Southeastern Bank Financial (SBFC) 10-Q 2007 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

x Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2007.

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.  0-23980

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)

Check 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.  Yes  x     No  o

Check whether the issuer is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer o

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

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:

5,431,534 shares of common stock, $3.00 par value per share, outstanding as of July 31, 2007.

SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
			Page
Part I
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	3
		Consolidated Statements of Income for the Three and Six Months ended June 30, 2007 and 2006	4
		Consolidated Statements of Cash Flows for the  Six Months ended June 30, 2007 and 2006	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
	Item 4.	Controls and Procedures	24
Part II   Other Information
	Item 1.	Legal Proceedings	*
	Item 1A.	Risk Factors	25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
	Item 3.	Defaults Upon Senior Securities	*
	Item 4.	Submission of Matters to a Vote of Security Holders	26
	Item 5.	Other Information	*
	Item 6.	Exhibits	27
Signature			28

* No information submitted under this caption

1

PART I

FINANCIAL INFORMATION

2

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

	June 30,
	2007			December 31,
Assets	(Unaudited)			2006
Cash and due from banks	$	25,027,050		$	25,709,915
Federal funds sold		21,322,000			14,688,000
Interest-bearing deposits in other banks		500,000			512,690
Cash and cash equivalents		46,849,050			40,910,605
Investment securities
Available-for-sale		222,853,031			199,135,716
Held-to-maturity, at cost (fair values of $1,974,288 and $3,048,196, respectively)		1,935,358			2,970,619
Loans held for sale		11,889,620			14,857,315
Loans		797,706,559			735,111,615
Less allowance for loan losses		(11,133,435	)		(9,776,779	)
Loans, net		786,573,124			725,334,836
Premises and equipment, net		25,768,202			23,402,588
Accrued interest receivable		6,661,129			5,982,654
Bank-owned life insurance		16,307,789			15,982,052
Restricted equity securities		4,879,781			4,936,281
Other assets		9,601,218			7,689,596
	$	1,133,318,302		$	1,041,202,262
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing	$	110,247,395		$	106,846,160
Interest-bearing:
NOW accounts		125,090,049			119,334,300
Savings		295,546,347			255,065,766
Money management accounts		54,700,645			45,897,176
Time deposits over $100,000		216,922,210			193,860,714
Other time deposits		95,604,566			80,758,973
		898,111,212			801,763,089
Federal funds purchased and securities sold under repurchase agreements		69,581,289			70,019,551
Advances from Federal Home Loan Bank		55,000,000			60,000,000
Other borrowed funds		1,000,000			1,000,000
Accrued interest payable and other liabilities		7,782,475			9,495,498
Subordinated debentures		20,000,000			20,000,000
Total liabilities		1,051,474,976			962,278,138
Stockholders' equity:
Common stock, $3.00 par value; 10,000,000 shares authorized; 5,433,614 and 5,433,285 shares issued in 2007 and 2006, respectively; 5,431,734 and 5,432,854 shares outstanding in 2007 and 2006, respectively		16,300,842			16,299,855
Additional paid-in capital		39,238,901			38,989,058
Retained earnings		29,604,629			25,287,006
Treasury stock, at cost; 1,880 and 431 shares in 2007 and 2006, respectively		(70,830	)		(16,809	)
Accumulated other comprehensive loss, net		(3,230,216	)		(1,634,986	)
Total stockholders' equity		81,843,326			78,924,124
	$	1,133,318,302		$	1,041,202,262

See accompanying notes to consolidated financial statements.

3

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Interest income:
Loans, including fees	$	16,399,199	$	13,018,274	$	31,902,869	$	24,830,362
Investment securities		2,921,476		2,702,309		5,532,810		5,158,381
Federal funds sold		315,503		44,036		681,585		194,629
Interest-bearing deposits in other banks		6,980		5,675		13,470		13,650
Total interest income		19,643,158		15,770,294		38,130,734		30,197,022
Interest expense:
Deposits		8,164,890		5,547,283		15,657,083		10,465,934
Federal funds purchased and securities sold under repurchase agreements		802,685		724,846		1,669,830		1,408,754
Other borrowings		1,188,987		1,058,303		2,263,726		1,905,291
Total interest expense		10,156,562		7,330,432		19,590,639		13,779,979
Net interest income		9,486,596		8,439,862		18,540,095		16,417,043
Provision for loan losses		1,030,389		456,336		1,606,187		960,128
Net interest income after provision for loan losses		8,456,207		7,983,526		16,933,908		15,456,915
Noninterest income:
Service charges and fees on deposits		1,581,451		1,539,978		2,978,467		2,892,122
Gain on sales of loans		1,320,377		1,270,992		2,604,655		2,525,337
Investment securities gains, net		-		283,600		33,191		283,600
Retail investment income		275,218		216,562		598,457		383,973
Trust service fees		284,906		198,367		558,442		390,832
Increase in cash surrender value of bank-owned life insurance		160,935		149,973		325,737		289,243
Miscellaneous income		160,861		146,770		328,540		296,395
Total noninterest income		3,783,748		3,806,242		7,427,489		7,061,502
Noninterest expense:
Salaries and other personnel expense		4,628,251		4,505,040		9,423,758		8,945,020
Occupancy expenses		742,442		685,165		1,502,786		1,433,901
Other operating expenses		2,223,365		2,041,484		4,490,300		4,018,655
Total noninterest expense		7,594,058		7,231,689		15,416,844		14,397,576
Income before income taxes		4,645,897		4,558,079		8,944,553		8,120,841
Income tax expense		1,674,956		1,631,675		3,214,332		2,734,462
Net income	$	2,970,941	$	2,926,404	$	5,730,221	$	5,386,379
Basic net income per share	$	0.55	$	0.55	$	1.05	$	1.02
Diluted net income per share	$	0.54	$	0.55	$	1.04	$	1.01
Weighted average common shares outstanding		5,432,476		5,279,333		5,433,054		5,276,526
Weighted average number of common and common equivalent shares outstanding		5,499,666		5,331,632		5,501,470		5,329,007

