Southeastern Bank Financial (SBFC) 10-Q 2009 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009.

or

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

For the transition period from                    to                    .

Commission File No.0-24172

Southeastern Bank Financial Corporation

(Exact name of registrant as specified in its charter)

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

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

(706) 738-6990

(Issuer’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

5,988,237 shares of common stock, $3.00 par value per share, outstanding as of April 30, 2009.

SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX

	Page
Part I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008		2
Consolidated Statements of Income for the Three Months ended March 31, 2009 and 2008		3
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2009 and 2008		4
Notes to Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures about Market Risk		29
Item 4. Controls and Procedures		29
Part II Other Information
Item 1. Legal Proceedings		30	*
Item 1A. Risk Factors		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3. Defaults Upon Senior Securities		31	*
Item 4. Submission of Matters to a Vote of Security Holders		31	*
Item 5. Other Information		31	*
Item 6. Exhibits		31
Signature		32
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

* No information submitted under this caption.

1

PART I

FINANCIAL INFORMATION

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	March 31,			December 31,
	2009			2008
	(Unaudited)
Assets
Cash and due from banks	$	33,763		$	24,860
Federal funds sold		61,664			9,780
Interest-bearing deposits in other banks		23,949			3,128
Cash and cash equivalents		119,376			37,768
Investment securities
Available-for-sale		300,295			299,339
Held-to-maturity, at cost (fair values of $676 and $698, respectively)		689			689
Loans held for sale		20,809			18,955
Loans		976,838			986,831
Less allowance for loan losses		(15,186	)		(14,742	)
Loans, net		961,652			972,089
Premises and equipment, net		33,254			33,960
Accrued interest receivable		6,343			7,085
Bank-owned life insurance		17,548			17,368
Restricted equity securities		6,390			6,571
Other real estate owned		6,990			5,734
Other assets		11,336			11,481
	$	1,484,682		$	1,411,039
Deposits
Noninterest-bearing	$	117,921		$	111,291
Interest-bearing:
NOW accounts		181,130			166,561
Savings		271,987			247,249
Money management accounts		46,335			50,404
Time deposits over $100		428,636			385,439
Other time deposits		180,674			178,608
		1,226,683			1,139,552
Federal funds purchased and securities sold under repurchase agreements		48,764			62,553
Advances from Federal Home Loan Bank		84,000			84,000
Other borrowed funds		900			—
Accrued interest payable and other liabilities		9,406			10,283
Subordinated debentures		20,000			20,000
Total liabilities		1,389,753			1,316,388
Stockholders’ equity:
Common stock, $3.00 par value; 10,000,000 shares authorized; 5,988,087 and 5,987,674 shares issued in 2009 and 2008, respectively; 5,987,785 and 5,987,674 shares outstanding in 2009 and 2008, respectively		17,964			17,963
Preferred stock, no par value; 10,000,000 shares authorized; 0 shares outstanding in 2009 and 2008, respectively		—			—
Additional paid-in capital		55,242			55,189
Retained earnings		20,733			21,455
Treasury stock, at cost; 302 and 0 shares in 2009 and 2008, respectively		(5	)		—
Accumulated other comprehensive income, net		995			44
Total stockholders’ equity		94,929			94,651
	$	1,484,682		$	1,411,039

See accompanying notes to consolidated financial statements.

2

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(Dollars in thousands, except share data)

(Unaudited)

	Three Months Ended
	March 31,
	2009			2008
Interest income:
Loans, including fees	$	13,805		$	16,393
Investment securities		4,074			3,261
Federal funds sold		24			91
Interest-bearing deposits in other banks		4			6
Total interest income		17,907			19,751
Interest expense:
Deposits		6,801			7,877
Federal funds purchased and securities sold under repurchase agreements		111			540
Other borrowings		896			1,069
Total interest expense		7,808			9,486
Net interest income		10,099			10,265
Provision for loan losses		4,749			1,271
Net interest income after provision for loan losses		5,350			8,994
Noninterest income:
Service charges and fees on deposits		1,641			1,670
Gain on sales of loans		2,237			1,260
Gain on sale of fixed assets		26			3
Investment securities (losses) gains, net		(164	)		38
Retail investment income		209			289
Trust service fees		253			286
Increase in cash surrender value of bank-owned life insurance		180			164
Miscellaneous income		163			221
Total noninterest income		4,545			3,931
Noninterest expense:
Salaries and other personnel expense		5,658			5,171
Occupancy expenses		1,141			1,026
Other operating expenses		3,034			2,724
Total noninterest expense		9,833			8,921
Income before income taxes		62			4,004
Income tax expense		6			1,369
Net income	$	56		$	2,635
Basic net income per share	$	0.01		$	0.45
Diluted net income per share	$	0.01		$	0.44
Weighted average common shares outstanding		5,987,948			5,958,963
Weighted average number of common and common equivalent shares outstanding		5,998,578			6,015,301

See accompanying notes to consolidated financial statements.

