Southeastern Bank Financial (SBFC) 10-Q 2008 Q3 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 endedSeptember 30, 2008.

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.000-24172

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)

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. Yesþ Noo

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

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

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:

5,987,674 shares of common stock, $3.00 par value per share, outstanding as of October 31, 2008.

SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX

	Page
Part I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007		3
Consolidated Statements of Income for the Three and Nine Months ended September 30, 2008 and 2007		4
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2008 and 2007		5
Notes to Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures about Market Risk		28
Item 4. Controls and Procedures		28
Part IIOther Information
Item 1. Legal Proceedings		*
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3. Defaults Upon Senior Securities		*
Item 4. Submission of Matters to a Vote of Security Holders		*
Item 5. Other Information		*
Item 6. Exhibits		30
Signature		31
*     No information submitted under this caption
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

1

PART I
FINANCIAL INFORMATION

2

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

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

	September 30,			December 31,
	2008			2007
	(Unaudited)
Assets
Cash and due from banks	$	28,712		$	24,558
Federal funds sold		43,210			—
Interest-bearing deposits in other banks		500			500
Cash and cash equivalents		72,422			25,058
Investment securities
Available-for-sale		240,916			245,429
Held-to-maturity, at cost (fair values of $698 and $1,467, respectively)		689			1,435
Loans held for sale		15,187			11,303
Loans		985,239			871,440
Less allowance for loan losses		(13,516	)		(11,800	)
Loans, net		971,723			859,640
Premises and equipment, net		34,263			32,612
Accrued interest receivable		6,436			7,416
Bank-owned life insurance		17,209			16,660
Restricted equity securities		6,595			5,060
Other assets		12,690			8,367
	$	1,378,130		$	1,212,980
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	109,742		$	101,272
Interest-bearing:
NOW accounts		151,886			132,186
Savings		280,699			289,731
Money management accounts		70,237			73,609
Time deposits over $100,000		366,536			243,501
Other time deposits		146,685			111,867
		1,125,785			952,166
Federal funds purchased and securities sold under repurchase agreements		48,607			81,166
Advances from Federal Home Loan Bank		84,000			59,000
Other borrowed funds		400			500
Accrued interest payable and other liabilities		8,777			10,390
Subordinated debentures		20,000			20,000
Total liabilities		1,287,569			1,123,222
Stockholders’ equity:
Common stock, $3.00 par value; 10,000,000 shares authorized; 5,987,451 and 5,976,811 shares issued in 2008 and 2007, respectively; 5,987,169 and 5,967,536 shares outstanding in 2008 and 2007, respectively		17,962			16,301
Additional paid-in capital		55,130			39,518
Retained earnings		21,573			34,228
Treasury stock, at cost; 282 and 9,275 shares in 2008 and 2007, respectively		(7	)		(317	)
Accumulated other comprehensive (loss) income, net		(4,097	)		28
Total stockholders’ equity		90,561			89,758
	$	1,378,130		$	1,212,980

See accompanying notes to consolidated financial statements.

3

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

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

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008		2007
Interest income:
Loans, including fees	$	15,003		$	17,139		$	46,483	$	49,042
Investment securities		3,345			3,016			9,944		8,548
Federal funds sold		188			220			375		902
Interest-bearing deposits in other banks		7			6			18		20
Total interest income		18,543			20,381			56,820		58,512
Interest expense:
Deposits		7,497			8,688			22,539		24,346
Federal funds purchased and securities sold under repurchase agreements		295			830			1,160		2,499
Other borrowings		1,009			1,127			3,072		3,391
Total interest expense		8,801			10,645			26,771		30,236
Net interest income		9,742			9,736			30,049		28,276
Provision for loan losses		2,073			1,001			4,996		2,607
Net interest income after provision for loan losses		7,669			8,735			25,053		25,669
Noninterest income:
Service charges and fees on deposits		1,955			1,675			5,446		4,654
Gain on sales of loans		1,529			1,350			4,365		3,954
(Loss) gain on sale of fixed assets		(1	)		1,095			7		1,032
Investment securities gains (losses), net		21			(278	)		88		(245	)
Retail investment income		277			296			841		894
Trust service fees		288			271			873		830
Increase in cash surrender value of bank-owned life insurance		190			169			548		495
Miscellaneous income		178			168			652		497
Total noninterest income		4,437			4,746			12,820		12,111
Noninterest expense:
Salaries and other personnel expense		5,202			4,905			15,755		14,329
Occupancy expenses		1,122			845			3,153		2,348
Other operating expenses		3,041			2,558			8,642		6,985
Total noninterest expense		9,365			8,308			27,550		23,662
Income before income taxes		2,741			5,173			10,323		14,118
Income tax expense		866			1,817			3,405		5,031
Net income	$	1,875		$	3,356		$	6,918	$	9,087
Basic net income per share	$	0.31		$	0.56		$	1.16	$	1.52
Diluted net income per share	$	0.31		$	0.56		$	1.15	$	1.50
Weighted average common shares outstanding		5,976,883			5,971,086			5,967,310		5,974,473
Weighted average number of common and common equivalent shares outstanding		6,018,584			6,042,428			6,010,367		6,048,633

See accompanying notes to consolidated financial statements.

