UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 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)

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.25 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

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

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

Indicate by check mark 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 preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

The aggregate market value of common stock held by non-affiliates on June 30, 2011 was approximately $12,421,000 (based on a per share price of $6.05 on over-the-counter trades executed by broker-dealers). For purposes of this calculation, the Registrant has assumed that its directors, principal shareholders and executive officers are affiliates.

As of March 1, 2012, the Registrant had 3,129,388 shares of common stock, par value $1.25 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement in connection with the 2012 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

TABLE OF CONTENTS


CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS		2
PART I		3
ITEM 1.	BUSINESS	3
GENERAL		3
MARKETS AND COMPETITION		3
EMPLOYEES		6
AVAILABILITY OF INFORMATION		6
SUPERVISION AND REGULATION		6
ITEM 1A.	RISK FACTORS	15
ITEM 1B.	UNRESOLVED STAFF COMMENTS	24
ITEM 2.	PROPERTIES	24
ITEM 3.	LEGAL PROCEEDINGS	24
ITEM 4.	REMOVED AND RESERVED	25
PART II		25
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	25
ITEM 6.	SELECTED FINANCIAL DATA	26
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
STATISTICAL DISCLOSURES		28
LIQUIDITY AND CAPITAL RESOURCES		45
RESULTS OF OPERATIONS		47
CRITICAL ACCOUNTING POLICIES		50
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	53
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)		53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		54
CONSOLIDATED STATEMENTS OF CONDITION		55
CONSOLIDATED STATEMENTS OF OPERATIONS		56
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)		57
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY		58
CONSOLIDATED STATEMENTS OF CASH FLOWS		59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		61
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND FINANCIAL DISCLOSURE	93
ITEM 9A.	CONTROLS AND PROCEDURES	93
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES		93
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING		93
ITEM 9B.	OTHER INFORMATION	94
PART III		94
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	94
ITEM 11.	EXECUTIVE COMPENSATION	94
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	94
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	94
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	94
PART IV		95
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	95
SIGNATURES		96

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements set forth in this Report or incorporated herein by reference, including, without limitation, matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements” within the meaning of the federal securities laws, including, without limitation, statements regarding our outlook on earnings, stock performance, asset quality, economic conditions, real estate markets and projected growth, and are based upon management’s beliefs as well as assumptions made based on data currently available to management. In this Report, the terms the “Company”, the “Bank”, “we”, “us”, or “our” refer to Southeastern Banking Corporation and its wholly-owned subsidiaries, Southeastern Bank and SBC Financial Services, Inc. When words like “anticipate”, “believe”, “intend”, “plan”, “may”, “continue”, “project”, “would”, “expect”, “estimate”, “could”, “should”, “will”, and similar expressions are used, you should consider them as identifying forward-looking statements. These forward-looking statements are not guarantees of future performance, and a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements. Many of these factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting us, summarizes several factors that could cause our actual results to differ materially from those anticipated or expected in these forward-looking statements: (1) general economic conditions (both generally and in our markets) may be less favorable than expected, resulting in, among other things, a continued deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values; (2) the general decline in the real estate and lending market, particularly the market areas of Coastal Georgia and North Florida, may continue to negatively affect our financial results; (3) our ability to raise additional capital may be impaired if current levels of market disruption and volatility continue or worsen; (4) restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals; (5) legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect the businesses in which we are engaged; (6) competitive pressures among depository and other financial institutions may increase significantly; (7) changes in the interest rate environment may reduce margins or the volumes or values of the loans we make; (8) competitors may have greater financial resources and develop products that enable those competitors to compete more successfully than we can; (9) our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry; (10) adverse changes may occur in the bond and equity markets; (11) war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; and (12) the risk factors discussed from time to time in the Company’s Periodic Reports filed with the Securities and Exchange Commission (the “SEC”), including but not limited to, this Annual Report on Form 10-K (the “Report”). We undertake no obligation to, and we do 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. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Notice. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, please read the “Risk Factors” section of this report. Any forward-looking statement speaks only as of the date that the statement was made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which we made the statement or to reflect the occurrence of unanticipated events.

PART I

ITEM 1.

BUSINESS

General

Southeastern Banking Corporation (the “Company”) is a bank holding company headquartered in Darien, McIntosh County, Georgia. The Company was organized and incorporated in 1980 under the laws of the State of Georgia as the holding company for its then sole subsidiary bank, The Citizens Bank, Folkston, Georgia, which later changed its name to Southeastern Bank (the “Bank”). In 1983, the Company acquired The Darien Bank, Darien, Georgia, one of the oldest banks in the state, with a banking charter dating back to 1888. From 1983 to 1988, the Company acquired three other Georgia financial institutions and subsequently merged those institutions into the Bank. In 1990, the Bank merged with and into The Darien Bank, with the Darien Bank being the surviving bank in the merger operating under its 1888 charter. Immediately upon the merger, The Darien Bank changed its name to Southeastern Bank.

Currently, the Bank operates 13 branches located in eight counties in southeast Georgia and three branches located in one county in northeast Florida. Additional information on each of the markets that we serve is provided below under the caption “Markets and Competition.”

Unless the context indicates otherwise, all references in this report to the “Company,” “we,” “us” and “our” refer to Southeastern Banking Corporation and its wholly owned subsidiaries, Southeastern Bank and SBC Financial Services, Inc., except that in the discussion of its capital stock and related matters, these terms refer solely to Southeastern Banking Corporation and not to its subsidiaries. All references to the “Bank” refer to Southeastern Bank only.

The Bank

The Bank offers traditional banking products and services to commercial and individual customers in our markets. Our product line includes, among other things, loans to small- and medium-sized businesses, residential and commercial construction and development loans, commercial real estate loans, farmland and agricultural production loans, residential mortgage loans, home equity loans, consumer loans, and a variety of commercial and consumer demand, savings and time deposit products. We also offer internet banking, on-line cash management, electronic bill payment services, safe deposit box rentals, telephone banking, credit and debit card services, remote depository products and the availability of a network of automated teller machines (“ATMs”) to our customers. In addition, through an agreement with a third-party broker-dealer and investment advisory firm, we are able to offer securities brokerage and investment advisory services to our customers.

Markets and Competition

The financial services industry is highly competitive. In our markets, we face competitive pressures from both larger regional banks and smaller community banks and thrifts in attracting and retaining commercial and consumer accounts. The competitive environment is amplified in some of our smaller markets as there are more financial service providers competing for fewer customers. The principal factors in competing for such accounts include interest rates, fee structures, the range of products and services offered, convenience of office and ATM locations, and flexible office hours. Other competition for such accounts comes from credit unions, internet banks, retail brokerage firms, mortgage companies, insurance companies and consumer finance offices. These nonbank financial providers are not subject to the same regulatory restrictions as banks and bank holding companies. Therefore, they can often operate at a competitive advantage with greater flexibility, lower cost structures and higher leverage. Other investment alternatives such as stocks and mutual funds made readily accessible by the internet have also had an effect on our ability to grow deposits in our markets.

Our experience and strong community relationships in our markets allow us to deliver a higher level of customer service to the small- and medium-sized commercial businesses and to individual consumers. Being smaller and less bureaucratic than our regional and national competitors allows us to provide a more timely response and greater flexibility in serving the needs of our customers. At the same time, we have invested in systems and support to provide a product line that we believe gives us a competitive edge over many of the smaller financial institutions in our markets.

A brief description of each of our markets follows.

Georgia

The Bank has branches in thirteen communities in eight counties in southeast Georgia. Overall, we have the third largest market share¹ with 8.70% of the total deposits in the Bank’s eight-county Georgia market.

McIntosh County is located on the Georgia coast along Interstate 95. Darien is the county seat of McIntosh County and is 62 miles south of Savannah, 17 miles north of Brunswick and 79 miles north of Jacksonville, Florida. McIntosh County is part of the Brunswick Metropolitan Statistical Area (“MSA”). We have 16 employees, two branches (Darien and Eulonia), and an ATM serving our customers in this county. The Company’s administrative and operational facilities and 40 additional employees are also located in Darien. Founded in 1793, McIntosh County is one of the oldest counties in Georgia. The county is rich in historical sites and nature preserves. McIntosh County contains Harris Neck National Wildlife Refuge, Blackbeard Island National Wildlife Refuge and Wilderness Area, Fort King George State Historic Site, Wolf Island National Wildlife Refuge and Wilderness, Sapelo Island State Reserve and Sapelo Island National Estuarine Sanctuary.

