than 75%. The Company experienced $903,000 in net loan charge-offs on construction and development loans during 2007, due to one loan
for $915,000 charged off in December 2007.

Residential construction loans are typically made for homes with a completed value in the range
of $100,000 to $500,000. Loans are typically made for a term of six months to twelve months. Typically, these loans bear interest at a floating rate and the Company collects an origination fee. The Company may renew these loans for an additional
term (up to 24 months total) to allow the contractor time to market the home. In order to reduce the credit risk with respect to these loans, the Company restricts the number and dollar amount of loans that are made for homes being built on a
speculative basis and carefully manages its aggregate lending relationship with each borrower.

Residential Loans. The Company
originates, on a selective basis, residential loans for its portfolio on single and multi-family properties, both owner-occupied and non-owner-occupied. At December 31, 2007, the Company held $190.6 million of such loans, including home equity
loans, representing 21.6% of the Companys loan portfolio, as compared to $158.5 million, or 21.1% of the Companys loan portfolio at December 31, 2006. This portfolio typically includes 15 or 30-year adjustable rate mortgage loans
whose terms mirror those prevalent in the secondary market for mortgage loans or, less typically, floating rate non-amortized term loans for purposes other than acquisition of the underlying residential property. A limited number of fixed rate loans
are maintained in the portfolio when there are compelling market reasons to do so. Generally, all fixed rate residential loans are sold into the secondary market. In the case of home equity loans and lines of credit, the underwriting criteria are
the same as applied by the Company when making a first mortgage loan, as described above. Home equity lines of credit typically mature ten years after their origination. The Company experienced net loan charge-offs on residential loans of $164,000
during 2007.

The Company also originates residential loans for sale into the secondary market, an activity that began with the acquisition
of First Columbia. The Company originates both fixed and variable rate residential mortgage loans for sale with servicing released. Loans originated for sale into the secondary market are approved for purchase by an investor prior to closing. The
Company generates loan origination fees, typically ranging from 1.0% to 1.5% of the loan balance, and servicing release fees, generally ranging from 0.25% to 0.75% of the loan balance, both of which are recognized as income when the loan is sold.
The Company minimizes interest rate and credit risk on these loans by locking the interest rate for each loan with the secondary investor and receiving the investors underwriting approval prior to originating the loan. The Company had $11.3
million of such loans at December 31, 2007, representing 1.3% of the Companys total loans.



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Commercial Loans. The Company makes loans for commercial purposes to various types of businesses.
At December 31, 2007, the Company held $93.3 million of these loans, representing 10.6% of the total loan portfolio, excluding for these purposes commercial loans secured by real estate. See Real Estate Loans. Equipment loans are
made for a term of up to five years (more typically three years) at fixed or variable rates, with the loan being fully amortized over the term and secured by the financed equipment with a loan-to-value ratio based on the overall relationship and
creditworthiness of the customer. Working capital loans are made for a term typically not exceeding one year. These loans are usually secured by accounts receivable or inventory, and principal is either repaid as the assets securing the loan are
converted into cash, or principal is due at maturity. The Company experienced net loan charge-offs on commercial loans of $391,000 during 2007.

Consumer Loans. The Company makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans, and revolving lines of credit such as overdraft protection. At
December 31, 2007, the Company held $33.6 million of consumer loans, representing 3.8% of total loans. These loans typically carry balances of less than $25,000 and earn interest at a fixed rate. Non-revolving loans are either amortized over a
period generally not exceeding 60 months or are ninety-day term loans. Revolving loans require monthly payments of interest and a portion of the principal balance (typically 2 to 3% of the outstanding balance). The Company entered the indirect
lending business in 1997 and currently purchases sales finance contracts from dealers for new and used automobiles and home improvements. At December 31, 2007, indirect loans outstanding totaled $4.2 million. The Company experienced net
charge-offs on consumer loans of $108,000 during 2007 and net recoveries of $97,000 during 2006.

Loan Approval and Review. The
Companys loan approval policies provide for various levels of officer lending authority. When the aggregate amount of outstanding loans to a single borrower exceeds that individual officers lending authority, the loan request must be
considered and approved by an officer with a higher lending limit or by the Directors Loan Committee. Individual officers lending limits range from $15,000 to $2.0 million depending on seniority and the type of loan. Any loan in excess
of the lending limit of senior bank officers must be approved by the Directors Loan Committee.

The Company has a loan review
procedure involving multiple officers of the Company which is designed to promote early identification of credit quality problems. All loan officers are charged with the responsibility of rating all their loans and reviewing those loans on a
periodic basis, the frequency of which increases as the quality of the loans decreases. The Senior Vice President and Manager of Credit Administration are charged with the responsibility of ensuring that all significant lending relationships are
reviewed annually. The Companys current goal is to annually review lending relationships in excess of $500,000. In addition, the Credit Administration Department is generally involved in the analysis of all loans that require Directors
Loan Committee approval.

Deposits

The
Company offers a variety of deposit programs to individuals and to small to medium-sized businesses and other organizations at interest rates generally consistent with local market conditions. The following table sets forth the mix of depository
accounts for the Company as a percentage of total deposits at December 31, 2007.



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Deposit Mix



|                           |  |                        |         |  |        |  
|-------------------------- |  | ---------------------- | ------- |  | ------ | -
|                           |  | (Dollars in Thousands) |        
|Noninterest-bearing demand |  | $                      | 101,272 |  | 10.64  | %
|Interest checking          |  |                        | 132,186 |  | 13.88  | %
|Money management           |  |                        | 73,609  |  | 7.73   | %
|Savings                    |  |                        | 289,731 |  | 30.43  | %
|Time deposits              |  |                        |         |  |        |  
|Under $100,000             |  |                        | 111,867 |  | 11.75  | %
|$100,000 and over          |  |                        | 243,501 |  | 25.57  | %
|                           |  |                        |         |  |        |  
|                           |  | $                      | 952,166 |  | 100.00 | %
|                           |  |                        |         |  |        |  

The Company accepts deposits at both main office locations and eleven branch banking offices,
twelve of which maintains an automated teller machine. The Company is a member of Mastercards Maestro and Cirrus networks, VISA Plus, as well as the STAR network of automated teller machines, which permits customers to perform
certain transactions in many cities throughout Georgia, South Carolina and other regions. The Company controls deposit volumes primarily through the pricing of deposits and to a certain extent through promotional activities such as free
checking. The Company also utilizes other sources of funding, specifically repurchase agreements, Federal Home Loan Bank borrowings, Insured Network Deposits and brokered certificates of deposit. Deposit rates are set weekly by executive
management of the Company. Management believes that the rates it offers are competitive with, or in some cases, slightly above those offered by other institutions in its market area. The Company does not actively solicit deposits outside of its
market area.

Competition

The banking
business generally is highly competitive, and sources of competition are varied. The Company competes as a financial intermediary with other commercial banks, savings and loan associations, credit unions, mortgage banking companies, consumer finance
companies, securities brokerages, insurance companies, and money market mutual funds operating in Richmond, Columbia and Clarke Counties in Georgia, Aiken County in South Carolina and elsewhere. In addition, customers conduct banking activities
without regard to geographic barriers through computer-based banking and similar services.

Many of the financial organizations in
competition with the Company have much greater financial resources, more diversified markets and larger branch networks than the Company and are able to offer similar services at varying costs with higher lending limits. In addition, with the
enactment of federal and state laws affecting interstate and bank holding company expansion, there have been major interstate acquisitions involving financial institutions which have offices in the Companys market area but are headquartered in
other states. The effect of such acquisitions (and the possible increase in size of the financial institutions in the Companys market areas) may further increase the competition faced by the Company. The Company believes, however, that it will
be able to use its local independent image to its advantage in competing for retail and commercial business.

Employees

The Company had approximately 347 full-time equivalent employees at December 31, 2007. The Company maintains training, educational and affirmative
action programs designed to prepare employees for positions of increasing responsibility in both management and operations, and provides a variety of benefit programs, including group life, health, accident and other insurance and retirement plans.
None of the Companys employees are covered by a collective bargaining agreement, and the Company believes its employee relations are generally good.



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Supervision and Regulation

The Company, GB&T and SB&T are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws generally are
intended to protect depositors and not shareholders.

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.
| | - |  | -----------------------------------------------------------------------------------------

Set forth below is a summary of the major pieces of legislation affecting the Companys industry and how that legislation affects its actions. The
following summary is qualified by references to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on the Companys business and prospects, and legislative changes and the
policies of various regulatory authorities may significantly affect its operations. We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on the Companys business and earnings in the
future.

The Company

The
Company owns all of the capital stock of GB&T and SB&T and is a multi-bank holding company under the federal Bank Holding Company Act of 1956. As a result, the Company is primarily subject to the supervision, examination, and reporting
requirements of the Bank Holding Company Act and the regulations of the Federal Reserve. As a bank holding company located in Georgia, the Georgia Department of Banking and Finance (GDBF) also regulates and monitors all significant
aspects of the Companys operations. GB&T is a commercial bank regulated by the GDBF, while SB&T is a federally chartered thrift regulated by the Office of Thrift Supervision (OTS). Both subsidiaries are regulated by the
FDIC.

Acquisitions of Banks.The Bank Holding Company Act requires every bank holding company to obtain the Federal
Reserves prior approval before:



| |  |  | 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.
| | - |  | -------------------------------------------------------------

Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly or, substantially lessen competition or
otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also
required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserves consideration of financial
resources generally focuses on capital adequacy, which is discussed below.



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Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Company or any
other bank holding company located in Georgia may purchase a bank located outside of Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Georgia may purchase a bank located inside Georgia. In
each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. Currently, Georgia law prohibits acquisitions of banks
that have been incorporated for less than three years.

Change in Bank Control.Subject to various exceptions, the
Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring control of a bank holding company. Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is refutably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting
securities and either:



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------

The Companys common stock is registered under the Securities Exchange Act of 1934. The regulations also provide a procedure for challenging the rebuttable
presumption of control.

Permitted Activities. The Bank Holding Company Act has generally prohibited a bank holding company
from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the
Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a
financial holding company. Under the regulations implementing the Gramm-Leach-Bliley Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activity. Those
activities include, among other activities, certain insurance and securities activities.

To qualify to become a financial holding company,
any depository institution subsidiary of the Company must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least satisfactory. Additionally, the Company must file an election with the Federal
Reserve to become a financial holding company and must provide the Federal Reserve with 30 days written notice prior to engaging in a permitted financial activity. While the Company meets the qualification standards applicable to financial
holding companies, the Company has not elected to become a financial holding company at this time.

Capital Adequacy. The
Company, GB&T and SB&T are required to comply with the capital adequacy standards established by the Federal Reserve, in the case of the Company, and the FDIC, in the case of GB&T and SB&T. The Federal Reserve has established a
risk-based and a leverage measure of capital adequacy for bank holding companies. GB&T and SB&T are also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the
Federal Reserve for bank holding companies.



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The risk-based capital standards are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan
commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2
Capital. Tier 1 Capital generally consists of common stockholders equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, a limited amount of qualifying cumulative
perpetual preferred stock, and notes payable to unconsolidated special purpose entities that issue trust preferred securities, net of investment in the entity, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least
4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock and hybrid capital, and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. The
Companys ratio of total capital to risk-weighted assets was 12.61% and the ratio of Tier 1 Capital to risk-weighted assets was 11.38% at December 31, 2007.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other
specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserves risk-based capital measure for market risk. All other bank holding
companies generally are required to maintain a leverage ratio of at least 4%. At December 31, 2007, our leverage ratio was 9.08%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating
proposals for expansion or new activities.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of
enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. As described in Prompt Corrective
Action below, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.

Payment of Dividends

The Company is a legal entity separate and distinct from its subsidiaries. The principal sources of
the Companys cash flow, including cash flow to pay dividends to its shareholders, are dividends paid by the subsidiaries to the Company. Statutory and regulatory limitations apply to GB&Ts and SB&Ts payment of dividends.
If, in the opinion of the federal banking regulator, such subsidiaries were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulator could require, after notice and a hearing, that it stop or refrain from
engaging in the questioned practice. The federal banking agencies have indicated that paying dividends that deplete a depository institutions capital base to an inadequate level would be an unsafe and unsound banking practice. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution



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may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have
issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. See The CompanyPrompt Corrective Action.

GB&T and SB&T have additional restrictions for dividends imposed by their respective regulatory agencies. Cash dividends on GB&Ts
common stock may be declared and paid only out of its retained earnings, and dividends may not be declared at any time when GB&Ts paid-in capital and appropriated earnings do not, in combination, equal at least 20% of its capital stock
account. In addition, the GDBFs current rules and regulations require prior approval before cash dividends may be declared and paid if: (1) the banks ratio of equity capital to adjusted total assets is less than 6%; (ii) the
aggregate amount of dividends declared or anticipated to be declared in that calendar year exceeds 50% of the banks net profits, after taxes but before dividends, for the previous calendar year; or (iii) the percentage of the banks
loans classified as adverse as to repayment or recovery by the GDBF at the most recent examination of the bank exceeds 80% of the banks equity as reflected at such examination. The OTS must approve any dividend payment made by SB&T during
its first three years of operation pursuant to the business plan that was filed as part of its initial charter.

GB&T declared cash
dividends payable to the Company of $0 in 2007, $500,000 in 2006 and $3.5 million in 2005. The Company has paid cash dividends of $0.13 per share each quarter since 2004, which totaled $2.8 million in 2007 and 2006, and $2.7 million in 2005.

Restrictions on Transactions with Affiliates

The Company, GB&T and SB&T are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a banks capital and surplus and, as to all
affiliates combined, to 20% of a banks capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. GB&T and SB&T must also
comply with other provisions designed to avoid the taking of low-quality assets.

The Company, GB&T and SB&T are also subject to
the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as
favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.



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GB&T and SB&T are also subject to restrictions on extensions of credit to their executive
officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

Support of Subsidiary Institutions. Under Federal Reserve policy, the Company is expected to act as a source of financial strength for its subsidiaries and to commit resources to support them. This support may be required at
times when, without this Federal Reserve policy, the Company might not be inclined to provide it. In addition, any capital loans made by the Company to its subsidiaries will be repaid only after the applicable subsidiarys deposits and various
other obligations are repaid in full. In the unlikely event of the Companys bankruptcy, any commitment by it to a federal bank regulatory agency to maintain the capital of GB&T and SB&T will be assumed by the bankruptcy trustee and
entitled to a priority of payment.

Prompt Corrective Action.The Federal Deposit Insurance Corporation Improvement
Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of the other
categories. At December 31, 2007, both GB&T and SB&T qualified for the well-capitalized category.

Federal banking regulators
are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in
which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

FDIC Insurance Assessments. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into
account the risks attributable to different categories and concentrations of assets and liabilities. The system assesses higher rates on those institutions that pose greater risks to the Deposit Insurance Fund (the DIF). The FDIC places
each institution in one of four risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory group assignment). Within the lower risk category, Risk
Category I, rates will vary based on each institutions CAMELS component ratings, certain financial ratios, and long-term debt issuer ratings.

Capital group assignments are made quarterly and an institution is assigned to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described above, with the undercapitalized category including institutions that are undercapitalized, significantly undercapitalized and critically undercapitalized for
prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institutions primary federal banking regulator provides to the FDIC and information that
the FDIC determines to be relevant to the institutions financial condition and the risk posed to the deposit insurance funds. Assessments range from 5 to 43 cents per $100 of deposits, depending on the institutions capital group and
supervisory subgroup. Institutions that are well capitalized will be charged a rate between 5 and 7 cents per $100 of deposits.



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The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe
and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions
within their respective jurisdictions, the Federal Reserve or the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also
considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Company.Additionally, we must publicly
disclose the terms of various Community Reinvestment Act-related agreements.

Allowance for Loan and Lease Losses. The
Allowance for Loan and Lease Losses (the ALLL) represents one of the most significant estimates in the Companys financial statements and regulatory reports. Because of its significance, the Company has developed a system by which
it develops, maintains and documents a comprehensive, systematic and consistently applied process for determining the amounts of the ALLL and the provision for loan and lease losses. The Interagency Policy Statement on the Allowance for Loan and
Lease Losses, issued on December 13, 2006, encourages all banks to ensure controls are in place to consistently determine the ALLL in accordance with GAAP, the banks stated policies and procedures, managements best judgment and
relevant supervisory guidance. Consistent with supervisory guidance, the Company maintains a prudent and conservative, but not excessive, ALLL, that is at a level that is appropriate to cover estimated credit losses on individually evaluated loans
determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The Companys estimate of credit losses reflects consideration of all significant factors that affect the collectability of
the portfolio as of the evaluation date. See Managements Discussion and Analysis  Critical Accounting Policies.

Commercial Real Estate Lending. Our lending operations may be subject to enhanced scrutiny by federal banking regulators based on its concentration of commercial real estate loans. On December 6, 2006, the federal banking
regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate (CRE) lending concentrations. CRE loans generally include land development, construction loans and loans secured by multifamily
property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property

Other Regulations. Interest and other charges collected or contracted for are subject to state usury laws and federal laws concerning interest rates.

Our loan operations are also subject to federal laws applicable to credit transactions, such as the:



| |  |  | federal 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, as amended by the Fair and Accurate Credit
Transactions Act, which became effective in 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Soldiers and Sailors Civil Relief Act of 1940, as amended by the Service members Civil Relief Act, 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 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

Our deposit operations are subject to:



| |  |  | Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

Georgia Bank & Trust Company

Because
GB&T is a commercial bank chartered under the laws of the State of Georgia, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the GDBF. The FDIC and the GDBF regularly examine GB&Ts
operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies also have the power to prevent the continuance or development of unsafe or unsound banking
practices or other violations of law.

Branching.Under current Georgia law, GB&T may open branch offices
throughout Georgia with the prior approval of the Georgia Department of Banking and Finance. In addition, with prior regulatory approval, GB&T may acquire branches of existing banks located in Georgia. GB&T and any other national or
state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states laws. Georgia law, with limited exceptions, currently permits branching across state lines through
interstate mergers.

Under the Federal Deposit Insurance Act, states may opt-in and allow out-of-state banks to branch into
their state by establishing a new start-up branch in the state. Currently, Georgia has not opted-in to this provision. Therefore, interstate merger is the only method through which a bank located outside of Georgia may branch into Georgia. This
provides a limited barrier of entry into the Georgia banking market, which protects us from an important segment of potential competition. However, because Georgia has elected not to opt-in, our ability to establish a new start-up branch in another
state may be limited. Many states that have elected to opt-in have done so on a reciprocal basis,



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meaning that an out-of-state bank may establish a new start-up branch only if their home state has also elected to opt-in. Consequently, until Georgia
changes its election, the only way we will be able to branch into states that have elected to opt-in on a reciprocal basis will be through interstate merger. The Company entered the South Carolina market by chartering a thrift, which is not subject
to the same limitation.

Southern Bank & Trust

SB&T is a federally chartered thrift subject to the supervision, examination and reporting requirements of the OTS. The OTS regularly examines SB&Ts operations and has the authority to approve or
disapprove mergers, the establishment of branches and similar corporate actions, as well as the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Qualified Thrift Lender Status. To be a Qualified Thrift Lender (QTL), an institution must meet the requirements of the Home Owners Loan Act
QTL test for nine out of the last twelve months or the taxable year.

Under the QTL test, an institution must hold Qualified Thrift
Investments (QTI) equal to at least 65.0% of its portfolio assets. QTI must fall into one of the two following categories: (1) assets that are includable in QTI without limit; or (2) assets limited to 20% of portfolio assets. Portfolio
assets are total assets minus goodwill and other identifiable intangible assets, office property, and liquid assets not exceeding 20% of total assets. An institution ceases to be a QTL when its actual thrift investment percentage (the ratio of QTI
divided by portfolio assets) falls, at month end, below 65.0% for four months within any 12-month period. At December 31, 2007, the actual thrift investment percentage for SB&T was 80.47%.

Assets that are includable as QTI without limit include:



| |  |  | Loans to purchase, refinance, construct, improve or repair domestic residential or manufactured housing;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Home equity loans;
| | - |  | ------------------



| |  |  | Educational loans;
| | - |  | ------------------



| |  |  | Small business loans;
| | - |  | ---------------------



| |  |  | Loans made through credit card or credit card accounts;
| | - |  | -------------------------------------------------------



| |  |  | Securities backed by or representing an interest in mortgages on domestic residential or manufactured housing;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Federal Home Loan Bank stock; and
| | - |  | ---------------------------------



| |  |  | Obligations of the FDIC, FSLIC, RTC, and the FSLIC Resolution Fund.
| | - |  | -------------------------------------------------------------------

Assets that are includable as QTI up to 20% of portfolio assets include:



| |  |  | Fifty percent of the amount of domestic residential housing mortgage loans originated and sold within 90 days. An institution may, on a consistent basis, include as
QTI either the sales amounts from a previous quarter or the previous rolling 90 days or three-month period;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Investments in a service corporation that derives at least 80% of its gross revenues from activities related to domestic or manufactured residential housing;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Two hundred percent of the amount of loans and investments in starter homes;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Two hundred percent of the amount of certain loans in credit-needy areas;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Loans for the purchase, construction, development, or improvements of community service facilities not in credit-needy areas;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Loans for personal, family, or household purposes (other than those reported in the assets includable without limit category); and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | FNMA and FHLMC stock.
| | - |  | ---------------------

Lending
Limit. Lenders create a form of concentration risk when they extend a significant amount of credit to any one borrower or to borrowers who are related in a common enterprise. As such, savings associations are subject to regulatory limitations on
loans to one borrower. Under the general lending limit an associations total loans and extensions of credit outstanding to one borrower at one time shall not exceed 15% of the associations unimpaired capital and unimpaired surplus. If
certain qualifications are met, the savings association can have an additional 10% for loans and extensions of credit fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price
quotations, at least equal to the amount of the funds outstanding. There are also other exceptions to the general lending limit based on the loan type. The Director of the OTS may impose more stringent restrictions on a savings associations
loans to one borrower if OTS determines that such restrictions are necessary to protect the safety and soundness of the association.

Unimpaired capital and unimpaired surplus are defined as: core capital and supplementary capital included in total capital, plus any allowance for loan losses not included in supplementary capital, plus the amount of investment in, and
advances to, subsidiaries not included in calculating core capital. As of December 31, 2007, the general lending limit for loans to one borrower for SB&T was $2.0 million.

Unlike commercial banks, thrifts may generally make the following categories of loans only to the extent specified:



| |  |  | Commercial loans up to 20% of assets (50% of which must be in small business loans).
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Nonresidential real property loans up to 400% of capital (the OTS may grant increased authority if it is determined that the increased authority poses no
significant threat to the safe and sound operation of the institution and is consistent with prudent operating practices).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consumer loans up to 35% of assets (all loans in excess of 30% of assets must be direct loans).
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Education loans up to 5% of assets.
| | - |  | -----------------------------------



| |  |  | Non-conforming loans up to 5% of assets.
| | - |  | ----------------------------------------



| |  |  | Construction loans (residential) without security up to 5% of assets.
| | - |  | ---------------------------------------------------------------------

Other Regulations. The Company received approval of its application for permission to organize SB&T on July 12, 2006, and SB&T began
operations in September 2006. This approval includes, but is not limited to, the following conditions that must be complied with in a manner satisfactory to the Regional Director of the OTS:



| |  |  | SB&T must submit independent audit reports to the Regional Director for its first three years of operations;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | SB&T must operate within the parameters of the business plan submitted with the application and submit any proposed major deviations or material changes from
the plan for the prior, written non-objection of the Regional Director. The request for change must be submitted no later than 60 calendar days prior to the desired implementation date with a copy sent to the FDIC Regional Officer;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | During the first two years of operation, SB&T must receive prior written non-objection of the Regional Director for any proposed new directors or senior
executive officers or any significant change in responsibilities of any senior executive officer; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the first eighteen months of operation, any contracts or agreements pertaining to transactions with affiliates, not yet submitted to the OTS for review, must
be provided to the Regional Director, at least 30 days prior to execution and must receive the Regional Directors written non-objection prior to implementation.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The FDIC approved SB&Ts application for federal deposit insurance on May 26, 2006 subject to the condition that the Tier 1 capital to
assets leverage ratio be maintained at not less than 8% throughout the first three years of operation and that an adequate allowance for loan and lease losses be provided.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that
contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States. We cannot predict whether or in what form any proposed regulation or
statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve Banks monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks and thrifts through its power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its
regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.



|Item 1A. | Risk Factors
|-------- | ------------

An investment in our common stock
involves risks. If any of the following risks or other risks, which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results of operations could be harmed. In such a
case, the trading price of our common stock could decline, and investors could lose all or part of their investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those
discussed in these forward-looking statements.

We could suffer loan losses from a decline in credit quality.

We could sustain losses if borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted
underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for credit losses that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance,



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tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could
materially adversely affect our results of operations. In particular, we face credit quality risks presented by past, current and potential economic and real estate market conditions as more fully described in the risk factors appearing below.

As a community financial institution, we have different lending risks than larger banks.

We provide services to our local communities. Our ability to diversify our economic risks is limited by our own local markets and economies. We lend
primarily to small to medium-sized businesses and, to a lesser extent, individuals, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories.

We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval
and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the
establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, the economies in which we and our borrowers operate, as well as the judgment of our regulators. Our loan loss reserves may not be
sufficient to absorb future loan losses or prevent a material adverse effect on our business, financial condition, or results of operations. See the disclosure below under Our allowance for loan losses may not be adequate to cover actual
loan losses, which may require us to take a charge to our earnings and adversely impact our financial condition and results of operations.

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.

With most of our loans concentrated in Richmond, Columbia and Clarke Counties in the State of Georgia and Aiken County
in the State of South Carolina, a decline in local economic conditions could adversely affect the values of our real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than
on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

In addition to
considering the financial strength and cash flow characteristics of borrowers, we often secure loans with real estate collateral. At December 31, 2007, approximately 85.7% of our loans had real estate as a primary or secondary component of
collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. Our markets and the U.S. generally are
experiencing a period of reduced real estate values, and if we are required to liquidate the collateral securing a significant loan or collection of loans to satisfy the debt during such a period, our earnings and capital could be adversely
affected. See the disclosure below under An economic downturn, especially one affecting our market areas, could adversely affect our financial condition, results of operations, or cash flows.

We make and hold in our portfolio a significant number of land acquisition and development and construction loans, which pose more credit risk than other types of
loans typically made by financial institutions.

We offer land acquisition and development and construction loans for builders and
developers. As of December 31, 2007, approximately $318.4 million (36%) of our loan portfolio represented loans for which the related property is neither presold nor preleased. These land acquisition and development



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and construction loans are considered more risky than other types of residential mortgage loans. The primary credit risks associated with land acquisition
and development and construction lending are underwriting, project risks and market risks. Project risks include cost overruns, borrower credit risk, project completion risk, general contractor credit risk, and environmental and other hazard risks.
Market risks are risks associated with the sale of the completed residential units. They include affordability risk, which means the risk of affordability of financing by borrowers, product design risk, and risks posed by competing projects. Given
the current environment, we expect that in 2008, the non-performing loans in our land acquisition and development and construction portfolio could increase substantially, which would reduce our interest income. These non-performing loans could also
result in an increased level of charge-offs, which would negatively impact our capital and earnings.

Our recent results may not be indicative of our
future results, and may not provide guidance to assess the risk of an investment in our common stock.

We may not be able to
sustain our historical rate of growth or may not even be able to grow our business at all. In addition, our rapid growth in prior years may distort some of our historical financial ratios and statistics. In the future, we may not have the benefit of
favorable factors that we have experienced in the past, such as a generally increasing interest rate environment or ability to find suitable expansion opportunities. For example, we experienced in 2007 and are continuing to experience in 2008 a
general downturn in the national and local economies and in our local real estate markets. Other factors, such as regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we
experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.

Our profitability is vulnerable to interest rate fluctuations.

Our profitability depends substantially upon our net interest income. Net interest income is the difference between the interest earned on assets, such as loans and investment securities, and the interest paid for
liabilities, such as savings and time deposits and out-of-market certificates of deposit. Market interest rates for loans, investments and deposits are highly sensitive to many factors beyond our control. Recently, interest rate spreads (the
difference between interest rates earned on assets and interest rates paid on liabilities) have generally narrowed as a result of changing market conditions, policies of various government and regulatory authorities and competitive pricing
pressures, and we cannot predict whether these rate spreads will narrow even further. This narrowing of interest rate spreads could adversely affect our financial condition and results of operations. In addition, we cannot predict whether interest
rates will continue to remain at present levels. Changes in interest rates may cause significant changes, up or down, in our net interest income. Depending on our portfolio of loans and investments, our results of operations may be adversely
affected by changes in interest rates. See Managements Discussion and Analysis of Results of Operations and Financial Condition  Asset/Liability Management, Interest Rate Sensitivity and Liquidity.

Our allowance for loan losses may not be adequate to cover actual loan losses, which may require us to take a charge to our earnings and adversely impact our
financial condition and results of operations.

We maintain an allowance for estimated loan losses that we believe is adequate for
absorbing any probable losses in our loan portfolio. Management determines the provision for loan losses based upon an analysis of general market conditions, credit quality of our loan portfolio, and performance of our customers relative to their
financial obligations with us. We periodically evaluate our loan portfolio for risk grading, which can result in changes in our allowance for estimated loan losses. The amount of



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future losses is susceptible to changes in economic, operating, and other conditions, including changes in interest rates, that may be beyond our control,
and such losses may exceed the allowance for estimated loan losses. Although we believe that the allowance for estimated loan losses is adequate to absorb any probable losses on existing loans that may become uncollectible, there can be no assurance
that the allowance will prove sufficient to cover actual loan losses in the future. Significant increases to the provision for loan losses may be necessary if material adverse changes in general economic conditions occur or the performance of our
loan portfolio deteriorates. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review the allowance for estimated loan losses. If these regulatory agencies require us to increase the allowance
for estimated loan losses, it would have a negative effect on our results of operations and financial condition. See Managements Discussion and Analysis of Results of Operations and Financial ConditionProvision for Loan Losses, Net
Charge-Offs and Allowance for Loan Losses.

An economic downturn, especially one affecting our market areas, could adversely affect our
financial condition, results of operations or cash flows.

Our success depends upon the growth in population, income levels,
deposits and housing starts in our primary market areas which principally include Richmond, Columbia and Clarke Counties in the State of Georgia and Aiken County in the State of South Carolina. If the communities in which we operate do not grow, or
if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. Unpredictable economic conditions may have an adverse effect on the quality of our loan portfolio and our financial performance. Economic
recession over a prolonged period or other economic problems in our market areas could have a material adverse impact on the quality of the loan portfolio and the demand for our products and services. We have already experienced a higher percentage
of non-performing loans to total loans in 2007 than in past years based in part on general economic conditions in our market areas. Future adverse changes in the economies in our market areas may have a material adverse effect on our financial
condition, results of operations or cash flows. Further, the banking industry in Georgia and South Carolina is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond our control. As community
financial institutions, we are less able to spread the risk of unfavorable local economic conditions than larger or more regional banks. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic
conditions in our primary market areas even if they do occur.

Current and anticipated deterioration in the housing market and the homebuilding
industry may lead to increased losses and further worsening of delinquencies and non-performing assets in our loan portfolios. Consequently, our results of operations may be adversely impacted.

There has been substantial industry concern and publicity over asset quality among financial institutions due in large part to issues related to subprime
mortgage lending, declining real estate values and general economic concerns. As of December 31, 2007, our non-performing assets had increased significantly to $5.5 million, or 0.62%, of our loan portfolio plus other real estate owned.
Furthermore, the housing and the residential mortgage markets recently have experienced a variety of difficulties and changed economic conditions. If market conditions continue to deteriorate, they may lead to additional valuation adjustments on our
loan portfolios and real estate owned as we continue to reassess the market value of our loan portfolio, the losses associated with the loans in default and the net realizable value of real estate owned.

The homebuilding industry has experienced a significant and sustained decline in demand for new homes and an oversupply of new and existing homes available for sale in
various markets, including some of the markets in which we lend. Our customers who are builders and developers face greater difficulty in selling their homes in markets where these trends are more pronounced. Consequently, we



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are facing increased delinquencies and non-performing assets as these builders and developers are forced to default on their loans with us. We do not know
when the housing market will improve, and accordingly, additional downgrades, provisions for loan losses and charge-offs related to our loan portfolio may occur.

We face intense competition in all of our current and planned markets.

The financial services industry, including
commercial banking, mortgage banking, consumer lending, and home equity lending, is highly competitive, and we encounter strong competition for deposits, loans, and other financial services in all of our market areas in each of our lines of
business. Our principal competitors include other commercial banks, savings banks, savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, credit unions, and mortgage companies. Many of our
non-bank competitors are not subject to the same degree of regulation as us and have advantages over us in providing certain services. Many of our competitors are significantly larger than us and have greater access to capital and other resources.
Also, our ability to compete effectively in our business is dependent on our ability to adapt successfully to regulatory and technological changes within the banking and financial services industry generally. If we are unable to compete effectively,
we will lose market share and our income from loans and other products may diminish.

Our ability to compete successfully depends on a
number of factors, including, among other things:



| |  |  | the ability to develop, maintain, and build upon long-term customer relationships based on top quality service and high ethical standards;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the scope, relevance, and pricing of products and services offered to meet customer needs and demands;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the rate at which we introduce new products and services relative to our competitors;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | customer satisfaction with our level of service; and
| | - |  | ----------------------------------------------------



| |  |  | industry and general economic trends.
| | - |  | -------------------------------------

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and
results of operations.

Our business strategy includes the continuation of growth plans, and our financial condition and results of operations could
be negatively affected if we fail to grow or fail to manage our growth effectively.

We plan to expand our business in the Aiken
County, South Carolina market and intend to continue pursuing a growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in growth stages of development,
such as recruiting and retaining qualified personnel, becoming familiar with new geographic markets and financing the expansion. Our ability to grow successfully will depend on these and other factors, including the continued availability of
desirable business opportunities and the competitive responses from other financial institutions in our market areas. If we are unable to address these factors or otherwise manage our growth effectively, our expansion efforts could have a material
adverse effect on our business, financial condition, results of operations, or future prospects, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or
declines, our results of operations could be materially adversely affected.



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Additional growth may require us to raise additional capital in the future, but that capital may not be available
when it is needed, which could adversely affect our financial condition and results of operations.

We are required by federal and
state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future, although we may need to raise
additional capital to support our continued growth.

Our ability to raise additional capital will depend on conditions in the capital
markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital on terms acceptable to us. If we cannot raise additional capital when needed, our
ability to further expand our operations could be materially impaired.

Our ability to pay dividends is limited and we may be unable to pay future
dividends. As a result, capital appreciation, if any, of our common stock may be your sole opportunity for gains on your investment for the foreseeable future.

We make no assurances that we will pay any dividends in the future. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors,
including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that our Board of Directors may deem relevant. The holders of our common stock are entitled to receive dividends
when, and if declared by our Board of Directors out of funds legally available for that purpose. As part of our consideration to pay cash dividends, we intend to retain adequate funds from future earnings to support the development and growth of our
business. In addition, our ability to pay dividends is restricted by federal policies and regulations and by the terms of our existing indebtedness. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends
on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organizations expected future needs and financial condition. Further, our principal source of funds to pay
dividends are cash dividends that we receive from our subsidiaries. See Business  Supervision and Regulation  Payment of Dividends.