3

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2009			2008
Cash flows from operating activities:
Net income	$	56		$	2,635
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		671			537
Deferred income tax benefit		—			(393	)
Provision for loan losses		4,749			1,271
Net investment securities losses (gains)		164			(38	)
Net accretion of discount on investment securities		(161	)		(20	)
Increase in CSV of bank owned life insurance		(180	)		(164	)
Stock options compensation cost		47			51
Gain on disposal of premises and equipment		(26	)		(3	)
Loss on the sale of other real estate		112			—
Gain on sales of loans		(2,237	)		(1,260	)
Real estate loans originated for sale		(103,376	)		(64,977	)
Proceeds from sales of real estate loans		103,759			57,902
Decrease in accrued interest receivable		742			633
Increase in other assets		(462	)		(225	)
(Decrease) increase in accrued interest payable and other liabilities		(877	)		871
Net cash provided (used) by operating activities		2,981			(3,180	)
Cash flows from investing activities:
Proceeds from sales of available for sale securities		15,874			3,950
Proceeds from maturities of available for sale securities		44,161			26,583
Purchase of available for sale securities		(58,904	)		(38,241	)
Purchase of restricted equity securities		(352	)		(755	)
Net decrease (increase) in loans		3,078			(36,623	)
Additions to premises and equipment		(188	)		(1,157	)
Proceeds from sale of other real estate		1,241			—
Proceeds from sale of premises and equipment		250			54
Net cash provided (used) in investing activities		5,160			(46,189	)
Cash flows from financing activities:
Net increase in deposits		87,131			63,795
Net decrease in federal funds purchased and securities sold under repurchase agreements		(13,789	)		(18,896	)
Advances from Federal Home Loan Bank		—			10,000
Proceeds from other borrowed funds		900			200
Purchase of treasury stock		(5	)		(437	)
Payment of cash dividends		(778	)		(704	)
Proceeds from stock options exercised		—			129
Proceeds from Directors’ stock purchase plan		8			13
Net cash provided by financing activities		73,467			54,100
Net increase in cash and cash equivalents	$	81,608		$	4,731
Cash and cash equivalents at beginning of period		37,768			25,057
Cash and cash equivalents at end of period	$	119,376		$	29,788
Supplemental disclosures of cash paid during the period for:
Interest	$	8,582		$	10,117
Income taxes	$	10		$	—
Supplemental information on noncash investing activities:
Loans transferred to other real estate	$	2,609		$	412

See accompanying notes to consolidated financial statements.

4

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2009

Note 1 — Basis of Presentation

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

The financial statements for the three months ended March 31, 2009 and 2008 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, 2008.

In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations and cash flows for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2009 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.

5

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 March 31, 2009, the fair values of nine available-for-sale securities totaling $11,281 were measured using discounted cash flows (Level 3 inputs). These securities, which include six subordinated debentures issued by financial institutions and three collateralized mortgage obligations, were measured using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades during the first quarter. Five of these securities, which included two subordinated debentures totaling $3,363 and three collateralized mortgage obligations totaling $2,781, were measured in prior quarters using Level 2 inputs. The discount rates used in the valuation model were based on current spreads to U.S. Treasury rates of long-term corporate debt obligations with maturities and risk characteristics similar to the subordinated debentures and collateralized mortgage obligations being measured. An additional adjustment to the discount rate for illiquidity in the market for subordinated debentures and collateralized mortgage obligations was not considered necessary based on the illiquidity premium already present in the spreads used to estimate the discount rate.

All of the subordinated debentures are rated Investment Grade by Moody’s, Standard & Poor’s and Fitch. The three collateralized mortgage obligations have been rated Speculative by at least one of these rating agencies. As with our other investment securities, we expect the fair value of these securities to recover as liquidity returns to the market and we have the ability and intent to hold the securities during the recovery period.

6

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).

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 tables below present the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy as of March 31, 2009 and December 31, 2008:

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Available-for-sale securities	$	300,295	$	24	$	288,990	$	11,281
Tax credits		494		—		—		494
Held-to-maturity securities		676		—		676		—
Total	$	301,465	$	24	$	289,666	$	11,775

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2008		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Available-for-sale securities	$	299,339	$	46	$	295,163	$	4,130
Tax credits		515		—		—		515
Held-to-maturity securities		698		—		698		—
Total	$	300,552	$	46	$	295,861	$	4,645

7

The tables below present a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended March 31, 2009 and March 31, 2008:

Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)

				Available-for-sale
	Tax credits			Securities		Total
Beginning balance, January 1, 2009	$	515		$	4,130	$	4,645
Total gains or losses (realized/unrealized)
Included in earnings
Amortization of tax credit investment		(21	)		—		(21	)
Included in other comprehensive income		—			1,007		1,007
Transfers in and/or out of Level 3		—			6,144		6,144
Ending balance, M arch 31, 2009	$	494		$	11,281	$	11,775

Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)

				Available-for-sale
	Tax credits			Securities		Total
Beginning balance, January 1, 2008	$	594		$	—	$	594
Total gains or losses (realized/unrealized)
Included in earnings
Amortization of tax credit investment		(20	)		—		(20	)
Included in other comprehensive income		—			—		—
Transfers in and/or out of Level 3		—			—		—
Ending balance, March 31, 2008	$	574		$	—	$	574

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2009 and December 31, 2008 are summarized below:

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
Assets:
Imp aired loans	$	19,566		—		—	$	19,566
Other real estate owned		6,990		—		—		6,990

8

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2008		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans	$	14,743		—		—	$	14,743
Other real estate owned		5,734		—		—		5,734

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 $22,056, with a valuation allowance of $2,490.

Other real estate owned, which is carried at lower of cost or fair value, was written down to fair value of $6,990.

In April 2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2,Recognition and Presentation of Other-Than-Temporary Impairments,which amends existing guidance for determining whether impairment is other-than-temporary for debt securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter, however, does not expect the adoption to have a material effect on the results of operations or financial position.

In April 2009, the FASB issued Staff Position (FSP) No. 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter, however, does not expect the adoption to have a material effect on the results of operations or financial position.

9

In April 2009, the FASB issued Staff Position (FSP) No. 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107,Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter.

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 $56 coupled with a $951 change in other comprehensive income for the quarter resulted in total comprehensive income of $1,007 for the three months ended March 31, 2009 compared to total comprehensive income of $3,538 for the three months ended March 31, 2008.

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.

On January 21, 2009, the Company declared a quarterly cash dividend of $0.13 per share on outstanding shares. The dividend was paid on February 18, 2009 to shareholders of record as of February 5, 2009.

The Company suspended the payment of quarterly cash dividends on the company’s common stock effective April 24, 2009. The Company considered the action prudent in order to maintain its capital position in the current state of the economy. The suspension of the dividend will conserve approximately $3.2 million of capital per year. The Company plans to reinstate the dividend payment at an appropriate time once economic conditions improve and stabilize.

10

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 — 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. The Company applied for but withdrew its application for a capital investment from the United States Department of the Treasury under the Troubled Assets Relief Program (“TARP”) Capital Purchase Program. The Company is currently evaluating other sources of capital.

Note 7 — Subsequent Event Receivership of Silverton Bank, National Association

On May 1, 2009, Silverton Bank, N.A. was closed by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”). The FDIC created a bridge bank to take over the operations of Silverton Bank. The creation of the bridge bank allows former client banks of Silverton Bank to transition their correspondent banking needs to other providers. The Company has used Silverton Bank to provide certain correspondent services to the Bank and Thrift. Effective May 1, the Bank and Thrift moved the majority of its operational correspondent services to Federal Reserve Financial Services. Further, the Bank and the Thrift continue to have federal funds purchased accommodation with the bridge bank in the amount of $16,700 and $4,600 respectively until July 29, 2009. Management is evaluating its alternatives regarding these lines of credit.

In addition, the Company holds investments in the common stock and senior debt of Silverton Bank’s holding company, Silverton Financial Services, Inc. Based on Silverton Bank being placed into receivership, the Company concluded that its investment in the securities of Silverton Financial Services, Inc. were impaired and accordingly recorded an estimated other-than-temporary-impairment charge of $908.

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. Southern Bank & Trust (the “Thrift”), a federally chartered thrift, was organized by the Company during 2005 and 2006 and opened its main office on September 12, 2006. Today it operates three full service branches in North Augusta and Aiken, South Carolina. The Company’s Operations Center is located in Martinez, Georgia and services both subsidiaries.

The Company’s primary market includes Richmond and Columbia Counties in Georgia and Aiken County in South Carolina, all part of the Augusta-Richmond County, GA-SC metropolitan statistical area (MSA). The 2007 population of the Augusta-Richmond County, GA-SA MSA was 528,519, the second largest in Georgia and fourth largest in South Carolina. The Augusta market area has a diversified economy based principally on government, public utilities, health care, manufacturing, construction, and wholesale and retail trade. Augusta is one of the leading medical centers in the Southeast. The Company entered the Athens, GA market in December 2005. The 2007 population for the Athens-Clarke County, GA MSA was 187,405, ranked fifth in the state of Georgia. The Athens market area has a diversified economy based primarily on government, retail services, tourism, manufacturing, other services, and health care, with the largest share of government jobs in the state. In August 2007, the Company entered the Greenville, SC market. The 2007 population for the Greenville-Mauldin-Easley, SC MSA was 613,828, ranked third in the state of South Carolina. The Greenville market area has a diversified economy based primarily on government, manufacturing, construction, retail services, and health care.

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.

