Southeastern Bank Financial (SBFC) 10-Q 2010 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2010.

or

o Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to                    .

Commission File No.0-24172

Southeastern Bank Financial Corporation

(Exact name of registrant as specified in its charter)

Georgia	58-2005097
(State of Incorporation)	(I.R.S. Employer Identification No.)

3530 Wheeler Road, Augusta, Georgia 30909
(Address of principal executive offices)

(706) 738-6990

(Issuer’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

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

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yeso Noþ

APPLICABLE ONLY TO CORPORATE ISSUERS

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

6,673,925 shares of common stock, $3.00 par value per share, outstanding as of April 29, 2010.

SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX

	Page
Part I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009		3
Consolidated Statements of Income for the Three Months ended March 31, 2010 and 2009		5
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2010 and 2009		7
Notes to Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures about Market Risk		45
Item 4. Controls and Procedures		45
Part IIOther Information
Item 1. Legal Proceedings		46
Item 1A. Risk Factors		46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 3. Defaults Upon Senior Securities		46
Item 4. Submission of Matters to a Vote of Security Holders		46
Item 5. Other Information		46
Item 6. Exhibits		47
Signature		48
Exhibit 10.24
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

* No information submitted under this caption

1

PART I

FINANCIAL INFORMATION

2

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	March 31,		December 31,
	2010		2009
	(Unaudited)
Assets
Cash and due from banks	$	83,257	$	123,661
Federal funds sold		7,300		7,300
Interest-bearing deposits in other banks		21,687		17,033
Cash and cash equivalents		112,244		147,994
Investment securities
Available-for-sale		376,353		306,216
Held-to-maturity, at cost (fair values of $312 and $492, respectively)		310		490
Loans held for sale		19,736		19,157
Loans		919,777		937,489
Less allowance for loan losses		23,138		22,338
Loans, net		896,639		915,151
Premises and equipment, net		31,049		31,702
Accrued interest receivable		5,480		6,091
Bank-owned life insurance		23,477		23,248
Restricted equity securities		6,338		6,338
Other real estate owned		5,865		7,974
Prepaid FDIC assessment		6,382		6,886
Deferred tax asset		9,966		11,160
Other assets		3,520		8,712
	$	1,497,359	$	1,491,119

3

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets
(Dollars in thousands, except share data)

	March 31,		December 31,
	2010		2009
	(Unaudited)
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	115,490	$	114,780
Interest-bearing:
NOW accounts		247,996		210,438
Savings		371,699		343,740
Money management accounts		35,311		44,781
Time deposits over $100		377,485		418,751
Other time deposits		142,916		148,044
		1,290,897		1,280,534
Securities sold under repurchase agreements		2,130		3,188
Advances from Federal Home Loan Bank		72,000		77,000
Other borrowed funds		700		600
Accrued interest payable and other liabilities		11,085		13,106
Subordinated debentures		22,947		22,947
Total liabilities		1,399,759		1,397,375
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 0 shares outstanding in 2010 and 2009, respectively		—		—
Common stock, $3.00 par value; 10,000,000 shares authorized; 6,673,352 and 6,672,826 shares issued and outstanding in 2010 and 2009, respectively		20,020		20,018
Additional paid-in capital		62,424		62,360
Retained earnings		13,947		12,692
Accumulated other comprehensive income (loss), net		1,209		(1,326	)
Total stockholders’ equity		97,600		93,744
	$	1,497,359	$	1,491,119

See accompanying notes to consolidated financial statements.

4

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(Dollars in thousands, except share data)

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009
Interest income:
Loans, including fees	$	13,343		$	13,805
Investment securities		3,419			4,074
Federal funds sold		20			24
Interest-bearing deposits in other banks		72			4
Total interest income		16,854			17,907
Interest expense:
Deposits		5,367			6,801
Federal funds purchased and securities sold under repurchase agreements		11			111
Other borrowings		954			896
Total interest expense		6,332			7,808
Net interest income		10,522			10,099
Provision for loan losses		3,288			4,749
Net interest income after provision for loan losses		7,234			5,350
Noninterest income:
Service charges and fees on deposits		1,595			1,641
Gain on sales of loans		1,353			2,237
Gain on sale of fixed assets		27			26
Investment securities gains (losses), net		13			(164	)
Retail investment income		335			209
Trust service fees		287			253
Increase in cash surrender value of bank-owned life insurance		229			180
Miscellaneous income		161			163
Total noninterest income		4,000			4,545
Noninterest expense:
Salaries and other personnel expense		5,494			5,658
Occupancy expenses		1,171			1,141
Other real estate (gains) losses		(85	)		112
Other operating expenses		2,852			2,922
Total noninterest expense		9,432			9,833
Income before income taxes		1,802			62
Income tax expense		547			6
Net income	$	1,255		$	56

5

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income
(Dollars in thousands, except share data)

(Unaudited)

	Three Months Ended
	March 31,
	2010		2009
Basic net income per share	$	0.19	$	0.01
Diluted net income per share	$	0.19	$	0.01
Weighted average common shares outstanding		6,673,334		5,987,948
Weighted average number of common and common equivalent shares outstanding		6,673,334		5,998,578

See accompanying notes to consolidated financial statements.

6

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009
Cash flows from operating activities:
Net income	$	1,255		$	56
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		687			671
Provision for loan losses		3,288			4,749
Net investment securities (gains) losses		(13	)		164
Net amortization of premium (accretion of discount) on investment securities		280			(161	)
Increase in CSV of bank-owned life insurance		(229	)		(180	)
Stock options compensation cost		60			47
Gain on disposal of premises and equipment		(27	)		(26	)
(Gain) loss on the sale of other real estate		(340	)		112
Other real estate valuation allowance		255			—
Gain on sales of loans		(1,353	)		(2,237	)
Real estate loans originated for sale		(58,601	)		(103,376	)
Proceeds from sales of real estate loans		59,374			103,759
Decrease in accrued interest receivable		611			742
Decrease (increase) in other assets		5,306			(462	)
Decrease in accrued interest payable and other liabilities		(2,021	)		(877	)
Net cash provided by operating activities		8,532			2,981
Cash flows from investing activities:
Proceeds from sales of available for sale securities		—			15,874
Proceeds from maturities of available for sale securities		26,551			44,161
Proceeds from maturities of held to maturity securities		180			—
Purchase of available for sale securities		(92,835	)		(58,904	)
Purchase of restricted equity securities		—			(352	)
Net decrease in loans		12,994			3,078
Additions to premises and equipment		(37	)		(188	)
Proceeds from sale of other real estate		4,424			1,241
Proceeds from sale of premises and equipment		30			250
Net cash (used) provided by investing activities		(48,693	)		5,160

7

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Dollars in thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009
Cash flows from financing activities:
Net increase in deposits		10,363			87,131
Net decrease in federal funds purchased and securities sold under repurchase agreements		(1,057	)		(13,789	)
Payments of Federal Home Loan Bank advances		(5,000	)		—
Proceeds from other borrowed funds		100			900
Purchase of treasury stock		—			(5	)
Payment of cash dividends		—			(778	)
Proceeds from Directors’ stock purchase plan		5			8
Net cash provided by financing activities		4,411			73,467
Net (decrease) increase in cash and cash equivalents	$	(35,750	)	$	81,608
Cash and cash equivalents at beginning of period		147,994			37,768
Cash and cash equivalents at end of period	$	112,244		$	119,376
Supplemental disclosures of cash paid during the period for:
Interest	$	6,570		$	8,582
Income taxes	$	21		$	10
Supplemental information on noncash investing activities:
Loans transferred to other real estate	$	2,230		$	2,609

See accompanying notes to consolidated financial statements.

8

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2010

Note 1 — Basis of Presentation

The accompanying consolidated financial statements include the accounts of Southeastern Bank Financial Corporation (the “Company”), and its wholly-owned subsidiaries, Georgia Bank & Trust Company of Augusta (the “Bank”) and Southern Bank & Trust (the “Thrift”). Significant intercompany transactions and accounts are eliminated in consolidation. Dollar amounts are rounded to thousands except share and per share data.