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.

As a bank holding company, we are primarily regulated by the Board of Governors of the Federal Reserve System
(Federal Reserve Board). Our subsidiary bank is primarily regulated by the Federal Deposit Insurance Corporation (the FDIC) and the Georgia Department of Banking and Finance. Our subsidiary thrift is primarily regulated by
the Office of Thrift Supervision (OTS). Our compliance with Federal Reserve Board, FDIC, Department of Banking and Finance and OTS regulations is costly and may limit our growth and restrict certain of our activities, including payment
of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capital requirements of our regulators.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business
and profitability. Because government regulation greatly affects the business and financial results of all commercial banks, thrifts and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.



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Environmental liability associated with lending activities could result in losses.

In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances are discovered on any of
these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew
of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we
neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit the use of properties that we acquire through foreclosure, reduce their value or limit our ability to sell them in
the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

Holders of our subordinated debentures have rights that are senior to those of our common shareholders.

We have supported our continued growth by issuing trust preferred securities from special purpose trusts and accompanying subordinated debentures. At
December 31, 2007, we had outstanding subordinated debentures totaling $20 million and may issue additional trust preferred securities in the future. We unconditionally guarantee the payment of principal and interest on the trust preferred
securities. Also, the debentures we issued to the special purpose trusts that relate to those trust preferred securities are senior to our common stock. As a result, we must make payments on the subordinated debentures before we can pay any
dividends on our common stock. In the event of our bankruptcy, dissolution or liquidation, holders of our subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on
our subordinated debentures (and related trust preferred securities) for up to five years, but during that time we would not be able to pay dividends on our common stock.

If we are unable to increase our share of deposits in our market, we may accept out of market and brokered deposits, the costs of which may be higher than expected.

We can offer no assurance that we will be able to maintain or increase our market share of deposits in our highly competitive service area. If we are
unable to do so, we may be forced to accept increased amounts of out of market or brokered deposits. As of December 31, 2007, we had approximately $78.5 Million in out of market deposits, including brokered deposits, which represented
approximately 8.24% of our total deposits. At times, the cost of out of market and brokered deposits exceeds the cost of deposits in our local market. In addition, the cost of out of market and brokered deposits can be volatile, and if we are unable
to access these markets or if our costs related to out of market and brokered deposits increases, our liquidity and ability to support demand for loans could be adversely affected.

Opening new offices may not result in increased assets or revenues for us.

The investment
necessary for branch expansion may negatively impact our efficiency ratio. There is a risk that we will be unable to manage our growth, as the process of opening new branches may divert our time and resources. There is also risk that we may fail to
open any additional branches, and a risk that, if we do open these branches, they may not be profitable which would negatively impact our results of operations.



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Changes in monetary policies may have an adverse effect on our business, financial condition and results of
operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities,
particularly the Federal Reserve Board. Actions by monetary and fiscal authorities, including the Federal Reserve Board, could have an adverse effect on our deposit levels, loan demand or business and earnings.

Our directors and executive officers own a significant portion of our common stock and can influence shareholder decisions.

Our directors, executive officers and relatives of directors, as a group, beneficially owned approximately 54.0% of our fully diluted outstanding common
stock as of March 3, 2008. As a result of their ownership, the directors and executive officers will have the ability, if they voted their shares in concert, to control the outcome of all matters submitted to our shareholders for approval,
including the election of directors.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None



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|Item 2. | Properties
|------- | ----------

The Company currently operates two main
offices, nine branches and an operations center. The principal administrative offices of the Company are located at 3530 Wheeler Road, Augusta, Georgia. Locations in Georgia include the main office, four branch offices in Augusta, Georgia, two
branches in Martinez, Georgia, two branches in Evans, Georgia, and one branch in Athens, Georgia. SB&T locations include the main office in Aiken, South Carolina, and one branch in North Augusta, South Carolina. All banking offices are owned by
the Company, are not subject to mortgage, and are covered by appropriate insurance for replacement value.

Each banking office in metro
Augusta is a brick building with a teller line, customer service area, offices for the Companys lenders, drive-in teller lanes, a vault with safe deposit boxes, and a walk-up or drive-up automated teller machine. The banking offices are
generally 3,000 to 5,000 square foot buildings. Exceptions are the main office with approximately 14,000 square feet, the Washington Road branch with 1,800 square feet, and the Cotton Exchange branch with 7,500 square feet of space.

In December 2005, the first branch located outside of metro Augusta was opened in Athens, Georgia. This 4,000 square foot banking office is located on
the border of the Athens historic district and includes a teller line, customer service area, and lending offices. The SB&T main office, located in Aiken, South Carolina, opened in September 2006, and consists of a 4,000 square foot banking
office with all the facilities of the metro Augusta offices. In July 2007, a 1600 square foot drive-thru facility was opened in Evans, Georgia, and in August 2007, a 4600 square foot full-service branch was opened in North Augusta, South Carolina.
In April 2007, the Company purchased land and a building in Aiken, South Carolina, and plans to renovate the property and open a branch facility during the first quarter of 2008.

In 1997, the Company acquired 24,000 square feet of commercial office space located at 3515 Wheeler Road, across the street from the main office. This
office space is currently occupied by the mortgage operations and construction lending departments.

Due to continued growth, the Company
purchased a commercial building with approximately 45,000 square feet of office space on Columbia Road in Martinez in May 2006. This office space was renovated during 2006-2007, and operational functions including data processing, deposit
operations, human resources, loan operations, credit administration and accounting were relocated to this facility in October 2007.

The
Companys automated teller machine network includes four drive-up machines located in major retail shopping areas as well as machines located at each branch office.

See Note 5 to the Consolidated Financial Statements for additional information concerning the Companys premises and equipment and Note 6 to the Consolidated Financial Statements for additional information
concerning the Companys commitments under various equipment leases.



|Item 3. | Legal Proceedings
|------- | -----------------

In the ordinary course of
business, the Company and its subsidiaries are parties to various legal proceedings. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, there is no proceeding pending or, to
the knowledge of management, threatened in which an adverse decision would result in a material adverse change to the consolidated results of operations or financial condition of the Company or its subsidiaries.



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|Item 4. | Submission of Matters to a Vote of Shareholders
|------- | -----------------------------------------------

There were no matters submitted to a vote of the shareholders of the Company during the fourth quarter of the Companys fiscal year ended December 31, 2007.



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PART II



|Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ----------------------------------------------------------------------------------------------------------------

As of March 3, 2008, there were approximately 930 holders of record of the Companys common stock. As of March 3, 2008, there were
5,414,888 shares of the Companys common stock outstanding. Transactions in the Companys common stock are generally negotiated through UBS Financial Services and Robinson-Humphrey/Soloman Smith Barney Company, Inc. Both firms make a
market in the common stock of the Company via the over-the-counter bulletin board. The following table reflects the range of high and low bid quotations, adjusted for stock dividends and splits, in the Companys common stock for the past two
years:

Southeastern Bank Financial Corporation Stock Price



|                   |  |       |  |      
|------------------ |  | ----- |  | -----
|Quarter ended      |  | Low   |  | High 
|March 31, 2006     |  | 37.87 |  | 40.25
|June 30, 2006      |  | 35.00 |  | 39.50
|September 30, 2006 |  | 38.00 |  | 45.00
|December 31, 2006  |  | 36.00 |  | 42.00
|                   |  |      
|Quarter ended      |  |       |  |      
|March 31, 2007     |  | 36.25 |  | 41.00
|June 30, 2007      |  | 34.25 |  | 40.00
|September 30, 2007 |  | 33.60 |  | 40.00
|December 31, 2007  |  | 30.00 |  | 36.00
|                   |  |      
|Period ended       |  |       |  |      
|March 3, 2008      |  | 30.00 |  | 35.00

The Company declared cash dividends of $0.13 per share on January 17,
2007, April 25, 2007, July 23, 2007, and October 17, 2007. The Company declared cash dividends of $0.13 per share in each quarter of 2006. The Companys primary sources of income are dividends and other payments
received from its subsidiaries. The amount of dividends that may be paid by GB&T and SB&T to the Company depends upon the subsidiaries earnings and capital position and is limited by federal and state law, regulations and policies.

Cash dividends on GB&Ts common stock may be declared and paid only out of its retained earnings, and dividends may not be
declared at any time when GB&Ts paid-in capital and appropriated earnings do not, in combination, equal at least 20% of its capital stock account. In addition, the GDBFs current rules and regulations require prior approval before
cash dividends may be declared and paid if: (1) the banks ratio of equity capital to adjusted total assets is less than 6%; (ii) the aggregate amount of dividends declared or anticipated to be declared in that calendar year exceeds
50% of the banks net profits, after taxes but before dividends, for the previous calendar year; or (iii) the percentage of the banks loans classified as adverse as to repayment or recovery by the GDBF at the most recent examination
of the bank exceeds 80% of the banks equity as reflected at such examination. Cash dividends on SB&Ts common stock are not permitted during its first three years of operation without approval from the OTS pursuant to its current
business plan.



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The Companys ability to pay cash dividends is further subject to continued payment of interest that
is owed on subordinated debentures issued in connection with the Southeastern Bank Financial Statutory Trust I issuance in December 2005 of $10.0 million of trust preferred securities and the Southeastern Bank Financial Trust II issuance in March
2006 of $10.0 million of trust preferred securities. As of December 31, 2007, the Company had approximately $20.0 million of subordinated debentures outstanding. The Company has the right to defer payment of interest on the subordinated
debentures for a period not exceeding 20 consecutive quarters. If the Company defers, or fails to make, interest payments on the subordinated debentures, the Company will be prohibited, subject to certain exceptions, from paying cash dividends on
common stock until all deferred interest is paid and interest payments on the subordinated debentures resumes.

The Company did not sell
any of its equity securities without registration under the Securities Act of 1933, as amended, during the fourth quarter of 2007.

See
Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for a table presenting information on equity securities subject to future issuance under the Companys equity compensation
plans.

The following table sets forth information regarding the Companys repurchases of its common stock on a monthly basis during
the fourth quarter of 2007. Of the 800 shares repurchased during the fourth quarter, 500 were privately negotiated and 300 were made in the open market.



|                                     |  |                                |  |                            |       |                                                                                         |        |                                                                                                           |       
|------------------------------------ |  | ------------------------------ |  | -------------------------- | ----- | --------------------------------------------------------------------------------------- | ------ | --------------------------------------------------------------------------------------------------------- | ------
|Period                               |  | Total Numberof SharesPurchased |  | Average PricePaid PerShare |       | Total Number ofShares (or Units)Purchased as Part ofPublicly AnnouncedPlans or
Programs |        | Maximum Number (orAppropriate DollarValue) of Shares (orUnits) Yet BePurchased Under thePlans or
Programs
|October 1 through October 31, 2007   |  | 500                            |  |                            | 35.00 |                                                                                         | 11,931 |                                                                                                           | 88,069
|November 1 through November 30, 2007 |  |                               |  |                            |      |                                                                                         | 11,931 |                                                                                                           | 88,069
|December 1 through December 31, 2007 |  | 300                            |  |                            | 31.45 |                                                                                         | 12,231 |                                                                                                           | 87,769
|                                     |  |                                |  |                            |       |                                                                                         |        |                                                                                                           |       
|Total                                |  | 800                            |  | $                          | 33.67 |                                                                                         | 12,231 |                                                                                                           | 87,769
|                                     |  |                                |  |                            |       |                                                                                         |        |                                                                                                           |       



|Item 6. | Selected Financial Data
|------- | -----------------------

The selected consolidated
financial data presented on the following page as of December 31, 2007 and 2006 and for each of the years in the three-year period ended December 31, 2007 is derived from the audited consolidated financial statements and related notes
included in this report and should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations. The selected consolidated financial data as of December 31, 2004 and 2003 is
derived from audited consolidated financial statements that are not included in this report but that are included in the Annual Reports on Form 10-K filed with the Securities and Exchange Commission for those years

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108),which is effective for fiscal years ending on or after



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November 15, 2006. SAB 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in
quantifying a current year misstatement. SAB 108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement
that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as
management properly applied its previous approach and all relevant facts and circumstances were considered. Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach
required by SAB 108, are to be recorded upon initial adoption of SAB 108. The amount so recorded is shown as a cumulative effect adjustment is recorded in opening retained earnings as of January 1, 2006. Included in this cumulative effect
adjustment are the following items and amounts: The allowance for loan loss was decreased $694,000 to adjust for estimated losses on unfunded lines and commitments and standby letters of credit. This reduction also resulted in a $269,235 decrease in
the deferred income tax asset account and a $424,765 increase in retained earnings. Accrued income taxes were decreased by $369,726 to eliminate a tax contingency reserve due to an assumption of taxability of certain federal agency interest for
state purposes, subsequently determined to be nontaxable. The reduction in accrued income taxes resulted in an increase in retained earnings of $369,726. Both of these amounts had been recorded in immaterial amounts over the preceding six to seven
years.

Proforma disclosures illustrating the effects of SAB 108 on what the allowance for loan loss and the related provision for loan
loss and ratios would have been excluding the error are provided in selected financial data and in other related areas of the report.



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|                                                                                                                                           |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|Selected Consolidated Financial Data                                                                                                       |  | 2007                                          |           |   | 2006 |   |           | 2005 |  |   | 2004      |   |  | 2003 |          
|                                                                                                                                           |  | (Dollars in thousands, except per share data) |          
|Earnings                                                                                                                                   |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total interest income                                                                                                                      |  | $                                             | 79,181    |   |      | $ | 65,626    |      |  | $ | 47,277    |   |  | $    | 35,350    |   |  | $ | 32,337    |  
|Total interest expense                                                                                                                     |  |                                               | 40,932    |   |      |   | 31,423    |      |  |   | 17,885    |   |  |      | 9,670     |   |  |   | 9,685     |  
|Net interest income                                                                                                                        |  |                                               | 38,249    |   |      |   | 34,203    |      |  |   | 29,392    |   |  |      | 25,680    |   |  |   | 22,652    |  
|Provision for loan losses                                                                                                                  |  |                                               | 3,823     |   |      |   | 2,478     |      |  |   | 1,842     |   |  |      | 1,588     |   |  |   | 1,694     |  
|Noninterest income                                                                                                                         |  |                                               | 16,168    |   |      |   | 14,040    |      |  |   | 12,371    |   |  |      | 12,461    |   |  |   | 14,522    |  
|Noninterest expense                                                                                                                        |  |                                               | 32,508    |   |      |   | 28,932    |      |  |   | 25,012    |   |  |      | 23,744    |   |  |   | 23,564    |  
|Net income                                                                                                                                 |  |                                               | 11,765    |   |      |   | 11,160    |      |  |   | 9,954     |   |  |      | 8,704     |   |  |   | 7,933     |  
|                                                                                                                                           |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Per Share Data                                                                                                                             |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net incomeDiluted                                                                                                                         |  | $                                             | 2.14      |   |      | $ | 2.08      |      |  | $ | 1.86      |   |  | $    | 1.63      |   |  | $ | 1.48      |  
|Book value                                                                                                                                 |  |                                               | 16.54     |   |      |   | 14.53     |      |  |   | 12.08     |   |  |      | 11.24     |   |  |   | 10.23     |  
|Cash dividends declared per common share                                                                                                   |  |                                               | 0.52      |   |      |   | 0.52      |      |  |   | 0.52      |   |  |      | 0.52      |   |  |   |          |  
|Weighted average common and common equivalent shares outstanding                                                                           |  |                                               | 5,496,389 |   |      |   | 5,371,656 |      |  |   | 5,350,384 |   |  |      | 5,323,924 |   |  |   | 5,359,815 |  
|                                                                                                                                           |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Selected Average Balances                                                                                                                  |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Assets                                                                                                                                     |  | $                                             | 1,133,064 |   |      | $ | 951,115   |      |  | $ | 785,081   |   |  | $    | 673,805   |   |  | $ | 604,585   |  
|Loans (net of unearned income)                                                                                                             |  |                                               | 811,509   |   |      |   | 664,101   |      |  |   | 547,414   |   |  |      | 464,769   |   |  |   | 420,023   |  
|Deposits                                                                                                                                   |  |                                               | 893,959   |   |      |   | 735,128   |      |  |   | 611,029   |   |  |      | 528,167   |   |  |   | 465,868   |  
|Stockholders equity                                                                                                                       |  |                                               | 83,850    |   |      |   | 69,317    |      |  |   | 61,655    |   |  |      | 56,162    |   |  |   | 50,786    |  
|                                                                                                                                           |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Selected Year-End Balances                                                                                                                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Assets                                                                                                                                     |  | $                                             | 1,212,980 |   |      | $ | 1,041,202 |      |  | $ | 864,277   |   |  | $    | 706,517   |   |  | $ | 630,633   |  
|Loans (net of unearned income)                                                                                                             |  |                                               | 882,743   |   |      |   | 749,969   |      |  |   | 601,235   |   |  |      | 494,170   |   |  |   | 432,679   |  
|Allowance for loan losses                                                                                                                  |  |                                               | 11,800    |   |      |   | 9,777     |      |  |   | 9,125     |   |  |      | 7,930     |   |  |   | 7,278     |  
|Deposits                                                                                                                                   |  |                                               | 952,166   |   |      |   | 801,763   |      |  |   | 663,655   |   |  |      | 556,785   |   |  |   | 483,952   |  
|Short-term borrowings                                                                                                                      |  |                                               | 81,666    |   |      |   | 76,020    |      |  |   | 73,013    |   |  |      | 45,481    |   |  |   | 57,769    |  
|Long-term borrowings                                                                                                                       |  |                                               | 79,000    |   |      |   | 75,000    |      |  |   | 57,000    |   |  |      | 40,000    |   |  |   | 30,000    |  
|Stockholders equity                                                                                                                       |  |                                               | 89,758    |   |      |   | 78,924    |      |  |   | 63,583    |   |  |      | 58,980    |   |  |   | 53,689    |  
|                                                                                                                                           |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Selected Ratios                                                                                                                            |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average total assets                                                                                                             |  |                                               | 1.04      | % |      |   | 1.17      | %    |  |   | 1.27      | % |  |      | 1.29      | % |  |   | 1.31      | %
|Return on average equity                                                                                                                   |  |                                               | 14.03     | % |      |   | 16.10     | %    |  |   | 16.15     | % |  |      | 15.50     | % |  |   | 15.62     | %
|Average earning assets to average total assets                                                                                             |  |                                               | 93.66     | % |      |   | 93.67     | %    |  |   | 93.90     | % |  |      | 93.56     | % |  |   | 94.57     | %
|Average loans to average deposits                                                                                                          |  |                                               | 90.78     | % |      |   | 90.34     | %    |  |   | 89.59     | % |  |      | 88.00     | % |  |   | 90.16     | %
|Average equity to average total assets                                                                                                     |  |                                               | 7.40      | % |      |   | 7.29      | %    |  |   | 7.85      | % |  |      | 8.33      | % |  |   | 8.40      | %
|Net interest margin                                                                                                                        |  |                                               | 3.60      | % |      |   | 3.84      | %    |  |   | 3.98      | % |  |      | 4.08      | % |  |   | 3.97      | %
|Operating efficiency                                                                                                                       |  |                                               | 60.64     | % |      |   | 60.20     | %    |  |   | 59.78     | % |  |      | 62.09     | % |  |   | 63.04     | %
|Net charge-offs to average loans                                                                                                           |  |                                               | 0.22      | % |      |   | 0.17      | %    |  |   | 0.12      | % |  |      | 0.20      | % |  |   | 0.23      | %
|Allowance for loan losses to net loans (year-end)                                                                                          |  |                                               | 1.34      | % |      |   | 1.30      | %    |  |   | 1.52      | % |  |      | 1.60      | % |  |   | 1.68      | %
|Risk-based capital                                                                                                                         |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Tier 1 capital                                                                                                                             |  |                                               | 11.38     | % |      |   | 12.09     | %    |  |   | 11.10     | % |  |      | 10.33     | % |  |   | 10.33     | %
|Total capital                                                                                                                              |  |                                               | 12.61     | % |      |   | 13.29     | %    |  |   | 12.35     | % |  |      | 11.58     | % |  |   | 11.58     | %
|Tier 1 leverage ratio                                                                                                                      |  |                                               | 9.08      | % |      |   | 9.78      | %    |  |   | 9.01      | % |  |      | 8.38      | % |  |   | 8.40      | %
|Proforma data to illustrate the effect of SAB 108                                                                                          |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance for loan losses to net loans excluding amount applicable to unfunded lines, commitments and standby letters of credit (year-end) |  |                                               |           |   |      |   |           |      |  |   | 1.40      | % |  |      | 1.49      | % |  |   | 1.55      | %
|Provision for loan losses excluding amount applicable to unfunded lines, commitments and standby letters of credit                         |  |                                               |           |   |      |   |           |      |  |   | 1,723     |   |  |      | 1,584     |   |  |   | 1,452     |  
|Allowance for loan losses excluding amount applicable to unfunded lines, commitments and standby letters of credit (year-end)              |  |                                               |           |   |      |   |           |      |  |   | 8,431     |   |  |      | 7,355     |   |  |   | 6,707     |  



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company and its
subsidiaries, Georgia Bank & Trust Company of Augusta (GB&T) and Southern Bank & Trust (SB&T), during the past three years. The discussion and analysis is intended to supplement and highlight
information contained in the accompanying consolidated financial statements and related notes to the consolidated financial statements.

Overview

The Companys services include the origination of residential and commercial real estate loans, construction and development loans,
and commercial and consumer loans. The Company also offers a variety of deposit programs, including noninterest-bearing demand, interest checking, money management, savings, and time deposits. In the Augusta-Richmond County, GA-SC metropolitan
statistical area, GB&T had 12.87% of all deposits and was the second largest depository institution and the largest locally based institution at June 30, 2007 based on deposit levels, as cited from the FDICs website. Securities sold
under repurchase agreements are also offered. Additional services include wealth management, trust, retail investment, and mortgage. As a matter of practice, most mortgage loans are sold in the secondary market; however, some mortgage loans are
placed in the portfolio based on asset/liability management strategies. The Company continues to concentrate on increasing its market share through various new deposit and loan products and other financial services, by adding locations, and by
focusing on the customer relationship management philosophy. The Company is committed to building lifelong relationships with its customers, employees, shareholders, and the communities it serves.

The Companys primary source of income is from its lending activities followed by interest income from its investment activities, service charges
and fees on deposits, and gain on sales of mortgage loans in the secondary market. Interest income on loans and investment securities increased primarily due to increased volumes. Service charges and fees on deposits increased due to increases in
NSF income on retail and business checking accounts and debit/ATM card income, both the result of new account growth. Gain on sales of mortgage loans for 2007 did not change significantly over 2006. Both trust service fees and retail investment
income experienced significant growth this year as the Company continues to focus on the expansion of the wealth management area. With the significant growth that the Company has seen over the year salary and benefit expenses have increased $1.5
Million from 2006 primarily from the opening of new locations, increased in commissions and increase in operational staff personnel somewhat offset by the increase in FAS 91 deferred cost expense. Occupancy expense increased $610,000 from 2006
primarily due to moving and equipment expense for the new operations facility and increased rent expenses on ATMs. Provision expense increased $1.3 Million primarily due to the increase in downgrades in the loan portfolio.

The Company has experienced steady growth. Over the past four years, assets grew from $630.6 Million at December 31, 2003 to $1.2 Billion at
December 31, 2007. From year end 2003 to year end 2007, loans increased $450.0 Million, and deposits increased $468.2 Million. Net income for the year ended 2003 was $7.9 Million compared to net income of $11.8 Million at year end 2007. The
Company has paid cash dividends of $0.13 per share each quarter since 2004.

The Company meets its liquidity needs by managing cash and due
from banks, federal funds purchased and sold, maturity of investment securities, principal repayments received from mortgage backed securities, and draws on lines of credit. Additionally, liquidity can be managed through



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structuring deposit and loan maturities. The Company funds loan and investment growth with core deposits, securities sold under repurchase agreements and
Federal Home Loan Bank advances. During inflationary periods, interest rates generally increase and operating expenses generally rise. When interest rates rise, variable rate loans and investments produce higher earnings; however, deposit and other
borrowings interest expense also rise. The Company monitors its interest rate risk as it applies to net income in a ramp up and down annually 200 basis points (2%) scenario and as it applies to economic value of equity in a shock up and down
200 (2%) basis points scenario. The Company monitors operating expenses through responsibility center budgeting. See Interest Rate Sensitivity below.

Critical Accounting Estimates

The accounting and financial reporting policies of the Company and its
subsidiaries conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Of these policies, management has identified the allowance for loan losses as a critical
accounting estimate that requires difficult, subjective judgment and is important to the presentation of the financial condition and results of operations of the Company.

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects the Companys earnings directly. Loans are charged against the allowance for loan losses when
management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will be adequate to absorb losses on existing loans that become
uncollectible, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific
problem loans, and current economic conditions and trends that may affect a borrowers ability to repay.

The Company segments its
allowance for loan losses into the following three major categories: 1) identified losses for impaired loans; 2) general allocation for Classified/Watch loans; and 3) general allocation for loans with satisfactory ratings. Risk ratings are initially
assigned in accordance with the Companys loan and collection policy. An organizationally independent department reviews grade assignments on an ongoing basis. Management reviews current information and events regarding a borrowers
financial condition and strengths, cash flows available for debt repayment, the related collateral supporting the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with
the individual loan, management classifies the loan accordingly. If the loan is determined to be impaired, management allocates a portion of the allowance for loan losses for that loan based upon the present value of future cash flows discounted at
the loans effective interest rate, or the fair value of the collateral if collection of the loan is deemed to be dependent upon the collateral. Regulatory guidance is also considered. Cash receipts for accruing loans are applied to principal
and interest under the contractual terms of the loan agreement; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are generally applied first to principal and then to interest income
depending upon the overall risk of principal loss to the Company. Impaired and Classified/Watch loans are aggressively monitored. The allocation for loans rated satisfactory is further subdivided into various types of loans as defined by regulatory
reporting codes. The Companys management also gives consideration to subjective factors such as, national and local economic conditions, bankruptcy trends, unemployment trends, loan concentrations, and competitive factors in the local market.
These factors represent uncertainties in the Companys business environment and are included in the various individual components of the allowance for loan losses.



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Management believes that the allowance for loan losses is adequate. The loan portfolio is comprised of
85.7% real estate loans; 10.6% commercial, financial and agricultural loans; and 3.8% consumer loans. Commercial real estate comprises 26.8% of the loan portfolio, and of these loans 55.0% are owner occupied properties where the operations of the
commercial entity provide the necessary cash flow to service the debt. For this portion of the real estate loan portfolio, repayment is not dependent upon the sale of the real estate held as collateral. Construction and development loans, 36.1% of
the portfolio, have been an increasingly important portion of the real estate loan portfolio. The Company carefully monitors the loans in this category since the repayment of these loans is generally dependent upon the sale of the real estate in the
normal course of business and can be impacted by national and local economic conditions. The residential category, 21.6% of the portfolio, represents those loans that the Company chooses to maintain in its portfolio rather than selling into the
secondary market for marketing and competitive reasons and commercial loans secured by residential real estate. The residential held for sale category, 1.3% of the portfolio, comprises loans that are in the process of being sold into the secondary
market. In these loans, the credit has been approved by the investor and the interest rate locked so that the Company minimizes credit and interest rate risk with respect to these loans. The Company has no large loan concentrations to individual
borrowers. Unsecured loans at December 31, 2007 were $15.7 million. 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 additions to the allowance based on their judgments about information
available to them at the time of their examination. Such regulatory guidance is considered, and the Company may recognize additions to the allowance as a result.

Please see Provision for Loan Losses, Net Charge-offs, and Allowance for Loan Losses and Non-Performing Assets for a further discussion of the Companys loans, loss experience, and
methodology in determining the allowance.

Results of Operations

Total assets increased $172.0 million, or 16.5% in 2007 compared to year end 2006, primarily due to loan growth and an increase in available for sale investment securities somewhat offset by a decrease in cash and
cash equivalents. The Company recorded net income of $11.8 million in 2007, a 5.4% increase over 2006. The increase in net income is attributable to increases in net interest income and noninterest income, somewhat offset by increases in noninterest
expense. Interest income increased $13.6 million or 20.7% in 2007. Interest income on loans, including loan fees, was the principal contributor, representing an increase of $11.9 million over 2006. This was primarily the result of $132.8 million in
loan growth for the Company in 2007. Interest income on investment securities increased $1.2 million in 2007 as a result of a $13.6 million increase in the annual average balance of the investment portfolio in 2007. Significant changes to
noninterest income in 2007 include a $667,000 increase in service charges and fees on deposits related to new account growth, a gain on the sale of fixed assets of $1,002,000, and a $479,000 increase in retail investment income and an $271,000
increase in trust service fees due to the continued expansion of the wealth management area, somewhat offset by a $450,000 loss on the sale of investment securities.

The Company had total deposit growth of $150.4 million, or 18.8% in 2007. Interest expense on deposits increased $9.0 million as a result of this growth and higher interest rates. The most significant increase was in
time deposits with an $80.7 million balance increase over 2006 year end with a corresponding $6.6 million increase in interest expense. Brokered CDs totaled $78.5 million at year end 2007 and accounted for $1.3 million of the increase in interest
expense. The annual average balance of federal funds purchased and securities sold under repurchase agreements grew $3.3 million



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in 2007, with related interest expense increasing $266,000 over 2006. The Company was in a $17.5 million federal funds purchase position at 2007 year end, as
compared to a $14.7 million federal funds sold position at 2006 year end. Provision for loan loss expense increased $1.3 million from 2006 primarily due to loan volume growth as well as increases in specifically-reserved loans, higher levels of
Classified and Watch-rated debt and managements assessment of current economic environment. Noninterest expense increased $3.6 million or 12.4% in 2007. Salaries and other personnel expense increased $1.5 million primarily as a result of
additional employees in 2007 related to the Companys continued growth and expansion into new markets. Premises and fixed asset expense increased $610,000 or 21.4% from 2006 due to increased depreciation expense and expenses incurred moving the
Companys operational facilities to the new operations center in Martinez, Georgia. Other operating expenses increased $1.4 million with the most significant increases reflected in the processing expense and IT maintenance expense categories.
The Company continues to monitor operating expenses and uses responsibility center budgeting to assist in this endeavor. The operating efficiency ratio of 60.64% in 2007 is a 0.44% increase from 2006.

The earnings performance of the Company is reflected in its return on average assets and average equity of 1.04% and 14.03%, respectively, during 2007
compared to 1.17% and 16.10%, respectively, during 2006. Return on equity decreased in 2007 due to 5.4% growth in net income compared to a 20.9% growth in average stockholders equity. The return on average assets and average equity was 1.27% and
16.15%, respectively, in 2005. Basic net income per share on weighted average common shares outstanding improved to $2.17 in 2007 compared to $2.10 in 2006 and $1.89 in 2005. Diluted net income per share on weighted average common and common
equivalent shares outstanding improved to $2.14 in 2007 compared to $2.08 in 2006 and $1.86 in 2005. The Company has paid cash dividends of $0.13 per share each quarter since 2004.

Net Interest Income

The primary source of earnings for the Company is net interest income, which is
the difference between income on interest-earning assets, such as loans and investment securities, and interest expense incurred on interest-bearing sources of funds, such as deposits and borrowings. The following table shows the average balances of
interest-earning assets and interest-bearing liabilities, average yields earned and rates paid on those respective balances, and the resulting interest income and interest expense for the periods indicated. Average balances are calculated based on
daily balances, yields on non-taxable investments are not reported on a tax equivalent basis and average balances for loans include nonaccrual loans even though interest was not earned.