See accompanying notes to consolidated financial statements.

4

 

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	5,730,221		$	5,386,379
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		729,628			720,553
Provision for loan losses		1,606,187			960,128
Net investment securities gains		(33,191	)		(283,600	)
Net (accretion of discount) amortization of premium on investment securities		(110,702	)		(167,840	)
Increase in CSV of bank owned life insurance		(325,737	)		(289,243	)
Stock options compensation cost		267,603			258,890
Loss (Gain) on disposal of premises and equipment		42,983			(91,834	)
Gain on sales of loans		(2,604,655	)		(2,525,337	)
Real estate loans originated for sale		(133,166,370	)		(136,105,604	)
Proceeds from sales of real estate loans		138,738,720			140,676,591
Increase in accrued interest receivable		(678,475	)		(151,270	)
Increase in other assets		(355,030	)		(339,948	)
(Decrease) increase in accrued interest payable and other liabilities		(1,713,024	)		199,627
Net cash provided by operating activities		8,128,158			8,247,492
Cash flows from investing activities:
Proceeds from sales of available for sale securities		-			15,729,239
Proceeds from maturities of available for sale securities		30,270,483			22,151,932
Proceeds from maturities of held to maturity securities		1,045,350			500,000
Purchase of available for sale securities		(56,713,297	)		(44,778,338	)
Purchase of Federal Home Loan Bank stock		(168,500	)		(873,800	)
Proceeds from redemption of FHLB stock		225,000			225,000
Net increase in loans		(63,185,250	)		(60,311,450	)
Purchase of Bank-owned life insurance		-			(3,500,000	)
Additions to premises and equipment		(3,148,243	)		(3,061,294	)
Proceeds from sale of other real estate		48,256			-
Proceeds from sale of premises and equipment		10,018			1,770,651
Net cash used in investing activities		(91,616,183	)		(72,148,060	)
Cash flows from financing activities:
Net increase in deposits		96,348,122			65,982,787
Net decrease in federal funds purchased and securities sold under repurchase agreements		(438,262	)		(12,609,226	)
Advances from Federal Home Loan Bank		-			19,000,000
Payments of Federal Home Loan Bank advances		(5,000,000	)		(11,000,000	)
Proceeds from subordinated debentures		-			10,000,000
Principal payments on other borrowed funds		-			(600,000	)
Purchase of treasury stock		(70,830	)		(31,146	)
Payment of cash dividends		(1,412,597	)		(1,372,090	)
Proceeds from stock options exercised		37			176,124
Net cash provided by financing activities		89,426,470			69,546,449
Net increase in cash and cash equivalents	$	5,938,445		$	5,645,881
Cash and cash equivalents at beginning of period		40,910,605			22,563,056
Cash and cash equivalents at end of period	$	46,849,050		$	28,208,937
Supplemental disclosures of cash paid during the period for:
Interest	$	19,931,087		$	13,165,019
Income taxes	$	2,491,847		$	3,255,000
Supplemental information on noncash investing activities:
Loans transferred to other real estate	$	340,775		$	-

See accompanying notes to consolidated financial statements.

5

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2007

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 (the “Bank”) and Southern Bank & Trust (the “Thrift”).  Significant intercompany transactions and accounts are eliminated in consolidation.

The financial statements for the three and six months ended June 30, 2007 and 2006 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, 2006.

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 and six months ended June 30, 2007 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 – Comprehensive Income

Other comprehensive income for the Company consists of net unrealized gains and losses on investment securities available for sale.  Total comprehensive income for the three months ended June 30, 2007 was $647,000 compared to $806,000 for the three months ended June 30, 2006.  Total comprehensive income for the six months ended June 30, 2007 was $4,135,000 compared to $3,651,000 for the six months ended June 30, 2006.

