UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2011

Commission File Number 000-32627

LOGO

(Exact name of registrant as specified in its charter)

Georgia

58-1423423

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

P. O. Box 455, 1010 North Way, Darien, Georgia 31305

(Address of principal executive offices) (Zip Code)

(912) 437-4141

(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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 November 10, 2011, 3,129,388 shares of the Registrant’s common stock, par value $1.25 per share, were outstanding.

Table of Contents


		Page

Part I – Financial Information

Item 1.	Consolidated Financial Statements:
	Consolidated Balance Sheets		3
	Consolidated Statements of Operations		4
	Consolidated Statements of Shareholders’ Equity		5
	Consolidated Statements of Cash Flows		6
	Notes to Consolidated Financial Statements		7

	CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS		24

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		25
	Financial Condition		26
	Results of Operations		40
	Liquidity and Capital Resources		46
	Critical Accounting Estimates		49

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.		51

Item 4.	Controls and Procedures.		52

Part II – Other Information

Item 1.	Legal Proceedings.		53

Item 1A.	Risk Factors.		53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		53

Item 3.	Defaults upon Senior Securities.		53

Item 4.	(Removed and Reserved).		53

Item 5.	Other Information.		53

Item 6.	Exhibits.		53

Signatures			54

Part I - Financial Information

Item 1. Financial Statements

Southeastern Banking Corporation

Consolidated Balance Sheets


	(Unaudited) September 30, 2011			December 31, 2010

Assets

Cash and due from banks	$	8,289,295		$	8,206,514
Interest-bearing deposits in other banks		87,765,886			70,511,991
Federal funds sold		2,150,000			2,150,000

Cash and cash equivalents		98,205,181			80,868,505

Investment securities:
Available-for-sale, at market value (amortized cost of $64,803,395 and $73,893,247 at September 30, 2011 and December 31, 2010)		65,958,580			74,299,903

Loans, gross		214,889,850			245,688,555
Unearned income		(49,205	)		(65,007	)
Allowance for loan losses		(8,563,900	)		(9,915,559	)

Net loans		206,276,745			235,707,989

Premises and equipment, net		11,875,560			12,107,464
Bank-owned life insurance, at cash surrender value		5,914,329			5,738,642
Other real estate		14,825,435			11,636,290
Other assets		6,081,549			7,274,264

Total Assets	$	409,137,379		$	427,633,057


Liabilities and Shareholders’ Equity

Liabilities

Deposits:
Noninterest-bearing demand deposits	$	64,071,059		$	55,377,519
Interest-bearing demand, savings, and time deposits		293,542,551			319,817,600

Total deposits		357,613,610			375,195,119

U. S. Treasury demand note		1,048,743			762,782
Federal Home Loan Bank advances		5,000,000			5,000,000
Other liabilities		2,329,086			1,869,597

Total liabilities		365,991,439			382,827,498


Shareholders’ Equity

Common stock, $1.25 par value		4,475,996			4,475,996
Additional paid-in-capital		1,529,687			1,495,668
Retained earnings		45,272,296			47,459,963
Treasury stock, at cost		(8,894,461	)		(8,894,461	)
Accumulated other comprehensive income		762,422			268,393

Total shareholders’ equity		43,145,940			44,805,559

Total Liabilities and Shareholders’ Equity	$	409,137,379		$	427,633,057


Common shares issued		3,580,797			3,580,797
Common shares authorized		10,000,000			10,000,000
Common shares outstanding		3,129,388			3,129,388
Treasury shares		451,409			451,409

See accompanying Notes to Consolidated Financial Statements.

Southeastern Banking Corporation

Consolidated Statements of Operations

(Unaudited)


	Three Months						Nine Months
Period Ended September 30,	2011			2010			2011			2010

Interest income:
Interest and fees on loans	$	3,304,961		$	3,497,895		$	9,938,252		$	10,756,384
Interest on investment securities:
Taxable		432,321			533,041			1,305,316			1,792,990
Tax-exempt		128,210			180,200			406,770			580,585
Other interest income		53,702			51,835			163,544			112,362

Total interest income		3,919,194			4,262,971			11,813,882			13,242,321


Interest expense:
Interest on deposits		721,470			1,093,704			2,448,377			3,453,226
Interest on Federal Home Loan Bank advances		33,019			33,019			97,981			159,647
Interest on other borrowings		—			—			—			313

Total interest expense		754,489			1,126,723			2,546,358			3,613,186


Net interest income		3,164,705			3,136,248			9,267,524			9,629,135

Provision for loan losses		2,700,000			4,450,000			4,260,000			10,570,000

Net interest income (loss) after provision for loan losses		464,705			(1,313,752	)		5,007,524			(940,865	)


Noninterest income:
Service charges on deposit accounts		626,168			704,391			1,761,608			2,050,344
Net loss on sales of investment securities available-for-sale		—			—			(18,191	)		(143,408	)
Other noninterest income		354,096			324,383			1,040,874			1,013,702

Total noninterest income		980,264			1,028,774			2,784,291			2,920,638


Noninterest expense:
Salaries and employee benefits		1,727,271			1,747,115			5,089,502			5,364,874
Occupancy and equipment expense, net		643,233			665,640			1,907,128			2,020,188
Other-than-temporary impairment loss on debt security		—			—			—			45,059
Net (gain) loss on sales of other real estate		359			4,935			(21,625	)		3,430
Write-downs on other real estate		256,604			821,529			500,216			1,731,098
Other noninterest expense		806,051			770,061			2,504,261			2,597,287

Total noninterest expense		3,433,518			4,009,280			9,979,482			11,761,936


Loss before income tax benefit		(1,988,549	)		(4,294,258	)		(2,187,667	)		(9,782,163	)

Income tax benefit		—			(1,642,138	)		—			(3,905,624	)

Net loss	$	(1,988,549	)	$	(2,652,120	)	$	(2,187,667	)	$	(5,876,539	)


Basic and diluted loss per common share	$	(0.64	)	$	(0.85	)	$	(0.70	)	$	(1.88	)


Basic and diluted weighted average common shares outstanding		3,129,388			3,129,388			3,129,388			3,132,402

See accompanying Notes to Consolidated Financial Statements.

Southeastern Banking Corporation

Consolidated Statements of Shareholders’ Equity

(Unaudited)


														Accumulated
	Common Stock					Additional								Other
	Shares			Stated Value		Paid-In Capital		Retained Earnings			Treasury Stock			Comprehensive Income (Loss)			Total

Balance, December 31, 2009		3,138,531		$	4,475,996	$	1,449,696	$	60,512,342		$	(8,803,031	)	$	(1,076,320	)	$	56,558,683

Comprehensive income (loss):
Net loss		—			—		—		(5,876,539	)		—			—			(5,876,539	)
Unrealized holding gains on investment securities available- for-sale arising during the period, net of tax of $934,649		—			—		—		—			—			1,814,319			1,814,319
Reclassification adjustment for net loss on sales of investment securities available-for-sale included in net loss, net of tax benefit of $48,759		—			—		—		—			—			94,649			94,649
Reclassification adjustment for other-than-temporary impairment loss on debt security included in net loss, net of tax benefit of $15,321		—			—		—		—			—			29,738			29,738

Total comprehensive loss																		(3,937,833	)


Cash dividends declared, $0.13 per share		—			—		—		(407,416	)		—			—			(407,416	)

Stock-based compensation		—			—		35,550		—			—			—			35,550

Purchase of treasury stock		(9,143	)		—		—		—			(91,430	)		—			(91,430	)

Balance, September 30, 2010		3,129,388		$	4,475,996	$	1,485,246	$	54,228,387		$	(8,894,461	)	$	862,386		$	52,157,554


Balance, December 31, 2010		3,129,388		$	4,475,996	$	1,495,668	$	47,459,963		$	(8,894,461	)	$	268,393		$	44,805,559

Comprehensive income (loss):
Net loss		—			—		—		(2,187,667	)		—			—			(2,187,667	)
Unrealized holding gains on investment securities available- for-sale arising during the period, net of tax of $248,315		—			—		—		—			—			482,023			482,023
Reclassification adjustment for net loss on sales of investment securities available-for-sale included in net loss, net of tax benefit of $6,185		—			—		—		—			—			12,006			12,006

Total comprehensive loss																		(1,693,638	)


Stock-based compensation		—			—		34,019		—			—			—			34,019

Balance, September 30, 2011		3,129,388		$	4,475,996	$	1,529,687	$	45,272,296		$	(8,894,461	)	$	762,422		$	43,145,940

See accompanying Notes to Consolidated Financial Statements.

Southeastern Banking Corporation

Consolidated Statements of Cash Flows

(Unaudited)


Nine Months Ended September 30,	2011			2010

Cash flows from operating activities:
Net loss	$	(2,187,667	)	$	(5,876,539	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization and accretion, net		610,860			766,005
Provision for loan losses		4,260,000			10,570,000
Deferred income tax benefit		—			(208,199	)
Net loss on sales of investment securities available-for-sale		18,191			143,408
Other-than-temporary impairment loss on debt security		—			45,059
Increase in cash surrender value of bank-owned life insurance		(175,687	)		(178,403	)
Net (gain) loss on sales of other real estate		(21,625	)		3,430
Write-downs on other real estate		500,216			1,731,098
Stock-based compensation		34,019			35,550
Decrease in interest receivable		134,505			366,972
Decrease in interest payable		(204,264	)		(89,165	)
Net change in income tax receivable or payable		9,953			(3,707,906	)
Decrease in prepaid FDIC assessments		451,000			503,200
Net (increase) decrease in other assets		427,407			(297,588	)
Net increase in other liabilities		409,253			265,406

Net cash provided by operating activities		4,266,161			4,072,328

Cash flows from investing activities:
Purchase of investment securities available-for-sale		(296,666,514	)		—
Proceeds from sales of investment securities available-for-sale		474,000			4,591,930
Proceeds from maturities, calls, and paydowns of investment securities available-for-sale		305,191,706			10,905,604
Redemption of restricted equity securities		154,100			94,200
Net decrease in loans		19,864,693			13,118,582
Capital expenditures, net		(290,737	)		(178,144	)
Proceeds from sales of other real estate		1,638,815			355,386

Net cash provided by investing activities		30,366,063			28,887,558

Cash flows from financing activities:
Net increase (decrease) in deposits		(17,581,509	)		11,713,505
Net increase (decrease) in U. S. Treasury demand note		285,961			(139,754	)
Repayment of advances from Federal Home Loan Bank		—			(5,000,000	)
Purchase of treasury stock		—			(91,430	)
Dividends paid		—			(407,416	)

Net cash provided by (used in) financing activities		(17,295,548	)		6,074,905

Net increase in cash and cash equivalents		17,336,676			39,034,791
Cash and cash equivalents at beginning of period		80,868,505			42,632,459

Cash and cash equivalents at end of period	$	98,205,181		$	81,667,250


Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest	$	2,750,622		$	3,702,351

Income taxes paid (refunded), net	$	(9,953	)	$	—

Noncash investing and financing transactions:
Change in unrealized gains (losses) on investment securities available-for-sale	$	748,529		$	2,937,435

Loans charged-off to allowance for loan losses	$	5,762,581		$	8,878,129

Real estate acquired through foreclosure	$	5,306,551		$	3,990,205

Loans made in connection with sales of other real estate	$	21,681		$	259,718

See accompanying Notes to Consolidated Financial Statements.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

1.	BASIS OF PRESENTATION

Southeastern Banking Corporation (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned commercial bank subsidiary, Southeastern Bank (the “Bank”). The Company operates within one business segment, community banking, offering a broad range of banking services to consumer and commercial customers through 16 banking offices in southeast Georgia and northeast Florida. The Company, whose tradition of service spans over 120 years, is headquartered in Darien, Georgia.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

The accounting and reporting policies followed in the presentation of the accompanying unaudited consolidated financial statements are consistent with those described in Note 1 of the notes to the consolidated financial statements included in the Company’s 2010 Form 10-K, as updated by the information contained in this Form 10-Q. In the opinion of management, these consolidated financial statements reflect all adjustments necessary to fairly present such information for the periods and dates indicated. Such adjustments, which include transactions typically determined or settled at year-end, are normal and recurring in nature. All significant intercompany accounts and transactions have been eliminated. The consolidated balance sheet as of December 31, 2010 has been extracted from the audited consolidated balance sheet included in the Company’s 2010 Form 10-K. Certain reclassifications, with no effect on total assets or net operating results, have been made to prior period amounts to conform to the current period presentation.