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Average Balances, Income and Expenses, Yields and Rates



|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|--------------------------------------------------------------------- |  | ------------------------ | --------- | ------------------------ | ------------------- | ------------------------ | - | ------------------- | - | ------------- |  | - | ------------------- | - |  | ------------------- | - | ------------- | - | ------ | ------------------- | - | ------- | ------------------- |  | ---- | - |  | - | ------
|                                                                      |  | Year Ended Dec. 31, 2007 |           | Year Ended Dec. 31, 2006 |                     | Year Ended Dec. 31, 2005
|                                                                      |  | AverageAmount            |           |                          | AverageYield orRate |                          |   | AmountPaid orEarned |   | AverageAmount |  |   | AverageYield orRate |   |  | AmountPaid orEarned |   | AverageAmount |   |        | AverageYield orRate |   |         | AmountPaid orEarned
|                                                                      |  | (Dollars in thousands)  
|ASSETS                                                                |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Interest-earning assets:                                              |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Loans                                                                 |  | $                        | 811,509   |                          |                     | 8.16                     | % |                     | $ | 66,219        |  | $ | 664,101             |   |  | 8.18                | % |               | $ | 54,338 |                     | $ | 547,414 |                     |  | 7.11 | % |  | $ | 38,898
|Investments                                                           |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Taxable                                                               |  |                          | 209,082   |                          |                     | 5.27                     | % |                     |   | 11,023        |  |   | 189,321             |   |  | 5.09                | % |               |   | 9,633  |                     |   | 158,017 |                     |  | 4.56 | % |  |   | 7,206 
|Tax-exempt                                                            |  |                          | 18,734    |                          |                     | 4.27                     | % |                     |   | 800           |  |   | 24,658              |   |  | 4.18                | % |               |   | 1,030  |                     |   | 18,765  |                     |  | 4.09 | % |  |   | 767   
|Federal funds sold                                                    |  |                          | 21,434    |                          |                     | 5.19                     | % |                     |   | 1,112         |  |   | 12,248              |   |  | 4.90                | % |               |   | 600    |                     |   | 12,106  |                     |  | 3.14 | % |  |   | 380   
|Interest-bearing deposits in other banks                              |  |                          | 506       |                          |                     | 5.34                     | % |                     |   | 27            |  |   | 612                 |   |  | 4.08                | % |               |   | 25     |                     |   | 884     |                     |  | 2.94 | % |  |   | 26    
|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Total interest-earning assets                                         |  |                          | 1,061,265 |                          |                     | 7.46                     | % |                     | $ | 79,181        |  |   | 890,940             |   |  | 7.37                | % |               | $ | 65,626 |                     |   | 737,186 |                     |  | 6.41 | % |  | $ | 47,277
|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Cash and due from banks                                               |  |                          | 25,624    |                          |                     |                          |   |                     |   |               |  |   | 19,977              |   |  |                     |   |               |   |        |                     |   | 17,096  |                     |  |      |   |  |   |       
|Premises and equipment                                                |  |                          | 26,676    |                          |                     |                          |   |                     |   |               |  |   | 22,242              |   |  |                     |   |               |   |        |                     |   | 19,208  |                     |  |      |   |  |   |       
|Other                                                                 |  |                          | 30,527    |                          |                     |                          |   |                     |   |               |  |   | 27,486              |   |  |                     |   |               |   |        |                     |   | 20,253  |                     |  |      |   |  |   |       
|Allowance for loan losses                                             |  |                          | (11,029   | )                        |                     |                          |   |                     |   |               |  |   | (9,530              | ) |  |                     |   |               |   |        |                     |   | (8,662  | )                   |  |      |   |  |   |       
|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Total assets                                                          |  | $                        | 1,133,063 |                          |                     |                          |   |                     |   |               |  | $ | 951,115             |   |  |                     |   |               |   |        |                     | $ | 785,081 |                     |  |      |   |  |   |       
|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|                                                                     
|LIABILITIES AND STOCKHOLDERS EQUITY                                 
|Interest-bearing liabilities:                                         |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|NOW accounts                                                          |  | $                        | 127,093   |                          |                     | 2.30                     | % |                     | $ | 2,926         |  | $ | 114,021             |   |  | 2.00                | % |               | $ | 2,277  |                     | $ | 87,982  |                     |  | 0.89 | % |  | $ | 787   
|Savings and money management accounts                                 |  |                          | 341,097   |                          |                     | 4.04                     | % |                     |   | 13,788        |  |   | 305,186             |   |  | 3.93                | % |               |   | 11,996 |                     |   | 288,759 |                     |  | 2.98 | % |  |   | 8,610 
|Time deposits                                                         |  |                          | 317,298   |                          |                     | 5.18                     | % |                     |   | 16,433        |  |   | 213,889             |   |  | 4.59                | % |               |   | 9,826  |                     |   | 145,209 |                     |  | 3.08 | % |  |   | 4,476 
|Federal funds purchased / securities sold under repurchase agreements |  |                          | 65,735    |                          |                     | 5.03                     | % |                     |   | 3,305         |  |   | 62,451              |   |  | 4.93                | % |               |   | 3,079  |                     |   | 55,658  |                     |  | 3.05 | % |  |   | 1,697 
|Other borrowings                                                      |  |                          | 79,250    |                          |                     | 5.65                     | % |                     |   | 4,480         |  |   | 75,034              |   |  | 5.66                | % |               |   | 4,245  |                     |   | 50,121  |                     |  | 4.62 | % |  |   | 2,315 
|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Total interest-bearing liabilities                                    |  |                          | 930,473   |                          |                     | 4.40                     | % |                     |   | 40,932        |  |   | 770,581             |   |  | 4.08                | % |               |   | 31,423 |                     |   | 627,729 |                     |  | 2.85 | % |  |   | 17,885
|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Noninterest-bearing demand deposits                                   |  |                          | 108,470   |                          |                     |                          |   |                     |   |               |  |   | 102,032             |   |  |                     |   |               |   |        |                     |   | 89,079  |                     |  |      |   |  |   |       
|Other liabilities                                                     |  |                          | 10,270    |                          |                     |                          |   |                     |   |               |  |   | 9,185               |   |  |                     |   |               |   |        |                     |   | 6,618   |                     |  |      |   |  |   |       
|Stockholders equity                                                  |  |                          | 83,850    |                          |                     |                          |   |                     |   |               |  |   | 69,317              |   |  |                     |   |               |   |        |                     |   | 61,655  |                     |  |      |   |  |   |       
|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Total liabilities and stockholders equity                            |  | $                        | 1,133,063 |                          |                     |                          |   |                     |   |               |  | $ | 951,115             |   |  |                     |   |               |   |        |                     | $ | 785,081 |                     |  |      |   |  |   |       
|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       
|Net interest spread                                                   |  |                          |           |                          |                     | 3.06                     | % |                     |   |               |  |   |                     |   |  | 3.29                | % |               |   |        |                     |   |         |                     |  | 3.56 | % |  |   |       
|Benefit of noninterest sources                                        |  |                          |           |                          |                     | 0.54                     | % |                     |   |               |  |   |                     |   |  | 0.55                | % |               |   |        |                     |   |         |                     |  | 0.42 | % |  |   |       
|Net interest margin/income                                            |  |                          |           |                          |                     | 3.60                     | % |                     | $ | 38,249        |  |   |                     |   |  | 3.84                | % |               | $ | 34,203 |                     |   |         |                     |  | 3.98 | % |  | $ | 29,392
|                                                                      |  |                          |           |                          |                     |                          |   |                     |   |               |  |   |                     |   |  |                     |   |               |   |        |                     |   |         |                     |  |      |   |  |   |       

The increase in average loans of $147.4 million and the increase in average investments of $13.8
million were funded by increases in average deposits of $152.4 million, Federal Home Loan Bank borrowings of $4.2 million, and federal funds purchased and securities sold under repurchase agreements of $3.3 million. For 2007, average total assets
were $1,133 million, a 19.1% increase over 2005. Average interest-earning assets for 2007 were $1,061 million, or 93.7% of average total assets.

Interest income is the largest contributor to income. Interest income on loans, including loan fees, increased $11.9 million from 2006 to $66.2 million in 2007. The increase in loan interest income resulted from increased loan volume.
Investment income increased $1.2 million to $11.8 million as a result of volume and higher investment yields in 2007. Interest income on federal funds sold increased primarily as the result of higher volume and a 0.29% increase in the average yield.
Interest expense on deposits increased $9.0 million from 2006 to $33.1 million as the result of deposit growth and higher



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interest rates. Interest expense on federal funds purchased and securities sold under repurchase agreements increased $1.4 million, again due to growth and
rising interest rates. Interest expense on other borrowings increased primarily due to an increase in the annual average balance. The overall result was an increase in net interest income of $4.0 million or 11.8% in 2007 from 2006. Average yields on
interest-earning assets increased to 7.46% in 2007, compared to 7.37% in 2005.

Net interest income increased $4.8 million in 2006 compared
to 2005 as a result of the growth in the volume of average earning assets and an increase in interest rates. Interest earning assets averaged $890.9 million in 2006, an increase of 16.4%, from the $737.2 million averaged in 2005. Average yields on
earning assets increased to 7.37% in 2006, compared to 6.41% in 2005.

A key performance measure for net interest income is the net
interest margin, or net interest income divided by average interest-earning assets. Unlike the net interest spread (the difference between interest rates earned on assets and interest rates paid on liabilities), the net interest
margin is affected by the level of non-interest sources of funding used to support interest-earning assets. The Companys net interest margin decreased to 3.60% in 2007 from 3.84% in 2006. In 2005, the net interest margin was 3.98%. The net
interest margin deteriorated in 2007 as the average rate paid on interest-bearing deposits increased more quickly than the average rate on interest-earning assets. The high level of competition in the local market for both loans and deposits
continues to influence the net interest margin. The net interest margin continues to be supported by demand deposits which provide a noninterest-bearing source of funds. The Companys current marketing efforts are focused on increasing demand
deposits and NOW accounts to help prevent further deterioration in the net interest margin. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing sources of
funds. The net interest spread eliminates the impact of noninterest-bearing funds and gives a direct perspective on the effect of market interest rate movements. As a result of changes in interest rates in 2007, the net interest spread decreased 23
basis points to 3.06% in 2007. The 2006 net interest spread of 3.29% also represented a decrease from 2005s 3.56%.

Changes in the
net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases in the average rates earned and paid on such assets and liabilities, the ability to
manage the earning asset portfolio, and the availability of particular sources of funds, such as noninterest-bearing deposits. The following table: Analysis of Changes in Net Interest Income indicates the changes in the Companys
net interest income as a result of changes in volume and rate from 2007 to 2006, and 2006 to 2005. The analysis of changes in net interest income included in the following table indicates that on an overall basis in 2007 to 2006, the increase in the
balances or volumes of interest-earning assets created a positive impact in net income. This was somewhat offset by the impact of increased volumes of interest-bearing liabilities. The rate environment of 2007 resulted in modest rate increases on
interest-earning assets which were more than offset by rate increases on interest-bearing liabilities. In 2006 to 2005, the increase in the balances or volumes of interest-earning assets created a positive impact in net income which was partially
offset by the impact of increased volumes of interest-bearing liabilities. Rising rates in 2006 resulted in rate increases on interest-bearing liabilities that exceeded rate increases on interest-earning assets.



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Analysis of Changes in Net Interest Income



|                                                                      |  |                                  |        |   |                                  |   |       |          |  |   |       |   |  |               |        |   |             |   |          |   |  |       |       |  |   |       |   |  |   |        |  
|--------------------------------------------------------------------- |  | -------------------------------- | ------ | - | -------------------------------- | - | ----- | -------- |  | - | ----- | - |  | ------------- | ------ | - | ----------- | - | -------- | - |  | ----- | ----- |  | - | ----- | - |  | - | ------ | -
|                                                                      |  | 2007 vs. 2006Increase (Decrease) |        |   | 2006 vs. 2005Increase (Decrease) |  
|                                                                      |  | AverageVolume                    |        |   | AverageRate                      |   |       | Combined |  |   | Total |   |  | AverageVolume |        |   | AverageRate |   | Combined |   |  | Total |      
|                                                                      |  | (Dollars in thousands)           |        |   | (Dollars in thousands)           |  
|Interest income from interest-earning assets:                         |  |                                  |        |   |                                  |   |       |          |  |   |       |   |  |               |        |   |             |   |          |   |  |       |       |  |   |       |   |  |   |        |  
|Loans                                                                 |  | $                                | 12,058 |   |                                  | $ | (133) |          |  | $ | (44   | ) |  | $             | 11,881 |   |             | $ | 8,296    |   |  | $     | 5,858 |  | $ | 1,286 |   |  | $ | 15,440 |  
|Investments, taxable                                                  |  |                                  | 1,006  |   |                                  |   | 341   |          |  |   | 43    |   |  |               | 1,390  |   |             |   | 1,428    |   |  |       | 837   |  |   | 162   |   |  |   | 2,427  |  
|Investments, tax-exempt                                               |  |                                  | (248   | ) |                                  |   | 42    |          |  |   | (24   | ) |  |               | (230   | ) |             |   | 241      |   |  |       | 17    |  |   | 5     |   |  |   | 263    |  
|Federal funds sold                                                    |  |                                  | 450    |   |                                  |   | 36    |          |  |   | 26    |   |  |               | 512    |   |             |   | 4        |   |  |       | 213   |  |   | 3     |   |  |   | 220    |  
|Interest-bearing deposits in other banks                              |  |                                  | (4     | ) |                                  |   | 8     |          |  |   | (1    | ) |  |               | 2      |   |             |   | (8       | ) |  |       | 10    |  |   | (3    | ) |  |   | (1     | )
|                                                                      |  |                                  |        |   |                                  |   |       |          |  |   |       |   |  |               |        |   |             |   |          |   |  |       |       |  |   |       |   |  |   |        |  
|Total                                                                 |  | $                                | 13,262 |   |                                  | $ | 293   |          |  | $ | (0    | ) |  | $             | 13,555 |   |             | $ | 9,961    |   |  | $     | 6,935 |  | $ | 1,453 |   |  | $ | 18,349 |  
|                                                                      |  |                                  |        |   |                                  |   |       |          |  |   |       |   |  |               |        |   |             |   |          |   |  |       |       |  |   |       |   |  |   |        |  
|                                                                      |  |                                  |        |   |                                  |   |       |         
|Interest expense on interest-bearing liabilities:                     |  |                                  |        |   |                                  |   |       |          |  |   |       |   |  |               |        |   |             |   |          |   |  |       |       |  |   |       |   |  |   |        |  
|NOW accounts                                                          |  | $                                | 261    |   |                                  | $ | 342   |          |  | $ | 45    |   |  | $             | 649    |   |             | $ | 232      |   |  | $     | 976   |  | $ | 282   |   |  | $ | 1,490  |  
|Savings and money management accounts                                 |  |                                  | 1,411  |   |                                  |   | 336   |          |  |   | 45    |   |  |               | 1,792  |   |             |   | 490      |   |  |       | 2,743 |  |   | 153   |   |  |   | 3,386  |  
|Time deposits                                                         |  |                                  | 4,746  |   |                                  |   | 1,262 |          |  |   | 599   |   |  |               | 6,607  |   |             |   | 2,115    |   |  |       | 2,193 |  |   | 1,042 |   |  |   | 5,350  |  
|Federal funds purchased / securities sold under repurchase agreements |  |                                  | 162    |   |                                  |   | 62    |          |  |   | 2     |   |  |               | 226    |   |             |   | 207      |   |  |       | 1,047 |  |   | 128   |   |  |   | 1,382  |  
|Other borrowings                                                      |  |                                  | 239    |   |                                  |   | (8    | )        |  |   | 4     |   |  |               | 235    |   |             |   | 1,151    |   |  |       | 521   |  |   | 258   |   |  |   | 1,930  |  
|                                                                      |  |                                  |        |   |                                  |   |       |          |  |   |       |   |  |               |        |   |             |   |          |   |  |       |       |  |   |       |   |  |   |        |  
|Total                                                                 |  | $                                | 6,819  |   |                                  | $ | 1,995 |          |  | $ | 695   |   |  | $             | 9,509  |   |             | $ | 4,195    |   |  | $     | 7,480 |  | $ | 1,863 |   |  | $ | 13,538 |  
|                                                                      |  |                                  |        |   |                                  |   |       |          |  |   |       |   |  |               |        |   |             |   |          |   |  |       |       |  |   |       |   |  |   |        |  
|Change in net interest income                                         |  |                                  |        |   |                                  |   |       |          |  |   |       |   |  | $             | 4,046  |   |             |   |          |   |  |       |       |  |   |       |   |  | $ | 4,811  |  
|                                                                      |  |                                  |        |   |                                  |   |       |          |  |   |       |   |  |               |        |   |             |   |          |   |  |       |       |  |   |       |   |  |   |        |  

The variances for each major category of interest-earning assets and interest-bearing liabilities
are attributable to (a) changes in volume (changes in volume times prior year rate), (b) changes in rate (changes in rate times prior year volume) and (c) combined (changes in rate times the change in volume).

Noninterest Income

Noninterest income consists of
revenues generated from a broad range of financial services and activities, including service charges on deposit accounts, gain on sales of loans, gain on sale of fixed assets, fee-based services, and products where commissions are earned through
sales of products such as real estate mortgages, retail investment services, trust services, and other activities. In addition, the increase in cash surrender value of bank-owned life insurance and gains or losses realized from the sale of
investment securities are included in noninterest income.

Noninterest income for 2007 was $16.2 million, an increase of $2.1 million or
15.2% from 2006. Service charges and fees on deposits increased $667,000 in 2007 primarily due to increases in NSF fees for retail checking accounts and debit/ATM card income, both the result of new account growth. The gain on the sale of fixed
assets increased $1.0 million from 2006. The Company, in anticipation of moving its operational facilities, sold part of its operations campus which had a book value of $1.8 million resulting in a gain of $1.1 million. These increases were somewhat
offset by decreases in service charges on non-personal deposit accounts due to increases in the earnings credit



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applied to average balances maintained in those accounts. Retail investment income increased $479,000 primarily due to production by new personnel. Other
contributing factors include increases in trust services fees due to a $5.5 million increase in assets managed from 2006 and increases in the increase in cash-surrender value of bank-owned life insurance due to an additional purchase of $3.5 million
in bank-owned life insurance in February 2007. A $237,000 loss recognized on the sale of agency securities resulted in a decrease in net investment securities gains (losses) from 2006.

Noninterest income for 2006 was $14.0 million, an increase of $1.7 million or 13.5% from 2005. Contributing factors include increases in gain on sales of
loans in the secondary mortgage market due to higher mortgage loan volumes. The increase in cash surrender value of life insurance decreased due to reduced interest rates. These decreases were partially offset by increases in service charges and
fees on deposits during the period primarily due to increases in NSF fees and ATM income, somewhat offset by decreases in service charges, all a result of new retail checking accounts. The decrease in service charge income was also attributable to
increases in the earnings credit applied to average balances maintained in non-personal deposit accounts.

The following table presents the
principal components of noninterest income for the last three years:

Noninterest Income



|                                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                           |  | Year Ended December 31, |       
|                                                           |  | 2007                    |        |   | 2006 |   |        | 2005 | 
|                                                           |  | (Dollars in thousands)  |       
|Service charges and fees on deposit accounts               |  | $                       | 6,409  |   |      | $ | 5,742  |      |  | $ | 5,363  |  
|Gain on sales of loans                                     |  |                         | 5,185  |   |      |   | 5,154  |      |  |   | 5,089  |  
|Gain on sale of fixed assets                               |  |                         | 1,049  |   |      |   | 47     |      |  |   | (7     | )
|Investment securities gains (losses), net                  |  |                         | (237   | ) |      |   | 213    |      |  |   | (86    | )
|Retail investment income                                   |  |                         | 1,267  |   |      |   | 788    |      |  |   | 455    |  
|Trust service fees                                         |  |                         | 1,132  |   |      |   | 860    |      |  |   | 642    |  
|Increase in cash surrender value of life insurance         |  |                         | 678    |   |      |   | 605    |      |  |   | 400    |  
|Other                                                      |  |                         | 685    |   |      |   | 631    |      |  |   | 515    |  
|                                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Total noninterest income                                   |  | $                       | 16,168 |   |      | $ | 14,040 |      |  | $ | 12,371 |  
|                                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Noninterest income as a percentage of total average assets |  |                         | 1.70   | % |      |   | 1.79   | %    |  |   | 1.84   | %
|Noninterest income as a percentage of total income         |  |                         | 19.77  | % |      |   | 20.75  | %    |  |   | 26.06  | %

Noninterest Expense

Noninterest expense totaled $32.5 million in 2007, an increase of 12.4% from 2006 noninterest expense of $28.9 million. Noninterest expense attributable to the Companys expansion into new markets totaled $1.0
million for 2007. Salaries and other personnel expense increased $1.5 million due to offices opened in the Aiken and Greenville, South Carolina and Evans, Georgia markets, the expansion of the wealth management area, medical expenses, employer 401K
expense, and stock options compensation expense somewhat offset by an increase in FAS 91 deferred cost expense.



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Operating expenses, excluding salary and employee benefits, increased $2.0 million in 2007. Processing expenses increased $271,000 primarily due to ATM
processing fees related to new account growth of checking products. IT maintenance expense increased $276,000 primarily for increase in core software maintenance agreement and security maintenance. Due to the continued growth of the company, other
expensed including communications, postage, and staff development increased $298,000 in 2007. Contributions increased as a result of a $250,000 donation made to Georgia Bank Foundation.

Noninterest expense totaled $28.9 Million in 2006, an increase of 15.5% from 2005 noninterest expense of $25.0 Million. Noninterest expense attributable
to the Companys expansion into new markets totaled $1.9 million for 2006. Salaries and other personnel expense increased $2.3 million due to offices opened in the Aiken, South Carolina and Athens, Georgia markets, the expansion of the wealth
management area, medical expenses and stock options compensation expense recognized for the acceleration of the vesting period for two key employees and to comply with SFAS No. 123(R). Other operating expenses increased $1.5 million in 2006.
Processing expenses increased $407,000 primarily due to retail investment processing fees related to increased production and fees associated with new account growth for both retail and business checking products. Professional fees increased
$275,000 primarily for Sarbanes-Oxley 404 compliance, other advisory services and legal fees. Marketing expense increased $174,000 primarily due to advertising for expansion into the Athens and Aiken markets. Contributions increased as the result of
a $200,000 donation made to Georgia Bank Foundation, and supplies expense increased $152,000 due to the continued growth of the Company

The Company continues to monitor expenditures in all organizational units by utilizing specific cost-accounting and reporting methods as well as responsibility center budgeting. The following table presents the principal components of
noninterest expense for the years ended December 31, 2007, 2006 and 2005.

Noninterest Expense



|                                                            |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                            |  | Year Ended December 31, |       
|                                                            |  | 2007                    |        |   | 2006 |   |        | 2005 | 
|                                                            |  | (Dollars in thousands)  |       
|Salaries and employee benefits                              |  | $                       | 19,343 |   |      | $ | 17,806 |      |  | $ | 15,531 |  
|Occupancy expense                                           |  |                         | 3,457  |   |      |   | 2,847  |      |  |   | 2,731  |  
|Marketing & business development expense                    |  |                         | 1,586  |   |      |   | 1,405  |      |  |   | 1,119  |  
|Processing expense                                          |  |                         | 1,750  |   |      |   | 1,480  |      |  |   | 1,073  |  
|Legal and professional fees                                 |  |                         | 1,508  |   |      |   | 1,369  |      |  |   | 1,094  |  
|Data processing expense                                     |  |                         | 942    |   |      |   | 667    |      |  |   | 532    |  
|Loan costs                                                  |  |                         | 460    |   |      |   | 442    |      |  |   | 396    |  
|Supplies expense                                            |  |                         | 704    |   |      |   | 660    |      |  |   | 508    |  
|Other expense                                               |  |                         | 2,758  |   |      |   | 2,256  |      |  |   | 2,028  |  
|                                                            |  |                         |        |   |      |   |        |      |  |   |        |  
|Total noninterest expense                                   |  | $                       | 32,508 |   |      | $ | 28,932 |      |  | $ | 25,012 |  
|                                                            |  |                         |        |   |      |   |        |      |  |   |        |  
|Noninterest expense as a percentage of total average assets |  |                         | 2.87   | % |      |   | 3.04   | %    |  |   | 3.19   | %
|Operating efficiency ratio                                  |  |                         | 60.64  | % |      |   | 60.20  | %    |  |   | 59.78  | %

The Companys efficiency ratio (noninterest expense as a percentage of net interest income
and noninterest income, excluding gains and losses on the sale of investments) increased to 60.64% in 2007 compared to 60.20% in 2006, and 59.78% in 2005. Although the Company had significant increases in both net interest income and noninterest
income, noninterest expense related to continued growth and expansion into new markets led to the deterioration of the efficiency ratio in 2007 and 2006. Expenses for growth and expansion were more than offset by income produced from existing
operations.



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Income Taxes

Income tax expense increased $648,000 or 11.4% in 2007 from 2006, and increased $718,000 or 14.5% in 2006 from 2005. The effective tax rate as a percentage of pre-tax income was 34.9% in 2007, 33.7% in 2006, and 33.2% in 2005. Higher income
in 2007 resulted in taxable income over $15.0 million which was taxed at a higher federal income tax rate. The increase in the effective tax rate is primarily due to the graduated increase in the federal income tax rate from 34% in 2002 to 35% in
2007. Additionally, for federal income tax purposes, increases in nontaxable bank-owned life insurance income and tax-exempt municipals were generally offset by increases in nondeductible stock compensation expense. However, for state income tax
purposes, the increase in nontaxable bank-owned life insurance income was significantly offset by Georgia disallowed agency interest income and increases in nondeductible stock compensation expense.

Provision for Loan Losses, Net Charge-offs and Allowance for Loan Losses

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. The allowance for loan losses represents a reserve for losses in the loan portfolio. The
Company has developed policies and procedures for evaluating the overall quality of its loan portfolio and the timely identification of problem credits. Management continues to review these policies and procedures and makes further improvements as
needed. The adequacy of the Companys allowance for loan losses and the effectiveness of the Companys internal policies and procedures are also reviewed periodically by the Companys regulators and the Companys internal loan
review personnel. The Companys regulators may advise the Company to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is considered,
and the Company may recognize additions to the allowance as a result.

The Companys Board of Directors, with the recommendation of
management, approves the appropriate level for the allowance for loan losses based upon internal policies and procedures, historical loan loss ratios, loan volume, size and character of the loan portfolio, concentrations of loans to specific
borrowers or industries, value of the collateral underlying the loans, specific problem loans and present or anticipated economic conditions and trends. The Company continues to refine the methodology on which the level of the allowance for loan
losses is based, by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics.

For significant problem loans, managements review consists of the evaluation of the financial condition and strengths of the borrower, cash flows available for debt repayment, the related collateral supporting
the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with the individual problem loan, management classifies the loan accordingly and allocates a portion of the
allowance for loan losses for that loan based on the results of the evaluations described above.

The table below indicates the allocated
general allowance for all loans according to loan type determined through the Companys comprehensive allowance methodology for the years indicated. Because these allocations are based upon estimates and subjective judgment, it is not
necessarily indicative of the specific amounts or loan categories in which loan losses may occur.

The allowance for loan losses was
decreased $694,000 in 2006 to eliminate the allowance allocated for unfunded lines and commitments and standby letters at December 31, 2005 to comply



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with SAB 108. This adjustment decreased the allowance for loan losses at January 1, 2006 from $9.1 million to $8.4 million. The allowance for loan
losses was $9.8 million at December 31, 2006, a $1.3 million increase after the adjustment. Increases in outstanding loan balances were the primary reason for the increase somewhat offset by decreases in the allowance due to lower levels of
Classified and Watch-rated debt, decreased reserves for specific loans and the change in the allowance calculation related to economic and market risk factors. In 2006, the loan loss method discussed under Critical Accounting Estimates
was revised to include economic and market risk factors as part of the various individual components of the allowance for loan losses and to eliminate unfunded lines and commitments and standby letters of credit from the general allocation. Prior to
2006, economic and market risk factors were specifically identified and recorded as a separate component of the allowance and unfunded lines and commitments and standby letters of credit were included in the general allocation. With the two
exceptions noted above, the loan loss method discussed under Critical Accounting Estimates was consistently applied to loans in 2007, 2006, 2005, 2004 and 2003.

Allocation of the Allowance for Loan Loss



|                                                          |  |                        |        |            |        |    |        |      |            |  |        |        |  |      |            |   |  |        |    |  |            |       |   |        |        |    |            |   |       |   |  |        |   
|--------------------------------------------------------- |  | ---------------------- | ------ | ---------- | ------ | -- | ------ | ---- | ---------- |  | ------ | ------ |  | ---- | ---------- | - |  | ------ | -- |  | ---------- | ----- | - | ------ | ------ | -- | ---------- | - | ----- | - |  | ------ | --
|                                                          |  | December 31,           |       
|                                                          |  | 2007                   |        |            | 2006   |    |        | 2005 |            |  | 2004   |        |  | 2003 |           
|                                                          |  | Amount                 |        | 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, agricultural                       |  | $                      | 1,760  |            | 10.72  | %  |        | $    | 1,254      |  | 10.78  | %      |  |      | 1,060      |   |  | 10.71  | %  |  |            | 1,164 |   |        | 12.09  | %  |            |   | 1,151 |   |  | 13.09  | % 
|Real estate-construction                                  |  |                        | 4,344  |            | 36.54  | %  |        |      | 3,139      |  | 35.58  | %      |  |      | 2,288      |   |  | 30.74  | %  |  |            | 1,648 |   |        | 25.76  | %  |            |   | 1,249 |   |  | 20.87  | % 
|Real estate-mortgage                                      |  |                        | 4,681  |            | 49.00  | %  |        |      | 4,835      |  | 49.58  | %      |  |      | 4,441      |   |  | 52.85  | %  |  |            | 3,648 |   |        | 53.84  | %  |            |   | 3,141 |   |  | 54.37  | % 
|Consumer loans to                                         |  |                        |        |            |        |    |        |      |            |  |        |        |  |      |            |   |  |        |    |  |            |       |   |        |        |    |            |   |       |   |  |        |   
|individuals                                               |  |                        | 1,015  |            | 3.85   | %  |        |      | 549        |  | 4.16   | %      |  |      | 642        |   |  | 5.78   | %  |  |            | 895   |   |        | 8.34   | %  |            |   | 1,166 |   |  | 11.69  | % 
|Lease financing                                           |  |                        |       |            | 0.00   | %  |        |      |           |  | 0.02   | %      |  |      |           |   |  | 0.02   | %  |  |            |      |   |        | 0.00   | %  |            |   |      |   |  | 0.00   | % 
|Deferred loan origination fees                            |  |                        |       |            | (0.11  | )% |        |      |           |  | (0.12  | )%     |  |      |           |   |  | (0.10  | )% |  |            |      |   |        | (0.03  | )% |            |   |      |   |  | (0.02  | )%
|Unfunded lines, commitments and standby letters of credit |  |                        |        |            |        |    |        |      |            |  |        |        |  |      | 694        |   |  | 0.00   | %  |  |            | 575   |   |        | 0.00   | %  |            |   | 571   |   |  | 0.00   | % 
|Other                                                     |  |                        |       |            | 0.00   | %  |        |      |           |  | 0.00   | %      |  |      |           |   |  | 0.00   | %  |  |            |      |   |        | 0.00   | %  |            |   |      |   |  | 0.00   | % 
|                                                          |  |                        |        |            |        |    |        |      |            |  |        |        |  |      |            |   |  |        |    |  |            |       |   |        |        |    |            |   |       |   |  |        |   
|Balance at end of year                                    |  | $                      | 11,800 |            | 100.00 | %  |        | $    | 9,777      |  | 100.00 | %      |  | $    | 9,125      |   |  | 100.00 | %  |  | $          | 7,930 |   |        | 100.00 | %  |            | $ | 7,278 |   |  | 100.00 | % 
|Proforma excluding unfunded                               |  |                        |        |            |        |    |        |      |            |  |        |        |  |      | (694       | ) |  |        |    |  |            | (575  | ) |        |        |    |            |   | (571  | ) |  |        |   
|lines, commitments and standby letters of credit          |  |                        |        |            |        |    |        |      |            |  |        |        |  | $    | 8,431      |   |  |        |    |  | $          | 7,355 |   |        |        |    |            | $ | 6,707 |   |  |        |   
|                                                          |  |                        |        |            |        |    |        |      |            |  |        |        |  |      |            |   |  |        |    |  |            |       |   |        |        |    |            |   |       |   |  |        |   



|(1) | Percent of loans in each category to total loans
|--- | ------------------------------------------------

Additions to the allowance for loan losses, which are expensed on the Companys income statement as the provision for loan losses, are made periodically to maintain the allowance for loan losses at an appropriate level
based upon managements evaluation of the potential risk in the loan portfolio. The Companys provision for loan losses in 2007 was $3.8 million, an increase of $1.3 million, or 54.2% from the 2006 provision of $2.5 million.

The allocation of allowance for loan losses on real estate-construction loans grew $1.2 million in 2007 due to higher levels of net charge offs in this
category coupled with growth of $51.6 million or 19.3% and in 2007.



42



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##### Table of Contents

The decrease in the allowance for commercial, financial, and agricultural loans in 2006 is primarily due to $694,000 for
unfunded lines and commitments and standby letters of credit in 2005 which were eliminated in 2006 to comply with SAB 108.

The following
table provides details regarding charge-offs and recoveries by loan category during the most recent five year period, as well as supplemental information relating to both net loan losses, the provision and the allowance for loan losses during each
of the past five years. Net charge-offs for 2007 represented 0.22% of average loans outstanding, compared to 0.17% for 2006 and 0.12% for 2005.



|                                                                 |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                 |  | Allowances for Loan LossesAt December 31, |        
|                                                                 |  | 2007                                      |         |   | 2006 |   |         | 2005 |  |   | 2004    |   |  | 2003 |        
|                                                                 |  | (Dollars in thousands)                    |        
|Total loans outstanding at end of period, net of unearned income |  | $                                         | 882,743 |   |      | $ | 749,969 |      |  | $ | 601,235 |   |  | $    | 494,170 |   |  | $ | 432,679 |  
|                                                                 |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Average loans outstanding, net of unearned income                |  | $                                         | 811,509 |   |      | $ | 664,101 |      |  | $ | 547,414 |   |  | $    | 464,769 |   |  | $ | 420,023 |  
|                                                                 |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance of allowance for loan losses at beginning of year        |  | $                                         | 9,777   |   |      | $ | 8,431   | (1)  |  | $ | 7,930   |   |  | $    | 7,278   |   |  | $ | 6,534   |  
|Charge-offs:                                                     |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial, financial and agricultural                           |  |                                           | 98      |   |      |   | 648     |      |  |   | 694     |   |  |      | 458     |   |  |   | 439     |  
|Real estate  construction                                       |  |                                           | 915     |   |      |   | 100     |      |  |   | 80      |   |  |      | 18      |   |  |   | 25      |  
|Real estate  mortgage                                           |  |                                           | 477     |   |      |   | 806     |      |  |   | 95      |   |  |      | 52      |   |  |   | 55      |  
|Consumer                                                         |  |                                           | 1,086   |   |      |   | 386     |      |  |   | 736     |   |  |      | 1,165   |   |  |   | 1,102   |  
|                                                                 |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                                |  |                                           | 2,576   |   |      |   | 1,940   |      |  |   | 1,605   |   |  |      | 1,693   |   |  |   | 1,621   |  
|                                                                 |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries of previous loan losses:                              |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial, financial and agricultural                           |  |                                           | 21      |   |      |   | 287     |      |  |   | 307     |   |  |      | 175     |   |  |   | 190     |  
|Real estate  construction                                       |  |                                           | 12      |   |      |   | 6       |      |  |   | 5       |   |  |      | 4       |   |  |   |        |  
|Real estate  mortgage                                           |  |                                           | 125     |   |      |   | 31      |      |  |   | 52      |   |  |      | 8       |   |  |   | 3       |  
|Consumer                                                         |  |                                           | 618     |   |      |   | 484     |      |  |   | 594     |   |  |      | 570     |   |  |   | 478     |  
|                                                                 |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                                 |  |                                           | 776     |   |      |   | 808     |      |  |   | 958     |   |  |      | 757     |   |  |   | 671     |  
|                                                                 |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loan losses                                                  |  |                                           | 1,800   |   |      |   | 1,132   |      |  |   | 647     |   |  |      | 936     |   |  |   | 950     |  
|Provision for loan losses                                        |  |                                           | 3,823   |   |      |   | 2,478   |      |  |   | 1,842   |   |  |      | 1,588   |   |  |   | 1,694   |  
|                                                                 |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance of allowance for loan losses at end of period            |  | $                                         | 11,800  |   |      | $ | 9,777   |      |  | $ | 9,125   |   |  |      | 7,930   |   |  |   | 7,278   |  
|                                                                 |  |                                           |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses to period end loans                    |  |                                           | 1.34    | % |      |   | 1.30    | %    |  |   | 1.52    | % |  |      | 1.60    | % |  |   | 1.68    | %
|Net charge-offs to average loans                                 |  |                                           | 0.22    | % |      |   | 0.17    | %    |  |   | 0.12    | % |  |      | 0.20    | % |  |   | 0.23    | %
|Proforma ALLL at end of period (2)                               |  |                                           |         |   |      |   |         |      |  | $ | 8,431   |   |  | $    | 7,355   |   |  | $ | 6,707   |  
|Proforma ALLL to period end loans(2)                             |  |                                           |         |   |      |   |         |      |  |   | 1.40    | % |  |      | 1.49    | % |  |   | 1.55    | %



|(1) | Includes adjustment of $694 for estimated overstatement of allowance for loan loss as of 12/31/05 as required by SAB 108.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(2) | Proforma assumes adjustment to prior periods of amounts corrected pursuant to SAB108 under the iron curtain method.
|--- | -------------------------------------------------------------------------------------------------------------------

At December 31, 2007, the allowance for loan losses was 1.34% of outstanding loans, up slightly from the 1.30% level at December 31, 2006 and
the 1.52% level at December 31, 2005 (1.40% as adjusted for SAB 108). The Company experienced higher levels of net charge offs in the real estate construction and consumer categories in 2007. Management considers the allowance appropriate based



43



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##### Table of Contents

upon its analysis of the potential risk in the portfolio using the methods previously discussed. Managements judgment is based upon a number of
assumptions about events which are believed to be reasonable, but which may or may not prove correct. While it is the Companys policy to charge off in the current period the loans in which a loss is considered probable, there are additional
risks of losses which cannot be quantified precisely or attributed to a particular loan or class of loans. Because these risks include present and forecasted economic conditions, managements judgment as to the adequacy of the allowance is
necessarily approximate and imprecise. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance will not be required. See Critical Accounting
Estimates.