4

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	6,918		$	9,087
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		1,685			1,114
Deferred income tax benefit		(1,003	)		—
Provision for loan losses		4,996			2,607
Net investment securities (gains) losses		(88	)		245
Net accretion of discount on investment securities		(133	)		(113	)
Increase in CSV of bank owned life insurance		(548	)		(495	)
Stock options compensation cost		155			405
Gain on disposal of premises and equipment		(7	)		(1,032	)
Loss (gain) on the sale of other real estate		4			(3	)
Gain on sales of loans		(4,365	)		(3,954	)
Real estate loans originated for sale		(197,388	)		(198,634	)
Proceeds from sales of real estate loans		197,869			207,883
Decrease (increase) in accrued interest receivable		980			(1,442	)
Increase in other assets		(326	)		(305	)
Decrease in accrued interest payable and other liabilities		(1,613	)		(1,271	)
Net cash provided by operating activities		7,136			14,092
Cash flows from investing activities:
Proceeds from sales of available for sale securities		27,285			8,310
Proceeds from maturities of available for sale securities		59,853			35,248
Proceeds from maturities of held to maturity securities		765			1,045
Purchase of available for sale securities		(89,165	)		(76,342	)
Purchase of restricted equity securities		(1,535	)		(619	)
Proceeds from redemption of FHLB stock		—			495
Net increase in loans		(117,943	)		(105,672	)
Additions to premises and equipment		(4,841	)		(7,813	)
Proceeds from sale of other real estate		482			293
Proceeds from sale of premises and equipment		1,512			2,994
Net cash used in investing activities		(123,587	)		(142,061	)
Cash flows from financing activities:
Net increase in deposits		173,618			149,465
Net decrease in federal funds purchased and securities sold under repurchase agreements		(32,558	)		(8,065	)
Advances from Federal Home Loan Bank		25,000			10,000
Payments of Federal Home Loan Bank advances		—			(11,000	)
Principal payments on other borrowed funds		(100	)		(100	)
Purchase of treasury stock		(445	)		(290	)
Payment of cash dividends		(2,186	)		(2,118	)
Proceeds from stock options exercised		466			—
Proceeds from Directors’ stock purchase plan		25			—
Cash paid for fractional shares		(5	)		—
Net cash provided by financing activities		163,815			137,892
Net increase in cash and cash equivalents	$	47,364		$	9,923
Cash and cash equivalents at beginning of period		25,058			40,911
Cash and cash equivalents at end of period	$	72,422		$	50,834
Supplemental disclosures of cash paid during the period for:
Interest	$	27,661		$	30,153
Income taxes	$	5,190		$	6,444
Supplemental information on noncash investing activities:
Loans transferred to other real estate	$	863		$	341

See accompanying notes to consolidated financial statements.

5

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2008

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 and nine months ended September 30, 2008 and 2007 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, 2007.

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 nine months ended September 30, 2008 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.

6

Note 2 — Fair Value Measurements

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” at the beginning of our 2008 fiscal year. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurement. According to SFAS No. 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 applies to all assets and liabilities that are being measured and reported on a fair value basis. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. This statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1:	Quoted prices in active markets for identical assets or liabilities.
Level 2:	Significant other observable inputs other than level 1 prices, such as quoted market prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
	Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3:	Unobservable inputs that are not corroborated by market data.

In determining the appropriate levels, the Company used the following methods and significant assumptions to estimate the fair value of items:

Securities: The fair values of trading securities, held-to-maturity securities and substantially all securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

At September 30, 2008, the fair values of four available-for-sale securities totaling $4,412 were measured using discounted cash flows (Level 3 inputs). Prior to this date, the fair values for these securities were measured using the Level 2 inputs described above. These securities, all of which are subordinated debentures issued by financial institutions, were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the third quarter. The discount rates used in the valuation model were based on current spreads to U.S. Treasury rates of long-term corporate debt obligations with maturities and risk characteristics similar to the subordinated debentures. Based on the reduced level of liquidity in the market for long-term corporate debt obligations, we believe that adjustments to the valuation model discount rates for the illiquidity in the subordinated debentures market are not necessary.

Each of these securities is rated A2 by Moody’s, A- by Standard & Poor’s and A by Fitch. As with our other investment securities, we expect the fair value of these subordinated debentures to recover as liquidity returns to the market and we have the ability and intent to hold the subordinated debentures during the recovery period.