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Results of operations for interim periods are not necessarily indicative of trends or results to be expected for the full year, due in part to seasonal variations and unusual or infrequently occurring items.

Earnings (Loss) Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share are based on the weighted average number of common shares outstanding adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issuable upon exercise of outstanding stock options using the treasury stock method. In any periods of net loss, diluted loss per share is calculated in the same manner as basic earnings per share. Since they were non-dilutive, 70,250 and 77,500 equivalent shares related to stock options were excluded from the computation of diluted earnings (loss) per share at September 30, 2011 and 2010, respectively.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

2.	NEW ACCOUNTING PRONOUNCEMENTS

In December 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update addressing differences in the ways entities have disclosed pro forma revenue and earnings in a business combination. If an entity presents comparable financial statements, the guidance requires the entity to disclose revenue and earnings of the combined entity as if the business combination(s) occurring during the current year had occurred as of the beginning of the comparable prior annual reporting period. Supplemental pro forma disclosures must also be expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination(s). The new requirements, which became effective as of January 1, 2011, have not had a material impact on the Company’s financial position, results of operations, or cash flows.

In January 2010, the FASB issued an accounting standards update requiring additional disclosures on transfers in and out of the fair value hierarchy and activity within level 3 financial instruments. This update also provides clarification on classification of financial instruments and the discussion of inputs and valuation techniques. The new disclosures and clarification were effective for the Company as of December 31, 2009, except for disclosures related to activity within level 3 financial instruments. The level 3 disclosures were effective the interim reporting period ending March 31, 2011. Adoption of the new disclosure requirements has not had a material impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued additional guidance on fair value measurement. The new guidance results in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. The amendments do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments clarify the proper application of the highest and best use and valuation premise concepts and the fair value measurement of an instrument classified in shareholders’ equity. Additionally, the amendments permit a reporting entity that manages financial instruments on the basis of its net exposure, rather than gross exposure, to measure the underlying financial assets and liabilities at the price that would be received to sell a net asset position or transfer a net liability position for a particular risk in an orderly transaction between market participants at the measurement date and clarify that premiums and discounts in fair value measurements relate to the unit of account, and not size, as a characteristic of an entity’s holding. Expanded disclosure must be provided about valuation processes used for level 3 instruments, including quantitative information on unobservable inputs and sensitivity of fair value measurement to changes in unobservable inputs; use of nonfinancial assets if that use varies from its highest and best use, and that an asset is measured at fair value on the balance sheets or its fair value is based on highest and best use; and categorization by level of the fair value hierarchy for items not measured at fair value on the balance sheets but for which fair value must be disclosed. The amendments are effective for interim and annual periods beginning after December 15, 2011. Adoption of the new guidance is not expected to have a material impact on the Company’s financial position or results of operations.

In July 2010, the FASB issued an accounting standards update requiring more robust disclosures about the credit quality of loans and the allowance for loan losses. The additional disclosures include a rollforward of the allowance for loan losses on a disaggregated basis and more information, by type of loan, on credit quality indicators including aging and troubled debt restructurings (“TDRs”) as well as any significant purchases and sales. Most of the new disclosure requirements were effective for interim and annual periods beginning after December 15, 2010. The disclosure requirements in the update related to TDRs was delayed and became effective for interim and annual periods beginning after June 15, 2011. The new disclosure requirements have not had a material impact on the Company’s financial position or results of operations.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

In April 2011, the FASB issued an accounting standards update clarifying the accounting guidance on a creditor’s evaluation of whether a restructuring constitutes a troubled debt restructuring. It is the objective of the FASB that the clarifying guidance in this update will result in more consistent application of U.S. GAAP for debt restructurings. The amendments in this update are effective for interim and annual periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, the Company may identify loans that are newly considered impaired under the new guidance. For purposes of measuring impairment of those loans, the Company must apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Adoption of the new guidance, which became effective as of July 1, 2011, has not had a material impact on the Company’s financial position or results of operations.

3.	INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities as of September 30, 2011 and December 31, 2010 are summarized below.


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

*September 30, 2011*
Available-for-sale:
U. S. Government and agency securities	$	7,465,754	$	211,881	$	3,169	$	7,674,466
U. S. Government-sponsored enterprise securities		3,792,250		118,264		—		3,910,514
Agency residential mortgage-backed securities		30,738,582		827,941		24,108		31,542,415
Obligations of states and political subdivisions		13,377,102		526,696		—		13,903,798
Corporate debt obligations		9,429,707		85,728		588,048		8,927,387

Total investment securities	$	64,803,395	$	1,770,510	$	615,325	$	65,958,580


December 31, 2010
Available-for-sale:
U. S. Government and agency securities	$	4,551,010	$	187,524	$	—	$	4,738,534
U. S. Government-sponsored enterprise securities		33,549,865		118,203		31		33,668,037
Agency residential mortgage-backed securities		10,323,420		642,201		—		10,965,621
Obligations of states and political subdivisions		16,587,458		370,210		136,664		16,821,004
Corporate debt obligations		8,881,494		20,710		795,497		8,106,707

Total investment securities	$	73,893,247	$	1,338,848	$	932,192	$	74,299,903

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2011 are shown in the table below. In some cases, issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date. Agency-issued mortgage-backed securities and U.S. Small Business Administration (“SBA”) participation certificates (included in U. S. Government and agency securities) are shown separately from other debt securities due to customary prepayment features which cause average lives to differ significantly from contractual maturities.


	Available-for-Sale
*September 30, 2011*	Amortized Cost		Fair Value
Due within one year	$	2,042,050	$	2,068,582
Due from one to five years		9,855,593		10,157,869
Due from five to ten years		4,111,044		4,288,532
Due after ten years		10,590,372		10,226,716

		26,599,059		26,741,699
Agency residential mortgage-backed securities		30,738,582		31,542,415
SBA participation certificates		7,465,754		7,674,466

Total investment securities	$	64,803,395	$	65,958,580

Securities with carrying values of $49,277,556 and $65,127,641 at September 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits as required by law and certain borrowing arrangements.

Gains and losses on sales and calls of investment securities for the three months and nine months ended September 30, 2011 and 2010 consist of the following:


	Three Months				Nine Months
Period Ended September 30,	2011		2010		2011			2010
Gross realized gains	$	—	$	—	$	—		$	—
Gross realized losses		—		—		(18,191	)		(143,408	)

Net realized gain (loss)	$	—	$	—	$	(18,191	)	$	(143,408	)

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010.


	Less Than Twelve Months				Over Twelve Months
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Unrealized Losses
*September 30, 2011*
Available-for-sale:
U.S. Government and federal agency securities	$	1,555,610	$	3,169	$	—	$	—	$	3,169
U.S. Government-sponsored enterprise securities		—		—		—		—		—
Agency residential mortgage-backed securities		4,488,450		24,108		—		—		24,108
Obligations of states and political subdivisions		—		—		—		—		—
Corporate debt obligations		1,030,363		21,618		3,882,211		566,430		588,048

Total investment securities	$	7,074,423	$	48,895	$	3,882,211	$	566,430	$	615,325


December 31, 2010
Available-for-sale:
U.S. Government and federal agency securities	$	—	$	—	$	—	$	—	$	—
U.S. Government-sponsored enterprise securities		22,099,730		31		—		—		31
Agency residential mortgage-backed securities		—		—		—		—		—
Obligations of states and political subdivisions		978,233		28,015		834,049		108,649		136,664
Corporate debt obligations		2,325,199		132,946		4,284,304		662,551		795,497

Total investment securities	$	25,403,162	$	160,992	$	5,118,353	$	771,200	$	932,192

Management evaluates investment securities for other-than-temporary impairment on a quarterly basis, and more frequently when conditions warrant. This analysis requires management to consider various factors, including the duration and magnitude of the decline in value; the financial condition of the issuer or issuers; structure of the security; and, notwithstanding classification of the portfolio as available-for-sale, the Company’s intent to sell the security or whether it’s more likely than not that the Company would be required to sell the security before the anticipated recovery in market value. As of September 30, 2011, the Company concluded that there was no other-than-temporary impairment in its investment securities.

The Bank is a member of the Federal Home Loan Bank of Atlanta (the “FHLB”), and ownership of FHLB stock is a membership requirement. This restricted equity investment amounted to $1,019,600 and $1,173,700 at September 30, 2011 and December 31, 2010, respectively. The Company carries the stock, which is included in other assets on its balance sheet, at cost and regularly evaluates it for other-than-temporary impairment. As of September 30, 2011, the Company concluded that there was no impairment in its holdings in FHLB stock.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the Company’s loan portfolio at September 30, 2011 and December 31, 2010 is shown below:


	September 30, 2011						December 31, 2010
	Balance			Percent of Total			Balance			Percent of Total
Commercial real estate:
Construction and development	$	64,994,478			30.2	%	$	86,972,052			35.4	%
Owner-occupied		37,533,867			17.5			35,300,711			14.4
Non owner-occupied		27,905,306			13.0			29,523,640			12.0
Residential real estate - mortgage		45,997,850			21.4			48,686,595			19.8
Other commercial, financial, and agricultural		28,644,127			13.3			33,504,726			13.6
Consumer, including credit cards		9,814,222			4.6			11,700,831			4.8

Loans, gross		214,889,850			100.0	%		245,688,555			100.0	%

Unearned income		(49,205	)					(65,007	)
Allowance for loan losses		(8,563,900	)					(9,915,559	)

Net loans	$	206,276,745					$	235,707,989

In accordance with U.S. GAAP, the loan portfolio was disaggregated into four segments and further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level in which an entity develops and documents a systematic method for determining its allowance for loan losses. The segments used in the portfolio include commercial real estate; residential real estate – mortgage; other commercial, financial, agricultural; and consumer. Commercial real estate has been divided into three classes, including construction and development, owner-occupied, and non owner-occupied credits. All land and lot development loans have been included in the construction and development class, regardless of whether the underlying real estate is zoned commercial or residential. This classification of construction and development loans corresponds with definitions used by banking regulators for examination and other purposes.

Aging of past due loans is presented by segment in the following table. Balances presented are based on book balance, or recorded investment.


	Current		Accruing 30 – 89 Days Past Due		Accruing 90+ Days Past Due		Total Accruing Past Due		Nonaccrual		Total

*September 30, 2011*
Commercial real estate:
Construction and development	$	41,605,657	$	638,251	$	16,092	$	654,343	$	22,734,478	$	64,994,478
Owner-occupied		36,908,555		206,972		—		206,972		418,340		37,533,867
Non owner-occupied		27,787,446		37,902		—		37,902		79,958		27,905,306
Residential real estate - mortgage		39,868,074		1,513,644		58,740		1,572,384		4,557,392		45,997,850
Other commercial, financial, and agricultural		27,915,600		466,140		—		466,140		262,387		28,644,127
Consumer, including credit cards		9,119,958		434,882		—		434,882		259,382		9,814,222

Loans, gross	$	183,205,290	$	3,297,791	$	74,832	$	3,372,623	$	28,311,937	$	214,889,850


December 31, 2010
Commercial real estate:
Construction and development	$	64,560,275	$	553,271	$	18,555	$	571,826	$	21,839,951	$	86,972,052
Owner-occupied		33,422,584		1,197,251		—		1,197,251		680,876		35,300,711
Non owner-occupied		28,745,303		81,151		—		81,151		697,186		29,523,640
Residential real estate - mortgage		43,425,467		678,612		75,848		754,460		4,506,668		48,686,595
Other commercial, financial, and agricultural		32,925,618		155,384		—		155,384		423,724		33,504,726
Consumer, including credit cards		10,890,188		410,570		26,536		437,106		373,537		11,700,831

Loans, gross	$	213,969,435	$	3,076,239	$	120,939	$	3,197,178	$	28,521,942	$	245,688,555

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

In accordance with bank regulatory guidance, a loan is placed on nonaccrual status if:

•

it is maintained on a cash basis because of deterioration in the financial condition of the borrower,

•

payment in full of principal or interest is not expected, or

•

principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection.

