10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 0-24172

SOUTHEASTERN BANK FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

GEORGIA	58-2005097
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3530 Wheeler Road Augusta, Georgia	30909
(Address of principal executive offices)	(Zip Code)

(706) 738-6990

(Registrant’s telephone number, including area code)

None

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

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

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

Title of each class	Name of each exchange on which registered
Common Stock, $3.00 par value per share	OTCBB

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act.     Yes  ¨    No  x

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

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

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

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

                                Large accelerated filer  ¨                                 Accelerated filer  x                                 Non-accelerated filer  ¨

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

Act).     Yes  ¨     No  x

As of June 30, 2005, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $93,651,674 based on the closing sale price of $34.00 per share as reported on the Over the Counter Bulletin Board.

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

Class	Outstanding at March 3, 2006
Common Stock, $3 par value per share	5,275,794 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Annual Report to Shareholders for the Fiscal Year Ended December 31, 2005	Part II
Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2006	Part III

Item 1. Description of Business

General

Southeastern Bank Financial Corporation (the “Company”) is a Georgia corporation that is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company had total consolidated assets of $864.3 million, total deposits of $663.7 million and total stockholders’ equity of $63.6 million at December 31, 2005. Through its wholly-owned subsidiary, Georgia Bank & Trust Company of Augusta (the “Bank”), the Company operates a total of nine banking offices in the greater Augusta area in Richmond and Columbia Counties, Georgia and in Athens, Georgia. The Bank also has mortgage operations in Augusta, Georgia, and Savannah, Georgia. The Company opened a banking office in Athens, Georgia, in December 2005 and is in the process of organizing a federally chartered thrift in Aiken, South Carolina.

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

History

The Bank was organized by a group of local citizens from Richmond and Columbia Counties and commenced business from the main office location at 3530 Wheeler Road in Augusta on August 28, 1989. The Bank opened its first Augusta branch at 3111 Peach Orchard Road in December 1991 and its second Augusta branch at 1530 Walton Way in December 1992. The Bank became a subsidiary of the Company in February 1992 as a result of its holding company reorganization. The Company acquired FCS Financial Corporation and First Columbia Bank (“First Columbia”) on December 31, 1992. This allowed the Company to expand into neighboring Columbia County. In July 1993, First Columbia merged into the Bank, and the Bank now operates the former main office of First Columbia at 4105 Columbia Road, Martinez, Georgia as a branch. The Bank opened a second branch in Columbia County in November 1994 that is located in Evans, Georgia. In October 1995, the Bank opened its sixth banking office at 3133 Washington Road. The Bank opened a full service branch in May 2001 in Martinez, Georgia, the third Columbia County branch. In September 2004, the Bank opened its eighth banking office located in the Cotton Exchange historic building in downtown Augusta, Georgia. In December 2005, the Bank opened its ninth banking office and first full service branch outside of the Augusta market in Athens, Georgia.

Management Team

The Bank was founded with an experienced management team, and that team has continued to expand with the growth of the Bank. The Bank’s President and Chief Executive Officer, R. Daniel

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Blanton, was involved in the organization of the Bank in 1988 and previously served with a predecessor to First Union National Bank, Georgia State Bank, for over thirteen years. With the acquisition of First Columbia, the Bank obtained its Executive Vice President and Chief Operating Officer, Ronald L. Thigpen, who had served as Chief Executive Officer of First Columbia since 1991, and before that served in various capacities with First Union National Bank and its predecessors. J. Pierce Blanchard, Jr., Executive Vice President-Business Development, joined the team in 1994. He previously served for six years as President of Citizens Bank & Trust Company in Evans, Georgia, and had prior experience with First Union National Bank and its predecessors. The Bank’s senior loan officer and Group Vice President, Tom C. McLaughlin, has been associated with the Bank for fourteen years, and worked previously with Mr. Blanton at Georgia State Bank. Regina W. Mobley, Group Vice President, Bank Operations, has been with the Bank since the acquisition of First Columbia Bank. With over 28 years of bank operations experience, she previously served First Columbia Bank and C & S National Bank, as predecessor of Bank of America. The Bank’s senior credit officer and Group Vice President, James R. Riordan, Jr., joined the team in 2002. For the prior ten years, he served in various capacities with SunTrust Bank, Augusta, N. A., most recently as senior lending officer. He has 19 years of bank lending and credit administration experience. Jay Forrester, Group Vice President, Retail Banking, has been associated with the Bank since 1995. He previously served as Vice President, Commercial Lending for C & S National Bank and NationsBank, predecessors of Bank of America. In September 2004, Robert C. Osborne, Jr., joined the Bank as Executive Vice President and head of Wealth Management. For the prior twenty-eight years, he was associated with Wachovia Corporation in Atlanta and Augusta, most recently as head of their Wealth Management unit in Augusta. Darrell Rains, Group Vice President and Chief Financial Officer, joined the bank in October 2005. He has over 25 years of financial experience, including service at Regions Bank as Regional Financial Officer for the Mid-Atlantic Region and at Palmetto Federal, a predecessor to Regions Bank in Aiken, S.C., as Chief Financial Officer.

Market Area

The Bank’s primary market area includes Richmond and Columbia Counties and is centered in West Augusta. This area represents a significant portion of the Augusta-Richmond County, GA-SC metropolitan area. Augusta-Richmond County, GA-SC is one of 15 metropolitan statistical areas (MSA) in Georgia and its 2004 population of 341,560 ranked 2nd in Georgia. The Augusta market area has a diversified economy based principally on government, transportation, public utilities, health care, manufacturing, construction, and wholesale and retail trade. Augusta is one of the leading medical centers in the Southeast. Significant medical facilities include the Medical College of Georgia, the University Hospital, Veteran’s Administration Hospital, Dwight D. Eisenhower Hospital, Gracewood State School and Hospital, Doctors’ Hospital and St. Joseph’s Hospital. Other major employers in the Augusta market area include the Fort Gordon military installation, E-Z Go (golf car manufacturer), International Paper Company (bleached paper board manufacturer), Thermal Ceramics (insulating material manufacturer), President Baking Company (cookie manufacturer), John Deere (tractor manufacturer) and Club Car (golf car manufacturer). The area is served by Interstate 20, which connects it to Atlanta, 140 miles to the west and Columbia, South Carolina, 70 miles to the east. Augusta is also served by a major commercial airport (Bush Field) and a commuter airport (Daniel Field). The average unemployment rate for the Augusta-Richmond County MSA was 5.2% in 2004. Between June 2004 and June 2005 (the latest date for which FDIC information is available), total commercial bank and thrift deposits in Richmond County increased 4.3% from $2.3 billion to $2.4 billion, and total commercial bank and thrift deposits in Columbia County increased 10.0% from $909.0

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million to $1.0 billion. Based on data reported as of June 30, 2005, the Bank has 16.43% of all deposits in Richmond County and 21.13% in Columbia County. In both Richmond and Columbia Counties, the Bank has 17.84% of all deposits and is the second largest depository institution. The demographic information as presented above is based upon information and estimates provided by the U.S. Census Bureau, U.S. Department of Labor and the Federal Deposit Insurance Corporation.

The Bank entered the Athens, GA market in December 2005. The 2004 population for the Athens – Clarke County, GA MSA was 173,760, ranked 6^th in the state of Georgia. The Athens market area has a diversified economy based primarily on government, retail services, tourism, manufacturing, other services, and health care, with the largest share of government jobs in the state. Major employers in the Athens area include the University of Georgia, Athens Regional Medical Center, Pilgrim’s Pride (poultry processing plant), St. Mary’s Hospital, Clarke County School District, and the Athens-Clarke County Unified Government. Athens is located 70 miles northeast of Atlanta and 120 miles northwest of Augusta. The average unemployment rate for the Athens – Clarke County MSA was 3.4% in 2004. Total commercial bank and thrift deposits in Clarke County increased 1.3% from $1.5 billion to $1.7 billion between June 2004 and June 2005. The demographic information presented above is based upon information and estimates provided by the U.S. Census Bureau, U.S. Department of Labor, the Federal Deposit Insurance Corporation and the Athens Chamber of Commerce.

In July 2005, the Company announced its intention to enter the Aiken County, South Carolina market by chartering a federal thrift bank to be regulated by the Office of Thrift Supervision (“the OTS”). Aiken County, South Carolina is part of the MSA the Company operates in. Management believes an opportunity exists in the market for the local community style banking that the Bank has successfully employed in the Augusta area. The Company filed the charter application with the OTS and the FDIC on December 13, 2005. Based on the normal regulation process, it expects to open the thrift known as Southern Bank & Trust Company during the third quarter of 2006.

Lending Activities

The Bank offers a wide range of lending services, including real estate, commercial and consumer loans, to individuals, small to medium-sized businesses and professionals that are located in, or conduct a substantial portion of their business in, the Bank’s market area. The Bank’s total loans at December 31, 2005, were $601.2 million, or 74.2% of total interest-earning assets. An analysis of the composition of the Bank’s loan portfolio is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Composition of the Loan Portfolio.”

Real Estate Loans. Loans secured by real estate are the primary component of the Bank’s loan portfolio, constituting $502.6 million, or 83.6% of the Bank’s total loans, at December 31, 2005. These loans consist of commercial real estate loans, construction and development loans, residential real estate loans, and home equity loans.

Commercial Real Estate Loans. At December 31, 2005, the Bank held $171.7 million of commercial real estate loans of various sizes secured by office buildings, retail establishments, and other types of property. These commercial real estate loans represented 28.6% of the Bank’s total loans at December 31, 2005. Loan terms are generally limited to five years and often do not exceed three years, although the installment payments may be structured on a 20-year amortization basis with a balloon payment at maturity. Interest rates may be fixed or adjustable. The Bank generally charges an

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origination fee. Management attempts to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 80%. In addition, the Bank requires personal guarantees from the principal owners of the property supported with an analysis by the Bank of the guarantors’ personal financial statements in connection with a substantial majority of such loans. The Bank experienced $20,000 in net charge-offs on commercial real estate loans during 2005. A number of the loans classified as commercial real estate loans are, in fact, commercial loans for which a security interest in real estate has been taken as additional collateral. These loans are subject to underwriting as commercial loans as described below.

Construction and Development Loans. Construction and development real estate loans comprise $184.8 million, or 30.7% of the Bank’s total loans at December 31, 2005. A construction and development loan portfolio presents special problems and risks, requiring additional administration and monitoring. This is necessary since most loans are originated as lines of credit and draws under the line require specific activities which add value to the asset, such as progress on the completion of a building or the placement of utilities and roads in a development. This requires specialized knowledge on the part of our personnel to appraise and evaluate that progress, hence the higher level of administration and monitoring. The level of construction and development loans are representative of the character of the Bank’s market. The Bank subjects this type of loan to underwriting criteria that include: certified appraisal and valuation of collateral; loan-to-value margins (typically not exceeding 75%); cash equity requirements; evaluations of borrowers’ cash flows and alternative sources of repayment; and a determination that the market is able to absorb the project on schedule.

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

Infrastructure development loans are generally made with an initial maturity of one year, although the Bank may renew the loan for up to two additional one-year terms to allow the developer to complete the sale of the lots comprising the property before requiring the payment of the related loan. These loans typically bear interest at a floating rate and the Bank typically charges an origination fee. These loans are repaid, interest only, on a monthly or quarterly basis until sales of lots begin, and then principal payments are made as each lot is sold at a rate allowing the Bank to be repaid in full by the time 75% of the lots have been sold. In order to reduce the credit risk associated with these loans, the Bank requires the project’s loan to value ratio (on an as completed basis) to be not more than 70%. The Bank experienced $75,000 in net loan charge-offs on construction loans during 2005.

Residential construction loans are typically made for homes with a completed value in the range of $110,000 to $500,000. Loans for the lower-value homes are typically made for a term of six months, while loans for the larger homes are typically made for a term of nine to twelve months. Typically,

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these loans bear interest at a floating rate and the Bank collects an origination fee. The Bank may renew these loans for one additional term (equal to the original term) to allow the contractor time to market the home. In order to reduce the credit risk with respect to these loans, the Bank restricts the loans that are made for homes being built on a speculative basis, carefully manages its aggregate lending relationship with each borrower, and requires approval of the Loan Committee of the Board of Directors to lend more than $500,000 in the aggregate to any borrower and its related interests.

Residential Loans. The Bank originates, on a selective basis, residential loans for its portfolio on single-and multi-family properties, both owner-occupied and non-owner-occupied. At December 31, 2005, the Bank held $124.0 million of such loans, including home equity loans, representing 20.6% of the Bank’s loan portfolio, as compared to $96.1 million, or 19.5% of the Bank’s loan portfolio at December 31, 2004. There has been little growth in Residential Loans as a percentage of total loans as most mortgage loans are sold in the secondary market. This portfolio includes, typically 15 or 30-year adjustable rate mortgage loans whose terms mirror those prevalent in the secondary market for mortgage loans or, less typically, floating rate non-amortized term loans for purposes other than acquisition of the underlying residential property. A limited number of fixed rate loans are maintained in the portfolio when there are compelling market reasons to do so. Generally, all fixed rate residential loans are sold into the secondary market. In the case of home equity loans and lines of credit, the underwriting criteria are the same as applied by the Bank when making a first mortgage loan, as described above. Home equity lines of credit typically mature ten years after their origination. The Bank experienced net loan charge-offs on residential loans of $23,000 during 2005.

The Bank also originates residential loans for sale into the secondary market, an activity that began with the acquisition of First Columbia. Residential real estate lending for the purpose of sale of such loans was further expanded with the acquisition of Georgia Union Mortgage Company in May of 1997. The Bank further expanded its secondary market mortgage operations in June 2000 with the addition of experienced mortgage staff. The Bank moved its mortgage department from the Martinez Branch to its facilities located in the Operations Complex at 3515 Wheeler Road to accommodate this expansion. In September of 2000, the Bank acquired the mortgage origination offices of Prime Lending in Savannah, Georgia. In April of 2001, the Bank acquired the mortgage origination office of Prime Lending in Nashville, Tennessee, and subsequently closed the office in December 2004 since it was no longer profitable. The addition of experienced mortgage personnel well known to our management staff provides an opportunity to participate in the dynamic Savannah market. The Bank originates both fixed and variable rate residential mortgage loans for sale with servicing released. Loans originated for sale into the secondary market are approved for purchase by an investor prior to closing and the Bank takes no credit or interest rate risk with respect to these loans. The Bank generates loan origination fees, typically ranging from 1.0% to 1.5% of the loan balance, and servicing release fees, generally ranging from 0.25% to 0.75% of the loan balance, both of which are recognized as income when the loan is sold. The Bank limits interest rate and credit risk on these loans by locking the interest rate for each loan with the secondary investor and receiving the investor’s underwriting approval prior to originating the loan. The Bank had $22.1 million of such loans at December 31, 2005, representing 3.7% of the Bank’s total loans.

Commercial Loans. The Bank makes loans for commercial purposes to various types of businesses. At December 31, 2005, the Bank held $64.4 million of these loans, representing 10.7% of the total loan portfolio, excluding for these purposes commercial loans secured by real estate. See “Real Estate Loans.” Equipment loans are made for a term of up to five years (more typically three

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years) at fixed or variable rates, with the loan being fully amortized over the term and secured by the financed equipment with a loan-to-value ratio based on the overall relationship and creditworthiness of the customer. Working capital loans are made for a term typically not exceeding one year. These loans are usually secured by accounts receivable or inventory, and principal is either repaid as the assets securing the loan are converted into cash, or principal is due at maturity. The Bank experienced net loan charge-offs on commercial loans of $386,000 during 2005 and $283,000 during 2004.

Consumer Loans. The Bank makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans, and revolving lines of credit such as overdraft protection. At December 31, 2005, the Bank held $34.8 million of consumer loans, representing 5.8% of total loans. These loans typically carry balances of less than $25,000 and earn interest at a fixed rate. Non-revolving loans are either amortized over a period not exceeding 60 months or are ninety-day term loans. Revolving loans require monthly payments of interest and a portion of the principal balance (typically 2 to 3% of the outstanding balance). The Bank entered the indirect lending business in 1997 and currently purchases sales finance contracts from dealers for new and used automobiles and home improvements. At December 31, 2005, indirect loans outstanding totaled $9.8 million. The Bank experienced net loan charge-offs on consumer loans of $143,000 during 2005 and $595,000 during 2004.

Loan Approval and Review. The Bank’s loan approval policies provide for various levels of officer lending authority. When the aggregate amount of outstanding loans to a single borrower exceeds that individual officer’s lending authority, the loan request must be considered and approved by an officer with a higher lending limit or by the Directors’ Loan Committee. Individual officers’ lending limits range from $15,000 to $750,000 depending on seniority and the type of loan. Any loan in excess of the lending limit of senior bank officers must be approved by the Directors’ Loan Committee.

The Bank has a loan review procedure involving multiple officers of the Bank which is designed to promote early identification of credit quality problems. All loan officers are charged with the responsibility of rating all their loans and reviewing those loans on a periodic basis, the frequency of which increases as the quality of the loans decreases. The Bank’s Senior Vice President of Credit Administration is charged with the responsibility of ensuring that all significant lending relationships are reviewed annually. The Bank’s current goal is to review lending relationships in excess of $400,000. In addition, the Credit Administration Department is involved in the analysis of all loans that require Directors Loan Committee approval.

Deposits

The Bank offers a variety of deposit programs to individuals and to small to medium-sized businesses and other organizations at interest rates generally consistent with local market conditions. The following table sets forth the mix of depository accounts at the Bank as a percentage of total deposits at December 31, 2005.

Deposit Mix

Noninterest-bearing demand	$	97,083,931	14.51	%
Interest checking		100,692,388	14.44	%
Money management		37,719,408	4.52	%
Savings		265,131,754	40.51	%
Time deposits
Under $100,000		41,017,555	6.83	%
$100,000 and over		122,009,813	19.19	%
	$	663,654,849	100.00	%

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

Competition

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

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

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Employees

The Company had approximately 270 full-time equivalent employees at December 31, 2005. The Company maintains training, educational and affirmative action programs designed to prepare employees for positions of increasing responsibility in both management and operations, and provides a variety of benefit programs, including group life, health, accident and other insurance and retirement plans. None of the Company’s employees are covered by a collective bargaining agreement, and the Company believes its employee relations are generally good.

Supervision and Regulation

Both the Company and the Bank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws generally are intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.

The Company

Because the Company owns all of the capital stock of the Bank, it is a bank holding company under the federal Bank Holding Company Act of 1956. As a result, the Company is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve. As a bank holding company located in Georgia, the Georgia Department of Banking and Finance also regulates and monitors all significant aspects of the Company’s operations.

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

• acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

• acquiring all or substantially all of the assets of any bank; or

• merging or consolidating with any other bank holding company.

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

Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Company or any other bank holding company located in Georgia may purchase a bank located outside

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of Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Georgia may purchase a bank located inside Georgia. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. Currently, Georgia law prohibits acquisitions of banks that have been incorporated for less than three years. Because the Bank has been incorporated for more than three years, this limitation does not apply to the Company or to the Bank.

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

• the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or

• no other person owns a greater percentage of that class of voting securities immediately after the transaction.

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

Permitted Activities. A bank holding company is generally permitted under the Bank Holding Company Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities:

• Banking or managing or controlling banks; and

• Any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

• Factoring accounts receivable;

• Making, acquiring, brokering or servicing loans and usual related activities;

• Leasing personal or real property;

• Operating a non-bank depository institution, such as a savings association;

• Trust company functions;

• Financial and investment advisory activities;

• Conducting discount securities brokerage activities;

• Underwriting and dealing in government obligations and money market instruments;

• Providing specified management consulting and counseling activities;

• Performing selected data processing services and support services;

• Acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

• Performing selected insurance underwriting activities.

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Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries.

In addition to the permissible bank holding company activities listed above, a bank holding company may qualify and elect to become a financial holding company, permitting the bank holding company to engage in activities that are financial in nature or incidental or complementary to financial activity. The Bank Holding Company Act expressly lists the following activities as financial in nature:

• Lending, trust and other banking activities;

• Insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state;

• Providing financial, investment, or advisory services;

• Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;

• Underwriting, dealing in or making a market in securities;

• Other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks;

• Foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;

• Merchant banking through securities or insurance affiliates; and

• Insurance company portfolio investments.

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

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

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The Bank

The Bank is subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of our operations. These laws are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.

Because the Bank is a commercial bank chartered under the laws of the State of Georgia, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the Georgia Department of Banking and Finance. The FDIC and Georgia Department of Banking and Finance regularly examine the Bank’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Additionally, the Bank’s deposits are insured by the FDIC to the maximum extent provided by law. The Bank is also subject to numerous state and federal statutes and regulations that affect its business, activities and operations.

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

Under the Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state banks to branch into their state by establishing a new start-up branch in the state. Currently, Georgia has not opted-in to this provision. Therefore, interstate merger is the only method through which a bank located outside of Georgia may branch into Georgia. This provides a limited barrier of entry into the Georgia banking market, which protects us from an important segment of potential competition. However, because Georgia has elected not to opt-in, our ability to establish a new start-up branch in another state may be limited. Many states that have elected to opt-in have done so on a reciprocal basis, meaning that an out-of-state bank may establish a new start-up branch only if their home state has also elected to opt-in. Consequently, until Georgia changes its election, the only way we will be able to branch into states that have elected to opt-in on a reciprocal basis will be through interstate merger. To circumvent this limitation, the Company is entering the South Carolina market by chartering a thrift.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of the other categories. At December 31, 2005, the Bank qualified for the well-capitalized category.

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

An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

FDIC Insurance Assessments. The FDIC has adopted a risk-based assessment system for insured depository institutions’ that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the “undercapitalized” category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institution’s primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds. Assessments range from 0 to 27 cents per $100 of deposits, depending on the institution’s capital group and supervisory subgroup. In addition, the FDIC imposes assessments to help pay off the $780 million in annual interest payments on the $8 billion Financing Corporation bonds issued in the late 1980s as part of the government rescue of the thrift industry. This assessment rate is adjusted quarterly and is set at 1.32 basis points of assessable deposits for the first quarter of 2006.

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

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

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Other Regulations. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. For example, under the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally prohibited from charging an annual interest rate in excess of 6% on any obligation for which the borrower is a person on active duty with the United States military.

The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

• federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

• Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies, as amended by the Fair and Accurate Credit Transactions Act, which became effective in 2004;

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

• Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and

• rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

In addition to the federal and state laws noted above, the Georgia Fair Lending Act (“GAFLA”) imposes restrictions and procedural requirements on most mortgage loans made in Georgia, including home equity loans and lines of credit. On August 5, 2003, the Office of the Comptroller of the Currency issued a formal opinion stating that the entirety of GAFLA is preempted by federal law for national banks and their operating subsidiaries. GAFLA contains a provision that preempts GAFLA as to state banks in the event that the Office of the Comptroller of the Currency preempts GAFLA as to national banks. Therefore, the Bank and any of its operating subsidiaries that may be engaged in mortgage lending will be exempt from the requirements of GAFLA.

The Bank’s deposit operations are subject to:

• the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

• the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

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Capital Adequacy

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

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

The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock, and notes payable to unconsolidated special purpose entities that issue trust preferred securities, net of investment in the entity, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. In December 2005, the Company issued $10.0 million of unsecured subordinated debentures to Southeastern Bank Financial Statutory Trust I which qualify as Tier 1 Capital. The Company’s ratio of total capital to risk-weighted assets was 12.35% and the ratio of Tier 1 Capital to risk-weighted assets was 11.10% at December 31, 2005.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. At December 31, 2005, our leverage ratio was 9.01%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

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

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Payment of Dividends

The Company is a legal entity separate and distinct from the Bank. The principal sources of the Company’s cash flow, including cash flow to pay dividends to its shareholders, are dividends that the Bank pays to its sole shareholder, the Company. Statutory and regulatory limitations apply to the Bank’s payment of dividends. If, in the opinion of the federal banking regulator, the Bank were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulator could require, after notice and a hearing, that it stop or refrain from engaging in the questioned practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. See “The Bank—Prompt Corrective Action.”

The Georgia Department of Banking and Finance also regulates the Bank’s dividend payments and must approve dividend payments that would exceed 50% of the Bank’s net income for the prior year. Our payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.

The Bank declared cash dividends payable to the Company of $3.5 million in 2005, $2.0 million in 2004, and $2.0 million in 2003. The Company declared cash dividends of $0.13 per share each quarter in 2005 which totaled $2,733,427 and in 2004 which totaled $2,729,118. The Company paid a 10% stock dividend on August 29, 2003 and a 2:1 stock split on November 21, 2003.

Restrictions on Transactions with Affiliates

The Company and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

• a bank’s loans or extensions of credit to affiliates;

• a bank’s investment in affiliates;

• assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;

• loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and

• a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

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

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

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

Privacy

Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

Anti-Terrorism Legislation

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) imposes requirements and limitations on specified financial transactions and account relationships, intended to guard against money laundering and terrorism. The Bank has established a customer identification program pursuant to the “know your customer” rules contained in Section 326 of the USA PATRIOT Act.

Proposed Legislation and Regulatory Action

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

Effect of Governmental Monetary Polices

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb

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inflation or combat a recession. The monetary policies of the Federal Reserve affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

Item 1A. Risk Factors

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

Our profitability is vulnerable to interest rate fluctuations.

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

If the value of real estate in our core market were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our business, financial condition and results of operations.

At December 31, 2005, approximately 83.6% of our loans had real estate as a primary component of collateral. This collateral provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be materially adversely affected, given the relatively high percentage of our loans that are secured by real estate.

A significant portion of our real estate collateral is located in Richmond, Columbia and Clarke Counties in the State of Georgia. A decline in local economic conditions in these areas could adversely affect the value of our real estate collateral, which could have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are diversified across a broader geographic area.

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

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

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

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

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

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

We could sustain losses if borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for credit losses that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations.

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

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

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

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future, although we plan to undertake a private placement of our common stock and may issue additional trust preferred securities in order to raise the additional capital necessary to finance our planned expansion into the Aiken, South Carolina market. We may thereafter need to raise additional capital to support our continued growth.

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

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

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

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

We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all. In addition, our recent and rapid growth may distort some of our historical financial ratios and statistics. In the future, we may not have the benefit of several recently favorable factors, such as a generally increasing interest rate environment, a strong residential mortgage market or the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.

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

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

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

Our directors, executive officers and relatives of directors, as a group, beneficially owned approximately 56.8% of our fully diluted outstanding common stock as of December 31, 2005. As a result of their ownership, the directors and executive officers will have the ability, if they voted their shares in concert, to control the outcome of all matters submitted to our shareholders for approval, including the election of directors.

We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, which limitations or restrictions could adversely affect our profitability.

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

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

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

We have supported our continued growth by issuing trust preferred securities from a special purpose trust and accompanying subordinated debentures. At December 31, 2005, we had outstanding trust preferred securities totaling $10 million and may issue additional trust preferred securities in the future. We unconditionally guarantee the payment of principal and interest on the trust preferred securities. Also, the debentures we issued to the special purpose trust that relate to those trust preferred securities are senior to our common stock. As a result, we must make payments on the subordinated debentures before we can pay any dividends on our common stock. In the event of our bankruptcy, dissolution or liquidation, holders of our subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on our subordinated debentures (and related trust preferred securities) for up to five years, but during that time we would not be able to pay dividends on our common stock.

Environmental liability associated with lending activities could result in losses.

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

Item 1B. Unresolved Staff Comments

None

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Item 2. Description of Property

The Company currently operates a main office, eight branches and an operations center housed in a series of buildings adjacent to the main office. The principal administrative offices of the Company are located at 3530 Wheeler Road, Augusta, Georgia. Locations in metro Augusta include the main office, four branch offices in Augusta, Georgia, two branches in Martinez, Georgia, and one branch in Evans, Georgia. There is one branch located in Athens, Georgia. All banking offices are owned by the Company and are not subject to mortgage.