Impaired Loans: The fair value of impaired loans is determined by reviewing the estimated amount realizable from collateral liquidation based upon an appraisal as well as the estimated amounts realizable from borrowers and guarantors (Level 3 inputs).

7

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).

Assets and Liabilities Measured on a Recurring Basis

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy:

			Quoted
			Prices in
			Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs
	2008		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Available-for-sale securities	$	240,916	$	101	$	236,403	$	4,412
Tax credits		534		—		—		534
Held-to-maturity securities		698		—		698		—
Total	$	242,148	$	101	$	237,101	$	4,946

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended September 30, 2008:

Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)

Tax Credits, Jan. 1, 2008	$	594
Total realized losses included in earnings		(60	)
Tax Credits, September 30, 2008	$	534
Available-for-sale securities	$	4,412
Total	$	4,946

8

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Quoted
			Prices in
			Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs
	2008		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans		18,011		—		—		18,011

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 $18,011, with a valuation allowance of $1,749.

In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company has not fully implemented SFAS 157 for nonfinancial assets and liabilities. Nonfinancial assets at September 30, 2008 consist of other real estate owned, the amount of which was not material to the financial statements.

Note 3 — 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 $1,875 coupled with a $1,879 change in other comprehensive income for the quarter resulted in total comprehensive loss of $4 for the three months ended September 30, 2008 compared to total comprehensive income of $5,557 for the three months ended September 30, 2007. Net income of $6,918 coupled with a $4,126 change in other comprehensive income for the year resulted in total comprehensive income of $2,792 for the nine months ended September 30, 2008 compared to $9,692 for the nine months ended September 30, 2007.

Note 4 — Dividends Declared

On April 23, 2008, the Company declared a 10% stock dividend which was paid on June 2, 2008 to shareholders of record as of May 22, 2008. No fractional shares were issued. Shareholders entitled to fractional shares received cash for the fractional shares at a price equal to the closing price of the stock as of the record date, adjusted for the stock dividend. 542,343 additional shares of common stock and 854 shares of treasury stock were issued in connection with the stock dividend. The Company’s earnings per share has been adjusted accordingly for all periods presented.

9

On July 16, 2008, the Company declared a quarterly cash dividend of $0.13 per share on outstanding shares. The dividend was paid on August 18, 2008 to shareholders of record as of August 5, 2008.

On October 8, 2008, the Company declared a quarterly cash dividend of $0.13 per share on outstanding shares. The dividend is payable on November 20, 2008 to shareholders of record as of November 5, 2008.

Note 5 — 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 decline in value is considered temporary and the issuers are either obligations of the U.S. government or are of high credit quality and the value is expected to recover as the obligations approach maturity.

Note 6 — Recently Issued Accounting Standards on the Financial Statements

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 new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

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

10

Note 7 — Participation in the Treasury Capital Purchase Program

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which provides the U. S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act is the Treasury Capital Purchase Program (CPP), which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1% of Risk-Weighted Assets, with a maximum investment equal to the lesser of 3 percent of Total Risk-Weighted Assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9%, thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. The Company is evaluating its participation in the CPP. Participation in the program is not automatic and subject to approval by the Company’s principal regulator, the Federal Reserve, and the Treasury.

11

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. SB&T Capital Corporation (the “LPO”) a wholly-owned subsidiary of the Bank, was organized on August 16, 2007 and opened an office in Greenville, South Carolina. On November 1, 2007 the Bank entered into an Operating Agreement with NMF Asset Management LLC (“NMF”) whereby the Bank became a 30% partner. NMF is an investment management firm that provides services to individuals, trusts, pensions, nonprofit organizations as well as other institutions. Southern Bank & Trust (the “Thrift”), a federally chartered thrift, operates three full service branches in North Augusta and Aiken, South Carolina. Effective first quarter 2008 the Thrift began originating mortgage loans to be sold in the secondary market. 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 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 15.62% of all deposits and was the second largest depository institution at June 30, 2008, 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.

12

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 for the three and nine months ended September 30, 2008 as compared with the three and nine months ended September 30, 2007 due to lower interest rates and increased nonaccruals offset in part by increased volumes. Interest income on investment securities increased due to higher interest rates and increased volumes. Service charges and fees on deposits increased as a result of increases in NSF income on both retail and business checking accounts and ATM/Debit card income. The introduction of risk based pricing, which has resulted in higher coupon rates, resulted in an increase in gain on sales of loans for the three and nine months ended September 30, 2008 as compared with the three and nine months ended September 30, 2007.