The financial statements for the three months ended March 31, 2010 and 2009 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations and cash flows for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results of operations which the Company may achieve for the entire year.

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

Note 2 — Recent Accounting Pronouncements

In June 2009, the FASB amended previous guidance relating to transfers of financial assets and eliminates the concept of a qualifying special purpose entity. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance. The effect of adopting this new guidance was not material to the consolidated financial statements.

9

In June 2009, the FASB amended guidance for consolidation of variable interest entity guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is prohibited. The effect of adopting this new guidance was not material to the consolidated financial statements.

Note 3 — Investment Securities

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at March 31, 2010 and December 31, 2009 and the corresponding amounts of unrealized gains and losses therein.

	March 31, 2010
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
	(Dollars in thousands)
Available for sale
Mortgage backed securities
U.S. GSE’s MBS — residential*	$	67,152		2,565		(82	)		69,635
U.S. GSE’s CMO		131,060		1,540		(551	)		132,049
Other CMO		7,816		11		(268	)		7,559
Total MBS	$	206,028		4,116		(901	)		209,243
Obligations of U.S.
Government agencies	$	128,686		127		(748	)		128,065
Obligations of states and political subdivisions		27,095		394		(356	)		27,133
Corporate bonds		12,592		212		(897	)		11,907
Equity securities		4		1		—			5
	$	374,405		4,850		(2,902	)		376,353
Held to maturity
Obligations of states and political subdivisions	$	310		2		—			312
	$	310		2		—			312

* Government sponsored entities

10

	December 31, 2009
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
	(Dollars in thousands)
Available for sale
Mortgage backed securities
U.S. GSE’s MBS — residential	$	86,463		2,245		(107	)		88,601
U.S. GSE’s CMO		107,153		1,116		(1,427	)		106,842
Other CMO		8,484		142		(399	)		8,227
Total MBS	$	202,100		3,503		(1,933	)		203,670
Obligations of U.S. Government agencies	$	67,290		43		(1,003	)		66,330
Obligations of states and political subdivisions		26,402		299		(521	)		26,180
Corporate bonds		12,591		35		(2,594	)		10,032
Equity securities		4		—		—			4
	$	308,387		3,880		(6,051	)		306,216
Held to maturity
Obligations of states and political subdivisions	$	490		2		—			492
	$	490		2		—			492

The amortized cost and fair value of the investment securities portfolio excluding equity securities are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2010
	Amortized		Estimated
	cost		fair value
	(Dollars in thousands)
Available for sale:
One year or less	$	1,055		1,060
After one year through five years		12,685		12,822
After five years through ten years		53,238		53,754
After ten years		307,423		308,712
	$	374,401		376,348
Held to maturity:
After one year through five years	$	310		312
	$	310		312

11

The following tables summarize the investment securities with unrealized losses at March 31, 2010 and December 31, 2009, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.

	March 31, 2010
	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss		fair value		loss		fair value		loss
	(Dollars in thousands)
Temporarily impaired
Mortgage backed securities
U.S. GSE’s MBS — residential	$	4,429		1		570		81		4,999		82
U.S. GSE’s CMO		38,512		551		—		—		38,512		551
Other CMO		—		—		6,376		268		6,376		268
Total MBS	$	42,941		552		6,946		349		49,887		901
Obligations of U.S. Government agencies	$	85,027		709		1,582		39		86,609		748
Obligations of states and political subdivisions		5,771		107		4,507		249		10,278		356
Corporate bonds		1,100		150		6,541		747		7,641		897
	$	134,839		1,518		19,576		1,384		154,415		2,902

	December 31, 2009
	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss		fair value		loss		fair value		loss
	(Dollars in thousands)
Temporarily impaired
Mortgage backed securities
U.S. GSE’s MBS — residential	$	21,444		107		—		—		21,444		107
U.S. GSE’s CMO		61,373		1,408		665		19		62,038		1,427
Other CMO		552		98		4,243		285		4,795		383
Total MBS	$	83,369		1,613		4,908		304		88,277		1,917
Obligations of U.S. Government agencies	$	43,528		1,003		—		—		43,528		1,003
Obligations of states and political subdivisions		8,644		220		4,457		301		13,101		521
Corporate bonds		733		267		6,291		2,327		7,024		2,594
					��
	$	136,274		3,103		15,656		2,932		151,930		6,035
Other-than-temporarily impaired
Mortgage backed securities
Other CMO	$	—		—		748		16		748		16
	$	136,274		3,103		16,404		2,948		152,678		6,051

Proceeds from maturities, sales and calls of securities available for sale were $26,551 and $60,035 for the three months ended March 31, 2010 and 2009, respectively. Gross gains of $13 and $765 and gross losses of $0 and $929 were realized on these sales and calls during 2010 and 2009, respectively.

12

Note 4 — Fair Value Measurements

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In determining the appropriate levels, the Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Mortgage Banking Derivatives: The fair value of mortgage banking derivatives is determined by individual third party sales contract prices for the specific loans held at each reporting period end (Level 2 inputs). The fair value adjustment is included in other assets.

Loans Held for Sale: Loans held for sale are carried at fair value, as determined by outstanding commitments, from third party investors (Level 2).

13

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Investments in Tax Credits: The fair values for tax credits are measured on a recurring basis and are based upon total credits and deductions remaining to be allocated and total estimated credits and deductions to be allocated (Level 3 inputs).

Other Real Estate Owned: The fair value of other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management may adjust the appraised value for estimated costs to sell. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring Basis

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy as of March 31, 2010 and December 31, 2009.

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
	March 31,		Identical Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
			(Dollars in thousands)
Available-for-sale securities
Obligations of U.S. Government agencies	$	128,065		31,675		96,390		—
Obligations of states and political subdivisions		27,133		1,010		26,123		—
Mortgage-backed securities
U.S. GSE’s MBS — residential		69,635		—		69,065		570
U.S. GSE’s CMO		132,049		21,911		110,138		—
Other CMO		7,559		—		4,158		3,401
Corporate bonds		11,907		—		—		11,907
Equity securities		5		5		—		—
Total available-for-sale securities	$	376,353		54,601		305,874		15,878
Tax credits		415		—		—		415
Loans held for sale		19,736		—		19,736		—
Mortgage banking derivatives		28		—		28		—
Total	$	396,532		54,601		325,638		16,293

14

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
			(Dollars in thousands)
Available-for-sale securities
Obligations of U.S. Government agencies	$	66,330		21,663		44,667		—
Obligations of states and political subdivisions		26,180		—		26,180		—
Mortgage-backed securities
U.S. GSE’s MBS — residential		88,601		—		88,601		—
U.S. GSE’s CMO		106,842		10,510		96,332		—
Other CMO		8,227		—		3,894		4,333
Corporate bonds		10,032		—		—		10,032
Equity securities		4		4		—		—
Total available-for-sale securities	$	306,216		32,177		259,674		14,365
Tax credits		435		—		—		435
Loans held for sale		19,157		—		19,157		—
Mortgage banking derivatives		182		—		182		—
Total	$	325,990		32,177		279,013		14,800

The tables below present a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2010 and 2009.

	Fair Value Measurements Using Significant Unobservable Inputs
				(Level 3)
				Available-for-sale
	Tax credits			Securities		Total
				(Dollars in thousands)
Beginning balance, January 1, 2010	$	435			14,365		14,800
Total gains or losses (realized/unrealized)
Included in earnings
Other-than-temporary impairment		—			—		—
Amortization of tax credit investment		(20	)		—		(20	)
Included in other comprehensive income		—			1,513		1,513
Transfers in and/or out of Level 3		—			—		—
Ending balance, March 31, 2010	$	415			15,878		16,293

15

	Fair Value Measurements Using Significant Unobservable Inputs
				(Level 3)
				Available-for-sale
	Tax credits			Securities		Total
	(Dollars in thousands)
Beginning balance, January 1, 2009	$	515			4,130		4,645
Total gains or losses (realized/unrealized)
Included in earnings
Other-than-temporary impairment		—			—		—
Amortization of tax credit investment		(21	)		—		(21	)
Included in other comprehensive income		—			1,007		1,007
Transfers in and/or out of Level 3		—			6,144		6,144
Ending balance, March 31, 2009	$	494			11,281		11,775

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2010 and December 31, 2009 are summarized below.