Internal risk-ratings, or grades, are assigned to each loan based on an analysis of the financial strength, collateral, and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances. The rating methodology complies with the asset classification system promulgated by the federal banking agencies. Loan grades range from one to eight, with one-graded loans having the least credit risk, as defined below:

Pass (Grades 1 -4) - Loans included in or migrating towards a “pass” grade of one to four carry the lowest risk of loss. Such loans are well-protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less selling costs, of underlying collateral.

Special Mention (Grade 5) – Loans in this category have potential weaknesses requiring additional monitoring. These loans are not adversely classified and do not currently have sufficient risk to warrant adverse classification. Substantially all special mention loans are performing.

Substandard (Grade 6) – These loans are inadequately supported by the current worth and paying capacity of the obligor or collateral pledged, if any. A distinct possibility of loss exists if the underlying deficiencies are not corrected. At September 30, 2011 and December 31, 2010, all nonaccrual loans were graded substandard.

Doubtful (Grade 7) – These loans have all the weaknesses of a substandard loan with the added detriment that full collection or liquidation is highly questionable and improbable on the basis of currently known facts, conditions, and values.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Loss (Grade 8) – These loans are deemed uncollectible and have, at best, nominal value. Maintaining these loans on the books, without establishment of specific valuation allowances, is not warranted.

Loans considered doubtful or loss are normally charged-off upon such determination and hence, no balances apply to these categories. Risk ratings of the loan portfolio are shown in the next table.

Pass
(1 – 4)

Special
Mention
(5)

Substandard
(6)

Doubtful
(7)

Loss
(8)

Total

September 30, 2011

Commercial real estate:

Construction and development

28,814,138

8,457,943

27,722,397

—

64,994,478

Owner-occupied

33,341,014

3,016,914

1,175,939

—

37,533,867

Non owner-occupied

16,075,569

8,638,697

3,191,040

—

27,905,306

Residential real estate - mortgage

34,184,052

3,785,254

8,028,544

—

45,997,850

Other commercial, financial, and agricultural

25,183,210

2,932,373

528,544

—

28,644,127

Consumer, including credit cards

8,377,352

1,114,363

322,507

—

9,814,222

Loans, gross

145,975,335

27,945,544

40,968,971

—

214,889,850


	Pass (1 – 4)		Special Mention (5)		Substandard (6)		Doubtful (7)		Loss (8)		Total

December 31, 2010
Commercial real estate:
Construction and development	$	35,170,540	$	21,525,120	$	30,276,392	$	—	$	—	$	86,972,052
Owner-occupied		31,702,978		2,649,760		947,973		—		—		35,300,711
Non owner-occupied		22,531,694		3,242,934		3,749,012		—		—		29,523,640
Residential real estate - mortgage		35,813,611		5,194,612		7,678,372		—		—		48,686,595
Other commercial, financial, and agricultural		30,000,682		610,926		2,893,118		—		—		33,504,726
Consumer, including credit cards		10,988,957		240,987		470,887		—		—		11,700,831

Loans, gross	$	166,208,462	$	33,464,339	$	46,015,754	$	—	$	—	$	245,688,555

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Activity in the allowance for loan losses is summarized by loan segment below:

As of and for the

Nine Months Ended

September 30, 2011

Commercial
Real Estate

Residential
Real Estate

Other
Commercial,
Financial, &
Agricultural

Consumer

Unallocated

Total

Allowance for loan losses:

Balance, beginning of year

7,442,941

1,747,843

405,830

262,223

56,722

9,915,559

Provision for loan losses

2,868,437

1,384,676

46,716

(52,220

)

12,391

4,260,000

Charge-offs

(4,558,904

)

(973,800

)

(66,370

)

(163,507

)

—

(5,762,581

)

Recoveries

18,417

35,363

16,948

80,194

—

150,922

Ending balance

5,770,891

2,194,082

403,124

126,690

69,113

8,563,900

Ending balance, individually evaluated for impairment

2,736,204

1,380,321

26,866

—

n/a

4,143,391

Ending balance, collectively evaluated for impairment

3,034,687

813,761

376,258

126,690

69,113

4,420,509

Loan, gross:

Ending balance

130,433,651

45,997,850

28,644,127

9,814,222

n/a

214,889,850

Ending balance, individually evaluated for impairment

32,125,463

7,119,412

84,299

—

n/a

39,329,174

Ending balance, collectively evaluated for impairment

98,308,188

38,878,438

28,559,828

9,814,222

n/a

175,560,676

Within the commercial real estate segment, activity included:

As of & for the

Nine Months Ended

September 30, 2011

Construction
&
Development

Owner-
Occupied

Non Owner-
Occupied

Total
Commercial
Real Estate

Allowance for loan losses:

Balance, beginning of year

7,133,461

124,729

184,751

7,442,941

Provision for loan losses

2,406,703

410,326

51,408

2,868,437

Charge-offs

(4,341,944

)

(170,431

)

(46,529

)

(4,558,904

)

Recoveries

18,417

—

18,417

Ending balance

5,216,637

364,624

189,630

5,770,891

Ending balance, individually evaluated for impairment

2,366,445

247,640

122,119

2,736,204

Ending balance, collectively evaluated for impairment

2,850,192

116,984

67,511

3,034,687

Loan, gross:

Ending balance

64,994,478

37,533,867

27,905,306

130,433,651

Ending balance, individually evaluated for impairment

27,155,677

1,858,705

3,111,081

32,125,463

Ending balance, collectively evaluated for impairment

37,838,801

35,675,162

24,794,225

98,308,188

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

A loan is considered impaired when it is probable, based on current information and events, the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans include loans placed on nonaccrual status as well as TDRs, loans past due 90 days or more and still accruing, and other accruing loans individually evaluated for impairment. All of the Company’s impaired loans have a valuation allowance. Impaired loans comprised the following at September 30, 2011 and December 31, 2010:


	September 30, 2011		December 31, 2010
Nonaccrual loans	$	28,311,937	$	28,521,942
Troubled debt restructurings not included above		6,774,918		12,669,230
Loans past due 90 days or more and still accruing		74,832		120,939
Other accruing loans individually evaluated for impairment		6,946,021		4,520,331
Total impaired loans	$	42,107,708	$	45,832,442


Valuation allowance related to total impaired loans	$	4,246,000	$	3,580,409

Total impaired loans are disaggregated by segment and class below:

As of and for the Nine Months Ended

September 30, 2011

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Impaired loans with a valuation allowance:

Commercial real estate:

Construction and development

27,972,186

38,463,450

2,426,245

Owner-occupied

2,083,260

2,243,201

248,376

Non owner-occupied

3,191,039

3,191,040

122,337

Residential real estate - mortgage

8,262,426

9,647,226

1,403,856

Other commercial, financial, and agricultural

339,415

463,135

31,497

Consumer, including credit cards

259,382

388,863

13,689

Total impaired loans

42,107,708

54,396,915

4,246,000

Average investment in impaired loans

40,857,455


As of December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with a valuation allowance:
Commercial real estate:
Construction and development	$	30,017,176	$	39,673,998	$	2,459,478
Owner-occupied		1,337,701		1,483,080		35,631
Non owner-occupied		3,749,011		3,869,208		117,131
Residential real estate - mortgage		7,544,914		8,558,866		881,587
Other commercial, financial, and agricultural		2,751,545		2,882,978		80,651
Consumer, including credit cards		432,095		812,241		5,931

Total impaired loans	$	45,832,442	$	57,280,371	$	3,580,409

Impaired loans with a valuation allowance include pools of impaired loans. At September 30, 2011, these pools had a recorded investment, or book balance, of $2,778,534, unpaid principal balance of $3,609,045, and related allowance of $102,609. The recorded investment, unpaid principal and related allowance in such pools totaled $3,135,061, $4,179,940, and $106,737, respectively, at December 31, 2010. Cash basis interest income actually recognized on nonaccrual loans during the nine months ended September 30, 2011 approximated $47,127. Nonaccrual loans included in impaired loans averaged approximately $28,697,644 in the first nine months of 2011.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the carrying balances of TDRs as of September 30, 2011 and December 31, 2010.


	September 30, 2011		December 31, 2010
Performing	$	6,771,953	$	12,669,230
Nonperforming		7,893,947		7,204,307

Total troubled debt restructurings	$	14,665,900	$	19,873,537

Unfunded commitments to borrowers whose loans were modified in troubled debt restructurings	$	—	$	17,918

The following tables summarize loans that were modified and recognized as TDRs during the periods indicated.


	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
*For the Three Months Ended September 30, 2011:*
Commercial real estate:
Construction and development		1	$	271,935	$	271,935
Owner-occupied		—		—		—
Non owner-occupied		—		—		—
Residential real estate - mortgage		—		—		—
Other commercial, financial, and agricultural		—		—		—
Consumer, including credit cards		—		—		—

Total		1	$	271,935	$	271,935


*For the Nine Months Ended September 30, 2011:*
Commercial real estate:
Construction and development		2	$	492,513	$	492,513
Owner-occupied		2		1,253,349		1,253,349
Non owner-occupied		—		—		—
Residential real estate - mortgage		—		—		—
Other commercial, financial, and agricultural		—		—		—
Consumer, including credit cards				—		—

Total		4	$	1,745,862	$	1,745,862

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following tables summarize how loans that were considered troubled debt restructurings were modified during the periods indicated.


	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
*For the Three Months Ended September 30, 2011:*
Rate concession		—	$	—	$	—
Term concession		1		271,935		271,935
Rate and term concessions		—		—		—
Required principal paydowns concession		—		—		—
Other		—		—		—

Total		1	$	271,935	$	271,935


*For the Nine Months Ended September 30, 2011:*
Rate concession		—	$	—	$	—
Term concession		4		1,745,862		1,745,862
Rate and term concessions		—		—		—
Required principal paydowns concession		—		—		—
Other		—		—		—

Total		4	$	1,745,862	$	1,745,862

There was one loan in the amount of $271,935 modified as troubled debt restructurings within the previous 12-month period for which there was a payment default during the three months ended September 30, 2011. Other than that one loan, there were no loans modified as troubled debt restructurings within the previous 12-month period for which there was a payment default during the nine months ended September 30, 2011.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

5.	FAIR VALUE

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and for disclosure purposes. Accounting guidance on fair value measurements and disclosures specifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best defined using quoted market prices, but in many instances, quoted market prices for the Company’s various financial instruments may not be available. Under these circumstances, fair values are estimated using present value or other variation techniques. Those techniques are significantly affected by the underlying assumptions, including the discount rate and estimates of future cash flows; accordingly, the resulting fair value estimate may not be realized in an immediate settlement of the instrument.

Recent fair value guidance clarifies that exit prices based on orderly transactions between market participants under current market conditions, not forced liquidations or distressed sales, should be the basis for determining fair value. If the volume and level of activity for the asset or liability has declined significantly, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In this instance, determining the price at which willing market participants would transact depends on the various facts and circumstances and requires significant judgment. The resulting fair value is a reasonable point within the determined range that best indicates fair value under current conditions.

Fair Value Hierarchy

In accordance with accounting guidance, the Company groups its financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities trade and the reliability of the assumptions used to determine fair value:

Level 1 – Valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 assets and liabilities generally include debt and equity securities that are traded on an active exchange. Valuations are obtained from readily available pricing sources for market transactions involving such assets or liabilities.

Level 2 – Valuation is based on inputs other than level 1 prices that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. Level 2 inputs may incorporate interest rates and yield curves that are observable at commonly quoted intervals, volatilities, prepayment speeds, credit risks, and default rates.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments whose valuation requires significant management judgment or estimation. Level 3 valuation also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Risk premiums that a market participant would require must be considered.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value is the primary basis of accounting for investment securities available-for-sale. The Company does not currently measure any other assets or liabilities at fair value on a recurring basis. When quoted market prices for identical securities are available in an active market, these securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, such as U.S. Treasury notes, or exchange-traded equities. If quoted market prices for identical securities are not available, then fair values are estimated using matrix models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within level 2, include U.S. Government-sponsored enterprise securities, agency mortgage-backed securities, obligations of states and political subdivisions, and certain corporate debt obligations. Due to limited activity and less transparency regarding input factors, one corporate debt obligation was classified in level 3 at September 30, 2011 and December 31, 2010.

Securities measured at fair value on a recurring basis are presented in the next table.