Each banking office in metro Augusta is a brick building with a teller line, customer service area, offices for the Bank’s lenders, drive-in teller lanes, a vault with safe deposit boxes, and a walk-up or drive-up automated teller machine. The banking offices are generally 3,000 to 5,000 square foot buildings. Exceptions are the main office with approximately 14,000 square feet, the Washington Road branch with 1,800 square feet, and the newly renovated Cotton Exchange branch with 7,500 square feet of space. The Cotton Exchange which is listed in the National Register of Historic Places and located in downtown Augusta, Georgia was acquired in August 2003. It was fully renovated while preserving the old artifacts and historical setting and opened as a full-service banking office in September 2004. The Washington Road branch, previously converted to a drive through only facility, was subsequently reopened in February 2005 as a full-service banking office. In December 2005, the first branch located outside of metro Augusta was opened in Athens, Georgia. This 4,000 square foot banking office is located on the border of the Athens historic district and includes a teller line, customer service area, and lending offices.

In 1997, the Company acquired 24,000 square feet of commercial office space located at 3515 Wheeler Road, across the street from the main office. The Company renovated 17,000 square feet of this newly acquired space to be utilized for a consolidation of all operational functions, including data processing, deposit operations, human resources, loan operations, credit administration, and accounting. The objective of the Company in acquiring this property and planning the renovation was to provide adequate space for existing operations and to meet future requirements necessitated by growth of the Company. Renovations were completed in June 1998 and operational functions were relocated. In June 2000, the mortgage operations were moved to this Operations Complex, and occupied 4,500 square feet. In August 2001, with the expiration of a 3,000 square foot tenant lease, the mortgage department expanded operations and now occupies a total of 6,000 square feet. In December 2003, the remaining 1,500 square feet that was leased was renovated and the construction lending department now occupies this location.

In November 2002, the Bank purchased approximately 23,400 square feet of commercial office space on Walton Way Ext., located in close proximity to the Operations Complex and Main Office. Approximately 10,400 square feet was renovated in 2003 to accommodate operational functions. Approximately 500 square feet of this property is used as a meeting room. All properties owned by the Company are adequately covered by the appropriate insurance for replacement value.

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

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See Note 5 to the Consolidated Financial Statements for additional information concerning the Bank’s premises and equipment and Note 7 to the Consolidated Financial Statements for additional information concerning the Bank’s commitments under various equipment leases.

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Shareholders

There were no matters submitted to a vote of the shareholders of the Company during the fourth quarter of the Company’s fiscal year ended December 31, 2005.

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PART II

Item 5. Market for the Company’s Common Equity and Related Stockholder Matters

As of March 3, 2006, there were approximately 802 holders of record of the Company’s common stock. As of March 3, 2006, there were 5,275,794 shares of the Company’s common stock outstanding. Transactions in the Company’s common stock are generally negotiated through UBS Financial Services and Robinson-Humphrey/Soloman Smith Barney Company, Inc. Both firms make a market in the common stock of the Company via the over-the-counter bulletin board. The following table reflects the range of high and low bid quotations, adjusted for stock dividends and splits, in the Company’s common stock for the past two years:

Southeastern Bank Financial Corporation Stock Price

Quarter ended	Low		High
March 31, 2004	$	25.10	$	29.25
June 30, 2004		26.25		28.88
September 30, 2004		26.50		28.50
December 31, 2004		27.75		29.25
Quarter ended
March 31, 2005		28.25		35.00
June 30, 2005		32.00		36.00
September 30, 2005		33.50		45.00
December 31, 2005		39.75		43.15
Period ended
March 3, 2006		38.00		40.25

The Company declared cash dividends of $0.13 per share on January 26, 2005, April 20, 2005, July 18, 2005, and October 26, 2005. The Company declared cash dividends of $0.13 per share in each quarter of 2004. The Company’s primary sources of income are dividends and other payments received from the Bank. The amount of dividends that may be paid by the Bank to the Company depends upon the Bank’s earnings and capital position and is limited by federal and state law, regulations and policies.

Cash dividends on the Bank’s common stock may be declared and paid only out of its retained earnings, and dividends may not be declared at any time when the Bank’s paid-in capital and appropriated earnings do not, in combination, equal at least 20% of its capital stock account. In addition, the Georgia Department of Banking and Finance’s current rules and regulations require prior approval before cash dividends may be declared and paid if: (1) the Bank’s ratio of equity capital to adjusted total assets is less than 6%; (ii) the aggregate amount of dividends declared or anticipated to be declared in that calendar year exceeds 50% of the Bank’s net profits, after taxes but before dividends, for the previous calendar year; or (iii) the percentage of the Bank’s loans classified as adverse as to repayment or recovery by the Georgia Department of Banking and Finance at the most recent examination of the Bank exceeds 80% of the Bank’s equity as reflected at such examination.

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

The Company did not repurchase any of its equity securities or sell any of its equity securities without registration under the Securities Act of 1933, as amended, during the fourth quarter of 2005.

Item 6. Selected Consolidated Financial Data

The selected consolidated financial data presented on the following page as of December 31, 2005 and 2004 and for each of the years in the three-year period ended December 31, 2005 is derived from the audited consolidated financial statements and related notes included in this report and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data as of December 31, 2003, 2002 and 2001 and for the two years ended December 31, 2003 is derived from audited consolidated financial statements that are not included in this report but that are included in the Annual Reports on Form 10-K filed with the Securities and Exchange Commission for those years. The per share data presented below has been adjusted to give effect to the 2-for-1 stock split effected on November 21, 2003.

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Selected Consolidated Financial Data	2005			2004			2003			2002			2001
	(Dollars in thousands, except per share data)
Earnings
Total interest income	$	47,277		$	35,350		$	32,337		$	31,370		$	32,561
Total interest expense		17,885			9,670			9,685			11,160			15,249
Net interest income		29,392			25,680			22,652			20,210			17,312
Provision for loan losses		1,841			1,588			1,694			2,414			1,825
Noninterest income		12,378			12,461			14,522			11,587			7,970
Noninterest expense		25,019			23,744			23,564			20,278			16,795
Net income		9,954			8,704			7,933			6,010			4,561
Per Share Data
Net income - Diluted	$	1.86		$	1.63		$	1.48		$	1.13		$	0.86
Book value		12.08			11.24			10.23			8.91			7.62
Cash dividends declared per common share		0.52			0.52			—			—			—
Weighted average common and common equivalent shares outstanding		5,350,384			5,323,924			5,359,815			5,327,286			5,275,745
Selected Average Balances
Assets	$	785,081		$	673,805		$	604,585		$	526,337		$	449,322
Loans (net of unearned income)		547,414			464,769			420,023			363,624			315,003
Deposits		611,029			528,167			465,868			403,992			348,706
Stockholders’ equity		61,655			56,162			50,786			43,090			37,405
Selected Year-End Balances
Assets	$	864,277		$	706,517		$	630,633		$	569,832		$	481,544
Loans (net of unearned income)		601,235			494,170			432,679			396,699			339,670
Allowance for loan losses		9,125			7,930			7,278			6,534			5,109
Deposits		663,655			556,785			483,952			439,557			369,149
Short-term borrowings		73,013			45,481			57,769			48,988			33,456
Long-term borrowings		57,000			40,000			30,000			30,000			35,000
Stockholders’ equity		63,583			58,980			53,689			46,748			39,999
Selected Ratios
Return on average total assets		1.27	%		1.29	%		1.31	%		1.14	%		1.02	%
Return on average equity		16.15	%		15.50	%		15.62	%		13.95	%		12.19	%
Average earning assets to average total assets		93.90	%		93.56	%		94.57	%		94.86	%		93.38	%
Average loans to average deposits		89.59	%		88.00	%		90.16	%		90.01	%		90.33	%
Average equity to average total assets		7.85	%		8.33	%		8.40	%		8.19	%		8.32	%
Net interest margin		3.98	%		4.08	%		3.97	%		4.04	%		4.13	%
Operating efficiency		59.78	%		62.09	%		63.04	%		64.02	%		66.42	%
Net charge-offs to average loans		0.12	%		0.20	%		0.23	%		0.27	%		0.27	%
Allowance for loan losses to net loans (year-end)		1.52	%		1.60	%		1.68	%		1.65	%		1.50	%
Risk-based capital
Tier 1 capital		11.10	%		10.33	%		10.33	%		10.15	%		10.05	%
Total capital		12.35	%		11.58	%		11.58	%		11.40	%		11.30	%
Tier 1 leverage ratio		9.01	%		8.38	%		8.40	%		7.96	%		8.02	%

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company and the Bank during the past three years. The discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and related notes to the consolidated financial statements.

Overview

The Bank was organized by a group of local citizens and commenced business on August 28, 1989. It began operations with one branch. Today, the Bank operates eight full service banking offices in Richmond and Columbia counties in Augusta, Martinez, and Evans, Georgia and one branch in Athens, Georgia. The Bank operates two mortgage origination offices in Augusta, Georgia, and Savannah, Georgia. The Savannah, Georgia office also offers construction lending services. Bank and mortgage operations are located in Augusta, Georgia in two operations campuses located in close proximity to the main office in Augusta, Georgia. Trust and retail investment services are located in the main office. The Bank is Augusta’s largest community banking company.

Richmond and Columbia counties have a diversified economy based primarily on government, transportation, public utilities, health care, manufacturing, construction, and wholesale and retail trade. Augusta is one of the leading medical centers in the Southeast. The 2004 population of the Augusta-Richmond County, GA-SC metropolitan area was 341,560, the second largest in Georgia. The Bank expanded into the Athens, Georgia market in December 2005. Athens has a diversified economy which includes government, retail services, tourism, manufacturing, other services, and health care, with the largest share of government jobs in the state. The Athens-Clarke County, GA metropolitan area ranks sixth in Georgia with a 2004 population of 173,760.

The Bank’s services include the origination of residential and commercial real estate loans, construction and development loans, and commercial and consumer loans. The Bank also offers a variety of deposit programs, including noninterest-bearing demand, interest checking, money management, savings, and time deposits. In both Richmond and Columbia counties, the Bank had 17.84% of all deposits and was the second largest depository institution at June 30, 2005, as cited from the Federal Deposit Insurance Corporation’s website. Securities sold under repurchase agreements are also offered. Additional services include 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 marketing and balance sheet considerations. The Bank 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 Bank is committed to building lifelong relationships with its customers, employees, shareholders, and the communities it serves.

The Bank’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. Loan interest income increased due to rising interest rates and increased volumes while gain on sales of mortgage loans decreased due to lower production levels. Both trust service fees and retail investment income experienced growth again this year as the Bank continues to focus on the expansion of the wealth management area.

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The Bank has experienced steady growth. Over the past four years, assets grew from $481.5 million at December 31, 2001 to $864.3 million at December 31, 2005. From year end 2001 to year end 2005, loans increased $261.6 million, and deposits increased $294.5 million. Also, from 2001 to 2005 return on average equity increased from 12.19% to 16.15% and return on average assets increased from 1.02% to 1.27%. Net income for the year ended 2001 was $4.6 million compared to net income of $10.0 million at year end 2005. The Company has reached a level of maturity evidenced by long-term financial performance and stability that resulted in cash dividends of $0.13 per share paid for each quarter of 2005 and 2004.

The Bank meets its liquidity needs by managing cash and due from banks, federal funds purchased and sold, maturity of investment securities, principal repayments received from mortgage backed securities, and draws on lines of credit. Additionally, liquidity can be managed through structuring deposit and loan maturities. The Bank funds loan and investment growth with core deposits, securities sold under repurchase agreements and wholesale borrowings. 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 Bank monitors its interest rate risk as it applies to 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 Bank monitors operating expenses through responsibility center budgeting. See “Interest Rate Sensitivity” below.

Critical Accounting Estimates

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

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

The Company segments its allowance for loan losses into the following four major categories: 1) identified losses for impaired loans; 2) general reserves for Classified/Watch loans; 3) general reserves for loans with satisfactory ratings; and 4) general reserves based on economic and market risk qualitative factors. Risk ratings are initially assigned in accordance with the Bank’s loan and collection policy. An organizationally independent department reviews grade assignments on an ongoing basis. Management reviews current information and events regarding a borrowers’ financial condition and

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strengths, cash flows available for debt repayment, the related collateral supporting the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with the individual loan, management classifies the loan accordingly. If the loan is determined to be impaired, management allocates a portion of the allowance for loan losses for that loan based upon the present value of future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if collection of the loan is deemed to be dependent upon the collateral. Regulatory guidance is also considered. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are generally applied first to principal and then to interest income depending upon the overall risk of principal loss to the bank. Impaired and Classified/Watch loans are aggressively monitored. The reserves for loans rated satisfactory are further subdivided into various types of loans as defined by call report codes. Qualitative factors are based upon economic, market and industry conditions that are specific to the Company’s local two county markets. These qualitative factors include, but are not limited to, national and local economic conditions, bankruptcy trends, unemployment trends, loan concentrations, and competitive factors in the local market. These allocations for the qualitative factors are included in the various individual components of the allowance for loan losses. The qualitative factors are subjective in nature and require considerable judgment on the part of the Bank’s management. However, it is the Bank’s opinion that these factors do represent uncertainties in the Bank’s business environment that must be factored into the Bank’s analysis of the allowance for loan losses.

Management believes that the allowance for loan losses is adequate. While the Company has 83.6% of its loan portfolio secured by real estate loans, this percentage is not significantly higher than in previous years. Commercial real estate comprises 28.6% 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 loans, repayment is not dependent upon liquidation of the real estate. Construction and development (30.7%) 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 liquidation of the real estate and is impacted by national and local economic conditions. The residential category, 20.6% of the portfolio, represents those loans that the Company chooses to maintain in its portfolio rather than selling into the secondary market for marketing and competitive reasons and commercial loans secured by residential real estate. The residential held for sale category, 3.7% of the portfolio, comprises loans that are in the process of being sold into the secondary market. In these loans, the credit has been approved by the investor and the interest rate locked so that the Company minimizes credit and interest rate risk with respect to these loans. The Company has no large loan concentrations to individual borrowers or industries. Only 5.8% of the Company’s portfolio consists of consumer loans. Unsecured loans at December 31, 2005 were $10.4 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 require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

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

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Results of Operations

Total assets increased $157.8 million, or 22.3% in 2005 compared to year end 2004, primarily due to loan and investment growth. The Company achieved record income of $10.0 million in 2005, a 14.4% increase over 2004. The increase in net income is attributable to increases in net interest income somewhat offset by increases in interest expense with noninterest income remaining stable. Interest income increased $11.9 million or 33.7% in 2005. Interest income on loans, including loan fees, was the principal contributor, representing an increase of $10.7 million over 2004. This was the result of $107.1 million in loan growth for the Company in 2005 and the rising interest rate environment. Interest income on investment securities increased $934,000 in 2005 as a result of a $49.2 million increase in the investment portfolio in 2005. Significant changes to noninterest income in 2005 include a $439,000 increase in service charges and fees on deposits related to new retail checking accounts and a $616,000 decrease in gain on sales of mortgage loans, the result of decreases in mortgage loan volumes.

The Company had deposit growth of $106.9 million, or 19.2% in 2005. Interest expense on deposits increased $6.7 million as a result of this growth and higher interest rates. Securities sold under repurchase agreements grew $22.4 million, or 50.3% in 2005, with related interest expense increasing $1.1 million over 2004. Other funding sources utilized are wholesale borrowings, including Federal Home Loan Bank borrowings and brokered CDs, which totaled $92.4 million at year end 2005. The Company was in a $2.8 million federal funds sold position at 2005 year end, as compared to $12.3 million at 2004 year end. Noninterest expense increased $1.3 million or 5.4% in 2005. Salary expense and employee benefits increased $977,000 primarily as a result of additional employees in 2005 related to the Company’s continued growth and expansion. The Company continues to monitor operating expenses and uses responsibility center budgeting to assist in this endeavor. The operating efficiency ratio of 59.78% in 2005 is a 2.31% decrease from 2004.

The earnings performance of the Company is reflected in its return on average assets and average equity of 1.27% and 16.15%, respectively, during 2005 compared to 1.29% and 15.50%, respectively, during 2004. The return on average assets and average equity was 1.31% and 15.62%, respectively, in 2003. Basic net income per share on weighted average common shares outstanding improved to $1.89 in 2005 compared to $1.66 in 2004 and $1.51 in 2003. Diluted net income per share on weighted average common and common equivalent shares outstanding improved to $1.86 in 2005 compared to $1.63 in 2004 and $1.48 in 2003. Cash dividends of $0.13 per share were paid for each quarter of 2005 and 2004. A 10% stock dividend was paid on August 29, 2003 and a 2:1 stock split was paid on November 21, 2003.

Net Interest Income

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

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Average Balances, Income and Expenses, Yields and Rates

	Year Ended Dec. 31, 2005							Year Ended Dec. 31, 2004							Year Ended Dec. 31, 2003
	Average Amount			Average Yield or Rate		Amount Paid or Earned		Average Amount			Average Yield or Rate		Amount Paid or Earned		Average Amount			Average Yield or Rate		Amount Paid or Earned
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans	$	547,414		7.11	%	$	38,898	$	464,769		6.08	%	$	28,235	$	420,023		6.15	%	$	25,840
Investments
Taxable		158,017		4.56	%		7,206		146,660		4.43	%		6,495		131,532		4.50	%		5,914
Tax-exempt		18,765		4.09	%		767		13,613		4.00	%		544		11,810		4.16	%		491
Federal funds sold		12,106		3.14	%		380		5,211		1.40	%		73		8,088		1.09	%		88
Interest-bearing deposits in other banks		884		2.94	%		26		163		1.84	%		3		305		1.31	%		4
Total interest-earning assets		737,186		6.41	%	$	47,277		630,416		5.61	%	$	35,350		571,758		5.66	%	$	32,337
Cash and due from banks		17,096							15,601							13,230
Premises and equipment		19,208							16,577							13,899
Other		20,253							18,723							12,706
Allowance for loan losses		(8,662	)						(7,512	)						(7,008	)
Total assets	$	785,081						$	673,805						$	604,585
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities (1):
NOW Accounts	$	87,982		0.89	%	$	787	$	75,866		0.54	%	$	407	$	64,006		0.55	%	$	353
Savings and money management accounts		288,759		2.98	%		8,610		236,306		1.54	%		3,650		206,295		1.68	%		3,461
Time deposits		145,209		3.08	%		4,476		137,238		2.31	%		3,165		125,809		2.73	%		3,437
Federal funds purchased / securities sold under repurchase agreements		55,658		3.05	%		1,697		46,541		1.40	%		651		47,204		1.37	%		646
Other borrowings		50,121		4.62	%		2,315		37,488		4.79	%		1,797		35,678		5.01	%		1,788
Total interest-bearing liabilities		627,729		2.85	%		17,885		533,439		1.81	%		9,670		478,992		2.02	%		9,685
Noninterest-bearing demand deposits		89,079							78,757							69,758
Other liabilities		6,618							5,447							5,049
Stockholders’ equity		61,655							56,162							50,786
Total liabilities and stockholders’ equity	$	785,081						$	673,805						$	604,585
Net interest spread				3.56	%						3.80	%						3.63	%
Benefit of noninterest sources				0.42	%						0.28	%						0.34	%
Net interest margin/income				3.98	%	$	29,392				4.08	%	$	25,680				3.97	%	$	22,652

(1) Exlcudes subordinated debentures issued in December 2005 which had no effect on the margin due to the timing of the issuance.

The increase in average loans of $82.6 million, the increase in average investments of $16.5 million, and the increase in average federal funds sold of $6.9 million were funded by increases in average deposits of $82.9 million, Federal Home Loan Bank borrowings of $11.7 million, and securities sold under repurchase agreements of $9.1 million. For 2005, average total assets were $785.1 million, a 16.5% increase over 2004. Average interest-earning assets for 2005 were $737.2 million, or 93.9% of average total assets.

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Interest income is the largest contributor to income. Interest income on loans, including loan fees, increased $10.7 million from 2004 to $38.9 million. The increase in loan interest income resulted from increased loan volume and higher yields due to the rising interest rate environment in 2005. Investment income increased $934,000 to $8.0 million as a result of volume and slightly higher investment yields in 2005. Interest income on federal funds sold also increased as a result of rising rates and increased volumes in 2005. Interest expense on deposits increased $6.7 million from 2004 to $13.9 million as the result of deposit growth and higher interest rates. Interest expense on federal funds purchased and securities sold under repurchase agreements also increased, again due to growth and rising interest rates. Interest expense on other borrowings increased due to increased volumes somewhat offset by a decrease in the average interest rate, the result of additional borrowings at lower rates. The overall result was an increase in net interest income of $3.7 million or 14.5% in 2005 from 2004. Average yields on interest-earning assets increased to 6.41% in 2005, compared to 5.61% in 2004.

Net interest income increased $3.0 million in 2004 compared to 2003 as a result of the growth in the volume of average earning assets somewhat offset by a decrease in interest rates. Interest earning assets averaged $630.4 million in 2004, an increase of 10.2%, from the $571.8 million averaged in 2003. Average yields on earning assets decreased to 5.61% in 2004, compared to 5.66% in 2003.

A key performance measure for net interest income is the “net interest margin”, or net interest income divided by average interest-earning assets. Unlike the “net interest spread”, the net interest margin is affected by the level of non-interest sources of funding used to support interest-earning assets. The Company’s net interest margin decreased to 3.98% in 2005 from 4.08% in 2004. In 2003, the net interest margin was 3.97%. The net interest margin deteriorated in 2005 as the average rate paid on interest-bearing deposits increased more quickly than the average rate on interest-earning assets. The high level of competition in the local market for both loans and deposits continues to influence the net interest margin. The net interest margin continues to be supported by an increasing amount of demand deposits which provide a noninterest-bearing source of funds and helps prevent further deterioration in the net interest margin. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing sources of funds. The net interest spread eliminates the impact of noninterest-bearing funds and gives a direct perspective on the effect of market interest rate movements. As a result of changes in interest rates in 2005, the net interest spread decreased 23 basis points to 3.56% in 2005. The 2004 net interest spread of 3.80% represented an increase from 2003’s 3.63%.

Changes in the net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases in the average rates earned and paid on such assets and liabilities, the ability to manage the earning asset portfolio, and the availability of particular sources of funds, such as noninterest-bearing deposits. The following table: “Analysis of Changes in Net Interest Income” indicates the changes in the Company’s net interest income as a result of changes in volume and rate from 2005 to 2004, and 2004 to 2003. The analysis of changes in net interest income included in the following table indicates that on an overall basis in 2005 to 2004, the increase in the balances or volumes of interest-earning assets created a positive impact in net income. This was somewhat offset by the impact of increased volumes of interest-bearing liabilities. The rising rate environment of 2005 resulted in rate increases on interest-earning assets which were more than offset by rate increases on interest-bearing liabilities. In 2004 to 2003, the

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increase in the balances or volumes of interest-earning assets created a positive impact in net income. This was slightly offset by the negative impact of decreases in interest rates of interest-earning assets. The increase in the balances or volumes of interest-bearing liabilities was substantially offset by the decrease in the interest rates of interest-bearing liabilities.

Analysis of Changes in Net Interest Income

	2005 vs. 2004 Increase (Decrease)										2004 vs. 2003 Increase (Decrease)
	Average Volume		Average Rate			Combined			Total		Average Volume			Average Rate			Combined			Total
	(Dollars in thousands)
Interest income from interest-earning assets:
Loans	$	5,025	$	4,787		$	850		$	10,662	$	2,752		$	(294	)	$	(63	)	$	2,395
Investments, taxable		503		191			17			711		681			(92	)		(8	)		581
Investments, tax-exempt		206		12			5			223		75			(19	)		(3	)		53
Federal funds sold		97		91			121			309		(32	)		25			(9	)		(16	)
Interest-bearing deposits in other banks		13		2			7			22		(2	)		2			0			0
Total	$	5,844	$	5,083		$	1,000		$	11,927	$	3,474		$	(378	)	$	(83	)	$	3,013
Interest expense on interest-bearing liabilities:
NOW accounts	$	65	$	266		$	49		$	380	$	65		$	(6	)	$	(5	)	$	54
Savings and money management accounts		808		3,403			749			4,960		504			(289	)		(26	)		189
Time deposits		184		1,057			70			1,311		312			(528	)		(56	)		(272	)
Federal funds purchased / securities sold under repurchase agreements		128		768			150			1,046		(9	)		14			0			5
Other borrowings		605		(64	)		(23	)		518		91			(79	)		(3	)		9
Total	$	1,790	$	5,430		$	995		$	8,215	$	963		$	(888	)	$	(90	)	$	(15	)
Change in net interest income.									$	3,712										$	3,028

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

Noninterest Income

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

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Noninterest income for 2005 was $12.4 million, a decrease of $84,000 or 0.7% from 2004. Contributing factors include decreases in gain on sales of loans in the secondary mortgage market due to lower mortgage loan volumes which were primarily the result of the rising interest rate environment, increased competition, reduced staff in existing offices, and the closing of the Nashville, Tennessee mortgage office. The increase in cash surrender value of life insurance decreased due to reduced interest rates. These decreases were partially offset by increases in service charges and fees on deposits during the period primarily due to increases in NSF fees and ATM income, somewhat offset by decreases in service charges, all a result of new retail checking accounts. The decrease in service charge income was also attributable to increases in the earnings credit applied to average balances maintained in non-personal deposit accounts.

Noninterest income for 2004 was $12.5 million, a decrease of $2.1 million or 14.2% from 2003. The decrease is primarily attributable to a $3.2 million decrease in the gain on sales of loans in the secondary mortgage market as a result of decreases in both home purchases and mortgage refinancing in 2004. Service charges and fees on deposits were $4.9 million for the year ended 2004, an increase of $410,000 over 2003, and constitute the second largest contributor to noninterest income. This increase is primarily due to an increase in NSF and Debit/ATM fees, somewhat offset by a decrease in service charge income. Trust services continued to grow and accounted for $554,000 of the year end 2004 balance while retail investment income accounted for $444,000. The increase in cash surrender value of bank-owned life insurance was $492,000 in 2004, an increase of 51.4% from 2003.

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

Noninterest Income

	Year Ended December 31,
	2005			2004			2003
	(Dollars in thousands)
Service charges and fees on deposit accounts	$	5,363		$	4,925		$	4,514
Gain on sales of loans		5,089			5,705			8,875
Investment securities losses, net		(86	)		(102	)		(203	)
Retail investment income		455			444			280
Trust service fees		642			554			353
Increase in cash surrender value of life insurance		400			492			325
Other		515			443			378
Total noninterest income	$	12,378		$	12,461		$	14,522
Noninterest income as a percentage of total average assets		1.58	%		1.85	%		2.40	%
Noninterest income as a percentage of total income		20.75	%		26.06	%		30.99	%

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Noninterest Expense

Noninterest expense totaled $25.0 million in 2005, an increase of 5.4% from 2004 interest expense of $23.7 million. Noninterest expense attributable to the Company’s expansion into new markets totaled $432,000 for 2005. Salary expense and employee benefits increased $977,000 primarily as a result of additional employees in 2005 related to the Company’s continued growth and expansion. The increase in occupancy expenses is primarily due to depreciation expense on the Walton Way Operations Campus and the Cotton Exchange branch which both opened in 2004. Other operating expenses increased $191,000 in 2005. Professional fees increased $247,000 primarily due to trust advisory fees and other advisory services. Staff development expense increased $143,000 primarily due to sales training. Increases in other operating expenses were partially offset by decreases in loan related expenses of $209,000 and processing expenses of $91,000. Nonrecurring expenses in 2004 included $150,000 related to a loan which was sold into the secondary market that the Company was required to repurchase based on a fraudulent appraisal and $50,000 for a commercial loan litigation settlement. The decrease in processing expenses is attributable to moving ATM processing in-house and the expiration of commissions due under an overdraft protection contract.