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
	March 31,		Identical Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans	$	7,653		—		—		7,653
Other real estate owned		5,865		—		—		5,865

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans	$	9,767		—		—		9,767
Other real estate owned		7,974		—		—		7,974

The following represents impairment charges recognized during the period:

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $8,665, with a valuation allowance of $1,012, resulting in an additional provision for loan losses of $249 for the three months ended March 31, 2010. Impaired loans for which there is no specific allowance for credit losses had a carrying amount of $18,325 at March 31, 2010.

16

As of December 31, 2009, impaired loans had a carrying amount of $11,746, with a valuation allowance of $1,979, resulting in an additional provision for loan losses of $1,979. Impaired loans for which there is no specific allowance for credit losses had a carrying amount of $22,921 at December 31, 2009.

Other real estate owned, which is carried at lower of cost or fair value, was $5,865 which consisted of the outstanding balance of $6,120, less a valuation allowance of $255, resulting in a write down of $255 for the three months ended March 31, 2010.

As of December 31, 2009, other real estate owned was $7,974 which consisted of the outstanding balance of $8,562, less a valuation allowance of $588, resulting in a write down of $588 for the year ending 2009.

Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value is required. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather a good-faith estimate of the fair value of financial instruments held by the Company. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements.

17

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

(a) Cash and Cash Equivalents and Federal Funds Sold

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

(b) Investment Securities

The fair values of investment securities are determined as discussed above.

(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 without considering widening credit spreads due to market illiquidity. The estimated maturity is based on the Company’s historical experience with repayments adjusted to estimate the effect of current market conditions. The carrying amount of related accrued interest receivable approximates its fair value and is not disclosed. The carrying amount of real estate loans originated for sale approximates their fair value. The allowance for loan losses is considered a reasonable discount for credit risk.

(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) 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.

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(h) Subordinated debentures

The fair value for subordinated debentures is calculated based upon current market spreads to LIBOR for debt of similar remaining maturities and collateral terms.

(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 March 31, 2010 and December 31, 2009 are as follows:

	March 31, 2010
	Carrying		Estimated
	amount		fair value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	112,244		112,244
Investment securities		376,663		376,665
Loans, net		916,375		921,691
Financial liabilities:
Deposits with stated maturities		520,401		523,996
Deposits without stated maturities		770,496		770,496
Securities sold under repurchase agreements		2,130		2,130
Other borrowed funds		700		700
Advances from FHLB		72,000		75,870
Subordinated debentures		22,947		14,838

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	December 31, 2009
	Carrying		Estimated
	amount		fair value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	147,994		147,994
Investment securities		306,706		306,708
Loans, net		934,308		943,885
Financial liabilities:
Deposits with stated maturities		566,795		570,791
Deposits without stated maturities		713,739		713,739
Securities sold under repurchase agreements		3,188		3,188
Other borrowed funds		600		600
Advances from FHLB		77,000		80,670
Subordinated debentures		22,947		14,793

Note 5 — Comprehensive Income

Other comprehensive income for the Company consists of changes in net unrealized gains and losses on investment securities available for sale. Net income of $1,255 coupled with a $2,535 change in other comprehensive income for the quarter resulted in total comprehensive income of $3,790 for the three months ended March 31, 2010 compared to total comprehensive income of $1,007 for the three months ended March 31, 2009.

Note 6 — Dividends Declared

The Company suspended the payment of quarterly cash dividends on the company’s common stock effective April 22, 2009. The Company considered the action prudent in order to maintain its capital position in the current state of the economy. The Company plans to reinstate the dividend payment at an appropriate time once economic conditions improve and stabilize.

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

(Dollar amounts are expressed in thousands unless otherwise noted)

Overview

Southeastern Bank Financial Corporation (the “Company”) operates two wholly-owned subsidiaries in the Augusta-Richmond County, GA-SC metropolitan area. Georgia Bank & Trust Company (the “Bank”) was organized by a group of local citizens and commenced business on August 28, 1989, with one branch location. Today, it is Augusta’s largest community banking company operating nine full service branches in Augusta, Martinez, and Evans, Georgia and one branch in Athens, Georgia. Mortgage origination offices are located in Augusta, Savannah and Athens, Georgia. Southern Bank & Trust (the “Thrift”), a federally chartered thrift, was organized by the Company during 2005 and 2006 and opened its main office on September 12, 2006. Today it operates three full service branches in North Augusta and Aiken, South Carolina. The Company’s Operations Center is located in Martinez, Georgia and services both subsidiaries.

The Company’s primary market 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 2009 population of the Augusta-Richmond County, GA-SA MSA was 539,154, 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. The Company entered the Athens, GA market in December 2005. The 2009 population for the Athens-Clarke County, GA MSA was 192,222, ranked fifth 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.

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 primary market area, Augusta-Richmond County, GA-SC metropolitan area, the Company had 16.70% of all deposits and was the second largest depository institution at June 30, 2009, as cited from the Federal Deposit Insurance Corporation’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 life-long relationships with its customers, employees, shareholders, and the communities it serves.

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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 decreased during the first three months of 2010 as compared to the first three months of 2009 due primarily to decreased loan volume offset in part by higher yields. Interest income on investment securities decreased primarily due to decreased yields somewhat offset by a larger portfolio. Service charges and fees on deposits decreased as a result of decreases in NSF income on retail checking accounts due primarily to decreased economic activity and was partially offset by increases in ATM/Debit card income. Decreased mortgage refinancing activity resulted in an decrease in gain on sales of loans for the first three months of 2010 as compared to the same period in 2009. Investment securities gains were realized in 2010 versus net losses realized in the 2009 period, which contained a $908 impairment charge related to investments in the common stock and trust preferred securities of Silverton Financial Services, Inc., parent holding company of Silverton Bank, N.A.

Table 1 — Selected Financial Data

	March 31,			December 31,			March 31,
	2010			2009			2009
	(Dollars in thousands)
Assets	$	1,497,359		$	1,491,119		$	1,484,682
Loans		919,777			937,489			997,647
Deposits		1,290,897			1,280,534			1,226,683
Annualized return on average total assets		0.34	%		(0.54	%)		0.02	%
Annualized return on average equity		5.31	%		(7.92	%)		0.24	%

The Company continues to maintain a defensive posture as the economy appears to be moving out of recessionary conditions. Since the first quarter of 2009, we have kept total assets relatively flat, as compared to our high historical growth levels. The operational focuses in 2009 of capital preservation, strong liquidity and risk mitigation with rising non-performing assets, has ultimately driven the financial results achieved in the first quarter of 2010, where we returned to profitability. Of particular note has been our increase in deposits over the course of the past 12 months, whereas we increased deposits by approximately $64 million since March 31, 2009, creating a larger base of core deposits with less reliance on more volatile funding sources. Despite our efforts and achievements, we continue to operate in a challenging economic environment and expect to continue to realize high levels of FDIC insurance premiums, and until non-performing assets are ultimately reduced to normalized levels, we will be impacted by the lack of income from these assets and the costs to carry them.

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Annualized return on average total assets and annualized return on average equity have improved recently as compared to declines the Company experienced in 2009. The increased returns were due primarily to decreased levels of non-performing assets which have resulted in lower loan loss provisions in the first quarter of 2010. Net income for the three months ended March 31, 2010 was $1.3 million compared to $56 thousand for the same period in 2009. The effects of the economic downturn continue to negatively affect financial results primarily through a continued elevated level of provision for loan losses. The Company suspended the payment of dividends indefinitely effective April 22, 2009 to conserve capital.

The Company meets its liquidity needs by managing cash and due from banks, federal funds purchased and sold, maturity of investment securities, principal repayments from mortgage-backed securities, and draws on lines of credit. Additionally, liquidity can be managed through structuring deposit and loan maturities. The Company funds loan and investment growth with core deposits, securities sold under repurchase agreements, Federal Home Loan Bank advances and other wholesale funding including brokered certificates of deposit. 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 (2.00%) scenario and as it applies to economic value of equity in a shock up and down 200 (2.00%) basis points scenario. The Company monitors operating expenses through responsibility center budgeting.