Table 1 — Selected Financial Data

	September 30,			December 31,			December 31,
	2008			2007			2003
	(Dollars in thousands)
Assets	$	1,378,130		$	1,212,980		$	630,633
Loans		1,000,426			882,743			432,679
Deposits		1,125,785			952,166			483,952
Annualized return on average total assets		0.71	%		1.04	%		1.31	%
Annualized return on average equity		10.39	%		14.03	%		15.62	%

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 returns on assets and equity as noted in the table above. Annualized return on average total assets and annualized return on average equity have declined recently due primarily to increased levels of non-performing assets which have resulted in higher loan loss provision. Net income for the year ended 2003 was $7.9 million compared to net income of $11.8 million at year end 2007. Net income for the nine months ended September 30, 2008 was $6.9 million. Current market conditions along with increases to the provision for loan losses had a significant affect on net income for the third quarter 2008. The Company has paid cash dividends of $0.13 per share each quarter since 2004.

The Company meets its liquidity needs by managing cash and due from banks, federal funds purchased and sold, maturity of investment securities, principal repayments 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%) 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.

13

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.

Critical Accounting Estimates

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

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects the Company’s earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management’s estimate of the level of inherent 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.

14

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.

Performance Overview

The Company’s net income for the third quarter of 2008 was $1,875, which was a decrease of $1,481 (44.12%) compared to net income of $3,356 for the third quarter of 2007. Diluted net income per share for the three months ended September 30, 2008 was $0.31 compared to $0.56 for the three months ended September 30, 2007. Net income for the first nine months of 2008 was $6,918, a decrease of $2,169 (23.86%) compared with net income of $9,087 for the first nine months of 2007. The decrease in net income for the three and nine months ended September 30, 2008 as compared with the three and nine months ended September 30, 2007, was primarily a result of increases in the provision for loan losses due to increased levels of nonperforming assets. Interest income on loans decreased due to lower interest rates and increased levels of nonaccrual loans somewhat offset by increased volumes. Interest income on investment securities increased due to increased volumes and higher interest rates. Interest expense on deposits, securities sold under repurchase agreements and other borrowings decreased as a result of lower interest rates.

Factors contributing to the increase in noninterest income for the nine months ended September 30, 2008, were increases in service charges and fees on deposits, gain on sales of loans, and net investment securities gains somewhat offset by a decrease in gain on sale of fixed assets. Service charges and fees on deposits increased primarily due to increases in NSF income and ATM/Debit card income. The increased gain on sales of loans was due to the introduction of risk based pricing. Gain on sale of fixed assets decreased from 2007 due to a $1,097 gain on the sale of property recorded in August 2007. Noninterest expense increased during the three and nine months ended September 30, 2008 compared to the same periods ended September 30, 2007, primarily due to increases in salaries and occupancy expense related to Company growth and other operating expenses. Significant changes in other operating expenses during the three and nine month periods include increases in processing, marketing, IT maintenance expense, communications, professional fees, and insurance and tax expense.

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Table 2 — Selected Balance Sheet Data

	September 30,		December 31,		Variance
	2008		2007		Amount			%
	(Dollars in thousands)
Cash and due from banks	$	28,712	$	24,558	$	4,154			16.9	%
Federal funds sold		43,210		—		43,210			N/A
Investment securities		241,605		246,864		(5,259	)		(2.1	%)
Loans		1,000,426		882,743		117,683			13.3	%
Assets		1,378,130		1,212,980		165,150			13.6	%
Deposits		1,125,785		952,166		173,619			18.2	%
Securities sold under repurchase agreements		48,607		81,166		(32,559	)		(40.1	%)
Advances from Federal Home Loan Bank		84,000		59,000		25,000			42.4	%
Liabilities		1,287,569		1,123,222		164,347			14.6	%
Stockholders’ equity		90,561		89,758		803			0.9	%

Table 2 highlights significant changes in the balance sheet at September 30, 2008 as compared to December 31, 2007. Assets increased $165,150, primarily the result of higher balances for fed funds sold and loans. The $117,683 increase in loans included the purchase of a $29,000 loan portfolio. The increase in assets was funded by an increase in deposits of $173,619 along with increases in Federal Home Loan Bank advances, somewhat offset by decreases in securities sold under repurchase agreements. Net income of $6,918 less dividends paid of $2,185 also contributed to the funding. The bank enhanced its liquidity position by increasing cash and cash equivalents $47,000 in light of current economic conditions and volatility in the banking industry.

The annualized return on average assets for the Company was 0.71% for the nine months ended September 30, 2008, compared to 1.10% for the same period last year. While total assets have increased $190,210 since third quarter 2007, net income has decreased $2,169 resulting in a decrease in ROA.

The annualized return on average stockholders’ equity was 10.39% for the nine months ended September 30, 2008, compared to 14.77% for the same period last year. The decrease is primarily attributable to the decrease in net income and increases in accumulated other comprehensive income.