Note 3 – Cash Dividend Declared

On April 25, 2007, the Company declared a quarterly cash dividend of $0.13 per share on outstanding shares.  The dividend was paid on May 21, 2007 to shareholders of record as of May 9, 2007.

6

On July 23, 2007, the Company declared a quarterly cash dividend of $0.13 per share on outstanding shares.  The dividend is payable on August 22, 2007 to shareholders of record as of August 10, 2007.

Note 4 – Unrealized Losses on Investment Securities

Available for Sale securities are carried at fair market value with related unrealized gains or losses included in stockholders’ equity as accumulated other comprehensive income.  Unrealized losses have not been recognized into income because the issuers are either obligations of the U.S. government or are of high credit quality.  Also, the decline in fair value is largely due to changes in interest rates and the fair value is expected to recover as the obligations approach maturity.

Note 5 - Recently Issued Accounting Standards on the Financial Statements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements.  This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset.  The standard is effective for fiscal years beginning after November 15, 2007.  The Company has not completed its evaluation of the impact of the adoption of this standard.

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

The Company does not expect that the following newly issued accounting standards will have a material effect on the financial statements when adopted in future years.  In general, these standards revise the accounting for derivatives embedded in other financial instruments for 2007, revise the recognition and accounting for servicing of financial assets for 2007, and revise the accrual of post-retirement benefits associated with providing split-dollar life insurance for 2008.  The Company did not have any of these assets or liabilities as of June 30, 2007.

7

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007.  The adoption of FIN 48 had no affect on the Company’s financial statements. The Company has no unrecognized tax benefits and does not anticipate any increase in unrecognized benefits during 2007 relative to any tax positions taken prior to January 1, 2007.  Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income taxes accounts; no such accruals exist as of January 1, 2007.  The Company and its subsidiaries file a consolidated U.S. federal income tax return and files in the state of Georgia.  These returns are subject to examination by taxing authorities for all years after 2002.

In February 2007 the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value with an objective of improving financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of SFAS No. 159 are effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  Management is currently evaluating the impact, if any, that adoption of SFAS No. 159 will have on the Company’s financial position, results of operations and liquidity.

8

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

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.  A new full service branch was opened in Evans, Georgia on July 9, 2007.  Mortgage origination offices are located in Augusta, Savannah and Athens, Georgia.  Southern Bank & Trust (the “Thrift), a federally chartered thrift, opened its main office in Aiken, South Carolina on September 12, 2006.  A new branch has been approved by the Office of the Thrift Supervision and is expected to open on August 13, 2007 in North Augusta, South Carolina.

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 Company’s services include the origination of residential and commercial real estate loans, construction and development loans, and commercial and consumer loans.  The Company also offers a variety of deposit programs, including noninterest-bearing demand, interest checking, money management, savings, and time deposits.  In the Augusta-Richmond County, GA-SC metropolitan area, GB&T had 12.34% of all deposits and was the second largest depository institution at June 30, 2006, 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 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.

The Company’s primary source of income is from its lending activities followed by interest income from its investment activities, service charges and fees on deposits, and gain on sales of mortgage loans in the secondary market.  Interest income on loans and investment securities increased during the first six months of 2007 as compared to the first six months of 2006 due to higher interest rates and increased volumes.  Retail investment income increased due to higher volume and additional brokers.  Trust service fees increased due to higher volume.

9

Table 1 - Selected Financial Data
	June 30,			December 31,			December 31,
	2007			2006			2002
	(Dollars in thousands)
Assets	$	1,133,318		$	1,041,202		$	569,832
Loans		809,596			749,969			396,699
Deposits		898,111			801,763			439,557
Return on average total assets		1.06	%		1.10	%		1.14	%
Return on average equity		14.19	%		14.69	%		13.95	%

The Company continues to experience steady growth as evidenced in Table 1 above.  The Company has also achieved significant increases in loans and deposits and continues to provide strong returns on assets and equity as noted in the table above.  Net income for the year ended 2002 was $6.0 million compared to net income of $11.2 million at year end 2006.  Net income for the six months ended June 30, 2007 was $5.7 million.  The Company has paid cash dividends of $0.13 per share paid each quarter since 2004.

The Company meets its liquidity needs by managing cash and due from banks, federal funds purchased and sold, maturity of investment securities, principal repayments 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 and Federal Home Loan Bank advances.  During inflationary periods, interest rates generally increase and operating expenses generally rise.  When interest rates rise, variable rate loans and investments produce higher earnings; however, deposit and other borrowings interest expense also rise.  The Company monitors its interest rate risk as it applies to net income in a ramp up and down annually 200 basis points (2%) scenario and as it applies to economic value of equity in a shock up and down 200 (2%) basis points scenario.  The Company monitors operating expenses through responsibility center budgeting.

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 economy, the national economy, governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values and securities portfolio values; difficulties in interest rate risk management; the effects of competition in the banking business; difficulties in expanding the Company’s business into new markets; changes in governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions; failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans; and other factors.  The Company cautions that such factors are not exclusive.  The Company does not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, the Company.