Noninterest expense remained steady at $23.7 million in 2004 compared to $23.6 million in 2003. Salaries decreased $779,000 primarily as the result of decreased mortgage commissions directly related to the reduction of secondary mortgage market volume. Employee benefits held constant with increases in state unemployment tax and medical and dental insurance being offset by decreases in long term compensation expenses. Other operating expenses increased $729,000, an increase of 12.5% from 2003. This increase is primarily due to increases related to the new retail checking account program, a loss resulting from a fraudulent appraisal on a mortgage loan, ATM processing fees due to higher volume levels, software maintenance agreements, external audit expense primarily due to Sarbanes-Oxley 404, and cash item losses, somewhat offset by decreases in overdraft protection expense and contributions. Occupancy expense increased $228,000 in 2004 primarily due to maintenance and depreciation expenses related to the Walton Way Operations Campus and the Cotton Exchange branch which opened in 2004.

The Company continues to monitor expenditures in all organizational units by utilizing specific cost accounting and reporting methods as well as responsibility center budgeting. In 2005, the Company completed the implementation of Customer, Product and Organizational profitability systems. The implementation of these systems emphasizes that management is committed to a continuing emphasis on expense control. The following table presents the principal components of noninterest expense for the years ended December 31, 2005, 2004 and 2003.

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Noninterest Expense

	Year Ended December 31,
	2005			2004			2003
	(Dollars in thousands)
Salaries and employee benefits	$	15,531		$	14,555		$	15,282
Occupancy expense		2,731			2,623			2,395
Marketing & business development expense		1,119			1,100			1,034
Processing expense		1,073			1,163			1,063
Legal and professional fees		1,094			847			588
Staff development expense		567			424			351
Data processing expense		532			503			409
Supplies expense		508			485			446
Other expense		1,864			2,044			1,996
Total noninterest expense	$	25,019		$	23,744		$	23,564
Noninterest expense as a percentage of total average assets		3.19	%		3.52	%		3.90	%
Operating efficiency ratio		59.78	%		62.09	%		63.04	%

The Company’s efficiency ratio (noninterest expense as a percentage of net interest income and noninterest income, excluding gains and losses on the sale of investments) decreased to 59.78% in 2005 compared to 62.09% in 2004 and 63.04% in 2003. The steady decline in the efficiency ratio reflects the Company’s continued focus on expense monitoring. The improvement in the efficiency ratio in 2005 is due to net interest income increasing at a faster rate than noninterest expense. Expenses for continued growth and expansion were more than offset by income produced from existing operations. The improvement in the efficiency ratio in 2004 is the result of increased income with noninterest expense remaining stable. Increased expenses for new facilities and product development were offset by a reduction in salaries expense. The improvement in the efficiency ratio in 2003 is due to the established mortgage, trust, and Fury’s Ferry branch operations. The additional income due to mortgage operations during 2003 allowed the Company to undertake new initiatives, such as marketing and consulting expenses, which resulted in incremental expenses.

Income Taxes

Income tax expense increased $850,000 or 20.7% in 2005 from 2004, and increased $122,000 or 3.1% in 2004 from 2003. The effective tax rate as a percentage of pre-tax income was 33.2% in 2005, 32.0% in 2004, and 33.4% in 2003. The increase in the effective tax rate in 2005 is primarily due to the graduated increase in the federal income tax rate from 34% in 2002 to 35%. The lower effective tax rate in 2004 is primarily due to an increase in tax-exempt income on loans, municipal securities, and increase in cash surrender value of bank-owned life insurance. In 2003, the effective rate decreased due to the increase in tax-exempt income from increase in cash surrender value of bank-owned life insurance.

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

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. The allowance for loan losses represents a reserve for losses in the

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loan portfolio. The Company has developed policies and procedures for evaluating the overall quality of its loan portfolio and the timely identification of problem credits. Management continues to review these policies and procedures and makes further improvements as needed. The adequacy of the Company’s allowance for loan losses and the effectiveness of the Company’s internal policies and procedures are also reviewed periodically by the Company’s regulators and the Company’s internal loan review personnel. The Company’s regulators may require the Company to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination.

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

For significant problem loans, management’s review consists of the evaluation of the financial condition and strengths of the borrower, cash flows available for debt repayment, the related collateral supporting the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with the individual problem loan, management classifies the loan accordingly and allocates a portion of the allowance for loan losses for that loan based on the results of the evaluation described above plus the historical loss rates and regulatory guidance relating to classified loans. The table below indicates those allowances allocated for loans classified as problem loans and the allocated general allowance for all non-classified loans according to loan type determined through the Company’s comprehensive loan methodology for the years indicated. The unallocated general allowance is based on management’s consideration at the balance sheet date of various conditions that are not directly measurable in determining the allocated allowance considering the recognized uncertainty in estimating loan losses. These conditions include, but are not limited to, changes in interest rates; trends in volumes, credit concentrations and terms of loans in the portfolio; national and local economic conditions; recent loss experience; and changes in lending policies and procedures. As reflected by the unallocated portion of the allowance, the adequacy of the Company’s allowance for loan losses is evaluated on an overall portfolio basis. Because these allocations are based upon estimates and subjective judgment, it is not necessarily indicative of the specific amounts or loan categories in which loan losses may occur.

The Company’s provision for loan losses in 2005 was $1,841,000, an increase of $253,000, or 15.9% from the 2004 provision of $1,588,000. This increase is the result of increases in outstanding loan balances, the level of Classified and Watch-rated debt, and specific reserves, somewhat offset by decreases in the provision for qualitative factors related to local economic conditions. The loan loss method, discussed under “Critical Accounting Estimates,” was consistently applied to loans in 2005, 2004, 2003 and 2002. In 2002 and 2001, the Company made the decision to increase the provision for loan losses to provide a higher level of allowance for loan losses commensurate with the increasing risk in the Company’s loan portfolio. This higher level reflected management’s overall evaluation of the loan portfolio and the significant growth of the loan portfolio.

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Allocation of the Allowance for Loan Loss

	December 31,
	2005				2004				2003				2002				2001
	Amount		Percent(1)		Amount		Percent(1)		Amount		Percent(1)		Amount		Percent(1)		Amount		Percent(1)
	(Dollars in thousands)
Balance at End of Year
Applicable to:
Commercial, financial, agricultural	$	1,754	10.71	%	$	1,739	12.09	%	$	1,722	13.09	%	$	1,286	14.05	%	$	916	14.53	%
Real estate-construction		2,288	30.74	%		1,648	25.76	%		1,249	20.87	%		1,187	20.04	%		646	19.87	%
Real estate-mortgage		4,430	52.85	%		3,637	53.84	%		3,122	54.37	%		2,950	53.31	%		2,036	52.00	%
Consumer loans to individuals		642	5.78	%		895	8.34	%		1,166	11.69	%		1,062	12.58	%		814	13.54	%
Lease financing		—	0.02	%		—	0.00	%		—	0.00	%		1	0.03	%		1	0.06	%
Deferred loan origination fees		—	(0.10)	%		—	(0.03)	%		—	(0.02)	%		—	(0.01)	%		—	0.00	%
Unallocated		11	0.00	%		11	0.00	%		19	0.00	%		48	0.00	%		696	0.00	%
Balance at end of year	$	9,125	100.00	%	$	7,930	100.00	%	$	7,278	100.00	%	$	6,534	100.00	%	$	5,109	100.00	%

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

Additions to the allowance for loan losses, which are expensed on the Company’s income statement as the “provision for loan losses”, are made periodically to maintain the allowance for loan losses at an appropriate level based upon management’s evaluation of the potential risk in the loan portfolio.

The allocation of $4.4 million of the allowance for loan losses to real estate-mortgage reflects the credit ratings associated with these loans and the resulting higher reserve factor. The unallocated component of the allowance for loan losses is due to allocations made to the loan components of the allowance based on the qualitative factors described above.

The following table provides details regarding charge-offs and recoveries by loan category during the most recent five year period, as well as supplemental information relating to both net loan losses, the provision and the allowance for loan losses during each of the past five years. As the table indicates, net charge-offs for 2005 represented 0.12% of average loans outstanding, compared to 0.20% for 2004 and 0.23% for 2003. The Company’s charge-off ratios continue to be lower than the average for the industry.

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	Allowances for Loan Losses At December 31,
	2005			2004			2003			2002			2001
	(Dollars in thousands)
Total loans outstanding at end of period, net of unearned income	$	601,235		$	494,170		$	432,679		$	396,699		$	339,670
Average loans outstanding, net of unearned income	$	547,414		$	464,769		$	420,023		$	363,624		$	315,003
Balance of allowance for loan losses at beginning of year	$	7,930		$	7,278		$	6,534		$	5,109		$	4,143
Charge-offs:
Commercial, financial and agricultural		694			458			439			582			283
Real estate - construction		80			18			25			36			—
Real estate - mortgage		95			52			55			—			6
Consumer		736			1,165			1,102			1,009			781
Total charge-offs		1,605			1,693			1,621			1,627			1,070
Recoveries of previous loan losses:
Commercial, financial and agricultural		308			175			190			169			1
Real estate - construction		5			4			—			—			1
Real estate - mortgage		52			8			3			7			—
Consumer		593			570			478			462			209
Total recoveries		958			757			671			638			211
Net loan losses		647			936			950			989			859
Provision for loan losses		1,842			1,588			1,694			2,414			1,825
Balance of allowance for loan losses at end of period		9,125			7,930			7,278			6,534			5,109
Allowance for loan losses to period end loans		1.52	%		1.60	%		1.68	%		1.65	%		1.50	%
Net charge-offs to average loans		0.12	%		0.20	%		0.23	%		0.27	%		0.27	%

At December 31, 2005, the allowance for loan losses was 1.52% of outstanding loans, down from the 1.60% level at December 31, 2004 and the 1.68% level at December 31, 2003. The decrease in the allowance for loan losses as a percentage of total loans in 2005 is primarily due to decreases in the provision for qualitative factors related to local economic conditions. Management considers the allowance appropriate based upon its analysis of the potential risk in the portfolio using the methods previously discussed. Management’s judgment is based upon a number of assumptions about events which are believed to be reasonable, but which may or may not prove correct. While it is the Company’s policy to charge off in the current period the loans in which a loss is considered probable, there are additional risks of losses which cannot be quantified precisely or attributed to a particular loan or class of loans. Because these risks include present and forecasted economic conditions, management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance will not be required. See “Critical Accounting Estimates.”

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Financial Condition

Composition of the Loan Portfolio

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

Loans outstanding averaged $547.4 million in 2005 compared to $464.8 million in 2004 and $420.0 million in 2003. At December 31, 2005, loans totaled $601.2 million compared to $494.2 million at December 31, 2004, an increase of $107.0 million (21.67%). This compares to growth in 2004 of $61.5 million (14.21%) and loans outstanding of $432.7 million at December 31, 2003.

The Company continues to experience significant increases in loan volumes and balances. The increases are attributable to a stable local economy and the desire of a segment of the community to do business with a locally-owned and operated financial institution. Commercial real estate loans increased $16.5 million in 2005. Construction and development loans increased $57.5 million from year end 2004. Average loans as a percentage of average interest-earning assets and average total assets were 74.3% and 69.7%, respectively, in 2005. This compares to average loans as a percentage of average interest-earning assets and average total assets of 73.7% and 69.0%, respectively, in 2004.

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

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Loan Portfolio Composition

At December 31,

	2005					2004					2003					2002					2001
	Amount			%		Amount			%		Amount			%		Amount			%		Amount		%
	(Dollars in thousands)
Commercial financial and agricultural	$	64,398		10.71	%	$	59,763		12.09	%	$	56,626		13.09	%	$	55,729		14.05	%	$	49,345	14.53	%
Real estate
Commercial	$	171,652		28.55	%	$	155,141		31.39	%	$	137,516		31.78	%	$	111,981		28.23	%	$	103,516	30.48	%
Residential		123,960		20.62	%		96,110		19.45	%		83,680		19.34	%		75,224		18.96	%		63,914	18.82	%
Residential held for sale		22,147		3.68	%		14,779		2.99	%		14,047		3.25	%		24,297		6.12	%		9,185	2.70	%
Construction and development		184,826		30.74	%		127,303		25.76	%		90,303		20.87	%		79,483		20.04	%		67,497	19.87	%
Total real estate		502,585		83.59	%		393,333		79.59	%		325,546		75.24	%		290,985		73.35	%		244,112	71.87	%
Lease financing		111		0.02	%		—		0.00	%		23		0.00	%		106		0.03	%		204	0.06	%
Consumer
Direct		24,343		4.05	%		24,185		4.89	%		25,967		6.00	%		24,542		6.19	%		21,514	6.33	%
Indirect		9,752		1.62	%		16,436		3.33	%		23,964		5.54	%		24,709		6.23	%		23,961	7.05	%
Revolving		656		0.11	%		600		0.12	%		631		0.15	%		655		0.17	%		534	0.16	%
Total consumer		34,751		5.78	%		41,221		8.34	%		50,562		11.69	%		49,906		12.58	%		46,009	13.54	%
Deferred loan origination fees		(610	)	-0.10	%		(147	)	-0.03	%		(78	)	-0.02	%		(27	)	-0.01	%		—	0.00	%
Total	$	601,235		100.00	%	$	494,170		100.00	%	$	432,679		100.00	%	$	396,699		100.00	%	$	339,670	100.00	%

Loans may be periodically renewed with principal reductions and appropriate interest rate adjustments. Loan maturities as of December 31, 2005 are set forth in the following table based upon contractual terms. Actual cash flows may differ as borrowers generally have the right to prepay without prepayment penalties.

Loan Maturity Schedule

At December 31, 2005

($ in thousands)	Within One Year		One to Five Years			After Five Years		Total
Commercial, financial and agricultural	$	30,739	$	24,658		$	9,001	$	64,398
Real Estate
Construction and development		153,325		29,686			1,815		184,826
Mortgage		132,647		102,545			82,567		317,759
Lease financing		111		—			—		111
Consumer		15,340		18,101			1,310		34,751
Deferred loan origination fees		—		(610	)		—		(610	)
Total loans	$	332,162	$	174,380		$	94,693	$	601,235

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The following table presents an interest rate sensitivity analysis of the Company’s loan portfolio as of December 31, 2005. The loans outstanding are shown in the time period where they are first subject to repricing.

Sensitivity of Loans to Changes in Interest Rates

At December 31, 2005

($ in thousands)	Within One year		One to Five Years		After Five Years		Total
Loans maturing or repricing with:
Predetermined interest rates	$	88,531	$	89,393	$	34,108	$	212,032
Floating or adjustable interest rates		354,614		31,033		3,556		389,203
Total loans	$	443,145	$	120,426	$	37,664	$	601,235

Non-Performing Assets

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

If nonaccruing loans had been accruing interest under their original terms, approximately $204,000 in 2005, $166,000 in 2004 and $107,000 in 2003 would have been recognized as earnings.

The Company accounts for impaired loans under the provisions of Statement of Financial Accounting Standards (SFAS) No. 114 “Accounting by Creditors for Impairment of a Loan” as amended by SFAS No. 118 “Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures”, which requires that the Company identify impaired loans and evaluate the collectibility of both contractual interest and principal of loans when assessing the need for a loss allowance. The provisions of SFAS No. 114 do not apply to large pools of smaller balance homogeneous loans which are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, and debt securities. A loan is considered impaired, when based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. All loans determined to be impaired are placed on nonaccrual. The amount of the impairment is measured based on the present value of future cash flows discounted at the loan’s effective interest rate or, if the loan is collateral dependent or foreclosure is probable, the fair value of collateral, less estimated selling expenses. Regulatory guidance is also considered. At December 31, 2005 and 2004, the Bank had impaired loans of $1,784,000 and $1,680,000, respectively.

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Non-performing loans are defined as nonaccrual and renegotiated loans. When other real estate owned is included with non-performing loans, the result is non-performing assets. The following table, “Non-Performing Assets”, presents information on these assets and loans past due 90 days or more and still accruing interest as of December 31, for the past five years. Non-performing assets were $4.0 million at December 31, 2005 or 0.67% of total loans and other real estate owned. This compares to $3.0 million or 0.61% of total loans and other real estate owned at December 31, 2004.

The increase in nonaccrual loans in 2005 was primarily due to $1.5 million in loans for three customers who have filed bankruptcy. The levels of nonaccrual loans in 2004 were principally due to increased consumer nonaccrual loans resulting from increased bankruptcies and the adoption of stricter internal monitoring and reporting requirements.

At December 31, 2005 and 2004 there were loans past due 90 days or more and still accruing of $1,000 and $29,000, respectively. At December 31, 2003, there were no loans past due 90 days or more and still accruing. All loans past due 90 days or more are classified as nonaccrual loans unless the loan officer believes that both principal and interest are collectible, in which case the loan continues to accrue interest. Management believes the Company will receive full payment of principal and accrued interest on the nonaccrual loans because of the Company’s collateral position and other factors, despite their past due status.

	Non-Performing Assets Year Ended December 31,
	2005			2004			2003			2002			2001
	(Dollars in thousands)
Nonaccrual loans	$	4,009		$	2,972		$	3,045		$	1,897		$	1,953
Other real estate owned		—			53			5			—			—
Total nonperforming assets	$	4,009		$	3,025		$	3,050		$	1,897		$	1,953
Loans past due 90 days or more and still accruing interest	$	1		$	29		$	—		$	30		$	—
Allowance for loan losses to period end total loans		1.52	%		1.60	%		1.68	%		1.65	%		1.50	%
Allowance for loan losses to period end nonperforming loans		227.56	%		262.15	%		238.62	%		344.44	%		261.33	%
Net charge-offs to average loans		0.12	%		0.20	%		0.23	%		0.27	%		0.27	%
Nonperforming assets to period end loans		0.67	%		0.61	%		0.70	%		0.48	%		0.58	%
Nonperforming assets to period end loans and other real estate owned		0.67	%		0.61	%		0.70	%		0.48	%		0.58	%

Management is not aware of any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been identified which (1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (2) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

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Off-Balance Sheet Arrangements

The Bank is party to lines of credit with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Lines of credit are unfunded commitments to extend credit. These instruments involve, in varying degrees, exposure to credit and interest rate risk in excess of the amounts recognized in the financial statements. The Bank’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 Bank follows the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Unfunded commitments to extend credit where contractual amounts represent potential credit risk totaled $204.4 million and $167.5 million at December 31, 2005 and 2004, respectively. These commitments are primarily at variable interest rates.

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

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

Commitments and Contractual Obligations	Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
($ in thousands)
Lines of credit	$	181,835		—		—		—
Mortgage loan commitments		22,587		—		—		—
Lease agreements		84		79		14		—
Deposits		621,841		32,878		4,791		4,145
Federal funds purchased / Securities sold under repurchase agreements		67,013		—		—		—
FHLB advances		5,000		—		35,000		12,000
Other borrowings		1,000		—		—		—
Subordinated debentures		—		—		—		10,000
Total commitments and contractual obligations	$	899,360	$	32,957	$	39,805	$	26,145

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

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Investment Securities

The Company’s investment securities portfolio increased $48.5 million to $201.3 million at year-end 2005 from 2004. The Company maintains an investment strategy of seeking portfolio yields within acceptable risk levels, as well as providing liquidity. The Company maintains two classifications of investments: “Held to Maturity” and “Available for Sale.” “Available for Sale” securities are carried at fair market value with related unrealized gains or losses included in stockholders’ equity as accumulated other comprehensive income, whereas the “Held to Maturity” securities are carried at amortized cost. As a consequence, with a higher percentage of securities being placed in the “Available for Sale” category, the Company’s stockholders’ equity is more volatile than it would be if a larger percentage of investment securities were placed in the “Held to Maturity” category. Although equity is more volatile, management has discretion, with respect to the “Available for Sale” securities, to proactively adjust to favorable market conditions in order to provide liquidity and realize gains on the sales of securities. The changes in values in the investment securities portfolio are not taken into account in determining regulatory capital requirements. As of December 31, 2005, except for the U.S. Government agencies, Countrywide Home Loans was the only issuer who represented 10% or more of stockholders’ equity within the investment portfolio. As of December 31, 2005 and 2004, the estimated fair value of investment securities as a percentage of their amortized cost was 98.4% and 100.5%, respectively. At December 31, 2005, the investment securities portfolio had gross unrealized gains of $481,000 and gross unrealized losses of $3,783,000, for a net unrealized loss of $3,302,000. As of December 31, 2004 and 2003, the investment securities portfolio had net unrealized gains of $769,000 and $1,833,000, respectively. The following table presents the amortized cost of investment securities held by the Company at December 31, 2005, 2004 and 2003.

Investment Securities

	December 31,
(Dollars in thousands)	2005		2004		2003
Available for sale:
U.S. Government Agencies		68,646		42,445		51,578
Obligations of states and political subdivisions		19,641		12,582		8,490
Mortgage-backed securities		92,984		72,704		62,940
Corporate Bonds		9,071		13,761		17,638
Trust Preferred		10,133		6,554		6,493
Equity securities		500		500		500
Total	$	200,975	$	148,546	$	147,639
	December 31,
	2005		2004		2003
Held to maturity:
Obligations of states and political subdivisions	$	3,776	$	3,776	$	5,438
Total	$	3,776	$	3,776	$	5,438

The table on the next page represents maturities and weighted average yields of debt securities at December 31, 2005. Yields are based on the amortized cost of securities. Maturities are based on the contractual maturities. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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Maturity Distribution and Yields of Investment Securities

(Dollars in thousands)

	December 31, 2005
	Amortized Cost		Yield
Available for Sale
U.S. Government Agencies
One year or less	$	9,881	4.30	%
Over one through five years		17,394	4.15	%
Over five through ten years		28,260	4.81	%
Over ten years		13,111	5.02	%
Total U. S. Government Agencies	$	68,646	4.61	%
Municipal Securities(1)
One year or less	$	1,029	6.71	%
Over one through five years		1,315	5.00	%
Over five through ten years		3,889	5.39	%
Over ten years		13,408	5.91	%
Total Municipal Securities	$	19,641	5.79	%
Corporate Bonds
One year or less	$	6,013	4.75	%
Over one through five years		3,058	5.99	%
Total Corporate Bonds	$	9,071	5.17	%
Trust Preferred
Over five through ten years	$	2,019	6.30	%
Over ten years		8,114	6.50	%
Total Trust Preferred securities	$	10,133	6.46	%
Mortgage Backed Securities
Over one through five years	$	6,752	3.89	%
Over five through ten years		14,783	4.08	%
Over ten years		71,449	4.70	%
Total Mortgage Backed securities	$	92,984	4.54	%
Total Available for Sale	$	200,475	4.81	%
Held to Maturity
Municipal Securities(1)
One year or less	$	805	5.88	%
Over one through five years		931	7.32	%
Over five through ten years		1,538	7.69	%
Over ten years		502	7.31	%
Total Municipal Securities	$	3,776	7.16	%
Total Held to Maturity	$	3,776	7.16	%
Total Investment Securities	$	204,251	4.86	%

(1) Tax-equivalent yield

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Asset/Liability Management, Interest Rate Sensitivity and Liquidity

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

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

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

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

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

The Company manages its sensitivity to interest rate movements by adjusting the maturity of, and establishing rates on, the interest-earning asset portfolio and interest-bearing liabilities in line with management’s expectations relative to market interest rates. The Company would generally benefit from increasing market interest rates when the balance sheet is asset sensitive and would benefit from decreasing market rates when it is liability sensitive. At December 31, 2005, the Company’s interest rate sensitivity position was liability sensitive within the one-year horizon.

The following table “Interest Sensitivity Analysis” details the interest rate sensitivity of the Company at December 31, 2005. The principal balances of the various interest-earning and interest-bearing balance sheet instruments are shown in the time period where they are first subject to repricing,

48

whether as a result of floating or adjustable rate contracts. Time deposits do not reprice and are presented according to their contractual maturity. Prime savings accounts reprice at management’s discretion when prime is below 5% and at 50% of the prime rate when prime is greater than 5%. In the table presented below, prime savings reprices in the within three months time frame. Regular savings, money management and NOW accounts do not have a contractual maturity date and are presented as repricing at the earliest date in which the deposit holder could withdraw the funds. All other borrowings are shown in the first period in which they could reprice. In the one-year time period, the pricing mismatch on a cumulative basis was liability sensitive $131.8 million or 26.7% of total interest-earning assets. Management has procedures in place to carefully monitor the Company’s interest rate sensitivity as the rate environment changes. It should also be noted that all interest rates do not adjust at the same velocity. As an example, the majority of the savings category listed below is priced on an adjustable basis. When prime is greater than 5%, it is fifty percent of the prime rate. Therefore, as the prime rate adjusts 100 basis points, the rate on this liability only adjusts 50 basis points. Moreover, varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities. Investments prepayments are reflected at their current prepayment speeds in the interest sensitivity analysis report. No other prepayments are reflected in the following interest sensitivity analysis report. Prepayments may have significant effects on the Company’s net interest margin. Hence, gap is only a general indicator of interest rate sensitivity and cannot be interpreted as an absolute measurement of the Company’s interest rate risk.

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Interest Sensitivity Analysis

At December 31, 2005

	Within Three Months			After Three Through Six Months			After Six Through Twelve Months			Within One Year			One Year Through Five Years			Over Five Years			Total
	(Dollars in thousands)
Interest-earning assets:
Loans	$	381,499		$	26,329		$	35,317		$	443,145		$	120,425		$	37,665		$	601,235
Investment securities		19,235			17,387			9,465			46,087			68,784			90,744			205,615
Federal funds sold		2,758			—			—			2,758			—			—			2,758
Interest-bearing deposits in other banks		512			500			—			1,012			—			—			1,012
Total interest-earning assets	$	404,004		$	44,216		$	44,782		$	493,002		$	189,209		$	128,409		$	810,620
Interest-bearing liabilities:
Money management accounts	$	37,719		$	0		$	0		$	37,719		$	0		$	0		$	37,719
Savings accounts		265,132			—			—			265,132			—			—			265,132
NOW accounts		100,692			—			—			100,692			—			—			100,692
Time deposits		52,081			20,320			48,811			121,212			37,670			4,145			163,027
Federal funds purchased / securities sold under repurchase ageements		67,013			—			—			67,013			—			—			67,013
Federal Home Loan Bank advances		22,000			—			—			22,000			24,000			6,000			52,000
Notes and bonds payable		1,000			—			—			1,000			—			—			1,000
Subordinated debentures		10,000			—			—			10,000			—			—			10,000
Total interest-bearing liabilities	$	555,637		$	20,320		$	48,811		$	624,768		$	61,670		$	10,145		$	696,583
Period gap	$	(151,633	)	$	23,896		$	(4,029	)	$	(131,766	)	$	127,539		$	118,264
Cumulative gap	$	(151,633	)	$	(127,737	)	$	(131,766	)	$	(131,766	)	$	(4,227	)	$	114,037
Ratio of cumulative gap to total interest-earning assets		-18.71	%		-15.76	%		-16.25	%		-26.73	%		-0.52	%		14.07	%

Liquidity

Management of the Company’s liquidity position is closely related to the process of asset/liability management. Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to provide sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. The Company intends to meet its liquidity needs by managing cash and due from banks, federal funds sold and purchased, maturity of investment securities, principal repayments received from mortgage-backed securities and lines of credit as necessary. The Company maintains a line of credit with the Federal Home Loan Bank at 10% of the

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Bank’s total assets. Federal Home Loan Bank advances are collateralized by eligible first mortgages, commercial real estate loans and investment securities. The Company maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20.0 million and with The Bankers Bank, Atlanta, Georgia, for advances up to $10.0 million. At December 31, 2005, a $10.0 million repurchase agreement was outstanding with SunTrust Robinson Humphrey. The Company has a federal funds purchased accommodation with The Bankers Bank, Atlanta, Georgia, for advances up to $16.7 million and with SunTrust Bank, Atlanta, Georgia, for advances up to $10.0 million. 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 $57.0 million at December 31, 2005.