	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value

*September 30, 2011*
Investment securities available-for-sale:
Debt securities:
U. S. Government and agency securities	$	—	$	7,674,466	$	—	$	7,674,466
U. S. Government-sponsored enterprise securities		—		3,910,514		—		3,910,514
Agency residential mortgage-backed securities		—		31,542,415		—		31,542,415
Obligations of states and political subdivisions		—		13,903,798		—		13,903,798
Corporate debt obligations		—		8,427,387		500,000		8,927,387

Total investment securities	$	—	$	65,458,580	$	500,000	$	65,958,580


December 31, 2010
Investment securities available-for-sale:
Debt securities:
U. S. Government and agency securities	$	—	$	4,738,534	$	—	$	4,738,534
U. S. Government-sponsored enterprise securities		—		33,668,037		—		33,668,037
Agency residential mortgage-backed securities		—		10,965,621		—		10,965,621
Obligations of states and political subdivisions		—		16,821,004		—		16,821,004
Corporate debt obligations		—		7,606,707		500,000		8,106,707

Total investment securities	$	—	$	73,799,903	$	500,000	$	74,299,903

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The corporate debt obligation measured at fair value using level 3 inputs at September 30, 2011 and December 31, 2010 comprised one trust preferred security with a cost basis of $500,000, for which there is currently no active market. Like the Company’s other corporate debt holdings, this security is also an issue of a bank/bank holding company domiciled in the southeastern United States. No transfers or activity involving other securities occurred within the level 3 category during the first nine months of 2011. Should transparency in input factors diminish, additional obligations could be classified as level 3 assets in the future. No transfers were made between level 1 or 2 assets measured at fair value on a recurring basis during the first nine months of 2011.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain instruments are measured at fair value on a nonrecurring basis; in other words, these instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances – for example, when evidence of impairment exists. Such instruments include impaired loans and other real estate. Loan impairment is reported when full payment under the original loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral-dependent. When management believes the uncollectibility of all or any portion of a loan is confirmed, a loss is charged against the allowance. Any necessary increase to the allowance resulting from impaired loans is recorded as a component of the provision for loan losses. During the first nine months of 2011, the Company recognized losses of $5,315,588 on impaired loans outstanding through the allowance for loan losses. At September 30, 2011, impaired loans with an aggregate outstanding book balance of $42,107,708 were measured and reported net of specific allowances at a fair value of $37,861,708. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan impairment as a level 2 instrument. When an appraised value is not available or management determines the fair value of the collateral is impaired beyond appraised value and no observable market price exists, the Company records the loan impairment in level 3. Given the current difficulties in obtaining comparable sales and other observable inputs due to high inventories and distressed sales prevalent in the market, particularly for certain real estate collateral, the Company classified all impaired loans in level 3 at September 30, 2011.

Other real estate is recorded at fair value upon transfer of the underlying loan to foreclosed balances. Fair value is based upon independent market prices, appraised values, or management’s estimate of collateral value. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company classifies other real estate as level 2; otherwise, other real estate is classified as level 3. Any write-down to fair value at foreclosure is charged to the allowance for loan losses while subsequent devaluations resulting primarily from updated appraisals or observations of comparable sales prices are included in noninterest expense. During the nine months ended September 30, 2011, devaluations (or write-downs) of other real estate totaled $500,216. Given the current difficulties in obtaining comparable sales and other observable inputs due to high inventories and distressed sales prevalent in the market, particularly for certain real estate types, the Company classified all foreclosed real estate in level 3 at September 30, 2011.

Level 3 assets also include FHLB stock, which is only redeemable with the issuer at par and cannot be traded in the market; as such, no observable market data for this holding is available. The Company evaluated its holding in FHLB stock at September 30, 2011 and determined no impairment charge was necessary. Other assets are similarly evaluated under fair value accounting on a nonrecurring basis.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The table below presents the Company’s outstanding assets for which a nonrecurring change in fair value was recorded during the nine months ended September 30, 2011 and 2010, aggregated by the level in the fair value hierarchy within which those measurements fall. Assets reviewed for impairment such as level 3 FHLB stock, but for which no corresponding impairment charge was recorded, are not included in these totals.


	Fair Value Measurements Using
*September 30, 2011*	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Carrying Value		Total Gains (Losses) for the Nine Months
Assets:
Impaired loans	$	—	$	—	$	37,861,708	$	37,861,708	$	(5,315,588	)
Other real estate		—		—		2,448,225		2,448,225		(500,216	)

Total fair value of assets on a nonrecurring basis	$	—	$	—	$	40,309,933	$	40,309,933	$	(5,815,804	)


*September 30, 2010*
Assets:
Impaired loans	$	—	$	—	$	46,559,479	$	46,559,479	$	(9,654,999	)
Other real estate		—		—		6,564,618		6,564,618		(1,702,598	)

Total fair value of assets on a nonrecurring basis	$	—	$	—	$	53,124,097	$	53,124,097	$	11,357,597

As disclosed on the prior page, the loss amount shown for impaired loans include charge-offs as well as the provision allocated for these loans for the first nine months of 2011. The loss amount for other real estate does not include charge-offs recognized on these credits prior to foreclosure of the underlying collateral. No transfers were made between level 1, 2, and 3 assets evaluated under fair value accounting on a nonrecurring basis. Additionally, no nonrecurring change in fair value was recognized on any liabilities during the first nine months of 2011.

Fair Value of Financial Instruments

Methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. For certain other financial assets and liabilities, fair value approximates carrying value due to the nature of the financial instrument. These instruments include cash and cash equivalents, demand and other non-maturity deposits, and overnight borrowings. The following methods and assumptions were used in estimating the fair value of other financial instruments:

•

Variable rate loans that reprice frequently and have no significant change in credit risk are fairly valued at their carrying amounts. For fixed rate loans, fair values are estimated based on discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The Company did not use an incremental market risk and liquidity discount in deriving loan fair values as management has no present intention to sell any portion of the loan portfolio. Impaired loans are valued using discounted cash flow analyses or underlying collateral values, as discussed.

•

Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities. The intangible value of long-term relationships with depositors is not considered in estimating fair values.

•

The U. S. Treasury demand note and other variable rate borrowings are fairly valued at their carrying amounts. Fair values for other borrowings, including FHLB advances with fixed rates, are based on quoted market prices for similar instruments or estimated using discounted cash flow analysis and the Company’s current incremental borrowing rate for similar instruments.

•

The carrying amount of accrued interest and other financial assets approximates their fair values.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The table below presents the fair value of financial assets and liabilities carried on the Company’s consolidated balance sheet, including those financial assets and liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis:


	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	98,205,181	$	98,205,181	$	80,868,505	$	80,868,505
Investment securities available-for-sale		65,958,580		65,958,580		74,299,903		74,299,903
Net loans		206,276,745		206,034,344		235,707,989		237,411,612
Accrued interest receivable		1,352,621		1,352,621		1,487,126		1,487,126
Other financial assets		1,019,600		1,019,600		1,173,700		1,173,700

Financial liabilities:
Deposits	$	357,613,610	$	358,280,111	$	375,195,119	$	376,619,703
U.S. Treasury demand note		1,048,743		1,048,743		762,782		762,782
FHLB advances		5,000,000		5,128,190		5,000,000		5,191,353
Accrued interest payable		1,083,652		1,083,652		1,287,916		1,287,916

Bank premises and equipment, customer relationships, deposit base, and other information needed to compute the Company’s aggregate fair value are not included in the table above. Accordingly, the fair values above are not intended to represent the underlying market value of the Company.

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements set forth in this Quarterly Report on Form 10-Q (this “Report”) or incorporated herein by reference, including matters discussed in Item 2 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of federal securities laws, including, without limitation, statements regarding the Company’s outlook on earnings, stock performance, asset quality, capital position, plans regarding nonperforming assets, economic conditions, real estate markets, and projected growth, and are based upon management’s beliefs as well as assumptions based on data currently available to management. When words like “anticipate”, “believe”, “intend”, “plan”, “may”, “continue”, “project”, “would”, “expect”, “estimate”, “could”, “should”, “will”, and similar expressions are used, they should be considered forward-looking statements. These forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in forward-looking statements. Factors that could cause actual results to differ materially from those described in the forward-looking statements include: (1) difficult economic conditions, both generally and in local markets, may persist, resulting in, among other things, further deterioration in credit quality, a reduction in demand for credit, or additional declines in real estate values; (2) the severe decline in the real estate and lending market, particularly in the Company’s coastal markets and primarily comprising acquisition and development loans, may continue to negatively affect financial results; (3) the allowance for loan losses may not be adequate to cover eventual loss; (4) future losses will be realized if proceeds received upon liquidation of nonperforming assets are less than carrying values of such assets; (5) restrictions or conditions imposed by regulators on the Company’s operations may make it more difficult for the Company to achieve its goals; (6) the Company’s recovery of its deferred tax asset could be delayed for an extended period; (7) the Company’s ability to raise any needed capital in a prolonged economic downturn may be impaired if market disruption and volatility continue or worsen; (8) legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect the Company’s business, revenue, and profit margins; (9) poor financial results may negatively affect liquidity, including liquidity from core deposits; (10) competitive pressures among depository and other financial institutions may increase significantly, resulting in lost business relationships or reduced margins; (11) changes in the interest rate environment may reduce margins or the volumes or values of loans made; (12) competitors may have greater financial resources and develop products that enable them to compete more successfully; (13) the Company’s ability to attract and retain key personnel can be affected by increased competition for experienced employees in the banking industry; (14) adverse changes may occur in the bond markets, affecting portfolio valuation and causing impairment; (15) war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; (16) economic, governmental, or other factors may prevent growth in the Company’s markets; (17) changes in consumer spending and savings habits could impede the Company’s ability to grow its loan and deposit portfolios; (18) the Company may be unfavorably impacted by litigation, which depends on judicial interpretations of law and findings of juries; (19) the dividend suspension may adversely affect the market price of the Company’s stock; (20) third party vendors who provide key components of the Company’s business infrastructure may have system failures or other difficulties which could materially affect operations; and (21) the risk factors discussed from time to time in the Company’s periodic reports filed with the SEC, including but not limited to, this Report. The Company undertakes no obligation to, and does not intend to, update or revise these statements following the date of this filing, whether as a result of new information, future events or otherwise, except as may be required by law.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Analysis should be read in conjunction with the 2010 Annual Report on Form 10-K and the Consolidated Financial Statements & related Notes included in this Report. The Company’s accounting policies, which are described in detail in Form 10-K, are integral to understanding the results reported. The Company’s accounting policies require management’s judgment in valuing assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. This Analysis contains forward-looking statements with respect to business and financial matters. Actual results may vary significantly from those contained in these forward-looking statements. See the sections entitled “Critical Accounting Estimates” and “Cautionary Notice Regarding Forward-Looking Statements” within this Report.

Description of Business

Southeastern Banking Corporation, with assets exceeding $409 million, is a financial services company with operations in southeast Georgia and northeast Florida. Southeastern Bank (the “Bank”), the Company’s wholly-owned commercial bank subsidiary chartered in 1888, offers a full line of commercial and retail services to meet the financial needs of its customer base through its 16 branch locations and ATM network. Services offered include traditional deposit and credit services, long-term mortgage originations, and credit cards. The Bank also offers 24-hour delivery channels, including internet and telephone banking and through an affiliation with a third party broker-dealer, provides insurance and investment brokerage services.

The table below provides a summary of the Bank’s markets as of September 30, 2011.


*Market/* *County*	*Number* of *Offices*	*Total* *Loans¹*		*Total* *Deposits¹*		*Market* Share (%)²		*Market* *Share* *Rank²*

Georgia
McIntosh	2	$	74,445	$	64,144		72.0	1
Brantley	2		17,193		55,155		70.8	1
Bryan	1		16,244		7,370		1.8	5
Camden	3		29,217		47,881		19.7	2
Charlton	1		2,852		53,380		55.3	1
Coffee	2		9,308		21,202		3.2	9
Glynn	1		41,937		18,304		1.2	15
Jeff Davis	1		2,584		22,187		17.0	3

	13	$	193,780	$	289,623		8.7	3


Florida
Nassau	3	$	21,110	$	67,991		7.6	5


Totals	16	$	214,890	$	357,614		8.5	3

¹	Dollar amounts are presented in thousands as of September 30, 2011.