10

Critical Accounting Estimates

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

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

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

11

Performance Overview -- Net Income

The Company’s net income for the second quarter of 2007 was $3.0 million, which was an increase of $45,000 (1.5%) compared to net income of $2.9 million for the second quarter of 2006.  Diluted net income per share for the three months ended June 30, 2007 was $0.54 compared to $0.55 for the three months ended June 30, 2006.  Net income for the first six months of 2007 was $5.7 million, an increase of $344,000 (6.4%) compared with net income of $5.4 million for the first six months of 2006.  The increase in net income for the three and six months ended June 30, 2007 as compared with the three and six months ended June 30, 2006, was primarily a result of increases in net interest income, somewhat offset by increases in noninterest expense and provision for loan losses.  Interest income on both loans and investment securities increased due to increased volumes and higher interest rates.  Interest expense on deposits, securities sold under repurchase agreements and other borrowings increased as a result of higher volumes and increase in interest rates.  The loan loss provision increased primarily due to loan volume growth which was facilitated by the opening of Southern Bank & Trust in September 2006.  Factors contributing to the increase in noninterest income for the six months ended June 30, 2007, were primarily due to an increase in retail investment income and trust services fees resulting from increased staff in the Wealth Management area somewhat offset by a decrease in investment securities (losses) gains, net due to a $526,000 gain recognized on the sale of equity securities in May 2006, partially offset by losses on the sale of agency securities.  Increases in cash surrender value of bank owned life insurance was primarily due to the purchase of additional policies in February 2006 and increases in interest rates.  Noninterest expense increased during the three and six months ended June 30, 2007 compared to the same periods ended June 30, 2006, primarily due to increases in salaries, employee benefits, occupancy expense and other operating expenses.  Significant changes in other operating expenses during the three and six month periods include increases in processing expense, marketing expense, IT maintenance expense, professional fees, contributions, and gain/loss on sale of fixed assets.

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Table 2 - Selected Balance Sheet Data
	June 30,		December 31,		Variance
	2007		2006		Amount			%
	(Dollars in thousands)
Cash and due from banks	$	25,027	$	25,710	$	(683	)		(2.7	%)
Federal funds sold		21,322		14,688		6,634			45.2	%
Investment securities		224,789		202,106		22,683			11.2	%
Loans		809,596		749,969		59,627			8.0	%
Assets		1,133,318		1,041,202		92,116			8.8	%
Deposits		898,111		801,763		96,348			12.0	%
Securities sold under repurchase agreements		69,581		70,020		(439	)		(0.6	%)
Liabilities		1,051,475		962,278		89,197			9.3	%
Stockholders' equity		81,843		78,924		2,919			3.7	%

Table 2 highlights significant changes in the balance sheet at June 30, 2007 as compared to December 31, 2006.  Assets increased $92.1 million, primarily the result of higher balances for loans and investment securities.  The increase in assets was funded by the increase in deposits of $96.3 million somewhat offset by a $5.0 million decrease in Federal Home Loan Bank borrowings.  Net income of $5.7 million less dividends paid of $1.4 million also contributed to the funding.

The annualized return on average assets for the Company was 1.06% for the six months ended June 30, 2007, compared to 1.20% for the same period last year.  While total assets have increased $92.1 million since second quarter 2006, net income has only increased $44,000 resulting in a decrease in ROA.  The annualized return on average stockholders’ equity was 14.19% for the six months ended June 30, 2007, compared to 16.47% for the same period last year.  The decrease is primarily attributable to the issuance of common stock and the related increase in additional paid in capital, the increase in retained earnings due to net income and decreases in accumulated other comprehensive 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.

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Table 3 - Average Balances, Income and Expenses, Yields and Rates
	Three Months Ended June 30, 2007							Three Months Ended June 30, 2006
	Average Amount		Annualized Average Yield or Rate			Amount Paid or Earned		Average Amount		Annualized Average Yield or Rate			Amount Paid or Earned
	(Dollars in thousands)
Interest-earning assets:
Loans	$	792,449		8.22	%	$	16,399	$	643,862		8.03	%	$	13,018
Investment securities		227,454		5.14	%		2,921		219,279		4.93	%		2,702
Federal funds sold		23,177		5.46	%		316		3,665		4.83	%		44
Interest-bearing deposits in other banks		511		5.48	%		7		512		4.49	%		6
Total interest-earning assets	$	1,043,591		7.48	%	$	19,643	$	867,318		7.23	%	$	15,770
Interest-bearing liabilities:
Deposits	$	769,266		4.26	%	$	8,165	$	608,932		3.65	%	$	5,547
Federal funds purchased / securities sold under repurchase agreements		61,431		5.24	%		803		59,724		4.87	%		725
Other borrowings		78,479		6.08	%		1,189		76,065		5.58	%		1,058
Total interest-bearing liabilities	$	909,176		4.48	%	$	10,157	$	744,721		3.95	%	$	7,330
Net interest margin/income:				3.58	%	$	9,486				3.84	%	$	8,440