Deposits

The Company’s average deposits and other borrowings increased $104.6 million or 17.1% from 2004 to 2005. Average interest-bearing liabilities increased $94.3 million or 17.7% while average noninterest-bearing deposits increased $10.3 million or 13.1% from 2004 to 2005. Average deposits and borrowings increased $63.4 million or 11.6% from 2003 to 2004. Average interest-bearing liabilities increased $54.4 million or 11.4% from 2003 to 2004, while average noninterest-bearing deposits increased $9.0 million or 12.9% during the same period. The majority of the growth in deposits reflects the Company’s strategy of consistently emphasizing deposit growth, as deposits are the primary source of funding for balance sheet growth. Borrowed funds consist of short-term borrowings, securities sold under agreements to repurchase with the Bank’s commercial customers and reverse repurchase agreements with SunTrust Robinson Humphrey, federal funds purchased, and borrowings from the Federal Home Loan Bank. Brokered certificates of deposit included in time deposits over $100,000 at December 31, 2005 and 2004 were $40.4 million and $34.9 million, respectively.

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The following table presents the average amount outstanding and the average rate paid on deposits and borrowings by the Company for the years 2005, 2004 and 2003:

Average Deposit and Borrowing Balances and Rates

	Year ended December 31,
	2005				2004				2003
	Average Amount		Average Rate		Average Amount		Average Rate		Average Amount		Average Rate
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	89,079	0.00	%	$	78,756	0.00	%	$	69,758	0.00	%
Interest-bearing liabilities (1):
NOW accounts		87,982	0.89	%		75,866	0.54	%		64,006	0.55	%
Savings, money management accounts		288,759	2.98	%		236,306	1.54	%		206,295	1.68	%
Time deposits		145,209	3.08	%		137,238	2.31	%		125,809	2.73	%
Federal funds purchased/securities sold under repurchase agreements		55,658	3.05	%		46,541	1.40	%		47,204	1.37	%
Other borrowings		50,121	4.62	%		37,488	4.79	%		35,678	5.01	%
Total interest-bearing liabilities	$	627,729	2.85	%	$	533,439	1.81	%	$	478,992	2.02	%
Total noninterest & interest-bearing liabilities	$	716,808			$	612,195			$	548,750

(1) Excludes subordinated debentures issued in December 2005 which had no effect on the average rate due to the timing of the issuance.

The following table presents the maturities of the Company’s time deposits over $100,000 at December 31, 2005:

Maturities of Time Deposits

(Dollars in thousands)

	Time Certificates of Deposit of $100,000 or More
Months to Maturity
Within 3 months	$	46,650
After 3 through 6 months		13,098
After 6 through 12 months		31,053
Within one year		90,801
After 12 months		31,209
Total	$	122,010

This table indicates that the majority of time deposits of $100,000 or more have a maturity of less than twelve months. This is reflective of both the Company’s market and recent interest rate environments. Large time deposit customers tend to be extremely rate sensitive, making these deposits a volatile source of funding for liquidity planning purposes. However, dependent upon pricing, these deposits are virtually always available in the Company’s market. At December 31, 2005, the Bank had $18.6 million of brokered certificates of deposit that mature after 12 months. The Company does not have any time deposits of $100,000 or more that are not certificates of deposit.

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Capital

Total stockholders’ equity was $63.6 million at December 31, 2005, increasing $4.6 million or 7.8% from the previous year. The increase was the combination of retained earnings, earnings less dividends paid, in the amount of $7.2 million, somewhat offset by a decrease in accumulated other comprehensive income of $2.6 million. The decrease in accumulated other comprehensive income represents an increase in unrealized losses in the available for sale investment portfolio. The Company purchased 2,200 shares of treasury stock in 2004, and 41,300 shares in 2000 at a cost of $62,000 and $507,000 respectively, which is shown as a reduction of stockholders’ equity. The Company issued 21,400 shares of treasury stock in 2005, and 6,000 shares in 2004 at a price of $263,000 and $72,000, respectively, for stock options which were exercised.

The Company’s average equity to average total assets was 7.85% in 2005 compared to 8.33% in 2004 and 8.40% in 2003. The decrease in 2005 and 2004 reflects the overall growth of the Company. Capital is considered to be adequate to meet present operating needs and anticipated future operating requirements. Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material effect on the Company’s capital resources or operations. The following table presents the return on equity and assets for the years 2005, 2004 and 2003.

Return on Equity and Assets

	Years ended December 31,
	2005		2004		2003
Return on average total assets	1.27	%	1.29	%	1.31	%
Return on average equity	16.15	%	15.50	%	15.62	%
Average equity to average assets ratio	7.85	%	8.33	%	8.40	%

At December 31, 2005, the Company was well above the minimum capital ratios required under the regulatory risk-based capital guidelines. The following table presents the capital ratios for the Company and the Bank.

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ANALYSIS OF CAPITAL

	Required				Actual				Excess
	Amount		%		Amount		%		Amount		%
	(Dollars in thousands)
Southeastern Bank Financial Corporation
12/31/2005
Risk-based capital:
Tier 1 capital	$	27,287	4.00	%	$	75,702	11.10	%	$	48,415	7.10	%
Total capital		54,573	8.00	%		84,236	12.35	%		29,663	4.35	%
Tier 1 leverage ratio		33,610	4.00	%		75,702	9.01	%		42,092	5.01	%
12/31/2004
Risk-based capital:
Tier 1 capital	$	22,648	4.00	%	$	58,479	10.33	%	$	35,831	6.33	%
Total capital		45,297	8.00	%		65,567	11.58	%		20,270	3.58	%
Tier 1 leverage ratio		27,913	4.00	%		58,479	8.38	%		30,566	4.38	%
Georgia Bank & Trust Company
12/31/2005
Risk-based capital:
Tier 1 capital	$	27,086	4.00	%	$	62,111	9.17	%	$	35,025	5.17	%
Total capital		54,172	8.00	%		70,584	10.42	%		16,412	2.42	%
Tier 1 leverage ratio		33,382	4.00	%		62,111	7.44	%		28,729	3.44	%
12/31/2004
Risk-based capital:
Tier 1 capital	$	22,586	4.00	%	$	55,564	9.84	%	$	32,978	5.84	%
Total capital		45,172	8.00	%		62,633	11.09	%		17,461	3.09	%
Tier 1 leverage ratio		27,851	4.00	%		55,564	7.98	%		27,713	3.98	%

Cash Flows from Operating, Investing and Financing Activities

Net cash provided by operating activities was $6.1 million in 2005, a decrease of $4.7 million from 2004. The decrease is primarily attributable to lower volumes of real estate loans originated and sold in the secondary market. In 2005, cash provided by proceeds from sales of real estate loans decreased $17.5 million and was somewhat offset by a decrease of $10.2 million in cash used for real estate loans originated for sale. Net cash provided by operating activities was $10.9 million in 2004, a decrease of $10.5 million from 2003. This decrease is also the result of lower volumes of real estate loans originated and sold in the secondary market. Net proceeds on sales of real estate loans provided net cash flows of $4.9 million in 2004, a decrease of $14.2 million over 2003. The related gain on sales of loans was $5.7 million in 2004 compared to $8.9 million in 2003.

Net cash used in investing activities increased $89.9 million in 2005 to $158.3 million. Net changes in the investment securities portfolio resulted in a $53.1 million increase in cash used. Loan growth of $100.6 million caused an increase in cash used of $38.6 million for 2005. Net cash used in investing activities decreased $7.6 million in 2004 to $68.3 million. Net changes in the investment securities portfolio resulted in a $19.4 million decrease in cash used. An additional decrease in cash

54

used resulted from no purchase of Bank-owned life insurance in 2004, compared to an $8.0 million purchase in 2003. These decreases were partially offset by a $14.6 million increase in cash used for loan growth of $62.0 million in 2004.

Net cash provided by financing activities in 2005 was $148.7 million, an increase of $80.9 million from 2004. Net cash provided by changes in deposits accounts increased $34.0 million in 2005 to $106.9 million. Federal funds purchased and securities sold under repurchase agreements provided cash flows of $22.4 million in 2005, an increase of $34.8 million over 2004. Advances from Federal Home Loan Bank increased $7.0 million in 2005, partially offset by repayments of $5.0 million in 2005 compared to no repayments in 2004. A new issuance of subordinated debentures provided $10.0 million in cash flows in 2005. Net cash provided by financing activities in 2004 was $67.8 million, an increase of $14.6 million from 2003. Net cash provided by changes in deposits accounts increased $28.4 million in 2004 but was substantially offset by a decrease of $26.4 million in federal funds purchased and securities sold under repurchase agreements. Advances from Federal Home Loan Bank provided cash flows of $10.0 million in 2004 and there were no repayments in 2004, compared to repayments of $5.0 million in 2003.

Forward-Looking Statements

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

Recent Accounting Pronouncements

SFAS No. 123 (Revised 2004), Accounting for Stock-Based Compensation, will require most public entities, effective at the beginning of the first annual period beginning after June 15, 2005, to compute the fair value of options at the date of grant and to recognize such costs as compensation expense immediately if there is no vesting period or ratably over the vesting period of the options. Due to the April 15, 2005, deferral of the effective date to the beginning of the first annual period beginning after June 15, 2005, the Bank has chosen not to adopt the cost recognition principles of this statement for 2005. If the Bank had chosen to adopt these principles, an annual expense of $242,000 would be recorded for the year ending 2005. Based on the options outstanding as of December 31, 2005, the expense would be $274,000 in 2006 and then decline in succeeding years as the options fully vest. The Bank will adopt SFAS No. 123 (Revised 2004) as of January 1, 2006.

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Effects of Inflation and Changing Prices

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

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

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

The following tables present all rate sensitive assets and liabilities by contractual amounts and maturity dates. Cash flows from mortgage backed securities reflect anticipated prepayments. For core deposits, without a contractual maturity date, cash flows are based on the earliest date at which the deposit holder could withdraw the funds. The fair value of rate sensitive assets and liabilities is presented in total. The fair value of investment securities is based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The fair value of loans is calculated using discounted cash flows by loan type. The discount rate used to determine the present value of the loan portfolio is an estimated market rate that reflects the credit and interest rate risk inherent in the loan portfolio. Fair values for certificates of deposit have been determined using discounted cash flows. The discount rate used is based on estimated market rates for deposits of similar remaining maturities. The carrying amounts of all other deposits, securities sold under repurchase agreements and variable interest rate borrowings approximated their fair values. The fair value of the Federal Home Loan Bank borrowings is obtained from the Federal Home Loan Bank and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the Bank for debt of similar remaining maturities and collateral terms.

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Market Risk at December 31, 2005

(Dollars in thousands)	2006		2007		2008		2009		2010		Thereafter		Total		Fair Value
Rate Sensitive Assets:
Fixed interest rate loans	88,531		52,147		22,846		8,640		5,760		34,108		212,032		209,597
Average interest rate	6.76	%	6.82	%	7.15	%	7.14	%	6.91	%	6.38	%	6.78	%
Variable interest rate loans	243,630		55,221		15,627		6,808		7,332		60,585		389,203		389,203
Average interest rate	7.58	%	7.41	%	7.34	%	7.36	%	7.32	%	6.48	%	7.37	%
Fixed interest rate securities	30,423		18,502		17,815		12,054		15,100		90,986		184,880		185,001
Average interest rate	5.20	%	4.64	%	4.64	%	4.70	%	4.65	%	4.60	%	4.72	%
Variable interest rate securities	3,273		2,271		1,576		1,093		759		11,764		20,736		20,736
Average interest rate	3.93	%	3.93	%	3.93	%	3.93	%	3.93	%	4.81	%	4.43	%
Variable federal funds sold	2,758		—		—		—		—		—		2,758		2,758
Average interest rate	4.02	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	4.02	%
Fixed interest-bearing deposits in other banks	1,012		—		—		—		—		—		1,012		1,012
Average interest rate	3.54	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	3.54	%
Rate Sensitive Liabilities:
Noninterest-bearing deposits	97,084		—		—		—		—		—		97,084		97,084
Average interest rate	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%
Money market accounts	37,719		—		—		—		—		—		37,719		37,719
Average interest rate	3.43	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	3.43	%
Savings accounts	265,132		—		—		—		—		—		265,132		265,132
Average interest rate	3.47	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	3.47	%
NOW accounts	100,692		—		—		—		—		—		100,692		100,692
Average interest rate	1.21	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	1.21	%
Fixed interest rate time deposits < $100M	30,411		5,907		1,293		1,058		1,961		387		41,017		40,882
Average interest rate	3.63	%	4.08	%	3.47	%	3.71	%	4.31	%	1.37	%	3.70	%
Fixed interest rate time deposits > $100M	90,802		24,709		969		319		1,453		3,758		122,010		121,963
Average interest rate	3.50	%	4.24	%	3.71	%	3.54	%	4.53	%	4.44	%	3.69	%
Securities sold under repurchase agreements	67,013		—		—		—		—		—		67,013		67,013
Average interest rate	4.06	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	4.06	%
Fixed Federal Home Loan Bank borrowings	—		—		—		—		24,000		6,000		30,000		28,723
Average interest rate	0.00	%	0.00	%	0.00	%	0.00	%	5.86	%	4.80	%	5.65	%
Variable Federal Home Loan Bank borrowings	5,000		—		—		—		11,000		6,000		22,000		22,039
Average interest rate	3.91	%	0.00	%	0.00	%	0.00	%	3.35	%	3.54	%	3.53	%
TT&L note borrowings	1,000		—		—		—		—		—		1,000		1,000
Average interest rate	2.42	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	2.42	%
Subordinated debentures	—		—		—		—		—		10,000		10,000		10,000
Average interest rate	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	5.94	%	5.94	%

57

Market Risk at December 31, 2004

(Dollars in thousands)	2005		2006		2007		2008		2009		Thereafter		Total		Fair Value
Rate Sensitive Assets:
Fixed interest rate loans	70,909		31,975		20,251		6,449		3,088		16,118		148,790		147,666
Average interest rate	6.51	%	6.72	%	6.64	%	7.20	%	6.83	%	6.09	%	6.56	%
Variable interest rate loans	200,634		55,568		25,790		8,218		6,897		48,273		345,380		345,380
Average interest rate	5.69	%	5.64	%	5.59	%	5.63	%	5.57	%	5.64	%	5.66	%
Fixed interest rate securities	15,819		14,915		8,588		7,970		8,388		79,368		135,048		135,269
Average interest rate	4.28	%	4.80	%	4.22	%	4.27	%	4.38	%	4.43	%	4.43	%
Variable interest rate securities	3,343		2,575		1,984		1,529		1,178		10,756		21,365		21,365
Average interest rate	3.59	%	3.59	%	3.59	%	3.59	%	3.59	%	3.90	%	3.75	%
Variable federal funds sold	12,326		—		—		—		—		—		12,326		12,326
Average interest rate	2.01	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%
Fixed interest-bearing deposits in other banks	512		—		—		—		—		—		512		512
Average interest rate	1.97	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	1.97	%
Rate Sensitive Liabilities:
Noninterest-bearing deposits	80,798		—		—		—		—		—		80,798		80,798
Average interest rate	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%
Money market accounts	25,143		—		—		—		—		—		25,143		25,143
Average interest rate	1.84	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	1.84	%
Savings accounts	225,533		—		—		—		—		—		225,533		225,533
Average interest rate	2.15	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	2.15	%
NOW accounts	80,418		—		—		—		—		—		80,418		80,418
Average interest rate	0.63	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.63	%
Fixed interest rate time deposits < $100M	15,782		17,458		1,886		1,069		1,428		434		38,057		38,180
Average interest rate	1.87	%	2.52	%	4.21	%	3.25	%	3.69	%	0.59	%	2.38	%
Fixed interest rate time deposits > $100M	80,160		21,403		4,092		928		151		102		106,836		106,925
Average interest rate	2.13	%	2.44	%	3.51	%	3.60	%	3.00	%	1.24	%	2.26	%
Securities sold under repurchase agreements	44,581		—		—		—		—		—		44,581		44,581
Average interest rate	2.08	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	2.08	%
Fixed Federal Home Loan Bank borrowings	—		—		—		—		—		30,000		30,000		27,267
Average interest rate	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	5.65	%	5.65	%
Variable Federal Home Loan Bank borrowings	—		5,000		5,000		0		—		—		10,000		9,979
Average interest rate	0.00	%	2.52	%	2.02	%	0.00	%	0.00	%	0.00	%	2.27	%
TT&L note borrowings	900		—		—		—		—		—		900		900
Average interest rate	1.78	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	1.78	%

58

Item 8. Financial Statements and Supplementary Data

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Table of Contents

	Page
Reports of Independent Registered Public Accounting Firms	60
Consolidated Balance Sheets	62
Consolidated Statements of Income	64
Consolidated Statements of Stockholders’ Equity and Comprehensive Income	65
Consolidated Statements of Cash Flows	66
Notes to Consolidated Financial Statements	68

59

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Southeastern Bank Financial Corporation

We have audited the accompanying consolidated balance sheet of Southeastern Bank Financial Corporation and subsidiary (the Company) as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Company as of and for the years ended December 31, 2004 and 2003, were audited by other auditors whose report dated March 14, 2005, expressed an unqualified opinion on those statements.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31 2005, and the results of its operations and its cash flows for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Southeastern Bank Financial Corporation’s internal control over financial reporting as of December 31, 2005, based criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2006 expressed an unqualified opinion thereon.

Crowe Chizek and Company LLC

Brentwood, Tennessee

March 7, 2006

60

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Southeastern Bank Financial Corporation:

We have audited the accompanying consolidated balance sheet of Southeastern Bank Financial Corporation (formerly Georgia Bank Financial Corporation) and subsidiary as of December 31, 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southeastern Bank Financial Corporation and subsidiary as of December 31, 2004, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

KPMG LLP

Atlanta, Georgia,

March 14, 2005

61

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2005 and 2004

	2005		2004
Assets
Cash and due from banks	$	18,792,799	13,186,173
Federal funds sold		2,758,000	12,326,000
Interest-bearing deposits in other banks		1,012,257	512,024
Cash and cash equivalents		22,563,056	26,024,197
Investment securities:
Available-for-sale		197,551,996	149,093,369
Held-to-maturity, at cost (fair values of $3,897,341 and $3,997,361 at December 31, 2005 and 2004, respectively)		3,776,040	3,776,428
Loans held for sale		22,146,834	14,778,614
Loans		579,087,791	479,391,209
Less allowance for loan losses		9,124,801	7,930,366
Loans, net		569,962,990	471,460,843
Premises and equipment, net		21,376,183	18,437,500
Accrued interest receivable		4,624,023	3,638,247
Goodwill, net		139,883	139,883
Bank-owned life insurance		11,863,276	11,463,591
Restricted equity securities		4,287,481	3,543,721
Other assets		5,985,477	4,160,918
	$	864,277,239	706,517,311

62

	2005			2004
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	97,083,931		80,798,355
Interest-bearing:
NOW accounts		100,692,388		80,417,657
Savings		265,131,754		225,533,029
Money management accounts		37,719,408		25,142,955
Time deposits over $100,000		122,009,813		106,835,743
Other time deposits		41,017,555		38,056,932
		663,654,849		556,784,671
Federal funds purchased and securities sold under repurchase agreements		67,013,416		44,581,259
Advances from Federal Home Loan Bank		52,000,000		40,000,000
Other borrowed funds		1,000,000		900,000
Accrued interest payable and other liabilities		7,025,767		5,271,556
Subordinated debentures		10,000,000		—
Total liabilities		800,694,032		647,537,486
Stockholders’ equity:
Common stock, $3.00 par value; 10,000,000 shares authorized; 5,279,241 and 5,287,100 shares issued in 2005 and 2004, respectively; 5,263,144 and 5,249,604 shares outstanding in 2005 and 2004, respectively		15,837,723		15,861,300
Additional paid-in capital		34,138,876		34,375,510
Retained earnings		16,099,414		8,878,633
Treasury stock, at cost; 16,097 and 37,496 shares in 2005 and 2004, respectively		(233,898	)	(497,127	)
Accumulated other comprehensive (loss) income, net		(2,258,908	)	361,509
Total stockholders’ equity		63,583,207		58,979,825
	$	864,277,239		706,517,311

See accompanying notes to consolidated financial statements.

63

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Income

Years ended December 31, 2005, 2004, and 2003

	2005			2004		2003
Interest income:
Loans, including fees	$	38,897,578		28,235,160		25,839,796
Investment securities:
Taxable		7,206,167		6,495,443		5,913,773
Tax-exempt		767,340		543,818		491,350
Federal funds sold		380,453		72,941		88,506
Interest-bearing deposits in other banks		25,598		3,293		3,517
Total interest income		47,277,136		35,350,655		32,336,942
Interest expense:
Deposits (including interest on time deposits over $100,000 of $3,386,531, $2,382,174, and $2,490,017 in 2005, 2004, and 2003, respectively)		13,873,143		7,222,141		7,251,075
Federal funds purchased and securities sold under repurchase agreements		1,697,219		651,185		645,949
Other borrowings		2,314,911		1,797,163		1,788,137
Total interest expense		17,885,273		9,670,489		9,685,161
Net interest income		29,391,863		25,680,166		22,651,781
Provision for loan losses		1,841,435		1,588,426		1,694,141
Net interest income after provision for loan losses		27,550,428		24,091,740		20,957,640
Noninterest income:
Service charges and fees on deposits		5,363,306		4,924,629		4,514,269
Gain on sales of loans		5,088,557		5,705,051		8,875,410
Investment securities losses, net		(85,666	)	(101,990	)	(203,325	)
Retail investment income		454,710		444,479		279,717
Trust services fees		642,016		554,331		353,115
Increase in cash surrender value of bank-owned life insurance		399,685		491,958		324,882
Miscellaneous income		514,999		443,017		378,420
Total noninterest income		12,377,607		12,461,475		14,522,488
Noninterest expense:
Salaries		12,451,873		11,649,152		12,428,169
Employee benefits		3,079,548		2,905,631		2,904,002
Occupancy expenses		2,730,594		2,622,953		2,394,793
Other operating expenses		6,757,077		6,566,480		5,837,064
Total noninterest expense		25,019,092		23,744,216		23,564,028
Income before income taxes		14,908,943		12,808,999		11,916,100
Income tax expense		4,954,734		4,104,723		3,982,999
Net income	$	9,954,209		8,704,276		7,933,101
Basic net income per share	$	1.89		1.66		1.51
Diluted net income per share		1.86		1.63		1.48
Weighted average common shares outstanding		5,257,904		5,247,901		5,247,204
Weighted average number of common and common equivalent shares outstanding		5,350,384		5,323,924		5,359,815

See accompanying notes to consolidated financial statements.

64

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Years ended December 31, 2005, 2004, and 2003

																Accumulated other comprehensive income (loss), net
				Common stock						Additional paid-in capital		Retained earnings		Treasury stock				Total stockholders’ equity
	Comprehensive income			Number of shares			Amount
Balance, December 31, 2002					4,808,102		$	14,424,306		23,374,772		7,471,434		(507,360	)	1,984,908		46,748,060
Comprehensive income:
Net income	$	7,933,101			—			—		—		7,933,101		—		—		7,933,101
Other comprehensive loss – unrealized loss on investment securities available for sale, net of income tax effect of ($505,571)		(981,402	)		—			—		—		—		—		(981,402	)	(981,402	)
Total comprehensive income	$	6,951,699
Stock dividend – 10%					480,398			1,441,194		11,049,154		(12,490,348	)	—		—		—
Cash paid for fractional shares					—			—		—		(10,712	)	—		—		(10,712	)
Balance, December 31, 2003					5,288,500		$	15,865,500		34,423,926		2,903,475		(507,360	)	1,003,506		53,689,047
Comprehensive income:
Net income	$	8,704,276			—			—		—		8,704,276		—		—		8,704,276
Other comprehensive loss – unrealized loss on investment securities available for sale, net of income tax effect of ($330,725)		(641,997	)		—			—		—		—		—		(641,997	)	(641,997	)
Total comprehensive income	$	8,062,279
Cash dividends ($0.52 per common share)					—			—		—		(2,729,118	)	—		—		(2,729,118	)
Stock options exercised, issued from treasury stock					—			—		(14,466	)	—		72,276		—		57,810
Purchase of treasury stock					—			—		—		—		(62,043	)	—		(62,043	)
Retirement of common stock					(1,400	)		(4,200	)	(33,950	)	—		—		—		(38,150	)
Balance, December 31, 2004					5,287,100		$	15,861,300		34,375,510		8,878,633		(497,127	)	361,509		58,979,825
Comprehensive income:
Net income	$	9,954,209			—			—		—		9,954,209		—		—		9,954,209
Other comprehensive loss – unrealized loss on investment securities available for sale, net of income tax effect of ($1,349,912)		(2,620,417	)		—			—		—		—		—		(2,620,417	)	(2,620,417	)
Total comprehensive income	$	7,333,792
Cash dividends ($0.52 per common share)					—			—		—		(2,733,428	)	—		—		(2,733,428	)
Stock options exercised, issued from treasury stock		—			—			26,720		—		263,229		—		289,949
Retirement of common stock					(7,859	)		(23,577	)	(263,354	)	—		—		—		(286,931	)
Balance, December 31, 2005					5,279,241		$	15,837,723		34,138,876		16,099,414		(233,898	)	(2,258,908	)	63,583,207
				Disclosure of reclassification amount
				2005			2004			2003
Unrealized holding losses arising during period, net of taxes				$	(2,676,957	)		(709,310	)	(1,115,597	)
Reclassification adjustment for losses included in net income, net of taxes					56,540			67,313		134,195
Net unrealized losses in securities				$	(2,620,417	)		(641,997	)	(981,402	)

See accompanying notes to consolidated financial statements.

65

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2005, 2004, and 2003

	2005			2004		2003
Cash flows from operating activities:
Net income	$	9,954,209		8,704,276		7,933,101
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,454,503		1,335,362		1,279,202
Deferred income tax benefit		(617,633	)	(204,160	)	(759,360	)
Provision for loan losses		1,841,435		1,588,426		1,694,141
Net investment securities losses		85,666		101,990		203,325
Net amortization of premium on investment securities		311,604		411,722		745,988
Increase in cash surrender value of bank-owned life insurance		(399,685	)	(491,958	)	(324,882	)
Loss (gain) on disposal of premises and equipment		7,278		2,365		(6,312	)
Loss on the sale of other real estate		7,888		3,728		4,306
Gain on sales of loans		(5,088,557	)	(5,705,051	)	(8,875,410	)
Real estate loans originated for sale		(264,726,917	)	(274,939,497	)	(374,275,713	)
Proceeds from sales of real estate loans		262,447,254		279,913,014		393,400,641
(Increase) decrease in accrued interest receivable		(985,776	)	146,641		(96,258	)
Decrease (increase) in other assets		89,557		(46,790	)	(212,965	)
Increase in accrued interest and other liabilities		1,754,211		48,202		683,386
Net cash provided by operating activities		6,135,037		10,868,270		21,393,190
Cash flows from investing activities:
Proceeds from sales of available for sale securities		23,852,712		40,304,730		49,788,193
Proceeds from sales of held to maturity securities		—		550,000		—
Proceeds from maturities of available for sale securities		24,281,923		47,852,287		57,801,211
Proceeds from maturities of held to maturity securities		—		1,168,000		700,000
Purchase of available for sale securities		(100,960,474	)	(89,633,987	)	(127,446,982	)
Purchase of restricted equity securities		(968,759	)	(1,309,000	)	—
Proceeds from redemption of FHLB stock		225,000		—		—
Net increase in loans		(100,569,887	)	(62,006,652	)	(47,398,926	)
Purchase of Bank-owned life insurance		—		—		(8,000,000	)
Additions to premises and equipment		(4,402,964	)	(5,574,879	)	(1,667,783	)
Proceeds from sale of other real estate		271,846		259,476		209,491
Proceeds from sale of premises and equipment		2,500		50,195		27,337
Net cash used in investing activities		(158,268,103	)	(68,339,830	)	(75,987,459	)

(continued)

66

(continued)

	2005			2004		2003
Cash flows from financing activities:
Net increase in deposits		106,870,178		72,832,869		44,395,101
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements		22,432,157		(12,387,495	)	13,981,073
Proceeds from other borrowed funds		100,000		100,000		—
Advances from Federal Home Loan Bank		17,000,000		10,000,000		—
Payments of Federal Home Loan Bank advances		(5,000,000	)	—		(5,000,000	)
Proceeds from subordinated debentures		10,000,000		—		—
Principal payments on other borrowed funds		—		—		(200,000	)
Purchase of treasury stock		—		(62,043	)	—
Payment of cash dividends		(2,733,428	)	(2,729,118	)	—
Proceeds from stock options exercised, net of stock redeemed		3,018		19,660		—
Cash paid for fractional shares		—		—		(10,712	)
Net cash provided by financing activities		148,671,925		67,773,873		53,165,462
Net (decrease) increase in cash and cash equivalents		(3,461,141	)	10,302,313		(1,428,807	)
Cash and cash equivalents at beginning of year		26,024,197		15,721,884		17,150,691
Cash and cash equivalents at end of year	$	22,563,056		26,024,197		15,721,884
Supplemental disclosures of cash paid during the year for:
Interest	$	17,310,768		9,721,549		9,968,518
Income taxes		5,046,258		4,571,000		4,543,500
Supplemental information on noncash investing activities:
Loans transferred to other real estate	$	226,305		311,905		218,525

See accompanying notes to consolidated financial statements.