Financial Condition

Composition
of the Loan Portfolio

Loans are the primary component of the Companys interest-earning assets and generally are expected to
provide higher yields than the other categories of earning assets. Those higher yields reflect the inherent credit risks associated with the loan portfolio. Management attempts to control and balance those risks with the rewards associated with
higher returns.

Loans outstanding averaged $811.5 million in 2007 compared to $664.1 million in 2006 and $547.4 million in 2005. At
December 31, 2007, loans totaled $882.7 million compared to $750.0 million at December 31, 2006, an increase of $132.8 million (17.7%). This compares to growth in 2006 of $148.8 million (24.8%) and loans outstanding of $601.2 million
at December 31, 2005.

The Company continues to experience significant increases in loan volumes and balances. The increases are
attributable to a stable local economy and the desire of a segment of the community to do business with a locally-owned and operated financial institution. Commercial real estate loans increased $37.9 million (19.1%) in 2007. Construction and
development loans increased $51.6 million (19.3%) from year end 2006. Average loans as a percentage of average interest-earning assets and average total assets were 76.5% and 71.6%, respectively, in 2007. This compares to average loans as a
percentage of average interest-earning assets and average total assets of 74.5% and 69.8%, respectively, in 2006.

The following table sets
forth the composition of the Companys loan portfolio as of December 31 for the past five years. The Companys loan portfolio does not contain any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed
as a category of loans in this table. The Company has not invested in loans to finance highly-leveraged transactions (HLT), such as leveraged buy-out transactions, as defined by the Federal Reserve and other regulatory agencies. Loans
made by a bank for recapitalization or acquisitions (including acquisitions by management or employees) which result in a material change in the borrowers financial structure to a highly-leveraged condition are considered HLT loans. The
Company had no foreign loans or loans to lesser-developed countries as of December 31 of any of the years presented.



44



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##### Table of Contents

Loan Portfolio Composition

At December 31,



|                                      |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  
|------------------------------------- |  | ---------------------- | ------- | - | ---- | ------ | - | ------ | - | ------- | ---- |  | ------ | ------ |  | - | ------- | - |  | ------ | - |  | - | ------- | - | ------ | ------ | - | - | - | ------- | - |  | ------ | -
|                                      |  | 2007                   |         |   | 2006 |        |   | 2005   |   |         | 2004 |  |        | 2003   | 
|                                      |  | Amount                 |         |   | %    |        |   | Amount |   |         | %    |  |        | Amount |  |   | %       |   |  | Amount |   |  | % |         |   | Amount |        |   | % |  
|                                      |  | (Dollars in thousands) |        
|Commercial financial and agricultural |  | $                      | 93,318  |   |      | 10.57  | % |        | $ | 80,823  |      |  | 10.78  | %      |  | $ | 64,398  |   |  | 10.71  | % |  | $ | 59,763  |   |        | 12.09  | % |   | $ | 56,626  |   |  | 13.09  | %
|                                      |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  
|Real estate                           |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  
|Commercial                            |  | $                      | 236,358 |   |      | 26.78  | % |        | $ | 198,453 |      |  | 26.46  | %      |  | $ | 156,896 |   |  | 26.10  | % |  | $ | 139,616 |   |        | 28.25  | % |   | $ | 129,223 |   |  | 29.87  | %
|Residential                           |  |                        | 190,613 |   |      | 21.59  | % |        |   | 158,543 |      |  | 21.14  | %      |  |   | 138,716 |   |  | 23.07  | % |  |   | 111,635 |   |        | 22.59  | % |   |   | 91,973  |   |  | 21.26  | %
|Residential held for sale             |  |                        | 11,303  |   |      | 1.28   | % |        |   | 14,857  |      |  | 1.98   | %      |  |   | 22,147  |   |  | 3.68   | % |  |   | 14,779  |   |        | 2.99   | % |   |   | 14,047  |   |  | 3.25   | %
|Construction and development          |  |                        | 318,438 |   |      | 36.07  | % |        |   | 266,875 |      |  | 35.58  | %      |  |   | 184,826 |   |  | 30.74  | % |  |   | 127,303 |   |        | 25.76  | % |   |   | 90,303  |   |  | 20.87  | %
|                                      |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  
|Total real estate                     |  |                        | 756,712 |   |      | 85.72  | % |        |   | 638,728 |      |  | 85.17  | %      |  |   | 502,585 |   |  | 83.59  | % |  |   | 393,333 |   |        | 79.59  | % |   |   | 325,546 |   |  | 75.24  | %
|                                      |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  
|Lease financing                       |  |                        | 37      |   |      | 0.00   | % |        |   | 116     |      |  | 0.02   | %      |  |   | 111     |   |  | 0.02   | % |  |   | 0       |   |        | 0.00   | % |   |   | 23      |   |  | 0.01   | %
|Consumer                              |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  
|Direct                                |  |                        | 25,569  |   |      | 2.90   | % |        |   | 24,146  |      |  | 3.22   | %      |  |   | 24,343  |   |  | 4.05   | % |  |   | 24,185  |   |        | 4.89   | % |   |   | 25,967  |   |  | 6.00   | %
|Indirect                              |  |                        | 4,237   |   |      | 0.48   | % |        |   | 6,232   |      |  | 0.83   | %      |  |   | 9,752   |   |  | 1.62   | % |  |   | 16,436  |   |        | 3.33   | % |   |   | 23,964  |   |  | 5.54   | %
|Revolving                             |  |                        | 3,819   |   |      | 0.43   | % |        |   | 843     |      |  | 0.11   | %      |  |   | 656     |   |  | 0.11   | % |  |   | 600     |   |        | 0.12   | % |   |   | 631     |   |  | 0.15   | %
|                                      |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  
|Total consumer                        |  |                        | 33,625  |   |      | 3.81   | % |        |   | 31,221  |      |  | 4.16   | %      |  |   | 34,751  |   |  | 5.78   | % |  |   | 41,221  |   |        | 8.34   | % |   |   | 50,562  |   |  | 11.69  | %
|                                      |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  
|Deferred loan origination fees        |  |                        | (949    | ) |      | -0.11  | % |        |   | (919    | )    |  | -0.12  | %      |  |   | (610    | ) |  | -0.10  | % |  |   | (147    | ) |        | -0.03  | % |   |   | (78     | ) |  | -0.02  | %
|                                      |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  
|Total                                 |  | $                      | 882,743 |   |      | 100.00 | % |        | $ | 749,969 |      |  | 100.00 | %      |  | $ | 601,235 |   |  | 100.00 | % |  | $ | 494,170 |   |        | 100.00 | % |   | $ | 432,679 |   |  | 100.00 | %
|                                      |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |  |   |         |   |        |        |   |   |   |         |   |  |        |  

Loans may be periodically renewed with principal reductions and appropriate interest rate
adjustments. Loan maturities as of December 31, 2007 are set forth in the following table based upon contractual terms. Actual cash flows may differ as borrowers generally have the right to prepay without prepayment penalties.

Loan Maturity Schedule

At
December 31, 2007



|                                       |  |                |         |   |                  |   |                 |  |       |        |  |   |         |  
|-------------------------------------- |  | -------------- | ------- | - | ---------------- | - | --------------- |  | ----- | ------ |  | - | ------- | -
|($ in thousands)                       |  | WithinOne Year |         |   | One to FiveYears |   | After FiveYears |  | Total |       
|Commercial, financial and agricultural |  | $              | 47,900  |   |                  | $ | 38,714          |  | $     | 6,704  |  | $ | 93,318  |  
|Real Estate                            |  |                |         |   |                  |   |                 |  |       |        |  |   |         |  
|Construction and development           |  |                | 253,413 |   |                  |   | 57,467          |  |       | 7,558  |  |   | 318,438 |  
|Mortgage                               |  |                | 184,389 |   |                  |   | 201,216         |  |       | 52,669 |  |   | 438,274 |  
|Lease financing                        |  |                | 37      |   |                  |   |                |  |       |       |  |   | 37      |  
|Consumer                               |  |                | 17,615  |   |                  |   | 14,924          |  |       | 1,086  |  |   | 33,625  |  
|Deferred loan origination fees         |  |                | (949    | ) |                  |   |                |  |       |       |  |   | (949    | )
|                                       |  |                |         |   |                  |   |                 |  |       |        |  |   |         |  
|Total loans                            |  | $              | 502,405 |   |                  | $ | 312,321         |  | $     | 68,017 |  | $ | 882,743 |  
|                                       |  |                |         |   |                  |   |                 |  |       |        |  |   |         |  

The following table presents an interest rate sensitivity analysis of the Companys loan
portfolio as of December 31, 2007. The loans outstanding are shown in the time period where they are first subject to repricing.



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Sensitivity of Loans to Changes in Interest Rates

At December 31, 2007



|                                      |  |                |         |                  |   |                 |  |       |        |  |   |        
|------------------------------------- |  | -------------- | ------- | ---------------- | - | --------------- |  | ----- | ------ |  | - | -------
|($ in thousands)                      |  | WithinOne year |         | One to FiveYears |   | After FiveYears |  | Total
|Loans maturing or repricing with:     |  |                |         |                  |   |                 |  |       |        |  |   |        
|Predetermined interest rates          |  | $              | 146,515 |                  | $ | 232,857         |  | $     | 26,051 |  | $ | 405,423
|Floating or adjustable interest rates |  |                | 440,881 |                  |   | 35,412          |  |       | 1,027  |  |   | 477,320
|                                      |  |                |         |                  |   |                 |  |       |        |  |   |        
|Total loans                           |  | $              | 587,396 |                  | $ | 268,269         |  | $     | 27,078 |  | $ | 882,743
|                                      |  |                |         |                  |   |                 |  |       |        |  |   |        

Non-Performing Assets

As a result of managements ongoing review of the loan portfolio, loans are classified as nonaccrual when it is not reasonable to expect collections of interest and principal under the original terms, generally
when a loan becomes 90 days or more past due. 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, the interest which has been accrued but remains unpaid is reversed and deducted from current period interest income. No additional interest is accrued and recognized as income on the loan balance until the collection of both principal
and interest becomes reasonably certain. Also, there may be write downs, and ultimately, the total charge-off of the principal balance of the loan, which could necessitate additional charges to earnings through the provision for loan losses.

If non accruing loans had been accruing interest under their original terms, approximately $198,000 in 2007, $118,000 in 2006 and $204,000
in 2005 would have been recognized as earnings.

The Company accounts for impaired loans under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114 Accounting by Creditors for Impairment of a Loan as amended by SFAS No. 118 Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, which requires
that the Company identify impaired loans and evaluate the collectability of both contractual interest and principal of loans when assessing the need for a loss allowance. The provisions of SFAS No. 114 do not apply to large pools of smaller
balance homogeneous loans which are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, and debt securities. A loan is considered impaired, when based upon 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 note agreement. The amount of the impairment is measured based on the present value of future cash flows discounted at the
loans effective interest rate or, if the loan is collateral dependent or foreclosure is probable, the fair value of collateral, less estimated selling expenses. Regulatory guidance is also considered. At December 31, 2007 and 2006, the
Company had impaired loans of $14.2 million and $1.5 million, respectively. Allowances for losses on impaired loans totaled $291,000 on balances of $1.7 million and $252,000 on balances of $590,000 respectively at December 31, 2007 and 2006
respectively. The amount of impaired loans for which there is no related allowance for credit losses totaled $12.4 million and $944,000 at December 31, 2007 and 2006 respectively.

Non-performing loans are defined as nonaccrual and renegotiated loans. When other real estate owned is included with non-performing loans, the result is
non-performing assets. The following table, Non-Performing Assets, presents information on these assets and loans past due 90 days or more and



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still accruing interest as of December 31, for the past five years. Non-performing assets were $5.5 million at December 31, 2007 or 0.62% of total
loans and other real estate owned. This compares to $2.4 million or 0.31% of total loans and other real estate owned at December 31, 2006.

Significant changes in nonaccrual loans during 2007 included an increase in non-performing assets for several large credits on nonaccrual. The largest credit placed on nonaccrual was a $1.7 million secured by commercial real estate. In
addition, a loan for $800 thousand secured by residential real estate as well as a $410 unsecured loan to the same borrower were placed on nonaccrual.

Significant changes in nonaccrual loans during 2006 included a decrease in non-performing assets with balances less than $100,000, a $1.4 million decrease for two customers from a combination of collateral sale and
charge-off, a $254,000 decrease for one customer removed from nonaccrual status, and an increase of $825,000 for two customers added to nonaccrual status.

At December 31, 2007 and 2006, there were no loans past due 90 days or more and still accruing. At December 31, 2005 and 2004 there were loans past due 90 days or more and still accruing of $1,000 and
$29,000, respectively. All loans past due 90 days or more are classified as nonaccrual loans unless the loan officer believes that both principal and interest are collectible, in which case the loan continues to accrue interest.



|                                                                                                                                                     |  |                                              |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                                     |  | Non-Performing AssetsYear Ended
December 31, |       
|                                                                                                                                                     |  | 2007                                         |        |   | 2006 |   |        | 2005 |  |   | 2004   |   |  | 2003 |       
|                                                                                                                                                     |  | (Dollars in thousands)                       |       
|Nonaccrual loans                                                                                                                                     |  | $                                            | 5,495  |   |      | $ | 2,351  |      |  | $ | 4,009  |   |  | $    | 2,972  |   |  | $ | 3,045  |  
|Other real estate owned                                                                                                                              |  |                                              |       |   |      |   |       |      |  |   |       |   |  |      | 53     |   |  |   | 5      |  
|                                                                                                                                                     |  |                                              |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                                                                                                           |  | $                                            | 5,495  |   |      | $ | 2,351  |      |  | $ | 4,009  |   |  | $    | 3,025  |   |  | $ | 3,050  |  
|                                                                                                                                                     |  |                                              |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans past due 90 days or more and still accruing interest                                                                                           |  | $                                            |       |   |      | $ |       |      |  | $ | 1      |   |  | $    | 29     |   |  | $ |       |  
|                                                                                                                                                     |  |                                              |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses to period end total loans                                                                                                  |  |                                              | 1.34   | % |      |   | 1.30   | %    |  |   | 1.52   | % |  |      | 1.60   | % |  |   | 1.68   | %
|Allowance for loan losses to period end nonperforming loans                                                                                          |  |                                              | 214.74 | % |      |   | 415.87 | %    |  |   | 227.56 | % |  |      | 262.15 | % |  |   | 238.62 | %
|Net charge-offs to average loans                                                                                                                     |  |                                              | 0.22   | % |      |   | 0.17   | %    |  |   | 0.12   | % |  |      | 0.20   | % |  |   | 0.23   | %
|Nonperforming assets to period end loans                                                                                                             |  |                                              | 0.62   | % |      |   | 0.31   | %    |  |   | 0.67   | % |  |      | 0.61   | % |  |   | 0.70   | %
|Nonperforming assets to period end loans and other real estate owned                                                                                 |  |                                              | 0.62   | % |      |   | 0.31   | %    |  |   | 0.67   | % |  |      | 0.61   | % |  |   | 0.70   | %
|Proforma data to illustrate the effect of SAB 108                                                                                                    |  |                                              |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses to period end net loans excluding amount applicable to unfunded lines, commitments and standby letters of credit           |  |                                              |        |   |      |   |        |      |  |   | 1.40   | % |  |      | 1.49   | % |  |   | 1.55   | %
|Allowance for loan losses to period end nonperforming loans excluding amount applicable to unfunded lines, commitments and standby letters of
credit |  |                                              |        |   |      |   |        |      |  |   | 210.30 | % |  |      | 243.14 | % |  |   | 219.90 | %

Management is not aware of any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been identified which (1) represent or result from trends



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or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (2) represent
material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Off-Balance Sheet Arrangements

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 and letters of 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 contractual amounts represent potential credit risk totaled $208.5 million and $202.6 million
at December 31, 2007 and 2006, respectively. These commitments are primarily at variable interest rates.

The Companys
commitments are funded through internal funding sources of scheduled repayments of loans and sales and maturities of investment securities available for sale or external funding sources through acceptance of deposits from customers or borrowings
from other financial institutions.

The following table is a summary of the Companys commitments to extend credit, commitments under
contractual leases as well as the Company contractual obligations, consisting of deposits, FHLB advances and borrowed funds by contractual maturity date.



|                                                                      |  |                 |           |            |        |            |        |                  |       
|--------------------------------------------------------------------- |  | --------------- | --------- | ---------- | ------ | ---------- | ------ | ---------------- | ------
|Commitments and Contractual
Obligations ($ in thousands)              |  | Less than1 Year |           | 1 - 3Years |        | 3 - 5Years |        | More than5 Years
|Lines of credit                                                       |  | $               | 193,883   |            |       |            |       |                  |      
|Mortgage loan commitments                                             |  |                 | 14,616    |            |       |            |       |                  |      
|Lease agreements                                                      |  |                 | 336       |            | 452    |            | 222    |                  | 156   
|Deposits                                                              |  |                 | 908,283   |            | 37,428 |            | 5,789  |                  | 666   
|Federal funds purchased / Securities sold under repurchase agreements |  |                 | 81,166    |            |       |            |       |                  |      
|FHLB advances                                                         |  |                 |          |            | 24,000 |            | 6,000  |                  | 29,000
|Other borrowings                                                      |  |                 | 500       |            |       |            |       |                  |      
|Subordinated debentures                                               |  |                 |          |            |       |            |       |                  | 20,000
|                                                                      |  |                 |           |            |        |            |        |                  |       
|Total commitments and contractual obligations                         |  | $               | 1,198,784 |            | 61,880 |            | 12,011 |                  | 49,822
|                                                                      |  |                 |           |            |        |            |        |                  |       

Although management regularly monitors the balance of outstanding commitments to fund loans to
ensure funding availability should the need arise, management believes that the risk of all customers fully drawing on all these lines of credit at the same time is remote.



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Investment Securities

The Companys investment securities portfolio increased $44.8 million to $246.9 million at year-end 2007 from 2006. The Company maintains an investment strategy of seeking portfolio yields within acceptable risk
levels, as well as providing liquidity. The Company maintains two classifications of investments: Held to Maturity and Available for Sale. Available for Sale securities are carried at fair market value with
related unrealized gains or losses included in stockholders equity as accumulated other comprehensive income, whereas the Held to Maturity securities are carried at amortized cost. As a consequence, with a higher percentage of
securities being placed in the Available for Sale category, the Companys stockholders equity is more volatile than it would be if a larger percentage of investment securities were placed in the Held to Maturity
category. Although equity is more volatile, management has discretion, with respect to the Available for Sale securities, to proactively adjust to favorable market conditions in order to provide liquidity and realize gains on the sales
of securities. The changes in values in the investment securities portfolio are not taken into account in determining regulatory capital requirements. (As of December 31, 2007, except for the U.S. Government agencies, there was no issuer who
represented 10% or more of stockholders equity within the investment portfolio.) As of December 31, 2007 and 2006, the estimated fair value of investment securities as a percentage of their amortized cost was 100.0% and 98.8%,
respectively. At December 31, 2007, the investment securities portfolio had gross unrealized gains of $2,097,000 and gross unrealized losses of $2,022,000, for a net unrealized gain of $75,000. As of December 31, 2006 and 2005, the
investment securities portfolio had net unrealized losses of $2,400,000 and $3,302,000, respectively. The following table presents the amortized cost of investment securities held by the Company at December 31, 2007, 2006 and 2005.

Investment Securities



|                                                 |  |              |         |      |   |         |  |   |        
|------------------------------------------------ |  | ------------ | ------- | ---- | - | ------- |  | - | -------
|                                                 |  | December 31,
|(Dollars in thousands)                           |  | 2007         |         | 2006 |   | 2005   
|Available for sale:                              |  |              |         |      |   |         |  |   |        
|U.S. Government Agencies                         |  |              | 96,166  |      |   | 77,717  |  |   | 68,646 
|Obligations of states and political subdivisions |  |              | 15,755  |      |   | 15,391  |  |   | 19,641 
|Mortgage-backed securities                       |  |              | 118,179 |      |   | 95,910  |  |   | 92,984 
|Corporate bonds                                  |  |              | 9,722   |      |   | 5,987   |  |   | 9,071  
|Trust preferred                                  |  |              | 5,314   |      |   | 6,358   |  |   | 10,133 
|Equity securities                                |  |              | 250     |      |   | 250     |  |   | 500    
|                                                 |  |              |         |      |   |         |  |   |        
|Total                                            |  | $            | 245,386 |      | $ | 201,613 |  | $ | 200,975
|                                                 |  |              |         |      |   |         |  |   |        
|                                                 | 
|                                                 |  | December 31,
|                                                 |  | 2007         |         | 2006 |   | 2005   
|Held to maturity:                                |  |              |         |      |   |         |  |   |        
|Obligations of states and political subdivisions |  | $            | 1,435   |      | $ | 2,971   |  | $ | 3,776  
|                                                 |  |              |         |      |   |         |  |   |        
|Total                                            |  | $            | 1,435   |      | $ | 2,971   |  | $ | 3,776  
|                                                 |  |              |         |      |   |         |  |   |        

The following table represents maturities and weighted average yields of debt securities at
December 31, 2007. Yields are based on the amortized cost of securities. Maturities are based on the contractual maturities. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.



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Maturity Distribution and Yields of

Investment Securities

(Dollars in thousands)



|                                 |  |                   |         |       |      |  
|-------------------------------- |  | ----------------- | ------- | ----- | ---- | -
|                                 |  | December 31, 2007 |        
|                                 |  | Amortized Cost    |         | Yield |     
|Available for Sale               |  |                   |         |       |      |  
|US Government Agencies           |  |                   |         |       |      |  
|Over one through five years      |  | $                 | 11,587  |       | 4.91 | %
|Over five through ten years      |  |                   | 44,324  |       | 5.49 | %
|Over ten years                   |  |                   | 40,255  |       | 5.81 | %
|                                 |  |                   |         |       |      |  
|Total U. S. Government Agencies  |  | $                 | 96,166  |       | 5.55 | %
|                                 |  |                   |         |       |      |  
|                                 |  |                  
|Municipal Securities(1)          |  |                   |         |       |      |  
|One year or less                 |  | $                 | 250     |       | 4.51 | %
|Over five through ten years      |  |                   | 2,843   |       | 5.85 | %
|Over ten years                   |  |                   | 12,662  |       | 6.24 | %
|                                 |  |                   |         |       |      |  
|Total Municipal Securities       |  | $                 | 15,755  |       | 6.14 | %
|                                 |  |                   |         |       |      |  
|                                 |  |                  
|Corporate Bonds                  |  |                   |         |       |      |  
|Over one through five years      |  | $                 | 1,011   |       | 7.31 | %
|Over five through ten years      |  |                   | 3,821   |       | 6.13 | %
|Over ten years                   |  |                   | 4,890   |       | 6.70 | %
|                                 |  |                   |         |       |      |  
|Total Corporate Bonds            |  | $                 | 9,722   |       | 6.54 | %
|                                 |  |                   |         |       |      |  
|                                 |  |                  
|Trust Preferred                  |  |                   |         |       |      |  
|Over one through five years      |  | $                 | 1,014   |       | 6.39 | %
|Over five through ten years      |  |                   | 1,000   |       | 6.25 | %
|Over ten years                   |  |                   | 3,300   |       | 7.32 | %
|                                 |  |                   |         |       |      |  
|Total Trust Preferred securities |  | $                 | 5,314   |       | 6.94 | %
|                                 |  |                   |         |       |      |  
|                                 |  |                  
|Mortgage Backed Securities       |  |                   |         |       |      |  
|Over one through five years      |  | $                 | 6,188   |       | 4.11 | %
|Over five through ten years      |  |                   | 11,493  |       | 4.48 | %
|Over ten years                   |  |                   | 100,498 |       | 5.13 | %
|                                 |  |                   |         |       |      |  
|Total Mortgage Backed securities |  | $                 | 118,179 |       | 5.01 | %
|                                 |  |                   |         |       |      |  
|Total Equity securities          |  | $                 | 250     |       | 0.00 | %
|                                 |  |                   |         |       |      |  
|                                 |  |                  
|Total Available for Sale         |  | $                 | 245,386 |       | 5.39 | %
|                                 |  |                   |         |       |      |  
|                                 |  |                  
|Held to Maturity                 |  |                   |         |       |      |  
|Municipal Securities(1)          |  |                   |         |       |      |  
|Over one through five years      |  | $                 | 926     |       | 7.22 | %
|Over five through ten years      |  |                   | 509     |       | 7.73 | %
|                                 |  |                   |         |       |      |  
|Total Municipal Securities       |  | $                 | 1,435   |       | 7.40 | %
|                                 |  |                   |         |       |      |  
|                                 |  |                  
|Total Held to Maturity           |  | $                 | 1,435   |       | 7.40 | %
|                                 |  |                   |         |       |      |  
|                                 |  |                  
|Total Investment Securities      |  | $                 | 246,821 |       | 5.40 | %
|                                 |  |                   |         |       |      |  



|(1) | Tax-equivalent yield
|--- | --------------------

Asset/Liability Management, Interest Rate
Sensitivity and Liquidity

General. It is the objective of the Company to manage assets and liabilities to preserve the integrity
and safety of the deposit and capital base of the Company by protecting the Company from undue exposure to poor asset quality and interest rate risk. Additionally, the Company pursues a consistent level of earnings as further protection for the
depositors and to provide an appropriate return to stockholders on their investment.



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These objectives are achieved through compliance with an established framework of asset/liability,
interest rate risk, loan, investment, and capital policies. Management is responsible for monitoring policies and procedures that result in proper management of the components of the asset/liability function to achieve stated objectives. The
Companys philosophy is to support quality asset growth primarily through growth of core deposits, which include non-volatile deposits of individuals, partnerships and corporations. Management seeks to invest the largest portion of the
Companys assets in loans that meet the Companys quality standards. Alternative investments are made in the investment portfolio. The Companys asset/liability function and related components of liquidity and interest rate risk are
monitored on a continuous basis by management. The Board of Directors reviews and monitors these functions on a monthly basis.

Interest
Rate Sensitivity. The process of asset/liability management involves monitoring the Companys balance sheet in order to determine the potential impact that changes in the interest rate environment would have on net interest income so that
the appropriate strategies to minimize any negative impact can be implemented. The primary objective of asset/liability management is to continue the steady growth of net interest income, the Companys primary earnings component within a
context of liquidity requirements.

In theory, interest rate risk can be minimized by maintaining a nominal level of interest rate
sensitivity. In practice, however, this is made difficult because of uncontrollable influences on the Companys balance sheet, including variations in both loan demand and the availability of funding sources.

The measurement of the Companys interest rate sensitivity is one of the primary techniques employed by the Company in asset/liability management.
The dollar difference between assets and liabilities which are subject to interest rate repricing within a given time period, including both floating rate or adjustable instruments and instruments which are approaching maturity, determine the
interest sensitivity gap.

The Company manages its sensitivity to interest rate movements by adjusting the maturity of, and establishing
rates on, the interest-earning asset portfolio and interest-bearing liabilities in line with managements expectations relative to market interest rates. The Company would generally benefit from increasing market interest rates when the balance
sheet is asset sensitive and would benefit from decreasing market rates when it is liability sensitive. At December 31, 2007, the Companys interest rate sensitivity position was liability sensitive within the one-year horizon.

The following table Interest Sensitivity Analysis details the interest rate sensitivity of the Company at December 31, 2007. The
principal balances of the various interest-earning and interest-bearing balance sheet instruments are shown in the time period where they are first subject to repricing, whether as a result of floating or adjustable rate contracts. Fixed rate time
deposits are presented according to their contractual maturity while variable rate time deposits reprice with the prime rate and are presented in the within three months time frame. Prime savings accounts reprice at managements discretion when
prime is below 5% and at 50% of the prime rate when prime is greater than 5%. In the table presented below, prime savings reprices in the within three months time frame. Regular savings, money management and NOW accounts do not have a contractual
maturity date and are presented as repricing at the earliest date in which the deposit holder could withdraw the funds. All other borrowings are shown in the first period in which they could reprice. In the one-year time period, the pricing mismatch
on a cumulative basis was liability sensitive $351.7 million or 31.1% of total interest-earning assets. Management has procedures in place to carefully monitor the Companys interest rate sensitivity as the rate environment changes. It should
also be noted that all interest rates do not adjust at the same velocity. As an example, the majority of the savings category listed below is priced on an



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adjustable basis. When prime is greater than 5%, it is fifty percent of the prime rate. Therefore, as the prime rate adjusts 100 basis points, the rate on
this liability only adjusts 50 basis points. Moreover, varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities. Investments prepayments are reflected at their current prepayment speeds in the
interest sensitivity analysis report. No other prepayments are reflected in the following interest sensitivity analysis report. Prepayments may have significant effects on the Companys net interest margin. Hence, gap is only a general
indicator of interest rate sensitivity and cannot be interpreted as an absolute measurement of the Companys interest rate risk.

Interest Sensitivity Analysis

At December 31, 2007



|                                                                     |  |                        |          |   |                              |   |          |                              |  |   |                |   |  |                           |          |   |                |   |         |       |  |   |         |   |  |   |          
|-------------------------------------------------------------------- |  | ---------------------- | -------- | - | ---------------------------- | - | -------- | ---------------------------- |  | - | -------------- | - |  | ------------------------- | -------- | - | -------------- | - | ------- | ----- |  | - | ------- | - |  | - | ---------
|                                                                     |  | WithinThreeMonths      |          |   | After ThreeThroughSix Months |   |          | After SixThroughTwelveMonths |  |   | Within OneYear |   |  | One YearThroughFive Years |          |   | Over FiveYears |   |         | Total
|                                                                     |  | (Dollars in thousands)
|Interest-earning assets:                                             |  |                        |          |   |                              |   |          |                              |  |   |                |   |  |                           |          |   |                |   |         |       |  |   |         |   |  |   |          
|Loans                                                                |  | $                      | 479,473  |   |                              | $ | 46,336   |                              |  | $ | 62,956         |   |  | $                         | 588,765  |   |                | $ | 267,321 |       |  | $ | 26,657  |   |  | $ | 882,743  
|Investment securities                                                |  |                        | 8,103    |   |                              |   | 5,789    |                              |  |   | 12,293         |   |  |                           | 26,185   |   |                |   | 99,041  |       |  |   | 121,638 |   |  |   | 246,864  
|Federal funds sold                                                   |  |                        |         |   |                              |   |         |                              |  |   |               |   |  |                           |         |   |                |   |        |       |  |   |        |   |  |   |         
|Interest-bearing deposits in other banks                             |  |                        | 500      |   |                              |   |         |                              |  |   |               |   |  |                           | 500      |   |                |   |        |       |  |   |        |   |  |   | 500      
|                                                                     |  |                        |          |   |                              |   |          |                              |  |   |                |   |  |                           |          |   |                |   |         |       |  |   |         |   |  |   |          
|Total interest-earning assets                                        |  | $                      | 488,076  |   |                              | $ | 52,125   |                              |  | $ | 75,249         |   |  | $                         | 615,450  |   |                | $ | 366,362 |       |  | $ | 148,295 |   |  | $ | 1,130,107
|                                                                     |  |                        |          |   |                              |   |          |                              |  |   |                |   |  |                           |          |   |                |   |         |       |  |   |         |   |  |   |          
|Interest-bearing liabilities:                                        |  |                        |          |   |                              |   |          |                              |  |   |                |   |  |                           |          |   |                |   |         |       |  |   |         |   |  |   |          
|Money management accounts                                            |  | $                      | 73,609   |   |                              | $ | 0        |                              |  | $ | 0              |   |  | $                         | 73,609   |   |                | $ | 0       |       |  | $ | 0       |   |  | $ | 73,609   
|Savings accounts                                                     |  |                        | 289,731  |   |                              |   |         |                              |  |   |               |   |  |                           | 289,731  |   |                |   |        |       |  |   |        |   |  |   | 289,731  
|NOW accounts                                                         |  |                        | 132,186  |   |                              |   |         |                              |  |   |               |   |  |                           | 132,186  |   |                |   |        |       |  |   |        |   |  |   | 132,186  
|Time deposits                                                        |  |                        | 115,914  |   |                              |   | 72,507   |                              |  |   | 127,199        |   |  |                           | 315,620  |   |                |   | 39,748  |       |  |   |        |   |  |   | 355,368  
|Federal funds purchased / securities sold under repurchase ageements |  |                        | 81,166   |   |                              |   |         |                              |  |   |               |   |  |                           | 81,166   |   |                |   |        |       |  |   |        |   |  |   | 81,166   
|Federal Home Loan Bank advances                                      |  |                        | 19,000   |   |                              |   |         |                              |  |   |               |   |  |                           | 19,000   |   |                |   | 24,000  |       |  |   | 16,000  |   |  |   | 59,000   
|Notes and bonds payable                                              |  |                        | 500      |   |                              |   |         |                              |  |   |               |   |  |                           | 500      |   |                |   |        |       |  |   |        |   |  |   | 500      
|Subordinated debentures                                              |  |                        | 20,000   |   |                              |   |         |                              |  |   |               |   |  |                           | 20,000   |   |                |   |        |       |  |   |        |   |  |   | 20,000   
|                                                                     |  |                        |          |   |                              |   |          |                              |  |   |                |   |  |                           |          |   |                |   |         |       |  |   |         |   |  |   |          
|Total interest-bearing liabilities                                   |  | $                      | 732,106  |   |                              | $ | 72,507   |                              |  | $ | 127,199        |   |  | $                         | 931,812  |   |                | $ | 63,748  |       |  | $ | 16,000  |   |  | $ | 1,011,560
|                                                                     |  |                        |          |   |                              |   |          |                              |  |   |                |   |  |                           |          |   |                |   |         |       |  |   |         |   |  |   |          
|Period gap                                                           |  | $                      | (244,030 | ) |                              | $ | (20,382  | )                            |  | $ | (51,950        | ) |  | $                         | (316,362 | ) |                | $ | 302,614 |       |  | $ | 132,295 |   |  |   |          
|Cumulative gap                                                       |  | $                      | (244,030 | ) |                              | $ | (264,412 | )                            |  | $ | (316,362       | ) |  | $                         | (316,362 | ) |                | $ | (13,748 | )     |  | $ | 118,547 |   |  |   |          
|Ratio of cumulative gap to total interest-earning assets             |  |                        | -21.59   | % |                              |   | -23.40   | %                            |  |   | -27.99         | % |  |                           | -27.99   | % |                |   | -1.22   | %     |  |   | 10.49   | % |  |   |          



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Liquidity

Management of the Companys liquidity position is closely related to the process of asset/liability management. Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well
as to provide sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. The Company intends to meet its liquidity needs by managing cash and due from banks, federal funds sold and purchased, maturity of investment
securities, principal repayments received from mortgage-backed securities and lines of credit as necessary. GB&T maintains a line of credit with the Federal Home Loan Bank at 10% of GB&Ts total assets. Federal Home Loan Bank advances
are collateralized by eligible first mortgages, commercial real estate loans and investment securities. GB&T maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20.0. At December 31,
2007, a $10.0 million repurchase agreement was outstanding with SunTrust Robinson Humphrey. GB&T has a federal funds purchased accommodation with Silverton Bank, Atlanta, Georgia, for advances up to $16.7 million and with SunTrust Bank, Atlanta,
Georgia, for advances up to $10.0 million, while SB&T has a federal funds purchased accommodation with Silverton Bank, Atlanta, Georgia, for advances up to $3.3 Million. Additionally, liquidity needs can be satisfied by the structuring of the
maturities of investment securities and the pricing and maturities on loans and deposits offered to customers. The Company also uses retail securities sold under repurchase agreements to fund growth. Retail securities sold under repurchase
agreements were $48.6 million at December 31, 2007.