Table 4 - Average Balances, Income and Expenses, Yields and Rates
	Six Months Ended June 30, 2007							Six Months Ended June 30, 2006
	Average Amount		Annualized Average Yield or Rate			Amount Paid or Earned		Average Amount		Annualized Average Yield or Rate			Amount Paid or Earned
	(Dollars in thousands)
Interest-earning assets:
Loans	$	776,823		8.20	%	$	31,903	$	625,967		7.92	%	$	24,830
Investment securities		216,130		5.12	%		5,533		212,726		4.85	%		5,158
Federal funds sold		26,138		5.26	%		682		8,750		4.48	%		195
Interest-bearing deposits in other banks		512		5.27	%		13		714		3.92	%		14
Total interest-earning assets	$	1,019,603		7.47	%	$	38,131	$	848,157		7.11	%	$	30,197
Interest-bearing liabilities:
Deposits	$	744,111		4.24	%	$	15,657	$	599,968		3.52	%	$	10,466
Federal funds purchased / securities sold under repurchase agreements		64,046		5.26	%		1,670		61,300		4.63	%		1,409
Other borrowings		79,531		5.74	%		2,264		69,059		5.56	%		1,905
Total interest-bearing liabilities	$	887,688		4.45	%	$	19,591	$	730,327		3.80	%	$	13,780
Net interest margin/income:				3.59	%	$	18,540				3.84	%	$	16,417

14

Net interest income increased $1.0 million (12.4%) during the three-month period and $2.1 million (12.9%) during the six-month period as compared to the same period in 2006.  Loan interest income increased $3.4 million and $7.1 million in the three and six month periods, respectively, while deposit interest expense increased $2.6 million and $5.2 million in the three and six month periods, respectively, all the result of rising interest rates and the continued growth of account balances.  The annual average balance for loans was $776.8 million at June 30, 2007 with an annualized average yield of 8.20% compared to $626.0 million at June 30, 2006 with an annualized average yield of 7.92%.  Interest-bearing deposits had an annual average balance of $744.1 million with an annualized average rate of 4.24% at June 30, 2007 compared to $600.0 million and 3.52% at June 30, 2006.  Other contributing factors during both the three and six month periods included increases in interest income on investment securities, increases in interest expense on other borrowings, securities sold under repurchase agreements and subordinated debentures, all the result of higher interest rates.

The Company’s net interest margin for the three and six months ended June 30, 2007 was 3.58% and 3.59% respectively as compared to 3.84% for both the three and six months ended June 30, 2006.  The rate for earning assets increased 25 basis points and 36 basis points for the three and six month periods, respectively, with higher average yields on loans and federal funds sold accounting for most of the increase.  The cost to fund earning assets increased 53 basis points and 65 basis points for the three and six month periods, respectively, primarily due to higher rates on deposits, securities sold under repurchase agreements, and subordinated debentures.

Noninterest Income

Table 5 - Noninterest Income
											��
	Three Months Ended										Six Months Ended
	June 30,				Variance						June 30,				Variance
	2007		2006		Amount			%			2007		2006		Amount			%
	(Dollars in thousands)										(Dollars in thousands)
Service charges and fees on deposits	$	1,581	$	1,540	$	41			2.7	%	$	2,978	$	2,892	$	86			3.0	%
Gain on sales of loans		1,320		1,271		49			3.9	%		2,605		2,525		80			3.2	%
Investment securities (losses) gains, net		-		284		(284	)	N/A				33		284		(251	)	N/A
Retail investment income		275		216		59			27.3	%		598		384		214			55.7	%
Trust services fees		285		198		87			43.9	%		558		391		167			42.7	%
Increase in cash surrender value of bank-owned life insurance		161		150		11			7.3	%		326		289		37			12.8	%
Miscellaneous income		162		147		15			10.2	%		329		296		33			11.1	%
Total noninterest income	$	3,784	$	3,806	$	(22	)		(0.6	%)	$	7,427	$	7,061	$	366			5.2	%

15

Noninterest income decreased $22,000 (0.6%) during the three-month period and increased $366,000 (5.2%) during the six-month period.  The most significant changes for the three and six month periods were increases in retail investment income, trust income somewhat offset by a decrease in net investment securities gains.  Decreases in net investment securities gains for both the three and six month periods were the result of a $526,000 gain recognized on the sale of equity securities, partially offset by losses on the sale of agency securities in second quarter 2006.  The increase in retail investment income is primarily due to broker production increases.  The increase in trust income is primarily due to volume growth.  Increases in cash surrender value of bank owned life insurance was primarily due to the purchase of additional policies in February 2006 and increases in interest rates.