67

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(1) Summary of Significant Accounting Policies

Southeastern Bank Financial Corporation and subsidiary (collectively the Company) offer a wide range of lending services, including real estate, commercial, and consumer loans to individuals and small to medium-sized businesses and professionals that are located in, or conduct a substantial portion of their business in, the Richmond and Columbia Counties area of Georgia. The Company is subject to competition from other financial institutions and is also subject to the regulations of certain Federal and state agencies and undergoes periodic examinations by those regulatory authorities.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The following is a description of the more significant of those policies the Company follows in preparing and presenting its consolidated financial statements.

(a) Basis of Presentation

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

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

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

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

(b) Cash and Cash Equivalents

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

68 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(c) Investment Securities

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

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

A decline in the fair value of any available for sale or held to maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security.

Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using a method which approximates the effective interest method and takes into consideration prepayment assumptions. Dividends and interest income are recognized when earned. Realized gains and losses for investment securities available for sale which are sold are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

(d) Loans and Allowance for Loan Losses

Loans are stated at the amount of unpaid principal outstanding less unearned loan fees, reduced by an allowance for loan losses. Interest on loans is calculated using the simple interest method. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the straight line method without anticipating prepayments. Accrual of interest is generally discontinued on loans that become past due 90 days or more. These loans are classified as nonaccrual, even though the presence of collateral or the borrower’s financial strength may be sufficient to provide for ultimate repayment. When a loan is placed on nonaccrual status, all previously accrued but uncollected interest is reversed against current period interest income. Future collections are applied first to principal and then to interest until such loans are brought current, at which time loans may be returned to accrual status.

69 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

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

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

The Company accounts for impaired loans under the provisions of SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. Management, considering current information and events regarding a borrowers’ ability to repay its obligations, considers a loan to be impaired if it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is generally measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. If the loan is collateral-dependent, the fair value of the collateral less estimated selling costs is used to determine the amount of impairment. Specific guidance from bank regulators is also considered. Impairment losses are included in the allowance for loan losses through a charge to the provision for losses on loans. The accounting for impaired loans described above applies to all loans, except for large pools of smaller-balance, homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, and debt securities. The allowance for loan losses for loans not considered impaired and for large pools of smaller-balance, homogeneous loans is established through consideration of such factors as changes in the nature and volume of the portfolio, overall portfolio quality, individual risk rating, adequacy of the underlying collateral, loan concentrations, historical charge-off trends, and economic conditions that may affect the borrowers’ ability to pay. Cash receipts on impaired

70 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

loans for which the accrual of interest has been discontinued are applied first to reduce the principal amount of such loans until all contractual principal payments have been brought current.

The Company originates mortgages to be held for sale only for loans that have been individually pre-approved by the investor. The Company bears minimal interest rate risk on these loans and only holds the loans temporarily until documentation can be completed to finalize sale to the investor. Such loans are stated at the lower of cost or aggregate fair value. Under SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, loan commitments that relate to the origination of mortgage loans that will be held for sale, commonly referred to as interest rate lock commitments, must be accounted for as derivatives by the issuer of the commitment. Forward sales commitments to the investor are made at the same time and have identical terms as the mortgage loan commitments to the customers. These forward sales commitments are also derivatives. Upon closing of the loan with the customer, Georgia Bank & Trust accounts for the forward sales commitments on loans held for sale as a hedge. Once a loan is closed with the customer, it is funded by the investor, in no more than fifteen days. We have determined this hedge is effective because the gain that is unrealized, but embedded, upon closing the loan with the customer is exactly realized when the loan is funded from the investor. Fair values of these derivatives as of December 31, 2005 and 2004 were insignificant.

(e) Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets, which range from three to forty years. Premises and equipment and other long term assets are reviewed for impairment when events indicate their carrying amounts may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

(f) Other Real Estate

Other real estate is carried at the lower of its cost or fair value less estimated costs to sell. Any excess of the loan balance at the time of foreclosure over the fair value of the collateral is treated as a loan loss and is charged against the allowance for loan losses. A provision for estimated losses on other real estate is charged to earnings upon subsequent declines in value. Costs related to the development and improvement of property are capitalized; holding costs are charged to expense. The carrying values of other real estate as of December 31, 2005 and 2004 were $0 and $53,000, respectively.

71 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(g) Goodwill

SFAS No. 142, Goodwill and Other Intangible Assets eliminated amortization of goodwill and intangible assets that have indefinite useful lives and requires annual tests of impairments of those assets. The Company’s goodwill is not considered impaired at December 31, 2005.

(h) Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 also amends Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in the interim financial information. The Company adopted the provisions of SFAS No. 148 effective December 31, 2002. In December 2004, the FASB amended SFAS 123 to SFAS No. 123 (Revised 2004), Accounting for Stock-Based Compensation, which required most public entities, effective for the interim or annual periods beginning after June 15, 2005, to compute the fair value of options at the date of grant and to recognize such costs as compensation expense immediately if there is no vesting period or ratably over the vesting period of the options. Due to the April 15, 2005, deferral of the effective date to the beginning of the first annual period beginning after June 15, 2005, the Company has chosen not to adopt the cost recognition principles of this statement for 2005. The Company will adopt SFAS No. 123 (Revised 2004) as of January 1, 2006.

The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. Accordingly, compensation cost is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock. Had compensation cost been determined based upon the fair value of the options at the grant dates consistent with the method recommended by SFAS No. 123, on a pro forma basis, the Company’s net income and income per share for the years ended December 31, 2005, 2004 and 2003 is indicated below:

72 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

	2005			2004		2003
Net income	$	9,954,209		8,704,276		7,933,101
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effect		(241,554	)	(208,430	)	(157,625	)
Pro forma	$	9,712,655		8,495,846		7,775,476
Basic net income per share:
As reported	$	1.89		1.66		1.51
Pro forma		1.85		1.62		1.48
Diluted net income per share:
As reported		1.86		1.63		1.48
Pro forma		1.83		1.60		1.45

The fair value of each option grant is estimated on the date of grant using a minimum value option price assessment with weighted average assumptions used and estimated fair values as follows:

	2005	2004	2003
Options granted	51,500	5,000	64,300
Risk-free interest rate	4.25%	4.18%	4.13%
Dividend yield	2.00%	2.00%	0.00%
Expected life at date of grant	8.54 years	10 years	10 years
Volatility	31.18%	29.45%	38.59%
Weighted average grant-date fair value	$12.64	$10.17	$12.85

(i) Income Taxes

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

(j) Income Per Share

Basic net income per share is computed on the weighted average number of shares outstanding in accordance with SFAS No. 128, Earnings Per Share. Diluted net

73 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

income per share is computed by dividing net income by weighted average shares outstanding plus common share equivalents resulting from dilutive stock options, determined using the treasury stock method.

On October 16, 2003, the Company’s board of directors approved a 2 for 1 stock split payable on November 21, 2003 to shareholders of record on October 31, 2003. All weighted average share and per share information in the accompanying financial statements has been restated to reflect the effect of the additional shares outstanding from the stock split.

On July 18, 2003, the Company’s board of directors approved a 10% stock dividend payable on August 29, 2003 to shareholders of record on August 8, 2003, which has been accounted for as a dividend.

	December 31,
	2005	2004	2003
Weighted average common shares outstanding	5,257,904	5,247,901	5,247,204
Effect of stock options	92,480	76,023	112,611
Weighted average number of common and common equivalent shares outstanding	5,350,384	5,323,924	5,359,815

(k) Other Comprehensive Income (Loss)

Other comprehensive income (loss) for the Company consists of items recorded directly in equity under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.

(l) Segment Disclosures

SFAS No. 131 establishes standards for the disclosures made by public business enterprises to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company operates as a single segment.

(m) Recent Accounting Pronouncements

SFAS No. 123 (Revised 2004), Accounting for Stock-Based Compensation, will require most public entities, effective at the beginning of the first annual period beginning after June 15, 2005, to compute the fair value of options at the date of grant and to recognize such costs as compensation expense immediately if there is no

74 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

vesting period or ratably over the vesting period of the options. Due to the April 15, 2005, deferral of the effective date to the beginning of the first annual period beginning after June 15, 2005, the Company has chosen not to adopt the cost recognition principles of this statement for 2005. If the Company had chosen to adopt these principles, an annual expense of $242,000 would be recorded for the year ending 2005. Based on the options outstanding as of December 31, 2005, the expense would be $274,000 in 2006 and then decline in succeeding years as the options fully vest. The Company will adopt SFAS No. 123 (Revised 2004) as of January 1, 2006.

(n) Bank Owned Life Insurance

The Company has purchased life insurance policies on certain executives. Bank owned life insurance is recorded as its cash surrender value or the amount that can be realized at the balance sheet date.

(o) Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are reported as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the consolidated financial statements.

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

(2) Cash and Due From Banks

The subsidiary bank is required by the Federal Reserve Bank to maintain average daily cash balances. These required balances were $663,000 at December 31, 2005 and $759,000 at December 31, 2004.

75 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(3) Investment Securities

A summary of investment securities as of December 31, 2005 and 2004 is as follows:

	2005
	Amortized cost		Gross unrealized gains	Gross unrealized losses		Estimated fair value
Held to maturity:
Obligations of states and political subdivisions	$	3,776,040	121,301	—		3,897,341
	$	3,776,040	121,301	—		3,897,341
Available for sale:
Obligations of U.S. Government agencies	$	68,646,172	—	(1,103,512	)	67,542,660
Obligations of states and political subdivisions		19,641,196	86,044	(213,504	)	19,513,736
Mortgage-backed securities		92,983,634	4,392	(2,296,405	)	90,691,621
Corporate bonds		9,070,990	167,822	(91,579	)	9,147,233
Trust preferred securities		10,132,592	101,974	(77,820	)	10,156,746
Equity securities		500,000	—	—		500,000
	$	200,974,584	360,232	(3,782,820	)	197,551,996
	2004
	Amortized cost		Gross unrealized gains	Gross unrealized losses		Estimated fair value
Held to maturity:
Obligations of states and political subdivisions	$	3,776,428	220,933	—		3,997,361
	$	3,776,428	220,933	—		3,997,361
Available for sale:
Obligations of U.S. Government agencies	$	42,444,647	145,535	(187,649	)	42,402,533
Obligations of states and political subdivisions		12,581,774	269,199	(10,352	)	12,840,621
Mortgage-backed securities		72,703,436	353,475	(488,805	)	72,568,106
Corporate bonds		13,761,343	416,293	(27,452	)	14,150,184
Trust preferred securities		6,554,428	115,163	(37,666	)	6,631,925
Equity securities		500,000	—	—		500,000
	$	148,545,628	1,299,665	(751,924	)	149,093,369

76 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

The following tables show investments available for sale with an unrealized loss at December 31, 2005 and 2004 for which an other than temporary impairment has not been recognized.

	December 31, 2005
	Less than 12 months			12 months or longer		Total
	Estimated fair value		Unrealized loss	Estimated fair value	Unrealized loss	Estimated fair value	Unrealized loss
Obligations of U.S. Government agencies	$	47,605,504	520,702	19,937,156	582,810	67,542,660	1,103,512
Obligations of states and political subdivisions		13,338,901	213,504	—	—	13,338,901	213,504
Mortgage-backed securities		57,946,156	1,249,092	30,478,847	1,047,313	88,425,003	2,296,405
Corporate bonds		—	—	3,946,394	91,579	3,946,394	91,579
Trust preferred securities		2,049,081	35,867	999,015	41,953	3,048,096	77,820
	$	120,939,642	2,019,165	55,361,412	1,763,655	176,301,054	3,782,820
	December 31, 2004
	Less than 12 months			12 months or longer		Total
	Estimated fair value		Unrealized loss	Estimated fair value	Unrealized loss	Estimated fair value	Unrealized loss
Obligations of U.S. Government agencies	$	14,009,201	101,568	3,902,500	86,081	17,911,701	187,649
Obligations of states and political subdivisions		861,230	7,601	599,004	2,751	1,460,234	10,352
Mortgage-backed securities		36,252,555	331,710	5,775,749	157,095	42,028,304	488,805
Corporate bonds		5,553,181	27,452	—	—	5,553,181	27,452
Trust preferred securities		2,006,875	37,666	—	—	2,006,875	37,666
	$	58,683,042	505,997	10,277,253	245,927	68,960,295	751,924

At December 31, 2005, there were thirty-one obligations of U.S. government agencies, twenty-seven obligations of states and political subdivisions, fifty-one mortgage-backed securities, and two trust preferred securities with an unrealized loss for less than 12 months. There were eighteen obligations of U.S. government agencies, thirty-nine mortgage-backed securities, four corporate bonds, and two trust preferred securities with an unrealized loss for longer than 12 months. The total estimated fair value of the securities with an unrealized loss at December 31, 2005 represented 97.9% of the book value. Unrealized losses have not been recognized into income because the issuers are either obligations of the U.S. government or are of high credit quality. Also, the decline in fair value is largely due to changes in interest rates and the fair value is expected to recover as the obligations approach maturity.

77 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

The amortized cost and estimated fair value of securities held to maturity and available for sale, other than equity and trust preferred securities, as of December 31, 2005, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Securities held to maturity			Securities available for sale
	Amortized cost		Estimated fair value	Amorized Cost	Estimated fair value
One year or less	$	804,898	807,815	16,923,616	16,876,143
After one year through five years		931,307	957,025	21,766,476	21,624,465
After five years through ten years		1,537,948	1,608,661	32,149,511	31,536,957
After ten years		501,887	523,840	26,518,755	26,166,064
		3,776,040	3,897,341	97,358,358	96,203,629
Mortgage-backed securities		—	—	92,983,634	90,691,621
	$	3,776,040	3,897,341	190,341,992	186,895,250

Proceeds from sales of securities available for sale during 2005, 2004, and 2003 were $23,852,712, $40,304,730, and $49,788,193, respectively. Gross realized gains of $45,636, $181,620, and $253,013 were realized on those sales in 2005, 2004, and 2003, respectively, and gross realized losses of $131,302, $337,403, and $456,338, were realized on those sales in 2005, 2004, and 2003, respectively.

During the third quarter of 2004, the Company sold a held-to maturity investment upon realization that the investment was not bank qualified. The amortized cost of this security was $496,207 and the realized gain was $53,793.

Investment securities with a carrying amount of approximately $141,649,000 and $72,565,000 at December 31, 2005 and 2004, respectively, were pledged to secure public and trust deposits, and for other purposes required by law.

78 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(4) Loans

Loans at December 31, 2005 and 2004 are summarized as follows:

	2005		2004
Commercial, financial, and agricultural	$	64,508,872	59,763,116
Real estate - construction/development		184,825,703	127,302,407
Other loans secured by real estate:
Single-family		123,960,501	96,110,257
Commercial		171,652,087	155,141,267
Consumer installment		34,751,143	41,221,114
		579,698,306	479,538,161
Less allowance for loan losses		9,124,801	7,930,366
Less deferred loan origination fees		610,515	146,952
	$	569,962,990	471,460,843

As of December 31, 2005 and 2004, the Company had nonaccrual loans aggregating $4,009,479 and $2,971,622, respectively. Interest that would have been recorded on nonaccrual loans had they been in accruing status was approximately $204,000 in 2005, $166,000 in 2004, and $107,000 in 2003. At December 31, 2005 and 2004, the Company had impaired loans with an outstanding balance of $1,784,000 and $1,680,000, respectively, with a related valuation allowance of $268,000 and $238,000 at December 31, 2005 and 2004. The average balance of impaired loans was approximately $1,732,000, $1,731,000 and $1,586,000 for the years ended December 31, 2005, 2004, and 2003, respectively. The interest recognized on such loans in 2005, 2004, and 2003 was immaterial. Loans past due 90 days or more and still accruing interest were $1,000 and $29,000 at December 31, 2005 and 2004, respectively.

The following is a summary of the activity in the allowance for loan losses for the years ended December 31, 2005, 2004, and 2003:

	2005			2004		2003
Balance, beginning of year	$	7,930,366		7,277,588		6,534,417
Provision for loan losses		1,841,435		1,588,426		1,694,141
Charge-offs		(1,605,034	)	(1,692,675	)	(1,621,086	)
Recoveries		958,034		757,027		670,116
Balance, end of year	$	9,124,801		7,930,366		7,277,588

In the ordinary course of business, the Company has direct and indirect loans outstanding to certain executive officers, directors, and principal holders of equity securities (including their associates).

79 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

The following is a summary of the activity in loans outstanding to officers, directors, and their associates for the year ended December 31, 2005:

Balance at beginning of year	$	19,563,568
New loans		18,727,204
Principal repayments		(22,964,284	)
Balance at end of year	$	15,326,488

The Company is also committed to extend credit to certain directors and executives of the Company, including companies in which they are principal owners, through personal lines of credit, letters of credit, and other loan commitments. As of December 31, 2005, available balances on these commitments to these persons aggregated approximately $4,598,000.

(5) Premises and Equipment

Premises and equipment at December 31, 2005 and 2004 are summarized as follows:

	2005		2004
Land	$	2,950,782	2,515,078
Buildings		19,142,953	16,098,828
Furniture and equipment		8,193,172	7,860,832
		30,286,907	26,474,738
Less accumulated depreciation		8,910,724	8,037,238
	$	21,376,183	18,437,500

Depreciation expense amounted to $1,454,503, $1,335,362, and $1,279,202 in 2005, 2004, and 2003, respectively.

(6) Commitments

The Company is committed under various operating leases for office space and equipment. At December 31, 2005, minimum future lease payments under noncancelable real property and equipment operating leases are as follows:

2006	$	84,042
2007		68,621
2008		9,839
2009		10,180
2010		4,300
	$	176,982

80 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

Rent expense for all building, equipment, and furniture rentals totaled $213,534, $267,364, and $244,137 for the years ended December 31, 2005, 2004, and 2003, respectively.

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

Unfunded commitments to extend credit where contract amounts represent potential credit risk totaled $204,422,000 and $167,534,000 at December 31, 2005 and 2004, respectively. These commitments are primarily at variable interest rates.

Lines of credit are legally binding contracts to lend to a customer, as long as there is no violation of any condition established in the contract. These commitments have fixed termination dates and generally require payment of a fee. As commitments often expire prior to being drawn, the amounts above do not necessarily represent the future cash requirements of the commitments. Credit worthiness is evaluated on a case by case basis, and if necessary, collateral is obtained to support the commitment.

(7) Deposits

At December 31, 2005, scheduled maturities of certificates of deposit are as follows:

2006	$	121,212,796
2007		30,616,451
2008		2,262,265
2009		1,377,211
2010		3,413,737
Thereafter		4,144,908
Total	$	163,027,368

(8) Borrowings

Securities Sold Under Repurchase Agreements

The securities sold under repurchase agreements at December 31, 2005 are collateralized by obligations of the U.S. Government or its corporations and agencies, state and municipal securities, corporate bonds, or mortgage-backed securities with an aggregate carrying value

81 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

of $12,072,434 for corporate customers, which are held by independent trustees. At December 31, 2005, public funds agreements for deposit accounts and securities sold under repurchase agreements for public funds customers were maintained by the Georgia Bankers Association pooled pledging program. The total carrying value of investments in the pooled pledging program at December 31, 2005 was $141,649,000. At December 31, 2004, securities sold under repurchase agreements were collateralized by the above referenced securities with an aggregate carrying value of $49,736,911, which were held by independent trustees. Under such agreements, the Company agrees to repurchase identical securities as those sold. The repurchase agreements at December 31, 2005 mature on demand. The next page summarizes pertinent data related to the securities sold under the agreements to repurchase as of and for the years ended December 31, 2005, 2004, and 2003.

	2005			2004		2003
Weighted average borrowing rate at year-end		3.93	%	1.89	%	1.26	%
Weighted average borrowing rate during the year		3.04	%	1.39	%	1.36	%
Average daily balance during the year	$	55,168,048		45,092,101		45,108,754
Maximum month-end balance during the year		72,461,883		52,403,748		50,586,502
Balance at year-end		67,013,416		44,581,259		46,556,754

At December 31, 2005, the Company had securities sold under agreements to repurchase with one counterparty aggregating approximately $52,632,000.

Advances from Federal Home Loan Bank

The Company has an available line of credit from the Federal Home Loan Bank of Atlanta (FHLB) in an amount not to exceed 10% of total assets. The line of credit is reviewed annually by the FHLB. The following advances were outstanding under this line at December 31, 2005 and 2004.

82 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

	2005		Rate		2004		Rate
Due March 17, 2006 adjustable rate credit	$	5,000,000	4.517	%	$	5,000,000	2.521	%
Due June 18, 2007 convertible flipper		—				5,000,000	2.020	%
Due January 27, 2010 convertible flipper		5,000,000	3.966	%		—
Due March 22, 2010		7,000,000	6.180	%		7,000,000	6.180	%
Due March 30, 2010		5,000,000	6.020	%		5,000,000	6.020	%
Due May 19, 2010 convertible flipper		6,000,000	3.870	%		—
Due September 29, 2010		5,000,000	5.820	%		5,000,000	5.820	%
Due October 18, 2010		7,000,000	5.460	%		7,000,000	5.460	%
Due May 2, 2011		6,000,000	4.800	%		6,000,000	4.800	%
Due July 23, 2012 convertible flipper		6,000,000	3.870	%		—
	$	52,000,000			$	40,000,000

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

The adjustable rate credit advance is indexed to three-month LIBOR-based floating-rate plus two basis points. The convertible flipper advance maturing on January 27, 2010, is indexed to the three-month LIBOR-based floating rate minus 25 basis points for the first year and then converts to a fixed rate of 3.44% for the last four years. The convertible flipper advance maturing on May 19, 2010, is indexed to the one-month LIBOR-based floating rate minus 50 basis points for the first year and then converts to a fixed rate of 3.83% for the last four years. The convertible flipper advance maturing on July 23, 2012, is indexed to the one-month LIBOR-based floating rate minus 50 basis points for the first two years and then converts to a fixed rate of 3.93% for the last five years. The convertible flipper advance maturing on June 18, 2007, was called on June 20, 2005.

At December 31, 2005 and 2004, the Company has pledged, under a blanket floating lien, first mortgage loans with unpaid balances which, when discounted at 80% of such unpaid principal balances, equals or exceeds the advances outstanding.

83 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

Other Borrowed Funds

Other borrowed funds at December 31, 2005 and 2004 consist of a treasury, tax, and loan account with the Federal Reserve Bank of $1,000,000 and $900,000, respectively.

(9) Subordinated Debentures

In December 2005 the Company issued $10,000,000 of unsecured subordinated debentures, which bear interest at three-month LIBOR plus 1.40%, adjusted quarterly, to Southeastern Bank Financial Statutory Trust I. The Company intends to use the funds to capitalize a new federally chartered thrift subsidiary, Southern Bank and Trust (currently in organization). The Company has temporarily used the proceeds to purchase a short term investment security while it continues the process of applying for regulatory approval. Southeastern Bank Financial Statutory Trust I is a wholly owned subsidiary of the Company which is not consolidated in these financial statements pursuant to FIN 46R. Southeastern Bank Financial Statutory Trust I acquired these debentures using the proceeds of its offerings of $10.0 million of Trust Preferred Securities to outside investors. The Trust Preferred Securities qualify as Tier 1 capital under Federal Reserve Board guidelines and accrue and pay distributions quarterly at a variable per annum rate of interest, reset quarterly, equal to LIBOR plus 1.40% of the stated liquidation amount of $1,000 per Capital Security. The Company has entered into contractual arrangements which constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of Southeastern Bank Financial Statutory Trust I under the Trust Preferred Securities.

The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on December 15, 2035, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by Southeastern Bank Financial Statutory Trust I in whole or in part, on or after December 15, 2010 and in whole or in part at any time within 90 days following the occurrence of a Tax Event, an Investment Company Event or a Capital Treatment Event. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be 100% of their principal amount plus accrued but unpaid interest. With respect to the redemption of any Debt Security following a Tax Event, an Investment Company Event or a Capital Treatment Event, an amount in cash equal to 103.525% of the principal amount of Debt Securities to be redeemed prior to December 15, 2006. Thereafter, an amount equal in cash to the percentage of the principal amount of the Debt Securities plus unpaid interest will be redeemed as specified below.

84 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

Special Redemption During the 12-Month Period Beginning December 15	Percentage of Principal Amount
2006	103.140%
2007	102.355%
2008	101.570%
2009	100.785%
2010 and thereafter	100.000%

(10) Income Taxes

Income tax expense (benefit) for the years ended December 31, 2005, 2004, and 2003 consists of the following:

	2005			2004		2003
Current tax expense:
Federal	$	4,965,140		3,858,470		4,215,197
State		607,227		450,413		527,162
Total current		5,572,367		4,308,883		4,742,359
Deferred tax benefit
Federal		(528,723	)	(171,820	)	(658,442	)
State		(88,910	)	(32,340	)	(100,918	)
Total deferred		(617,633	)	(204,160	)	(759,360	)
Total income tax expense	$	4,954,734		4,104,723		3,982,999

85 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

Income tax expense differed from the amount computed by applying the statutory Federal corporate tax rate of 35% in 2005, 2004 and 2003 to income before income taxes as follows:

	Years ended December 31
	2005			2004		2003
Computed “expected” tax expense	$	5,218,130		4,483,150		4,170,635
Increase (decrease) resulting from:
Tax-exempt interest income		(368,910	)	(301,705	)	(265,263	)
Nondeductible interest expense		46,459		21,184		21,359
State income tax, net of Federal tax Effect		340,256		271,747		277,059
Earnings on cash surrender value of life insurance		(137,306	)	(172,186	)	(113,709	)
Meals, entertainment, and club dues		40,477		40,042		34,116
Impact of graduated rate		(96,369	)	(100,000	)	(77,550	)
Other, net		(88,003	)	(137,509	)	(63,648	)
	$	4,954,734		4,104,723		3,982,999

86 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004 are presented below:

	2005			2004
Deferred tax assets:
Allowance for loan losses	$	3,538,599		2,963,210
Deferred compensation		952,995		735,809
Other		231,618		56,928
Unrealized loss on investment securities available for sale		1,163,680		—
Total deferred tax assets		5,886,892		3,755,947
Deferred tax liabilities:
Depreciation		(519,124	)	(373,383	)
Prepaid Assets		(207,235	)	—
Unrealized gain on investment securities available for sale		—		(186,232	)
Total deferred tax liabilities		(726,359	)	(559,615	)
Net deferred tax asset	$	5,160,533		3,196,332

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

(11) Related Party Transactions

Deposits include accounts with certain directors and executives of the Company, including companies in which they are principal owners. As of December 31, 2005 and 2004, these deposits totaled approximately $16,000,000 and $14,000,000, respectively. See note 4 for discussion of related party loans.

During the years ended December 31, 2005, 2004, and 2003, the Company paid approximately $1,400, $0, and $18,000, respectively, in legal fees in the normal course of business to a law firm in which a director or former director is a member.