Forward-Looking Statements

Southeastern Bank Financial Corporation 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 economies, 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.

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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, determining the fair values of financial instruments including other real estate owned, investment securities, and other-than-temporary impairment as critical accounting estimates that requires difficult, subjective judgment and are important to the presentation of the financial condition and results of operations of the Company.

Allowance for Loan Losses

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 reflects management’s estimate of the level of incurred losses in the portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to: (1) detailed reviews of individual loans; (2) historical and current trends in loan charge-offs for the various portfolio segments evaluated; (3) the level of the allowance in relation to total loans and to historical loss levels; (4) levels and trends in non-performing and past due loans; (5) collateral values of properties securing loans; (6) management’s assessment of economic conditions. The Company’s Board of Directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors.

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. 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 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. 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 applied to principal and interest income depending upon the overall risk of principal loss to the Company.

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Fair Value of Financial Instruments

A significant portion of the Company’s assets are financial instruments carried at fair value. This includes securities available for sale, loans held for sale, certain impaired loans, tax credits and other real estate owned. At March 31, 2010 and December 31, 2009 the percentage of total assets measured at fair value was 27.38% and 23.04% respectively. The majority of assets carried at fair value are based on either quoted market prices or market prices for similar instruments. At March 31, 2010, 7.27% of assets measured at fair value were based on significant unobservable inputs. This represents approximately 1.99% of the Company’s total assets. See Note 4 “Fair Value Measurements” in the “Notes to Consolidated Financial Statements” herein for additional disclosures regarding the fair value of financial instruments.

Other Real Estate Owned

Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lesser of the outstanding loan balance or the fair value at the date of foreclosure minus estimated costs to sell. Any valuation adjustments required at the time of foreclosure are charged to the allowance for loan losses. After foreclosure, the properties are carried at the lower of carrying value or fair value less estimated costs to sell. Any subsequent valuation adjustments, operating expenses or income, and gains and losses on disposition of such properties are recognized in current operations. The valuation allowance is established based on our historical realization of losses and adjusted for current market trends.

Investment Securities

The fair values for available-for-sale securities are generally based upon quoted market prices or observable market prices for similar instruments. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment. The Company conducts periodic reviews to identify and evaluate each available-for-sale security that has an unrealized loss for other-than-temporary impairment. An unrealized loss exists when the fair value of an individual security is less than its amortized cost basis. The primary factors the Company considers in determining whether an impairment is other-than-temporary are the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether the Company intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. As of March 31, 2010, the Company had approximately $15,878 of available-for-sale securities, which is approximately 1.06% of total assets, valued using unobservable inputs (Level 3). These securities were primarily non-agency mortgage-backed securities and subordinated debentures issued by financial institutions.

25

Results of Operations

The Company’s net income for the first quarter of 2010 was $1,255 which was an increase of $1,199 compared to net income of $56 for the first quarter of 2009. Diluted net income per share for the three months ended March 31, 2010 was $0.19 compared to $0.01 for the three months ended March 31, 2009. The increase in net income for the three months ended March 31, 2010 as compared with the three months ended March 31, 2009, was primarily a result of a $1,461 decrease in the provision for loan losses due to decreased levels of nonperforming assets, a $401 decrease in total operating expenses somewhat offset by an $884 decrease in gains on sales of mortgage loans. Interest income on loans decreased due to a lower volume of loans somewhat offset by increased yields. Interest income on investment securities decreased due to lower yields offset in part by increased volumes. Interest expense on deposits decreased as a result of lower interest rates offset in part by higher volumes of interest bearing liabilities.

Factors contributing to the decrease in noninterest income for the three months ended March 31, 2010, were primarily decreases in gain on sales of loans and to a lesser degree in decreased service charges and fees on deposits. These decreases were partially offset by an increase in net investment securities gains, retail investment income, cash surrender value of life insurance and trust service fees.

Gain on sales of loans decreased substantially as mortgage production slowed during the quarter. While mortgage rates remain at historically low levels which are normally favorable to refinance activity, the lower production levels have resulted from the overall weakening of the economy and the decrease in borrower capacity to refinance, based on tightening of credit standards from our third party investors to whom we sell, as well as overall lower values of properties securing such refinanced loans. For the quarter gain on sales of loans decreased from $2,237 to $1,353 or 39.5%.

Service charges and fees on deposits for the quarter were $1,595, a decrease of $46 or 2.8%. The decrease was primarily due to decreases in consumer NSF fees. The decline in NSF income was primarily due to reduced consumer activity which the Company attributes to the national recessionary conditions and overall economic environment.

Net investment securities gains for the quarter were $13 as opposed to net securities losses of $164 in 2009. The net securities losses in the first quarter of 2009 included an other than temporary impairment charge of $908 related to investments in the common stock and trust preferred securities of Silverton Financial Services, Inc., parent holding company of Silverton Bank, N.A., which failed in 2009.

Noninterest expense totaled $9,432 for the three months ended March 31, 2010, a decrease of $401 or 4.1% compared to the same period ended March 31, 2009. The decrease was primarily due to decreased commissions paid on mortgage production of approximately $218 and a gain on sale of real estate owned of $85 (net of valuation allowance) in 2010 versus a loss on sale of other real estate of $197 in 2009.

26

Table 2 — Selected Balance Sheet Data

	March 31,		December 31,		Variance
	2010		2009		Amount			%
	(Dollars in thousands)
Cash, due from banks and interest-bearing deposits	$	104,944	$	140,694		($35,750	)		(25.4	%)
Federal funds sold		7,300		7,300		0			0.0	%
Investment securities		376,663		306,706		69,957			22.8	%
Loans		919,777		937,489		(17,712	)		(1.9	%)
Other real estate owned		5,865		7,974		(2,109	)		(26.4	%)
Assets		1,497,359		1,491,119		6,240			0.4	%
Deposits		1,290,897		1,280,534		10,363			0.8	%
Securities sold under repurchase agreements		2,130		3,188		(1,058	)		(33.2	%)
Advances from Federal Home Loan Bank		72,000		77,000		(5,000	)		(6.5	%)
Liabilities		1,399,759		1,397,375		2,384			0.2	%
Stockholders’ equity		97,600		93,744		3,856			4.1	%

Table 2 highlights significant changes in the balance sheet at March 31, 2010 as compared to December 31, 2009. Total assets only increased $6,240 and the balance sheet changes primarily reflect a moderate deployment of liquidity to investments. Cash, due from banks and interest-bearing deposits in other banks decreased $35,750 or 25.4% from $140,694 at December 31, 2009 to $104,944 at March 31, 2010, $72,347 of which was held at the Federal Reserve Bank. The Company has maintained an increased level of liquid funds in light of current economic conditions and volatility in the banking industry but elected in the first quarter to invest a portion of the funds into the investment portfolio. Loan demand was weak during the quarter and resulted in a decrease in gross loans of $17,712 or 1.9%. The decreased demand caused normal principal repayments to exceed the originations of new loans during the quarter. Investment securities increased $69,957 or 22.8% during the quarter primarily for the purpose of deploying liquid assets to achieve an overall higher yield on interest earning assets. Proceeds from sales and maturities and other purchases were partially reinvested in instruments that required a lower level of regulatory capital and that have lower levels of interest rate risk. The increase in the investment portfolio was funded by an increase in deposits of $10,363, the decrease in loans of $17,712 and the decrease in cash and due from banks of $35,750 somewhat offset by decreases in advances from Federal Home Loan Bank of $5,000 and securities sold under repurchase agreements of $1,058.

The net increase in deposits of $10,363 was achieved despite the repayment of approximately $37,290 in brokered deposits, and also included reduced retail time deposits of $9,104. These decreases were more than offset by approximately $24,000 in new checking account balances from a promotion started in the first quarter as well as increases in retail savings accounts of $27,960 and public funds of $17,684.