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The Company’s primary source of income is from its lending activities followed by interest income from its investment activities, service charges and fees on deposits, and gain on sales of mortgage loans in the secondary market. Interest income on loans decreased during the first three months of 2009 as compared to the first three months of 2008 due to lower interest rates and increased levels of loans placed on nonaccrual offset in part by increased volumes. Interest income on investment securities increased primarily due to increased volumes as well as slightly higher yields over 2008. The yield on the investment portfolio increased slightly due to the accretion of discount on certain agency securities called during the quarter. Service charges and fees on deposits decreased as a result of decreases in NSF income on both retail and business checking accounts due primarily to decreased economic activity and was partially offset by increases in ATM/Debit card income. Declining mortgage rates and a significant increase in mortgage refinancing activity resulted in an increase in gain on sales of loans for the first three months of 2009 as compared to the same period in 2008. Investment securities (losses) gains decreased due to a $908 impairment charge related to investments in the common stock and trust preferred securities of Silverton Financial Services, Inc., parent holding company of Silverton Bank, N.A., which was placed in receivership on May 1, 2009.

Table 1 — Selected Financial Data

	March 31,			December 31,			December 31,
	2009			2008			2004
	(Dollars in thousands)
Assets	$	1,484,682		$	1,411,039		$	706,517
Loans		997,647			1,005,786			494,170
Deposits		1,226,683			1,139,552			556,785
Annualized return on average total assets		0.02	%		0.57	%		1.29	%
Annualized return on average equity		0.24	%		8.48	%		15.50	%

The Company continues to experience growth although at a slower rate as evidenced in Table 1 above. The Company has also achieved increases in deposits and continues to provide returns on assets and equity although on a reduced level 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 provisions. Net income for the year ended 2004 was $8.7 million compared to net income of $7.6 million at year end 2008. Net income for the three months ended March 31, 2009 was $56 thousand compared to $2.6 million for the same period in 2008. Current market conditions along with increases to the provision for loan losses and impairment charges had a significant affect on net income for the quarter. The Company has paid cash dividends of $0.13 per share each quarter since 2004 but has elected to suspend dividends effective April 24, 2009 to conserve capital.

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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.

Forward-Looking Statements

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

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Critical Accounting Estimates

The accounting and financial reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Of these policies, management has identified the allowance for loan losses 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.

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

The Company continues to refine the methodology on which the level of the allowance for loan losses is based, by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to the Company.

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Performance Overview

The Company’s net income for the first quarter of 2009 was $56, which was a decrease of $2,579 (97.9%) compared to net income of $2,635 for the first quarter of 2008. Diluted net income per share for the three months ended March 31, 2009 was $0.01 compared to $0.44 for the three months ended March 31, 2008. The decrease in net income for the three months ended March 31, 2009 as compared with the three months ended March 31, 2008, was primarily a result of increases in the provision for loan losses due to increased levels of nonperforming assets and an impairment loss on certain investments related to Silverton Financial Services. 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 yields. Interest expense on deposits, securities sold under repurchase agreements and other borrowings decreased as a result of lower interest rates offset in part by higher volumes of interest bearing liabilities.

Factors contributing to the increase in noninterest income for the three months ended March 31, 2009, were increases in gain on sales of loans somewhat offset by a decrease in net investment securities gains, retail investment income, trust service fees and service charges and fees on deposits. Gain on sales of loans increased substantially as mortgage rates declined and mortgage refinancing activity increased. Investment securities gains decreased $202 over 2008 primarily due to an impairment charge for the investment in Silverton Financial Services, and were somewhat offset by the Company taking advantage of favorable market conditions to liquidate and reinvest certain US Agency securities. Service charges and fees on deposits decreased primarily due to decreases in NSF income. The decline in NSF income was primarily due to reduced consumer activity. Noninterest expense increased during the three months ended March 31, 2009 compared to the same period ended March 31, 2008, primarily due to increases in salaries due to increased commissions paid on mortgage production, occupancy expense related to Company growth and increased accruals for FDIC deposit insurance.

Table 2 — Selected Balance Sheet Data

	March 31,		December 31,		Variance
	2009		2008		Amount			%
	(Dollars in thousands)
Cash, due from banks and interest-bearing deposits	$	57,712	$	27,988	$	29,724			106.2	%
Federal funds sold		61,664		9,780		51,884			530.5	%
Investment securities		300,984		300,028		956			0.3	%
Loans		997,647		1,005,786		(8,139	)		(0.8	%)
Assets		1,484,682		1,411,039		73,643			5.2	%
Deposits		1,226,683		1,139,552		87,131			7.6	%
Securities sold under repurchase agreements		48,764		62,553		(13,789	)		(22.0	%)
Advances from Federal Home Loan Bank		84,000		84,000		0			0.0	%
Liabilities		1,389,753		1,316,388		73,365			5.6	%
Stockholders’ equity		94,929		94,651		278			0.3	%

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Table 2 highlights significant changes in the balance sheet at March 31, 2009 as compared to December 31, 2008. Assets increased $73,643, primarily the result of higher balances in cash, due from banks, interest-bearing deposits and fed funds sold which increased $81,608. Management increased the level of liquid funds in light of current economic conditions and volatility in the banking industry. Gross loans decreased $8,139 due primarily to decreased demand resulting from the slowing economy. The decreased demand caused normal principal repayments to exceed the originations of new loans during the quarter. In addition, loans decreased due to real estate acquired through foreclosure which increased $1,256. The increase in assets was funded by an increase in deposits of $87,131, somewhat offset by decreases in securities sold under repurchase agreements of $13,789.