87 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(12) Regulatory Capital Requirements

The Company and its subsidiary bank (the Bank) are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005, that the Company meets all capital adequacy requirements to which it is subject.

As of December 31, 2005, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. Management is not aware of the existence of any conditions or events occurring subsequent to December 31, 2005 which would affect the Bank’s well capitalized classification.

88 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

Actual capital amounts and ratios for the Company are presented in the table below as of December 31, 2005 and 2004, on a consolidated basis and for the Bank individually (dollars in thousands):

	Actual				For capital adequacy purposes				To be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Southeastern Bank Financial Corporation and subsidiary consolidated:
As of December 31, 2005:
Total Capital (to risk- weighted assets)	$	84,236	12.35	%	$	54,573	8.00	%		N/A	N/A
Tier I Capital - risk-based (to risk-weighted assets)		75,702	11.10	%		27,287	4.00	%		N/A	N/A
Tier I Capital - leverage (to average assets)		75,702	9.01	%		33,610	4.00	%		N/A	N/A
As of December 31, 2004:
Total Capital (to risk- weighted assets)		65,567	11.58	%		45,297	8.00	%		N/A	N/A
Tier I Capital - risk-based (to risk-weighted assets)		58,479	10.33	%		22,648	4.00	%		N/A	N/A
Tier I Capital - leverage (to average assets)		58,479	8.38	%		27,913	4.00	%		N/A	N/A
	Actual				For capital adequacy purposes				To be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Georgia Bank & Trust Company:
As of December 31, 2005:
Total Capital (to risk- weighted assets)	$	70,584	10.42	%	$	54,172	8.00	%	$	67,716	10.00	%
Tier I Capital - risk-based (to risk-weighted assets)		62,111	9.17	%		27,086	4.00	%		40,629	6.00	%
Tier I Capital - leverage (to average assets)		62,111	7.44	%		33,382	4.00	%		41,727	5.00	%
As of December 31, 2004:
Total Capital (to risk- weighted assets)		62,633	11.09	%		45,172	8.00	%	$	56,466	10.00	%
Tier I Capital - risk-based (to risk-weighted assets)		55,564	9.84	%		22,586	4.00	%		33,879	6.00	%
Tier I Capital - leverage (to average assets)		55,564	7.98	%		27,851	4.00	%		34,814	5.00	%

The Department of Banking and Finance of the State of Georgia (DBF) requires that state banks in Georgia generally maintain a minimum ratio of Tier 1 capital to total assets of four and one-half percent (4.5%) for banks and four percent (4%) for holding companies.

89 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

These ratios are shown in the preceding tables as Tier 1 Capital – leverage (to average assets). The Company’s ratio at 9.01% and the Bank’s ratio at 7.44% exceed the minimum required.

The DBF requires its prior approval for a bank to pay dividends in excess of 50% of the preceding year’s earnings. Based on this limitation, the amount of cash dividends available from the Bank for payment in 2006 is approximately $5,023,000, subject to maintenance of the minimum capital requirements. As a result of this restriction, at December 31, 2005, approximately $54,975,000 of the Parent Company’s investment in its subsidiary was restricted from transfer in the form of dividends.

(13) Employee Benefit Plans

The Company has an employee savings plan (the Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company has the option to make discretionary payments to the Plan. For the years ended December 31, 2005, 2004, and 2003, the Company contributed $522,903, $533,243, and $523,197, respectively, to the Plan, which is 5% of the annual salary of all eligible employees for 2005, 2004, and 2003.

In 1997, the Company established a nonqualified Long-Term Incentive Plan designed to motivate and sustain high levels of individual performance and align the interests of key officers with those of shareholders by rewarding capital appreciation and earnings growth. Stock appreciation rights may be awarded annually to those key officers whose performance during the year has made a significant contribution to the Company’s growth. Such stock appreciation rights are granted at a strike price equal to the trading price of the Company’s stock at date of grant, and are earned over a five-year appreciation period. Officers vest in such rights over a 10-year period. The Company recognized expense of $146,995, $122,539, and $207,835 during 2005, 2004, and 2003, respectively, related to this plan. The total amount accrued at December 31, 2005 and 2004 was $188,625 and $160,258, respectively.

The Company also has salary continuation agreements in place with certain key officers. Such agreements are structured with differing benefits based on the participants overall position and responsibility. These agreements provide the participants with a supplemental income upon retirement at age 65, additional incentive to remain with the Company in order to receive these deferred retirement benefits and a compensation package that is competitive in the market. These agreements vest over a ten year period, require a minimum number of years service, and contain change of control provisions. All benefits would cease in the event of termination for cause, and if the participant’s employment were to end due to disability, voluntary termination or termination without cause, the participant would be entitled to receive certain reduced benefits based on vesting and other conditions.

90 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

The estimated cost of an annuity to pay this obligation is being accrued over the vesting period for each officer. The Company recognized expense of $526,429, $506,031, and $563,388 during 2005, 2004, and 2003, respectively, related to these agreements. The total amount accrued at December 31, 2005 and 2004 was $2,232,930 and $1,742,501, respectively.

(14) Stock Option Plan

During 2000, the Company adopted the 2000 Long-Term Incentive Plan (the 2000 Plan) which allows for stock option awards for up to 253,000 shares of the Company’s common stock to key employees of the Company. Under the provisions of the 2000 Plan, the option price is determined by a committee of the board of directors at the time of grant and may not be less than 100% of the fair market value of the common stock on the date of grant of such option. When granted, these options vest over a five-year period. All options must be exercised within a ten-year period. At December 31, 2005, there were 10,166 options remaining to be issued.

The following table summarizes activity in the 2000 Plan by shares under option and weighted average exercise price per share:

	Shares		Exercise price/share
Options outstanding - December 31, 2002	124,740		$	13.48
Granted in 2003	64,300			22.36
Options outstanding - December 31, 2003	189,040			16.50
Granted in 2004	5,000			29.00
Options exercised in 2004	(6,000	)		(9.63	)
Options outstanding - December 31, 2004	188,040			17.05
Granted in 2005	51,500			36.09
Options exercised in 2005	(21,400	)		(13.55	)
Options lapsed in 2005	(2,706	)		(16.81	)
	215,434			21.95

91 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

The following options are exercisable at December 31, 2005:

Shares	Exercise Price
17,625	$      9.63
11,132	13.30
36,760	15.05
11,880	19.32
11,200	26.30
1,000	29.00
89,597

The following table summarizes information about options outstanding under the 2000 Plan at December 31, 2005:

Number outstanding at December 31, 2005	Weighted average remaining contractual life in years	Exercise price
17,625	4.6	$      9.63
13,409	5.5	13.30
67,560	6.1	15.05
32,340	7.1	19.32
28,000	7.9	26.30
5,000	8.9	29.00
9,000	9.2	30.00
25,000	9.5	34.30
12,500	9.8	42.00
5,000	9.8	41.25
215,434

SFAS No. 123 (Revised 2004), Accounting for Stock-Based Compensation, will require most public entities, effective for the interim or annual periods beginning after June 15, 2005, to compute the fair value of options at the date of grant and to recognize such costs as compensation expense immediately if there is no vesting period or ratably over the

92 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

vesting period of the options. Due to the April 15, 2005 deferral of the effective date to the beginning of the first annual period beginning after June 15, 2005, the Company has chosen not to adopt the cost recognition principles of this statement for 2005. The Company will adopt SFAS No. 123 (Revised 2004) as of January 1, 2006.

(15) Other Operating Expenses

Components of other operating expenses exceeding 1% of total revenues include the following for the years ended December 31, 2005, 2004, and 2003:

	2005		2004	2003
Marketing and business development	$	1,118,760	1,099,851	1,034,022
Processing expense		1,072,746	1,163,255	1,062,784
Legal and professional fees		1,094,340	846,852	588,492
Loan costs		395,513	604,389	467,112
Office supplies expense		508,199	484,633	445,990
Data processing expense		532,388	502,808	408,931

93 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(16) Condensed Financial Statements of Southeastern Bank Financial Corporation (Parent Only)

The following represents Parent Company only condensed financial information of Southeastern Bank Financial Corporation:

Condensed Balance Sheets

	December 31
	2005		2004
Assets
Cash and due from banks	$	739,183	1,379,997
Investment securities available for sale		10,371,733	500,000
Investment in subsidiary		59,998,151	56,065,159
Premises and equipment, net		2,470,796	1,034,669
Deferred tax asset, net		3,344	—
	$	73,583,207	58,979,825
Liabilities and Stockholders’ Equity
Liabilities:
Subordinated debentures	$	10,000,000	—
Stockholders’ equity		63,583,207	58,979,825
	$	73,583,207	58,979,825

94 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

Condensed Statements of Income

	Years ended December 31
	2005		2004	2003
Income:
Dividends from subsidiary	$	3,500,000	2,000,000	2,000,000
Interest income on investment securities		30,421	393	139
Miscellaneous income		109,831	102,006	91,200
		3,640,252	2,102,399	2,091,339
Expense:
Occupancy expense		44,800	44,800	44,800
Other operating expense		188,162	61,533	69,546
		232,962	106,333	114,346
Income before equity in undistributed earnings of subsidiary		3,407,290	1,996,066	1,976,993
Equity in undistributed earnings of subsidiary		6,546,919	6,708,210	5,956,108
Net income	$	9,954,209	8,704,276	7,933,101

95 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

Condensed Statements of Cash Flows

	Year Ended December 31
	2005			2004		2003
Cash flows from operating activities:
Net income	$	9,954,209		8,704,276		7,933,101
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		44,800		44,800		44,800
Equity in undistributed earnings of subsidiary		(6,546,919	)	(6,708,210	)	(5,956,108	)
Accretion on investment securities		(30,189	)	—		—
Decrease (increase) in due from subsidiary		—		1,000,000		(1,000,000	)
Net cash provided by operating activities		3,421,901		3,040,866		1,021,793
Cash flows from investing activities:
Purchase of investment securities		(9,851,378	)	—		—
Additions to premises and equipment		(1,480,927	)	—		—
Net cash used in investing activities		(11,332,305	)	—		—
Cash flows from financing activities:
Proceeds from subordinated debentures		10,000,000		—		—
Purchase of treasury stock		—		(62,042	)	—
Payment of cash dividends		(2,733,427	)	(2,729,118	)	—
Proceeds from stock options exercised, net of stock redeemed		3,017		19,660		—
Cash paid for fractional shares		—		—		(10,712	)
Net cash provided by (used in) financing activities		7,269,590		(2,771,500	)	(10,712	)
Net (decrease) increase in cash and cash equivalents		(640,814	)	269,366		1,011,081
Cash and cash equivalents at beginning of year		1,379,997		1,110,631		99,550
Cash and cash equivalents at end of year	$	739,183		1,379,997		1,110,631

96 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(17) Fair Value of Financial Instruments

SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather a good-faith estimate of the fair value of financial instruments held by the Company. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.

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

(a) Cash and Cash Equivalents

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

(b) Investment Securities

The fair value of investment securities is based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amount of related accrued interest receivable approximates its fair value.

97 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(c) Loans

The fair value of loans is calculated using discounted cash flows by loan type. The discount rate used to determine the present value of the loan portfolio is an estimated market rate that reflects the credit and interest rate risk inherent in the loan portfolio. The estimated maturity is based on the Company’s historical experience with repayments adjusted to estimate the effect of current market conditions. The carrying amount of related accrued interest receivable approximates its fair value. The carrying amount of real estate loans originated for sale approximates their fair value. The allowance for loan losses is considered a reasonable discount for credit risk.

(d) Deposits

Fair values for certificates of deposit have been determined using discounted cash flows. The discount rate used is based on estimated market rates for deposits of similar remaining maturities. The carrying amounts of all other deposits, due to their short-term nature, approximate their fair values. The carrying amount of related accrued interest payable approximates its fair value.

(e) Federal Funds Sold and Securities Sold Under Repurchase Agreements

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

(f) Other Borrowed Funds

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

(g) Advances from FHLB

The fair value of the FHLB fixed rate advances is obtained from the FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the Company for debt of similar remaining maturities and collateral terms. The fair value approximates the carrying value of the FHLB variable rate credit advances as the advances are at a variable rate of interest.

(h) Subordinated debentures

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

98 (Continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2005, 2004, and 2003

(i) Commitments

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

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2005 and 2004 are as follows:

	December 31
	2005			2004
	Carrying amount		Estimated fair value	Carrying amount	Estimated fair value
Financial assets:
Cash and cash equivalents	$	22,563,056	22,563,056	26,024,197	26,024,197
Investment securities		205,615,517	205,736,818	156,413,518	156,634,451
Loans, net		592,109,824	589,674,894	486,239,457	485,115,812
Financial liabilities:
Deposits		663,654,849	663,472,304	556,784,671	556,997,771
Federal funds purchased and securities sold under repurchase agreements		67,013,416	67,013,416	44,581,259	44,581,259
Other borrowed funds		1,000,000	1,000,000	900,000	900,000
Advances from FHLB		52,000,000	50,762,393	40,000,000	37,245,898
Subordinated debentures		10,000,000	10,000,000	—	—

99 (Continued)

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004, 2003, and 2002

(18) Quarterly Financial Data (Unaudited)

The supplemental quarterly financial data for the years ended December 31, 2005 and 2004 is summarized as follows:

	Quarters ended
	March 31, 2005		June 30, 2005	September 30, 2005	December 31, 2005
Interest income	$	10,066,120	11,310,753	12,486,415	13,413,848
Interest expense		3,425,387	4,149,674	4,814,966	5,495,246
Net interest income		6,640,733	7,161,079	7,671,449	7,918,602
Provision for loan losses		471,694	515,269	589,260	265,212
Noninterest income		2,700,790	3,188,758	3,282,223	3,205,836
Noninterest expense		5,737,238	6,206,784	6,445,479	6,629,591
Net income		2,083,989	2,405,732	2,598,597	2,865,891
Net income per share - basic		0.40	0.46	0.49	0.54
Net income per share - diluted		0.39	0.45	0.48	0.53
	Quarters ended
	March 31, 2004		June 30, 2004	September 30, 2004	December 31, 2004
Interest income	$	8,355,440	8,512,533	8,947,698	9,534,984
Interest expense		2,249,033	2,254,833	2,398,027	2,768,596
Net interest income		6,106,407	6,257,700	6,549,671	6,766,388
Provision for loan losses		388,723	131,197	493,103	575,403
Noninterest income		2,858,727	3,254,844	3,320,510	3,027,394
Noninterest expense		5,599,073	6,147,646	5,915,678	6,081,819
Net income		2,006,090	2,156,723	2,322,338	2,219,125
Net income per share – basic		0.38	0.41	0.44	0.42
Net income per share – diluted		0.38	0.41	0.44	0.42

100

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Not applicable.

Item 9A. Controls and Procedures

As of the end of the period covered by this report, our management, including our Chief Executive Officer and Chief Operating Officer (who serves as the Company’s principal financial officer), reviewed and evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Operating Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company’s internal controls or, to management’s knowledge, in other factors that could significantly affect those internal controls subsequent to the date management carried out its evaluation, and there have been no corrective actions with respect to significant deficiencies or material weaknesses.

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Management’s Report on Internal Controls over Financial Reporting

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

Management has assessed the effectiveness of the Southeastern Bank Financial Corporation’s internal control over financial reporting as of December 31, 2005. In making our assessment, management has utilized the framework published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission “Internal Control-Integrated Framework”. Based on our assessment, management has concluded that, as of December 31, 2005, internal control over financial reporting was effective.

Crowe Chizek and Company LLC, an independent registered public accounting firm, has issued an attestation report on management’s assessment, of the Company’s internal control over financial reporting, and a copy of Crowe Chizek’s report is included with this report.

/s/ R. Daniel Blanton

Chief Executive Officer

(principal executive officer)

/s/ Ronald L. Thigpen

Chief Operating Officer

(principal financial officer)

Date: March 7, 2006

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Southeastern Bank Financial Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls over Financial Reporting that Southeastern Bank Financial Corporation (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Southeastern Bank Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, management’s assessment that Southeastern Bank Financial Corporation maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework

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issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Southeastern Bank Financial Corporation as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2005 and our report dated March 7, 2006 expressed an unqualified opinion on those consolidated financial statements.

Crowe Chizek and Company LLC

Brentwood, Tennessee

March 7, 2006

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PART III

Item 9B. Other Information

None.

Item 10. Directors and Executive Officers of the Registrant

The Company has adopted a Code of Ethics applicable to its senior financial officers. A copy is available, without charge, upon telephonic or written request addressed to Ron Thigpen, Executive Vice President, Chief Operating Officer and Assistant Corporate Secretary, Southeastern Bank Financial Corporation, 3530 Wheeler Road, Augusta, Georgia 30909, telephone (706) 738-6990. The remaining information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2006 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2006).

Item 11. Executive Compensation

The remaining information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2006 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2006).

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table provides information regarding compensation plans under which equity securities of the Company are authorized for issuance. All data is presented as of December 31, 2005.

105

Equity Compensation Plan Table

	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted-average exercise price of outstanding options, warrants and rights	(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category
Equity compensation plans approved by security holders	215,434	21.95	10,166
Equity compensation plans not approved by security holders
Total	215,434	21.95	10,166

Additional information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2006 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2006).

Item 13. Certain Relationships and Related Transactions

Information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2006 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2006).

Item 14. Principal Accountant Fees and Services

Information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2006 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the Commission not later than April 30, 2006).

106

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1)	See Item 8 for a list of the financial statements as filed as a part of this report.
(2)	No financial statement schedules are applicable as the required information is included in the financial statements in Item 8.
(3)	The following exhibits are filed as part of this report:

Exhibit No.	Document
3.1	Articles of Incorporation of the Company (Incorporated by reference to the Company’s registration statement on Form SB-2 filed August 20, 1997 (Registration No. 333-34037))
3.2	Bylaws of the Company (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)
4.1	Indenture dated December 5, 2005 between the Company and U.S. Bank National Association (Incorporated by reference to the Company’s Current Report on From 8-K filed on December 8, 2005.)
10.1	Blanton Employment Contract (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)*
10.2	Thigpen Employment Contract (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)*
10.3	2000 Long Term Incentive Plan (Incorporated by reference to the Company’s definitive Proxy Statement, filed on March 29, 2001)*
10.4	Form of option agreement under 2000 Long Term Incentive Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*
10.5	1997 Long-term Incentive Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*

107

10.6	Form of stock appreciation rights agreement under 1997 Long-term Incentive Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*
10.7	Non-Qualified Defined Benefit Plan dated October 1, 2000*
10.8	Salary continuation agreement dated October 1, 2000 between the Company, the Bank and R. Daniel Blanton*
10.9	Salary continuation agreement dated October 1, 2000 between the Company, the Bank and Ronald L. Thigpen*
10.10	Salary continuation agreement dated October 15, 2003 between the Company, the Bank and R. Daniel Blanton*
10.11	Salary continuation agreement dated October 15, 2003 between the Company, the Bank and Ronald L. Thigpen*
11.1	Statement Re: Computation of Net Income Per Share
14.1	Code of Ethics (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003)
21.1	Subsidiaries of the Company
31.1	Certification by the Chief Executive Officer (principal executive officer)
31.2	Certification by the Chief Operating Officer (principal financial officer)
32.1	Certification by the Chief Executive Officer and Chief Operating Officer

* Denotes a management compensatory agreement or arrangement.

108

SIGNATURES

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

SOUTHEASTERN BANK FINANCIAL CORPORATION
By:	/s/ Robert W. Pollard, Jr.
	Robert W. Pollard, Jr.
	Chairman of the Board

March 14, 2006

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

March 14, 2006

SIGNATURE	TITLE
/s/ Robert W. Pollard, Jr. Robert W. Pollard, Jr.	Chairman of the Board and Director
/s/ Edward G. Meybohm Edward G. Meybohm	Vice Chairman of the Board and Director
/s/ R. Daniel Blanton Daniel Blanton	President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ Ronald L. Thigpen Ronald L. Thigpen	Executive Vice President, Chief Operating Officer (Principal Financial and Accounting Officer) and Director
/s/ William J. Badger William J. Badger	Director
/s/ Warren A. Daniel Warren A. Daniel	Director
/s/ Randolph R. Smith, M.D. Randolph R. Smith, M.D.	Director
/s/ John W. Trulock, Jr. John W. Trulock, Jr.	Director

109

EXHIBIT INDEX

(a) Exhibits

		Page
3.1	Articles of Incorporation of the Company (Incorporated by reference to the Company’s registration statement on Form SB-2 filed August 20, 1997 (Registration No. 333-34037))
3.2	Bylaws of the Company (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)
4.1	Indenture dated December 5, 2005 between the Company and U.S. Bank National Association (Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 8, 2005.)
10.1	Blanton Employment Contract (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)*
10.2	Thigpen Employment Contract (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)*
10.3	2000 Long Term Incentive Plan (Incorporated by reference to the Company’s definitive Proxy Statement, filed on March 29, 2001)*
10.4	Form of option agreement under 2000 Long Term Incentive Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*
10.5	1997 Long-term Incentive Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*

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10.6	Form of stock appreciation rights agreement under 1997 Long-term Incentive Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*
10.7	Non-Qualified Defined Benefit Plan dated October 1, 2000*	112
10.8	Salary continuation agreement dated October 1, 2000 between the Company, the Bank and R. Daniel Blanton*	118
10.9	Salary continuation agreement dated October 1, 2000 between the Company, the Bank and Ronald L. Thigpen*	127
10.10	Salary continuation agreement dated October 15, 2003 between the Company, the Bank and R. Daniel Blanton*	136
10.11	Salary continuation agreement dated October 15, 2003 between the Company, the Bank and Ronald L. Thigpen*	146
11.1	Statement Re: Computation of Net Income Per Share	156
14.1	Code of Ethics (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003)
21.1	Subsidiaries of the Company	157
31.1	Certification by the Chief Executive Officer (principal executive officer)	158
31.2	Certification by the Chief Operating Officer (principal financial officer)	160
32.1	Certification by the Chief Executive Officer and Chief Operating Officer	162

* Denotes a management compensatory agreement or arrangement.

111

EX-10.7

EXHIBIT 10.7

NON-QUALIFIED

DEFINED BENEFIT PLAN

OF

GEORGIA BANK & TRUST COMPANY OF AUGUSTA

I. Establishment and Purpose of Plan

1.1 Establishment and Duration of Plan. The Board of Directors of Georgia Bank & Trust Company of Augusta (the “Bank”), a banking corporation formed under the laws of the State of Georgia, hereby establishes the Non-Qualified Defined Benefit Plan of Georgia Bank & Trust Company of Augusta and its successors (the “Plan”), effective as of the 1^st day of October, 2000. By executing an Executive Salary Continuation and Participation Agreement (the “Participation Agreement”), an Executive agrees to the terms of the Plan. The Plan shall continue until terminated by the Board of Directors of the Bank.

1.2 Purpose of Plan. The purpose of the Plan is to provide each Executive (as hereinafter defined) with benefits upon their death or retirement, if they are eligible to receive benefits under the Plan.

II. Definitions

2.1 “Beneficiary” means, with respect to an Executive, the person or persons who are designated as such by an Executive, in his Participation Agreement, to receive payments under the Plan.

2.2 “Bank” means Georgia Bank &Trust Company of Augusta, a banking corporation formed under the laws of the State of Georgia, or any successor thereto and its subsidiaries.

2.3 “Death Benefit” means, with respect to each Executive, the amount listed as such on such Executive’s Participation Agreement. Nevertheless, the amount of such Executive’s Death Benefit shall be zero (0), if the Executive dies as a result of suicide or under contestable circumstances within 2 years of his or her Entry Date.

2.4 “Early Retirement” means the retirement, with the written consent of the Plan Administrator, from employment with the Bank by an Executive after the age of 55 but prior to the age of 65, and pursuant to the terms of the Participation Agreement relating to Termination of Employment.

2.5 “Early Retirement Benefit” means an amount equal to such Executive’s Normal Retirement Benefit multiplied by his or her Vesting Schedule.

112

2.6 “Early Retirement Date” means the first day of the month following the month during which the Executive attains Early Retirement.

2.7 “Entry Date” means the effective date as of which an Executive first executes a Participation Agreement under the Plan.

2.8 “Executive” means any employee who is designated as eligible to participate in the Plan by the Board of Directors of the Bank and who executes a Participation Agreement. Only management and highly paid employees within the meaning of the Employee Retirement Income and Security Act of 1974 shall be eligible to participate.

2.9 “Fiscal Year” shall mean the 12 month period following the Executive’s Entry Date.

2.10 “Normal Retirement Age” means the date on which an Executive attains the age of sixty- five (65).

2.11 “Normal Retirement Benefit” means for any Fiscal Year, with respect to any Executive, the amount designated as such by the Board of Directors of the Bank and listed as such on such Executive’s Participation Agreement.

2.12 “Normal Retirement Date” means the first day of the month following the month during which the Executive attains Normal Retirement Age, or, if later, the first day of the month following the Executive’s retirement after attainment of his Normal Retirement Age.

2.13 “Participation Agreement” means the Executive Salary Continuation and Participation Agreement executed by the Executive upon being admitted to the Plan. With respect to each Executive, the Participation Agreement shall be an integral part of the Plan.

2.14 “Plan” means the Non-Qualified Defined Benefit Plan of the Bank and its successors as described herein as the same may hereafter form time to time be amended.

2.15 “Year of Service” means, with respect to each Executive, each Fiscal Year following such Executive’s Entry Date during which such Executive is actively and continuously employed by the Bank on a full-time basis.

2.16 “Vesting Schedule” means the percentage amount in which vesting occurs as shown from Schedule “A” of the Executive’s Salary Continuation and Participation Agreement.

113

III. Payment of Benefits

3.1 If an Executive is actively and continuously employed by the Bank on a full-time basis from his or her Entry Date until he or she attains his or her Normal Retirement Age, then the Bank will make a series of payments to the Executive, each such payment to be equal to the Executive’s Normal Retirement Benefits. The first such payment shall be made on the Normal Retirement Date and the remaining payments shall be made on the first day of each succeeding month until 240 total payments have been made. If the Executive dies before all of the payments due to him or her have been made, the remaining payments shall be made to the Executive’s Beneficiary. If the Executive’s Beneficiary dies before receiving all the payments due to him or her, then the remaining payments shall be made to the personal representative of the Beneficiary’s estate.

3.2 In the event of an Executive’s Early Retirement, the Bank will make a series of payments to the Executive, each such payment to be equal to the Executive’s Early Retirement Benefit. The first such payment shall be made on the Executive’s Early Retirement Date and the remaining payments shall be made on the first day of each succeeding month until 240 total payments have been made. If an Executive dies before receiving all of the payments due to him or her, then the remaining payments shall be made to the Executive’s Beneficiary. If the Executive’s Beneficiary dies before receiving all the payments due to him or her, then the remaining payments shall be made to the personal representative of the Beneficiary’s estate.

3.3 If an Executive’s employment with the Bank is terminated on account of his or her death and neither such Executive nor his or her beneficiary is entitled to benefits under either Section 3.1 or 3.2, then the Bank will make a payment to such Executive’s Beneficiary, in an amount as established in the Executive’s Participation Agreement.

3.4 If, at the death of the Executive, there is no properly designated living Beneficiary, or, if the Beneficiary is an entity and such entity is not then in existence, then any payments due under this Plan shall be made to the Executive’s estate.

IV. Rights and Duties of Participants and Members

4.1 No Executive or any other person shall have any interest in any fund or in any specific asset or assets of the Bank by reason of this Plan, or for any other reason, or have any right to receive any distributions under the Plan except as and to the extent expressly provided under the Plan. An Executive is a general creditor of the Bank.

4.2 Each Executive shall receive an updated copy of the Plan and shall receive copies of any amendments to the Plan within ten (10) days after their adoption.

4.3 No right of any Executive or any Beneficiary to received payment hereunder shall be subject to alienation, transfer, sale assignment, pledge, attachment, garnishment or

114

encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such payments whether presently or hereafter payable shall be void. No payments under this Plan shall be subject to debts or liabilities of any Executive or Beneficiary.