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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 Sept. 30, 2008							Three Months Ended Sept. 30, 2007
			Annualized							Annualized
			Average							Average
	Average		Yield or			Amount Paid		Average		Yield or			Amount Paid
	Amount		Rate			or Earned		Amount		Rate			or Earned
	(Dollars in thousands)
Interest-earning assets:
Loans	$	968,298		6.09	%	$	15,003	$	826,787		8.14	%	$	17,139
Investment securities		248,398		5.39	%		3,345		230,660		5.23	%		3,016
Federal funds sold		39,133		1.91	%		188		16,237		5.38	%		220
Interest-bearing deposits in other banks		500		5.40	%		7		500		5.40	%		6
Total interest-earning assets	$	1,256,329		5.82	%	$	18,543	$	1,074,184		7.47	%	$	20,381
Interest-bearing liabilities:
Deposits	$	962,011		3.09	%	$	7,497	$	803,509		4.29	%	$	8,688
Federal funds purchased / securities sold under repurchase agreements		59,266		1.97	%		295		63,581		5.18	%		830
Other borrowings		104,171		3.84	%		1,009		78,618		5.69	%		1,127
Total interest-bearing liabilities	$	1,125,448		3.10	%	$	8,801	$	945,708		4.47	%	$	10,645
Net interest margin/income:				3.04	%	$	9,742				3.54	%	$	9,736

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Table 4 — Average Balances, Income and Expenses, Yields and Rates

	Nine Months Ended Sept. 30, 2008							Nine Months Ended Sept. 30, 2007
			Annualized							Annualized
			Average							Average
	Average		Yield or			Amount Paid		Average		Yield or			Amount Paid
	Amount		Rate			or Earned		Amount		Rate			or Earned
	(Dollars in thousands)
Interest-earning assets:
Loans	$	937,175		6.54	%	$	46,483	$	793,660		8.18	%	$	49,042
Investment securities		249,490		5.31	%		9,944		221,027		5.16	%		8,548
Federal funds sold		24,632		2.03	%		375		22,802		5.29	%		902
Interest-bearing deposits in other banks		500		5.00	%		18		508		5.31	%		20
Total interest-earning assets	$	1,211,797		6.20	%	$	56,820	$	1,037,997		7.47	%	$	58,512
Interest-bearing liabilities:
Deposits	$	918,478		3.27	%	$	22,539	$	764,128		4.26	%	$	24,346
Federal funds purchased / securities sold under repurchase agreements		62,043		2.49	%		1,160		63,889		5.23	%		2,499
Other borrowings		96,969		4.22	%		3,072		79,223		5.72	%		3,391
Total interest-bearing liabilities	$	1,077,490		3.31	%	$	26,771	$	907,240		4.46	%	$	30,236
Net interest margin/income:				3.25	%	$	30,049				3.57	%	$	28,276

Net interest income increased $6 (0.06%) during the three month period and $1,773 (6.27%) during the nine month period as compared to the same period in 2007. Loan interest income decreased $2,136 and $2,559 in the three and nine month periods as a result of decreasing interest rates and increased nonaccruals offset in part by the continued growth of account balances. Deposit interest expense decreased $1,191 and $1,807 in the three and nine month periods as a result of decreasing interest rates offset in part by the continued growth of account balances. The annual average balance for loans was $937,175 at September 30, 2008 with an annualized average yield of 6.54% compared to $793,660 at September 30, 2007 with an annualized average yield of 8.18%. Interest-bearing deposits had an annual average balance of $918,478 with an annualized average rate of 3.27% at September 30, 2008 compared to $764,128 and 4.26% at September 30, 2007. Other contributing factors during both the three and nine month periods included increases in interest income on investment securities and decreases in interest expense on securities sold under repurchase agreements.

The Company’s net interest margin for the three and nine months ended September 30, 2008 was 3.04% and 3.25%, respectively, as compared to 3.54% and 3.57% for the three and nine months ended September 30, 2007, respectively. This decrease in the net interest margin for the three and nine month periods was impacted by increased levels of nonaccrual loans which resulted in the reversal of $365 in interest income. The Company presently expects this trend of increasing nonaccrual loans and the resultant impact on net interest income to continue until property values in the Company’s primary market stabilize. The rate for earning assets decreased 165 basis points and 127 basis points for the three and nine month periods, with lower average yields on loans and federal funds sold accounting for most of the decrease. The cost to fund earning assets decreased 137 basis points and 115 basis points for the three and nine month periods, respectively, primarily due to lower rates on deposits and securities sold under repurchase agreements.