The annualized return on average assets for the Company was 0.02% for the three months ended March 31, 2009, compared to 0.86% for the same period last year. While total assets have increased $73,643 since March 31, 2008, net income has decreased $2,579 resulting in a decrease in ROA.

The annualized return on average stockholders’ equity was 0.24% for the three months ended March 31, 2009, compared to 11.57% for the same period last year. The decrease is primarily attributable to the decrease in net income.

Net Interest Income

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

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

	Three Months Ended March 31, 2009							Three Months Ended March 31, 2008
			Annualized							Annualized
			Average			Amount				Average			Amount
	Average		Yield or			Paid or		Average		Yield or			Paid or
	Amount		Rate			Earned		Amount		Rate			Earned
	(Dollars in thousands)
Interest-earning assets:
Loans	$	1,000,570		5.54	%	$	13,805	$	896,500		7.26	%	$	16,393
Investment securities		295,419		5.52	%		4,074		248,618		5.25	%		3,261
Federal funds sold		55,401		0.18	%		24		14,977		2.43	%		91
Interest-bearing deposits in other banks		6,029		0.27	%		4		500		4.60	%		6
Total interest-earning assets	$	1,357,419		5.29	%	$	17,907	$	1,160,595		6.77	%	$	19,751
Interest-bearing liabilities:
Deposits	$	1,077,012		2.56	%	$	6,801	$	874,421		3.61	%	$	7,877
Federal funds purchased / securities sold under repurchase agreements		55,476		0.81	%		111		64,306		3.37	%		540
Other borrowings		104,547		3.48	%		896		86,511		4.96	%		1,069
Total interest-bearing liabilities	$	1,237,035		2.56	%	$	7,808	$	1,025,238		3.71	%	$	9,486
Net interest margin/income:				2.96	%	$	10,099				3.49	%	$	10,265

Net interest income decreased $166 (1.62%) during the three month period as compared to the same period in 2008. Loan interest income decreased $2,588 in the three month period as a result of decreasing interest rates and increased levels of nonaccrual loans offset in part by growth in account balances. Deposit interest expense decreased $1,076 in the three month period as a result of decreasing interest rates offset in part by the continued growth of account balances. The annual average balance for loans was $1,000,570 at March 31, 2009 with an annualized average yield of 5.54% compared to $896,500 at March 31, 2008 with an annualized average yield of 7.26%. Loan yields were impacted by decreases in market interest rates as well as increased levels of nonaccrual loans. Since March 31, 2008 the federal funds target rate declined from 2.25% to 0.25% which resulted in a decrease of 2.00% in the Bank’s prime rate from 5.25% to 3.25%. In addition, nonaccrual loans increased $11,099 from December 2008 and resulted in the reversal of $661 in interest income which reduced the average loan yield by approximately 7 basis points. Interest-bearing deposits had an annual average balance of $1,077,012 with an annualized average rate of 2.56% at March 31, 2009 compared to $874,421 and 3.61% at March 31, 2008. Other contributing factors during the three month period 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 months ended March 31, 2009 decreased 53 basis points to 2.96% as compared to 3.49% for the three months ended March 31, 2008. This decrease in the net interest margin for the first quarter was impacted by increased levels of nonaccrual loans which resulted in the reversal of $661 in interest income. This trend of increasing nonaccrual loans and the resultant impact on net interest income could continue as long as regional and national economic trends remain negative. The rate for earning assets decreased 148 basis points for the three month period with lower average yields on loans and federal funds sold accounting for most of the decrease. The cost to fund earning assets decreased 115 basis points for the three month period primarily due to lower rates on deposits and securities sold under repurchase agreements.