Brantley County is southwest of McIntosh County. Brantley County is part of the Brunswick MSA. The Bank has a branch in Nahunta (the county seat) and in Hoboken. Nahunta is 40 miles southwest of Darien and Hoboken is 9 miles west of Nahunta along U.S. Highway 82. We have 16 employees, two branches and an ATM serving our customers in this county. The Okefenokee National Wildlife Refuge, an approximate 700 acre freshwater and black water wilderness swamp, occupies parts of the County’s southern and western borders.

Bryan County is north of McIntosh County. Bryan County is part of the Savannah MSA. The Bank has one branch in Richmond Hill. Richmond Hill is 43 miles north of Darien along Interstate 95 and 22 miles west of Savannah along Interstate 16. We have five employees, one branch and an ATM serving our customers in this county. Fort Stewart, a large U.S. Army training facility, runs through Bryan County.

Camden County is south of McIntosh County. Camden County is part of the St. Marys MSA. The Bank has branches in Woodbine (the county seat), Kingsland and St. Marys. Woodbine is 37 miles south of Darien, Kingsland is 47 miles south of Darien and St. Marys is 52 miles south of Darien. We have 13 employees, three branches and three ATMs serving our customers in this county. Camden County is home to Kings Bay Naval Nuclear Submarine Base and the Cumberland Island National Seashore.

Charlton County is southwest of McIntosh County. The Bank has a branch in Folkston (the county seat). Folkston is 59 miles southwest of Darien and 20 miles west of Kingsland. We have eight employees, a branch and an ATM serving our customers in this county. The Okefenokee National Wildlife Refuge occupies approximately one-third of the county.

Coffee County is west of McIntosh County. Coffee County is part of the Douglas MSA. The Bank has branches in Douglas (the county seat) and Nicholls. Douglas is 96 miles west of Darien and Nicholls is 83 miles west of Darien. We have ten employees, two branches and two ATMs serving our customers in this county.

Glynn County is south of McIntosh County. Glynn County is part of the Brunswick MSA. The Bank has a branch in Brunswick, the county seat. Brunswick is 17 miles south of Darien along Interstate 95. We have nine employees, one branch and an ATM serving our customers in this county. We also have ten administrative and executive employees located in the Brunswick branch facility. With its marshlands and barrier islands, this area referred to as the “Golden Isles” is a major tourist and recreational center. Glynn County is home to the Federal Law Enforcement Training Center, an interagency law enforcement training organization for 90 federal agencies and various other state, local and international law enforcement agencies, and the Georgia Port Authority’s Port of Brunswick, one of the largest deepwater port operations in the U.S. South Atlantic.

Jeff Davis County is west of McIntosh County. The Bank has a branch in Hazlehurst, the county seat. Hazlehurst is 88 miles west of Darien and 31 miles northeast of Douglas. We have five employees, a branch and an ATM serving our customers in this county.

¹	Based on the FDIC Summary of Deposits report as of June 30, 2011.

Florida

The Bank has three branches in one county in the northeast corner of Florida. We have the fifth largest market share² with 7.55% of the total deposits in the Bank’s Florida market.

Nassau County is south of McIntosh County. Nassau County is part of the Jacksonville MSA. The Bank has branches in Callahan, Hilliard and Yulee (the county seat). Yulee is 58 miles south of Darien and 24 miles north of Jacksonville along Interstate 95. Hilliard is 69 miles southwest of Darien and 10 miles south of Folkston. Callahan is 70 miles south of Darien and 15 miles west of Yulee. We have 16 employees, three branches and three ATMs serving our customers in this county.

Market Demographics

The Bank operates mainly in rural, slower growth markets. It also has a growing presence in some more heavily-populated coastal markets. The following table provides the most current summary demographic data³ on each of our markets.


Market/ County	2010 Population		2000-10 % Change Population		Persons per Square Mile		2009 Private Nonfarm Employment		2000-09 % Change Employment		2010 Median Household Income		2010 % Persons Below Poverty Level

Georgia
McIntosh		14,333		32.1		33.8		1,435		-29.2	$	39,075		16.6
Brantley		18,411		25.9		41.6		1,297		-11.3	$	37,343		21.4
Bryan		30,233		29.1		69.3		5,710		81.2	$	63,244		11.0
Camden		50,513		15.7		82.4		8,658		7.3	$	49,230		15.3
Charlton		12,171		18.4		15.7		1,716		7.2	$	40,850		19.8
Coffee		42,356		13.2		73.7		12,779		-24.3	$	35,202		21.3
Glynn		79,626		17.8		189.7		31,508		3.1	$	50,337		15.2
Jeff Davis		15,068		18.8		45.6		3,444		-25.2	$	32,928		24.0
GA Statewide		9,687,653		18.3		168.4		3,410,505		-2.1	$	49,347		15.7

Florida
Nassau		73,314		27.1		113.0		14,525		13.9	$	58,712		9.3
FL Statewide		18,801,310		17.6		350.6		6,861,612		10.4	$	47,661		13.8

Market Presence

The following table provides basic summary information on the Bank’s presence in each of our markets.


Market/ County	Metropolitan Statistical Area	Number of Branches		Number of ATMs		Number of Employees			Total Loans⁴		Total Deposits⁴		Market Share (%)²		Market Share Rank²

Georgia
McIntosh	Brunswick		2		1		56	⁵	$	57,320	$	62,510		72.01		1
Brantley	Brunswick		2		1		16			16,911		57,127		70.80		1
Bryan	Savannah		1		1		5			21,940		6,481		1.78		5
Camden	St. Marys		3		3		13			27,349		60,804		19.74		2
Charlton	n/a		1		1		8			2,888		56,023		55.28		1
Coffee	Douglas		2		2		10			9,178		20,474		3.22		9
Glynn	Brunswick		1		1		19	⁵		42,276		17,950		1.16		15
Jeff Davis	n/a		1		1		5			3,214		20,749		17.04		3

Total in GA			13		11		132		$	181,076	$	302,118		0.17		54


Florida
Nassau	Jacksonville		3		3		16		$	21,187	$	67,754		7.55		5

Total in FL			3		3		16		$	21,187	$	67,754		0.02		269


Company Total			16		14		148		$	202,263	$	369,872

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

³	Source: U.S. Census Bureau, www.census.gov.

⁴	Dollar amounts are presented in thousands as of December 31, 2011.

⁵	Includes administrative and operational support employees: 40 in McIntosh County and 10 in Glynn County.

Employees

As of December 31, 2011, we had a total of 142 full-time and six part-time employees. We offer a competitive compensation and benefits package to our employees, and we consider our relationship with our employees to be good.

Availability of Information

More information on the Company is available through a link on our internet website at www.southeasternbank.com. We are not incorporating by reference into this Report the information contained on our website and, therefore, the content of our website is not a part of this Report. Copies of this Report and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, including exhibits, are available free of charge on our website under the “About” tab as soon as reasonably practicable after they have been filed or furnished electronically to the SEC. Copies of these filings may also be obtained free of charge on the SEC’s website at www.sec.gov.

Supervision and Regulation

Both federal and state laws extensively regulate bank holding companies and banks. These laws (and the regulations promulgated thereunder) are primarily intended to protect depositors and the deposit insurance fund of the Federal Deposit Insurance Corporation (the “FDIC”). The following information describes particular laws and regulatory provisions relating to bank holding companies and banks. This discussion is qualified in its entirety by reference to the particular laws and regulatory provisions. A change in any of these laws or regulations may have a material effect on our business and the business of the Bank.

General

The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Georgia Department of Banking and Finance (the “Georgia Department”) under the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and the Financial Institutions Code of Georgia, respectively. The Company is subject to regulation, supervision, and examination by the Federal Reserve and the Georgia Department. The Federal Reserve may also make examinations of each of the Company’s subsidiaries.