Deposits

The Companys average deposits and other borrowings increased $166.3 million or 19.1% from 2006 to 2007. Average interest-bearing liabilities increased $159.9 million or 20.7% while average noninterest-bearing
deposits increased $6.4 million or 6.3% from 2006 to 2007. Average deposits and borrowings increased $155.8 million or 21.7% from 2005 to 2006. Average interest-bearing liabilities increased $142.9 million or 22.8% from 2005 to 2006, while average
noninterest-bearing deposits increased $13.0 million or 14.5% during the same period. The majority of the growth in deposits reflects the Companys strategy of consistently emphasizing deposit growth, as deposits are the primary source of
funding for balance sheet growth. Borrowed funds consist of short-term borrowings, securities sold under agreements to repurchase with the Companys commercial customers and reverse repurchase agreements with SunTrust Robinson Humphrey, federal
funds purchased, and borrowings from the Federal Home Loan Bank. Brokered certificates of deposit included in time deposits over $100,000 at December 31, 2007 and 2006 were $78.5 million and $67.4 million, respectively.

The following table presents the average amount outstanding and the average rate paid on deposits and borrowings by the Company for the years 2007, 2006
and 2005:



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|                                                                     |  |                         |           |             |      |   |               |      |             |  |      |               |  |             |         |  |      |  
|-------------------------------------------------------------------- |  | ----------------------- | --------- | ----------- | ---- | - | ------------- | ---- | ----------- |  | ---- | ------------- |  | ----------- | ------- |  | ---- | -
|                                                                     |  | Year ended December 31, |          
|                                                                     |  | 2007                    |           |             | 2006 |   |               | 2005 |            
|                                                                     |  | AverageAmount           |           | AverageRate |      |   | AverageAmount |      | AverageRate |  |      | AverageAmount |  | AverageRate |        
|                                                                     |  | (Dollars in thousands)  |          
|Noninterest-bearing demand deposits                                  |  | $                       | 108,470   |             | 0.00 | % |               | $    | 102,032     |  | 0.00 | %             |  | $           | 89,079  |  | 0.00 | %
|Interest-bearing liabilities:                                        |  |                         |           |             |      |   |               |      |             |  |      |               |  |             |         |  |      |  
|NOW accounts                                                         |  |                         | 127,093   |             | 2.30 | % |               |      | 114,021     |  | 2.00 | %             |  |             | 87,982  |  | 0.89 | %
|Savings, money management accounts                                   |  |                         | 341,097   |             | 4.04 | % |               |      | 305,186     |  | 3.93 | %             |  |             | 288,759 |  | 2.98 | %
|Time deposits                                                        |  |                         | 317,298   |             | 5.18 | % |               |      | 213,889     |  | 4.59 | %             |  |             | 145,209 |  | 3.08 | %
|Federal funds purchased/ securities sold under repurchase agreements |  |                         | 65,735    |             | 5.03 | % |               |      | 62,451      |  | 4.93 | %             |  |             | 55,658  |  | 3.05 | %
|Other borrowings                                                     |  |                         | 79,250    |             | 5.65 | % |               |      | 75,034      |  | 5.66 | %             |  |             | 50,121  |  | 4.62 | %
|                                                                     |  |                         |           |             |      |   |               |      |             |  |      |               |  |             |         |  |      |  
|Total interest-bearing liabilities                                   |  | $                       | 930,473   |             | 4.40 | % |               | $    | 770,581     |  | 4.08 | %             |  | $           | 627,729 |  | 2.85 | %
|                                                                     |  |                         |           |             |      |   |               |      |             |  |      |               |  |             |         |  |      |  
|Total noninterest & interest-bearing liabilities                     |  | $                       | 1,038,943 |             |      |   |               | $    | 872,613     |  |      |               |  | $           | 716,808 |  |      |  

The following table presents the maturities of the Companys time deposits over $100,000 at
December 31, 2007:

Maturities of Time Deposits

(Dollars in thousands)



|                          |  |                                              |        
|------------------------- |  | -------------------------------------------- | -------
|                          |  | TimeCertificatesof Depositof $100,000or More
|Months to Maturity        |  |                                              |        
|Within 3 months           |  | $                                            | 75,994 
|After 3 through 6 months  |  |                                              | 49,022 
|After 6 through 12 months |  |                                              | 89,100 
|                          |  |                                              |        
|Within one year           |  |                                              | 214,116
|After 12 months           |  |                                              | 29,385 
|                          |  |                                              |        
|Total                     |  | $                                            | 243,501
|                          |  |                                              |        

This table indicates that the majority of time deposits of $100,000 or more have a maturity of
less than twelve months. This is reflective of both the Companys market and recent interest rate environments. Large time deposit customers tend to be extremely rate sensitive, making these deposits a volatile source of funding for liquidity
planning purposes. However, dependent upon pricing, these deposits are virtually always available in the Companys market. At December 31, 2007, the Company had $21.2 million of brokered certificates of deposit that mature after 12 months.
The Company does not have any time deposits of $100,000 or more that are not certificates of deposit.

Capital

Total stockholders equity was $89.8 million at December 31, 2007, increasing $10.8 million or 13.7% from the previous year. The increase was
primarily the combination of retained earnings, earnings less dividends paid, in the amount of $8.9 million and an increase in accumulated other comprehensive income of $1,663,000. The increase in accumulated other comprehensive income represents a
decrease in unrealized losses in the available for sale investment portfolio. The Company purchased 8,432 shares of treasury stock in 2007, and 1,600 shares in 2006 at a cost of $317,000 and



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$62,000, respectively, which is shown as a reduction of stockholders equity. The Company issued 400 shares of treasury stock in 2007, 800 shares in
2006, and 21,400 shares in 2005 at a price of $17,000, $31,000 and $263,000, respectively, for stock options which were exercised.

The
Companys average equity to average total assets was 7.40% in 2007 compared to 7.29% in 2006 and 7.85% in 2005. Capital is considered to be adequate to meet present operating needs and anticipated future operating requirements. Management is
not aware of any trends, events or uncertainties that are reasonably likely to have a material effect on the Companys capital resources or operations. The following table presents the return on equity and assets for the years 2007, 2006 and
2005.

Return on Equity and Assets



|                                       |  |                          |   |  |       |   |  |       |  
|-------------------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                       |  | Years ended December 31, |  
|                                       |  | 2007                     |   |  | 2006  |   |  | 2005  |  
|Return on average total assets         |  | 1.04                     | % |  | 1.17  | % |  | 1.27  | %
|Return on average equity               |  | 14.03                    | % |  | 16.10 | % |  | 16.15 | %
|Average equity to average assets ratio |  | 7.40                     | % |  | 7.29  | % |  | 7.85  | %

At December 31, 2007, the Company was well above the minimum capital ratios required under
the regulatory risk-based capital guidelines. The following table presents the capital ratios for the Company and its subsidiaries.



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ANALYSIS OF CAPITAL



|                                        |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|--------------------------------------- |  | ---------------------- | ------ | - | ------ | - | ------ | ------ | ------- |  | ----- | ------ |  | - | ------ |  | ----- | -
|                                        |  | Required               |        |   | Actual |   |        | Excess |        
|                                        |  | Amount                 |        | % |        |   | Amount |        | %       |  |       | Amount |  | % |       
|                                        |  | (Dollars in thousands) |       
|Southeastern Bank Financial Corporation |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|12/31/2007                              |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Risk-based capital:                     |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Tier 1 capital                          |  | $                      | 38,531 |   | 4.00   | % |        | $      | 109,589 |  | 11.38 | %      |  | $ | 71,058 |  | 7.38  | %
|Total capital                           |  |                        | 77,062 |   | 8.00   | % |        |        | 121,463 |  | 12.61 | %      |  |   | 44,401 |  | 4.61  | %
|Tier 1 leverage ratio                   |  |                        | 48,307 |   | 4.00   | % |        |        | 109,589 |  | 9.07  | %      |  |   | 61,282 |  | 5.07  | %
|12/31/2006                              |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Risk-based capital:                     |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Tier 1 capital                          |  | $                      | 33,222 |   | 4.00   | % |        | $      | 100,419 |  | 12.09 | %      |  | $ | 67,197 |  | 8.09  | %
|Total capital                           |  |                        | 66,445 |   | 8.00   | % |        |        | 110,422 |  | 13.29 | %      |  |   | 43,977 |  | 5.29  | %
|Tier 1 leverage ratio                   |  |                        | 41,065 |   | 4.00   | % |        |        | 100,419 |  | 9.78  | %      |  |   | 59,354 |  | 5.78  | %
|                                        |  |                        |        |   |        |  
|Georgia Bank & Trust Company            |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|12/31/2007                              |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Risk-based capital:                     |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Tier 1 capital                          |  | $                      | 35,154 |   | 4.00   | % |        | $      | 88,095  |  | 10.02 | %      |  | $ | 52,941 |  | 6.02  | %
|Total capital                           |  |                        | 70,308 |   | 8.00   | % |        |        | 98,790  |  | 11.24 | %      |  |   | 28,482 |  | 3.24  | %
|Tier 1 leverage ratio                   |  |                        | 50,313 |   | 4.50   | % |        |        | 88,095  |  | 7.88  | %      |  |   | 37,782 |  | 3.38  | %
|12/31/2006                              |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Risk-based capital:                     |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Tier 1 capital                          |  | $                      | 31,649 |   | 4.00   | % |        | $      | 74,741  |  | 9.45  | %      |  | $ | 43,092 |  | 5.45  | %
|Total capital                           |  |                        | 63,298 |   | 8.00   | % |        |        | 84,173  |  | 10.64 | %      |  |   | 20,875 |  | 2.64  | %
|Tier 1 leverage ratio                   |  |                        | 44,401 |   | 4.50   | % |        |        | 74,741  |  | 7.57  | %      |  |   | 30,340 |  | 3.07  | %
|                                        |  |                        |        |   |        |  
|Southern Bank & Trust                   |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|12/31/2007                              |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Risk-based capital:                     |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Tier 1 capital                          |  | $                      | 3,248  |   | 4.00   | % |        | $      | 14,101  |  | 17.37 | %      |  | $ | 10,853 |  | 13.37 | %
|Total capital                           |  |                        | 6,495  |   | 8.00   | % |        |        | 15,117  |  | 18.62 | %      |  |   | 8,622  |  | 10.62 | %
|Tier 1 leverage ratio                   |  |                        | 3,389  |   | 4.00   | % |        |        | 14,101  |  | 16.64 | %      |  |   | 10,712 |  | 12.64 | %
|12/31/2006 (opened 09/12/2006)          |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Risk-based capital:                     |  |                        |        |   |        |   |        |        |         |  |       |        |  |   |        |  |       |  
|Tier 1 capital                          |  | $                      | 1,295  |   | 4.00   | % |        | $      | 9,438   |  | 29.16 | %      |  | $ | 8,143  |  | 25.16 | %
|Total capital                           |  |                        | 2,589  |   | 8.00   | % |        |        | 9,783   |  | 30.23 | %      |  |   | 7,194  |  | 22.23 | %
|Tier 1 leverage ratio                   |  |                        | 1,145  |   | 4.00   | % |        |        | 9,438   |  | 32.98 | %      |  |   | 8,293  |  | 28.98 | %

Cash Flows from Operating, Investing and Financing Activities

Net cash provided by operating activities was $17.6 million in 2007, a decrease of $3.2 million from 2006. A reduction in proceeds from sales of real
estate loans was the main contributor with a decrease of $16.6 million in 2007, primarily the result of a lower volume of real estate loans originated and sold in the secondary market. Net cash provided by operating activities was $20.9 million in
2006, an increase of $14.7 million from 2005. The increase is primarily attributable to higher volumes of real estate loans originated and sold in the secondary market. In 2006, cash provided by proceeds from sales of real estate loans increased
$15.0 million and an increase of $.3 million in cash used for real estate loans originated for sale.



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Net cash used in investing activities increased $26.4 million in 2007 to $190.4 million. Loan growth of
$132.8 million caused a decrease in cash used of $18.9 million for 2007. These increases were somewhat offset by decreases in cash used of $41.6 million for net changes in the investment securities portfolio. Net cash used in investing activities
increased $5.7 million in 2006 to $164.0 million. Net changes in the investment securities portfolio resulted in a $53.6 million increase in cash used in 2006. Loan growth of $157.3 million caused an increase in cash used of $56.8 million for 2006.

Net cash provided by financing activities in 2007 was $157.0 million, a decrease of $4.6 million from 2006. Deposit accounts provided cash
flows of $150.4 million in 2007, an increase of $12.3 million over 2006. Cash provided by federal funds purchased and securities sold under repurchase agreements increased $8.1 million in 2007. Repayments of advances from Federal Home Loan Bank
increased $6.0 million in 2007, partially offset by increases in new advances of $2.0 million in 2007 compared to 2006. Net cash provided by financing activities in 2006 was $161.5 million, an increase of $12.8 million from 2005. Net cash provided
by changes in deposit accounts increased $31.2 million in 2006 to $138.1 million. Federal funds purchased and securities sold under repurchase agreements provided cash flows of $3.0 million in 2006, a decrease of $19.4 million over 2005. Advances
from Federal Home Loan Bank increased $7.0 million in 2006, partially offset by repayments of $16.0 million in 2006 compared to repayment of $5.0 million in 2005. A new issuance of subordinated debentures provided $10.0 million in cash flows in
2006.

Forward-Looking Statements

The
Company may from time to time make written or oral forward-looking statements, including statements contained in the Companys filings with the Securities and Exchange Commission (the Commission) and its reports to shareholders.
Statements made in such documents, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon managements belief
as well as assumptions made by, and information currently available to, management pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Companys actual results may differ materially from
the results anticipated in forward-looking statements due to a variety of factors, including unanticipated changes in the Companys local economy, the national economy, governmental monetary and fiscal policies, deposit levels, loan demand,
loan collateral values and securities portfolio values; difficulties in interest rate risk management; the effects of competition in the banking business; difficulties in expanding the Companys business into new markets; changes in
governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions; failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying
delinquent loans; and other factors. The Company cautions that such factors are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, the Company.

Recent Accounting Pronouncements

In February 2006,
the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which permits fair value remeasurement for hybrid financial instruments that contain an embedded
derivative that otherwise would require bifurcation. Additionally, SFAS No. 155 clarifies the accounting guidance for beneficial interests in securitizations. Under SFAS No. 155, all beneficial interests in a securitization will require an
assessment in accordance with SFAS No. 133 to determine if an embedded derivative exists within the instrument. In January 2007, the FASB issued Derivatives Implementation Group Issue B40, Application of Paragraph 13(b) to Securitized Interests
in Prepayable Financial Assets (DIG Issue B40). DIG Issue B40 provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS



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No. 133 for instruments that would otherwise require bifurcation if the test is met solely because of a prepayment feature included within the
securitized interest and prepayment is not controlled by the security holder. SFAS No. 155 and DIG Issue B40 are effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 155 and DIG Issue B40 did not
have a material impact on the Companys consolidated financial position or results of operations.

In March 2006, the FASB issued
Statement No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This Statement provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2)
requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting
date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as
offsetting the entitys exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position and additional footnote disclosures. This standard is effective as of the beginning of an entitys first fiscal year that begins after September 15, 2006 with the
effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. Servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on
market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The adoption of this statement did not have a material
impact on the Companys consolidated financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption
of FIN 48 did not have a material effect on the financial statements.

In September 2006, the FASB Emerging Issues Task Force finalized
Issue No. 06-5, Accounting for Purchases of Life InsuranceDetermining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance).This issue requires that
a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual
policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be
discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The adoption of this issue did not have a material impact on the
Companys consolidated financial statements.

On January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP)
157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets



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and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material to the Companys consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides
companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

On January 1, 2008, the Company adopted FASB Emerging Issues Task Force Issue No. 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants
employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement.
This issue is effective for fiscal years beginning after December 15, 2007. The impact of adoption was not material to the Companys consolidated financial statements.

Effects of Inflation and Changing Prices

Inflation generally increases the cost of funds and
operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction and to the same
extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation can increase a financial institutions cost of goods and services purchased, the cost of salaries and
benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and stockholders equity. Mortgage
originations and refinancings tend to slow as interest rates increase, and can reduce the Companys earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.

Various information shown elsewhere herein will assist in the understanding of how well the Company is positioned to react to changing interest rates and
inflationary trends. In particular, the summary of net interest income, the maturity distributions and compositions of the loan and security portfolios and the data on the interest sensitivity of loans and deposits should be considered.



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|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------

Market risk reflects the risk of loss due to changes in the market prices and interest rates. This loss could be reflected in diminished current market values or reduced net interest income in future periods.

The Companys market risk arises primarily from the interest rate risk inherent in its lending and deposit activities. This risk is managed
primarily by careful periodic analysis and modeling of the various components of the entire balance sheet. The investment portfolio is utilized to assist in minimizing interest rate risk in both loans and deposits due to the flexibility afforded in
structuring the investment portfolio with regards to various maturities, cash flows and fixed or variable rates.

The following tables
present all rate sensitive assets and liabilities by contractual amounts and maturity dates. Cash flows from mortgage backed securities reflect anticipated prepayments. For core deposits, without a contractual maturity date, cash flows are based on
the earliest date at which the deposit holder could withdraw the funds. The fair value of rate sensitive assets and liabilities is presented in total. 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 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. Fair 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, securities sold under repurchase agreements and variable interest rate borrowings approximated their fair values. The fair value of
the Federal Home Loan Bank borrowings is obtained from the Federal Home Loan Bank 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.



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Market Risk at December 31, 2007



|                                               |  |           |   |  |        |   |  |        |   |  |        |   |  |        |   |  |             |   |  |         |   |  |          
|---------------------------------------------- |  | --------- | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ----------- | - |  | ------- | - |  | ---------
|(Dollars in thousands)                         |  | 2008      |   |  | 2009   |   |  | 2010   |   |  | 2011   |   |  | 2012   |   |  | There after |   |  | Total   |   |  | FairValue
|Rate Sensitive Assets:                         |  |           |   |  |        |   |  |        |   |  |        |   |  |        |   |  |             |   |  |         |   |  |          
|Fixed interest rate loans                      |  | 149,764   |   |  | 99,402 |   |  | 97,257 |   |  | 18,330 |   |  | 19,254 |   |  | 25,654      |   |  | 409,661 |   |  | 406,384  
|Average interest rate                          |  | 6.88      | % |  | 7.65   | % |  | 7.49   | % |  | 7.53   | % |  | 7.41   | % |  | 7.26        | % |  | 7.29    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Variable interest rate loans                   |  | 353,652   |   |  | 46,882 |   |  | 15,806 |   |  | 8,544  |   |  | 5,897  |   |  | 42,300      |   |  | 474,081 |   |  | 474,081  
|Average interest rate                          |  | 7.71      | % |  | 7.16   | % |  | 7.13   | % |  | 7.00   | % |  | 7.01   | % |  | 6.87        | % |  | 7.54    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Fixed interest rate securities                 |  | 20,690    |   |  | 18,936 |   |  | 24,162 |   |  | 20,726 |   |  | 26,603 |   |  | 119,038     |   |  | 230,155 |   |  | 230,186  
|Average interest rate                          |  | 5.64      | % |  | 5.38   | % |  | 5.03   | % |  | 4.87   | % |  | 4.81   | % |  | 5.40        | % |  | 5.27    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Variable interest rate securities              |  | 2,429,291 |   |  | 2,429  |   |  | 2,429  |   |  | 2,429  |   |  | 2,429  |   |  | 4,564       |   |  | 16,710  |   |  | 16,710   
|Average interest rate                          |  | 5.67      | % |  | 5.58   | % |  | 5.03   | % |  | 4.47   | % |  | 4.15   | % |  | 5.94        | % |  | 5.24    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Variable federal funds sold                    |  | 0         |   |  |       |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 0       |   |  |         
|Average interest rate                          |  | 0.00      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 0.00    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Fixed interest-bearing deposits in other banks |  | 500       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 500     |   |  | 500      
|Average interest rate                          |  | 5.30      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 4.50    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Rate Sensitive Liabilities:                    |  |           |   |  |        |   |  |        |   |  |        |   |  |        |   |  |             |   |  |         |   |  |          
|Noninterest-bearing deposits                   |  | 101,272   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 101,272 |   |  | 101,272  
|Average interest rate                          |  | 0.00      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 0.00    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Money market accounts                          |  | 73,609    |   |  |       |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 73,609  |   |  | 73,609   
|Average interest rate                          |  | 3.93      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 3.93    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Savings accounts                               |  | 289,731   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 289,731 |   |  | 289,731  
|Average interest rate                          |  | 3.58      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 3.58    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|NOW accounts                                   |  | 132,186   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 132,186 |   |  | 132,186  
|Average interest rate                          |  | 2.04      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 2.04    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Fixed interest rate time deposits < $100M      |  | 91,348    |   |  | 9,007  |   |  | 1,286  |   |  | 947    |   |  | 434    |   |  | 0           |   |  | 103,022 |   |  | 103,130  
|Average interest rate                          |  | 5.01      | % |  | 4.62   | % |  | 4.42   | % |  | 4.73   | % |  | 4.47   | % |  | 0.00        | % |  | 4.97    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Variable interest rate time deposits < $100M   |  | 6,686     |   |  | 2,159  |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 8,845   |   |  | 8,846    
|Average interest rate                          |  | 4.45      | % |  | 4.45   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 4.45    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Fixed interest rate time deposits > $100M      |  | 208,695   |   |  | 23,249 |   |  | 575    |   |  | 867    |   |  | 3,541  |   |  | 0           |   |  | 236,927 |   |  | 237,188  
|Average interest rate                          |  | 5.12      | % |  | 4.90   | % |  | 4.84   | % |  | 5.03   | % |  | 4.52   | % |  | 0.00        | % |  | 5.09    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Variable interest rate time deposits > $100M   |  | 5,421     |   |  | 1,153  |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 6,574   |   |  | 6,575    
|Average interest rate                          |  | 4.47      | % |  | 4.45   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 4.47    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Securities sold under repurchase agreements    |  | 81,165    |   |  |       |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 81,165  |   |  | 81,165   
|Average interest rate                          |  | 3.54      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 3.54    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Fixed Federal Home Loan Bank borrowings        |  |          |   |  |       |   |  | 24,000 |   |  |       |   |  |       |   |  | 16,000      |   |  | 40,000  |   |  | 38,136   
|Average interest rate                          |  | 0.00      | % |  | 0.00   | % |  | 5.86   | % |  | 0.00   | % |  | 0.00   | % |  | 4.55        | % |  | 5.34    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Variable Federal Home Loan Bank borrowings     |  |          |   |  |       |   |  |       |   |  |       |   |  |       |   |  | 19,000      |   |  | 19,000  |   |  | 18,641   
|Average interest rate                          |  | 0.00      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 4.67        | % |  | 4.67    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|TT&L note borrowings                           |  | 500       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |            |   |  | 500     |   |  | 500      
|Average interest rate                          |  | 6.47      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00        | % |  | 6.47    | % |  |          
|                                               |  |           |   |  |        |   |  |       
|Subordinated debentures                        |  |          |   |  |       |   |  |       |   |  |       |   |  |       |   |  | 20,000      |   |  | 20,000  |   |  | 20,000   
|Average interest rate                          |  | 0.00      | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 7.09        | % |  | 7.09    | % |  |          



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Market Risk at December 31, 2006



|                                               |  |         |   |  |        |   |  |        |   |  |        |   |  |        |   |  |            |   |  |         |   |  |          
|---------------------------------------------- |  | ------- | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ---------- | - |  | ------- | - |  | ---------
|(Dollars in thousands)                         |  | 2007    |   |  | 2008   |   |  | 2009   |   |  | 2010   |   |  | 2011   |   |  | Thereafter |   |  | Total   |   |  | FairValue
|Rate Sensitive Assets:                         |  |         |   |  |        |   |  |        |   |  |        |   |  |        |   |  |            |   |  |         |   |  |          
|Fixed interest rate loans                      |  | 152,899 |   |  | 65,317 |   |  | 33,137 |   |  | 9,730  |   |  | 9,957  |   |  | 34,245     |   |  | 305,285 |   |  | 301,323  
|Average interest rate                          |  | 7.26    | % |  | 7.48   | % |  | 7.63   | % |  | 7.54   | % |  | 7.42   | % |  | 6.82       | % |  | 7.31    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Variable interest rate loans                   |  | 312,995 |   |  | 46,641 |   |  | 15,220 |   |  | 6,894  |   |  | 5,421  |   |  | 57,513     |   |  | 444,684 |   |  | 444,684  
|Average interest rate                          |  | 8.48    | % |  | 8.45   | % |  | 8.24   | % |  | 8.14   | % |  | 8.17   | % |  | 7.16       | % |  | 8.29    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Fixed interest rate securities                 |  | 21,089  |   |  | 14,204 |   |  | 13,957 |   |  | 15,635 |   |  | 12,311 |   |  | 111,349    |   |  | 188,545 |   |  | 188,622  
|Average interest rate                          |  | 5.62    | % |  | 4.78   | % |  | 5.07   | % |  | 5.02   | % |  | 5.13   | % |  | 5.20       | % |  | 5.18    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Variable interest rate securities              |  | 3,309   |   |  | 2,296  |   |  | 1,593  |   |  | 1,105  |   |  | 767    |   |  | 9,428      |   |  | 18,498  |   |  | 18,498   
|Average interest rate                          |  | 4.32    | % |  | 4.32   | % |  | 4.32   | % |  | 4.32   | % |  | 4.32   | % |  | 5.92       | % |  | 5.13    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Variable federal funds sold                    |  | 14,688  |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 14,688  |   |  | 14,688   
|Average interest rate                          |  | 5.48    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 5.48    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Fixed interest-bearing deposits in other banks |  | 513     |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 513     |   |  | 513      
|Average interest rate                          |  | 4.51    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 4.51    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Rate Sensitive Liabilities:                    |  |         |   |  |        |   |  |        |   |  |        |   |  |        |   |  |            |   |  |         |   |  |          
|Noninterest-bearing deposits                   |  | 106,846 |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 106,846 |   |  | 106,846  
|Average interest rate                          |  | 0.00    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 0.00    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Money market accounts                          |  | 45,897  |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 45,897  |   |  | 45,897   
|Average interest rate                          |  | 4.76    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 4.76    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Savings accounts                               |  | 255,066 |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 255,066 |   |  | 255,066  
|Average interest rate                          |  | 4.03    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 4.03    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|NOW accounts                                   |  | 119,334 |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 119,334 |   |  | 119,334  
|Average interest rate                          |  | 2.33    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 2.33    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Fixed interest rate time deposits < $100M      |  | 59,020  |   |  | 10,869 |   |  | 1,230  |   |  | 1,231  |   |  | 1,074  |   |  | 427        |   |  | 73,851  |   |  | 73,605   
|Average interest rate                          |  | 4.88    | % |  | 5.04   | % |  | 3.93   | % |  | 4.40   | % |  | 4.71   | % |  | 1.59       | % |  | 4.86    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Variable interest rate time deposits < $100M   |  |        |   |  | 6,908  |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 6,908   |   |  | 6,918    
|Average interest rate                          |  | 0.00    | % |  | 5.40   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 5.40    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Fixed interest rate time deposits > $100M      |  | 136,409 |   |  | 45,326 |   |  | 328    |   |  | 561    |   |  | 1,043  |   |  | 4,030      |   |  | 187,697 |   |  | 187,474  
|Average interest rate                          |  | 4.98    | % |  | 5.18   | % |  | 4.21   | % |  | 4.84   | % |  | 4.98   | % |  | 4.31       | % |  | 5.01    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Variable interest rate time deposits > $100M   |  |        |   |  | 6,164  |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 6,164   |   |  | 6,176    
|Average interest rate                          |  | 0.00    | % |  | 5.40   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 5.40    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Securities sold under repurchase agreements    |  | 70,020  |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 70,020  |   |  | 70,020   
|Average interest rate                          |  | 5.27    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 5.27    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Fixed Federal Home Loan Bank borrowings        |  |        |   |  |       |   |  |       |   |  | 24,000 |   |  | 6,000  |   |  |           |   |  | 30,000  |   |  | 29,252   
|Average interest rate                          |  | 0.00    | % |  | 0.00   | % |  | 0.00   | % |  | 5.86   | % |  | 4.80   | % |  | 0.00       | % |  | 5.65    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Variable Federal Home Loan Bank borrowings     |  | 5,000   |   |  |       |   |  |       |   |  |       |   |  |       |   |  | 25,000     |   |  | 30,000  |   |  | 29,994   
|Average interest rate                          |  | 5.44    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 4.85       | % |  | 4.95    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|TT&L note borrowings                           |  | 1,000   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 1,000   |   |  | 1,000    
|Average interest rate                          |  | 4.62    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 4.62    | % |  |          
|                                               |  |         |   |  |        |   |  |       
|Subordinated debentures                        |  |        |   |  |       |   |  |       |   |  |       |   |  |       |   |  | 20,000     |   |  | 20,000  |   |  | 20,000   
|Average interest rate                          |  | 0.00    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 6.76       | % |  | 6.76    | % |  |          



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|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Table of Contents



|                                                                         |  |     
|------------------------------------------------------------------------ |  | ----
|                                                                         |  | Page
|Reports of Independent Registered Public Accounting Firms                |  | 65  
|Consolidated Balance Sheets                                              |  | 66  
|Consolidated Statements of Income                                        |  | 68  
|Consolidated Statements of Stockholders Equity and Comprehensive Income |  | 70  
|Consolidated Statements of Cash Flows                                    |  | 72  
|Notes to Consolidated Financial Statements                               |  | 74  



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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Southeastern Bank Financial Corporation

Augusta, Georgia

We have audited the accompanying consolidated balance sheets of Southeastern Bank Financial Corporation and Subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income, stockholders equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion,
the financial statements referred to above present fairly, in all material respects, the financial position of the Southeastern Bank Financial Corporation as of December 31, 2007 and 2006, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Southeastern Bank Financial Corporations internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2008 expressed an
unqualified opinion thereon.



/s/ Crowe Chizek and Company LLC


Brentwood, Tennessee

March 14, 2008



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2007 and 2006



|                                                                                                         |  |                        |           |      |          
|-------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | ---- | ---------
|                                                                                                         |  | 2007                   |           | 2006
|                                                                                                         |  | (Dollars in thousands)
|Assets                                                                                                   |  |                        |           |      |          
|Cash and due from banks                                                                                  |  | $                      | 24,558    |      | 25,710   
|Federal funds sold                                                                                       |  |                        |          |      | 14,688   
|Interest-bearing deposits in other banks                                                                 |  |                        | 500       |      | 513      
|                                                                                                         |  |                        |           |      |          
|Cash and cash equivalents                                                                                |  |                        | 25,058    |      | 40,911   
|                                                                                                         |  |                        |           |      |          
|Investment securities:                                                                                   |  |                        |           |      |          
|Available-for-sale                                                                                       |  |                        | 245,429   |      | 199,136  
|Held-to-maturity, at cost (fair values of $1,467 and $3,048 at December 31, 2007 and 2006, respectively) |  |                        | 1,435     |      | 2,971    
|Loans held for sale                                                                                      |  |                        | 11,303    |      | 14,857   
|Loans                                                                                                    |  |                        | 871,440   |      | 735,112  
|Less allowance for loan losses                                                                           |  |                        | 11,800    |      | 9,777    
|                                                                                                         |  |                        |           |      |          
|Loans, net                                                                                               |  |                        | 859,640   |      | 725,335  
|                                                                                                         |  |                        |           |      |          
|Premises and equipment, net                                                                              |  |                        | 32,612    |      | 23,402   
|Accrued interest receivable                                                                              |  |                        | 7,416     |      | 5,983    
|Goodwill, net                                                                                            |  |                        | 140       |      | 140      
|Bank-owned life insurance                                                                                |  |                        | 16,660    |      | 15,982   
|Restricted equity securities                                                                             |  |                        | 5,060     |      | 4,936    
|Other assets                                                                                             |  |                        | 8,227     |      | 7,549    
|                                                                                                         |  |                        |           |      |          
|                                                                                                         |  | $                      | 1,212,980 |      | 1,041,202
|                                                                                                         |  |                        |           |      |          

(continued)

See accompanying notes to consolidated financial statements.