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The annualized return on average assets for the Company was 0.34% for the three months ended March 31, 2010, compared to 0.02% for the same period last year.

The annualized return on average stockholders’ equity was 5.31% for the three months ended March 31, 2010, compared to 0.24% for the same period last year. The increase is primarily attributable to the increase in net income.

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, annualized average yields earned and rates paid on those respective balances, and the actual 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.

Table 3 — Average Balances, Income and Expenses, Yields and Rates

	Three Months Ended March 31, 2010							Three Months Ended March 31, 2009
			Annualized							Annualized
			Average			Amount				Average			Amount
	Average		Yield or			Paid or		Average		Yield or			Paid or
	Amount		Rate			Earned		Amount		Rate			Earned
	(Dollars in thousands)
Interest-earning assets:
Loans	$	940,030		5.70	%	$	13,343	$	1,000,570		5.54	%	$	13,805
Investment securities
Taxable		311,253		4.10	%		3,187		277,038		5.59	%		3,871
Tax-exempt		21,529		4.31	%		232		18,381		4.42	%		203
Federal funds sold		7,300		1.11	%		20		55,401		0.18	%		24
Interest-bearing deposits in other banks		85,446		0.34	%		72		6,029		0.27	%		4
Total interest-earning assets	$	1,365,558		4.95	%	$	16,854	$	1,357,419		5.29	%	$	17,907
Interest-bearing liabilities:
Deposits	$	1,168,891		1.86	%	$	5,367	$	1,077,012		2.56	%	$	6,801
Federal funds purchased / securities sold under repurchase agreements		3,058		1.47	%		11		55,476		0.81	%		111
Other borrowings		100,307		3.86	%		954		104,547		3.48	%		896
Total interest-bearing liabilities	$	1,272,256		2.02	%	$	6,332	$	1,237,035		2.56	%	$	7,808
Net interest margin/income:				3.07	%	$	10,522				2.96	%	$	10,099

28

Net interest income increased $423 (4.2%) during the three month period as compared to the same period in 2009. Loan interest income decreased $462 in the three month period primarily as a result of decreased volume offset in part by slightly higher yields. Deposit interest expense decreased $1,434 (21.1%) in the three month period primarily as a result of declining costs on repricing deposits offset in part by the continued growth of account balances. Annualized loan yields for the quarter increased from 5.54% to 5.70% and were impacted by decreases in levels of nonaccrual loans. Nonaccrual loans resulted in the reversal of $338 in interest income compared to $661 in the 2009 quarter which improved the comparative average loan yields by approximately 3 basis points. Due to the low interest rate environment, the quarterly annualized average rate of interest bearing liabilities decreased from 2.56% to 2.02% at March 31, 2010 compared to March 31, 2009.

The Company’s net interest margin for the three months ended March 31, 2010 was 3.07% as compared to 2.96% for the three months ended March 31, 2009. This increase in the net interest margin for the three month period was primarily impacted by decreased levels of nonaccrual loans coupled with an increase in the volume of the investment portfolio.

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 or decreases 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 tables present the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to changes attributable to change in volume (change in volume multiplied by prior rate), changes attributable to change in rate (change in rate multiplied by prior volume), and changes in rate/volume (change in rate multiplied by change in volume).

Table 4 — Rate/Volume Analysis

	Three Months Ended
	March 31, 2010 compared to March 31, 2009
	Increase (Decrease) due to
	Volume			Rate			Combined			Total
	(Dollars in thousands)
Interest-earning assets:
Loans		(835	)		397			(24	)		(462	)
Investment securities
Taxable		478			(1,034	)		(128	)		(684	)
Tax-exempt		35			(5	)		(1	)		29
Federal funds sold		(21	)		128			(111	)		(4	)
Interest-bearing deposits in other banks		53			1			14			68
Total interest-earning assets		(290	)		(513	)		(250	)		(1,053	)
Interest-bearing liabilities:
Deposits		580			(1,856	)		(158	)		(1,434	)
Federal funds purchased / securities sold under repurchase agreements		(105	)		89			(84	)		(100	)
Other borrowings		(36	)		98			(4	)		58
Total interest-bearing liabilities		439			(1,669	)		(246	)		(1,476	)
Net change in net interest income										$	423

29

Provision for Loan Losses

The provision for loan losses is the charge to operating earnings necessary to maintain the allowance for loan losses at a level which, in management’s estimate, is adequate to cover the estimated amount of incurred losses in the loan portfolio. The provision for loan losses totaled $3,288 for the three months ended March 31, 2010 compared to $4,749 for the three months ended March 31, 2009. See “Allowance for Loan Losses” for further analysis of the provision for loan losses.

Noninterest Income

Table 5 — Noninterest Income

	Three Months Ended
	March 31,					Variance
	2010		2009			Amount			%
	(Dollars in thousands)
Service charges and fees on deposits	$	1,595	$	1,641		$	(46	)		(2.8	%)
Gain on sales of loans		1,353		2,237			(884	)		(39.5	%)
Gain on sale of fixed assets		27		26			1			100.0	%
Investment securities gains (losses), net		13		(164	)		177			(107.9	%)
Retail investment income		335		209			126			60.3	%
Trust services fees		287		253			34			13.4	%
Increase in cash surrender value of bank-owned life insurance		229		180			49			27.2	%
Miscellaneous income		161		163			(2	)		(1.2	%)
Total noninterest income	$	4,000	$	4,545		$	(545	)		(12.0	%)

Noninterest income decreased $545 (12.0%) during the three month period as compared to the same period in 2009. The most significant changes for the three month period were decreases in gain on sales of loans and service charges on deposits somewhat offset by increases in investment securities gains, retail investment income, cash surrender value of life insurance and trust services fees. The decreased gain on sales of loans was due to a significant decrease in refinancing volume. Net investment securities gains increased during the three month period as compared to the same period in 2009 due primarily to an other than temporary impairment charge of $908 related to investments in the common stock and trust preferred securities of Silverton Financial Services, Inc., parent holding company of Silverton Bank, N.A. in the first quarter of 2009.

30

Noninterest Expense

Table 6 — Noninterest Expense

	Three Months Ended
	March 31,					Variance
	2010			2009		Amount			%
	(Dollars in thousands)
Salaries and other personnel expense	$	5,494		$	5,658	$	(164	)		(2.9	%)
Occupancy expenses		1,171			1,141		30			2.6	%
Marketing & business development		293			347		(54	)		(15.6	%)
Processing expense		366			492		(126	)		(25.6	%)
Legal and professional fees		432			360		72			20.0	%
Data processing expense		345			304		41			13.5	%
FDIC insurance		541			482		59			12.2	%
(Gain) loss on sale of other real estate		(340	)		112		(452	)		(403.6	%)
Other real estate valuation allowance		255			—		255			N/A
Other operating expenses		875			937		(62	)		(6.6	%)
Total noninterest expense	$	9,432		$	9,833	$	(401	)		(4.1	%)

Salaries and other personnel expenses:

Salaries and other personnel expense decreased $164 (2.9%) during the three month period as compared to the same period in 2009. This decrease was primarily due to reduced commission expense related to the level of mortgage originations. In addition, office and salary costs declined due to reduced full time equivalent employees and the Company’s decision to suspend merit increases for officers and limit staff increases to 2.0%. These decreases were partially offset by increased group health insurance costs and other benefits.

Occupancy expenses:

Increases in occupancy expenses during the three month period were primarily due to increased depreciation expense as a result of the purchase of an upgraded mainframe computer and related software and increased property tax accruals.

Other operating expenses:

(Gain) loss on sale of other real estate decreased $452 and resulted from a gain in the 2010 quarter compared to a loss in 2009. Partially offsetting the gain in 2010 was a valuation allowance on other real estate of $255 during the quarter.

31

FDIC insurance expense increased $59 or 12.2% due to higher balances and rates. Legal and professional fees increased $72 or 20.0% primarily due to increased legal fees associated with problem asset workouts. Data processing expenses increased $41 or 13.5% due to increased software maintenance costs. Processing expense decreased $126 (25.6%) due to reductions in direct mail programs and other operating expenses decreased $62 (6.6%) for the three month period as compared to the same period in 2009.