The Bank is a Georgia-chartered commercial bank. The Bank is a member of the FDIC, and as such, our deposits are insured by the FDIC to the maximum extent provided by law. The Bank is subject to regulation, supervision, and examination by the FDIC and the Georgia Department. These regulatory agencies regularly examine our operations and are given authority to approve or disapprove mergers, consolidations, the establishment of branches, and similar corporate actions. The agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Dodd-Frank Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is intended to effect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. The Dodd-Frank Act additionally creates a new independent federal regulator to administer federal consumer protection laws. The enacted provisions of the Dodd-Frank Act has already made an impact on our business operations through increased compliance and operating costs, increased deposit insurance and decreased fee income. It is difficult to predict at this time what specific impact the yet-to-be written implementing rules and regulations of the Dodd-Frank Act will have on community banks. A summary of a few of the provisions of the Dodd-Frank Act follow.

Payment of Interest on Business Checking Accounts. Effective one year from the date of enactment, the Dodd-Frank Act eliminated the federal statutory prohibition against the payment of interest on business checking accounts.

Corporate Governance. The Dodd-Frank Act requires publicly-traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The new legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Prohibition Against Charter Conversions of Troubled Institutions. Effective one year after enactment, the Dodd-Frank Act prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.

Limits on Derivatives. Effective 18 months after enactment, the Dodd-Frank Act prohibits state-chartered banks from engaging in derivatives transactions unless the loans to one borrower limits of the state in which the bank is chartered takes into consideration credit exposure to derivatives transactions. For this purpose, derivative transaction includes any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities securities, currencies, interest or other rates, indices or other assets.

Debit Card Interchange Fees. Effective July 21, 2011, the Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. On June 29, 2011, the Federal Reserve set the interchange rate cap at $0.24 per transaction. While the restrictions on interchange fees do not apply to banks that, together with their affiliates, have assets of less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller banks.

Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB will have examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

Acquisitions

The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before: (i) it may acquire direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or (iii) it may merge or consolidate with any other bank holding company.

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, and as further amended by the Dodd-Frank Act, the restrictions on interstate acquisitions of banks by bank holding companies were repealed. As a result, the Company, and any other bank holding company located in Georgia, is able to acquire a bank located in any other state, and a bank holding company located outside of Georgia can acquire any Georgia-based bank, in either case subject to certain deposit percentage concentration limits and other restrictions. De novo branching by an out-of-state bank is permitted only if it is expressly permitted by the laws of the host state. Georgia does not permit de novo branching by an out-of-state bank. Therefore, the only method by which an out-of-state bank or bank holding company may enter Georgia is through an acquisition.

Activities

The BHC Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act (the “GLB Act”), discussed below, have expanded the permissible activities of a bank holding company that qualifies as a financial holding company. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can be reasonably expected to produce benefits to the public, such as a greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.

Gramm-Leach-Bliley Act

The GLB Act implemented major changes to the statutory framework for providing banking and other financial services in the United States. The GLB Act, among other things, eliminated many of the restrictions on affiliations among banks and securities firms, insurance firms, and other financial service providers. A bank holding company that qualifies as a financial holding company is permitted to engage in activities that are financial in nature or incidental or complimentary to a financial activity. The GLB Act specifies certain activities that are deemed to be financial in nature, including underwriting and selling insurance, providing financial and investment advisory services, underwriting, dealing in, or making a market in securities, limited merchant banking activities, and any activity currently permitted for bank holding companies under Section 4(c)(8) of the BHC Act.

To become eligible for these expanded activities, a bank holding company must qualify as a financial holding company. To qualify as a financial holding company, each insured depository institution controlled by the bank holding company must be well-capitalized, well-managed, and have at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve of its intention to become a financial holding company.

The GLB Act designates the Federal Reserve as the overall umbrella supervisor of financial holding companies. The GLB Act adopts a system of functional regulation where the primary regulator is determined by the nature of activity rather than the type of institution. Under this principle, securities activities are regulated by the SEC and other securities regulators, insurance activities by the state insurance authorities, and banking activities by the appropriate banking regulator. As a result, to the extent that we engage in non-banking activities permitted under the GLB Act, we will be subject to the regulatory authority of the SEC or state insurance authority, as applicable. We have not made an election to become a financial holding company.

Payment of Dividends

The Company is a legal entity separate and distinct from its subsidiaries. Its principal source of cash flow is dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends from the Bank to the Company, as well as by the Company to its shareholders. Due to the elevated level of nonperforming assets and operating losses, the Company and the Bank must obtain prior written consent from our regulators prior to the payment of a dividend.

The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally pay dividends only out of current operating earnings.

In addition, the Federal Reserve, through guidance reissued in February 2009, has supervisory policies and guidance that:

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may restrict the ability of a bank or financial services holding company from paying dividends on any class of capital stock or any other Tier 1 capital instrument if the holding company is not deemed to have a strong capital position,

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states that a holding company should reduce or eliminate dividends when

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the holding company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

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the holding company’s prospective rate of earnings retention is not consistent with the holding company’s capital needs and overall current and prospective financial condition; or

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the holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

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requires that a holding company must inform the Federal Reserve in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization’s capital structure. Declaring or paying a dividend in either circumstance could raise supervisory concerns.

In the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. During 2009, we paid a total of $0.30 per share in cash dividends to our shareholders. Early in 2010, we paid a total of $0.13 per share in cash dividends to our shareholders. Later in 2010, we suspended our dividends until our operating performance improved and credit losses abated. We did not pay a dividend during 2011. We do not intend to pay a dividend in 2012 due to regulatory restrictions and continued pressure on earnings and capital.

Capital Adequacy

We are required to comply with the capital adequacy standards established by the federal banking agencies. There are two basic measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be considered in compliance.

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

The minimum guideline for the ratio of Total Capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%. Total Capital consists of Tier 1 Capital, which is comprised of common stock, undivided profits, minority interests in the equity accounts of consolidated subsidiaries and non-cumulative perpetual preferred stock, less goodwill and certain other intangible assets, and Tier 2 Capital, which consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The minimum guideline for the ratio of Tier 1 Capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 4.0%. At December 31, 2011, our consolidated Total Capital Ratio and our Tier 1 Capital Ratio were 17.63% and 16.37%, respectively.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio (the “Leverage Ratio”) of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3.0% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 3.0%, plus an additional cushion of 100 to 200 basis points. Our consolidated Leverage Ratio at December 31, 2011 was 9.70%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital Leverage Ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities.

The Bank is subject to risk-based and leverage capital requirements adopted by its federal banking regulators, which are substantially similar to those adopted by the Federal Reserve for bank holding companies. Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on the taking of brokered deposits, and certain other restrictions on its business. As described below, substantial additional restrictions can be imposed upon FDIC-insured depository institutions that fail to meet applicable capital requirements. See “Prompt Corrective Action”.

The federal bank agencies continue to indicate their desire to raise capital requirements applicable to banking organizations beyond their current levels. In this regard, the Federal Reserve and the FDIC require regulators to consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank’s capital adequacy. The regulatory agencies have proposed a methodology for evaluating interest rate risk that would require banks with excessive interest rate risk exposure to hold additional amounts of capital against such exposures.

The Basel Committee on Banking Supervision has issued proposed reforms to international bank capital and liquidity regulation. In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation (“Basel III”). Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more capital, with a greater emphasis on common equity. Implementation is presently scheduled to be phased in between 2013 and 2019, although it is possible that implementation may be delayed as a result of multiple factors including the current condition of the banking industry within the U.S. and abroad.

The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.

When fully phased in, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a “capital conservation buffer” of 2.5%; (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer; (iii) a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0% plus the capital conservation buffer and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

The U.S. banking agencies have indicated that they expect to propose regulations implementing Basel III, with final adoption of implementing regulations in mid-2012. Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is considering further amendments to Basel III. In addition to Basel III, the Dodd-Frank Act requires or permits the federal banking agencies to adopt regulations affecting banking institutions’ capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the regulations ultimately applicable to us may be substantially different from the Basel III final framework as published in December 2010. Requirements to maintain higher levels of capital or liquid assets could adversely impact our net income and return on equity.

Support of Subsidiary Institutions

Under Federal Reserve policy, the Company is expected to act as a source of financial strength for, and to commit resources to support, the Bank. This support may be required at times when, absent such Federal Reserve policy, we may not be inclined to provide such support. In addition, any capital loans by a bank holding company to any of its banking subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Prompt Corrective Action

FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal banking regulators have established five capital categories (“well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized”), and are required to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of the action will depend upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.

An institution that is categorized as “undercapitalized”, “significantly undercapitalized”, or “critically undercapitalized” is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to certain limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. In addition, the appropriate federal banking agency may treat an undercapitalized institution in the same manner as it treats a significantly undercapitalized institution if it determines those actions are necessary.