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|                                                                                                                                                                                                             |  |      |           |   |      |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | --------- | -
|                                                                                                                                                                                                             |  | 2007 |           |   | 2006 |          
|Liabilities and Stockholders Equity                                                                                                                                                                         |  |      |           |   |      |           |  
|Deposits                                                                                                                                                                                                     |  |      |           |   |      |           |  
|Noninterest-bearing                                                                                                                                                                                          |  | $    | 101,272   |   |      | 106,846   |  
|Interest-bearing:                                                                                                                                                                                            |  |      |           |   |      |           |  
|NOW accounts                                                                                                                                                                                                 |  |      | 132,186   |   |      | 119,334   |  
|Savings                                                                                                                                                                                                      |  |      | 289,731   |   |      | 255,066   |  
|Money management accounts                                                                                                                                                                                    |  |      | 73,609    |   |      | 45,897    |  
|Time deposits of $100,000 or more                                                                                                                                                                            |  |      | 243,501   |   |      | 193,861   |  
|Other time deposits                                                                                                                                                                                          |  |      | 111,867   |   |      | 80,759    |  
|                                                                                                                                                                                                             |  |      |           |   |      |           |  
|                                                                                                                                                                                                             |  |      | 952,166   |   |      | 801,763   |  
|Federal funds purchased and securities sold under repurchase agreements                                                                                                                                      |  |      | 81,166    |   |      | 70,020    |  
|Advances from Federal Home Loan Bank                                                                                                                                                                         |  |      | 59,000    |   |      | 60,000    |  
|Other borrowed funds                                                                                                                                                                                         |  |      | 500       |   |      | 1,000     |  
|Accrued interest payable and other liabilities                                                                                                                                                               |  |      | 10,390    |   |      | 9,495     |  
|Subordinated debentures                                                                                                                                                                                      |  |      | 20,000    |   |      | 20,000    |  
|                                                                                                                                                                                                             |  |      |           |   |      |           |  
|Total liabilities                                                                                                                                                                                            |  |      | 1,123,222 |   |      | 962,278   |  
|                                                                                                                                                                                                             |  |      |           |   |      |           |  
|Stockholders equity                                                                                                                                                                                         |  |      |           |   |      |           |  
|Common stock, $3.00 par value; 10,000,000 shares authorized; 5,433,614 and 5,433,285 shares issued in 2007 and 2006, respectively; 5,425,182
and 5,432,854 shares outstanding in 2007 and 2006, respectively |  |      | 16,301    |   |      | 16,300    |  
|Additional paid-in capital                                                                                                                                                                                   |  |      | 39,518    |   |      | 38,989    |  
|Retained earnings                                                                                                                                                                                            |  |      | 34,228    |   |      | 25,287    |  
|Treasury stock, at cost; 8,432 and 431 shares in 2007 and 2006, respectively                                                                                                                                 |  |      | (317      | ) |      | (17       | )
|Accumulated other comprehensive income (loss), net                                                                                                                                                           |  |      | 28        |   |      | (1,635    | )
|                                                                                                                                                                                                             |  |      |           |   |      |           |  
|Total stockholders equity                                                                                                                                                                                   |  |      | 89,758    |   |      | 78,924    |  
|                                                                                                                                                                                                             |  |      |           |   |      |           |  
|                                                                                                                                                                                                             |  | $    | 1,212,980 |   |      | 1,041,202 |  
|                                                                                                                                                                                                             |  |      |           |   |      |           |  

See accompanying notes to consolidated financial statements.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2007, 2006, and 2005



|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|----------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | ------ | ---- | ------ | -
|                                                                                                                              |  | 2007                                          |        |   | 2006 |        | 2005 |       
|                                                                                                                              |  | (Dollars in thousands, except per share data) |       
|Interest income:                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Loans, including fees                                                                                                         |  | $                                             | 66,219 |   |      | 54,338 |      | 38,898 |  
|Investment securities:                                                                                                        |  |                                               |        |   |      |        |      |        |  
|Taxable                                                                                                                       |  |                                               | 11,023 |   |      | 9,633  |      | 7,206  |  
|Tax-exempt                                                                                                                    |  |                                               | 800    |   |      | 1,030  |      | 767    |  
|Federal funds sold                                                                                                            |  |                                               | 1,112  |   |      | 600    |      | 380    |  
|Interest-bearing deposits in other banks                                                                                      |  |                                               | 27     |   |      | 25     |      | 26     |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Total interest income                                                                                                         |  |                                               | 79,181 |   |      | 65,626 |      | 47,277 |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Interest expense:                                                                                                             |  |                                               |        |   |      |        |      |        |  
|Deposits (including interest on time deposits over $100 of $11,529, $7,184, and $3,386 in 2007, 2006, and 2005, respectively) |  |                                               | 33,147 |   |      | 24,099 |      | 13,873 |  
|Federal funds purchased and securities sold under repurchase agreements                                                       |  |                                               | 3,305  |   |      | 3,079  |      | 1,697  |  
|Other borrowings                                                                                                              |  |                                               | 4,480  |   |      | 4,245  |      | 2,315  |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Total interest expense                                                                                                        |  |                                               | 40,932 |   |      | 31,423 |      | 17,885 |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Net interest income                                                                                                           |  |                                               | 38,249 |   |      | 34,203 |      | 29,392 |  
|Provision for loan losses                                                                                                     |  |                                               | 3,823  |   |      | 2,478  |      | 1,842  |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Net interest income after provision for loan losses                                                                           |  |                                               | 34,426 |   |      | 31,725 |      | 27,550 |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Noninterest income:                                                                                                           |  |                                               |        |   |      |        |      |        |  
|Service charges and fees on deposits                                                                                          |  |                                               | 6,409  |   |      | 5,742  |      | 5,363  |  
|Gain on sales of loans                                                                                                        |  |                                               | 5,185  |   |      | 5,154  |      | 5,089  |  
|Gain (loss) on sale of fixed assets, net                                                                                      |  |                                               | 1,049  |   |      | 47     |      | (7     | )
|Investment securities gains (losses), net                                                                                     |  |                                               | (237   | ) |      | 213    |      | (86    | )
|Retail investment income                                                                                                      |  |                                               | 1,267  |   |      | 788    |      | 455    |  
|Trust services fees                                                                                                           |  |                                               | 1,132  |   |      | 860    |      | 642    |  
|Increase in cash surrender value of bank-owned life insurance                                                                 |  |                                               | 678    |   |      | 605    |      | 400    |  
|Miscellaneous income                                                                                                          |  |                                               | 685    |   |      | 631    |      | 515    |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Total noninterest income                                                                                                      |  |                                               | 16,168 |   |      | 14,040 |      | 12,371 |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Noninterest expense:                                                                                                          |  |                                               |        |   |      |        |      |        |  
|Salaries and other personnel expense                                                                                          |  |                                               | 19,343 |   |      | 17,806 |      | 15,531 |  
|Occupancy expenses                                                                                                            |  |                                               | 3,457  |   |      | 2,847  |      | 2,731  |  
|Other operating expenses                                                                                                      |  |                                               | 9,708  |   |      | 8,279  |      | 6,750  |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Total noninterest expense                                                                                                     |  |                                               | 32,508 |   |      | 28,932 |      | 25,012 |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Income before income taxes                                                                                                    |  |                                               | 18,086 |   |      | 16,833 |      | 14,909 |  
|Income tax expense                                                                                                            |  |                                               | 6,321  |   |      | 5,673  |      | 4,955  |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  
|Net income                                                                                                                    |  | $                                             | 11,765 |   |      | 11,160 |      | 9,954  |  
|                                                                                                                              |  |                                               |        |   |      |        |      |        |  

(continued)



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(continued)



|                                                                           |  |      |           |      |           |      |          
|-------------------------------------------------------------------------- |  | ---- | --------- | ---- | --------- | ---- | ---------
|                                                                           |  | 2007 |           | 2006 |           | 2005
|Basic net income per share                                                 |  | $    | 2.17      |      | 2.10      |      | 1.89     
|                                                                           |  |      |          
|Diluted net income per share                                               |  |      | 2.14      |      | 2.08      |      | 1.86     
|                                                                           |  |      |          
|Weighted average common shares outstanding                                 |  |      | 5,429,961 |      | 5,324,558 |      | 5,257,904
|                                                                           |  |      |          
|Weighted average number of common and common equivalent shares outstanding |  |      | 5,496,389 |      | 5,371,656 |      | 5,350,384

See accompanying notes to consolidated financial statements.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity
and Comprehensive Income

Years ended December 31, 2007, 2006, and 2005



|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | --------------- | ------ | ------------ | ----- | - | ------------------------ | - | ------ | ---------------- |  | ------ | ------------- |  | ------ | ----------------------------------------------- |  | ---- | ------------------------ |  | ------ | - |  | ------ | -
|(In thousands, except per share data)                                                                                        |  | Comprehensiveincome |                 |        | Common stock |       |   | Additionalpaid-incapital |   |        | Retainedearnings |  |        | Treasurystock |  |        | Accumulatedothercomprehensiveincome (loss), net |  |      | Totalstockholdersequity | 
|                                                                                                                             |  |                     | Numberof shares |        |              |       |   |                          |   |        |                  | 
|                                                                                                                             |  |                     |                 | Amount |              |       |   |                          |   |       
|Balance, December 31, 2004                                                                                                   |  |                     |                 |        |              | 5,287 |   |                          | $ | 15,861 |                  |  | 34,376 |               |  | 8,879  |                                                 |  | (497 | )                        |  | 361    |   |  | 58,980 |  
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Comprehensive income:                                                                                                        |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Net income                                                                                                                   |  | $                   | 9,954           |        |              |       |   |                          |   |        |                  |  |        |               |  | 9,954  |                                                 |  |      |                          |  |        |   |  | 9,954  |  
|Other comprehensive loss  unrealized loss on investment securities available for sale, net of income tax effect of
($1,350) |  |                     | (2,620          | )      |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  | (2,620 | ) |  | (2,620 | )
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Total comprehensive income                                                                                                   |  | $                   | 7,334           |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Cash dividends ($0.52 per common share)                                                                                      |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  | (2,733 | )                                               |  |      |                          |  |        |   |  | (2,733 | )
|Stock options exercised, issued from treasury stock                                                                          |  |                     |                 |        |              |       |   |                          |   |        |                  |  | 27     |               |  |        |                                                 |  | 263  |                          |  |        |   |  | 290    |  
|Retirement of common stock                                                                                                   |  |                     |                 |        |              | (8    | ) |                          |   | (24    | )                |  | (263   | )             |  |        |                                                 |  |      |                          |  |        |   |  | (287   | )
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Balance, December 31, 2005                                                                                                   |  |                     |                 |        |              | 5,279 |   |                          | $ | 15,838 |                  |  | 34,139 |               |  | 16,099 |                                                 |  | (234 | )                        |  | (2,259 | ) |  | 63,583 |  
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Cumulative catch-up adjustment in accordance with SAB 108                                                                    |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  | 794    |                                                 |  |      |                          |  |        |   |  | 794    |  
|Comprehensive income:                                                                                                        |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Net income                                                                                                                   |  | $                   | 11,160          |        |              |       |   |                          |   |        |                  |  |        |               |  | 11,160 |                                                 |  |      |                          |  |        |   |  | 11,160 |  
|Other comprehensive income  unrealized gain on investment securities available for sale, net of income tax effect of
$321   |  |                     | 624             |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  | 624    |   |  | 624    |  
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Total comprehensive income                                                                                                   |  | $                   | 11,784          |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Cash dividends ($0.52 per common share)                                                                                      |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  | (2,767 | )                                               |  |      |                          |  |        |   |  | (2,767 | )
|Stock options exercised, issued from common stock                                                                            |  |                     |                 |        |              | 6     |   |                          |   | 17     |                  |  | 46     |               |  |        |                                                 |  |      |                          |  |        |   |  | 63     |  
|Stock options exercised, issued from treasury stock                                                                          |  |                     |                 |        |              |       |   |                          |   |        |                  |  | (82    | )             |  |        |                                                 |  | 265  |                          |  |        |   |  | 183    |  
|Stock options compensation cost                                                                                              |  |                     |                 |        |              |       |   |                          |   |        |                  |  | 415    |               |  |        |                                                 |  |      |                          |  |        |   |  | 415    |  
|Issuance of common stock                                                                                                     |  |                     |                 |        |              | 150   |   |                          |   | 450    |                  |  | 4,536  |               |  |        |                                                 |  | 14   |                          |  |        |   |  | 5,000  |  
|Purchase of treasury stock                                                                                                   |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  | (62  | )                        |  |        |   |  | (62    | )
|Retirement of common stock                                                                                                   |  |                     |                 |        |              | (2    | ) |                          |   | (5     | )                |  | (64    | )             |  |        |                                                 |  |      |                          |  |        |   |  | (69    | )
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Balance, December 31, 2006                                                                                                   |  |                     |                 |        |              | 5,433 |   |                          | $ | 16,300 |                  |  | 38,989 |               |  | 25,287 |                                                 |  | (17  | )                        |  | (1,635 | ) |  | 78,924 |  
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Comprehensive income:                                                                                                        |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Net income                                                                                                                   |  | $                   | 11,765          |        |              |       |   |                          |   |        |                  |  |        |               |  | 11,765 |                                                 |  |      |                          |  |        |   |  | 11,765 |  
|Other comprehensive income  unrealized gain on investment securities available for sale, net of income tax effect of
$857   |  |                     | 1,663           |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  | 1,663  |   |  | 1,663  |  
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Total comprehensive income                                                                                                   |  | $                   | 13,428          |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Cash dividends ($0.52 per common share)                                                                                      |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  | (2,824 | )                                               |  |      |                          |  |        |   |  | (2,824 | )
|Stock options exercised, issued from common stock                                                                            |  |                     |                 |        |              |       |   |                          |   | 1      |                  |  | (17    | )             |  |        |                                                 |  |      |                          |  |        |   |  | (16    | )
|Stock options exercised, issued from treasury stock                                                                          |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  | 17   |                          |  |        |   |  | 17     |  
|Stock options compensation cost                                                                                              |  |                     |                 |        |              |       |   |                          |   |        |                  |  | 546    |               |  |        |                                                 |  |      |                          |  |        |   |  | 546    |  
|Purchase of treasury stock                                                                                                   |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  | (317 | )                        |  |        |   |  | (317   | )
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  
|Balance, December 31, 2007                                                                                                   |  |                     |                 |        |              | 5,434 |   |                          | $ | 16,301 |                  |  | 39,518 |               |  | 34,228 |                                                 |  | (317 | )                        |  | 28     |   |  | 89,758 |  
|                                                                                                                             |  |                     |                 |        |              |       |   |                          |   |        |                  |  |        |               |  |        |                                                 |  |      |                          |  |        |   |  |        |  

(continued)



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(continued)



|                                                                      |  |                                       |       |   |      |      |   |      |        |  
|--------------------------------------------------------------------- |  | ------------------------------------- | ----- | - | ---- | ---- | - | ---- | ------ | -
|                                                                      |  | Disclosure of reclassification amount |      
|                                                                      |  | 2007                                  |       |   | 2006 |      |   | 2005 |       
|Unrealized holding gains (losses) arising during period, net of taxes |  | $                                     | 1,509 |   |      | 765  |   |      | (2,677 | )
|Reclassification adjustment for losses (gains) included in net income |  |                                       | 237   |   |      | (214 | ) |      | 86     |  
|Tax effect                                                            |  |                                       | (83   | ) |      | 73   |   |      | (29    | )
|                                                                      |  |                                       |       |   |      |      |   |      |        |  
|Net unrealized gains (losses) in securities                           |  | $                                     | 1,663 |   |      | 624  |   |      | (2,620 | )
|                                                                      |  |                                       |       |   |      |      |   |      |        |  

See accompanying notes to consolidated financial statements.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2007, 2006, and 2005



|                                                                                  |  |                        |          |   |      |          |   |      |          |  
|--------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ---- | -------- | - | ---- | -------- | -
|                                                                                  |  | 2007                   |          |   | 2006 |          |   | 2005 |         
|                                                                                  |  | (Dollars in thousands) |         
|Cash flows from operating activities:                                             |  |                        |          |  
|Net income                                                                        |  | $                      | 11,765   |   |      | 11,160   |   |      | 9,954    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                        |          |   |      |          |   |      |          |  
|Depreciation                                                                      |  |                        | 1,606    |   |      | 1,367    |   |      | 1,455    |  
|Deferred income tax benefit                                                       |  |                        | (825     | ) |      | (885     | ) |      | (618     | )
|Provision for loan losses                                                         |  |                        | 3,823    |   |      | 2,478    |   |      | 1,842    |  
|Net investment securities (gains) losses                                          |  |                        | 237      |   |      | (213     | ) |      | 86       |  
|Net (accretion of discount) amortization of premium on investment securities      |  |                        | (151     | ) |      | (368     | ) |      | 312      |  
|Increase in cash surrender value of bank-owned life insurance                     |  |                        | (678     | ) |      | (605     | ) |      | (400     | )
|Stock options compensation cost                                                   |  |                        | 546      |   |      | 415      |   |      |         |  
|(Gain) Loss on disposal of premises and equipment                                 |  |                        | (1,049   | ) |      | (47      | ) |      | 7        |  
|Loss on the sale of other real estate                                             |  |                        | 29       |   |      | 16       |   |      | 8        |  
|Gain on sales of loans                                                            |  |                        | (5,185   | ) |      | (5,154   | ) |      | (5,089   | )
|Real estate loans originated for sale                                             |  |                        | (252,114 | ) |      | (265,027 | ) |      | (264,727 | )
|Proceeds from sales of real estate loans                                          |  |                        | 260,853  |   |      | 277,470  |   |      | 262,447  |  
|(Increase) decrease in accrued interest receivable                                |  |                        | (1,433   | ) |      | (1,359   | ) |      | (986     | )
|(Increase) decrease in other assets                                               |  |                        | (710     | ) |      | (1,283   | ) |      | 90       |  
|Increase in accrued interest payable and other liabilities                        |  |                        | 895      |   |      | 2,885    |   |      | 1,753    |  
|                                                                                  |  |                        |          |   |      |          |   |      |          |  
|Net cash provided by operating activities                                         |  |                        | 17,609   |   |      | 20,851   |   |      | 6,135    |  
|                                                                                  |  |                        |          |   |      |          |   |      |          |  
|Cash flows from investing activities:                                             |  |                        |          |   |      |          |   |      |          |  
|Proceeds from sales of available for sale securities                              |  |                        | 20,712   |   |      | 42,346   |   |      | 23,853   |  
|Proceeds from maturities of available for sale securities                         |  |                        | 52,200   |   |      | 94,487   |   |      | 24,282   |  
|Proceeds from maturities of held to maturity securities                           |  |                        | 1,555    |   |      | 805      |   |      |         |  
|Purchase of available for sale securities                                         |  |                        | (116,790 | ) |      | (136,889 | ) |      | (100,960 | )
|Purchase of restricted equity securities                                          |  |                        | (619     | ) |      | (874     | ) |      | (969     | )
|Proceeds from redemption of FHLB stock                                            |  |                        | 495      |   |      | 225      |   |      | 225      |  
|Net increase in loans                                                             |  |                        | (138,469 | ) |      | (157,330 | ) |      | (100,570 | )
|Purchase of Bank-owned life insurance                                             |  |                        |         |   |      | (3,500   | ) |      |         |  
|Additions to premises and equipment                                               |  |                        | (12,783  | ) |      | (5,185   | ) |      | (4,403   | )
|Proceeds from sale of other real estate                                           |  |                        | 312      |   |      | 157      |   |      | 272      |  
|Proceeds from sale of premises and equipment                                      |  |                        | 3,016    |   |      | 1,791    |   |      | 3        |  
|                                                                                  |  |                        |          |   |      |          |   |      |          |  
|Net cash used in investing activities                                             |  |                        | (190,371 | ) |      | (163,966 | ) |      | (158,268 | )
|                                                                                  |  |                        |          |   |      |          |   |      |          |  

(continued)



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(continued)



|                                                                                                   |  |                        |         |   |      |         |   |      |         |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | ------- | - | ---- | ------- | -
|                                                                                                   |  | 2007                   |         |   | 2006 |         |   | 2005 |        
|                                                                                                   |  | (Dollars in thousands) |        
|Cash flows from financing activities:                                                              |  |                        |         |  
|Net increase in deposits                                                                           |  |                        | 150,403 |   |      | 138,108 |   |      | 106,870 |  
|Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements |  |                        | 11,146  |   |      | 3,006   |   |      | 22,432  |  
|Proceeds from other borrowed funds                                                                 |  |                        |        |   |      |        |   |      | 100     |  
|Advances from Federal Home Loan Bank                                                               |  |                        | 10,000  |   |      | 24,000  |   |      | 17,000  |  
|Payments of Federal Home Loan Bank advances                                                        |  |                        | (11,000 | ) |      | (16,000 | ) |      | (5,000  | )
|Proceeds from subordinated debentures                                                              |  |                        |        |   |      | 10,000  |   |      | 10,000  |  
|Proceeds from issuance of common stock                                                             |  |                        |        |   |      | 5,000   |   |      |        |  
|Principal payments on other borrowed funds                                                         |  |                        | (500    | ) |      |        |   |      |        |  
|Purchase of treasury stock                                                                         |  |                        | (317    | ) |      | (62     | ) |      |        |  
|Payment of cash dividends                                                                          |  |                        | (2,824  | ) |      | (2,767  | ) |      | (2,733  | )
|Proceeds from stock options exercised, net of stock redeemed                                       |  |                        | 1       |   |      | 176     |   |      | 3       |  
|                                                                                                   |  |                        |         |   |      |         |   |      |         |  
|Net cash provided by financing activities                                                          |  |                        | 156,909 |   |      | 161,462 |   |      | 148,672 |  
|                                                                                                   |  |                        |         |   |      |         |   |      |         |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                        | (15,853 | ) |      | 18,347  |   |      | (3,462  | )
|                                                                                                   |  |                        |        
|Cash and cash equivalents at beginning of year                                                     |  |                        | 40,911  |   |      | 22,563  |   |      | 26,024  |  
|                                                                                                   |  |                        |         |   |      |         |   |      |         |  
|Cash and cash equivalents at end of year                                                           |  | $                      | 25,058  |   |      | 40,910  |   |      | 22,563  |  
|                                                                                                   |  |                        |         |   |      |         |   |      |         |  
|Supplemental disclosures of cash paid during the year for:                                         |  |                        |         |   |      |         |   |      |         |  
|Interest                                                                                           |  | $                      | 40,285  |   |      | 29,988  |   |      | 17,311  |  
|Income taxes                                                                                       |  |                        | 7,394   |   |      | 6,265   |   |      | 5,046   |  
|                                                                                                   |  |                        |        
|Supplemental information on noncash investing activities:                                          |  |                        |         |   |      |         |   |      |         |  
|Loans transferred to other real estate                                                             |  | $                      | 341     |   |      | 173     |   |      | 226     |  

See accompanying notes to consolidated financial statements.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|(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 (the Bank),
and Southern Bank and Trust Company of Aiken, South Carolina (the Thrift), offer a wide range of lending services, including real estate, commercial, and consumer loans to individuals and small to medium-sized businesses and professionals that are
located in, or conduct a substantial portion of their business in, the Richmond, Columbia, and Clarke Counties area of Georgia, and Aiken and Greenville Counties area of South Carolina. On August 16, 2007, Georgia Bank & Trust Company
organized SB&T Capital Corporation (the LPO). SB&T Capital Corporation is a loan production office located in Greenville, SC. On November 1, 2007 GB&T entered into an Operating Agreement with NMF Asset Management LLC
(NMF) whereby GB&T became a 30% partner. NMF Corporation, LLC is a Delaware Limited Liability Corporation and provides investment advisory services. Georgia Bank and Trust Company provides all accounting services and client billings
and collection of these billings for NMF Corporation, LLC. NMF reimburses the Bank for the expenses incurred for these services. Georgia Bank & Trust accounts for the NMF investment using the equity method of accounting.

The Company is subject to competition from other financial institutions and is also subject to the regulations of certain Federal and state agencies and
undergoes periodic examinations by those regulatory authorities. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking
industry. The following is a description of the more significant of those policies the Company follows in preparing and presenting its consolidated financial statements.



| | (a) | Basis of Presentation
| | --- | ---------------------

The consolidated
financial statements include the accounts of Southeastern Bank Financial Corporation and its wholly owned subsidiaries, Georgia Bank & Trust Company of Augusta, Georgia, Southern Bank and Trust Company of Aiken, South Carolina. Significant
intercompany transactions and accounts are eliminated in consolidation.

The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Material estimates that are particularly susceptible to significant change in the near term relate to
the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.

A substantial portion of the Companys loans are secured by real estate in Augusta, Georgia, and the surrounding area. Accordingly, the ultimate
collectability of a substantial portion of the Companys loan portfolio is susceptible to changes in real estate market conditions in the Augusta, Georgia, and surrounding area.



| | (b) | Cash and Cash Equivalents
| | --- | -------------------------

Cash and cash
equivalents include cash and due from banks, Federal funds sold, and short-term interest-bearing deposits in other banks. Generally, Federal funds are sold for one-day periods. Net cash flows are reported for loan and deposit transactions and for
short term borrowings with an original maturity of 90 days or less.



| | (c) | Investment Securities
| | --- | ---------------------

The Company
classifies its investment securities into one of two categories: available for sale and held to maturity. Held to maturity securities are those debt securities for which the Company has the ability and intent to hold the security until maturity. All
other securities are classified as available for sale.

Held to maturity securities are recorded at cost adjusted for the amortization or
accretion of premiums or discounts. Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of related tax effects, on securities available for sale are excluded from net income and are reported within
stockholders equity as a component of comprehensive income and accumulated other comprehensive income (loss) until realized.

A
decline in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: the length of time and extent that fair value has been less
than cost, the financial condition and near term prospects of the issuer, and the Companys ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using a method which
approximates the effective interest method and takes into consideration prepayment assumptions.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Dividends and interest income are recognized when earned. Realized gains and losses for investment securities available for sale which are sold are included
in earnings and are derived using the specific identification method for determining the cost of securities sold.



| | (d) | Loans and Allowance for Loan Losses
| | --- | -----------------------------------

Loans
are stated at the amount of unpaid principal outstanding less unearned loan fees, reduced by an allowance for loan losses. Interest on loans is calculated using the simple interest method. Loan origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using the straight line method without anticipating prepayments. Accrual of interest is generally discontinued on loans that become past due 90 days or more. These loans are classified as
nonaccrual, even though the presence of collateral or the borrowers financial strength may be sufficient to provide for ultimate repayment. All interest accrued but not received for loans placed on nonaccrual is reversed against interest
income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.

The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that
management believes will be adequate to absorb losses on existing loans that become uncollectible, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the nature and volume of the
loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrowers ability to pay. The allowance is evaluated on a regular basis utilizing
estimated loss factors for specific types of loans. Such loss factors are periodically reviewed and adjusted as necessary based on actual losses.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination process, periodically review the Companys allowance for loan losses. Such agencies may advise the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Management, considering current information and events regarding a borrowers ability to repay
its obligations, considers a loan to be impaired if it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is generally measured based on the
present value of expected future cash flows discounted at the loans effective interest rate. If the loan is collateral-dependent, the fair value of the collateral less estimated selling costs is used to determine the amount of impairment.
Specific guidance from bank regulators is also considered. Impairment losses are included in the allowance for loan losses through a charge to the provision for losses on loans. The accounting for impaired loans described above applies to all loans,
except for large pools of smaller-balance, homogeneous loans that are collectively evaluated for impairment and loans that are measured at fair value or at the lower of cost or fair value. The allowance for loan losses for loans not considered
impaired and for large pools of smaller-balance, homogeneous loans is established through consideration of such factors as changes in the nature and volume of the portfolio, overall portfolio quality, individual risk rating, adequacy of the
underlying collateral, loan concentrations, historical charge-off trends, and economic conditions that may affect the borrowers ability to pay. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied
first to reduce the principal amount of such loans until all contractual principal payments have been brought current.

Mortgage loans
originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged
to earnings.

Mortgage loans held for sale are generally sold with servicing rights released. The carrying value of mortgage loans sold is
reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

The Company originates mortgages to be held for sale only for loans that have been individually pre-approved by the investor. Mortgage loans originated
and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings.

Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the
related loan sold.

The Company bears minimal interest rate risk on these loans and only holds the loans temporarily until documentation can
be completed to finalize the sale to the investor.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Under SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities,loan commitments that relate to the origination
of mortgage loans that will be held for sale, commonly referred to as interest rate lock commitments, must be accounted for as derivatives by the issuer of the commitment. Forward sales commitments to the investor are made at the same time and have
identical terms as the mortgage loan commitments to the customers. These forward sales commitments are also derivatives. Upon closing of the loan with the customer, Georgia Bank & Trust accounts for the forward sales commitments on loans
held for sale as a hedge. Once a loan is closed with the customer, it is funded by the investor, generally within fifteen days. We have determined this hedge is effective because the gain that is unrealized, but embedded, upon closing the loan with
the customer is highly correlated with the gain realized upon funding from the investor. Fair values of these derivatives as of December 31, 2007 and 2006 were insignificant.



| | (e) | Premises and Equipment
| | --- | ----------------------

Premises 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 Estate
| | --- | -----------------

Assets acquired through
or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs
after acquisition are expensed. Costs related to the development and improvement of property are capitalized. There were no carrying values of other real estate as of December 31, 2007 and 2006.



| | (g) | Goodwill
| | --- | --------

Goodwill 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, 2007.



| | (h) | Stock-Based Compensation
| | --- | ------------------------

Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-based Payment, using the modified



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



prospective transition method. Accordingly, the Company has recorded stock-based employee compensation cost using the fair value method starting in 2006. All
stock options issued are incentive stock options and therefore, no tax benefit is realized.

Prior to January 1, 2006, employee
compensation expense under stock options was reported using the intrinsic value method; therefore, no stock-based compensation cost is reflected in net income for the year ending December 31, 2005 as all options granted had an exercise price
equal to the market price of the underlying common stock at date of grant.

The following table illustrates the effect on net income and
earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, for the year ending December 31, 2005.



|                                                                                                                   |  |      |       |  
|------------------------------------------------------------------------------------------------------------------ |  | ---- | ----- | -
|Dollars in thousands, except per share data                                                                        |  | 2005 |      
|Net income                                                                                                         |  | $    | 9,954 |  
|Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effect |  |      | (241  | )
|                                                                                                                   |  |      |       |  
|Pro forma                                                                                                          |  | $    | 9,713 |  
|                                                                                                                   |  |      |       |  
|Basic net income per share:                                                                                        |  |      |       |  
|As reported                                                                                                        |  | $    | 1.89  |  
|Pro forma                                                                                                          |  |      | 1.85  |  
|Diluted net income per share:                                                                                      |  |      |       |  
|As reported                                                                                                        |  |      | 1.86  |  
|Pro forma                                                                                                          |  |      | 1.82  |  



| | (i) | Income Taxes
| | --- | ------------

The Company accounts for
income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax valuation allowance is provided to the extent it is more likely than not that deferred tax assets
will not be realized.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes
(FIN 48), as of January 1, 2007. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The adoption had
no material affect on the Companys consolidated financial statements.

The Company recognizes interest related to income tax matters
as interest expense and penalties related to income tax matters as other expense.



| | (j) | Income Per Share
| | --- | ----------------

Basic net income per share
is net income divided by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by weighted average shares outstanding plus common share equivalents resulting from
dilutive stock options, determined using the treasury stock method.



|                                                                               |  |              |  |           |  |          
|------------------------------------------------------------------------------ |  | ------------ |  | --------- |  | ---------
|                                                                               |  | December 31,
|                                                                               |  | 2007         |  | 2006      |  | 2005     
|Weighted average common shares outstanding for basic earnings per common share |  | 5,429,961    |  | 5,324,558 |  | 5,257,904
|Add: Dilutive effects of assumed exercises of stock options                    |  | 66,428       |  | 47,098    |  | 92,480   
|                                                                               |  |              |  |           |  |          
|Weighted average number of common and common equivalent shares outstanding     |  | 5,496,389    |  | 5,371,656 |  | 5,350,384
|                                                                               |  |              |  |           |  |          



| | (k) | Other Comprehensive Income (Loss)
| | --- | ---------------------------------

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.



| | (l) | Segment Disclosures
| | --- | -------------------

The Company has one
reportable segment, financial services. This segment provides financial services including banking, mortgage services, retail investment services and trust services through two subsidiary banks with offices located in Georgia and South Carolina.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



| | (m) | Recent Accounting Pronouncements
| | --- | --------------------------------

In
February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which permits fair value remeasurement for hybrid financial instruments that contain an
embedded derivative that otherwise would require bifurcation. Additionally, SFAS No. 155 clarifies the accounting guidance for beneficial interests in securitizations. Under SFAS No. 155, all beneficial interests in a securitization will
require an assessment in accordance with SFAS No. 133 to determine if an embedded derivative exists within the instrument. In January 2007, the FASB issued Derivatives Implementation Group Issue B40, Application of Paragraph 13(b) to
Securitized Interests in Prepayable Financial Assets (DIG Issue B40). DIG Issue B40 provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS No. 133 for instruments that would otherwise require bifurcation if the test
is met solely because of a prepayment feature included within the securitized interest and prepayment is not controlled by the security holder. SFAS No. 155 and DIG Issue B40 are effective for fiscal years beginning after September 15,
2006. The adoption of SFAS No. 155 and DIG Issue B40 did not have a material impact on the Companys consolidated financial position or results of operations.

In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This Statement provides the following: 1) revised guidance on when a
servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing
assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities
to trading securities for securities which are identified as offsetting the entitys exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate
presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. This standard is effective as of the beginning of an entitys first
fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. Servicing rights are initially recorded at fair value with the income statement effect
recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing
income. The Company does not retain servicing on any loans sold and as such this standard did not have a material impact upon adoption on the Companys consolidated financial position or results of operations.



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|81 |  | (Continued)



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material effect on
the Companys consolidated financial statements.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,
Accounting for Purchases of Life InsuranceDetermining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance).This issue requires that a policyholder
consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group
are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the
policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The adoption of this issue did not have a material impact on the Companys consolidated
financial statements.

On January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value Measurements. This Statement
defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions
about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB
Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material to the Companys consolidated financial statements.



|   |  |            
|-- |  | -----------
|82 |  | (Continued)



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial
liabilities as of January 1, 2008.