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Noninterest Income

Table 4 — Noninterest Income

	Three Months Ended
	March 31,					Variance
	2009			2008		Amount			%
	(Dollars in thousands)
Service charges and fees on deposits	$	1,641		$	1,670	$	(29	)		(1.7	%)
Gain on sales of loans		2,237			1,260		977			77.5	%
Gain on sale of fixed assets		26			3		23			766.7	%
Investment securities (losses) gains, net		(164	)		38		(202	)		(531.6	%)
Retail investment income		209			289		(80	)		(27.7	%)
Trust services fees		253			286		(33	)		(11.5	%)
Increase in cash surrender value of bank-owned life insurance		180			164		16			9.8	%
Miscellaneous income		163			221		(58	)		(26.2	%)
Total noninterest income	$	4,545		$	3,931	$	614			15.6	%

Noninterest income increased $614 (15.6%) during the three month period as compared to the same period in 2008. The most significant changes for the three month period were an increase in gain on sales of loans somewhat offset by decreases in net investment securities gains (losses), retail investment income, trust services fees and service charges and fees on deposits. The increased gain on sales of loans was due to a significant increase in refinancing volume. Net investment securities gains were down in 2009 as compared to 2008 due primarily to the impairment loss on the common stock and trust preferred securities of Silverton Financial Services, Inc., parent holding company of Silverton Bank, N.A. Silverton Bank was placed in receivership on May 1, 2009, and other-than-temporary-impairment losses associated with our Silverton holdings totaled approximately $908, and were somewhat offset by the sale of certain US Agency securities which generated approximately $765 in gains.

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Noninterest Expense

Table 5 — Noninterest Expense

	Three Months Ended
	March 31,				Variance
	2009		2008		Amount		%
	(Dollars in thousands)
Salaries and other personnel expense	$	5,658	$	5,171	$	487		9.4	%
Occupancy expenses		1,141		1,026		115		11.2	%
Other operating expenses		3,034		2,724		310		11.4	%
Total noninterest expense	$	9,833	$	8,921	$	912		10.2	%

Noninterest expense increased $912 (10.2%) during the three-month period.

Salaries and other personnel expenses:

Salaries and other personnel expense increased $487 (9.4%) for the first quarter 2009 as compared to the same period in 2008. This increase was primarily due to additional commission expense related to the increased level of mortgage originations and the addition of new personnel due to the Company’s growth.

Occupancy expenses:

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

Other operating expenses:

Other operating expenses increased $310 (11.4%) for the three month period as compared to the same period in 2008. The increase was due primarily to increased accrual rates for FDIC insurance, expenses and loss on sale associated with real estate acquired through foreclosure offset in part by decreases in professional services.

Income Taxes

Income tax expense in the first quarter of 2009 totaled $6, a decrease of $1,364 (99.6%) over the first quarter of 2008. The effective tax rate for the three months ended March 31, 2009 and 2008 was 9.1% and 34.2%, respectively. The significant 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 the three month period.

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Asset Quality

Table 6, which follows, shows the current and prior period amounts of non-performing assets. Non-performing assets were $52,870 at March 31, 2009, compared to $40,515 at December 31, 2008. Significant changes from December 2008 to March 2009 include a $1,256 increase in other real estate owned and an $11,099 increase in non-accrual loans. The ratio of non-performing assets to total loans and other real estate was 5.26% at March 31, 2009 compared to 4.01% at December 31, 2008. The control and monitoring of non-performing assets continues to be a priority of management.

The increase in non-performing assets is due primarily to an increase in impaired loans from several large loan relationships in the ADC category, which increased $6,601 during the first quarter. National economic conditions and real estate market conditions in several of the markets in which the Bank has outstanding loans contributed to the increase. These factors have combined to slow the rates of absorption for developers’ residential lots and builders’ completed homes. Significant portions of the overall level of impaired loans are in the Atlanta, Savannah and Athens markets. The following table provides selected asset quality information related to the acquisition development and construction loan portfolio as of March 31, 2009 and December 31, 2008.

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	March 31,			December 31,
(Dollars in thousands)	2009			2008
Acquisition Development and Construction Loans		344,821			355,943
CSRA — primary market area
Period-end loans		262,749			266,156
FAS 114 Impaired loans		621			5,187
Classified/watch rated loans		19,258			9,879
Charge-offs % (annual)		0.05	%		0.19	%
FAS 114 allowance / Impaired loans		0.00	%		0.00	%
FAS 5 Allowance / Loans not impaired %		0.90	%		0.67	%
Allowance / Charge-offs		24.67			4.78
Savannah, Georgia
Period-end loans		25,666			28,300
FAS 114 Impaired loans		5,257			2,645
Classified/watch rated loans		6,365			5,060
Charge-offs % (annual)		2.82	%		3.18	%
FAS 114 allowance / Impaired loans		13.98	%		6.62	%
FAS 5 Allowance / Loans not impaired %		7.42	%		4.20	%
Allowance / Charge-offs		2.91			1.39
Athens, Georgia
Period-end loans		29,317			31,806
FAS 114 Impaired loans		15,584			8,772
Classified/watch rated loans		2,280			13,667
Charge-offs % (annual)		16.54	%		1.78	%
FAS 114 allowance / Impaired loans		8.53	%		12.04	%
FAS 5 Allowance / Loans not impaired %		10.57	%		3.97	%
Allowance / Charge-offs		0.57			2.55
ADC Participations — Georgia
Period-end loans		19,294			21,676
FAS 114 Impaired loans		12,794			10,637
Classified/watch rated loans		—			48
Charge-offs % (annual)		40.66	%		8.88	%
FAS 114 allowance / Impaired loans		2.27	%		4.09	%
FAS 5 Allowance / Loans not impaired %		1.51	%		9.55	%
Allowance / Charge-offs		0.05			0.77
ADC Participations — Florida
Period-end loans		7,795			8,005
FAS 114 Impaired loans		3,236			3,650
Classified/watch rated loans		704			704
Charge-offs % (annual)		21.24	%		0.19	%
FAS 114 allowance / Impaired loans		0.00	%		11.34	%
FAS 5 Allowance / Loans not impaired %		3.11	%		4.27	%
Allowance / Charge-offs		0.09			2.00
Total ADC Impaired Loans		37,492			30,891
Total ADC Classified/Watch Loans		28,607			29,358