At December 31, 2011, the Bank had the requisite capital level to qualify as “well capitalized” under the regulatory framework for prompt corrective action.

FDIC Insurance Assessments

The FDIC maintains a risk-based assessment system for determining deposit insurance premiums. Four risk categories (I-IV), each subject to different premium rates, are established, based upon an institution’s capital category (discussed above) and the institution’s supervisory rating. The levels of rates are subject to periodic adjustment by the FDIC. Additionally, the FDIC may impose special assessments from time to time.

The Dodd-Frank Act permanently increased the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor, and extended unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments are now based on a financial institution’s average consolidated total assets less tangible equity capital. The Dodd-Frank Act also requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.

There are three adjustments that can be made to an institution’s initial base assessment rate: (1) a potential decrease for long-term unsecured debt, including senior and subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) a potential increase for secured liabilities above a threshold amount; and (3) for non-Risk Category I institutions, a potential increase for brokered deposits above a threshold amount.

The current schedule for base assessment rates and potential adjustment is set forth in the following table.


	Risk Category I	Risk Category II	Risk Category III	Risk Category IV	Large and Highly Complex Institutions

Initial Base Assessment Rate	5 to 9	14	23	35	5 to 35

Unsecured Debt Adjustment (added)	(4.5) to 0	(5) to 0	(5) to 0	(5) to 0	(5) to 0

Brokered Deposit Adjustment (added)	N/A	0 to 10	0 to 10	0 to 10	0 to 10

Total Base Assessment Rate	2.5 to 9	9 to 24	18 to 33	30 to 45	2.5 to 45

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

Safety and Soundness Standards

The Federal Deposit Insurance Act, as amended by the FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation and fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDICIA. See “Prompt Corrective Action”. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties. The federal regulatory agencies also proposed guidelines for asset quality and earnings standards.

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”) the Bank, as an FDIC insured institution, has a continuing and affirmative obligation to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA requires the appropriate federal regulator, in connection with its examination of an insured institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as applications for a merger or the establishment of a branch. An unsatisfactory rating may be used as the basis for the denial of an application by the federal banking regulator. The Bank received satisfactory ratings in its most recent CRA examination.

Restrictions on Transactions with Affiliates

The Company and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on: the amount of a bank’s loans or extensions of credit to affiliates; a bank’s investment in affiliates; assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve; the amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10.0% of a bank’s capital and surplus and, as to all affiliates combined, to 20.0% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank must also comply with other provisions designed to avoid an investment in low-quality assets.

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

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

Effect of Governmental Monetary Policies

The earnings of the Bank are affected by domestic and foreign conditions, particularly by the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve has had, and will continue to have, an important impact on the operating results of commercial banks through its power to implement monetary policy in order, among other things, to mitigate recessionary and inflationary pressures by regulating the national money supply. The techniques used by the Federal Reserve include setting the reserve requirements of member banks and establishing the discount rate on member bank borrowings. The Federal Reserve also conducts open market transactions in United States government securities.

Monitoring and Reporting Suspicious Activity

Under the Bank Secrecy Act, Internal Revenue Service (“IRS”) rules and other regulations, we are required to monitor and report unusual or suspicious account activity as well as transactions involving the transfer or withdrawal of amounts in excess of prescribed limits. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures and controls generally require financial institutions to take reasonable steps:

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to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;

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to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;

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to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and

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to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

Under the USA PATRIOT Act, financial institutions are also required to establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:

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the development of internal policies, procedures, and controls;

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the designation of a compliance officer;

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an ongoing employee training program; and

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an independent audit function to test the programs.

In addition, under the USA PATRIOT Act, the Secretary of the Treasury has adopted rules addressing a number of related issues, including increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to violate the privacy provisions of the GLB Act that are discussed above. Finally, under the regulations of the Office of Foreign Asset Control (“OFAC”), we are required to monitor and block transactions with certain “specially designated nationals” who OFAC has determined pose a risk to U.S. national security.

Consumer Laws and Regulations

We are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the following list is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair and Accurate Credit Transactions Act, the Real Estate Settlement Procedures Act and the Fair Housing Act, among others. These laws and regulations, among other things, prohibit discrimination on the basis of race, gender or other designated characteristics and mandate various disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. These and other laws also limit finance charges or other fees or charges earned in our activities. We must comply with the applicable provisions of these consumer protection laws and regulations as part of our ongoing customer relations.

Technology Risk Management and Consumer Privacy

State and federal banking regulators have issued various policy statements emphasizing the importance of technology risk management and supervision in evaluating the safety and soundness of depository institutions with respect to banks that contract with outside vendors to provide data processing and core banking functions. The use of technology-related products, services, delivery channels and processes exposes a bank to various risks, particularly operational, privacy, security, strategic, reputational and compliance. Banks are generally expected to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology.

Under Section 501 of the GLB Act, the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and confidentiality of customer records and information, protection against any anticipated threats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or inconvenience to a customer. Among other matters, the rules require each bank to implement a comprehensive written information security program that includes administrative, technical and physical safeguards relating to customer information.

Under the GLB Act, a financial institution must also provide its customers with a notice of privacy policies and practices. Section 502 prohibits a financial institution from disclosing nonpublic personal information about a customer to nonaffiliated third parties unless the institution satisfies various notice and opt-out requirements and the customer has not elected to opt out of the disclosure. Under Section 504, the agencies are authorized to issue regulations as necessary to implement notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about customers to nonaffiliated third parties. Under the final rule the regulators adopted, all banks must develop initial and annual privacy notices which describe in general terms the bank’s information sharing practices. Banks that share nonpublic personal information about customers with nonaffiliated third parties must also provide customers with an opt-out notice and a reasonable period of time for the customer to opt out of any such disclosure (with certain exceptions). Limitations are placed on the extent to which a bank can disclose an account number or access code for credit card, deposit or transaction accounts to any nonaffiliated third party for use in marketing.

Regulatory Reform and Legislation

The U.S. and global economies have experienced and are experiencing significant stress and disruptions in the financial sector. Dramatic slowdowns in the housing industry with falling home prices, elevated levels of foreclosures and high unemployment have created strains on financial institutions, including government-sponsored entities and investment banks. As a result, many financial institutions sought and continue to seek additional capital, merged or continue to seek mergers with other institutions and, in some cases, failed.

In response to the financial crisis affecting the banking and financial markets, in October 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury (“the Treasury”) was authorized to purchase equity stakes in U.S. financial institutions. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), the Treasury made $250 billion of capital available to U.S. financial institutions through the purchase of preferred stock or subordinated debentures by the Treasury. In conjunction with the purchase of preferred stock from publicly-held financial institutions, the Treasury received warrants to purchase common stock with an aggregate market price equal to 15% of the total amount of the preferred investment. Participating financial institutions were required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program and were restricted from increasing dividends to common shareholders or repurchasing common stock for three years without the consent of the Treasury. The Company did not participate in the TARP Capital Purchase Program.

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation’s financial institutions. Included among current proposals are discussions around restructuring the regulatory framework in which we and the Bank operate. Further, under the EESA, Congress has the ability to impose “after-the-fact” terms and conditions on participants in the TARP Capital Purchase Program. On February 10, 2009, the Treasury announced the Financial Stability Plan under the EESA (the “Financial Stability Plan”) which was intended to further stabilize financial institutions and stimulate lending across a broad range of economic sectors. On February 18, 2009, President Obama signed the America Recovery and Reinvestment Act (“ARRA”), a broad economic stimulus package that included additional restrictions on, and potential additional regulation of, financial institutions. Additional regulations adopted as part of the EESA, the Financial Stability Plan, the ARRA, or other legislation may subject us to additional regulatory requirements. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

ITEM 1A.

RISK FACTORS

Our business is subject to certain risks, including those described below. The risks below do not describe all risks applicable to our business and are intended only as a summary of certain material factors that affect our operations in our industry and markets. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our financial performance. More detailed information concerning these and other risks is contained in other sections of this Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Our business faces unpredictable economic conditions, which have had and could continue to have an adverse effect on us.