Income Taxes

The Company recognized income tax expense of $547 for the three months ended March 31, 2010 as compared to income tax expense of $6 for the same period in 2009. The significant increase in pretax income coupled with a lower proportion of nontaxable interest income resulted in an increase in income tax expense and the effective income tax rate for the three month period. The effective income tax rate in the 2010 period was 30.35%

At March 31, 2010, the Company maintains net deferred tax assets of $9,966. In assessing the realizability of deferred tax assets and the need for a valuation allowance, management has considered primarily existing carryback potential of approximately $12,000. Furthermore, although the Company did incur a loss in 2009, management has considered the severity of that loss and weighed the prospects for returning to sustained profitability in future periods in determining a need for a valuation allowance. Based on management’s assessment, no valuation allowance was deemed necessary March 31, 2010.

The Company was able to carryback the net operating loss (NOL) sustained in 2009. This carryback generated a tax refund of $2,755 that was received in the first quarter of 2010.

32

Loans

The following table presents the composition of the Company’s loan portfolio as of March 31, 2010 and December 31, 2009.

Table 7 — Loan Portfolio Composition

	March 31, 2010						December 31, 2009
	Amount			%			Amount			%
	(Dollars in thousands)
Commercial financial and agricultural	$	108,798			11.83	%	$	102,160			10.90	%
Real estate
Commercial		328,740			35.74	%		322,864			34.44	%
Residential		221,608			24.09	%		219,217			23.38	%
Acquisition, development and construction		238,961			25.98	%		270,062			28.81	%
Total real estate		789,309			85.81	%		812,143			86.63	%
Consumer
Direct		19,231			2.09	%		20,507			2.19	%
Indirect		1,609			0.18	%		1,898			0.20	%
Revolving		847			0.09	%		836			0.09	%
Total consumer		21,687			2.36	%		23,241			2.48	%
Deferred loan origination fees		(17	)		(0.00	%)		(55	)		(0.01	%)
Total	$	919,777			100.00	%	$	937,489			100.00	%

At March 31, 2010, the loan portfolio is comprised of 85.81% real estate loans. Commercial, financial and agricultural loans comprise 11.83%, and consumer loans comprise 2.36% of the portfolio.

Commercial real estate comprises 35.74% of the loan portfolio and consist of both non-owner occupied and owner occupied properties where the operations of the commercial entity provide the necessary cash flow to service the debt. For this portion of real estate loan portfolio, repayment is not dependent upon the sale of the real estate held as collateral. Construction and development loans comprise 25.98% of the real estate loan portfolio and the Company has recognized significant losses in this 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. New construction and absorption of existing real estate inventory in the Company’s primary market area of the Augusta-Richmond County, GA-SC MSA have slowed and prices have declined but less than the national rate. Conditions on certain loans the Company has made in markets outside the Company’s primary market area are outlined in Table 10. The residential category, 24.09% 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 Company has no large loan concentrations to individual borrowers. Unsecured loans at March 31, 2010 were $19.4 million.

33

Interest reserves are established for certain ADC (acquisition development and construction) loans based on the feasibility of the project, the timeframe for completion, the creditworthiness of the borrower and guarantors, and collateral. An interest reserve allows the borrower’s interest cost to be capitalized and added to the loan balance. As a matter of practice the Company does not generally establish loan funded interest reserves on ADC loans; however, the Company’s loan portfolio includes six loans with interest reserves at March 31, 2010. The following tables detail the loans and accompanying interest reserves as of March 31, 2010 and December 31, 2009.

	March 31, 2010
			Reserves
	Balance		Original		Advanced		Remaining
	(Dollars in thousands)
Loan 1	$	4,247		179		179		—
Loan 2		10,104		300		182		118
Loan 3		2,564		255		255		—
Loan 4		455		30		30		—
Loan 5		164		10		10		—
Loan 6		1,133		81		81		—

	December 31, 2009
			Reserves
	Balance		Original		Advanced		Remaining
	(Dollars in thousands)
Loan 1	$	4,278		179		179		—
Loan 2		9,666		300		77		223
Loan 3		2,598		255		255		—
Loan 4		455		30		30		—
Loan 5		166		10		10		—
Loan 6		1,133		81		81		—

Underwriting for ADC loans with interest reserves follows the same process as those loans without reserves. In order for the bank to establish a loan-funded interest reserve, the borrower must have the ability to repay without the use of a reserve and a history of developing and stabilizing similar properties. All ADC loans, including those with interest reserves, are carefully monitored through periodic construction site inspections by Bank employees or third party inspectors to ensure projects are moving along as planned. The Bank assesses the appropriateness of the use of interest reserves during the entire term of the loan as well as the adequacy of the reserve. Collateral inspections are completed before approval of advances. Two of these loans have been extended; one due to delays and time needed to obtain current financial information on the guarantors and another to allow for completion of the final punch list and negotiation of the permanent loan. None of these loans have been restructured or are currently on nonaccrual.

34

Loan Review and Classification Process

The Company maintains a loan review and classification process which involves multiple officers of the Company and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans. All loan officers are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. Risk ratings are selected from an 8-point scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful and rating 8 Loss.

When a loan officer originates a new loan, he or she documents the credit file with an offering sheet summary, supplemental underwriting analyses, relevant financial information and collateral evaluations. All of this information is used in the determination of the initial loan risk rating. Then, the Company’s Credit Administration department undertakes an independent credit review of that relationship in order to validate the lending officer’s rating. Lending relationships with total related exposure of $500 or greater are also placed into a tracking database and reviewed by Credit Administration personnel on an annual basis in conjunction with the receipt of updated borrower and guarantor financial information. The individual loan reviews analyze such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current/anticipated performance of the loan. The results of such reviews are presented to Executive Management.

Through the review of delinquency reports, updated financial statements or other relevant information in the normal course of business, the lending officer and/or Credit Administration review personnel may determine that a loan relationship has weakened to the point that a criticized (loan grade 5) or classified (loan grade 6 through 8) status is warranted. When a loan relationship with total related exposure of $200 or greater is adversely graded (5 or above), the lending officer is then charged with preparing a Classified/Watch report which outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assisting the borrower in moving the loans to another institution and/or collateral liquidation. All such Classified/Watch reports are reviewed on a quarterly basis by members of Executive Management at a regularly scheduled meeting in which each lending officer presents the workout plans for his criticized credit relationships.

35

Depending upon the individual facts, circumstances and the result of the Classified/Watch review process, Executive Management may categorize the loan relationship as impaired. Once that determination has occurred, Executive Management in conjunction with Credit Administration personnel, will complete an evaluation of the collateral (for collateral-dependent loans) based upon appraisals in file adjusting for current market conditions and other local factors that may affect collateral value. This judgmental evaluation may produce an initial specific allowance for placement in the Company’s Allowance for Loan & Lease Losses calculation. As soon as practical, updated appraisals on the collateral backing that impaired loan relationship are ordered. When the updated appraisals are received, Executive Management with assistance from Credit Administration department personnel reviews the appraisal, and updates the specific allowance analysis for each loan relationship accordingly. The Director’s Loan Committee reviews on a quarterly basis the Classified/Watch reports including changes in credit grades of 5 or higher as well as all impaired loans, the related allowances and OREO.

In general, once the specific allowance has been finalized, Executive Management will authorize a charge-off prior to the following calendar quarter-end in which that reserve calculation is finalized.

The review process also provides for the upgrade of loans that show improvement since the last review.

Nonperforming Assets

Non-performing assets include nonaccrual loans, loans past due 90 days or more, restructured loans and other real estate owned. Table 8 shows the current and prior period amounts of non-performing assets. Non-performing assets were $37,730 at March 31, 2010, compared to $40,231 at December 31, 2009 and $52,870 at March 31, 2009. Significant changes from December 2009 to March 2010 include a $2,109 decrease in other real estate owned and a $392 decrease in nonaccrual loans.

At March 31, 2010, December 31, 2009 and March 31, 2009 there were no loans past due 90 days or more and still accruing.