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Noninterest Income

Table 5 — Noninterest Income

	Three Months Ended												Nine Months Ended
	September 30,						Variance						September 30,					Variance
	2008			2007			Amount			%			2008		2007			Amount			%
	(Dollars in thousands)												(Dollars in thousands)
Service charges and fees on deposits	$	1,955		$	1,675		$	280			16.7	%	$	5,446	$	4,654		$	792			17.0	%
Gain on sales of loans		1,529			1,350			179			13.3	%		4,365		3,954			411			10.4	%
Gain on sale of fixed assets		(1	)		1,095			(1,096	)		(100.1	%)		7		1,032			(1,025	)		(99.3	%)
Investment securities gains (losses), net		21			(278	)		299			(107.6	%)		88		(245	)		333			(135.9	%)
Retail investment income		277			296			(19	)		(6.4	%)		841		894			(53	)		(5.9	%)
Trust services fees		288			271			17			6.3	%		873		830			43			5.2	%
Increase in cash surrender value of bank-owned life insurance		190			169			21			12.4	%		548		495			53			10.7	%
Miscellaneous income		178			168			10			6.0	%		652		497			155			31.2	%
Total noninterest income	$	4,437		$	4,746		$	(309	)		(6.5	%)	$	12,820	$	12,111		$	709			5.9	%

Noninterest income decreased $309 (6.51%) during the three month period and increased $709 (5.85%) during the nine month period. The most significant changes for the three and nine month periods were a decrease in gain on sale of fixed assets offset by increases in service charges and fees on deposits, gain on sales of loans, and net investment securities gains. Gain on sale of fixed assets is down in 2008 as compared to 2007 due to a $1,097 gain on the sale of the Operations Campus located in Augusta, Georgia in August 2007. Service charges and fees on deposits increased primarily due to increases in NSF income on retail and business checking accounts and ATM/Debit card income. The increased gain on sales of loans was due to the introduction of risk based pricing which has resulted in higher coupon rates. Net investment securities gains were up in 2008 as compared to 2007 due to a $278 investment security loss recognized in third quarter 2007.

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Noninterest Expense

Table 6 — Noninterest Expense

	Three Months Ended									Nine Months Ended
	September 30,				Variance					September 30,				Variance
	2008		2007		Amount		%			2008		2007		Amount		%
	(Dollars in thousands)									(Dollars in thousands)
Salaries and other personnel expense	$	5,202	$	4,905	$	297		6.1	%	$	15,755	$	14,329	$	1,426		10.0	%
Occupancy expenses		1,122		845		277		32.8	%		3,153		2,348		805		34.3	%
Other operating expenses		3,041		2,558		483		18.9	%		8,642		6,985		1,657		23.7	%
Total noninterest expense	$	9,365	$	8,308	$	1,057		12.7	%	$	27,550	$	23,662	$	3,888		16.4	%

Noninterest expense increased $1,057 (12.72%) during the three-month period and $3,888 (16.43%) during the nine-month period.

Salaries and other personnel expenses:

Salaries and other personnel expense increased $297 (6.1%) during the three month period and $1,426 (10.0%) during the nine month period as compared to the same period in 2007. This increase was primarily due to the opening of new branches in North Augusta and Aiken, South Carolina, and in Evans, Georgia as well as the addition of a loan production office in Greenville, South Carolina. The Company’s continued growth has resulted in the addition of new personnel, resulting in increased salaries, somewhat offset by increases in the deferral of loan production expense in compliance with SFAS No. 91.

Occupancy expenses:

Increases in occupancy expenses during the three and nine month periods were primarily due to increased depreciation expense as a result of the opening of new branches and the new Operations Center. Additionally, rent and lease expense increased due to the opening of the North Augusta branch as well as the loan production office in Greenville, South Carolina.

Other operating expenses:

Other operating expenses increased $483 (18.9%) during the three month period and $1,657 (23.7%) during the nine month period. Increases in processing expenses were attributable to increases in ATM processing and retail checking account expense due to higher levels of transaction accounts, and payroll processing fees related to Company growth. Marketing expenses increased as a result of agency fees and additional expenses for TV and other print media advertising due to a new branding campaign. Increases in IT maintenance expense during the three and nine month periods were primarily due to additional costs in software maintenance for SB&T and GB&T as a result of Company growth. Communications expense increased as a result of additional telephone expense due to the opening of new branches. Professional fees increased from 2007 as a result of outsourcing the Sarbanes Oxley testing. Increases in insurance and tax expenses were attributable to the FDIC credit of $96 that was used in 2007.

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Income Taxes

Income tax expense in the third quarter of 2008 totaled $866, a decrease of $951 (52.34%) over the third quarter of 2007. The effective tax rate for the three months ended September 30, 2008 and 2007 was 31.6% and 35.1%, respectively. Income tax expense for the nine months ended September 30, 2008 totaled $3,405 for an effective tax rate of 33.0% compared to 35.6% for the nine months ended September 30, 2007. A decrease in pretax income coupled with a higher proportion of nontaxable interest income resulted in a decrease in income tax expense and the effective income tax rate for both the three and nine month periods.