General economic conditions impact the banking industry. The credit quality of our loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we conduct our business. Our continued financial success depends somewhat on factors beyond our control, including:

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general economic conditions, including national and local real estate markets;

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the supply of and demand for deposits and other investable funds;

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demand for loans and access to credit;

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interest rates; and

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federal, state and local laws affecting these matters.

Any substantial deterioration in any of the foregoing conditions could have a material adverse effect on our financial condition, results of operations and liquidity, and would also likely adversely affect the market price of our common stock.

In our business, we must effectively manage our credit risk.

As a lender, we are exposed to the risk that our loan customers may not repay their loans according to the terms of these loans and the collateral securing the payment of these loans may be insufficient to fully compensate us for the outstanding balance of the loan plus the costs to dispose of the collateral. We may experience significant loan losses, which could have a material adverse effect on our operating results and financial condition. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the diversification by industry of our commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume, growth and composition of our loan portfolio, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers and the evaluation of our loan portfolio through our internal loan review process and other relevant factors.

We maintain an allowance for loan losses, which is an allowance established through a provision for loan losses charged to expense that represents management’s best estimate of probable losses inherent in our loan portfolio. Additional credit losses will likely occur in the future and may occur at a rate greater than we have experienced to date. In determining the amount of the allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to the allowance could materially decrease our net income.

In addition, federal and state regulators periodically review the adequacy of our allowance for loan losses and may require us to increase our provision for loan losses or recognize further charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or charge-offs as required by these regulatory agencies could have a material negative effect on our operating results, financial condition and liquidity.

Our business is concentrated in southeast Georgia and northeast Florida and a downturn in the local economy may adversely affect our business.

The business of the Bank is concentrated in southeast Georgia and northeast Florida. Most of our customers and revenue are derived from this area. The economy of this region is focused on real estate development, tourism and recreation, shipping and transportation, military, agriculture (including timber), governmental, commercial and industrial, medical, and education. Because we generally do not derive revenue or customers from other parts of the region or nation, our business and operations are dependent on economic conditions in our markets. Any significant decline in one or more segments of the local economy could adversely affect our business, revenue, operations and properties.

If the communities in which we operate do not recover and grow as anticipated or if prevailing economic conditions locally or nationally do not improve, our business may continue to be negatively impacted. The current economic downturn, increase in unemployment, and other events that have negatively affected household and corporate incomes both nationally and locally have decreased the demand for loans and our other products and services and have increased the number of customers who fail to pay interest or principal on their loans. Furthermore, if the economy improves in the future, we may not benefit from any market growth or favorable economic conditions in our market areas if they do occur.

Changes in economic conditions could cause an increase in delinquencies and non-performing assets, including loan charge-offs, which could depress our net income and growth.

If we continue to see negative economic conditions in the United States as a whole or in the portions of Georgia and Florida that we serve, we could continue to experience a high rate of delinquencies and loan charge-offs, which would continue to reduce our net income and adversely affect our financial condition.

The value of real estate collateral may fluctuate significantly resulting in an under-collateralized loan portfolio.

The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. We are in the fourth year of a local real estate market depression where we have seen dramatic declines in real estate valuations. At December 31, 2011, approximately 85.6% of our loan portfolio includes real estate secured loans. If the value of the real estate serving as collateral for our loan portfolio were to continue to decline materially, a significant part of our loan portfolio could become under-collateralized. As we have experienced in recent years, if the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then, in the event of foreclosure, we may not be able to realize the amount of collateral that we anticipated at the time of originating the loan. These factors have had a material adverse effect on our provision for loan losses and our operating results and financial condition.

Furthermore, to the extent that real estate collateral is obtained through foreclosure, the costs of holding and marketing the real estate collateral, as well as the ultimate values obtained from disposition, could continue to reduce our earnings and adversely affect our financial condition.

We will realize future losses if the proceeds we receive upon liquidation of nonperforming assets, particularly foreclosed real estate, are less than their carrying values.

Foreclosed real estate is carried on our books at fair value (typically based on appraisals) less estimated selling costs. Deteriorating market conditions could result in additional losses. Over the last two years, we have written-down foreclosed real estate by $4,274,026. Unless real estate markets stabilize and nonperforming levels moderate, the Company expects additional write-downs to be necessary in 2012.

Difficult market conditions and economic trends have adversely affected our industry and our business and may continue to do so.

As a result of the negative developments in the financial industry, new federal and state laws and regulations regarding lending, funding practices, liquidity standards, and other financial practices have been enacted; the Dodd-Frank Act, which is further discussed in this Report under the section “Supervision and Regulation”, is a case in point. Additionally, bank regulatory agencies have been, and are expected to continue being, aggressive in responding to concerns and trends identified in examinations. Difficult market conditions and the impact of new legislation in response to these developments could restrict our business operations, including our ability to originate loans, and increase our cost of compliance, divert our resources, and adversely affect our profitability.

Since August 2008, 132 banks and thrifts failed in Georgia and Florida, including numerous institutions with a presence in our markets. The closure of these institutions and the subsequent liquidation of their assets in our markets at depressed values by the FDIC and the acquiring institutions have had a negative impact on our business and on our customers in real estate-related businesses. It could take several years for the market to absorb the real estate inventories held by the FDIC and other financial institutions in our markets.

We are subject to extensive legislation and regulation that could limit or restrict our activities and adversely affect our earnings and financial condition.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies. Many of these regulations are further discussed in this Report under the section “Supervision and Regulation”. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. Our failure to comply with these requirements can lead to, among other remedies, administrative enforcement actions, termination or suspension of our licenses, rights of rescission for borrowers, and class action lawsuits. Many of these regulations are intended to protect depositors, the public and the FDIC rather than shareholders. The laws and regulations applicable to the banking industry are changing rapidly to reflect the government’s concerns about the economy and the banking system, and these changes may adversely affect our business and profitability. Changes to statutes, regulations or regulatory policies, and the interpretation and implementation of new statutes, regulations or policies could affect us in substantial and unpredictable ways, including limiting the types of financial services and products we may offer and/or increasing the ability of nonbanks to offer competing financial services and products.

Further, the legislation and regulations recently enacted in an effort to either stabilize or reform the financial and capital markets may have unintended harmful consequences on the U.S. financial system and our business. The overall effects of these and other legislative and regulatory efforts on the financial markets remain uncertain and they may not have the intended results. Should these or other legislative or regulatory initiatives have unintended effects, our business, financial condition, results of operations and prospects could be materially and adversely affected.

In addition, we may need to modify our strategies and business operations in response to these changes. We may also incur increased capital requirements and constraints or additional costs to satisfy new regulatory requirements. Given the volatile nature of the current regulatory environment and the uncertainties underlying efforts to mitigate or reverse disruptions, we may not timely anticipate or manage existing, new or additional risks, contingencies or developments in the current or future environment. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.

We may need to raise additional capital in the future, but that capital may not be available when we need it or may be dilutive.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. At some point, particularly if our asset quality or earnings were to continue to deteriorate significantly, we may need to raise additional capital to support our operations and any future growth, to protect against any further deterioration in our loan portfolio, or to meet our other commitments and business needs.

Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Volatility and disruption in the capital and credit markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. Such market conditions may disrupt our ability to raise additional capital when needed.

If we cannot raise additional capital when needed, our results of operations and financial condition may be adversely affected, and our banking regulators may subject the Bank to a formal regulatory enforcement action. In addition, the issuance of additional shares of our common stock will dilute the ownership interest of our common shareholders.

Diminished access to alternative sources of liquidity could adversely affect our net income, net interest margin and overall liquidity.

Although we have seldom used them, we have historically had access to a number of alternative sources of liquidity such as advances from the Federal Home Loan Bank of Atlanta (the “FHLB”), secured and unsecured lines of credit from other banks and the Federal Reserve’s discount window. Given the recent volatility in the credit and liquidity markets and a deterioration in our financial condition resulting from an increase in nonperforming assets and a decrease in earnings, we may not be able to obtain liquidity on terms that are favorable to us, or at all. In addition, financial institutions are unwilling to extend credit to banks because of concerns about the banking industry and the economy generally and, as discussed above, there may not be a viable market for raising equity capital. If our access to these sources of liquidity is diminished, or if it is only available on unfavorable terms, then our net income, net interest margin and overall liquidity could be adversely affected.

Our net interest income could be negatively affected by the continued low level of short-term interest rates, a sudden rising interest rate environment, recent developments in the credit and real estate markets and competition in our primary market area.