²	Based on the FDIC Summary of Deposits report as of June 30, 2011.

FINANCIAL CONDITION

Overview

Consolidated assets totaled $409.1 million at September 30, 2011, a decrease of $18.5 million (or 4.3%) since December 31, 2010. The decline in total assets was driven largely by a $23.2 million (or 33.5%) decrease in public funds on deposit at the Bank. In addition to the decline in total assets, the Company realized a significant shift in its asset mix since the end of 2010. Net loans decreased $29.4 million (or 12.5%) and cash and cash equivalents increased $17.3 million (or 21.4%) since December 31, 2010. The Company elected to retain liquidity rather than reinvest its funds in riskier financial assets during this weakened economic environment. This shift from higher-yielding loans to lower-yielding earning assets had a detrimental impact on the Company’s net interest margin and earnings. The elevated level of nonperforming assets further hampered the Company’s profitability in the first nine months of 2011, and this factor is expected to continue to create a drag on earnings through the remainder of 2011 and into the first half of 2012.

Total deposits decreased by $17.6 million (or 4.7%) since year end to $357.6 million at September 30, 2011. Noninterest-bearing demand deposits increased $8.7 million (or 15.7%) while interest-bearing demand, savings and time deposits decreased $26.3 million (8.2%) during the first nine months of 2011. As noted above, the decline in total deposits is due primarily to a $23.2 million (or 33.5%) decrease in public funds on deposit at the Bank. At September 30, 2011, public funds deposits represented approximately 12.9% of total deposits compared to 18.4% of total deposits at December 31, 2010. Although the Bank made progress in reducing its funding concentration with large public fund accounts, management expects public funds to increase slightly during the fourth quarter of 2011 as local municipalities collect annual property tax assessments. At September 30, 2011, noninterest-bearing demand deposits represented 17.9% of total deposits compared to 14.8% at December 31, 2010. Shareholders’ equity decreased $1.7 million (or 3.7%) during the first nine months of 2011. At September 30, 2011, shareholders’ equity represented 10.5% of total assets which, with the decline in total assets, remained consistent with the Company’s capital-to-asset ratio at the end of 2010. Refer to the “Liquidity and Capital Resources” section of this Analysis for details on deposits and other funding sources as well as the higher cash balances being maintained currently.

Investment Securities

The amortized cost and estimated fair value of investment securities, all available-for-sale, are summarized in the following table.

Investment Securities by Category

September 30, 2011

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value

^{(Dollars in thousands)}

U. S. Government and agency securities

7,466

212

7,675

U. S. Government-sponsored enterprise securities

3,792

118

—

3,910

Agency residential mortgage-backed securities

30,739

828

31,543

Obligations of states and political subdivisions

13,377

527

—

13,904

Corporate debt obligations

9,429

588

8,927

Total investment securities

64,803

1,771

615

65,959

The amortized cost of investment securities decreased $9.1 million (or 12.3%) since December 31, 2010 primarily due to a decrease in the need for securities to pledge as collateral on public deposits. While there was a decrease in the amount of funds invested in securities during the first nine months of 2011, there was significant volume in trading activity within the portfolio during the period in short-term (one-to-three months) Agency discount notes and U.S. Treasury Bills acquired to collateralize public funds. Purchases of securities in the first nine months of 2011 totaled $296.7 million and redemptions totaled $305.2 million. With the relief from pledging requirements abated, the Company began investing funds in the two-to-five year time horizon to improve its yield on earning assets in the third quarter of 2011.

Approximately 65% of the carrying value of the Company’s securities portfolio, including mortgage-backed securities, is supported by the U.S. Government, a U.S. Government agency or a U.S. Government-sponsored enterprise (“GSE”) at September 30, 2011. On August 5, 2011, Standard & Poor’s rating agency lowered the long-term rating of the U.S. Government, its federal agencies and GSEs from “AAA” to “AA+”. The rating agency maintained the “AAA” rating for short-term (one year or less) obligations of the U.S. Government, its federal agencies and GSEs. Despite this downgrade, management believes the credit quality of the investment portfolio remains fundamentally sound. The Company does not own any collateralized debt obligations, widely known as CDOs, secured by subprime residential mortgage-backed securities. Additionally, the Company does not own any private label mortgage-backed securities. The Company held $31.4 million in residential mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”), both a GSE, at September 30, 2011. Residential mortgage-backed securities issued by FNMA and FHLMC are collateralized foremost by the underlying mortgages and secondly, by FNMA and FHLMC themselves. Management continues to monitor the viability of both FNMA and FHLMC as going concerns: In early 2011, the U.S. Treasury again reiterated its support for FNMA and FHLMC although changes are expected in the business model going forward.

At September 30, 2011, the corporate bond portfolio included debt issuances of banks and bank holding companies domiciled in the southeastern United States. The $502 thousand net unrealized loss on the corporate portfolio is largely reflective of the illiquidity and risk premiums reflected in the market for bank-issued securities due to pervasive capital, asset quality, and other issues which have continued to afflict the banking industry. Although a) major rating agencies have downgraded certain of these securities since our acquisition and b) recent profitability and near-term profit forecasts by industry analysts reflect continuing pressure due to loan losses and other issues, the Company currently expects the issuers of these bonds to settle the securities at par. Since year end, the net unrealized loss position in the portfolio improved $272 thousand (or 35.2%). During 2011, the Company sold one “B+” rated corporate debt obligation for $474 thousand and recorded an $18 thousand loss on the sale. In 2010, the Company sold four “B+” holdings of this same issuer and recorded a $141 thousand loss on the sales. Also, in 2010, the Company recorded a $45 thousand other-than-temporary impairment charge in its holdings to this same issuer, which is further discussed in the Company’s 2010 Form 10-K. The Company held no residual investments in obligations of this issuer at September 30, 2011.

At September 30, 2011, all holdings in the municipal bond portfolio were rated investment grade securities except for twelve non-rated issues with fair values aggregating $3.2 million. The majority, or 84%, of the non-rated issues were based in Georgia. In analyzing non-rated municipals, management considers debt service coverage and whether the bonds support essential services such as water/sewer systems and education.

Management evaluates investment securities for other-than-temporary impairment on a quarterly basis, and more frequently when conditions warrant. This analysis requires management to consider various factors, including the duration and magnitude of the decline in value; the financial condition of the issuer or issuers; structure of the security; and, notwithstanding classification of the portfolio as available-for-sale, the Company’s intent to sell the security or whether it’s more likely than not that the Company would be required to sell the security before the anticipated recovery in market value. At September 30, 2011, management reviewed securities with an unrealized loss and concluded that no material individual securities were other-than-temporarily impaired. Impairment charges could become necessary in the future if the economic crisis facing the banking industry does not fully abate and various issuers’ financial condition weakens.

Loans

Loans, net of unearned income, decreased $30.8 million (or 12.5%) since the end of 2010 to $214.8 million at September 30, 2011. The net loans-to-deposits ratio aggregated 60.1% at September 30, 2011 versus 65.5% at December 31, 2010 and 68.8% a year ago. Due to economic uncertainties within the Company’s markets, particularly in the real estate sector, and resultant concerns regarding credit opportunities, management expects loan volumes to flatten or decline further for the remainder of 2011. The table below summarizes the categorical changes within the loan portfolio since the end of 2010.


*Loans by Category*	September 30, 2011			December 31, 2010			September 30, 2010
(Dollars in thousands)

Commercial, financial, and agricultural¹	$	28,644		$	33,505		$	31,814
Real estate – construction³		64,995			86,972			91,691
Real estate – commercial mortgage		65,439			64,824			65,291
Real estate – residential mortgage^2,3		45,998			48,687			49,404
Consumer, including credit cards		9,814			11,701			12,007

Loans, gross		214,890			245,689			250,207
Unearned income		(49	)		(65	)		(78	)

Net loans	$	214,841		$	245,624		$	250,129

¹	Includes obligations of states and political subdivisions.

²	Typically have final maturities of 15 years or less.

To comply with recent regulatory guidelines, certain loans that formerly would have been classified as real estate – mortgage, are now being coded as real estate - construction. Comparable loans from prior periods have not been reclassified to reflect this change. The majority of real estate construction loans are residential in nature.

Commercial real estate loans, which included construction and development loans, represented approximately 60.7% and 61.8% of the total loan portfolio at September 30, 2011 and December 31, 2010, respectively. Due to continued instability of real estate values, loans in the commercial real estate portfolio may have a greater risk of uncollectibility than other loans. Additionally, because a substantial portion of the loan portfolio is secured by real estate in southeast Georgia and northeast Florida, the loan portfolio is particularly susceptible to changes in market conditions in those areas.

The largest change within the portfolio since the end of 2010 was in construction and development loans, which declined $22.0 million (or 25.3%) due primarily to collections, foreclosures and charge-offs of delinquent loans during the first nine months of 2011. These loans, which are primarily loans for the acquisition and development of residential properties, are concentrated in the Company’s coastal markets. With the exception of existing commitments, the Company is only originating new construction and development loans to customers with extraordinary equity injections, outside financial strength, or other performance metrics with low dependence on the underlying collateral.

Many commercial and commercial real estate loans with floating rates have reached their contractual floors. Additionally, many recent originations and renewals have been priced at fixed rather than adjustable rates, unless floors applied. Loans with floating rates that had reached a contractual floor approximated $91.2 million at September 30, 2011 compared to $105.8 million at December 31, 2010 and $104.0 million at September 30, 2010. The average yield on these particular outstanding loans, which included all loan types, was 5.75% or 250 basis points above the Company’s prime rate of interest (3.25%), at September 30, 2011. Management continues to shorten maturity options on commercial credits as feasible, a move that should mitigate the Company’s interest sensitivity position when the prime rate adjusts upward.

Although the Company’s loan portfolio is diversified, significant portions of its loans are collateralized by real estate. At September 30, 2011, loans with real estate as the primary collateral comprised approximately 83.4% of the loan portfolio. As required by policy, real estate loans are collateralized

based on certain loan-to-appraised value ratios at origination. A geographic concentration in loans exists given the Company’s operations within a regional area of southeast Georgia and northeast Florida. The Company continues to closely monitor real estate valuations in its markets and consider any implications on the allowance for loan losses and the related provision.

On an aggregate basis, commitments to extend credit and standby letters of credit approximated $28.8 million at September 30, 2011, compared to $31.7 million at year-end 2010 and $36.3 million at September 30, 2010. The decline in overall commitments results from the Company’s decision to reduce its exposure to higher risk areas, including acquisition and development lending, as well as customer decisions not to renew their lines. Because a substantial amount of these contracts expire without being drawn upon, total contractual amounts do not necessarily represent future credit exposure or liquidity requirements.

Nonperforming Assets

Nonperforming assets, which consist of nonaccrual loans, restructured loans, foreclosed real estate, and other repossessions, totaled $49.3 million at September 30, 2011. The aggregate balance of nonperforming assets declined 5.6% since December 31, 2010 and 8.0% since September 30, 2010. As a percent of total assets, nonperforming assets totaled 12.1% at September 30, 2011 versus 12.2% at December 31, 2010 and 12.7% at September 30, 2010. Nonperforming assets materially and adversely affected the Company’s business, resources, and operating results during the first nine months of 2011, and management expects continuing adverse effects until real estate markets, particularly coastal markets, improve. Construction and development loans secured by land tracts and lots remained the primary factor in the nonperforming trends. Summary information about nonperforming assets and accruing loans past due 90 days or more is provided in the following table.


*Nonperforming Assets*¹	September 30, 2011			December 31, 2010			September 30, 2010
(Dollars in thousands)

Nonaccrual loans:
Commercial, financial, and agricultural	$	262		$	424		$	306
Real estate – construction		22,735			21,840			24,843
Real estate – commercial mortgage		498			1,378			1,567
Real estate – residential mortgage		4,558			4,507			3,726
Consumer, including credit cards		259			373			295

Total nonaccrual loans		28,312		$	28,522			30,737
Troubled debt restructured loans²		6,772			12,669			13,271

Total nonperforming loans		35,084		$	41,191			44,008
Foreclosed real estate³		14,232			11,034			9,565
Other repossessed assets		15			15			35

Total nonperforming assets	$	49,331		$	52,240		$	53,608


Accruing loans past due 90 days or more	$	75		$	121		$	106

Ratios:
Nonperforming loans to net loans⁴		16.3	%		16.8	%		17.6	%


Nonperforming assets to net loans⁴ plus foreclosed/repossessed assets		21.5	%		20.4	%		20.6	%

¹	See Note 4 to the consolidated financial statements for definitional variance between impaired and nonperforming loans and also, categorization differences resulting from disaggregation of loan portfolio required in footnote disclosure.