Noninterest Expense

Table 6 - Noninterest Expense
	Three Months Ended									Six Months Ended
	June 30,				Variance					June 30,				Variance
	2007		2006		Amount		%			2007		2006		Amount		%
	(Dollars in thousands)									(Dollars in thousands)
Salaries and other personnel expense	$	4,628	$	4,505	$	123		2.7	%	$	9,424	$	8,945	$	479		5.4	%
Occupancy expenses		743		685		58		8.5	%		1,503		1,434		69		4.8	%
Other operating expenses		2,223		2,042		181		8.9	%		4,490		4,019		471		11.7	%
Total noninterest expense	$	7,594	$	7,232	$	362		5.0	%	$	15,417	$	14,398	$	1,019		7.1	%

Noninterest expense increased $362,000 (5.0%) during the three-month period and $1.0 million (7.1%) during the six-month period.  Salary expense increased during the three and six month periods primarily due to opening of Southern Bank and Trust in Aiken, South Carolina, new personnel due to continued company growth and expansion of the wealth management area, somewhat offset by an increase in the deferral of loan production expense in compliance with SFAS No. 91.  Increases in employee benefits during the three and six month periods were for FICA taxes, medical expenses, and employer 401K contributions directly related to salaries.  Increases for occupancy expenses during the three and six month periods were primarily from increases related to opening Southern Bank and Trust.  Additionally, rent expense increased for leased property for ATM’s and parking.  Property taxes increased due to the opening of two branch offices at GB&T and the opening of SB&T.  Depreciation expense increased primarily due to the opening of Southern Bank & Trust somewhat offset by a decrease due to the Company’s core hardware and software systems, which became fully depreciated by the end of the second quarter of 2006.  Other operating expenses increased $181,000 (8.9%) for the three-month period and $471,000 (11.7%) for the six-month period.  Increases in processing expenses during both the three and six month periods were attributable to new account growth for both retail and business checking products and retail investment processing fees related to increased production.  Marketing expenses increased primarily due to Southern Bank and Trust.  Contributions decreased for both the three and six month periods as the result of a $200,000 donation made to Georgia Bank Foundation in June 2006.  Increases in IT maintenance expense during the three and six month periods were due primarily to additional costs in software maintenance for Southern Bank and Trust and Georgia Bank and Trust, and installation and upgrade expense increased primarily from computer upgrades and Merchant Capture.  Professional fees increased for the six-month period due to Southern Bank & Trust’s external audit expense, trust advisory fees due to increased production, somewhat offset by a decrease in consulting fees related to state training tax credits and to the opening of Southern Bank and Trust.

16

Income Taxes

Income tax expense in the second quarter of 2007 totaled $1.7 million, an increase of $43,000 (2.7%) over the second quarter of 2006.  The effective tax rate for the three months ended June 30, 2007 and 2006 was 36.1% and 35.8%, respectively.  Income tax expense for the six months ended June 30, 2007 totaled $3.2 million for an effective tax rate of 35.9% compared to 33.7% for the six months ended June 30, 2006.  The increase in the effective tax rate for both the three and six month periods is primarily due to lower nontaxable interest income and an increase in the federal tax rate due to anticipated higher income for the year.

Asset Quality

Table 7 which follows shows the current and prior period amounts of non-performing assets.  Non-performing assets were $3.4 million at June 30, 2007, compared to $2.4 million at December 31, 2006 and $3.2 million at June 30, 2006.  Significant changes from December 2006 to June 2007 include a $293,000 increase in other real estate owned,  a $37,000 decrease in non-performing assets with balances less than $100,000, a $60,000 decrease for customers with balances greater than $100,000, and a $864,000 increase for one customer added to nonaccrual status.  The ratio of non-performing assets to total loans and other real estate was 0.38% at June 30, 2007, compared to 0.31% at December 31, 2006 and 0.48% at June 30, 2006.  The control and monitoring of non-performing assets continues to be a priority of management.

There were no loans past due 90 days or more and still accruing at June 30, 2007, December 31, 2006 and June 30, 2006.

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Table 7 - Non-Performing Assets
(Dollars in thousands)
	June 30, 2007			December 31, 2006			June 30, 2006
Nonaccrual loans	$	3,118		$	2,351		$	3,185
Other real estate owned		293			-			-
Total non-performing assets	$	3,411		$	2,351		$	3,185
Loans past due 90 days or more  and still accruing interest	$	-		$	-		$	-
Total non-performing assets to total loans and other real estate owned		0.38	%		0.31	%		0.48	%

Allowance for Loan Losses

The allowance for loan losses represents an allocation for probable incurred loan 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.”

When reviewing the allowance for loan losses, it is important to understand to whom the Company lends.  The following table sets forth the composition of the Company’s loan portfolio as of June 30, 2007 and December 31, 2006.