As a community bank, our earnings significantly depend on our net interest income, which is the difference between the income that we earn on interest-earning assets, such as loans and investment securities, and the expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes resulting from changes in the Federal Reserve’s fiscal and monetary policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and net income.

Through monetary policy, the Federal Reserve has held short-term interest rates at historic lows since 2008. A significant portion of our loans, including residential construction and development loans and other commercial loans, bears interest at variable rates. The interest rates on a significant part of these loans decreased when the Federal Reserve reduced interest rates. In response, we instituted interest rate floors on most of our variable rate loans that are now considered “above” market rates. In addition, many of our customers have taken advantage of the low interest rate environment to borrow at fixed rates for terms up to five years. Accordingly, an increase in interest rates may not result in an increase in our interest income. Also, as interest rates rise, our interest expense for deposits and other borrowings will likely also rise. In addition, an increase in interest rates may decrease the demand for consumer and commercial credit, including real estate loans, which are a major component of our loan portfolio. Furthermore, increases in interest rates will add to the borrowing costs of our loan customers, which may adversely affect their ability to repay their loans.

Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. A decline in the market value of our assets has limited our ability to borrow additional funds and could result in our lenders requiring additional collateral from us under our borrowing agreements. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, to maintain our liquidity. If those sales are made at prices lower than the recorded amounts of the investments and loans, we will incur losses.

A decline in loans outstanding, increases in nonperforming loans and the continued low interest rate environment reduced our net interest income during the three years ended December 31, 2011 and could cause additional pressure on net interest income in future periods. This reduction in net interest income may also be exacerbated by the high level of competition that we face in our markets. Any significant reduction in our net interest income could negatively affect our business and could have a material adverse impact on our capital, financial condition and results of operations.

We face strong competition from other financial services providers.

We operate in highly competitive markets for the products and services we offer. The competition among financial services providers to attract and retain customers is strong. Customer loyalty can be easily influenced by a competitor’s new products, especially offerings that could provide cost savings or a higher return to the customer. Some of our competitors may be better able to provide a wider range of products and services over a greater geographic area. We compete with commercial banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate in our market areas and elsewhere. Moreover, this competitive industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Many of our competitors have greater financial resources, fewer regulatory constraints and some have lower cost structures. While we believe we can and do successfully compete with these other financial institutions in our market areas, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification and inability to spread our marketing costs across a broader market. As a result of these various sources of competition, we could lose business to competitors or be forced to price products and services on less advantageous terms to keep or attract customers, either of which could adversely affect our profitability.

Additionally, customers could pursue alternatives to bank deposits and bank transactions, causing us to lose a relatively inexpensive source of funding and fee income. For example, customers may perceive other investments, such as the stock market, as providing superior returns. And, technology now allows consumers to completely bypass banks in paying bills, transferring funds, and completing other financial transactions. This process could result in loss of deposits and related fee income. Conversely, when customers move borrowing relationships to other parties, we lose interest income.

If problem asset levels and real estate concentrations are not reduced, we could face formal regulatory action and loss of liquidity sources.

If our problem asset levels and real estate concentrations are not reduced, we could face a formal regulatory order and loss of liquidity sources, including the Federal Reserve discount window. Our future lending activities and growth prospects could be significantly curtailed, we could be required to take significant write-downs on problem assets, and our deposit insurance assessments could increase substantially. Publication of an enforcement order could harm our reputation and result in loss of deposits and market share. Besides our financial condition and operating results, our stock price could be materially and adversely affected.

Our financial instruments carried at fair value expose us to certain market risks.

We maintain an investment portfolio of securities available-for-sale, which includes various types of debt instruments and maturities. Instruments carried at fair value are exposed to market risks related to changes in interest rates, market liquidity, and default risks. Changes in the market values of these instruments could have a material adverse impact on our financial condition. Additionally, accounting regulations may require us to record other-than-temporary impairment losses. We may classify additional financial assets or liabilities at fair value in the future.

Diminished access to historical and alternative sources of liquidity could adversely affect our operating results, net interest margin, and our overall liquidity.

Deposits are our primary source of liquidity. In the current environment, customer confidence is a critical element in growing and retaining deposits, and heightened sensitivity to our asset quality could affect the stability of our deposit base. If our asset quality continues to deteriorate, our ability to grow and retain deposits could be curtailed, increasing our costs of funds and negatively impacting our overall liquidity and financial condition. We have historically had access to alternative sources of liquidity, including unsecured lines of credit from correspondent banks. Due to nonperforming assets and other trends, certain of these sources, including correspondent lines, are currently not available. The reduction in these alternative sources of liquidity has increased our reliance on deposits.

Recapture of our deferred tax asset balance (i.e. reversal of the valuation allowance) is subject to considerable judgment.

At December 31, 2011, we recorded a $7,464,854 valuation allowance for deferred tax assets. The establishment of the valuation allowance has significantly and adversely affected the Company’s operating results and financial conditions, including regulatory capital ratios. We expect to reverse the majority of the valuation allowance for deferred tax assets once we return to a sustained level of profitability. Like other estimates, the reversal of the valuation allowance is subject to considerable judgment, and we cannot affirm with certainty when the deferred tax asset balance will be restored.

Issuance or sale of common stock or other equity securities resulting in an “ownership change,” as defined in the Internal Revenue Code, could impair our ability to fully utilize certain tax benefits.

Our ability to use realized net operating losses to offset future taxable income may be significantly limited if we experience an “ownership change” as defined by Section 382 of the Internal Revenue Code of 1986, as amended. An ownership change under Section 382 generally occurs when the aggregate percentage of stock held by 5% shareholders increases by more than 50% over a rolling three year period. In general, the rules of Section 382 allow post-change corporations to use pre-change net operating losses, but impose an annual limitation equal to the value of the corporation’s stock immediately before the ownership change multiplied by the long-term tax-exempt rate, as defined by the Internal Revenue Code. Because a valuation allowance already exists for our entire deferred tax assets, no additional charge to earnings would result from an ownership change; however, such ownership change could adversely impact our ability to recover the deferred tax asset in the future.

Departures of our key personnel may harm our ability to operate successfully.

Our success has been and continues to depend largely on the services of our senior management team, including our senior loan officers and our Board of Directors, many of whom have significant relationships with our customers. Our continued success will depend, to a large extent, on the continued service of these key personnel.

Fluctuations in our expenses and other costs may hurt our financial results.

Our expenses and other costs, such as operating and marketing expenses, directly affect our earnings results. In light of the extremely competitive environment in which we operate, and because the size and scale of many competitors provides them with increased operational efficiencies, we must successfully manage such expenses. As our business develops, changes, or expands, additional expenses can arise. Changes in business strategies, including the possible sale or closure of some of our branches, may be warranted to manage our expenses and improve our results of operations.

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

FDIC deposit insurance premiums increased substantially for all insured financial institutions in 2009 as the large number of bank failures depleted the Deposit Insurance Fund. In addition, the FDIC required all financial institutions, including the Bank, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010 through and including 2012 to re-capitalize the Deposit Insurance Fund. Furthermore, the FDIC also increased the assessment rates by three basis points effective January 1, 2011. If FDIC deposit insurance premiums and assessments continue to increase, it could adversely affect our financial condition.

We must respond to rapid technological and other changes that may be more difficult or expensive than anticipated.

If our competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing product and service offerings, technology and systems may become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The financial services industry is changing rapidly, and to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. These changes may be more difficult or expensive than we anticipate. We may not be successful in introducing new products and services in response to industry trends or development in technology or those new products may not achieve market acceptance. As a result, we could lose business, be forced to price products and services on less advantageous terms to retain or attract customers, or be subject to cost increases.

We rely on other companies to provide key components of our business infrastructure.

Third parties provide key components of our business infrastructure such as processing, internet connections, and network access. Any disruption in services provided by these third parties could adversely affect our ability to deliver products and services to customers and otherwise conduct business. Technological or financial difficulties of a third party service provider could adversely affect our business if those difficulties result in the interruption or discontinuation of services provided by that party. Our insurance coverage may be inadequate to cover losses resulting from system failures or other disruptions. Failures in our business infrastructure could increase the costs of doing business.

We rely on our systems, employees, and certain counterparties, and certain failures could materially and adversely affect our operations.