²	Does not include restructured loans reported as nonaccrual.

³	Includes only other real estate acquired through foreclosure or in settlement of debts previously contracted.

⁴	Net of unearned income.

Nonaccrual Loans

Nonaccrual loans decreased $210 thousand (or 0.7%) in the first nine months of 2011. Since the end of 2010, approximately $13.3 million of loans were placed on nonaccrual status, $5.6 million charged-off, 5.4 million transferred out by foreclosure or repossession, and $2.5 million reduced by payments or other activity.

Loans restructured in troubled debt restructurings that are on nonaccrual status at September 30, 2011 totaled $7.9 million, a 9.6% increase compared to $7.2 million at December 31, 2010.

At September 30, 2011, real estate-secured loans comprised 98.7% of total nonaccrual balances. The collateral underlying nonaccrual balances is presented in the following table.


*Nonaccrual Loans by Collateral Type*	*September 30,* *2011*		December 31, 2010
(Dollars in thousands⁾

Collateral type:
Real estate:
Land tracts	$	6,555	$	6,027
Lots within developments		11,841		11,682
Residential dwellings		9,029		8,828
Commercial buildings		510		1,385

Total real estate	$	27,935		27,922
Equipment		249		442
Other		128		158

Total nonaccrual loans	$	28,312	$	28,522

Relationships above $250,000 comprised 85.7% or $24.3 million of nonaccrual balances at September 30, 2011. The table below presents nonaccrual loans by relationship tiers.


*Nonaccrual Loans by Relationship Tiers*	Number of Relationships		*Balances*		Percent of Total Balance			Average Balance within Tier
(Dollars in thousands⁾

*September 30, 2011*
Relationship tier:
£ $250,000		145	$	4,032		14.3	%	$	28
> $250,000 - £ $750,000		4		1,363		4.8	%		341
> $750,000		9		22,917		80.9	%		2,546

Total		158	$	28,312		100.0	%		179


December 31, 2010
Relationship tier:
£ $250,000		145	$	4,244		14.88	%	$	29
> $250,000 - £ $750,000		5		2,223		7.79	%		445
> $750,000		9		22,055		77.33	%		2,451

Total		159	$	28,522		100.00	%		179

At September 30, 2011, the largest relationship within this group had a $4.37 million book balance. Unless pricing and demand in the real estate markets improve, management expects other borrowers, including other borrowers with collateral-dependent loan balances above $250,000, may also stop servicing their loans.

Management continues to evaluate collateral underlying nonaccrual loans and adjusts valuations based on appraisal and similar information available. Unfortunately, valuation estimates can change, resulting in additional charge-offs and provisioning for loan losses. The Company has adopted the following policy for obtaining updated appraisals for impaired loans, which is differentiated based on terms, loan balance and status of the loan.

•

Impaired loans with interest-only payment terms or on nonaccrual status with:

•

Balances greater than or equal to $250,000 – Updated external appraisals are obtained at least every two years. For such loans, internal evaluations are required for each year in which an external appraisal is not obtained.

•

Balances less than $250,000 – Updated external appraisals are obtained at least every two years on more complex properties. For less complex properties, such as single-family residences, internal evaluations are permitted on an annual basis.

•

Impaired loans with amortizing principal and interest terms that are performing:

•

The underlying collateral on these loans are reevaluated each time the loan matures and is considered for renewal, or when the terms of the loan are materially modified. The decision of whether to order an external appraisal or perform an internal evaluation varies based on the age of original appraisal, the complexity of property, and the credit risk characteristics of the loan relationship.

Troubled Debt Restructurings

Troubled debt restructurings (“TDRs”) are loans where concessions were granted by the Company to borrowers experiencing financial difficulties. At September 30, 2011, the Company had $14.7 million in TDRs. Based on performance in accordance with the restructured terms, the Company has elected to accrue interest on $6.8 million in TDRs outstanding at September 30, 2011. Certain TDRs are on nonaccrual status due to a lack of performance or management’s concern regarding future repayment ability or performance. The TDRs that are on nonaccrual status at September 30, 2011 totaled $7.9 million. These TDRs are included in nonaccrual loans in this Report.

Since the end of 2010, the amount of accruing TDRs outstanding decreased $5.9 million (or 46.5%). The material changes in accruing TDRs during the first nine months of 2011 include: two loans totaling approximately $4.7 million were placed on nonaccrual status; one loan with a balance of $2.3 million was “upgraded” out of TDR status based on performance; and three loans totaling $1.5 million were added to the pool of TDRs. At September 30, 2011, the specific allowance allocated to the accruing TDR balance totaled $1.1 million.

Foreclosed Real Estate

During the first nine months of 2011, the balance of real estate acquired through foreclosure or in settlement of debts previously contracted increased $3.2 million (or 28.9%) to $14.2 million at September 30, 2011. Of the $14.8 million reported as other real estate owned on the Company’s consolidated balance sheet at September 30, 2011, $594 thousand is not categorized as “foreclosed real estate”. This property is under a lease-purchase agreement with a local municipality. Foreclosures, sales, and subsequent devaluations within foreclosed real estate balances totaled $5.3 million, $1.6 million, and $500 thousand, respectively, during the first nine months of 2011.

The following table summarizes the foreclosed real estate portfolio by real estate type.


*Foreclosed Real Estate by Type*	*September 30,* *2011*		December 31, 2010
(Dollars in thousands)

Real estate:
Land tracts	$	8,326	$	5,584
Lots within developments		2,637		2,025
Residential dwellings		2,414		2,986
Commercial buildings		855		439

Total foreclosed real estate	$	14,232	$	11,034

Approximately 82.3% of these holdings were located in Georgia with the balance in Nassau County, Florida at September 30, 2011. At September 30, 2011, the Company owned eight properties valued in excess of $500,000 per property with an aggregate basis of $8.1 million, representing 57.1% of the total foreclosed real estate portfolio. The Company’s foreclosed real estate holdings can be viewed via a link from its website at www.southeasternbank.com or directly at www.liveatthecoast.com.

Although foreclosed properties continue to be marketed aggressively, when estimating their carrying value, management expects to incur carrying costs for at least one year. Any additional devaluation subsequent to foreclosure will be charged to operations. Under state law, all foreclosed property is required to be appraised annually commencing within one year from acquisition by an independent appraiser knowledgeable in the fair market value of such assets, and if the book value of the property does not exceed two percent of the statutory capital base of the Bank (or $782 thousand at September 30, 2011), the appraisals may be made by a qualified officer of the Bank. The Company has adopted the following policy for obtaining subsequent reevaluations for foreclosed properties, which is differentiated primarily based on the carrying value of the property.

•

Balances less than $100,000 – New internal evaluations or external appraisals will be obtained as needed by management in order to make informed decisions in a deteriorating market environment.

•

Balances greater than $100,000 but less than $250,000 – New internal evaluations will be prepared on at least an annual basis. Management may elect to order an external appraisal in certain situations.

•

Balances of $250,000 and greater – An updated external appraisal will be obtained on at least an annual basis. However, management made elect to utilize an internal evaluation in lieu of an external appraisal in the following situations:

•

If, based on the previous external appraisal, an understanding of the changes in market conditions since that appraisal, or recent sales or appraisals of similar properties in the same market, management determines that the carrying balance of the property is significantly below market value.

•

If recent sales of comparable properties in the same market are readily available, and management concludes the valuation assumptions can be supported by market data.

•

If the property is under an executed sales contract at the appraisal anniversary date. In this situation, the expected net proceeds from the sales contract will represent the market value of the property.

Other Potential Problem Loans

Loans past due 90 days or more and still accruing interest totaled $75 thousand, or less than 1% of total loans, at September 30, 2011. Loans past due 30-89 days represented 1.53% of total loans at September 30, 2011, totaling $3.3 million. In aggregate, approximately 73.3% of these past due loans were secured by real estate.

Accruing loans classified as individually impaired under accounting guidance to creditors on impairment of loans totaled $6.9 million at September 30, 2011, up $2.4 million or 53.7% from the end of 2010. These loans are predominately to borrowers whose loan repayment was expected to come foremost from sales of underlying real estate collateral. Due to lagging sales and lingering distress in the real estate markets, payment of principal and interest on these loans has come from borrower reserves or other resources, constituting a change in the initial source of payment/terms of these loans. Although these loans continue to perform and management has no evidence to suggest that the borrowers might cease to perform in the future, their performance has been through other resources and the value of the underlying collateral has diminished. Management reviews all classified loans with total credit exposure of $250,000 or more on a monthly basis and evaluates underlying collateral, assuming salvage values and estimating any allowance necessary to cover projected losses at – worse case scenario – liquidation. After adjustments for collateral value shortfalls, the allowance for loan losses allocated to these classified credits totaled $1.5 million at September 30, 2011.

Allowance for Loan Losses

The Company continuously reviews its loan portfolio and maintains an allowance for loan losses available to absorb estimated losses inherent in the portfolio. Management prepares a comprehensive analysis of the allowance for loan losses on a monthly basis. This analysis is divided into two components: specific allowances for individual loans and general allowances for pools of loans based on similar risk characteristics such as loan type, credit risk grades and delinquency status. Such evaluation considers numerous factors, including, but not limited to, net charge-off trends, internal risk ratings, loss forecasts, collateral values, geographic location, delinquency rates, nonperforming loans, underwriting practices, industry conditions, and economic trends. The Bank’s Board of Directors is responsible for affirming the allowance methodology and assessing the general and specific allowance factors in relation to estimated and actual net charge-off trends.

Specific Reserves

The first component of the allowance for loan loss methodology covers the measurement of specific allowances for individual impaired loans as required by FASB ASC 310-10-35, Accounting by Creditors for Impairment of a Loan. Specific allowances for loan losses are established for large impaired loans evaluated on an individual basis. The specific allowance established for these loans is based on a thorough analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the loan’s estimated market value, or the estimated fair value of the underlying collateral.

The following table summarizes the impaired loans and the allowance for loan losses allocated to those loans by loan type as of September 30, 2011 and December 31, 2010.


	Recorded Investment			Unpaid Principal Balance		Related Allowance
(Dollars in thousands)

*September 30, 2011*
Impaired loans with a valuation allowance:
Commercial real estate:
Construction and development	$	27,972		$	38,464	$	2,426
Owner-occupied		2,083			2,243		248
Non owner-occupied		3,191			3,191		122
Residential real estate – mortgage		8,263			9,647		1,404
Other commercial, financial, and agricultural		340			463		32
Consumer, including credit cards		259			389		14

Total impaired loans	$	42,108		$	54,397	$	4,246


Related allowance as a % of impaired loans		10.08	%


Recorded investment of impaired loans as a % of unpaid principal balance of impaired loans		77.4	%


December 31, 2010
Impaired loans with a valuation allowance:
Commercial real estate:
Construction and development	$	30,017		$	39,674	$	2,459
Owner-occupied		1,338			1,483		36
Non owner-occupied		3,749			3,869		117
Residential real estate – mortgage		7,545			8,559		882
Other commercial, financial, and agricultural		2,752			2,883		81
Consumer, including credit cards		432			812		6

Total impaired loans	$	45,833		$	57,280	$	3,581


Related allowance as a % of impaired loans		7.81	%


Recorded investment of impaired loans as a % of unpaid principal balance of impaired loans		80.0	%

The aggregate amount of impaired loans decreased $3.7 million since the end of 2010. However, due to further weakness in real estate valuations, the allowance allocated to this category of loans increased $665 thousand from 7.81% at December 31, 2010 to 10.08% of impaired loans at September 30, 2011. At September 30, 2011, the Company’s recorded investment in impaired loans represented 77.4% of the unpaid principal balance on those loans. The Company has effectively already recognized a $12.3 million or 22.6% discount (through partial charge-offs and/or application of payments received to principal rather than interest and fees) on those impaired loans.