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Table 8 - Loan Portfolio Composition
	June 30, 2007						December 31, 2006
	Amount			%			Amount			%
	(Dollars in thousands)
Commercial financial and agricultural	$	87,971			10.87	%	$	80,823			10.78	%
Real estate
Commercial		213,794			26.41	%		198,453			26.46	%
Residential		173,482			21.43	%		158,543			21.14	%
Residential held for sale		11,890			1.47	%		14,857			1.98	%
Construction and development		292,880			36.18	%		266,875			35.58	%
Total real estate		692,046			85.48	%		638,728			85.17	%
Lease financing		34			0.00	%		116			0.02	%
Consumer
Direct		24,544			3.03	%		24,146			3.22	%
Indirect		5,232			0.65	%		6,232			0.83	%
Revolving		809			0.10	%		843			0.11	%
Total consumer		30,585			3.78	%		31,221			4.16	%
Deferred loan origination fees		(1,040	)		-0.13	%		(919	)		-0.12	%
Total		809,596			100.00	%	$	749,969			100.00	%

At June 30, 2007, the loan portfolio is comprised of 85.48% real estate loans.  Commercial, financial and agricultural loans comprise 10.87%, and consumer loans comprise 3.78% of the portfolio.

While the Company has 85.48% of its loan portfolio composed of real estate loans, this percentage is not significantly higher than in previous years.  Commercial real estate comprises 26.41% of the loan portfolio and is approximately half 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 (36.18%) has been an increasingly important portion of the real estate loan portfolio.  The Company carefully monitors the loans in this category since the repayment of these loans is generally dependent upon the sale of the real estate in the normal course of business and can be impacted by national and local economic conditions.  The residential category, 21.43% of the portfolio, represents those loans that the Company chooses to maintain in its portfolio rather than selling into the secondary market for marketing and competitive reasons and commercial loans secured by residential real estate.  The residential held for sale category, 1.47% of the portfolio, comprises loans that are in the process of being sold into the secondary market.  In these loans, the credit has been approved by the investor and the interest rate locked so that the Company minimizes credit and interest rate risk with respect to these loans.

The Company has no large loan concentrations to individual borrowers.  Unsecured loans at June 30, 2007 were $12.5 million.  While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may advise additions to the allowance based on their judgments about information available to them at the time of their examination.  Such regulatory guidance is considered, and the Company may recognize additions to the allowance as a result.

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Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based upon management’s analysis of potential 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 $1,030,000 was charged to expense for the quarter ended June 30, 2007 compared to $456,000 for the quarter ended June 30, 2006, and $1,606,000 for the six months ended June 30, 2007 compared to $960,000 for the six months ended June 30, 2006.  The increase in provision for loan losses for both three and six month periods is primarily due to the provision related to overall loan growth, including the new Thrift’s loan portfolio, and an increase in classified/watch loans.  The increase in the allowance for loan losses as of June 30, 2007 as compared to June 30, 2006 is primarily due to increases in outstanding loan balances, increases in the allowance applicable to specific loans, and increases to the allowance due to higher levels of Classified and Watch-rated debt.

Table 9 - Allowance for Loan Losses
	2007			2006
Beginning balance, January 1	$	9,777		$	9,125
Effects of SAB 108		-		$	(694	)
Provision charged to expense		1,605			504
Recoveries		413			259
Loans charged off		(662	)		(418	)
Ending balance, June 30	$	11,133		$	8,776

At June 30, 2007 the ratio of allowance for loan losses to total loans was 1.37% compared to 1.30% at December 31, 2006 and 1.31% at June 30, 2006.  Management considers the current allowance for loan losses appropriate based upon its analysis of the potential risk in the portfolio, although there can be no assurance that the assumptions underlying such analysis will continue to be correct.

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Liquidity and Capital Resources

The Company’s liquidity remains adequate to meet operating and loan funding requirements.  The loan to deposit ratio at June 30, 2007 was 90.1% compared to 93.5% at December 31, 2006 and 90.3% at June 30, 2006.  The decrease in the loan to deposit ratio from December 31, 2006 to June 30, 2007 reflects deposit growth at a higher rate than loan growth during the first six months of 2007.  The increase in the loan to deposit ratio from June 30, 2006 to December 31, 2006 reflects loan growth at a higher rate than deposit growth during that time period.  Deposits at June 30, 2007 and December 31, 2006 include $76.2 million and $67.4 million of brokered certificates of deposit, respectively.  GB&T has also utilized borrowings from the Federal Home Loan Bank.  GB&T maintains a line of credit with the Federal Home Loan Bank approximating 10% of GB&T’s total assets.  Federal Home Loan Bank advances are collateralized by eligible first mortgage loans, commercial real estate loans and investment securities.  These borrowings totaled $55.0 million at June 30, 2007.  GB&T maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20.0 million and with The Bankers Bank, Atlanta, Georgia, for advances up to $10.0 million.  At June 30, 2007, $10.0 million was outstanding with SunTrust Robinson Humphrey.  GB&T has a federal funds purchased accommodation with The Bankers Bank, Atlanta, Georgia, for advances up to $16.7 million and with SunTrust Bank, Atlanta, Georgia for advances up to $10.0 million, while SB&T has a federal funds purchased accommodation with The Bankers Bank, Atlanta, Georgia, for advances up to $3.3 million.  Additionally, liquidity needs can be satisfied by the structuring of the maturities of investment securities and the pricing and maturities on loans and deposits offered to customers.  The Company also uses retail securities sold under repurchase agreements to fund growth.  Retail securities sold under repurchase agreements were $59.6 million at June 30, 2007.