We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical and record-keeping errors, and computer/telecommunications malfunctions. Our business is dependent on our ability to process a large number of increasingly complex transactions. If any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially and adversely affected. We are similarly dependent on our employees. We could be adversely affected if one of our employees causes a significant operational breakdown or failure of our operations or systems, either as a result of human error, sabotage, or fraudulent manipulation. Third parties with whom we do business could also be sources of operational risk to us due to breakdowns or failures of such parties’ own systems or employees. Any of these occurrences could diminish our ability to operate.

Disruptions of our operating systems from events wholly or partially beyond our control, including computer viruses, electrical or telecommunications outages, or natural or man-made disasters could occur. Such disruptions may interrupt our customer services and cause loss or liability to us. In addition, our controls and procedures as well as business continuity and data security systems could prove inadequate. For example, we could be susceptible to hacking or identity theft. Any such failure could require us to expend significant resources to correct the defect and expose us to litigation or losses not covered by insurance.

We depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit, invest, or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements and other data. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on independent auditors’ reports.

We do business with other financial institutions that could experience financial difficulty.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Because these financial institutions have many risks, as do we, we could be adversely affected should one of these financial institutions experience significant financial difficulties or fail to comply with our agreements with them. Financial services institutions are interrelated as a result of clearing, counterparty, or other relationships.

We have exposure to industries and counterparties, and we routinely execute transactions with other parties, including broker-dealers, correspondent banks and other commercial banks. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or other institutions. Many of these transactions expose us to credit risk in the event of default of the other party or customer. Resultant losses could materially and adversely affect our results of operations.

Hurricanes and other natural or man-made disasters may adversely affect our loan portfolio and operations and increase the cost of doing business.

Large scale natural or man-made disasters may significantly affect our loan portfolio by damaging properties pledged as collateral and impairing the ability of certain borrowers to repay their loans. Such events may also disrupt our operations and ability to provide financial services to our customers. The impact of such an event may not be fully-protected by our insurance. Furthermore, the nature and level of natural disasters cannot be predicted and may be intensified by global climate change. The ultimate impact of a natural disaster on future financial results is difficult to predict and will be affected by numerous factors, including the extent of damage to our facilities, the extent to which damages are not covered by insurance, the extent to which unemployment and other economic conditions caused by the disaster affect borrowers’ ability to repay their loans, the impact on real estate markets, and the cost of collection, foreclosure moratoriums, loan forbearances, and other accommodations granted to borrowers and other customers.

Negative public opinion could damage our reputation and adversely impact business and revenues.

As a financial institution, our earnings and capital are subject to risks associated with negative public opinion. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by us to meet our customers’ expectations or applicable regulatory requirements, corporate governance, or from actions taken by regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep or attract customers and expose us to litigation and regulatory action.

Changes in accounting policies or standards could materially impact our financial statements.

Our accounting policies and processes are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (“FASB”) and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements and related disclosures. These changes, which can be hard to predict, can materially impact how we record and report our financial condition and results of operations. Because of the uncertainty surrounding our judgments and estimates pertaining to our accounting policies, we cannot guarantee that in the future we will not be required to adjust accounting policies or restate prior period financial statements.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Our disclosure controls and procedures over financial reporting are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit to the SEC is accurately accumulated and communicated to management, and recorded, processed, summarized, and reported in accordance with the SEC’s rules and regulations. We believe that any disclosure controls and procedures over financial reporting or internal controls and procedures, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, that alternative reasoned judgments can be drawn, or that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

The costs and effects of litigation, investigations, or similar matters, or adverse facts and developments related thereto, could materially affect our business, operating results, and financial condition.

From time to time, we may be involved in litigation, investigations, or similar matters arising out of our business. Our insurance may not cover all claims asserted against us, and such claims, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation or investigation significantly exceed our insurance coverage, our business, financial condition, and results of operations will be impacted. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all.

Our directors and executive officers own a significant portion of our common stock.

The directors and executive officers of the Company and the Bank, as a group, beneficially owned approximately 29.5% of our outstanding common stock as of December 31, 2011. As a result of their ownership, these directors and executive officers will have the ability, by voting their shares in concert, to significantly influence the outcome of all matters submitted to our shareholders for approval, including the election of directors.

The trading volume in our common stock has been low compared with larger bank holding companies, and the sale of substantial amounts of our common stock in the public market could depress the price of our common stock.

The trading volume in our common stock has generally been lower than other similarly sized, public bank holding companies. Furthermore, this trading volume does not compare with bank holding companies with similar market capitalization listed on a major stock exchange. Thus, the market in our common stock is somewhat limited in scope relative to some other companies, and a more active and liquid trading market for our common stock may not develop in the future. As a result, it may be more difficult for our shareholders to sell a large block of shares for the same price at which a smaller number of shares could be sold.

Sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, may cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.

If enacted, recently passed legislation called the Jumpstart Our Business Startups Act (or “JOBS Act”) may allow us to terminate the registration of our common stock under the Securities Exchange Act of 1934. The deregistration of our stock would enable us to save significant expenses relating to our public disclosure and reporting requirements under the Exchange Act. However, a deregistration of our stock may further limit the liquidity of our stock.

The price of our common stock may fluctuate significantly, which may make it difficult for shareholders to sell our common stock at times or at prices they may find favorable.

Our stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:

•

actual or anticipated variations in earnings;

•

legislation or actions by government regulators;

•

changes in dividends;

•

a new issuance of common stock or other equity securities;

•

deregistration of our common stock with the SEC;

•

operating and stock performance of other companies deemed to be peers;

•

announcement of developments related to our business;

•

new technology or services offered by traditional and non-traditional competitors;

•

news reports of trends, concerns and other issues related to the financial services industry;

•

changes in analysts’ recommendations or projections; and

•

cyclical fluctuations.

Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price of our common stock may not be indicative of future market prices. In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies and particularly those in the financial services and banking sector, including for reasons unrelated to their operating performance. These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results.

We suspended payment of dividends in 2010 and currently are not permitted to declare or pay any dividend without the prior written approval of our regulators. As a result, capital appreciation, if any, of our common stock may be the sole opportunity for a return on an investment in our common stock for the foreseeable future.

In 2010, we suspended payment of dividends on our common stock until our operating performance improved and credit losses abated. In addition, we are not permitted to declare or pay any dividend without the prior written approval of our regulators. As a result, we do not intend to declare a dividend on our common shares in 2012. The dividend restriction could adversely affect the market price of our common stock.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Company Property

The Company’s executive offices are located within the Bank’s main office at 1010 North Way, Darien, McIntosh County, Georgia 31305.

Bank Property

In addition to its main office in Darien, the Bank has fifteen other banking offices in northeast Florida and southeast Georgia as shown in the following table.

Banking Offices


Florida	542238 US Highway 1 Nassau County Callahan, Florida 32011	463128 State Road 200 Nassau County Yulee, Florida 32097

	15885 County Road 108 Nassau County Hilliard, Florida 32046

Georgia	15 Trade Street Glynn County Brunswick, Georgia 31525	1501 GA Highway 40 East Camden County Kingsland, Georgia 31548

	620 S. Peterson Avenue Coffee County Douglas, Georgia 31533	105 Bacon Street Brantley County Nahunta, Georgia 31553

	15039 Highway 17 McIntosh County Eulonia, Georgia 31331	910 Van Streat Highway Coffee County Nicholls, Georgia 31554

	4233 Second Street North Charlton County Folkston, Georgia 31537	2004 Highway 17 Bryan County Richmond Hill, Georgia 31324

	14 Hinson Street Jeff Davis County Hazlehurst, Georgia 31539	2512 Osborne Road Camden County St. Marys, Georgia 31558

	4604 Main Street East Brantley County Hoboken, Georgia 31542	414 Bedell Avenue Camden County Woodbine, Georgia 31569

The Bank owns all of its banking facilities. All properties except Eulonia have been renovated within the last eight years. All of the properties are in a good state of repair and are designed for the purposes for which they are used.

The Bank also owns four parcels of land that are being held for future expansion; three parcels are located in Glynn County, in the St. Simons, Southport, and Sterling areas, and the fourth in Brantley County, near Waynesville.

ITEM 3.

LEGAL PROCEEDINGS

The nature of the business of the Company and the Bank ordinarily results in a certain amount of litigation. Accordingly, we are party to a limited number of lawsuits incidental to our respective businesses. In our opinion, the ultimate disposition of these matters will not have a material adverse impact on our consolidated financial position or results of operations.