General Reserves

The second component of the allowance for loan loss methodology addresses all loans that are not individually evaluated for impairment. General reserves are established for loans grouped into pools based on similar credit risk characteristics. Credit risk is a dynamic risk that fluctuates due to changes in borrowers’ repayment capacity, changes in interest rates, market changes, and other economic changes. For loans evaluated collectively in the general reserve component of the allowance for loan loss, the loan portfolio is segmented into groups of loans with common credit risk characteristics.

The loan segment groups currently used, and a description of their specific risks, are summarized as follows:

•

Commercial, financial, and agricultural

•

Unsecured commercial – Loans in this category are entirely reliant on the repayment capacity of the business and any guarantors. Risks common to commercial loans are potential industry and geographic concentrations. Deteriorating economic conditions increase the potential risk of cash flow difficulties in the ongoing business, which could impair the likelihood of repayment.

•

Equipment – In addition to risks common to unsecured commercial loans noted above, collateralized equipment may depreciate faster than the repayment of the loan, which means the outstanding balance on the loan may exceed the value of the collateral at some point during the loan term. Also, if repossession becomes necessary, it can be difficult to find the collateral. There is industry risk when financing equipment. For example, the logging industry has endured significant turmoil over the past decade, which has added to the credit risk for the financing of logging equipment.

•

Farm real estate – Loans in this category include farm and timber loans secured by real estate. These loans are susceptible to deterioration in the primary source of repayment, which is often the cash flow of the ongoing operation of farm or timber production. These industries tend to be cyclical in nature. In addition, there is the risk that weather can hamper production and harvesting, which can have immediate and unforeseen adverse impacts on the borrower’s financial condition. There is also some risk of deterioration in collateral value.

•

Other commercial – Loans in this category include the following:

•

Farm – other than real estate – These loans bear many of the same inherent risks as farm real estate loans and unsecured commercial loans.

•

Business assets – includes assigned notes, inventory, accounts receivable, furniture, fixtures, etc. Monitoring the condition and existence of this collateral can be difficult. Deteriorating economic conditions increase the risk of cash flow difficulties in the ongoing business, which could impair the likelihood of repayment.

•

Real estate – construction

•

This category includes loans for the acquisition, development or construction of residential and commercial properties. Risks in this category include geographic, industry and borrower concentrations. Repayment is often dependent on the resale of the underlying collateral. Construction loans bear unique risks, including the potential for cost overruns. Consumer residential construction loans bear the risk that the borrower will be unable to secure long-term financing arrangements. Contract construction loans bear the risk that the contract to purchase will not be honored after construction is completed. Speculative construction loans bear the risk that demand will soften and values will deteriorate such that the borrower cannot sell the property in a timely fashion or at a price sufficient to repay the debt in full.

•

Real estate – commercial mortgage

•

Owner-occupied – This category includes loans secured by commercial buildings that house the borrower’s primary business, and the primary source of repayment is the cash flow of the borrower and not the rental income or sale of the collateral. These loans are deemed to bear less credit risk than non owner-occupied commercial real estate loans because there is a source of repayment apart from the collateral. Nevertheless, as with risks associated with other commercial loans, the cash flow of these businesses is often detrimentally impacted during economic downturns – potentially to such a degree that the primary source of repayment is not sufficient to service the debt.

•

Non owner-occupied – This category includes loans secured by hotels, apartment buildings, and other commercial buildings for which the repayment of the loan is dependent

predominantly on the rental income or sale of the real estate. Deteriorating economic conditions can reduce occupancy rates and the sales potential of investment properties. Loans secured by buildings purchased for investment and resale bear the risk that real estate market conditions could deteriorate and detrimentally impact the value of the collateral to a degree that jeopardizes full repayment.

•

Real estate – residential mortgage

•

These loans are susceptible to risk factors common to the consumer loans described below that reduce a consumer’s capacity to repay. This includes increased unemployment and increases in the cost of living. Declining real estate values can reduce or eliminate the borrower’s equity in their homes which can affect the value of home equity lines of credit and second mortgages.

•

Consumer, including credit cards

•

Consumer unsecured – Loans in this category are susceptible to many of the same risks as consumer credit cards, especially overdraft protection lines of credit, which also have no maturity dates. There is no collateral, so a bankruptcy filing results in immediate charge-off. Risks common to consumer loans include unemployment and changes in local economic conditions.

•

Credit cards – Loans in this category are revolving unsecured lines of credit. They are susceptible to delinquency due to strains on consumers in the form of such factors as unemployment, inflation, and lifestyle changes. They have no maturity date, which adds to the risks of changes in repayment capacity over time.

•

Other consumer – Loans in this category include the following:

•

Vehicles, boats, recreational vehicles, mobile homes and other depreciating collateral – Loans in this category have the same collateral risks as those in the commercial equipment pool. They also have the risks common to unsecured consumer loans, including a weakened capacity to pay due to unforeseen changes in cash flow.

•

Securities – Loans in this category are susceptible to weakening collateral positions when the value of the securities declines to unacceptable levels. Security values can be volatile.

On each loan, credit risk ratings are assigned at loan origination and re-evaluated on performing credits at each renewal thereafter. Risk ratings are reviewed for loans past due over 30 days on a monthly basis and updated as necessary. Secured loans that reach 90 days past due are placed in nonaccrual status and downgraded to substandard. In addition, during the normal course of monitoring loan relationships, when the Company obtains information that reflects deterioration in the repayment capacity of a particular borrower, the risk grading for the loan is reviewed for accuracy and updated at that time.

In addition to the Company’s internal reviews of risk rating, as discussed above, the Company has established an external loan review function, which is currently carried out by an independent loan review firm. On a quarterly basis, the firm reviews a sample of the portfolio to independently evaluate the following: 1) timely and accurate assignment of risk ratings; 2) compliance with the Company’s loan policy; and 3) documentation and enforceability of borrower obligations and the Company’s interest in collateral. On an annual basis, at a minimum, the external loan review plan includes:

•

All loan relationships with balances in excess of $500,000;

•

All loan relationships with balances in excess of $50,000 with a risk rating of substandard or worse.

General reserve factors for each loan segment are established based on an analysis of historical charge-off experience and expected loss-given-default derived from the Company’s internal risk rating process. At September 30, 2011, management used a trailing ten-quarter historical average loss rate for each pool of

loans. At December 31, 2010, management used a trailing six-quarter historical average loss rate for each pool of loans. At December 31, 2009, management used a trailing four-quarter historical average loss rate for each pool of loans. The historical period has been gradually expanded to continue to include loss rates incurred early in the cycle. Management believes that excluding those losses would not provide an accurate estimate that best reflects the inherent risk in the loan portfolio. Other adjustments may be made to the historical loss rates for the pools after an assessment of internal and external influences on credit quality that are not fully reflected in the historical loss or risk rating data. These influences typically include recent loss experience in specific portfolio segments, trends in loan quality, changes in market focus, and concentrations of credit. This element necessarily requires a high degree of managerial judgment to anticipate the impact that economic trends, legislative or governmental actions, or other unique market and/or portfolio issues will have on credit losses.

The following table summarizes the historical loss rates and adjustments made for qualitative/ environmental factors used in assessing the general reserves for all loans not individually evaluated for impairment at September 30, 2011 and December 31, 2010.


	*September 30, 2011*		December 31, 2010
*Loan Segment*	10-Quarter Historical Loss Rate	Adjustments for Qualitative/ Environmental Factors	6-Quarter Historical Loss Rate	Adjustments for Qualitative/ Environmental Factors

Commercial, financial, and agricultural	0.03 – 1.94%	0.04 - 0.06%	0.22 – 2.85%	0.04 – 0.06%
Real estate – construction	7.28%	0.04%	7.96%	0.04%
Real estate – commercial mortgage:
Owner-occupied	0.29%	0.04%	0.22%	0.04%
Non owner-occupied	0.23%	0.04%	0.22%	0.04%
Real estate – residential mortgage	2.02%	0.04%	2.03%	0.04%
Consumer, including credit cards	4.93 – 5.20%	0.08%	4.14 – 5.74%	0.08%

Unallocated allowances relate to inherent losses that are not included elsewhere in the allowance. The qualitative factors associated with unallocated allowances include the inherent imprecision in models and lagging or incomplete data. Because of their subjective nature, these risk factors are carefully reviewed by management and revised as conditions indicate.

Deterioration in the real estate portfolio, particularly land acquisition and development loans, has been the overriding factor in the provisions made to the allowance for loan losses since 2008. Management expects additional provisions to be made to the allowance for loan losses in the fourth quarter of 2011 as updated appraisals are obtained on coastal real estate collateral. Net charge-offs represented 3.22% of average loans (annualized) for the first nine months of 2011, a 129 basis point decrease from 4.51% for the same period in 2010.

A summary of recent activity in the allowance for loan losses is presented in the following table.


*Allowance for Loan Losses*
*Nine Months Ended September 30,*	*2011*			2010			2009
(Dollars in thousands⁾

Allowance for loan losses at beginning of year	$	9,916		$	7,170		$	4,929
Provision for loan losses		4,260			10,570			3,540
Charge-offs:
Commercial, financial, and agricultural		66			395			280
Real estate – construction		4,342			7,101			1,711
Real estate – commercial mortgage		217			119			99
Real estate – residential mortgage		974			1,088			168
Consumer, including credit cards		164			175			205

Total charge-offs		5,763			8,878			2,463

Recoveries:
Commercial, financial, and agricultural		17			24			30
Real estate – construction		19			43			196
Real estate – commercial mortgage		—			—			—
Real estate – residential mortgage		35			11			5
Consumer, including credit cards		80			53			63

Total recoveries		151			131			294

Net charge-offs		5,612			8,747			2,169

Allowance for loan losses at end of period	$	8,564		$	8,993		$	6,300

Net loans outstanding¹ at end of period	$	214,841		$	250,129		$	282,104

Average net loans outstanding¹ at end of period	$	233,113		$	258,460		$	282,922

Ratios:
Allowance to net loans		3.99	%		3.60	%		2.23	%

Net charge-offs to average loans²		3.22	%		4.51	%		1.02	%

Provision to average loans²		2.44	%		5.45	%		1.67	%

Recoveries to total charge-offs		2.62	%		1.48	%		11.94	%

¹	Net of unearned income.

²	Annualized.

A loan is charged-off the Company’s books at any point in time when it is no considered a bankable asset within the parameters of policy. The Company’s charge-off policy is differentiated between unsecured and secured loans. The general parameters of the Company’s charge-off policy are as follows:

•

An unsecured loan is charged-off when it is 90 days past due.

•

A partially-secured loan is written-down to the fair value of the collateral when the loan reaches 90 days past due.

•

A fully-secured loan, is not written-down when the loan reaches 90 days past due.

The following are situations in which the Company might elect to record a specific reserve against an impaired loan rather than charge-off a portion of the loan:

•

The loan is an accruing TDR and performing as agreed.

•

The loan has already been written-down by the confirmed loss (the deficiency between the fair value of the collateral and the current balance of the loan), and an additional specific reserve is required above and beyond the initial write-down due to conservative discounts for such factors as estimated market deterioration, margining collateral according to federal supervisory limits, selling costs/commissions, etc.

•

There is outside financial repayment capacity in the form of either recurring cash flow or liquidity of the borrowers or guarantors.

•

The Company is currently in the process of re-evaluating the fair value of the collateral. A write-down decision would be premature in such instances.

•

The Company is negotiating or employing an alternative repayment plan.

If none of the above conditions are true, the loan will be written-down to the fair value of the collateral.

The following table summarizes the amount of impaired loans for which we have recorded partial charge-offs and the amount charged-off as of September 30, 2011 and December 31, 2010.