There were no loans past due 90 days or more and still accruing at March 31, 2009 as compared to $7,298 at December 31, 2008.

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Table 6 — Non-Performing Assets
(Dollars in thousands)

	March 31, 2009			December 31, 2008
Nonaccrual loans	$	45,880		$	34,781
Other real estate owned		6,990			5,734
Total non-performing assets	$	52,870		$	40,515
Loans past due 90 days or more and still accruing interest	$	—		$	7,298
Non-performing assets to total assets		3.56	%		2.87	%
Non-performing assets to total loans and ORE		5.26	%		4.01	%
Allowance for loan loss to total non-performing assets		28.72	%		36.39	%

Allowance for Loan Losses

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

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 March 31, 2009 and December 31, 2008.

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Table 7 — Loan Portfolio Composition

	March 31, 2009						December 31, 2008
	Amount			%			Amount			%
	(Dollars in thousands)
Commercial financial and agricultural	$	100,011			10.02	%	$	109,751			10.91	%
Real estate
Commercial		273,578			27.42	%		266,362			26.49	%
Residential		214,283			21.48	%		212,856			21.16	%
Residential held for sale		20,809			2.09	%		18,955			1.88	%
Construction and development		356,815			35.77	%		369,731			36.76	%
Total real estate		865,485			86.75	%		867,904			86.29	%
Lease financing		0			0.00	%		33			0.00	%
Consumer
Direct		25,184			2.52	%		24,272			2.41	%
Indirect		3,075			0.31	%		3,319			0.33	%
Revolving		4,214			0.42	%		905			0.09	%
Total consumer		32,473			3.25	%		28,496			2.83	%
Deferred loan origination fees		(322	)		-0.03	%		(398	)		-0.03	%
Total	$	997,647			100.00	%	$	1,005,786			100.00	%

At March 31, 2009, the loan portfolio is comprised of 86.75% real estate loans. Commercial, financial and agricultural loans comprise 10.02%, and consumer loans comprise 3.25% of the portfolio.

While the Company has 86.75% of its loan portfolio composed of real estate loans, this percentage is not significantly higher than in previous years. Commercial real estate comprises 27.42% 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 (35.77%) 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, 21.48% 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, 2.09% 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 March 31, 2009 were $20.7 million. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may advise additions to the allowance based on their judgments about information available to them at the time of their examination. Such regulatory guidance is considered, and the Company may recognize additions to the allowance as a result.

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 $4,749 was charged to expense for the quarter ended March 31, 2009 compared to $1,271 for the quarter ended March 31, 2008. The increase in provision for loan losses is primarily due to 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 March 31, 2009 as compared to March 31, 2008 is primarily due to increases in the allowance applicable to specific loans and increases to the allowance due to higher levels of classified and watch-rated debt as well as management’s assessment of current economic environment. Also impacting the allowance were charge-offs of $4,466 of which $3,804 or 85% are related to ADC (acquisition development and construction) loans. Of these charge-offs $2,375 or 53% are related to collateral dependent ADC loan participations, $1,212 or 27% are related to ADC loans in the Athens, Georgia market and $193 or 4% are related to ADC loans in the Savannah, Georgia market. The provision for loan losses exceeded charge-offs during the quarter which contributed to an increase in the ratio of allowance for loan losses to total loans as noted in the table below.

Table 8 — Allowance for Loan Losses
(Dollars in thousands)

	2009			2008
Beginning balance, January 1	$	14,742		$	11,800
Provision charged to expense		4,749			1,271
Recoveries		161			204
Loans charged off		(4,466	)		(467	)
Ending balance, March 31	$	15,186		$	12,808
Allowance for loan loss to total loans		1.52	%		1.38	%

At March 31, 2009 the ratio of allowance for loan losses to total loans was 1.52% compared to 1.38% at March 31, 2008. 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.