Asset Quality

Table 7 which follows shows the current and prior period amounts of non-performing assets. Non-performing assets were $38,282 at September 30, 2008, compared to $5,495 at December 31, 2007 and $2,579 at September 30, 2007. Significant changes from December 2007 to September 2008 include a $377 increase in other real estate owned, a $265 increase in non-accrual loans with balances less than $100, and a $32,127 increase for customers with balances greater than $100 due to $33,136 from new nonaccrual loans, somewhat offset by a $536 foreclosure as well as payments on existing nonaccrual loan balances. The ratio of non-performing assets to total loans and other real estate was 3.82% at September 30, 2008, compared to 0.62% at December 31, 2007 and 0.30% at September 30, 2007. The control and monitoring of non-performing assets continues to be a priority of management.

The increase in non-performing assets is comprised mainly of several loan relationships in the ADC, commercial real estate and 1-4 family residential mortgage categories, including certain participations purchased. The primary reasons for the increases in non-performing assets are national economic conditions and local real estate market conditions in several of the markets in which the Bank operates. These factors have combined to slow the rates of absorption for developers’ residential lots and builders’ completed homes.

There were no loans past due 90 days or more and still accruing at September 30, 2008, December 31, 2007 and September 30, 2007.

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Table 7 — Non-Performing Assets
(Dollars in thousands)

	September 30, 2008			December 31, 2007			September 30, 2007
Nonaccrual loans	$	37,905		$	5,495		$	2,529
Other real estate owned		377			—			50
Total non-performing assets	$	38,282		$	5,495		$	2,579
Loans past due 90 days or more and still accruing interest	$	—		$	—		$	—
Non-performing assets to total assets		2.78	%		0.45	%		0.22	%
Non-performing assets to total loans and ORE		3.82	%		0.62	%		0.30	%
Allowance for loan loss to total non-performing assets		35.33	%		214.74	%		457.74	%

Allowance for Loan Losses

The allowance for loan losses represents an allocation for the estimated amount of losses inherent 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 September 30, 2008 and December 31, 2007.

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Table 8 — Loan Portfolio Composition

	September 30, 2008						December 31, 2007
	Amount			%			Amount			%
	(Dollars in thousands)
Commercial financial and agricultural	$	107,122			10.71	%	$	93,318			10.57	%
Real estate
Commercial		273,564			27.34	%		236,358			26.78	%
Residential		208,587			20.85	%		190,613			21.59	%
Residential held for sale		15,187			1.52	%		11,303			1.28	%
Construction and development		365,944			36.58	%		318,438			36.07	%
Total real estate		863,282			86.29	%		756,712			85.72	%
Lease financing		34			0.00	%		37			0.00	%
Consumer
Direct		24,644			2.46	%		25,569			2.90	%
Indirect		3,515			0.35	%		4,237			0.48	%
Revolving		2,403			0.24	%		3,819			0.43	%
Total consumer		30,562			3.05	%		33,625			3.81	%
Deferred loan origination fees		(574	)		-0.06	%		(949	)		-0.11	%
Total		1,000,426			100.00	%	$	882,743			100.00	%

At September 30, 2008, the loan portfolio is comprised of 86.29% real estate loans. Commercial, financial and agricultural loans comprise 10.71%, and consumer loans comprise 3.05% of the portfolio.

While the Company has 86.29% of its loan portfolio composed of real estate loans, this percentage is not significantly higher than in previous years. Commercial real estate comprises 27.34% of the loan portfolio and is primarily 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 (36.58%) 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. 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 so than the national rate. The residential category, 20.85% 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, 1.52% 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.

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The Company has no large loan concentrations to individual borrowers. Unsecured loans at September 30, 2008 were $44.4 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.

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 $2,073 was charged to expense for the quarter ended September 30, 2008 compared to $1,001 for the quarter ended September 30, 2007, and $4,996 for the nine months ended September 30, 2008 compared to $2,607 for the nine months ended September 30, 2007. The increase in provision for loan losses for both three and nine month periods is primarily due to the provision related to overall loan growth coupled with an increase in impaired loans and increased levels of classified/watch loans rated debt as well as management’s assessment of current economic environment. The increase in the allowance for loan losses as of September 30, 2008 as compared to September 30, 2007 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 as well as management’s assessment of current economic environment. Also impacting the allowance were charge-offs of $3,808 of which $3,021 occurred in the current quarter. $1,775 or 59% of the charge-offs were related to three collateral dependent ADC (acquisition development and construction) loan participations which are considered impaired. A significant portion of the charge off experience has been in this segment of the portfolio which totaled approximately $40,000 at September 30, 2008. The charge-off of these loans during the quarter contributed to the decrease in the ratio of allowance for loan losses to total loans as noted in the table below. Also during the third quarter the Company purchased approximately $30,000 in loans which were recorded at fair value upon acquisition and did not require an addition to the allowance for loan losses.