On January 1, 2008, the Company adopted FASB Emerging Issues Task Force Issue No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement
continues after participants employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual
terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The impact of adoption was not material to the Companys consolidated financial statements.



| | (n) | Bank Owned Life Insurance
| | --- | -------------------------

The Company has
purchased life insurance policies on certain key executives. Upon adoption of EITF 06-5, which is discussed further below, 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. Prior to adoption of EITF 06-5, the Company recorded owned life insurance at its cash surrender value.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance  Determining the
amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance){Issue}. This Issue requires that a policy holder consider contractual terms of a life insurance policy to
determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value
be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue requires disclosure when there are contractual restrictions on the Companys ability to surrender a policy. The adoption of EITF
06-5 on January 1, 2007 had no material impact on the Companys consolidated financial condition or results of operations.



|   |  |            
|-- |  | -----------
|83 |  | (Continued)



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



| | (o) | Loss Contingencies
| | --- | ------------------

Loss 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) | Reclassifications
| | --- | -----------------

Some items in the prior
period financial statements were reclassified to conform to the current presentation.



| | (q) | Rounding
| | --- | --------

Dollar amounts are rounded to
thousands except share and per share data.



|(2) | Cash and Due From Banks
|--- | -----------------------

The subsidiary bank is
required by the Federal Reserve Bank to maintain average daily cash balances. These required balances were $945 at December 31, 2007 and $1,985 at December 31, 2006.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|(3) | Investment Securities
|--- | ---------------------

A summary of investment
securities as of December 31, 2007 and 2006 is as follows:



|                                                 |  |                        |         |                      |       |                       |        |   |                     |        
|------------------------------------------------ |  | ---------------------- | ------- | -------------------- | ----- | --------------------- | ------ | - | ------------------- | -------
|                                                 |  | 2007                  
|                                                 |  | Amortizedcost          |         | Grossunrealizedgains |       | Grossunrealizedlosses |        |   | Estimatedfair value
|                                                 |  | (Dollars in Thousands)
|Held to maturity:                                |  |                        |         |                      |       |                       |        |   |                     |        
|Obligations of states and political subdivisions |  | $                      | 1,435   |                      | 32    |                       |        |   |                     | 1,467  
|                                                 |  |                        |         |                      |       |                       |        |   |                     |        
|                                                 |  | $                      | 1,435   |                      | 32    |                       |        |   |                     | 1,467  
|                                                 |  |                        |         |                      |       |                       |        |   |                     |        
|Available for sale:                              |  |                        |         |                      |       |                       |        |   |                     |        
|Obligations of U.S. Government agencies          |  | $                      | 96,166  |                      | 951   |                       | (8     | ) |                     | 97,108 
|Obligations of states and political subdivisions |  |                        | 15,755  |                      | 96    |                       | (223   | ) |                     | 15,628 
|Mortgage-backed securities                       |  |                        | 118,179 |                      | 443   |                       | (1,061 | ) |                     | 117,561
|Corporate bonds                                  |  |                        | 9,722   |                      | 42    |                       | (342   | ) |                     | 9,422  
|Trust preferred securities                       |  |                        | 5,314   |                      | 31    |                       | (50    | ) |                     | 5,295  
|Equity securities                                |  |                        | 250     |                      | 165   |                       |        |   |                     | 415    
|                                                 |  |                        |         |                      |       |                       |        |   |                     |        
|                                                 |  | $                      | 245,386 |                      | 1,728 |                       | (1,684 | ) |                     | 245,429
|                                                 |  |                        |         |                      |       |                       |        |   |                     |        
|                                                 | 
|                                                 |  | 2006                  
|                                                 |  | Amortizedcost          |         | Grossunrealizedgains |       | Grossunrealizedlosses |        |   | Estimatedfair value
|                                                 |  | (Dollars in Thousands)
|Held to maturity:                                |  |                        |         |                      |       |                       |        |   |                     |        
|Obligations of states and political subdivisions |  | $                      | 2,971   |                      | 78    |                       |        |   |                     | 3,048  
|                                                 |  |                        |         |                      |       |                       |        |   |                     |        
|                                                 |  | $                      | 2,971   |                      | 78    |                       |        |   |                     | 3,048  
|                                                 |  |                        |         |                      |       |                       |        |   |                     |        
|Available for sale:                              |  |                        |         |                      |       |                       |        |   |                     |        
|Obligations of U.S. Government agencies          |  | $                      | 77,717  |                      | 18    |                       | (1,164 | ) |                     | 76,571 
|Obligations of states and political subdivisions |  |                        | 15,391  |                      | 135   |                       | (65    | ) |                     | 15,461 
|Mortgage-backed securities                       |  |                        | 95,910  |                      | 50    |                       | (1,978 | ) |                     | 93,982 
|Corporate bonds                                  |  |                        | 5,987   |                      | 45    |                       | (8     | ) |                     | 6,024  
|Trust preferred securities                       |  |                        | 6,358   |                      | 28    |                       | (41    | ) |                     | 6,345  
|Equity securities                                |  |                        | 250     |                      | 503   |                       |        |   |                     | 753    
|                                                 |  |                        |         |                      |       |                       |        |   |                     |        
|                                                 |  | $                      | 201,613 |                      | 779   |                       | (3,256 | ) |                     | 199,136
|                                                 |  |                        |         |                      |       |                       |        |   |                     |        

As of December 31, 2007, except for the U.S. Government agencies, there was no issuer who
represented 10% or more of stockholders equity within the investment portfolio.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



The following tables show securities available for sale with unrealized losses at year-end 2007 and
2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.



|                                                 |  |                        |        |                     |     |                     |         |                |       |                     |         |                |      
|------------------------------------------------ |  | ---------------------- | ------ | ------------------- | --- | ------------------- | ------- | -------------- | ----- | ------------------- | ------- | -------------- | -----
|                                                 |  | December 31, 2007     
|                                                 |  | Less than 12 months    |        | 12 months or longer |     | Total              
|                                                 |  | Estimatedfair value    |        | Unrealizedloss      |     | Estimatedfair value |         | Unrealizedloss |       | Estimatedfair value |         | Unrealizedloss
|                                                 |  | (Dollars in Thousands)
|Obligations of U.S. Government agencies          |  | $                      | 1,500  |                     |    |                     | 2,876   |                | 8     |                     | 4,375   |                | 8    
|Obligations of states and political subdivisions |  |                        | 10,397 |                     | 215 |                     | 838     |                | 8     |                     | 11,235  |                | 223  
|Mortgage-backed securities                       |  |                        | 16,242 |                     | 111 |                     | 49,352  |                | 950   |                     | 65,594  |                | 1,061
|Corporate bonds                                  |  |                        | 5,397  |                     | 342 |                     |        |                |      |                     | 5,397   |                | 342  
|Trust preferred securities                       |  |                        | 1,513  |                     | 50  |                     |        |                |      |                     | 1,513   |                | 50   
|                                                 |  |                        |        |                     |     |                     |         |                |       |                     |         |                |      
|                                                 |  | $                      | 35,049 |                     | 718 |                     | 53,066  |                | 966   |                     | 88,114  |                | 1,683
|                                                 |  |                        |        |                     |     |                     |         |                |       |                     |         |                |      
|                                                 | 
|                                                 |  | December 31, 2006     
|                                                 |  | Less than 12 months    |        | 12 months or longer |     | Total              
|                                                 |  | Estimatedfair value    |        | Unrealizedloss      |     | Estimatedfair value |         | Unrealizedloss |       | Estimatedfair value |         | Unrealizedloss
|                                                 |  | (Dollars in Thousands)
|Obligations of U.S. Government agencies          |  | $                      | 28,750 |                     | 236 |                     | 39,819  |                | 928   |                     | 68,569  |                | 1,164
|Obligations of states and political subdivisions |  |                        | 7,935  |                     | 56  |                     | 866     |                | 9     |                     | 8,801   |                | 65   
|Mortgage-backed securities                       |  |                        | 18,143 |                     | 171 |                     | 66,768  |                | 1,807 |                     | 84,911  |                | 1,978
|Corporate bonds                                  |  |                        | 4,961  |                     | 8   |                     |        |                |      |                     | 4,961   |                | 8    
|Trust preferred securities                       |  |                        |       |                     |    |                     | 2,064   |                | 41    |                     | 2,064   |                | 41   
|                                                 |  |                        |        |                     |     |                     |         |                |       |                     |         |                |      
|                                                 |  | $                      | 59,789 |                     | 471 |                     | 109,516 |                | 2,785 |                     | 169,306 |                | 3,256
|                                                 |  |                        |        |                     |     |                     |         |                |       |                     |         |                |      

At December 31, 2007, there was one obligation of U.S. government agencies, fifteen
obligations of states and political subdivisions, fifteen mortgage-backed securities, and four corporate bonds and two trust preferred securities with an unrealized loss for less than 12 months. There were three obligations of U.S. government
agencies, sixty-eight mortgage-backed securities, and two obligations of states and political subdivisions with an unrealized loss for longer than 12 months. The total estimated fair value of the securities with an unrealized loss at
December 31, 2007 represented 98.1% of the book value. Unrealized losses on securities have not been recognized into income because the issuer(s) bonds are of high credit quality, management has the intent and ability to hold for the
foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach maturity.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



The amortized cost and estimated fair value of securities held to maturity and available for sale,
other than equity securities, as of December 31, 2007, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.



|                                   |  |                            |  |                              |  |               |  |                    
|---------------------------------- |  | -------------------------- |  | ---------------------------- |  | ------------- |  | -------------------
|                                   |  | Securitiesheld to maturity |  | Securitiesavailable for sale
|                                   |  | Amortizedcost              |  | Estimatedfair value          |  | Amortizedcost |  | Estimatedfair value
|                                   |  | Dollars in Thousands      
|One year or less                   |  |                            |  |                              |  | 250           |  | 250                
|After one year through five years  |  | 926                        |  | 946                          |  | 13,613        |  | 13,674             
|After five years through ten years |  | 509                        |  | 521                          |  | 51,987        |  | 52,365             
|After ten years                    |  |                            |  |                              |  | 61,106        |  | 61,163             
|                                   |  |                            |  |                              |  |               |  |                    
|                                   |  | 1,435                      |  | 1,467                        |  | 126,957       |  | 127,453            
|                                   |  |                            |  |                             
|Mortgage-backed securities         |  |                           |  |                             |  | 118,179       |  | 117,561            
|                                   |  |                            |  |                              |  |               |  |                    
|                                   |  | 1,435                      |  | 1,467                        |  | 245,136       |  | 245,014            
|                                   |  |                            |  |                              |  |               |  |                    

Proceeds from sales of securities available for sale during 2007, 2006, and 2005 were $20,712,
$42,346, and $23,853, respectively. Gross realized gains of $68, $621, and $45, were realized on those sales in 2007, 2006, and 2005, respectively, and gross realized losses of $305, $408, and $131, were realized on those sales in 2007, 2006, and
2005, respectively.

Investment securities with a carrying amount of approximately $186,408 and $154,504 at December 31, 2007 and 2006,
respectively, were pledged to secure public and trust deposits, and for other purposes required by law.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|(4) | Loans
|--- | -----

Loans at December 31, 2007 and 2006 are
summarized as follows:



|                                        |  |                      |         |      |        
|--------------------------------------- |  | -------------------- | ------- | ---- | -------
|                                        |  | 2007                 |         | 2006
|                                        |  | Dollars in Thousands
|Commercial, financial, and agricultural |  | $                    | 93,355  |      | 80,938 
|Real estate:                            |  |                      |         |      |        
|Construction                            |  |                      | 318,438 |      | 266,875
|Residential                             |  |                      | 190,613 |      | 158,543
|Commercial                              |  |                      | 236,358 |      | 198,453
|Consumer installment                    |  |                      | 33,625  |      | 31,222 
|                                        |  |                      |         |      |        
|                                        |  |                      | 872,389 |      | 736,031
|Less allowance for loan losses          |  |                      | 11,800  |      | 9,777  
|Less deferred loan origination fees     |  |                      | 949     |      | 919    
|                                        |  |                      |         |      |        
|                                        |  | $                    | 859,640 |      | 725,335
|                                        |  |                      |         |      |        

As of December 31, 2007 and 2006, the Company had nonaccrual loans aggregating $5,495 and
$2,351, respectively. Interest that would have been recorded on nonaccrual loans had they been in accruing status was approximately $198 in 2007, $118 in 2006, and $204 in 2005. At December 31, 2007 and 2006, the Company had impaired loans with
an outstanding balance of $14,250 and $1,534, respectively, with an allowance allocation of $291 and $252 at December 31, 2007 and 2006. The amount of impaired loans with an allowance allocation totaled $1,808 and $590 respectively at
December 31, 2007 and 2006. The average balance of impaired loans was approximately $5,022, $2,223 and $2,331 for the years ended December 31, 2007, 2006, and 2005, respectively. The interest recognized on such loans in 2007, 2006, and
2005 was $598, $76, and $170 respectively and interest recognized as a cash basis was approximately the same. Loans past due 90 days or more and still accruing interest were $0 at December 31, 2007 and 2006, respectively and interest recognized
as a cash basis was approximately the same.

The following is a summary of the activity in the allowance for loan losses for the years ended
December 31, 2007, 2006, and 2005:



|                           |  |                      |        |   |      |        |   |      |        |  
|-------------------------- |  | -------------------- | ------ | - | ---- | ------ | - | ---- | ------ | -
|                           |  | 2007                 |        |   | 2006 |        |   | 2005 |       
|                           |  | Dollars in Thousands |       
|Balance, beginning of year |  | $                    | 9,777  |   |      | 9,125  |   |      | 7,930  |  
|Effects of *SAB 108        |  |                      |       |   |      | (694   | ) |      |       |  
|Provision for loan losses  |  |                      | 3,823  |   |      | 2,478  |   |      | 1,842  |  
|Charge-offs                |  |                      | (2,576 | ) |      | (1,940 | ) |      | (1,605 | )
|Recoveries                 |  |                      | 776    |   |      | 808    |   |      | 958    |  
|                           |  |                      |        |   |      |        |   |      |        |  
|Balance, end of year       |  | $                    | 11,800 |   |      | 9,777  |   |      | 9,125  |  
|                           |  |                      |        |   |      |        |   |      |        |  



|* | Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB
108).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



The allowance for loan loss in 2006 was decreased $694 to remove the entire balance of the allowance
for unfunded lines and commitments and standby letters of credit. The following table shows the effect of SAB 108 to prior years shown above.



|                                                       |  |                      |       |      |      
|------------------------------------------------------ |  | -------------------- | ----- | ---- | -----
|ALLL Balance                                           |  | 2006                 |       | 2005
|                                                       |  | Dollars in Thousands
|As Reported                                            |  | $                    | 9,777 |      | 9,125
|                                                       |  |                     
|Excluding unfunded lines and standby letters of credit |  |                      | 9,777 |      | 8,431

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, 2007:



|                             |  |                      |         |  
|---------------------------- |  | -------------------- | ------- | -
|                             |  | Dollars in Thousands |        
|Balance at beginning of year |  | $                    | 24,752  |  
|New loans                    |  |                      | 69,381  |  
|Principal repayments         |  |                      | (57,839 | )
|                             |  |                      |         |  
|Balance at end of year       |  | $                    | 36,294  |  
|                             |  |                      |         |  

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, 2007, available balances on these commitments to these persons aggregated approximately
$10,624.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|(5) | Premises and Equipment
|--- | ----------------------

Premises and equipment at
December 31, 2007 and 2006 are summarized as follows:



|                              |  |                      |        |      |       
|----------------------------- |  | -------------------- | ------ | ---- | ------
|                              |  | 2007                 |        | 2006
|                              |  | Dollars in Thousands
|Land                          |  | $                    | 5,031  |      | 3,953 
|Buildings                     |  |                      | 26,232 |      | 20,132
|Furniture and equipment       |  |                      | 12,626 |      | 9,412 
|                              |  |                      |        |      |       
|                              |  |                      | 43,889 |      | 33,497
|                              |  |                     
|Less accumulated depreciation |  |                      | 11,277 |      | 10,095
|                              |  |                      |        |      |       
|                              |  | $                    | 32,612 |      | 23,402
|                              |  |                      |        |      |       

Depreciation expense amounted to $1,606, and $1,367, in 2007 and 2006, respectively.



|(6) | Commitments
|--- | -----------

The Company is committed under various
operating leases for office space and equipment. At December 31, 2007, minimum future lease payments under non-cancelable real property and equipment operating leases are as follows:



|              |  |                       |      
|------------- |  | --------------------- | -----
|              |  | (Dollarsin Thousands)
|2008          |  | $                     | 336  
|2009          |  |                       | 233  
|2010          |  |                       | 219  
|2011          |  |                       | 152  
|2012          |  |                       | 70   
|2013 & Beyond |  |                       | 156  
|              |  |                       |      
|              |  | $                     | 1,166
|              |  |                       |      

Rent expense for all building, equipment, and furniture rentals totaled $237, $204, and $213, for
the years ended December 31, 2007, 2006, and 2005, 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.



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Unfunded commitments to extend credit where contract amounts represent potential credit risk totaled
$208 and $202, at December 31, 2007 and 2006, respectively. These commitments are primarily at variable interest rates. Fixed Rate commitments totaled $14,573 and $11,740 at December 31, 2007 and 2006, respectively. The rates on these
commitments ranged from 6.38% to 16.0% at December 31, 2007, and 4.5% to 16.0% at December 31, 2006. Maturity dates ranged from 1/8/2008 to 12/19/2017, at December 31, 2007, and 1/6/2007 to 4/4/2016 at December 31, 2006.

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.



|(7) | Deposits
|--- | --------

At December 31, 2007, scheduled maturities of
certificates of deposit are as follows:



|           |  |                     |        
|---------- |  | ------------------- | -------
|           |  | Dollars inThousands
|2008       |  | $                   | 312,150
|2009       |  |                     | 35,568 
|2010       |  |                     | 1,861  
|2011       |  |                     | 1,814  
|2012       |  |                     | 3,975  
|Thereafter |  |                     |        
|           |  |                     |        
|Total      |  | $                   | 355,368
|           |  |                     |        

Brokered Deposits as of December 31, 2007 totaled $78,482.



|(8) | 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



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



corporate customers at December 31, 2007 and 2006 were $16,720 and $10,492, respectively. At December 31, 2007, 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, 2007 and 2006 was $169,688 and $154,504, respectively. The repurchase agreements at December 31, 2007 mature on demand. Outstanding Federal Funds purchased totaled $17,537 and $0 as of December 31, 2007 and
December 31, 2006 respectively. 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, 2007, 2006, and 2005.



|                                                |  |                      |        |   |      |        |   |      |        |  
|----------------------------------------------- |  | -------------------- | ------ | - | ---- | ------ | - | ---- | ------ | -
|                                                |  | 2007                 |        |   | 2006 |        |   | 2005 |       
|                                                |  | Dollars in Thousands |       
|Securities Sold Under Repurchase Agreements     |  |                      |        |  
|Weighted average borrowing rate at year-end     |  |                      | 4.38   | % |      | 5.24   | % |      | 3.93   | %
|                                                |  |                      |       
|Weighted average borrowing rate during the year |  |                      | 5.03   | % |      | 4.92   | % |      | 3.04   | %
|                                                |  |                      |       
|Average daily balance during the year           |  | $                    | 64,501 |   |      | 60,614 |   |      | 55,168 |  
|                                                |  |                      |       
|Maximum month-end balance during the year       |  |                      | 74,525 |   |      | 74,772 |   |      | 72,462 |  
|                                                |  |                      |       
|Balance at year-end                             |  | $                    | 63,628 |   |      | 70,020 |   |      | 67,013 |  
|                                                |  |                      |       
|Federal Funds Purchased                         |  |                      | 17,537 |   |      |       |   |      |       |  
|                                                |  |                      |        |   |      |        |   |      |        |  
|                                                |  | $                    | 81,165 |   |      | 70,020 |   |      | 67,013 |  
|                                                |  |                      |        |   |      |        |   |      |        |  

Advances from Federal Home Loan Bank

The 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, 2007 and 2006.



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|                                         |  |                      |        |   |      |       |   |      |   |        |      |  |       |  
|---------------------------------------- |  | -------------------- | ------ | - | ---- | ----- | - | ---- | - | ------ | ---- |  | ----- | -
|                                         |  | 2007                 |        |   | Rate |       |   | 2006 |   |        | Rate | 
|                                         |  | Dollars in Thousands |       
|Due May 18, 2007 prime rate floater      |  | $                    |       |   |      |       |   |      | $ | 5,000  |      |  | 5.440 | %
|Due March 22, 2010                       |  |                      | 7,000  |   |      | 6.180 | % |      |   | 7,000  |      |  | 6.180 | %
|Due March 30, 2010                       |  |                      | 5,000  |   |      | 6.020 | % |      |   | 5,000  |      |  | 6.020 | %
|Due September 29, 2010                   |  |                      | 5,000  |   |      | 5.820 | % |      |   | 5,000  |      |  | 5.820 | %
|Due October 18, 2010                     |  |                      | 7,000  |   |      | 5.460 | % |      |   | 7,000  |      |  | 5.460 | %
|Due May 2, 2011                          |  |                      | 6,000  |   |      | 4.800 | % |      |   | 6,000  |      |  | 4.800 | %
|Due July 23, 2012 convertible flipper    |  |                      |       |   |      |       |   |      |   | 6,000  |      |  | 4.850 | %
|Due January 27, 2019 convertible flipper |  |                      | 5,000  |   |      | 4.355 | % |      | $ | 5,000  |      |  | 4.850 | %
|Due April 22, 2019 convertible flipper   |  |                      | 8,000  |   |      | 4.680 | % |      | $ | 8,000  |      |  | 4.874 | %
|Due May 22, 2019 flipper                 |  |                      | 6,000  |   |      | 4.515 | % |      | $ | 6,000  |      |  | 4.871 | %
|Due July 26, 2017                        |  |                      | 10,000 |   |      | 4.406 | % |      |   |        |      |  |       |  
|                                         |  |                      |        |   |      |       |   |      |   |        |      |  |       |  
|                                         |  | $                    | 59,000 |   |      |       |   |      | $ | 60,000 |      |  |       |  
|                                         |  |                      |        |   |      |       |   |      |   |        |      |  |       |  
|Total weighted average rate              |  |                      | 5.08   | % |      |       |   |      |   | 5.30   | %    |  |       |  
|                                         |  |                      |        |   |      |       |   |      |   |        |      |  |       |  

The FHLB has the option to convert the fixed-rate advances and convertible advances to
three-month, LIBOR-based floating-rate advances at various dates throughout the terms of the advances.

The convertible flipper advance
maturing on July 23, 2012, was called on July 23, 2007. The convertible flipper advance maturing on January 27, 2019, is indexed to the one-month LIBOR-based floating rate minus 50 basis points for the first three years and then
converts to a fixed rate of 4.10% for the last ten years. The convertible flipper advance maturing on April 22, 2019, is indexed to the three-month LIBOR-based floating rate minus 50 basis points for the first three years and then converts to a
fixed rate of 4.75% for the last ten years. The flipper advance maturing on May 22, 2019, is indexed to the three-month LIBOR-based floating rate minus 50 basis points. The convertible advance maturing on July 26, 2017 with a rate of
4.406% can be converted from a fixed rate to an adjustable rate on July 26, 2008 or any interest payment date thereafter.

At
December 31, 2007, the Company has pledged, under a blanket floating lien, eligible first mortgage loans with unpaid balances which, when discounted at approximately 80% of such unpaid principal balances, total $67,416. The Company has also
pledged for this lien eligible commercial real estate loans with unpaid balances which, when discounted at approximately 50% of such unpaid principal balances, total $9,784.



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Other Borrowed Funds

Other borrowed funds consist of a treasury, tax, and loan account with the Federal Reserve Bank at December 31, 2007 with a balance of $500 and at
December 31, 2006 with a balance of $1,000.



|(9) | Subordinated Debentures
|--- | -----------------------

In December 2005 the
Company issued $10.0 million of unsecured subordinated debentures, which bear interest at three-month LIBOR plus 1.40%, adjusted quarterly, to Southeastern Bank Financial Statutory Trust I. The Company used these funds to capitalize a new federally
chartered thrift subsidiary, Southern Bank and Trust. Southeastern Bank Financial Statutory Trust I is a wholly owned subsidiary of the Company which is not consolidated in these financial statements pursuant to FIN 46R. Southeastern Bank Financial
Statutory Trust I acquired these debentures using the proceeds of its offerings of $10.0 million of Trust Preferred Securities to outside investors. The Trust Preferred Securities qualify as Tier 1 capital under Federal Reserve Board guidelines and
accrue and pay distributions quarterly at a variable per annum rate of interest, reset quarterly, equal to LIBOR plus 1.40% of the stated liquidation amount of $1 thousand dollars per Capital Security. The Company has entered into contractual
arrangements which constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of Southeastern Bank Financial Statutory Trust I under the Trust Preferred Securities.

The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on December 15, 2035, or upon earlier redemption as
provided in the indenture. The Company has the right to redeem the debentures purchased by Southeastern Bank Financial Statutory Trust I in whole or in part, on or after December 15, 2010 and in whole or in part at any time within 90 days
following the occurrence of a Tax Event, an Investment Company Event or a Capital Treatment Event. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be 100% of their principal amount plus
accrued but unpaid interest. Prior to December 15, 2007, 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 103.140% of the principal amount of the
debentures. Thereafter, an amount equal in cash to the percentage of the principal amount of the debentures plus unpaid interest will be redeemed as specified below.



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|                                                                    |  |                               
|------------------------------------------------------------------- |  | ------------------------------
|Special Redemption During the 12-Month Period Beginning December 15 |  | Percentage of Principal Amount
|2007                                                                |  | 102.355%                      
|2008                                                                |  | 101.570%                      
|2009                                                                |  | 100.785%                      
|2010 and thereafter                                                 |  | 100.000%                      

In March 2006 the Company issued $10.0 million of unsecured subordinated debentures, which bear
interest at three-month LIBOR plus 1.40%, adjusted quarterly, to Southeastern Bank Financial Trust II. The Company used $5.0 million of the proceeds to contribute additional capital to Southern Bank & Trust on June 28, 2007. The
remaining $5.0 million has been used for general corporate purposes. Southeastern Bank Financial Trust II is a wholly owned subsidiary of the Company which is not consolidated in these financial statements pursuant to FIN 46R. Southeastern Bank
Financial Statutory Trust I acquired these debentures using the proceeds of its offerings of $10.0 million of Trust Preferred Securities to outside investors. The Trust Preferred Securities qualify as Tier 1 capital under Federal Reserve Board
guidelines and accrue and pay distributions quarterly at a variable per annum rate of interest, reset quarterly, equal to LIBOR plus 1.40% of the stated liquidation amount of $1 thousand dollars per Capital Security. The Company has entered into
contractual arrangements which constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of Southeastern Bank Financial Trust II under the Trust Preferred Securities.

The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on June 15, 2036, or upon earlier redemption as provided in
the indenture. The Company has the right to redeem the debentures purchased by Southeastern Bank Financial Trust II in whole or in part, on or after June 15, 2011 and in whole or in part at any time within 90 days following the occurrence of a
Tax Event, an Investment Company Event or a Capital Treatment Event. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be 100% of their principal amount plus accrued but unpaid interest. Prior
to June 15, 2008, the redemption of any debenture following a Tax Event, an Investment Company Event or a Capital Treatment Event, will be an amount in cash equal to 103.140% of the principal amount of the debentures. Thereafter, an amount
equal in cash to the percentage of the principal amount of the debentures plus unpaid interest will be redeemed as specified below.



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|                                                                |  |  |  |                               
|--------------------------------------------------------------- |  |  |  | ------------------------------
|Special Redemption During the 12-Month Period Beginning June 15 |  |  |  | Percentage of Principal Amount
|2008                                                            |  |  |  | 102.355%                      
|2009                                                            |  |  |  | 101.570%                      
|2010                                                            |  |  |  | 100.785%                      
|2011 and thereafter                                             |  |  |  | 100.000%                      



|(10) | Income Taxes
|---- | ------------

Income tax expense for the years
ended December 31, 2007, 2006, and 2005 consists of the following:



|                         |  |                      |       |   |      |       |   |      |       |  
|------------------------ |  | -------------------- | ----- | - | ---- | ----- | - | ---- | ----- | -
|                         |  | 2007                 |       |   | 2006 |       |   | 2005 |      
|                         |  | Dollars in Thousands |      
|Current tax expense:     |  |                      |       |  
|Federal                  |  | $                    | 6,543 |   |      | 5,966 |   |      | 4,965 |  
|State                    |  |                      | 603   |   |      | 592   |   |      | 607   |  
|                         |  |                      |       |   |      |       |   |      |       |  
|Total current            |  |                      | 7,146 |   |      | 6,558 |   |      | 5,572 |  
|                         |  |                      |       |   |      |       |   |      |       |  
|Deferred tax benefit     |  |                      |       |   |      |       |   |      |       |  
|Federal                  |  |                      | (681  | ) |      | (770  | ) |      | (528  | )
|State                    |  |                      | (144  | ) |      | (115  | ) |      | (89   | )
|                         |  |                      |       |   |      |       |   |      |       |  
|Total deferred           |  |                      | (825  | ) |      | (885  | ) |      | (617  | )
|                         |  |                      |       |   |      |       |   |      |       |  
|Total income tax expense |  | $                    | 6,321 |   |      | 5,673 |   |      | 4,955 |  
|                         |  |                      |       |   |      |       |   |      |       |  



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Income tax expense differed from the amount computed by applying the statutory Federal corporate tax
rate of 35% in 2007, 2006 and 2005 to income before income taxes as follows:



|                                                   |  |                         |       |   |      |       |   |      |       |  
|-------------------------------------------------- |  | ----------------------- | ----- | - | ---- | ----- | - | ---- | ----- | -
|                                                   |  | Years ended December 31 |      
|                                                   |  | 2007                    |       |   | 2006 |       |   | 2005 |      
|                                                   |  | Dollars in Thousands    |      
|Computed expected tax expense                    |  | $                       | 6,330 |   |      | 5,892 |   |      | 5,218 |  
|Increase (decrease) resulting from:                |  |                         |       |   |      |       |   |      |       |  
|Tax-exempt interest income                         |  |                         | (368  | ) |      | (479  | ) |      | (369  | )
|Nondeductible interest expense                     |  |                         | 53    |   |      | 69    |   |      | 46    |  
|State income tax, net of Federal tax effect        |  |                         | 298   |   |      | 310   |   |      | 340   |  
|Earnings on cash surrender value of life insurance |  |                         | (237  | ) |      | (210  | ) |      | (137  | )
|Nondeductible stock compensation expense           |  |                         | 191   |   |      | 144   |   |      |       |  
|Meals, entertainment, and club dues                |  |                         | 51    |   |      | 48    |   |      | 40    |  
|Impact of graduated rate                           |  |                         |       |   |      | (49   | ) |      | (96   | )
|Other, net                                         |  |                         | 3     |   |      | (52   | ) |      | (88   | )
|                                                   |  |                         |       |   |      |       |   |      |       |  
|                                                   |  | $                       | 6,321 |   |      | 5,673 |   |      | 4,955 |  
|                                                   |  |                         |       |   |      |       |   |      |       |  

The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities at December 31, 2007 and 2006 are presented below:



|                                                            |  |                      |        |   |      |       |  
|----------------------------------------------------------- |  | -------------------- | ------ | - | ---- | ----- | -
|                                                            |  | 2007                 |        |   | 2006 |      
|                                                            |  | Dollars in Thousands |       
|Deferred tax assets:                                        |  |                      |        |   |      |       |  
|Allowance for loan losses                                   |  | $                    | 4,518  |   |      | 3,973 |  
|Deferred compensation                                       |  |                      | 1,356  |   |      | 1,218 |  
|Other                                                       |  |                      | 578    |   |      | 216   |  
|Unrealized loss on investment securities available for sale |  |                      |       |   |      | 842   |  
|                                                            |  |                      |        |   |      |       |  
|Total deferred tax assets                                   |  |                      | 6,452  |   |      | 6,250 |  
|                                                            |  |                      |        |   |      |       |  
|Deferred tax liabilities:                                   |  |                      |        |   |      |       |  
|Depreciation                                                |  |                      | (565   | ) |      | (478  | )
|Prepaid assets and other                                    |  |                      | (446   | ) |      | (314  | )
|Unrealized gain on investment securities available for sale |  |                      | (15    | ) |      |      |  
|                                                            |  |                      |        |   |      |       |  
|Total deferred tax liabilities                              |  |                      | (1,026 | ) |      | (792  | )
|                                                            |  |                      |        |   |      |       |  
|Net deferred tax asset                                      |  | $                    | 5,426  |   |      | 5,459 |  
|                                                            |  |                      |        |   |      |       |  



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers taxes paid in the carryback period, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projection for future taxable income over the periods which the temporary differences resulting in the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of
the state of Georgia. The Company is no longer subject to examination by federal and state taxing authorities for years before 2004.

The
amount of the accrued income tax liability for uncertainties related to tax benefits was not material to the Companys consolidated balance sheets as of December 31, 2007 or 2006. Additionally, the total amount of interest and penalties
recorded in the consolidated statements of income for the year ended December 31, 2007, 2006 and 2005 was not material.



|(11) | 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, 2007 and 2006, these deposits totaled approximately $37,000, and $26,000,
respectively. See note 4 for discussion of related party loans.



|(12) | 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.



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



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, 2007, that the Company meets all capital adequacy requirements to which it is subject.

As of December 31, 2007, 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, 2007 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, 2007
and 2006, on a consolidated basis and for the Bank and Thrift individually :



|                                                                       |  |                      |         |       |                              |   |        |                                                                |        |  |      |        |  |       |  |    
|---------------------------------------------------------------------- |  | -------------------- | ------- | ----- | ---------------------------- | - | ------ | -------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- |  | ---
|                                                                       |  | Actual               |         |       | For capitaladequacy purposes |   |        | To be well capitalizedunder prompt correctiveaction provisions
|                                                                       |  | Amount               |         | Ratio |                              |   | Amount |                                                                | Ratio  |  |      | Amount |  | Ratio
|                                                                       |  | Dollars in Thousands
|Southeastern Bank Financial Corporation and subsidiaries consolidated: |  |                      |         |       |                              |   |        |                                                                |        |  |      |        |  |       |  |    
|As of December 31, 2007:                                               |  |                      |         |       |                              |   |        |                                                                |        |  |      |        |  |       |  |    
|Total Capital (to risk-weighted assets)                                |  | $                    | 121,463 |       | 12.61                        | % |        | $                                                              | 77,062 |  | 8.00 | %      |  | N/A   |  | N/A
|Tier I Capitalrisk-based (to risk-weighted assets)                    |  |                      | 109,589 |       | 11.38                        | % |        |                                                                | 38,531 |  | 4.00 | %      |  | N/A   |  | N/A
|Tier I Capitalleverage (to average assets)                            |  |                      | 109,589 |       | 9.07                         | % |        |                                                                | 48,307 |  | 4.00 | %      |  | N/A   |  | N/A
|As of December 31, 2006:                                               |  |                      |         |       |                              |   |        |                                                                |        |  |      |        |  |       |  |    
|Total Capital (to risk-weighted assets)                                |  |                      | 110,422 |       | 13.29                        | % |        |                                                                | 66,445 |  | 8.00 | %      |  | N/A   |  | N/A
|Tier I Capitalrisk-based (to risk-weighted assets)                    |  |                      | 100,419 |       | 12.09                        | % |        |                                                                | 33,222 |  | 4.00 | %      |  | N/A   |  | N/A
|Tier I Capitalleverage (to average assets)                            |  |                      | 100,419 |       | 9.78                         | % |        |                                                                | 41,065 |  | 4.00 | %      |  | N/A   |  | N/A



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|                                                    |  |                      |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|--------------------------------------------------- |  | -------------------- | ------ | ----- | ---------------------------- | - | ------ | -------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                                    |  | Actual               |        |       | For capitaladequacy purposes |   |        | To be well capitalizedunder prompt correctiveaction provisions |       
|                                                    |  | Amount               |        | Ratio |                              |   | Amount |                                                                | Ratio  |  |      | Amount |  | Ratio |       
|                                                    |  | Dollars in Thousands |       
|Georgia Bank & Trust Company:                       |  |                      |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|As of December 31, 2007:                            |  |                      |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Total Capital (to risk-weighted assets)             |  | $                    | 98,790 |       | 11.24                        | % |        | $                                                              | 70,308 |  | 8.00 | %      |  | $     | 87,885 |  | 10.00 | %
|Tier I Capitalrisk-based (to risk-weighted assets) |  |                      | 88,095 |       | 10.02                        | % |        |                                                                | 35,154 |  | 4.00 | %      |  |       | 52,731 |  | 6.00  | %
|Tier I Capitalleverage (to average assets)         |  |                      | 88,095 |       | 7.88                         | % |        |                                                                | 50,313 |  | 4.50 | %      |  |       | 55,904 |  | 5.00  | %
|As of December 31, 2006:                            |  |                      |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Total Capital (to risk-weighted assets)             |  |                      | 84,173 |       | 10.64                        | % |        |                                                                | 63,298 |  | 8.00 | %      |  |       | 79,123 |  | 10.00 | %
|Tier I Capitalrisk-based (to risk-weighted assets) |  |                      | 74,741 |       | 9.45                         | % |        |                                                                | 31,649 |  | 4.00 | %      |  |       | 47,474 |  | 6.00  | %
|Tier I Capitalleverage (to average assets)         |  |                      | 74,741 |       | 7.57                         | % |        |                                                                | 44,401 |  | 4.50 | %      |  |       | 49,334 |  | 5.00  | %
|                                                    |  |                      |       
|                                                    |  | Actual               |        |       | For capitaladequacy purposes |   |        | To be well capitalizedunder prompt correctiveaction provisions |       
|                                                    |  | Amount               |        | Ratio |                              |   | Amount |                                                                | Ratio  |  |      | Amount |  | Ratio |       
|                                                    |  | Dollars in Thousands |       
|Southern Bank & Trust:                              |  |                      |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|As of December 31, 2007:                            |  |                      |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Total Capital (to risk-weighted assets)             |  | $                    | 15,117 |       | 18.62                        | % |        | $                                                              | 6,495  |  | 8.00 | %      |  | $     | 8,119  |  | 10.00 | %
|Tier I Capitalrisk-based (to risk-weighted assets) |  |                      | 14,101 |       | 17.37                        | % |        |                                                                | 3,248  |  | 4.00 | %      |  |       | 4,871  |  | 6.00  | %
|Tier I Capitalleverage (to average assets)         |  |                      | 14,101 |       | 16.64                        | % |        |                                                                | 3,389  |  | 4.00 | %      |  |       | 4,236  |  | 5.00  | %
|As of December 31, 2006:                            |  |                      |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Total Capital (to risk-weighted assets)             |  |                      | 9,783  |       | 30.23                        | % |        |                                                                | 2,589  |  | 8.00 | %      |  |       | 3,237  |  | 10.00 | %
|Tier I Capitalrisk-based (to risk-weighted assets) |  |                      | 9,438  |       | 29.16                        | % |        |                                                                | 1,295  |  | 4.00 | %      |  |       | 1,942  |  | 6.00  | %
|Tier I Capitalleverage (to average assets)         |  |                      | 9,438  |       | 32.98                        | % |        |                                                                | 1,145  |  | 4.00 | %      |  |       | 1,431  |  | 5.00  | %

In addition to the capital requirements disclosed in the preceding table, the FDIC requires that
the Tier 1 capital to assets leverage ratio for Southern Bank & Trust be maintained at not less than 8% throughout the first three years of operation.