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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 March 31, 2009 was 81.33% compared to 88.26% at December 31, 2008 and 91.25% at March 31, 2008. The decrease in the loan to deposit ratio from December 31, 2008 to March 31, 2009 reflects deposit growth at a higher rate than loan growth during the first three months of 2009. Deposits at March 31, 2009 and December 31, 2008 include $286,213 and $244,540 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 March 31, 2009. The Bank maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20,000 of which no amounts were outstanding at March 31, 2009. The Bank has a federal funds purchased accommodation with Silverton Bridge Bank, Atlanta, Georgia, for advances up to $16,700 and with SunTrust Bank, Atlanta, Georgia for advances up to $10,000, while the Thrift has a federal funds purchased accommodation with Silverton Bridge Bank, Atlanta, Georgia, for advances up to $4,600. Effective May 1, 2009 Silverton Bank, N.A. was closed by the Office of the Comptroller of the Currency (OCC). The Federal Deposit Insurance Corporation (FDIC) created a bridge bank to take over the operations of Silverton Bank and the FDIC was appointed receiver. The bridge bank will continue operations and will honor the federal funds purchase lines until July 29, 2009. Management is currently evaluating its alternatives regarding these lines of credit. 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 $48,764 at March 31, 2009.

Stockholders’ equity to total assets was 6.39% at March 31, 2009 compared to 6.71% at December 31, 2008 and 7.26% at March 31, 2008. The capital of the Company exceeded all required regulatory guidelines at March 31, 2009. The Company’s Tier 1 risk-based, total risk-based and leverage capital ratios were 10.34%, 11.60%, and 7.84%, respectively, at March 31, 2009. The following table reflects the current regulatory capital levels in more detail, including comparisons to the regulatory minimums.

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Table 9 — Regulatory Capital Requirements
March 31, 2009

(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	$	113,804		10.34	%		44,005		4.00	%		69,799		6.34	%
Total capital		127,573		11.60	%		88,010		8.00	%		39,563		3.60	%
Tier 1 leverage ratio		113,804		7.84	%		58,080		4.00	%		55,724		3.84	%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital	$	95,742		9.79	%		39,109		4.00	%		56,633		5.79	%
Total capital		107,979		11.04	%		78,218		8.00	%		29,761		3.04	%
Tier 1 leverage ratio		95,742		7.32	%		58,863		4.50	%		36,879		2.82	%
Southern Bank & Trust
Risk-based capital:
Tier 1 capital	$	13,953		11.43	%		4,885		4.00	%		9,068		7.43	%
Total capital		15,482		12.68	%		9,769		8.00	%		5,713		4.68	%
Tier 1 leverage ratio		13,953		9.34	%		5,975		4.00	%		7,978		5.34	%

Georgia Bank & Trust Company is regulated by the Department of Banking and Finance of the State of Georgia (DBF). The DBF requires that state banks in Georgia generally maintain a minimum ratio of Tier 1 capital to total assets of four and one-half percent (4.50%).

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

Commitments and Contractual Obligations

The Company is a party to lines of credit with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Lines of credit are unfunded commitments to extend credit. These instruments involve, in varying degrees, exposure to credit and interest rate risk in excess of the amounts recognized in the financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unfunded commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company evaluates construction and acquisition and development loans for the percentage completed before extending additional credit. The Company follows the same credit policies in making commitments and contractual obligations as it does for on-balance sheet instruments.

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Unfunded commitments to extend credit where contract amounts represent potential credit risk totaled $209,423 at March 31, 2009. 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 10 — Commitments and Contractual Obligations

	Less than		1 – 3		3 – 5		More than
($ in thousands)	1 Year		Years		Years		5 Years
Lines of credit	$	209,423		—		—		—
Lease agreements		364		594		159		87
Deposits		1,101,820		117,305		7,403		155
Securities sold under repurchase agreements		48,764		—		—		—
FHLB advances		27,000		32,000		—		25,000
Other borrowings		900		—		—		—
Total commitments and contractual obligations	$	1,388,271	$	149,899	$	7,562	$	25,242

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 March 31, 2009, 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, 2008. 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, 2008 included in the Company’s 2008 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, 2008, 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 first quarter of 2009. All of the 302 shares repurchased during the first quarter were privately negotiated.

					Total Number of		Maximum Number (or
					Shares (or Units)		Appropriate Dollar Value ) of
	Total Number		Average		Purchased as Part of		Shares (or Units) Yet To Be
	of Shares		Price Paid		Publicly Announced		Purchased Under the Plans
Period	Purchased		Per Share		Plans or Programs		or Programs
January 1 through January 31, 2009		—		—		25,831		74,169
February 1 through February 28, 2009		302		16.00		26,133		73,867
March 1 through March 31, 2009		—		—		26,133		73,867
Total		302	$	16.00		26,133		73,867

On April 15, 2004, the Company announced the commencement of a stock repurchase program, pursuant to which it will, from time to time, repurchase up to 100,000 shares of its outstanding stock. The program does not have a stated expiration date. No stock repurchase programs were terminated during the first quarter of 2009.

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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: May 11, 2009	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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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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