36

Restructured loans are loans on which the original terms have been modified in favor of the borrower or either principal or interest has been forgiven due to deterioration in the borrower’s financial condition. There were no restructured loans at March 31, 2010 and 2009. Restructured loans totaled $1,656 at December 31, 2009. These restructured loans were on nonaccrual status at year end and are included under nonaccrual loans in the table below.

Table 8 — Non-Performing Assets

	March 31, 2010			December 31, 2009			March 31, 2009
	(Dollars in thousands)
Nonaccrual loans:
Commercial financial and agricultural	$	782		$	616		$	192
Real Estate:
Commercial		9,314			2,932			4,894
Residential		4,120			4,623			5,545
Acquisition, development and construction		17,113			23,755			34,882
Consumer:
Direct		536			331			367
Revolving		—			—			—
Total Nonaccrual loans		31,865			32,257			45,880
Restructured loans (1)		—			—			—
Other real estate owned		5,865			7,974			6,990
Total Non-performing assets	$	37,730		$	40,231		$	52,870
Loans past due 90 days or more and still accruing interest	$	—		$	—		$	—
Non-performing assets to total assets		2.52	%		2.70	%		3.56	%
Non-performing assets to total loans and OREO		4.08	%		4.26	%		5.37	%
Allowance for loan loss to total non-performing loans		72.61	%		69.25	%		33.10	%

(1) Restructured loans on nonaccrual status at period end are included under nonaccrual loans in the table.

The ratio of non-performing assets to total loans and other real estate was 4.08% at March 31, 2010 compared to 4.26% at December 31, 2009 and 5.37% at March 31, 2009. The ratio of allowance for loan losses to total non-performing loans was 72.61% at March 31, 2010 compared to 69.25% at December 31, 2009 and 33.10% at March 31, 2009. The resolution of non-performing assets continues to be a priority of management.

37

The table below presents a roll forward of other real estate owned for the three month period ended March 31, 2010 and 2009, respectively.

Table 9 — Other Real Estate Owned

	2010			2009
	(Dollars in thousands)
Beginning balance, January 1	$	7,974			5,734
Additions		2,230			2,609
Valuation allowance		(255	)		—
Sales		(4,424	)		(1,241	)
Gain (loss) on sale of OREO		340			(112	)
Ending balance, March 31	$	5,865			6,990

The following table provides details of other real estate owned as of March 31, 2010 and 2009, respectively.

	2010			2009
	(Dollars in thousands)
Other Real Estate:
Single family developed lots	$	1,651		$	2,181
Single family undeveloped land		—			2,649
1-4 Family residential		284			960
Commercial real estate		1,299			1,200
Condominums		2,886			—
		6,120			6,990
Valuation allowance		(255	)		—
	$	5,865		$	6,990

38

The decrease in other real estate owned is primarily due to an aggressive liquidation the Company began in the fourth quarter of 2009 in response to plummeting real estate values in metro Atlanta, Athens and Savannah, Georgia. In the first quarter of 2010 proceeds of $3,650 generated from the sale of a 71 acre tract of commercial land and a $255 increase to the valuation allowance based on recent appraisals also contributed to the decline in other real estate. The net decrease in nonaccrual loans reflects increased levels of such loans which were more than offset by foreclosures. A significant portion of the increases were in ADC loans. The following table provides further information regarding the Company’s nonaccrual loans.

Nonaccrual

Appraisal

Appraised

Balance

Originated

Date

Trigger

Collateral

Allowance

Method

Date

Value

(Dollars in thousands)

Commercial Real Estate

$

1,625

04/08/08

03/30/10

delinquency

land

—

collateral value

02/08

$

4,547

ADC Loan — CSRA

1,495

12/16/05-02/19/10

11/09-2/10

delinquency

lots & land

—

collateral value

03/10

1,761

1-4 Family Residential

561

10/22/07-09/04/08

11/30/09

delinquency

houses & lots

—

collateral value

03/10

1,173

ADC Loan — Georgia Loan Participation

979

12/06/06

09/17/08

delinquency

lots

—

collateral value

12/09

2,000

ADC Loan — Georgia Loan Participation

921

04/13/06

09/17/08

delinquency

lots

—

collateral value

03/09

1,330

ADC Loan — CSRA

1,084

08/17/07-05/02/08

12/30/09

delinquency

lots

—

collateral value

12/09

1,220

ADC Loan — CSRA

3,425

08/25/06

08/17/09

delinquency

lots

—

collateral value

09/09

6,333

Commercial Real Estate

3,919

12/19/08

01/15/10

delinquency

golf course

—

collateral value

03/10

8,100

ADC Loan — CSRA

3,468

01/02/07-03/01/10

1/10-3/10

delinquency

homes, lots & land

800

collateral value

03/10

2,002

ADC Loan — Athens, Georgia

2,570

08/18/06-01/10/07

01/28/09

delinquency

land & townhomes

—

collateral value

02/09

3,526

$

20,047

Other, net

11,818

Nonaccrual loans at March 31, 2010

$

31,865

Allowance for Loan Losses

The allowance for loan losses represents an allocation for the estimated amount of probable incurred losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with particular emphasis on impaired, non-accruing, past due, and other loans that management believes require special attention. The determination of the allowance for loan losses is considered a critical accounting estimate of the Company. See “Critical Accounting Estimates.”

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.

Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based upon management’s analysis of risk in the loan portfolio. Loans determined to be uncollectible are charged to the allowance for loan losses and subsequent recoveries are added to the allowance. A provision for losses in the amount of $3,288 was charged to expense for the quarter ended March 31, 2010 compared to $4,749 for the 2009 quarter.

39

Significant portions of the overall level of losses are in the Atlanta, Savannah and Athens markets. The following table provides selected asset quality information related to the acquisition development and construction loan portfolio as of March 31, 2010 and December 31, 2009.

Table 10 — Acquisition Development and Construction Loans

	March 31,			December 31,
	2010			2009
	(Dollars in thousands)
CSRA — primary market area
Period-end loans		178,681			195,394
Impaired loans		9,312			11,278
Classified/watch rated loans		24,300			27,237
Charge-offs % (annualized)		0.79	%		0.44	%
Specific reserve allowance / Impaired loans		9.00	%		10.29	%
General reserve allowance / Loans not impaired %		2.54	%		2.10	%
Allowance / Charge-offs		3.64			6.94
Savannah, Georgia
Period-end loans		16,047			19,666
Impaired loans		505			1,300
Classified/watch rated loans		4,086			4,064
Charge-offs % (annualized)		5.06	%		11.21	%
Specific reserve allowance / Impaired loans		0.00	%		8.62	%
General reserve allowance / Loans not impaired %		3.49	%		3.42	%
Allowance / Charge-offs		0.67			0.34
Athens, Georgia
Period-end loans		14,571			20,031
Impaired loans		4,296			8,457
Classified/watch rated loans		1,691			2,742
Charge-offs % (annualized)		0.19	%		47.59	%
Specific reserve allowance / Impaired loans		0.00	%		0.00	%
General reserve allowance / Loans not impaired %		10.36	%		10.68	%
Allowance / Charge-offs		38.04			0.13
ADC Participations — Georgia
Period-end loans		8,400			9,893
Impaired loans		1,900			3,393
Classified/watch rated loans		6,500			6,500
Charge-offs % (annualized)		52.33	%		47.41	%
Specific reserve allowance / Impaired loans		0.00	%		20.81	%
General reserve allowance / Loans not impaired %		9.51	%		9.50	%
Allowance / Charge-offs		0.14			0.28
ADC Participations — Florida
Period-end loans		3,633			4,034
Impaired loans		633			1,034
Classified/watch rated loans		3,000			—
Charge-offs % (annualized)		21.47	%		10.26	%
Specific reserve allowance / Impaired loans		0.00	%		0.00	%
General reserve allowance / Loans not impaired %		11.00	%		10.00	%
Allowance / Charge-offs		0.42			0.72

40

The increase in the allowance for loan losses as of March 31, 2010 as compared to March 31, 2009 is primarily due to increases in the allowance applicable to specific loans and increases to the allowance due to higher levels of classified and watch-rated debt as well as management’s assessment of current economic environment. Also impacting the allowance were charge-offs of $3,023 of which $2,214, or 73.2%, were related to ADC loans. Of the ADC charge-offs $1,294, or 58.4%, are related to collateral dependent ADC loan participations, $7 or 0.3% are related to ADC loans in the Athens, Georgia market and $203 or 9.2% are related to ADC loans in the Savannah, Georgia market. The provision for loan losses exceeded charge-offs during the quarter which contributed to an increase in the ratio of allowance for loan losses to total loans as noted in the table below.