	September 30, 2011							December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Amount Partially Charged-off			Recorded Investment		Unpaid Principal Balance		Amount Partially Charged-off
(Dollars in thousands)

Impaired loans with a partial charge-off:
Commercial real estate:
Construction and development	$	16,339	$	26,629	$	10,214		$	15,122	$	24,341	$	9,209
Owner-occupied		194		266		50			217		265		44
Non owner-occupied		—		—		—			—		—		—
Residential real estate – mortgage		1,885		3,146		1,205			1,876		2,570		658
Other commercial, financial, and agricultural		—		—		—			12		27		11
Consumer, including credit cards		—		—		—			73		339		265

Total impaired loans	$	18,418	$	30,041	$	11,469		$	17,300	$	27,542	$	10,187


Partial charge-offs as a % of unpaid principal balance						38.2	%						37.0	%

Partial charge-offs taken on impaired loans are reflected in the charge-off history for each general reserve loan pool used in our loan loss methodology. By recognizing a partial charge-off, we are absorbing the loss through the allowance for loan losses and reducing our recorded investment in the loan. These partial charge-offs reduce our coverage ratio – which is the ratio of the allowance for loan losses to total nonperforming loans. The following table illustrates the impact that these partial charge-offs had on our coverage ratio as of September 30, 2011.

As of September 30, 2011

As
Reported

Partial
Charge-offs

Proforma
Adjusted

(Dollars in thousands)

Allowance for loan losses

8,564

11,469

20,033

Nonperforming loans

35,084

11,469

46,553

Coverage ratio

24.4

43.0

RESULTS OF OPERATIONS

The Company recorded a net loss of $1.99 million for the three months ended September 30, 2011 compared to a net loss of $2.65 million during the same period in 2010. On a per share basis, the third quarter loss totaled $0.64 at September 30, 2011, a $0.21 per share improvement from the $0.85 net loss per share at September 30, 2010. Major variances in the Company’s results of operations for the three months ended September 30, 2011 compared to the same period in 2010 included:

•

$28 thousand improvement in net interest income;

•

$1.75 million decline in the provision for loan losses;

•

$49 thousand decrease in noninterest income;

•

$576 thousand decrease in noninterest expenses; and

•

Nonrecognition of income tax benefits for both regulatory and financial accounting purposes in 2011 compared to a $1.64 million benefit recognized in the third quarter of 2010.

The Company recorded a net loss of $2.19 million for the first nine months of 2011 compared to a net loss of $5.88 million during the same period in 2010. On a per share basis, the year-to-date loss totaled $0.70 at September 30, 2011, a $1.18 per share improvement from the $1.88 net loss per share at September 30, 2010. Major variances in the Company’s results of operations for the first nine months of 2011 compared to the same period in 2010 included:

•

$362 thousand reduction in net interest income;

•

$6.31 million decline in the provision for loan losses;

•

$136 thousand decrease in noninterest income;

•

$1.78 million decrease in noninterest expenses; and

•

Nonrecognition of income tax benefits for both regulatory and financial accounting purposes in 2011 compared to a $3.91 million benefit recognized in the first nine months of 2010.

Variations in net interest income and noninterest income and expenses are further discussed in the following subsections of this Analysis; the variation in the provision for loan losses is separately discussed within the Financial Condition section.

Net Interest Income

Net interest income declined $362 thousand (or 3.8%) during the first nine months of 2011 compared to 2010. Interest income declined $1.43 million (or 10.8%) during the first nine months of 2011 compared to 2010 due to a shift in earning assets from higher-yielding loans to lower-yielding cash and cash equivalents, an increase in nonaccrual loans, and the prolonged low interest rate environment. The decrease in interest income was offset in part by a $1.07 million (or 29.5%) decrease in interest expense as rates paid on deposit accounts continued to re-price downward. Reductions in the cost of funds in the current economic cycle have not kept pace with declines in asset yields since liquidity constraints have compelled other banks in our markets to rely more heavily on deposits, particularly time certificates, for funding; this reliance has kept deposit rates higher than national averages. In addition, new competitor banks in several of our markets have advertised higher deposit rates attempting to increase their market share.

Net interest income and resultant margins and spreads are projected to remain below 2010 levels for the remainder of 2011 due to: a) yield reductions on a year-over-year basis, due largely to higher cash equivalent balances and shortened maturities on investment securities; b) overall lower average balances on loans; and c) increases in nonperforming assets, particularly nonaccrual loans and foreclosed real estate, also on an average basis.

The net interest margin approximated 3.30% for the nine months ended September 30, 2011 versus 3.43% during the same period in 2010. The interest rate spread decreased 1 basis point to 3.12% compared to 3.13% in 2010. The average yield on earning assets declined 48 basis points to 4.18% in the first nine months of 2011 compared to 2010 while the average rate paid for interest-bearing liabilities decreased 47 basis points to 1.06% in the first nine months of 2011 compared to 2010. Comparative details about average balances, income/expense, and average yields earned and rates paid on interest-earning assets and liabilities for the nine months ended September 30, 2011 and 2010 are provided in the following table.


	2011							2010
*Average Balances⁷ Nine Months Ended September 30,*	Average Balances		Income/ Expense		Yields/ Rates			Average Balances		Income/ Expense		Yields/ Rates
(Dollars in thousands)

Assets
Interest-earning assets:
Net loans^1,2,4	$	233,113	$	10,073		5.78	%	$	258,460	$	10,871		5.62	%
Taxable investment securities³		59,269		1,305		2.94	%		50,131		1,793		4.77	%
Tax-exempt investment securities^3,4		12,611		617		6.54	%		17,919		873		6.50	%
Other interest-earning assets⁵		84,296		164		0.26	%		64,779		112		0.23	%

Total interest-earning assets	$	389,289	$	12,159		4.18	%	$	391,289	$	13,649		4.66	%


Liabilities
Interest-bearing liabilities:
Interest-bearing demand deposits⁶	$	126,454	$	478		0.51	%	$	116,282	$	635		0.73	%
Savings		57,187		205		0.48	%		54,756		298		0.73	%
Time certificates		132,159		1,765		1.79	%		137,510		2,520		2.45	%
FHLB advances		5,000		98		2.62	%		6,374		160		3.34	%
Other short-term borrowings		662		—		—			657		—		—

Total interest-bearing liabilities	$	321,462	$	2,546		1.06	%	$	315,579	$	3,613		1.53	%

Excess of interest-earning assets over interest-bearing liabilities	$	67,827						$	75,710

Interest rate spread						3.12	%						3.13	%

Net interest income			$	9,613						$	10,036

Net interest margin						3.30	%						3.43	%

¹	Average loans are shown net of unearned income. Nonperforming loans are included. Income on nonaccrual loans, if recognized, is recorded on a cash basis.

²	Includes loan fees and late charges.

³	Securities are presented on an amortized cost basis. Investment securities with original maturities of three months or less are included, as applicable.

⁴	Interest income on tax-exempt loans and securities is presented on a taxable-equivalent basis, using a federal income tax rate of 34%. No adjustments have been made for any state tax benefits or the nondeductible portion of interest expense.

⁵	Includes interest-bearing deposits in other banks, federal funds sold and FHLB stock.

⁶	Includes NOW and money market accounts.

⁷	Averages presented generally represent average daily balances.

The following table summarizes the changes in interest income and interest expense attributable to volume and rates between the two reporting periods.


	*2011 Compared to 2010*
*Interest Differential¹*	*Increase (Decrease) Due to*
Nine Months Ended September 30,	*Volume*			*Rate*			*Net*
(Dollars in thousands)

Interest income:
Net loans^2,3	$	(1,066	)	$	268		$	(798	)
Taxable investment securities		327			(815	)		(488	)
Tax-exempt investment securities³		(259	)		3			(256	)
Other interest-earning assets⁴		34			18			52

Total interest income		(964	)		(526	)		(1,490	)


Interest expense:
Interest-bearing demand deposits⁵		56			(213	)		(157	)
Savings		13			(106	)		(93	)
Time certificates		(98	)		(657	)		(755	)
FHLB advances		(34	)		(28	)		(62	)
Other short-term borrowings		—			—			—

Total interest expense		(63	)		(1,004	)		(1,067	)

Net change in net interest income	$	(901	)	$	478		$	(423	)

Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is change in rate times the previous volume. Thus, changes that are not solely due to volume have been consistently attributed to rate.

²	Includes loan fees. See the average balances table on the previous page for more details.

³	Interest income on tax-exempt loans and securities is presented on a taxable-equivalent basis, using a federal income tax rate of 34%. No adjustments have been made for any state tax benefits or the nondeductible portion of interest expense.

⁴	Includes interest-bearing deposits in other banks, federal funds sold and FHLB stock.

⁵	Includes NOW and money market accounts.

The decline in interest income is due primarily to declines in the volume of loans outstanding and the yield on taxable investment securities for the nine months ended September 30, 2011 compared to 2010. The decline in interest expense is due primarily to declines in rates paid on deposits.

Provision for Loan Losses

The provision for loan losses is discussed in detail with the allowance for loan losses in the “Financial Condition” section of the Analysis.

Noninterest Income

Noninterest income declined $137 thousand (or 4.7%) during the first nine months of 2011 compared to 2010. Excluding losses on sales of investment securities, noninterest income decreased $262 thousand (or 8.5%). A summary of the changes in noninterest income by category follows:


	*Three Months Ended* *September 30,*									Nine Months Ended September 30,
*(Dollars in thousands)*	*2011*			2010			*Pct. Chg.*			*2011*			2010			*Pct. Chg.*
Noninterest income:
Service charges on deposit accounts	$	209		$	217			-3.7	%	$	620		$	642			-3.5	%
Return check and stop payment fees		417			487			-14.4	%		1,142			1,408			-18.9	%
Insurance commissions		16			22			-26.6	%		52			74			-29.3	%
Gain/ (loss) on sale of securities		—			—			—			(18	)		(143	)		-87.3	%
Mortgage origination fees		20			10			100.6	%		26			46			-43.5	%
Bank card and credit card fees		155			136			14.4	%		470			409			15.1	%
Earnings on bank-owned life insurance		59			60			-1.5	%		176			178			-1.5	%
Other noninterest income		104			97			7.3	%		316			307			3.2	%

Total noninterest income	$	980		$	1,029			-4.7	%	$	2,784		$	2,921			-4.7	%

Noninterest income (annualized) as a percentage of average assets		0.93	%		0.95	%					0.87	%		0.91	%

For the first nine months of 2011, return check and stop payment fee income declined $266 thousand (or 18.9%) compared to 2010. Lower volume of overdraft fees, as well as regulatory changes impacting the collection of these fees, were the main factors in the year-to-date decline. These regulatory changes, which stem largely from amendments to Federal Reserve Regulation E, became effective July 2010; as a result of the Regulation E amendment, this income category will continue to decline in 2011 when compared to prior periods.

Fee income for credit life insurance sales decreased $22 thousand (or 29.3%) in the first nine months of 2011 compared to 2010 due to a decline in new consumer loan volume in 2011.

As discussed in the “Financial Condition” section of this Analysis, the Company recognized a net loss of $18 thousand on the sale of one corporate bond in the first quarter of 2011, a $125 thousand (or 87.3%) decrease compared to losses recognized on investment activities during the same period in 2010.

Fee income on mortgage originations declined $20 thousand (or 43.5%) in the first nine months of 2011 compared to the same period in 2010 due to a decline in volume of mortgage loan originations. In 2010, the Company either eliminated or reassigned its mortgage origination personnel due to insufficient activity to support the department.

For the first nine months of 2011, fees earned on bank card and credit card activity increased $61 thousand (or 15.1%) due to an increase in volume of card transactions and a change in vendors that allowed the Company to earn more per card transaction than in prior years. However, due to recent regulatory restrictions on card transaction fees enacted by the Dodd-Frank Act, the Company expects to see a decline in card fee income going forward.

Noninterest Expense

Noninterest expense decreased $1.78 million (or 15.2%) in the first nine months of 2011 compared to the same period in 2010. Excluding other operational losses, other than temporary impairment losses on securities, gains, losses and write-downs on other real estate owned, and gains and losses on other assets, noninterest expense decreased $422 thousand (or 4.3%) from $9.77 million in the first nine months of 2010 compared to $9.35 million for the same period in 2011 as management has focused its efforts on cost savings initiatives and operational efficiencies. A summary of the changes in noninterest expense by category follows:


	*Three Months Ended* *September 30,*							*Nine Months Ended* *September 30,*
*(Dollars in thousands)*	*2011*		2010		*Pct. Chg.*			*2011*		2010		*Pct. Chg.*
Noninterest expenses:
Salaries and wages	$	1,338	$	1,362		-1.7	%	$	3,925	$	4,157		-5.6	%
Employee benefits		389

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

SOUTHEASTERN BANKING CORP 10-Q