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
average assets). The Companys ratio at 9.08% and the Banks ratio at 7.88% exceed the minimum required.



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



The DBF requires its prior approval for a bank to pay dividends in excess of 50% of the preceding
years earnings. Based on this limitation, the amount of cash dividends available from the Bank for payment in 2008 is approximately $6,514, subject to maintenance of the minimum capital requirements.

The Office of Thrift Supervision (OTS) requires a three year business plan to be filed for all new thrifts. Southern Bank and Trusts business plan
does not provide for capital distributions for any of the three years. As a result, prior approval would be required from the OTS before any distributions are made.



|(13) | 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, 2007, 2006, and 2005, the Company contributed $699, $567, and $523, respectively, to the Plan, which is 5% of the
annual salary of all eligible employees for 2007, 2006, and 2005.

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 $57, $127, and $146, during 2007, 2006, and 2005, respectively, related to this plan. The total amount
accrued at December 31, 2007 and 2006 was $57 and $127, 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



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



period for each officer. The Company recognized expense of $758, $676, and $526, during 2007, 2006, and 2005, respectively, related to these agreements. The
total amount accrued at December 31, 2007 and 2006 was $3,541 and $2,855, respectively.



|(14) | 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 253,000 shares of the Companys common stock to employees, officers, and directors 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 10,000 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.

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 250,000 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, 2007 and 2006, options granted under this Plan were 72,334 and 44,834, respectively. As of December 31, 2007, 177,666 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 8,432 and 1,599 shares during 2007 and 2006 respectively.

Effective
January 1, 2006, the Company adopted SFAS No. 123(R), Share-based Payment, which requires the Company to compute the fair value of options at the date of grant and to



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



recognize such costs as compensation expense ratably over the vesting period of the options. For the year ended December 31, 2007 and 2006, the Company
recognized $546 and $415, respectively, as compensation expense resulting from all stock options. This expense includes $138 for 2006 related to the accelerated stock option vesting period for two key employees.

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.



|                               |  |            |   |  |            |   |  |            |  
|------------------------------ |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                               |  | 2007       |   |  | 2006       |   |  | 2005       |  
|Options granted                |  | 27,500     |   |  | 57,500     |   |  | 51,500     |  
|Risk-free interest rate        |  | 4.74       | % |  | 5.01       | % |  | 4.25       | %
|Dividend yield                 |  | 2.00       | % |  | 2.00       | % |  | 2.00       | %
|Expected life at date of grant |  | 7.86 years |   |  | 7.92 years |   |  | 8.54 years |  
|Volatility                     |  | 17.50      | % |  | 17.38      | % |  | 19.22      | %

A summary of activity for stock options with a specified vesting period follows:



|                                      |  |         |   |  |                              |       |                                         |      |                         |      
|------------------------------------- |  | ------- | - |  | ---------------------------- | ----- | --------------------------------------- | ---- | ----------------------- | -----
|                                      |  | Shares  |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Options outstandingDecember 31, 2006 |  | 250,285 |   |  | $                            | 26.64 |                                         |      |                         |      
|                                      |  |         |   | 
|Granted in 2007                       |  | 27,500  |   |  |                              | 38.82 |                                         |      |                         |      
|                                      |  |         |   | 
|Options exercised in 2007             |  | (1,200  | ) |  |                              | 15.05 |                                         |      |                         |      
|                                      |  |         |   |  |                              |       |                                         |      |                         |      
|Options OutstandingDecember 31, 2007 |  | 276,585 |   |  | $                            | 27.90 |                                         | 6.45 |                         | 1,509
|                                      |  |         |   |  |                              |       |                                         |      |                         |      
|Fully vested or expected to vest      |  | 276,585 |   |  | $                            | 27.90 |                                         | 6.45 |                         | 1,509
|                                      |  |         |   |  |                              |       |                                         |      |                         |      
|Exercisable at December 31, 2007      |  | 159,605 |   |  | $                            | 21.75 |                                         | 5.39 |                         | 1,915
|                                      |  |         |   |  |                              |       |                                         |      |                         |      



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Information related to the stock options that vest over a specified period follows:



|                                                          |  |                                               |       |      |   |       |  |   |      
|--------------------------------------------------------- |  | --------------------------------------------- | ----- | ---- | - | ----- |  | - | -----
|                                                          |  | 2007                                          |       | 2006 |   | 2005 
|                                                          |  | (dollars in thousands, except per share data)
|Intrinsic value of options exercised                      |  | $                                             | 27    |      | $ | 653   |  | $ | 511  
|Intrinsic value of options lapsed                         |  |                                               |       |      |   |       |  |   | 66   
|Cash received from option exercises                       |  |                                               | 1     |      |   | 176   |  |   | 3    
|Fair market value of stock received from option exercises |  |                                               | 17    |      |   | 69    |  |   | 287  
|Weighted average grant-date fair value                    |  |                                               | 15.12 |      |   | 16.23 |  |   | 12.64

All stock options issued are incentive stock options and therefore, no tax benefit is realized.

As of December 31, 2007 and 2006, there was $888 and $1,200, respectively, 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 4.0 years.

The following table provides information for stock options that vest based on specific loan growth performance targets.



|                                      |  |        |  |                              |       |                                         |     |                         |   |  
|------------------------------------- |  | ------ |  | ---------------------------- | ----- | --------------------------------------- | --- | ----------------------- | - | -
|                                      |  | Shares |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |     | AggregateIntrinsicValue
|Options outstandingDecember 31, 2006 |  | 10,000 |  | $                            | 34.30 |                                         |     |                         |   |  
|                                      |  |        |  |                             
|Granted in 2007                       |  |       |  |                              |      |                                         |     |                         |   |  
|                                      |  |        |  |                             
|Options exercised in 2007             |  |       |  |                              |      |                                         |     |                         |   |  
|                                      |  |        |  |                              |       |                                         |     |                         |   |  
|Options OutstandingDecember 31, 2007 |  | 10,000 |  | $                            | 34.30 |                                         | 7.5 |                         | $ | 5
|                                      |  |        |  |                              |       |                                         |     |                         |   |  
|Exercisable at December 31, 2007      |  | 4,000  |  | $                            | 34.30 |                                         | 7.5 |                         | $ | 2
|                                      |  |        |  |                              |       |                                         |     |                         |   |  

As of December 31, 2007 and 2006, there was $46 and $53, respectively, of total unrecognized compensation
cost related to nonvested options granted based on performance. That cost is expected to be recognized over a weighted average period of 2.8 years.



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|(15) | Other Operating Expenses
|---- | ------------------------

Components of other
operating expenses exceeding 1% of total revenues include the following for the years ended December 31, 2007, 2006, and 2005:



|                                   |  |                        |       |      |   |       |  |   |      
|---------------------------------- |  | ---------------------- | ----- | ---- | - | ----- |  | - | -----
|                                   |  | 2007                   |       | 2006 |   | 2005 
|                                   |  | (Dollars in Thousands)
|Marketing and business development |  | $                      | 1,586 |      | $ | 1,405 |  | $ | 1,119
|Processing expense                 |  |                        | 1,750 |      |   | 1,480 |  |   | 1,073
|Legal and professional fees        |  |                        | 1,508 |      |   | 1,370 |  |   | 1,094
|Data processing expense            |  |                        | 943   |      |   | 667   |  |   | 532  
|Loan costs                         |  |                        | 460   |      |   | 442   |  |   | 396  
|Office supplies expense            |  |                        | 704   |      |   | 660   |  |   | 508  
|Other expense                      |  |                        | 2,758 |      |   | 2,256 |  |   | 2,028
|                                   |  |                        |       |      |   |       |  |   |      
|Total other operating expense      |  | $                      | 9,708 |      | $ | 8,279 |  | $ | 6,750
|                                   |  |                        |       |      |   |       |  |   |      



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|(16) | Fair Value of Financial Instruments
|---- | -----------------------------------

SFAS
No. 107, Disclosures About Fair Value of Financial Instruments, requires 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. 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.

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. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its 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 Equivalents
| | --- | -------------------------

Fair value equals
the carrying value of such assets due to their nature.



| | (b) | Investment Securities
| | --- | ---------------------

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.



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



| | (c) | Loans
| | --- | -----

The 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. 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.



| | (d) | Deposits
| | --- | --------

Fair 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) | Federal Funds Sold and Securities Sold Under Repurchase Agreements
| | --- | ------------------------------------------------------------------

Fair value approximates the carrying value of such liabilities due to their short-term nature.



| | (f) | Other Borrowed Funds
| | --- | --------------------

Fair value
approximates the carrying value of such liabilities as the borrowings are at a variable rate of interest.



| | (g) | Advances from FHLB
| | --- | ------------------

The 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 debentures
| | --- | -----------------------

The fair value
approximates the carrying value of the subordinated debentures as the debentures are at a variable rate of interest.



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



| | (i) | Commitments
| | --- | -----------

The difference between the
carrying values and fair values of commitments to extend credit are not significant and are not disclosed.

The carrying amounts and
estimated fair values of the Companys financial instruments at December 31, 2007 and 2006 are as follows:



|                                                                        |  |                        |         |                     |         |                |         |                     |        
|----------------------------------------------------------------------- |  | ---------------------- | ------- | ------------------- | ------- | -------------- | ------- | ------------------- | -------
|                                                                        |  | December 31           
|                                                                        |  | 2007                   |         | 2006               
|                                                                        |  | Carryingamount         |         | Estimatedfair value |         | Carryingamount |         | Estimatedfair value
|                                                                        |  | (Dollars in Thousands)
|Financial assets:                                                       |  |                        |         |                     |         |                |         |                     |        
|Cash and cash equivalents                                               |  | $                      | 25,058  |                     | 25,058  |                | 40,911  |                     | 40,911 
|Investment securities                                                   |  |                        | 246,864 |                     | 246,896 |                | 202,107 |                     | 202,184
|Loans, net                                                              |  |                        | 870,943 |                     | 868,603 |                | 740,192 |                     | 736,230
|Financial liabilities:                                                  |  |                        |         |                     |         |                |         |                     |        
|Deposits                                                                |  |                        | 952,166 |                     | 952,537 |                | 801,763 |                     | 801,316
|Federal funds purchased and securities sold under repurchase agreements |  |                        | 81,165  |                     | 81,165  |                | 70,020  |                     | 70,020 
|Other borrowed funds                                                    |  |                        | 500     |                     | 500     |                | 1,000   |                     | 1,000  
|Advances from FHLB                                                      |  |                        | 59,000  |                     | 56,777  |                | 60,000  |                     | 59,246 
|Subordinated debentures                                                 |  |                        | 20,000  |                     | 20,000  |                | 20,000  |                     | 20,000 



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Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|(17) | 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 31           
|                                         |  | 2007                   |         | 2006
|                                         |  | (Dollars in Thousands)
|Assets                                   |  |                        |         |      |       
|Cash and due from banks                  |  | $                      | 1,519   |      | 5,104 
|Investment securities available for sale |  |                        | 3,430   |      | 10,689
|Investment in banking subsidiaries       |  |                        | 102,247 |      | 82,359
|Premises and equipment, net              |  |                        | 2,519   |      | 864   
|Accrued interest receivable              |  |                        | 40      |      | 7     
|Deferred tax asset, net                  |  |                        |        |      |      
|Other assets                             |  |                        | 130     |      | 135   
|                                         |  |                        |         |      |       
|                                         |  | $                      | 109,885 |      | 99,158
|                                         |  |                        |         |      |       
|Liabilities and Stockholders Equity     |  |                        |         |      |       
|Liabilities:                             |  |                        |         |      |       
|Accrued interest and other liabilities   |  | $                      | 127     |      | 234   
|Subordinated debentures                  |  |                        | 20,000  |      | 20,000
|                                         |  |                        |         |      |       
|Total liabilities                        |  |                        | 20,127  |      | 20,234
|                                         |  |                        |         |      |       
|Stockholders equity                     |  |                        | 89,758  |      | 78,924
|                                         |  |                        |         |      |       
|                                         |  | $                      | 109,885 |      | 99,158
|                                         |  |                        |         |      |       



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Condensed Statements of Income



|                                                                        |  |                         |        |   |      |   |        |      |  |      
|----------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | -----
|                                                                        |  | Years ended December 31
|                                                                        |  | 2007                    |        |   | 2006 |   |        | 2005
|                                                                        |  | (Dollars in Thousands) 
|Income:                                                                 |  |                         |        |   |      |   |        |      |  |      
|Dividend income                                                         |  | $                       | 43     |   |      |   | 535    |      |  | 3,500
|Interest income on investment securities                                |  |                         | 294    |   |      |   | 688    |      |  | 30   
|Investment securities gains, net                                        |  |                         | 23     |   |      |   | 526    |      |  |     
|Miscellaneous income                                                    |  |                         | 102    |   |      |   | 107    |      |  | 110  
|                                                                        |  |                         |        |   |      |   |        |      |  |      
|                                                                        |  |                         | 462    |   |      |   | 1,856  |      |  | 3,640
|                                                                        |  |                         |        |   |      |   |        |      |  |      
|Expense:                                                                |  |                         |        |   |      |   |        |      |  |      
|Interest expense                                                        |  |                         | 1,435  |   |      |   | 1,247  |      |  |     
|Salaries and other personnel expense                                    |  |                         | 24     |   |      |   | 138    |      |  |     
|Occupancy expense                                                       |  |                         | 52     |   |      |   | 55     |      |  | 45   
|Other operating expense                                                 |  |                         | 166    |   |      |   | 375    |      |  | 188  
|                                                                        |  |                         |        |   |      |   |        |      |  |      
|                                                                        |  |                         | 1,677  |   |      |   | 1,815  |      |  | 233  
|                                                                        |  |                         |        |   |      |   |        |      |  |      
|(Loss) / income before equity in undistributed earnings of subsidiaries |  |                         | (1,215 | ) |      |   | 41     |      |  | 3,407
|                                                                        |  |                         |       
|Equity in undistributed earnings of subsidiaries                        |  |                         | 12,494 |   |      |   | 10,995 |      |  | 6,547
|                                                                        |  |                         |       
|Income tax benefit                                                      |  |                         | (486   | ) |      |   | (124   | )    |  |     
|                                                                        |  |                         |        |   |      |   |        |      |  |      
|Net income                                                              |  | $                       | 11,765 |   |      | $ | 11,160 |      |  | 9,954
|                                                                        |  |                         |        |   |      |   |        |      |  |      



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



Condensed Statements of Cash Flows



|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                           |  | Year Ended December 31 |        
|                                                                                           |  | 2007                   |         |   | 2006 |   |         | 2005 | 
|                                                                                           |  | (Dollars in Thousands) |        
|Cash flows from operating activities:                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                 |  | $                      | 11,765  |   |      | $ | 11,160  |      |  | $ | 9,954   |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities |  |                        |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                               |  |                        | 45      |   |      |   | 45      |      |  |   | 45      |  
|Equity in undistributed earnings of subsidiaries                                           |  |                        | (12,494 | ) |      |   | (10,995 | )    |  |   | (6,547  | )
|Investment securities gains, net                                                           |  |                        | (23     | ) |      |   | (526    | )    |  |   |        |  
|Stock options compensation cost                                                            |  |                        | 24      |   |      |   | 137     |      |  |   |        |  
|Loss on disposal of premises and equipment                                                 |  |                        |        |   |      |   | 47      |      |  |   |        |  
|Accretion on investment securities                                                         |  |                        | (113    | ) |      |   | (453    | )    |  |   | (30     | )
|Increase in accrued interest receivable                                                    |  |                        | (33     | ) |      |   | (7      | )    |  |   |        |  
|(Decrease) / increase in accrued interest payable and other liabilities                    |  |                        | (3      | ) |      |   | 66      |      |  |   |        |  
|Decrease / (increase) in other assets                                                      |  |                        | 5       |   |      |   | (135    | )    |  |   |        |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by operating activities                                        |  |                        | (827    | ) |      |   | (661    | )    |  |   | 3,422   |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Proceeds from sales and maturities of investment securities                                |  |                        | 18,023  |   |      |   | 65,776  |      |  |   |        |  
|Purchase of investment securities                                                          |  |                        | (10,941 | ) |      |   | (64,611 | )    |  |   | (9,852  | )
|Investment in subsidiary                                                                   |  |                        | (5,000  | ) |      |   | (10,002 | )    |  |   |        |  
|Additions to premises and equipment                                                        |  |                        | (1,700  | ) |      |   | (434    | )    |  |   | (1,481  | )
|Proceeds from sale of premises and equipment                                               |  |                        |        |   |      |   | 1,950   |      |  |   |        |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) investing activities                                        |  |                        | 382     |   |      |   | (7,321  | )    |  |   | (11,333 | )
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Proceeds from subordinated debentures                                                      |  |                        |        |   |      |   | 10,000  |      |  |   | 10,000  |  
|Proceeds from issuance of common stock                                                     |  |                        |        |   |      |   | 5,000   |      |  |   |        |  
|Purchase of treasury stock                                                                 |  |                        | (317    | ) |      |   | (62     | )    |  |   |        |  
|Payment of cash dividends                                                                  |  |                        | (2,824  | ) |      |   | (2,767  | )    |  |   | (2,733  | )
|Proceeds from stock options exercised, net of stock redeemed                               |  |                        | 1       |   |      |   | 176     |      |  |   | 3       |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by financing activities                                        |  |                        | (3,140  | ) |      |   | 12,347  |      |  |   | 7,270   |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                       |  |                        | (3,585  | ) |      |   | 4,365   |      |  |   | (641    | )
|Cash and cash equivalents at beginning of year                                             |  |                        | 5,104   |   |      |   | 739     |      |  |   | 1,380   |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                   |  | $                      | 1,519   |   |      | $ | 5,104   |      |  | $ | 739     |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  



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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2007, 2006, and 2005



|(18) | Quarterly Financial Data (Unaudited)
|---- | ------------------------------------

The supplemental quarterly
financial data for the years ended December 31, 2007 and 2006 is summarized as follows:



|                             |  |                        |        |              |        |                   |        |                  |       
|---------------------------- |  | ---------------------- | ------ | ------------ | ------ | ----------------- | ------ | ---------------- | ------
|                             |  | Quarters ended        
|                             |  | March 31,2007          |        | June 30,2007 |        | September 30,2007 |        | December 31,2007
|                             |  | (Dollars in Thousands)
|Interest income              |  | $                      | 18,488 |              | 19,643 |                   | 20,381 |                  | 20,669
|Interest expense             |  |                        | 9,434  |              | 10,157 |                   | 10,645 |                  | 10,696
|Net interest income          |  |                        | 9,054  |              | 9,486  |                   | 9,736  |                  | 9,973 
|Provision for loan losses    |  |                        | 576    |              | 1,030  |                   | 1,001  |                  | 1,216 
|Noninterest income           |  |                        | 3,592  |              | 3,773  |                   | 4,746  |                  | 4,057 
|Noninterest expense          |  |                        | 7,771  |              | 7,583  |                   | 8,308  |                  | 8,846 
|Net income                   |  |                        | 2,760  |              | 2,971  |                   | 3,356  |                  | 2,678 
|Net income per sharebasic   |  |                        | 0.51   |              | 0.55   |                   | 0.62   |                  | 0.49  
|Net income per sharediluted |  |                        | 0.50   |              | 0.54   |                   | 0.61   |                  | 0.49  
|                             | 
|                             |  | Quarters ended        
|                             |  | March 31,2006          |        | June 30,2006 |        | September 30,2006 |        | December 31,2006
|                             |  | (Dollars in Thousands)
|Interest income              |  | $                      | 14,427 |              | 15,770 |                   | 17,115 |                  | 18,314
|Interest expense             |  |                        | 6,450  |              | 7,330  |                   | 8,403  |                  | 9,240 
|Net interest income          |  |                        | 7,977  |              | 8,440  |                   | 8,712  |                  | 9,074 
|Provision for loan losses    |  |                        | 504    |              | 456    |                   | 667    |                  | 851   
|Noninterest income           |  |                        | 3,258  |              | 3,895  |                   | 3,458  |                  | 3,429 
|Noninterest expense          |  |                        | 7,169  |              | 7,320  |                   | 7,234  |                  | 7,209 
|Net income                   |  |                        | 2,460  |              | 2,927  |                   | 2,925  |                  | 2,848 
|Net income per sharebasic   |  |                        | 0.47   |              | 0.55   |                   | 0.55   |                  | 0.52  
|Net income per sharediluted |  |                        | 0.46   |              | 0.55   |                   | 0.55   |                  | 0.52  



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|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

Not applicable.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

As of the end of the
period covered by this report, our management, including our Chief Executive Officer and Chief Financial Officer, reviewed and evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Companys periodic filings with the Securities and Exchange Commission. During the fourth quarter of 2007, there were no
significant changes in the Companys internal controls that materially affected, or are reasonably likely to materially affect the Companys internal controls over financial reporting.



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Managements Report on Internal Control over Financial Reporting

The management of Southeastern Bank Financial Corporation is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with
appropriate management authorization and accounting records are reliable for the preparation of financial statements in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Southeastern Bank Financial
Corporations internal control over financial reporting as of December 31, 2007. In making our assessment, management has utilized the framework published by the Committee of Sponsoring Organizations (COSO) of the Treadway
Commission Internal Control-Integrated Framework. Based on our assessment, management has concluded that, as of December 31, 2007, internal control over financial reporting was effective.



|                             
|-----------------------------
|/s/ R. Daniel Blanton        
|Chief Executive Officer      
|(principal executive officer)
|                             
|/s/ Ronald L. Thigpen        
|Chief Operating Officer      
|                             
|/s/ Darrell R. Rains         
|Chief Financial Officer      
|(principal financial officer)
|                             
|Date: March 14, 2008         



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Report of Independent Registered Public Accounting Firm on Internal Control

Over Financial Reporting

We have audited Southeastern Bank
Financial Corporations internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Southeastern Bank Financial Corporations management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting, including in Item 9.A. of the Companys Annual Report on Form 10-K. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion,
Southeastern Bank Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Southeastern Bank Financial Corporation and Subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of income, stockholders equity and comprehensive income and cash flows
for each of the three years in the period ended December 31, 2007 and our report dated March 14, 2008 expressed an unqualified opinion of those consolidated financial statements.

/s/ Crowe Chizek and Company LLC

Brentwood, Tennessee

March 14, 2008



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|Item 9B. | Other Information
|-------- | -----------------

None.

PART III



|Item 10. | Directors and Executive Officers and Corporate Governance
|-------- | ---------------------------------------------------------

The Company has adopted a Code of Ethics applicable to its senior financial officers. A copy is available, without charge, upon telephonic or written request addressed to Ron Thigpen, Executive Vice President, Chief Operating Officer and
Assistant Corporate Secretary, Southeastern Bank Financial Corporation, 3530 Wheeler Road, Augusta, Georgia 30909, telephone (706) 738-6990. The Code of Ethics is also incorporated by reference as an exhibit to this Annual Report on Form 10-K.
The remaining information in response to this item is incorporated by reference to the Companys definitive Proxy Statement for use in connection with the 2008 annual meeting of shareholders (which definitive Proxy Statement shall be filed with
the commission not later than April 29, 2008).



|Item 11. | Executive Compensation
|-------- | ----------------------

The remaining information
in response to this item is incorporated by reference to the Companys definitive Proxy Statement for use in connection with the 2008 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later
than April 29, 2008).



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The following table provides information regarding compensation plans under which equity securities of the Company are authorized for issuance. All data
is presented as of December 31, 2007.



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|                                                           |  |                                                                                             |  |     |                                                                           |     |                                                                                                                                            
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --- | ------------------------------------------------------------------------- | --- | -------------------------------------------------------------------------------------------------------------------------------------------
|Equity Compensation Plan Table                            
|                                                           |  | (a)                                                                                         |  | (b) |                                                                           | (c)
|Plan Category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |  |     | Weighted average exerciseprice of outstanding options,warrants and rights |     | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|Equity compensation plans approved by security holders     |  | 276,585                                                                                     |  | $   | 27.90                                                                     |     | 177,666                                                                                                                                    
|Equity compensation plans not approved by security holders |  | 0                                                                                           |  |     | 0                                                                         |     | 0                                                                                                                                          
|Total                                                      |  | 276,585                                                                                     |  | $   | 27.90                                                                     |     | 177,666                                                                                                                                    

Additional information in response to this item is incorporated by reference to the Companys
definitive Proxy Statement for use in connection with the 2008 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 29, 2008).



|Item 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

Information in response to this item is incorporated by reference to the Companys definitive Proxy Statement for use in connection with the 2008 annual meeting of shareholders (which definitive Proxy Statement
shall be filed with the commission not later than April 29, 2008).



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

Information
in response to this item is incorporated by reference to the Companys definitive Proxy Statement for use in connection with the 2008 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the Commission not later
than April 29, 2008).



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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 Quarterly Report on Form 10-Q for the quarter ended June 30,
2005.                                                                                                         
| |  |     
| |  | 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.)                                                                       
| |  |     
| |  | 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)*



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| |  |       |  |                                                                                                                                                                                                                                                                                 
| |  | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.3  |  | 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.)*                                             
| |  |      
| |  | 10.4  |  | 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.)*
| |  |      
| |  | 10.5  |  | 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.)*                                                                                                                  
| |  |      
| |  | 10.6  |  | 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.)*                                                               
| |  |      
| |  | 10.7  |  | 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.)*                                                           
| |  |      
| |  | 10.8  |  | 2000 Long Term Incentive Plan (Incorporated by reference to Appendix A to the Companys definitive Proxy Statement, filed on March 29, 2001)*                                                                                                                                   
| |  |      
| |  | 10.9  |  | Form of option agreement under 2000 Long Term Incentive Plan. (Incorporated by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.)*                                                                             
| |  |      
| |  | 10.10 |  | 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.)*                                                                                                            
| |  |      
| |  | 10.11 |  | 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.)*                                                          
| |  |      
| |  | 10.12 |  | 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.)*                                                                                 



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| |  |       |  |                                                                                                                                                                                                                                                                                                
| |  | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.13 |  | 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.)*                                                 
| |  |      
| |  | 10.14 |  | 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.)*
| |  |      
| |  | 10.15 |  | Salary Continuation Agreement dated October 1, 2000 between the Company, the Bank and Ronald L. Thigpen. (Incorporated by reference to Exhibit 10.9 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 Ronald L. Thigpen. (Incorporated by reference to Exhibit
10.16 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 R. Daniel Blanton. (Incorporated by reference to Exhibit 10.10 to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2005.)*                                               
| |  |      
| |  | 10.18 |  | 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.)*                                               
| |  |      
| |  | 10.19 |  | Executive Salary Continuation and Participation Agreement dated October 1, 2005 between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.19 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2006.)*                                  
| |  |      
| |  | 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.)*                                                                                                



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| |  |       |  |                                                                                                                                                                                                                                       
| |  | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.22 |  | Executive Salary Continuation and Participation Agreement dated January 1, 2007 between the Bank and R. Daniel Blanton. (Incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed on May 4, 2007.)*
| |  |      
| |  | 10.23 |  | Executive Salary Continuation and Participation Agreement dated January 1, 2007 between the Bank and Ronald L. Thigpen. (Incorporated by reference to Exhibit 10.3 to the Companys Current
Report on Form 8-K filed on May 4, 2007.)*
| |  |      
| |  | 10.24 |  | 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                                                                                                                                                                                                           
| |  |      
| |  | 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.
|- | -----------------------------------------------------------



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SIGNATURES

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



SOUTHEASTERN BANK FINANCIAL CORPORATIONBy:

/s/ Robert W. Pollard, Jr.Robert W. Pollard, Jr.Chairman of the Board


March 14, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.

March 14, 2008



|                           |  |  |  |                                                 
|-------------------------- |  |  |  | ------------------------------------------------
|SIGNATURE                  |  |  |  | TITLE                                           
|                           |  | 
|/s/ Robert W. Pollard, Jr. |  |  |  | Chairman of the Board and Director              
|Robert W. Pollard, Jr.     |  |  |  |                                                 
|                           |  | 
|/s/ Edward G. Meybohm      |  |  |  | Vice Chairman of the Board and Director         
|Edward G. Meybohm          |  |  |  |                                                 
|                           |  | 
|/s/ R. Daniel Blanton      |  |  |  | President, Chief Executive Officer and Director 
|Daniel Blanton             |  |  |  | (Principal Executive Officer)                   
|                           |  | 
|/s/ Ronald L. Thigpen      |  |  |  | Executive Vice President,                       
|Ronald L. Thigpen          |  |  |  | Chief Operating Officer and Director            
|                           |  | 
|/s/ Darrell R. Rains       |  |  |  | Group Vice President and Chief Financial Officer
|Darrell R. Rains           |  |  |  | (Principal Financial Officer)                   



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|                            |  |  |  |         
|--------------------------- |  |  |  | --------
|/s/ William J. Badger       |  |  |  | Director
|William J. Badger           |  |  |  |         
|                            |  | 
|/s/ Warren A. Daniel        |  |  |  | Director
|Warren A. Daniel            |  |  |  |         
|                            |  | 
|/s/ Randolph R. Smith, M.D. |  |  |  | Director
|Randolph R. Smith, M.D.     |  |  |  |         
|                            |  | 
|/s/ John W. Trulock, Jr.    |  |  |  | Director
|John W. Trulock, Jr.        |  |  |  |         



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EXHIBIT INDEX



|                |  |     
|--------------- |  | ----
|                |  | Page
|                | 
|(a)    Exhibits |  |     

| |  |      |  |                                                                                                                                                                                                                                                                                 |  | 
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  |      | 
| |  | 3.1  |  | Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).                                                                                                         |  | 
| |  |      | 
| |  | 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.)                                                                        |  | 
| |  |      | 
| |  | 10.1 |  | Key Officer Compensation Agreement dated January 1, 2000 between the Bank & R. Daniel Blanton (Incorporated by reference to Exhibit 10.1 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*                                             |  | 
| |  |      | 
| |  | 10.2 |  | First Amendment dated October 15, 2003 to Key Officer Compensation Agreement dated January 1, 2000 between the Bank and R. Daniel Blanton. (Incorporated by reference to Exhibit 10.2 to the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006)* |  | 
| |  |      | 
| |  | 10.3 |  | 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.)*                                             |  | 



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| |  |       |  |                                                                                                                                                                                                                                                                                  |  | 
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | 10.4  |  | 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.)* |  | 
| |  |       | 
| |  | 10.5  |  | 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.)*                                                                                                                   |  | 
| |  |       | 
| |  | 10.6  |  | 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.)*                                                                |  | 
| |  |       | 
| |  | 10.7  |  | 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.)*                                                            |  | 
| |  |       | 
| |  | 10.8  |  | 2000 Long Term Incentive Plan (Incorporated by reference to Appendix A to the Companys definitive Proxy Statement, filed on March 29, 2001)*                                                                                                                                    |  | 
| |  |       | 
| |  | 10.9  |  | Form of option agreement under 2000 Long Term Incentive Plan. (Incorporated by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2004.)*                                                                              |  | 
| |  |       | 
| |  | 10.10 |  | 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.)*                                                                                                             |  | 
| |  |       | 
| |  | 10.11 |  | 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.)*                                                           |  | 



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| |  |       |  |                                                                                                                                                                                                                                                                                                 |  | 
| |  | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | 10.12 |  | 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.)*                                                                                                 |  | 
| |  |       | 
| |  | 10.13 |  | 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.)*                                                  |  | 
| |  |       | 
| |  | 10.14 |  | 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.)* |  | 
| |  |       | 
| |  | 10.15 |  | Salary continuation agreement dated October 1, 2000 between the Company, the Bank and Ronald L. Thigpen. (Incorporated by reference to Exhibit 10.9 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 Ronald L. Thigpen. (Incorporated by reference to Exhibit
10.16 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 R. Daniel Blanton. (Incorporated by reference to Exhibit 10.10 to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2005.)*                                                |  | 
| |  |       | 
| |  | 10.18 |  | 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.)*                                                |  | 



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| |  |       |  |                                                                                                                                                                                                                                                               |  |    
| |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
| |  | 10.19 |  | Executive Salary Continuation and Participation Agreement dated October 1, 2005 between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.19 to the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)* |  |    
| |  |       | 
| |  | 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 |  | Executive Salary Continuation and Participation Agreement dated January 1, 2007 between the Bank and R. Daniel Blanton. (Incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed on May 4, 2007.)*                        |  |    
| |  |       | 
| |  | 10.23 |  | Executive Salary Continuation and Participation Agreement dated January 1, 2007 between the Bank and Ronald L. Thigpen. (Incorporated by reference to Exhibit 10.3 to the Companys Current
Report on Form 8-K filed on May 4, 2007.)*                        |  |    
| |  |       | 
| |  | 10.24 |  | 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                                                                                                                                                                                                                                   |  | 131
| |  |       | 
| |  | 23.1  |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                      |  | 132
| |  |       | 
| |  | 31.1  |  | Certification by the Chief Executive Officer (principal executive officer)                                                                                                                                                                                    |  | 133
| |  |       | 
| |  | 31.2  |  | Certification by the Chief Financial Officer (principal financial officer)                                                                                                                                                                                    |  | 135



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| |  |      |  |                                                                          |  |    
| |  | ---- |  | ------------------------------------------------------------------------ |  | ---
| |  | 32.1 |  | Certification by the Chief Executive Officer and Chief Financial Officer |  | 137



|* | Denotes a management compensatory agreement or arrangement.
|- | -----------------------------------------------------------



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SCHEDULE B

BENEFICIARY DESIGNATION

FOR

EXECUTIVE SALARY CONTINUATION AND

PARTICIPATION AGREEMENT

To the Plan Administrator of the Georgia Bank & Trust Company Non-Qualified Defined Benefit Plan for the benefit ofDarrell R. Rains:

Pursuant to the Provisions of my Executive Salary Continuation and Participation Agreement with Georgia Bank & Trust Company of Augusta dated October 1,
2005 permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death:

Primary Beneficiary:



|     |  |                        |  |             
|---- |  | ---------------------- |  | ------------
|Name |  | Social Security Number |  | Relationship
|     |  |                        |  |             
|     |  |                        |  |             

Secondary (Contingent) Beneficiary:



|     |  |                        |  |             
|---- |  | ---------------------- |  | ------------
|Name |  | Social Security Number |  | Relationship
|     |  |                        |  |             
|     |  |                        |  |             

THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF
BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED.

The Plan Administrator shall pay all sums payable under the Agreement by reason of my death
to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Plan Administrator shall pay all amounts in accordance with
the terms of the Executive Salary Continuation and Participation Agreement dated October 1, 2005. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that
event, the remaining unpaid benefit, payable according to the terms of the Agreement, shall be payable to the personal representatives of the estate of said deceased beneficiary, who survive me, but die prior to receiving the total benefit.



|                    |  |  |  |                       
|------------------- |  |  |  | ----------------------
|                    |  |  |  |                       
|Date of Designation |  |  |  | Signature of Executive



130