Table 11 — Allowance for Loan Losses

	March 31,
	2010			2009
	(Dollars in thousands)
Total loans outstanding at end of period, net of unearned income	$	919,777		$	976,838
Average loans outstanding, net of unearned income	$	920,584		$	980,688
Balance of allowance for loan losses at beginning of year	$	22,338		$	14,742
Charge-offs:
Commercial, financial and agricultural		126			204
Real estate — commercial		66
Real estate — acquisition, development and construction		2,214			3,806
Real estate — residential mortgage		423			249
Consumer		194			207
Total charge-offs		3,023			4,466
Recoveries of previous loan losses:
Commercial, financial and agricultural		72			89
Real estate — commercial		5
Real estate — acquisition, development and construction		356			1
Real estate — residential mortgage		31			1
Consumer		71			70
Total recoveries		535			161
Net loan losses		2,488			4,305
Provision for loan losses		3,288			4,749
Balance of allowance for loan losses at end of period	$	23,138		$	15,186
Allowance for loan losses to period end loans		2.52	%		1.55	%
Annualized net charge-offs to average loans		1.10	%		1.78	%

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At March 31, 2010 the ratio of allowance for loan losses to total loans was 2.52% compared to 2.38% at December 31, 2009 and 1.55% at March 31, 2009. Management considers the current allowance for loan losses appropriate based upon its analysis of risk in the portfolio, although there can be no assurance that the assumptions underlying such analysis will continue to be correct.

Liquidity and Capital Resources

The Company has maintained adequate liquidity to meet operating and loan funding requirements despite the lack of such demand due to current market conditions. The loan to deposit ratio at March 31, 2010 was 71.25% compared to 73.21% at December 31, 2009 and 79.63% at March 31, 2009. The decrease in the loan to deposit ratio from December 31, 2009 to March 31, 2010 reflects the decreased demand for loans resulting from the slowing economy coupled with an increased level of deposits. Deposits at March 31, 2010 and December 31, 2009 include $218,586 and $255,876 of brokered certificates of deposit, respectively. The Bank and the Thrift have also utilized borrowings from the Federal Home Loan Bank. They each maintain a line of credit with the Federal Home Loan Bank approximating 10% of their total assets. Federal Home Loan Bank advances are collateralized by eligible first mortgage loans, commercial real estate loans and investment securities. These borrowings totaled $72,000 at March 31, 2010. The Bank maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20,000 of which no amounts were outstanding at March 31, 2010. The Bank has a federal funds purchased accommodation with SunTrust Bank, Atlanta, Georgia for advances up to $10,000 and a $10,000 repurchase line of credit with Center State Bank, Orlando, Florida. Additionally, liquidity needs can be supplemented 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 $2,130 at March 31, 2010.

Stockholders’ equity to total assets was 6.52% at March 31, 2010 compared to 6.29% at December 31, 2009 and 6.39% at March 31, 2009. The capital of the Company exceeded all required regulatory guidelines at March 31, 2010. The Company’s Tier 1 risk-based, total risk-based and leverage capital ratios were 11.39%, 12.88%, and 7.76%, respectively, at March 31, 2010.

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The following table reflects the current regulatory capital levels in more detail, including comparisons to the regulatory minimums.

Table 12 — Regulatory Capital Requirements
March 31, 2010

						Required for capital
	Actual					adequacy purposes					Excess
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Southeastern Bank Financial Corporation
Risk-based capital:
Tier 1 capital	$	115,755		11.39	%		40,663		4.00	%		75,092		7.39	%
Total capital		130,949		12.88	%		81,327		8.00	%		49,622		4.88	%
Tier 1 leverage ratio		115,755		7.76	%		59,657		4.00	%		56,098		3.76	%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital	$	101,100		11.31	%		35,743		4.00	%		65,357		7.31	%
Total capital		112,394		12.58	%		71,486		8.00	%		40,908		4.58	%
Tier 1 leverage ratio		101,100		7.62	%		59,695		4.50	%		41,405		3.12	%
Southern Bank & Trust
Risk-based capital:
Tier 1 capital	$	14,275		11.70	%		4,879		4.00	%		9,396		7.70	%
Total capital		15,804		12.96	%		9,757		8.00	%		6,047		4.96	%
Tier 1 leverage ratio		14,275		8.44	%		6,768		4.00	%		7,507		4.44	%

Georgia Bank & Trust Company is 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 (4.50%).

Management is not aware of any other events or uncertainties that are reasonably likely to have a material effect on the Company’s liquidity, capital resources or operations.

Commitments and Contractual Obligations

The Company is a 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 evaluates construction and acquisition and development loans for the percentage completed before extending additional credit. The Company follows the same credit policies in making commitments and contractual obligations as it does for on-balance sheet instruments.

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Unfunded commitments to extend credit where contract amounts represent potential credit risk totaled $144,950 at March 31, 2010. 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’s contractual obligations, consisting of deposits, FHLB advances, which are subject to early termination options, and borrowed funds by contractual maturity date.

Table 13 — Commitments and Contractual Obligations

	Less than		1 - 3		3 - 5		More than
	1 Year		Years		Years		5 Years
			(Dollars in thousands)
Lines of credit	$	144,950		—		—		—
Lease agreements		338		394		70		53
Deposits		1,087,227		188,866		13,318		1,486
Securities sold under repurchase agreements		2,130		—		—		—
FHLB advances		12,000		8,000		13,000		39,000
Other borrowings		700		—		—		—
Subordinated debentures		—		—		2,947		20,000
Total commitments and contractual obligations	$	1,247,345	$	197,260	$	29,335	$	60,539

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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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 refinances 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of March 31, 2010, there were no substantial changes in the interest rate sensitivity analysis or the sensitivity of market value of portfolio equity for various changes in interest rates calculated as of December 31, 2009. The foregoing disclosures related to the market risk of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2009 included in the Company’s 2009 Annual Report on Form 10-K.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer (principal executive officer) and its Group Vice President and Chief Financial Officer (principal financial officer), of 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, such officers 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. There have been no changes in the Company’s internal controls or, to the Company’s knowledge, in other factors during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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Part II
OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is subject.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect its business, financial condition or future results. The risks described below and in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

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

Issuer Purchases of Equity Securities

On April 15, 2004, the Company announced the commencement of a stock repurchase program, pursuant to which it will, from time to time, repurchase up to 100,000 shares of its outstanding stock. The program does not have a stated expiration date. No stock repurchase programs were terminated during the first quarter of 2010 and there were no shares repurchased under the existing stock repurchase plan or otherwise during the first quarter.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Submission of Matters to a Vote of Security Holders

None

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Item 5. Other Information

On February 11, 2010, the Bank entered into a Second Amendment (the “Amendment”) to the Supplemental Executive Retirement Plan Agreement between the Bank and Darrell R. Rains. The Amendment revises the benefits payable under the agreement as specifically set forth in Exhibit A to the Amendment, which is attached as Exhibit 10.24 to this report. This summary description is qualified by reference to the text of the Amendment.

Item 6. Exhibits

10.24	Second Amendment dated February 11, 2010 to the Supplemental Executive Retirement Benefits Agreement between the Bank and Darrell R. Rains.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SOUTHEASTERN BANK FINANCIAL CORPORATION

Form 10-Q Signatures

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

	SOUTHEASTERN BANK FINANCIAL CORPORATION
Date: April 30, 2010	By:	/s/ Darrell R. Rains
		Darrell R. Rains
		Group Vice President, Chief Financial Officer (Duly Authorized Officer of Registrant and Principal Financial Officer)

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