4.4 Every person receiving or claiming payments under the plan shall be presumed to be mentally competent until the date on which the Bank receives a written notice in a form and manner acceptable to the Bank that such person is incompetent and that a guardian, conservator or other person legally vested with the interest of his or her estate has been appointed. If the guardian or conservator of the state or any person receiving or claiming payments under the Plan is appointed, payments under this Plan may be made to such guardian or conservator provided that the proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Bank. Any payments so made shall be a discharge of any liability of the Bank for such payments.

4.5 Each person entitled to receive a payment under this plan, whether an Executive, Beneficiary, a guardian or otherwise, shall provide the Bank with such information it may from time to time deem necessary or in its best interest in administering the Plan. Any such person shall also furnish the Bank with such documents, evidence, data or other information as the Bank may from time to time deem necessary or advisable.

V. Duties of the Plan Administrator

5.1 The Plan shall be administered by the Plan Administrator, who shall be chosen by and act under the direction of the Compensation Committee of the Board of Directors of the Bank.

5.2 The Plan Administrator may from time to time establish rule and regulations for the administration of the Plan and adopt standard forms for such matters as elections, beneficiary designations and applications for benefits, provided such rules and forms are not inconsistent with the provisions of the Plan. Subject to the direction of the Compensation Committee of the Board of Directors of the Bank, the Secretary of the Bank is hereby designated as the Named Fiduciary and the Chief Operating Officer as the Plan Administrator of this Plan.

5.3 All determinations of the Plan Administrator shall be binding on all parties. In construing or applying the provisions of the Plan, the Bank shall have the right to rely upon a written opinion of legal counsel, which may be independent legal counsel or legal counsel regularly employed by the Bank, whether or not any question or dispute has arisen as to any distribution from the Plan.

5.4 The Plan Administrator of the Bank shall be responsible for maintaining books and records for the Plan.

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VI. Amendment or Termination

6.1 The Bank reserves the right to amend, modify, terminate or discontinue the Plan at any time. However, no such amendment, modification, termination, or discontinuance shall have the effect of reducing the Executive’s benefits below that set forth in Article 3 of the Executive’s Participation Agreement.

VII. Not a Contract of Employment

7.1 This Plan is not a contract of employment between an Executive and the Bank. No provision of this Plan restricts the right of the Bank to discharge an Executive, or restricts the right of an Executive to terminate his or her employment.

VIII. Claims Procedure

8.1 If a benefit under this Plan is not paid to an Executive or Beneficiary and such person believes that he or she is entitled to receive it, a claim shall be made in writing to the Plan Administrator within sixty (60) days from the date payment was to be made. Such claim shall be reviewed by the Plan Administrator and the Bank. If the claim is denied, in full or in part, the Plan Administrator shall provide written notice within ninety (90) days setting forth the specific reasons for denial. The notice shall include specific reference to the provisions of this Plan upon which the denial is based and any additional material or information necessary to perfect the claim, if any. Such written notice shall also indicate the steps to be taken if a review of the denial is desired.

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If the claim is denied and a review is desired, the claimant shall notify the Plan Administrator in writing within sixty (60) days. A claim shall be treated as denied if the Plan Administrator does not take action in the aforesaid ninety (90) day period. In requesting review, the claimant may review this Plan or any documents relating to it and submit any written issues and comments he or she may feel appropriate. In his or her sole discretion the Plan Administrator shall then review the claim and provide a written decision within sixty (60) days. This decision likewise shall state the specific provisions of this Plan on which the decision is base.

IX. Construction and Expense

9.1 Whenever the context so requires, words in the masculine include the feminine and words in the feminine include the masculine and the definition of any term in the singular may include the plural.

9.2 All expenses of administering the Plan shall be paid by the Bank unless the Plan provides to the contrary.

9.3 This Plan shall be construed, administered and governed in all respects under the laws of the State of Georgia.

IN WITNESS WHEREOF, this Plan has been approved by the Board of Directors of the Bank for execution as of the 1^st day of October, 2000.

GEORGIA BANK & TRUST COMPANY OF AUGUSTA

/s/

On Behalf of the Board of Directors

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EX-10.8

EXHIBIT 10.8

STATE OF GEORGIA	)
	)
COUNTY OF RICHMOND	)

EXECUTIVE SALARY CONTINUATION AND PARTICIPATION AGREEMENT

THIS AGREEMENT, made and entered into this 1^st day of October, 2000 (hereinafter called the “Agreement” or “Participation Agreement” in this and simultaneously executed documents) by and between Georgia Bank & Trust Company of Augusta, a banking corporation organized and existing under the laws of the State of Georgia (hereinafter called the “Bank”), and R. Daniel Blanton, (hereinafter called the “Executive”).

WITNESSETH:

WHEREAS, the Executive is in the employ of the Bank serving as its President - Chief Executive Officer, and

WHEREAS, the experience of the Executive, his knowledge of the affairs of the Bank, his reputation and contacts in the industry are so valuable that assurance of his continued services is essential for the future growth and profits of the Bank it is in the best interests of the Bank to arrange terms of continued employment for the Executive so as to reasonably assure him remaining in the Bank’s employment during his lifetime or until the age of retirement; and

WHEREAS, it is the desire of the Bank that the services of the Executive be retained as herein provided; and

WHEREAS, the Bank has established a Non-Qualified Defined Benefit Plan (hereinafter called the “Plan”) as of the first day of October, 2000;

WHEREAS, the Executive accepts the Bank’s invitation to participate in the Plan and hereby acknowledges having read the Plan, understood its terms, understood that benefits will paid pursuant to the Plan only under certain circumstances described therein, understood that the Executive is a general creditor of the Bank, or its successors and assigns, and that the Executive has no interest in specific assets owned by the Bank;

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WHEREAS, the Executive is willing to continue in the employ of the Bank provided the Bank agrees to pay him or his beneficiaries certain benefits in accordance with the terms and conditions hereafter set forth;

NOW, THEREFORE, in consideration of the services to be performed in the future, as well as the mutual promise and covenants herein contained, it is agreed as follows:

ARTICLE 1.

Definitions

1.1. Beneficiary – The term Beneficiary shall mean the person or persons whom the Executive shall designate in writing to receive the benefits provided hereunder and as further designated on the Executive’s Beneficiary Designation shown as Schedule “C” hereto.

1.2. Disability – The term Disability shall mean an inability to substantially perform the usual and regular duties performed by the Executive as an employee of the Bank. Such disability may be caused by either illness or injury and includes mental disabilities. For purposes of this Agreement the determination of the Executive’s disability shall be made solely by the Board of Directors of the Bank without participation by the alleged disabled Executive. Such a determination by the Board of Directors shall be final and conclusive on all parties hereto.

1.3. Named Fiduciary and Plan Administrator – Subject to the direction of the Compensation Committee of the Board of Directors of the Bank, the Secretary of the Bank is hereby designated as the Named Fiduciary and the Chief Operating Officer as the Plan Administrator of this Plan.

ARTICLE 2.

Terms of Employment

2.1. Employment – The Bank agrees to employ the Executive in such capacity as the Bank may from time to time determine. The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of directors of the Bank

2.2. Full Efforts – The Executive agrees to devote his full time and attention exclusively to the business and affairs of the Bank, except during vacation periods, and to use his best efforts to furnish faithful and satisfactory services to the Bank.

2.3. Fringe Benefits – The salary continuation benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these salary continuation benefits.

119

ARTICLE 3.

Benefits

3.1. Retirement – If the Executive shall continue in the employment of the Bank until he attains the age of sixty-five (65), he may retire from active daily employment as of the first day of the month next following attainment of sixty-five (65) or upon such later date as may be mutually agreed upon by the Executive and the Bank. After age fifty-five (55) the Executive may take Early Retirement (as defined in the Plan) and receive a reduced benefit payment based upon the vesting schedule attached hereto as Schedule “A”.

3.2. Payment – The Bank agrees that upon such retirement it will pay to the Executive the annual sum of one hundred twenty thousand dollars ($120,000), payable monthly on the first day of each month following such retirement for a period of two hundred forty (240) months; subject to the conditions and limitations hereinafter set forth.

3.3. Death After Retirement – The Bank agrees that if the Executive shall so retire, but shall die before receiving the full amount of monthly payments to which he is entitled hereunder, it will continue to make such monthly payments to the Executive’s designated Beneficiary for the remaining period. The Executive shall execute a Beneficiary Designation as shown on the attached Schedule “C”, but if a valid Beneficiary Designation is not in effect, the payment shall be made to the Executive’s surviving spouse or, if none, said payments shall be made to the duly qualified personal representative, executor or administrator of his estate. Bank may, at its option, make a lump sum payment based upon the present value of remaining benefit.

3.4. Death Prior to Retirement – In the event the Executive should die while actively employed by the Bank, at any time after the date of this Agreement but prior to him attaining the age of sixty-five (65), the Bank will agree to pay a lump sum per attached Schedule “B” to the Executive’s designated Beneficiary. No death benefit shall be payable hereunder if it is determined that the Executive’s death was caused by suicide or contestable circumstances within 2 years of the date of this agreement.

3.5. Disability Prior to Retirement – In the event the Executive should be come disabled while actively employed by the bank, at any time after the date of this Agreement but prior to him attaining the age of sixty-five (65) years, the Executive will be considered to be fully vested in the amount set forth in Schedule A attached hereto and made a part hereof. Said amount shall be paid to the Executive in a lump sum within three (3) months of the determination of disability. At the Executive’s option said payment may be received over a period not to exceed 60 months. Said payment shall be in lieu of any other retirement or death benefit under this Agreement.

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ARTICLE 4.

Termination

4.1. Termination of Employment – The Bank reserves the right to terminate the employment of the Executive at any time prior to retirement. In the event that the employment of the Executive shall terminate prior to him attaining age sixty-five (65), other than by reason of his disability or his death, the Executive shall be entitled to the following benefits under the following circumstances:

4.1.1. If the Executive is terminated with Reasonable Cause, Executive shall receive no benefit under this Agreement and shall lose any right to any benefit vested at the time of termination.

4.1.2. If the Executive voluntarily terminates employment with the Bank prior to the age of fifty-five (55), Executive shall receive no benefit under this Agreement and shall lose any right to any benefit vested at the time of termination. If the Executive voluntarily terminates employment with the Bank prior to retirement after Executive has attained the age of fifty-five (55) and Executive has been employed by the Bank for a period of at least six (6) continuous years from the date of this Agreement, the Executive will be considered vested in the amount set out in Section 3.2 by the percentage set out in Schedule A attached hereto and made a part hereof. In the event of Executive’s voluntary termination as described herein, the Bank will pay such amount to the Executive over the time period and subject to the conditions applicable to Section 3.2, provided however, the Bank shall have the right to prepay this obligation in full.

4.1.3. Anything hereinabove to the contrary notwithstanding, if the Bank terminates the Executive’s employment involuntarily for any reason other than “reasonable cause,” defined below, or if the Bank undertakes any action or course of action designed to induce the Executive to terminate his employment (e.g., reducing the Executive’s title or responsibilities, reducing the Executive’s compensation disproportionately as compared to reductions for other Bank executives), the Bank shall pay to the Executive the retirement benefits described in 3.2. The benefits shall be paid commencing on the Executive’s 65^th birthday. “Reasonable cause” means the Executive’s gross negligence, fraud or conviction for any willful violation of any law or significant regulatory policy, committed in connection with the Executive’s employment and

121

resulting in a material adverse effect on the Bank. “Reasonable cause” shall not include ordinary negligence or failure to act, whether due to an error in judgment or otherwise, if the Executive has exercised substantial efforts in good faith to perform the duties reasonably assigned or appropriate to the position.

4.1.4. Anything hereinabove to the contrary notwithstanding, if the Executive is not fully vested in the amount set forth in Schedule A, he or she shall become fully vested in the benefit payment previously described in Section 3.2 in the event of a transfer in the controlling ownership or sale of the Bank or its parent. This benefit shall remain an obligation of the Bank and its successors and shall be fully funded to age 65 regardless of a change of control or continued employment of the Executive after the change of control.

4.2. Termination of Agreement by Reason of Changes in Law – The Bank is entering into this Agreement upon the assumption that certain existing tax laws will continue in effect in substantially their current form. In the event of any changes in such federal laws, the Bank shall have an option to terminate or modify this Agreement. Provided, however, that the Executive shall be entitled to at least the same amounts as he would have been entitled to under Article 3 hereof. The payment of said amount shall be made upon such terms and conditions and, at such time as the Bank shall determine, but in no event commencing no later than age sixty-five (65).

ARTICLE 5.

Miscellaneous

5.1. Nonassignability – Neither the Executive, his spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, owned by the Executive or his beneficiary or any of them, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise.

5.2. Claims Procedure – The Bank shall make all determinations as to rights to benefits under this Agreement. Any decision by the Bank denying a claim by the Executive or his beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed to the Executive or such beneficiary. Such decision shall set forth the specific reasons for the denial, written to the best of the Corporation’s ability in a manner calculated to be understood without legal or actuarial counsel. In addition, the Bank shall provide a reasonable opportunity to the Executive or such beneficiary for full and fair review of the decision denying such claim.

122

5.3. Unsecured General Creditor – The Executive and his beneficiary shall have no legal right or equitable rights, interests, or claims in or to any property or assets of the Bank. No assets of the Bank shall be held under any trust for the benefit of the Executive or his beneficiaries or held in any way as security for the fulfilling of the obligations of the Bank under this plan. All of the Bank’s assets shall be and remain the general, unpledged, unrestricted assets of the Bank. The Bank’s obligation under this plan shall be that of an unfunded and unsecured promise by the Bank to pay money in the future. Executives and their beneficiaries shall be unsecured general creditors with respect to any benefits hereunder.

5.4. Reorganization – The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another Bank, firm, or person unless and until such succeeding or continuing Bank, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term “Bank” as used in this Agreement shall be deemed to refer to such successor or survivor Bank.

5.5. Binding Effect – This Agreement shall be binding upon and inure to the benefits of the Executive and his personal representatives, and the Bank and any successor organization, which shall succeed to substantially all of its assets and business.

5.6. Not a Contract of Employment – This agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate his employment.

ARTICLE 6.

Participation in Plan

Acceptance of Invitation to Participate in the Plan - The Executive hereby agrees to accept the invitation of the Bank to participate in the Plan, subject to its terms and conditions as set forth therein.

IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly executed by its proper officer and the Executive has hereunto set his hand at Augusta, Georgia, the day and year first above written.

Georgia Bank & Trust Company of Augusta
By:	/s/ Robert W. Pollard, Jr.
Its:	Vice Chairman of the Board
EXECUTIVE:
	/s/ R. Daniel Blanton

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SCHEDULE A

Plan Year	Amount in Which Vesting Occurs
1	0%
2	0%
3	0%
4	0%
5	0%
6	60%
7	70%
8	80%
9	90%
10	100%

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SCHEDULE B

Lump Sum Death Benefit

R. Daniel Blanton

Year	Benefit
1	$   900,000
2	$   950,000
3	$   950,000
4	$1,000,000
5	$1,050,000
6	$1,000,000
7	$1,150,000
8	$1,200,000
9	$1,250,000
10	$1,300,000
11	$1,350,000
12	$1,400,000
13	$1,500,000
14	$1,550,000
15	$1,600,000
16	$1,700,000

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SCHEDULE “C”

BENEFICIARY DESIGNATION NOTICE

FOR

EXECUTIVE SALARY CONTINUATION AND

PARTICIPATION AGREEMENT

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

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

Primary Beneficiary:

Name Social Security Number Relationship

Secondary (Contingent) Beneficiary:

Name Social Security Number Relationship

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

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

Date of Designation Signature of Executive

126

EX-10.9

EXHIBIT 10.9

STATE OF GEORGIA	)
	)
COUNTY OF RICHMOND	)

EXECUTIVE SALARY CONTINUATION AND PARTICIPATION AGREEMENT

THIS AGREEMENT, made and entered into this 1^st day of October, 2000 (hereinafter called the “Agreement” or “Participation Agreement” in this and simultaneously executed documents) by and between Georgia Bank & Trust Company of Augusta, a banking corporation organized and existing under the laws of the State of Georgia (hereinafter called the “Bank”), and Ronald L. Thigpen, (hereinafter called the “Executive”).

WITNESSETH:

WHEREAS, the Executive is in the employ of the Bank serving as its Executive Vice President & Chief Operating Officer, and

WHEREAS, the experience of the Executive, his knowledge of the affairs of the Bank, his reputation and contacts in the industry are so valuable that assurance of his continued services is essential for the future growth and profits of the Bank it is in the best interests of the Bank to arrange terms of continued employment for the Executive so as to reasonably assure him remaining in the Bank’s employment during his lifetime or until the age of retirement; and

WHEREAS, it is the desire of the Bank that the services of the Executive be retained as herein provided; and

WHEREAS, the Bank has established a Non-Qualified Defined Benefit Plan (hereinafter called the “Plan”) as of the first day of October, 2000;

WHEREAS, the Executive accepts the Bank’s invitation to participate in the Plan and hereby acknowledges having read the Plan, understood its terms, understood that benefits will paid pursuant to the Plan only under certain circumstances described therein, understood that the Executive is a general creditor of the Bank, or its successors and assigns, and that the Executive has no interest in specific assets owned by the Bank;

WHEREAS, the Executive is willing to continue in the employ of the Bank provided the Bank agrees to pay him or his beneficiaries certain benefits in accordance with the terms and conditions hereafter set forth;

127

NOW, THEREFORE, in consideration of the services to be performed in the future, as well as the mutual promise and covenants herein contained, it is agreed as follows:

ARTICLE 1.

Definitions

1.1. Beneficiary – The term Beneficiary shall mean the person or persons whom the Executive shall designate in writing to receive the benefits provided hereunder and as further designated on the Executive’s Beneficiary Designation shown as Schedule “C” hereto.

1.2. Disability – The term Disability shall mean an inability to substantially perform the usual and regular duties performed by the Executive as an employee of the Bank. Such disability may be caused by either illness or injury and includes mental disabilities. For purposes of this Agreement the determination of the Executive’s disability shall be made solely by the Board of Directors of the Bank without participation by the alleged disabled Executive. Such a determination by the Board of Directors shall be final and conclusive on all parties hereto.

1.3. Named Fiduciary and Plan Administrator – Subject to the direction of the Compensation Committee of the Board of Directors of the Bank, the Secretary of the Bank is hereby designated as the Named Fiduciary and the Chief Operating Officer as the Plan Administrator of this Plan.

ARTICLE 2.

Terms of Employment

2.1. Employment – The Bank agrees to employ the Executive in such capacity as the Bank may from time to time determine. The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of directors of the Bank

2.2. Full Efforts – The Executive agrees to devote his full time and attention exclusively to the business and affairs of the Bank, except during vacation periods, and to use his best efforts to furnish faithful and satisfactory services to the Bank.

2.3. Fringe Benefits – The salary continuation benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these salary continuation benefits.

128

ARTICLE 3.

Benefits

3.1. Retirement – If the Executive shall continue in the employment of the Bank until he attains the age of sixty-five (65), he may retire from active daily employment as of the first day of the month next following attainment of sixty-five (65) or upon such later date as may be mutually agreed upon by the Executive and the Bank. After age fifty-five (55) the Executive may take Early Retirement (as defined in the Plan) and receive a reduced benefit payment based upon the vesting schedule attached hereto as Schedule “A”.

3.2. Payment – The Bank agrees that upon such retirement it will pay to the Executive the annual sum of one hundred twenty thousand dollars ($120,000), payable monthly on the first day of each month following such retirement for a period of two hundred forty (240) months; subject to the conditions and limitations hereinafter set forth.

3.3. Death After Retirement – The Bank agrees that if the Executive shall so retire, but shall die before receiving the full amount of monthly payments to which he is entitled hereunder, it will continue to make such monthly payments to the Executive’s designated Beneficiary for the remaining period. The Executive shall execute a Beneficiary Designation as shown on the attached Schedule “C”, but if a valid Beneficiary Designation is not in effect, the payment shall be made to the Executive’s surviving spouse or, if none, said payments shall be made to the duly qualified personal representative, executor or administrator of his estate. Bank may, at its option, make a lump sum payment based upon the present value of remaining benefit.

3.4. Death Prior to Retirement – In the event the Executive should die while actively employed by the Bank, at any time after the date of this Agreement but prior to him attaining the age of sixty-five (65), the Bank will agree to pay a lump sum per attached Schedule “B” to the Executive’s designated Beneficiary. No death benefit shall be payable hereunder if it is determined that the Executive’s death was caused by suicide or contestable circumstances within 2 years of the date of this agreement.

3.5. Disability Prior to Retirement – In the event the Executive should be come disabled while actively employed by the bank, at any time after the date of this Agreement but prior to him attaining the age of sixty-five (65) years, the Executive will be considered to be fully vested in the amount set forth in Schedule A attached hereto and made a part hereof. Said amount shall be paid to the Executive in a lump sum within three (3) months of the determination of disability. At the Executive’s option said payment may be received over a period not to exceed 60 months. Said payment shall be in lieu of any other retirement or death benefit under this Agreement.

129

ARTICLE 4.

Termination

4.1. Termination of Employment – The Bank reserves the right to terminate the employment of the Executive at any time prior to retirement. In the event that the employment of the Executive shall terminate prior to him attaining age sixty-five (65), other than by reason of his disability or his death, the Executive shall be entitled to the following benefits under the following circumstances:

4.1.1. If the Executive is terminated with Reasonable Cause, Executive shall receive no benefit under this Agreement and shall lose any right to any benefit vested at the time of termination.

4.1.2. If the Executive voluntarily terminates employment with the Bank prior to the age of fifty-five (55), Executive shall receive no benefit under this Agreement and shall lose any right to any benefit vested at the time of termination. If the Executive voluntarily terminates employment with the Bank prior to retirement after Executive has attained the age of fifty-five (55) and Executive has been employed by the Bank for a period of at least six (6) continuous years from the date of this Agreement, the Executive will be considered vested in the amount set out in Section 3.2 by the percentage set out in Schedule A attached hereto and made a part hereof. In the event of Executive’s voluntary termination as described herein, the Bank will pay such amount to the Executive over the time period and subject to the conditions applicable to Section 3.2, provided however, the Bank shall have the right to prepay this obligation in full.

4.1.3. Anything hereinabove to the contrary notwithstanding, if the Bank terminates the Executive’s employment involuntarily for any reason other than “reasonable cause,” defined below, or if the Bank undertakes any action or course of action designed to induce the Executive to terminate his employment (e.g., reducing the Executive’s title or responsibilities, reducing the Executive’s compensation disproportionately as compared to reductions for other Bank executives), the Bank shall pay to the Executive the retirement benefits described in 3.2. The benefits shall be paid commencing on the Executive’s 65^th birthday. “Reasonable cause” means the Executive’s gross negligence, fraud or conviction for any willful violation of any law or significant regulatory policy, committed in connection with the Executive’s employment and

130

resulting in a material adverse effect on the Bank. “Reasonable cause” shall not include ordinary negligence or failure to act, whether due to an error in judgment or otherwise, if the Executive has exercised substantial efforts in good faith to perform the duties reasonably assigned or appropriate to the position.

4.1.4. Anything hereinabove to the contrary notwithstanding, if the Executive is not fully vested in the amount set forth in Schedule A, he or she shall become fully vested in the benefit payment previously described in Section 3.2 in the event of a transfer in the controlling ownership or sale of the Bank or its parent. This benefit shall remain an obligation of the Bank and its successors and shall be fully funded to age 65 regardless of a change of control or continued employment of the Executive after the change of control.

4.2. Termination of Agreement by Reason of Changes in Law – The Bank is entering into this Agreement upon the assumption that certain existing tax laws will continue in effect in substantially their current form. In the event of any changes in such federal laws, the Bank shall have an option to terminate or modify this Agreement. Provided, however, that the Executive shall be entitled to at least the same amounts as he would have been entitled to under Article 3 hereof. The payment of said amount shall be made upon such terms and conditions and, at such time as the Bank shall determine, but in no event commencing no later than age sixty-five (65).

ARTICLE 5.

Miscellaneous

5.1. Nonassignability – Neither the Executive, his spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, owned by the Executive or his beneficiary or any of them, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise.

5.2. Claims Procedure – The Bank shall make all determinations as to rights to benefits under this Agreement. Any decision by the Bank denying a claim by the Executive or his beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed to the Executive or such beneficiary. Such decision shall set forth the specific reasons for the denial, written to the best of the Corporation’s ability in a manner calculated to be understood without legal or actuarial counsel. In addition, the Bank shall provide a reasonable opportunity to the Executive or such beneficiary for full and fair review of the decision denying such claim.

131

5.3. Unsecured General Creditor – The Executive and his beneficiary shall have no legal right or equitable rights, interests, or claims in or to any property or assets of the Bank. No assets of the Bank shall be held under any trust for the benefit of the Executive or his beneficiaries or held in any way as security for the fulfilling of the obligations of the Bank under this plan. All of the Bank’s assets shall be and remain the general, unpledged, unrestricted assets of the Bank. The Bank’s obligation under this plan shall be that of an unfunded and unsecured promise by the Bank to pay money in the future. Executives and their beneficiaries shall be unsecured general creditors with respect to any benefits hereunder.

5.4. Reorganization – The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another Bank, firm, or person unless and until such succeeding or continuing Bank, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term “Bank” as used in this Agreement shall be deemed to refer to such successor or survivor Bank.

5.5. Binding Effect – This Agreement shall be binding upon and inure to the benefits of the Executive and his personal representatives, and the Bank and any successor organization, which shall succeed to substantially all of its assets and business.

5.6. Not a Contract of Employment – This agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate his employment.

ARTICLE 6.

Participation in Plan

Acceptance of Invitation to Participate in the Plan - The Executive hereby agrees to accept the invitation of the Bank to participate in the Plan, subject to its terms and conditions as set forth therein.

IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly executed by its proper officer and the Executive has hereunto set his hand at Augusta, Georgia, the day and year first above written.

Georgia Bank & Trust Company of Augusta
By:	/s/ Robert W. Pollard, Jr.
Its:	Vice Chairman of the Board
EXECUTIVE:
	/s/ Ronald L. Thigpen

132

SCHEDULE A

Plan Year	Amount in Which Vesting Occurs
1	0%
2	0%
3	0%
4	0%
5	0%
6	60%
7	70%
8	80%
9	90%
10	100%

133

SCHEDULE B

Lump Sum Death Benefit

Ronald L. Thigpen

Year	Benefit
1	$   900,000
2	$   950,000
3	$   950,000
4	$1,000,000
5	$1,050,000
6	$1,000,000
7	$1,150,000
8	$1,200,000
9	$1,250,000
10	$1,300,000
11	$1,350,000
12	$1,400,000
13	$1,500,000
14	$1,550,000
15	$1,600,000
16	$1,700,000

134

SCHEDULE “C”

BENEFICIARY DESIGNATION NOTICE

FOR

EXECUTIVE SALARY CONTINUATION AND

PARTICIPATION AGREEMENT

To the Plan Administrator of the Georgia Bank Company & Trust Non-Qualified Defined Benefit Plan for the benefit of Ronald L. Thigpen:

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

Primary Beneficiary:

Name Social Security Number Relationship

Secondary (Contingent) Beneficiary:

Name Social Security Number Relationship

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

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

Date of Designation Signature of Executive

135

EX-10.10

EXHIBIT 10.10

STATE OF GEORGIA	)
	)
COUNTY OF RICHMOND	)

EXECUTIVE SALARY CONTINUATION AND PARTICIPATION AGREEMENT

THIS AGREEMENT, made and entered into this 15^th day of October, 2003 (hereinafter called the “Agreement” or “Participation Agreement” in this document) by and between Georgia Bank & Trust Company of Augusta, a banking corporation organized and existing under the laws of the State of Georgia (hereinafter called the “Bank”), and R. Daniel Blanton, (hereinafter called the “Executive”).