Shareholders’ equity to total assets was 7.22% at June 30, 2007 compared to 7.58% at December 31, 2006 and 7.07% at June 30, 2006.  Stockholders’ equity as of June 30, 2007 includes proceeds of $5.0 million from a private placement stock offering held during the third and fourth quarters of 2006.  The capital of the Company exceeded all required regulatory guidelines at June 30, 2007.  The Company’s Tier 1 risk-based, total risk-based and leverage capital ratios were 12.24%, 13.51%, and 9.44%, respectively, at June 30, 2007.  The following table reflects the current regulatory capital levels in more detail, including comparisons to the regulatory minimums.

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Table 10 - Regulatory Capital Requirements
June 30, 2007
(Dollars in Thousands)
	Actual					Required for capital adequacy purposes					Excess
	Amount		Percent			Amount		Percent			Amount		Percent
Southeastern Bank Financial Corporation
Risk-based capital:
Tier 1 capital	$	104,934		12.24	%		34,305		4.00	%		70,629		8.24	%
Total capital		115,836		13.51	%		68,609		8.00	%		47,227		5.51	%
Tier 1 leverage ratio		104,934		9.44	%		44,474		4.00	%		60,460		5.44	%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital	$	81,288		9.81	%		33,151		4.00	%		48,137		5.81	%
Total capital		91,648		11.06	%		66,302		8.00	%		25,346		3.06	%
Tier 1 leverage ratio		81,288		7.75	%		41,962		4.00	%		39,326		3.75	%
Southern Bank & Trust
Risk-based capital:
Tier 1 capital	$	14,219		24.69	%		2,304		4.00	%		11,915		20.69	%
Total capital		14,926		25.92	%		4,607		8.00	%		10,319		17.92	%
Tier 1 leverage ratio		14,219		25.45	%		2,235		4.00	%		11,984		21.45	%

Management is not aware of any 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.

22

Unfunded commitments to extend credit where contract amounts represent potential credit risk totaled $197.9 million at June 30, 2007.  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 11 - Commitments and Contractual Obligations ($ in thousands)	Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
Lines of credit	$	197,926		-		-		-
Mortgage loan commitments	$	10,548		-		-		-
Lease agreements		151		206		151		149
Deposits		847,781		42,849		6,427		1,054
Securities sold under repurchase agreements		59,581		-		-		-
FHLB advances		-		12,000		18,000		25,000
Other borrowings		1,000		-		-		-
Subordinated debentures		-		-		-		20,000
Total commitments and contractual obligations	$	1,116,987	$	55,055	$	24,578	$	46,203

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.

Effects of Inflation and Changing Prices

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

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

As of June 30, 2007, 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, 2006.  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, 2006 included in the Company’s 2006 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, 2006, which could materially affect its business, financial condition or future results. The risks described 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

The following table sets forth information regarding the Company’s purchases of its common stock on a monthly basis during the second quarter of 2007.  Of the 780 shares repurchased during the second quarter, 180 were privately negotiated and 600 were made in the open market.

Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Appropriate Dollar Value) of Shares (or Units) Yet Be Purchased Under the Plans or Programs
April 1 through April 30, 2007	-	-	4,899	95,101
May 1 through May 31, 2007	180	38.49	5,079	94,921
June 1 through June 30, 2007	600	35.92	5,679	94,321
Total	780	$36.51	5,679	94,321

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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 second quarter of 2007.

Item 3. Defaults Upon Senior Securities

Not applicable

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

(a) The Annual Meeting of Shareholders was held on April 25, 2007 at the Company’s Cotton Exchange office located at 32 8^th Street, Augusta, Georgia.

(b) The following directors were elected for a term of one year and until a successor is duly qualified and elected:

William J. Badger

R. Daniel Blanton

Warren Daniel

Edward G. Meybohm

Robert W. Pollard, Jr.

Larry S. Prather, Sr.

Randolph R. Smith

Ronald L. Thigpen

John W. Trulock, Jr.

(c) The following matters were voted on at the meeting as was previously identified in the Proxy materials forwarded to each shareholder:

1. Proposal to elect the nine individuals nominated by management as Directors.

Votes were cast as follows:

Director	For	Withhold
William J. Badger	4,866,335	0
R. Daniel Blanton	4,862,835	3,500
Warren Daniel	4,866,335	0
Edward G. Meybohm	4,866,335	0
Robert W. Pollard, Jr.	4,862,835	3,500
Larry S. Prather, Sr.	4,866,335	0
Randolph R. Smith, M.D.	4,862,835	3,500
Ronald L. Thigpen	4,862,835	3,500
John W. Trulock, Jr.	4,866,335	0

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Item 5. Other Information

None

Item 6. Exhibits

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:	August 9, 2007	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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