Table 9 — Allowance for Loan Losses
(Dollars in thousands)

	2008			2007
Beginning balance, January 1	$	11,800		$	9,777
Provision charged to expense		4,996			2,607
Recoveries		528			596
Loans charged off		(3,808	)		(1,175	)
Ending balance, September 30	$	13,516		$	11,805
Allowance for loan loss to total loans		1.35	%		1.39	%

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At September 30, 2008 the ratio of allowance for loan losses to total loans was 1.35% compared to 1.34% at December 31, 2007 and 1.39% at September 30, 2007. 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 current market conditions. The loan to deposit ratio at September 30, 2008 was 88.86% compared to 92.71% at December 31, 2007 and 89.30% at September 30, 2007. The decrease in the loan to deposit ratio from December 31, 2007 to September 30, 2008 reflects deposit growth at a higher rate than loan growth during the first nine months of 2008. The increase in the loan to deposit ratio from September 30, 2007 to December 31, 2007 reflects loan growth at a higher rate than deposit growth during that time period. Deposits at September 30, 2008 and December 31, 2007 include $163,614 and $78,482 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 $84,000 at September 30, 2008. GB&T maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20,000 of which no amounts were outstanding at September 30, 2008. GB&T has a federal funds purchased accommodation with Silverton Bank, Atlanta, Georgia, for advances up to $16,700 and with SunTrust Bank, Atlanta, Georgia for advances up to $10,000, while SB&T has a federal funds purchased accommodation with Silverton Bank, Atlanta, Georgia, for advances up to $4,600. Additionally, liquidity needs can be satisfied by the structuring of the maturities of investment securities and the pricing and maturities on loans and deposits offered to customers. The Company also uses retail securities sold under repurchase agreements to fund growth. Retail securities sold under repurchase agreements were $48,607 at September 30, 2008.

Stockholders’ equity to total assets was 6.51% at September 30, 2008 compared to 7.40% at December 31, 2007 and 7.29% at September 30, 2007. The capital of the Company exceeded all required regulatory guidelines at September 30, 2008. The Company’s Tier 1 risk-based, total risk-based and leverage capital ratios were 10.42%, 11.66%, and 8.54%, respectively, at September 30, 2008. 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
September 30, 2008
(Dollars in Thousands)

						Required for capital
	Actual					adequacy purposes					Excess
	Amount		Percent			Amount		Percent			Amount		Percent
Southeastern Bank Financial Corporation
Risk-based capital:
Tier 1 capital	$	114,369		10.42	%		43,890		4.00	%		70,479		6.42	%
Total capital		127,886		11.66	%		87,780		8.00	%		40,106		3.66	%
Tier 1 leverage ratio		114,369		8.54	%		53,561		4.00	%		60,808		4.54	%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital	$	95,286		9.66	%		39,449		4.00	%		55,837		5.66	%
Total capital		107,280		10.88	%		78,897		8.00	%		28,383		2.88	%
Tier 1 leverage ratio		95,286		7.83	%		54,785		4.50	%		40,501		3.33	%
Southern Bank & Trust
Risk-based capital:
Tier 1 capital	$	13,943		12.33	%		4,522		4.00	%		9,421		8.33	%
Total capital		15,358		13.58	%		9,045		8.00	%		6,313		5.58	%
Tier 1 leverage ratio		13,943		11.69	%		4,772		4.00	%		9,171		7.69	%

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 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 $198,252 at September 30, 2008. 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

	Less than						More than
($ in thousands)	1 Year		1 - 3 Years		3 - 5 Years		5 Years
Lines of credit	$	198,252		—		—		—
Lease agreements		339		605		233		105
Deposits		1,017,994		101,563		6,228		—
Securities sold under repurchase agreements		48,607		—		—		—
FHLB advances		32,000		32,000		—		20,000
Other borrowings		400		—		—		—
Total commitments and contractual obligations	$	1,297,592	$	134,168	$	6,461	$	20,105

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 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2008, 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, 2007. 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, 2007 included in the Company’s 2007 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, 2007, 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 third quarter of 2008. All of the 282 shares repurchased during the third quarter were privately negotiated.

					Total Number of		Maximum Number (or
					Shares (or Units)		Appropriate Dollar Value)
	Total Number		Average Price		Purchased as Part of		of Shares (or Units) Yet To
	of Shares		Paid Per		Publicly Announced		Be Purchased Under the
Period	Purchased		Share		Plans or Programs		Plans or Programs
July 1 through July 31, 2008		—		—		25,549		74,451
August 1 through August 31, 2008		—		—		25,549		74,451
September 1 through September 30, 2008		282		26.00		25,831		74,169
Total		282	$	26.00		25,831		74,169

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 third quarter of 2008.

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Item 3.	Defaults Upon Senior Securities
	Not applicable

Item 4.	Submission of Matters to a Vote of Security Holders
	None

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: November 10, 2008	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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SOUTHEASTERN BANK FINANCIAL CORPORATION

Form 10-Q Exhibit Index

Exhibit No.		Description
	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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