WITNESSETH:

WHEREAS, the Executive is in the employ of the Bank serving as an executive officer, and

WHEREAS, the experience of the Executive, his knowledge of the affairs of the Bank, his reputation and contacts in the industry are so valuable that assurance of his continued services is essential for the future growth and profits of the Bank it is in the best interests of the Bank to arrange terms of continued employment for the Executive so as to reasonably assure him remaining in the Bank’s employment during his lifetime or until the age of retirement; and

WHEREAS, it is the desire of the Bank that the services of the Executive be retained as herein provided; and

WHEREAS, the Bank has established a Non-Qualified Defined Benefit Plan (hereinafter called the “Plan”) as of the first day of October, 2000;

WHEREAS, the Executive accepts the Bank’s invitation to participate in the Plan and hereby acknowledges having read the Plan, understood its terms, understood that benefits will be paid pursuant to the Plan only under certain circumstances described therein, understood that the Executive is a general creditor of the Bank, or its successors and assigns, and that the Executive has no interest in specific assets owned by the Bank;

WHEREAS, the Executive is willing to continue in the employ of the Bank provided the Bank agrees to pay him or his beneficiaries certain benefits in accordance with the terms and conditions hereafter set forth;

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NOW, THEREFORE, in consideration of the services to be performed in the future, as well as the mutual promise and covenants herein contained, it is agreed as follows:

ARTICLE 1.

Definitions

1.1. Beneficiary – The term Beneficiary shall mean the person or persons whom the Executive shall designate in writing to receive the benefits provided hereunder and as further designated on the Executive’s Beneficiary Designation shown as Schedule “C” hereto.

1.2. Disability – The term Disability shall mean an inability to substantially perform the usual and regular duties performed by the Executive as an employee of the Bank. Such disability may be caused by either illness or injury and includes mental disabilities. For purposes of this Agreement the determination of the Executive’s disability shall be made solely by the Board of Directors of the Bank without participation by the alleged disabled Executive. Such a determination by the Board of Directors shall be final and conclusive on all parties hereto.

1.3. Named Fiduciary and Plan Administrator – Subject to the direction of the Compensation Committee of the Board of Directors of the Bank, the Secretary of the Bank is hereby designated as the Named Fiduciary and the Chief Operating Officer as the Plan Administrator of this Plan.

ARTICLE 2.

Terms of Employment

2.1. Employment – The Bank agrees to employ the Executive in such capacity as the Bank may from time to time determine. The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of directors of the Bank.

2.2. Full Efforts – The Executive agrees to devote his full time and attention exclusively to the business and affairs of the Bank, except during vacation periods, and to use his best efforts to furnish faithful and satisfactory services to the Bank.

2.3. Fringe Benefits – The salary continuation benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these salary continuation benefits.

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ARTICLE 3.

Benefits

3.1. Retirement – If the Executive shall continue in the employment of the Bank until he attains the age of sixty-five (65), he may retire from active daily employment as of the first day of the month next following attainment of sixty-five (65) or upon such later date as may be mutually agreed upon by the Executive and the Bank. After age fifty-five (55) the Executive may take Early Retirement (as defined in the Plan) and receive a reduced benefit payment based upon the vesting schedule attached hereto as Schedule “A”.

3.2. Payment – The Bank agrees that upon such retirement it will pay to the Executive the annual sum of sixty thousand dollars ($60,000), payable monthly on the first day of each month following such retirement for a period of two hundred forty (240) months; subject to the conditions and limitations hereinafter set forth.

3.3. Death After Retirement – The Bank agrees that if the Executive shall so retire or if the Executive should become disabled in accordance with Section 3.5, but shall die before receiving the full amount of monthly payments to which he is entitled hereunder, it will continue to make such monthly payments to the Executive’s designated Beneficiary for the remaining period. The Executive shall execute a Beneficiary Designation as shown on the attached Schedule “C”, but if a valid Beneficiary Designation is not in effect, the payment shall be made to the Executive’s surviving spouse or, if none, said payments shall be made to the duly qualified personal representative, executor or administrator of his estate. Bank may, at its option, make a lump sum payment based upon the present value of remaining benefit.

3.4. [Intentionally Omitted]

3.5. Death or Disability Prior to Retirement – In the event the Executive should die or become disabled while actively employed by the bank, at any time after the date of this Agreement but prior to him attaining the age of sixty-five (65) years, the Executive will be considered to be fully vested in the annual benefit amount set forth in Schedule “A” corresponding with the year in which the death occurred or the Disability commenced, payable monthly for 240 months to Executive (in the case of Disability) or to the Executive’s beneficiary or estate as contemplated by Section 3.3 above (in the case of death) commencing sixty (60) days after death or the determination of Disability. Bank may, at its option, make a lump sum payment based upon the present value of remaining benefit.

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ARTICLE 4.

Termination

4.1. Termination of Employment – The Bank reserves the right to terminate the employment of the Executive at any time prior to retirement. In the event that the employment of the Executive shall terminate prior to him attaining age sixty-five (65), other than by reason of his disability or his death, the Executive shall be entitled to the following benefits under the following circumstances:

4.1.1. If the Executive is terminated with Reasonable Cause, Executive shall receive no benefit under this Agreement and shall lose any right to any benefit vested at the time of termination.

4.1.2. If the Executive voluntarily terminates employment with the Bank prior to the age of fifty-five (55), Executive shall receive no benefit under this Agreement and shall lose any right to any benefit vested at the time of termination. If the Executive voluntarily terminates employment with the Bank prior to retirement after Executive has attained the age of fifty-five (55) and Executive has been employed by the Bank for a period of at least one (1) year from the date of this Agreement, the Executive will be considered vested in the annual benefit amount set forth in Schedule “A” attached hereto and made a part hereof corresponding with the year in which the Executive’s employment is terminated. In the event of Executive’s voluntary termination as described herein, the Bank will pay such amount to the Executive over the time period and subject to the conditions applicable to Section 3.2, provided however, the Bank shall have the right to prepay this obligation in full.

4.1.3. Anything hereinabove to the contrary notwithstanding, if the Bank terminates the Executive’s employment involuntarily for any reason other than “Reasonable cause,” defined below, or if the Bank undertakes any action or course of action designed to induce the Executive to terminate his employment (e.g., reducing the Executive’s title or responsibilities, reducing the Executive’s compensation disproportionately as compared to reductions for other Bank executives), the Bank shall pay to the Executive the retirement benefits described in 3.2. The benefits shall be paid commencing on the Executive’s 65^th birthday. “Reasonable cause” means the Executive’s gross negligence, fraud or conviction for any willful violation of any law or significant regulatory policy, committed in connection with the Executive’s employment and resulting in a material adverse effect on the Bank. “Reasonable cause” shall not include ordinary negligence or failure to act, whether due to an error in judgment or otherwise, if the Executive has exercised substantial efforts in good faith to perform the duties reasonably assigned or appropriate to the position.

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4.1.4. Anything hereinabove to the contrary notwithstanding, if the Executive is not fully vested in the amount set forth in Schedule “A”, he or she shall become fully vested in the benefit payment previously described in Section 3.2 in the event of a transfer in the controlling ownership or sale of the Bank or its parent (a “change of control”). This benefit shall remain an obligation of the Bank and its successors regardless of a change of control or continue employment of the Executive after the change of control. From and after the occurrence of a change of control, the Bank shall pay all reasonable legal fees and expenses incurred by the Executive seeking to obtain or enforce any right or benefit provided by this Agreement promptly from time to time, at the Executive’s request, as such fees and expenses are incurred; provided, however, that the Executive shall be required to reimburse the Bank for any such fees and expenses if a court or any other adjudicator agreed to by the parties determines that the Executive’s claim is without substantial merit. The Executive shall not be requires to pay any legal fees or expenses incurred by the Bank in connection with any claim or controversy arising out of or relating to this Agreement, or any breach thereof.

4.2. Termination of Agreement by Reason of Changes in Law – The Bank is entering into this Agreement upon the assumption that certain existing tax laws will continue in effect in substantially their current form. In the event of any changes in such federal laws, the Bank shall have an option to terminate or modify this Agreement. Provided, however, that the Executive shall be entitled to at least the same amounts as he would have been entitled to under Article 3 hereof. The payment of said amount shall be made upon such terms and conditions and, at such time as the Bank shall determine, but in no event commencing no later than age sixty-five (65).

4.3. Competition with Bank – Anything in this Agreement to the contrary notwithstanding (but subject to the following proviso), if the Executive, directly or indirectly, at any time after the execution of this Agreement, owns, manages, operates, joins, controls or participates in or is employed by or gives consultation or advice to or extends credit to (other than through insured deposits) or otherwise is connected in any manner, directly or indirectly with, any bank, financial institution, firm, person, sole proprietorship, partnership, corporation, company or other entity (other than the Bank or entities controlled or under common control with the Bank) that provides financial services, including, without limitation, retail or commercial lending services, and has an office within 50 miles or any banking location of the Bank or any of its affiliates, then the Bank shall have the option, in its sole and

140

absolute discretion, to terminate the Executive’s right to receive any benefits under this Agreement (and, to the extent Executive may already have begun receiving benefits hereunder, terminate Executive’s right to receive any further benefits hereunder); provided, however, that (i) this Section 4.3 shall be of no further force and effect after a change of control occurs, (ii) this Section 4.3 shall not apply if Executive’s employment with Bank is terminated by the Bank other than for reasonable cause prior to age 65 of the Executive and (iii) nothing in this Section 4.3 shall prohibit the Executive from owning less than one percent (1%) of the outstanding shares of any company whose common stock is publicly traded.

ARTICLE 5.

Miscellaneous

5.1. Nonassignability – Neither the Executive, his spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, owned by the Executive or his beneficiary or any of them, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise.

5.2. Claims Procedure – The Bank shall make all determinations as to rights to benefits under this Agreement. Any decision by the Bank denying a claim by the Executive or his beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed to the Executive or such beneficiary. Such decision shall set forth the specific reasons for the denial, written to the best of the Corporation’s ability in a manner calculated to be understood without legal or actuarial counsel. In addition, the Bank shall provide a reasonable opportunity to the Executive or such beneficiary for full and fair review of the decision denying such claim.

5.3. Unsecured General Creditor – The Executive and his beneficiary shall have no legal right or equitable rights, interests, or claims in or to any property or assets of the Bank. No assets of the Bank shall be held under any trust for the benefit of the Executive or his beneficiaries or held in any way as security for the fulfilling of the obligations of the Bank under this plan. All of the Bank’s assets shall be and remain the general, unpledged, unrestricted assets of the Bank. The Bank’s obligation under this plan shall be that of an unfunded and unsecured promise by the Bank to pay money in the future. Executives and their beneficiaries shall be unsecured general creditors with respect to any benefits hereunder.

5.4. Reorganization – The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another Bank, firm, or person unless and until such succeeding or continuing Bank, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term “Bank” as used in this Agreement shall be deemed to refer to such successor or survivor Bank.

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5.5. Binding Effect – This Agreement shall be binding upon and inure to the benefits of the Executive and his personal representatives, and the Bank and any successor organization, which shall succeed to substantially all of its assets and business.

5.6. Not a Contract of Employment – This agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate his employment.

ARTICLE 6.

Participation in Plan

Acceptance of Invitation to Participate in the Plan - The Executive hereby agrees to accept the invitation of the Bank to participate in the Plan, subject to its terms and conditions as set forth therein.

IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly executed by its proper officer and the Executive has hereunto set his hand at Augusta, Georgia, the day and year first above written.

Georgia Bank & Trust Company of Augusta
By:	/s/ E. G. Meybohm
Its:	Chairman of the Board
EXECUTIVE:
	/s/ R. Daniel Blanton

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SCHEDULE “A”

Year	Vested Annual Benefit (payable monthly)
1	$  6,000
2	$12,000
3	$18,000
4	$24,000
5	$30,000
6	$36,000
7	$42,000
8	$48,000
9	$54,000
10	$60,000

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SCHEDULE B

[INTENTIONALLY OMITTED]

144

SCHEDULE “C”

BENEFICIARY DESIGNATION NOTICE

FOR

EXECUTIVE SALARY CONTINUATION AND

PARTICIPATION AGREEMENT

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

Pursuant to the Provisions of my Executive Salary Continuation and Participation Agreement with Georgia Bank & Trust Company of Augusta dated October 15, 2003 permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death:

Primary Beneficiary:

Name Social Security Number Relationship

Secondary (Contingent) Beneficiary:

Name Social Security Number Relationship

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

The Plan Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Plan Administrator shall pay all amounts in accordance with the terms of the Executive Salary Continuation and Participation Agreement dated October 15, 2003. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the remaining unpaid benefit, payable according to the terms of the Agreement, shall be payable to the personal representatives of the estate of said deceased beneficiary, who survive me, but die prior to receiving the total benefit.

Date of Designation Signature of Executive

145

EX-10.11

EXHIBIT 10.11

STATE OF GEORGIA	)
	)
COUNTY OF RICHMOND	)

EXECUTIVE SALARY CONTINUATION AND PARTICIPATION AGREEMENT

THIS AGREEMENT, made and entered into this 15^th day of October, 2003 (hereinafter called the “Agreement” or “Participation Agreement” in this document) by and between Georgia Bank & Trust Company of Augusta, a banking corporation organized and existing under the laws of the State of Georgia (hereinafter called the “Bank”), and Ronald L. Thigpen, (hereinafter called the “Executive”).

WITNESSETH:

WHEREAS, the Executive is in the employ of the Bank serving as an executive officer, and

WHEREAS, the experience of the Executive, his knowledge of the affairs of the Bank, his reputation and contacts in the industry are so valuable that assurance of his continued services is essential for the future growth and profits of the Bank it is in the best interests of the Bank to arrange terms of continued employment for the Executive so as to reasonably assure him remaining in the Bank’s employment during his lifetime or until the age of retirement; and

WHEREAS, it is the desire of the Bank that the services of the Executive be retained as herein provided; and

WHEREAS, the Bank has established a Non-Qualified Defined Benefit Plan (hereinafter called the “Plan”) as of the first day of October, 2000;

WHEREAS, the Executive accepts the Bank’s invitation to participate in the Plan and hereby acknowledges having read the Plan, understood its terms, understood that benefits will be paid pursuant to the Plan only under certain circumstances described therein, understood that the Executive is a general creditor of the Bank, or its successors and assigns, and that the Executive has no interest in specific assets owned by the Bank;

WHEREAS, the Executive is willing to continue in the employ of the Bank provided the Bank agrees to pay him or his beneficiaries certain benefits in accordance with the terms and conditions hereafter set forth;

146

NOW, THEREFORE, in consideration of the services to be performed in the future, as well as the mutual promise and covenants herein contained, it is agreed as follows:

ARTICLE 1.

Definitions

1.1. Beneficiary – The term Beneficiary shall mean the person or persons whom the Executive shall designate in writing to receive the benefits provided hereunder and as further designated on the Executive’s Beneficiary Designation shown as Schedule “C” hereto.

1.2. Disability – The term Disability shall mean an inability to substantially perform the usual and regular duties performed by the Executive as an employee of the Bank. Such disability may be caused by either illness or injury and includes mental disabilities. For purposes of this Agreement the determination of the Executive’s disability shall be made solely by the Board of Directors of the Bank without participation by the alleged disabled Executive. Such a determination by the Board of Directors shall be final and conclusive on all parties hereto.

1.3. Named Fiduciary and Plan Administrator – Subject to the direction of the Compensation Committee of the Board of Directors of the Bank, the Secretary of the Bank is hereby designated as the Named Fiduciary and the Chief Operating Officer as the Plan Administrator of this Plan.

ARTICLE 2.

Terms of Employment

2.1. Employment – The Bank agrees to employ the Executive in such capacity as the Bank may from time to time determine. The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of directors of the Bank.

2.2. Full Efforts – The Executive agrees to devote his full time and attention exclusively to the business and affairs of the Bank, except during vacation periods, and to use his best efforts to furnish faithful and satisfactory services to the Bank.

2.3. Fringe Benefits – The salary continuation benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these salary continuation benefits.

147

ARTICLE 3.

Benefits

3.1. Retirement – If the Executive shall continue in the employment of the Bank until he attains the age of sixty-five (65), he may retire from active daily employment as of the first day of the month next following attainment of sixty-five (65) or upon such later date as may be mutually agreed upon by the Executive and the Bank. After age fifty-five (55) the Executive may take Early Retirement (as defined in the Plan) and receive a reduced benefit payment based upon the vesting schedule attached hereto as Schedule “A”.

3.2. Payment – The Bank agrees that upon such retirement it will pay to the Executive the annual sum of sixty thousand dollars ($60,000), payable monthly on the first day of each month following such retirement for a period of two hundred forty (240) months; subject to the conditions and limitations hereinafter set forth.

3.3. Death After Retirement – The Bank agrees that if the Executive shall so retire or if the Executive should become disabled in accordance with Section 3.5, but shall die before receiving the full amount of monthly payments to which he is entitled hereunder, it will continue to make such monthly payments to the Executive’s designated Beneficiary for the remaining period. The Executive shall execute a Beneficiary Designation as shown on the attached Schedule “C”, but if a valid Beneficiary Designation is not in effect, the payment shall be made to the Executive’s surviving spouse or, if none, said payments shall be made to the duly qualified personal representative, executor or administrator of his estate. Bank may, at its option, make a lump sum payment based upon the present value of remaining benefit.

3.4. [Intentionally Omitted]

3.5. Death or Disability Prior to Retirement – In the event the Executive should die or become disabled while actively employed by the bank, at any time after the date of this Agreement but prior to him attaining the age of sixty-five (65) years, the Executive will be considered to be fully vested in the annual benefit amount set forth in Schedule “A” corresponding with the year in which the death occurred or the Disability commenced, payable monthly for 240 months to Executive (in the case of Disability) or to the Executive’s beneficiary or estate as contemplated by Section 3.3 above (in the case of death) commencing sixty (60) days after death or the determination of Disability. Bank may, at its option, make a lump sum payment based upon the present value of remaining benefit.

148

ARTICLE 4.

Termination

4.1. Termination of Employment – The Bank reserves the right to terminate the employment of the Executive at any time prior to retirement. In the event that the employment of the Executive shall terminate prior to him attaining age sixty-five (65), other than by reason of his disability or his death, the Executive shall be entitled to the following benefits under the following circumstances:

4.1.1. If the Executive is terminated with Reasonable Cause, Executive shall receive no benefit under this Agreement and shall lose any right to any benefit vested at the time of termination.

4.1.2. If the Executive voluntarily terminates employment with the Bank prior to the age of fifty-five (55), Executive shall receive no benefit under this Agreement and shall lose any right to any benefit vested at the time of termination. If the Executive voluntarily terminates employment with the Bank prior to retirement after Executive has attained the age of fifty-five (55) and Executive has been employed by the Bank for a period of at least one (1) year from the date of this Agreement, the Executive will be considered vested in the annual benefit amount set forth in Schedule “A” attached hereto and made a part hereof corresponding with the year in which the Executive’s employment is terminated. In the event of Executive’s voluntary termination as described herein, the Bank will pay such amount to the Executive over the time period and subject to the conditions applicable to Section 3.2, provided however, the Bank shall have the right to prepay this obligation in full.

4.1.3. Anything hereinabove to the contrary notwithstanding, if the Bank terminates the Executive’s employment involuntarily for any reason other than “Reasonable cause,” defined below, or if the Bank undertakes any action or course of action designed to induce the Executive to terminate his employment (e.g., reducing the Executive’s title or responsibilities, reducing the Executive’s compensation disproportionately as compared to reductions for other Bank executives), the Bank shall pay to the Executive the retirement benefits described in 3.2. The benefits shall be paid commencing on the Executive’s 65^th birthday. “Reasonable cause” means the Executive’s gross negligence, fraud or conviction for any willful violation of any law or significant regulatory policy, committed in connection with the Executive’s employment and

149

resulting in a material adverse effect on the Bank. “Reasonable cause” shall not include ordinary negligence or failure to act, whether due to an error in judgment or otherwise, if the Executive has exercised substantial efforts in good faith to perform the duties reasonably assigned or appropriate to the position.

4.1.4. Anything hereinabove to the contrary notwithstanding, if the Executive is not fully vested in the amount set forth in Schedule “A”, he or she shall become fully vested in the benefit payment previously described in Section 3.2 in the event of a transfer in the controlling ownership or sale of the Bank or its parent (a “change of control”). This benefit shall remain an obligation of the Bank and its successors regardless of a change of control or continue employment of the Executive after the change of control. From and after the occurrence of a change of control, the Bank shall pay all reasonable legal fees and expenses incurred by the Executive seeking to obtain or enforce any right or benefit provided by this Agreement promptly from time to time, at the Executive’s request, as such fees and expenses are incurred; provided, however, that the Executive shall be required to reimburse the Bank for any such fees and expenses if a court or any other adjudicator agreed to by the parties determines that the Executive’s claim is without substantial merit. The Executive shall not be requires to pay any legal fees or expenses incurred by the Bank in connection with any claim or controversy arising out of or relating to this Agreement, or any breach thereof.

4.2. Termination of Agreement by Reason of Changes in Law – The Bank is entering into this Agreement upon the assumption that certain existing tax laws will continue in effect in substantially their current form. In the event of any changes in such federal laws, the Bank shall have an option to terminate or modify this Agreement. Provided, however, that the Executive shall be entitled to at least the same amounts as he would have been entitled to under Article 3 hereof. The payment of said amount shall be made upon such terms and conditions and, at such time as the Bank shall determine, but in no event commencing no later than age sixty-five (65).

4.3. Competition with Bank – Anything in this Agreement to the contrary notwithstanding (but subject to the following proviso), if the Executive, directly or indirectly, at any time after the execution of this Agreement, owns, manages, operates, joins, controls or participates in or is employed by or gives consultation or advice to or extends credit to (other than through insured deposits) or otherwise is connected in any manner, directly or indirectly with, any bank, financial institution, firm, person, sole proprietorship, partnership, corporation, company or other entity (other than the Bank or entities controlled or under common control with the Bank)

150

that provides financial services, including, without limitation, retail or commercial lending services, and has an office within 50 miles or any banking location of the Bank or any of its affiliates, then the Bank shall have the option, in its sole and absolute discretion, to terminate the Executive’s right to receive any benefits under this Agreement (and, to the extent Executive may already have begun receiving benefits hereunder, terminate Executive’s right to receive any further benefits hereunder); provided, however, that (i) this Section 4.3 shall be of no further force and effect after a change of control occurs, (ii) this Section 4.3 shall not apply if Executive’s employment with Bank is terminated by the Bank other than for reasonable cause prior to age 65 of the Executive and (iii) nothing in this Section 4.3 shall prohibit the Executive from owning less than one percent (1%) of the outstanding shares of any company whose common stock is publicly traded.

ARTICLE 5.

Miscellaneous

5.1. Nonassignability – Neither the Executive, his spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, owned by the Executive or his beneficiary or any of them, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise.

5.2. Claims Procedure – The Bank shall make all determinations as to rights to benefits under this Agreement. Any decision by the Bank denying a claim by the Executive or his beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed to the Executive or such beneficiary. Such decision shall set forth the specific reasons for the denial, written to the best of the Corporation’s ability in a manner calculated to be understood without legal or actuarial counsel. In addition, the Bank shall provide a reasonable opportunity to the Executive or such beneficiary for full and fair review of the decision denying such claim.

5.3. Unsecured General Creditor – The Executive and his beneficiary shall have no legal right or equitable rights, interests, or claims in or to any property or assets of the Bank. No assets of the Bank shall be held under any trust for the benefit of the Executive or his beneficiaries or held in any way as security for the fulfilling of the obligations of the Bank under this plan. All of the Bank’s assets shall be and remain the general, unpledged, unrestricted assets of the Bank. The Bank’s obligation under this plan shall be that of an unfunded and unsecured promise by the Bank to pay money in the future. Executives and their beneficiaries shall be unsecured general creditors with respect to any benefits hereunder.

151

5.4. Reorganization – The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another Bank, firm, or person unless and until such succeeding or continuing Bank, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term “Bank” as used in this Agreement shall be deemed to refer to such successor or survivor Bank.

5.5. Binding Effect – This Agreement shall be binding upon and inure to the benefits of the Executive and his personal representatives, and the Bank and any successor organization, which shall succeed to substantially all of its assets and business.

5.6. Not a Contract of Employment – This agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate his employment.

ARTICLE 6.

Participation in Plan

Acceptance of Invitation to Participate in the Plan - The Executive hereby agrees to accept the invitation of the Bank to participate in the Plan, subject to its terms and conditions as set forth therein.

IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly executed by its proper officer and the Executive has hereunto set his hand at Augusta, Georgia, the day and year first above written.

Georgia Bank & Trust Company of Augusta
By:	/s/ R. Daniel Blanton
Its:	President and CEO
EXECUTIVE:
	/s/ Ronald L. Thigpen

152

SCHEDULE “A”

Year	Vested Annual Benefit (payable monthly)
1	$6,000
2	$12,000
3	$18,000
4	$24,000
5	$30,000
6	$36,000
7	$42,000
8	$48,000
9	$54,000
10	$60,000

153

SCHEDULE B

[INTENTIONALLY OMITTED]

154

SCHEDULE “C”

BENEFICIARY DESIGNATION NOTICE

FOR

EXECUTIVE SALARY CONTINUATION AND

PARTICIPATION AGREEMENT

To the Plan Administrator of the Georgia Bank & Trust Company Non-Qualified Defined Benefit Plan for the benefit of Ronald L. Thigpen:

Pursuant to the Provisions of my Executive Salary Continuation and Participation Agreement with Georgia Bank & Trust Company of Augusta dated October 15, 2003 permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death:

Primary Beneficiary:

Name Social Security Number Relationship

Secondary (Contingent) Beneficiary:

Name Social Security Number Relationship

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

The Plan Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Plan Administrator shall pay all amounts in accordance with the terms of the Executive Salary Continuation and Participation Agreement dated October 15, 2003. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the remaining unpaid benefit, payable according to the terms of the Agreement, shall be payable to the personal representatives of the estate of said deceased beneficiary, who survive me, but die prior to receiving the total benefit.

Date of Designation Signature of Executive

155

EX-11.1

EXHIBIT 11.1

COMPUTATION OF NET INCOME PER SHARE

SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY

	Year ended December 31,
	2005		2004		2003
Net income	$	9,954,209	$	8,704,276	$	7,933,101
Basic and diluted net income per share:(1)
Weighted average number of common shares outstanding		5,257,904		5,247,901		5,247,204
Basic net income per share	$	1.89	$	1.66	$	1.51
Weighted average number of common and common equivalent shares Outstanding		5,350,384		5,323,924		5,359,815
Diluted net income per share	$	1.86	$	1.63	$	1.48

(1) Adjusted on a comparative basis for both the 10% stock dividend payable August 29, 2003 and the 2:1 stock split payable November 21, 2003.

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EX-21.1

EXHIBIT 21.1

Subsidiaries of Southeastern Bank Financial Corporation

Name	Jurisdiction of Incorporation
Georgia Bank & Trust Company of Augusta	Georgia
Southeastern Bank Financial Statutory Trust I	Connecticut

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EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, R. Daniel Blanton, Chief Executive Officer of Southeastern Bank Financial Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of Southeastern Bank Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of such disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the

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registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2006

/s/ R. Daniel Blanton

R. Daniel Blanton

President and Chief Executive Officer

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EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Ronald L. Thigpen, Executive Vice President and Chief Operating Officer (principal financial officer) of Southeastern Bank Financial Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of Southeastern Bank Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of such disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the

160

registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2006

/s/ Ronald L. Thigpen

Ronald L. Thigpen

Executive Vice President and

Chief Operating Officer

(Principal Financial Officer)

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EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that this Annual Report on Form 10-K for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This 14th day of March, 2006

/s/ R. Daniel Blanton

Chief Executive Officer

(principal executive officer)

/s/ Ronald L. Thigpen

Chief Operating Officer

(principal financial officer)

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