ITEM 4.

REMOVED AND RESERVED

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s stock, which is not listed on a national securities exchange, trades over-the-counter under the symbol “SEBC.” The high and low sales prices shown below are based on information being posted to automated quotation systems by broker-dealers. These market prices may include dealer mark-up, markdown, and/or commission. Prices paid on treasury stock purchases with non-brokers are excluded from these results.

The following table sets forth the high and low sales prices, the cash dividends declared, and earnings per share on the Company’s common stock during the periods indicated.


	Quarter	Sales Price				Dividends Declared		Earnings (Loss) Per Share
Year	Quarter	High		Low		Dividends Declared		Basic			Diluted
2011	4th	$	5.70	$	4.20	$	—	$	(0.90	)	$	(0.90	)
	3rd		7.00		4.50		—		(0.64	)		(0.64	)
	2nd		7.00		6.00		—		(0.07	)		(0.07	)
	1st		7.74		6.99		—		0.01			0.01
2010	4th	$	9.00	$	7.60	$	—	$	(2.16	)	$	(2.16	)
	3rd		10.60		6.75		—		(0.85	)		(0.85	)
	2nd		11.00		10.50		0.065		(0.66	)		(0.66	)
	1st		11.01		10.00		0.065		(0.37	)		(0.37	)
2009	4th	$	11.75	$	8.25	$	0.065	$	(0.09	)	$	(0.09	)
	3rd		13.00		11.00		0.065		0.09			0.09
	2nd		16.00		11.50		0.085		0.03			0.03
	1st		14.00		11.00		0.085		0.20			0.20

The Company had approximately 400 shareholders of record at December 31, 2011.

In July 2010, the Company’s Board of Directors voted to suspend dividends until the Company’s operating performance improved and credit losses abated. The Company’s ability to pay dividends in the future will be dependent on earnings, capital adequacy, the availability of liquid assets for distribution and regulatory approval. The Company is a legal entity separate from the Bank, and its revenues depend primarily on the payment of dividends from the Bank. Separate regulatory approval will be required before the Bank can itself pay a dividend.

In July 2010, the Company also suspended its treasury stock program. Purchases made for the years ended December 31, 2010 and 2009 prior to the suspension are summarized below.


Year	Quarter	Total # of Shares Purchased		Average Price Paid Per Share		# of Shares Purchased as Part of Publicly Announced Program		Maximum $ Value of Shares that May Yet be Purchased under the Program
2010	3rd		—	$	—		—	$	6,105,539
	2nd		9,143		10.00		9,143		6,105,539
	1st		—		—		—		6,196,969
2009	4th		—		—		—		6,196,969
	3rd		19,800		11.46		19,800		6,196,969
	2nd		—		—		—		6,423,882
	1st		18,000		12.56		18,000		6,423,882

Shares of common stock available for issuance under the Company’s 2006 Stock Option Plan are summarized below.

As of December 31, 2011

# of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights

Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights

# of Securities Remaining
Available for Future
Issuance under Equity
Compensation Plans

Equity compensation plans approved by shareholders

70,250

15.23

79,750

Equity compensation plans not approved by shareholders

—

Total

70,250

15.23

79,750

ITEM 6.

SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data for the Company. This selected financial data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and the Notes in Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.


As of and for the years ended December 31, (Dollars in thousands except per share data)	2011			2010			2009			2008		2007
Summary of Operations:
Interest income	$	15,431		$	17,460		$	21,120		$	24,798	$	29,148
Interest expense		3,205			4,647			5,833			8,093		9,905

Net interest income		12,226			12,813			15,287			16,705		19,243
Provision for loan losses		6,185			14,265			5,890			1,348		305
Noninterest income		3,803			3,891			4,450			3,570		5,153
Noninterest expense		14,836			15,276			13,626			14,048		13,708

Income (loss) before income tax expense (benefit)		(4,992	)		(12,837	)		221			4,879		10,383
Income tax expense (benefit)		—			(192	)		(513	)		1,329		3,352

Net income (loss)	$	(4,992	)	$	(12,645	)	$	734		$	3,550	$	7,031


Net interest income on a taxable-equivalent basis	$	12,674		$	13,355		$	15,887		$	17,356	$	19,982

Selected Average Balances:
Total assets	$	423,130		$	431,627		$	413,957		$	429,152	$	410,126
Earning assets		378,328			392,338			380,018			393,756		379,257
Loans, net of unearned income		227,413			256,088			282,946			270,133		268,445
Investment securities		72,956			65,145			89,642			118,486		106,369
Deposits		370,977			367,966			341,863			356,559		343,209
Shareholders’ equity		43,855			54,856			57,146			57,310		54,852
Selected Year-End Balances:
Total assets	$	416,610		$	427,633		$	421,056		$	434,987	$	436,386
Earning assets		376,513			393,759			369,683			396,795		390,952
Loans, net of unearned income		202,263			245,624			275,726			279,757		269,477
Allowance for loan losses		6,777			9,916			7,170			4,929		4,510
Investment securities		88,002			74,300			74,626			115,480		120,460
Deposits		369,872			375,195			351,771			349,810		362,056
Treasury stock		8,894			8,894			8,803			8,350		8,308
Shareholders’ equity		40,125			44,806			56,559			57,184		56,737
Per Share Ratios:
Basic and diluted earnings (loss)	$	(1.60	)	$	(4.04	)	$	0.23		$	1.12	$	2.19
Dividends declared		—			0.13			0.30			0.625		0.67
Book value		12.82			14.32			18.02			18.00		17.85
Market price:
High		7.74			11.00			16.00			23.15		30.00
Low		4.20			6.75			8.25			12.90		24.10
Common Share Data:
Outstanding at end of year		3,129,388			3,129,388			3,138,531			3,176,331		3,178,331
Basic and diluted weighted average outstanding		3,129,388			3,131,642			3,155,757			3,177,101		3,204,024


As of and for the years ended December 31,	2011			2010			2009			2008			2007
Financial Ratios and Other Data:
Profitability:
Return on average assets		-1.18	%		-2.93	%		0.18	%		0.83	%		1.71	%
Return on average equity		-11.38	%		-23.05	%		1.28	%		6.19	%		12.82	%
Net interest margin		3.35	%		3.40	%		4.18	%		4.41	%		5.27	%
Liquidity:
Net loans to total deposits		54.68	%		65.47	%		78.38	%		79.97	%		74.43	%
Average loans to average earning assets		60.11	%		65.27	%		74.46	%		68.60	%		70.78	%
Noninterest-bearing deposits to total deposits		17.20	%		14.76	%		15.73	%		15.90	%		17.80	%
Asset Quality:
Net charge-offs to average loans		4.10	%		4.50	%		1.29	%		0.34	%		0.01	%
Nonperforming assets to total assets		12.70	%		12.24	%		7.08	%		2.36	%		0.42	%
Allowance for loan losses to net loans		3.35	%		4.04	%		2.60	%		1.76	%		1.67	%
Allowance to nonperforming loans		16.60	%		24.00	%		32.78	%		67.85	%		299.07	%
Capital Adequacy:
Tier 1 capital ratio		16.37	%		15.88	%		17.90	%		17.40	%		17.93	%
Total capital ratio		17.63	%		17.16	%		19.17	%		18.66	%		19.18	%
Tier 1 leverage ratio		9.70	%		10.29	%		14.00	%		13.61	%		13.60	%
Dividend payout ratio		N/A			N/A			129.11	%		55.94	%		30.45	%

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and related Notes, and is qualified in its entirety by the foregoing and other more detailed financial information appearing elsewhere. Historical results of operations and the percentage relationships among any amounts included, and any trends which may appear to be inferred, should not be taken as being necessarily indicative of trends in operations or results of operations for any future periods.

We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business which are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Notice Regarding Forward-Looking Statements” at the beginning of this Report.

Overview

Southeastern Banking Corporation is a bank holding company headquartered in Darien, McIntosh County, Georgia. Southeastern Bank, our wholly-owned commercial bank subsidiary chartered in 1888, offers a full line of commercial and retail banking services to meet the financial needs of our customer base through 16 branch locations and a network of ATMs across southeast Georgia and northeast Florida. For additional information on our markets, see the “Markets and Competition” section in Part I of this Report. As a bank, we operate in a highly regulated and competitive environment. For a summary of the regulations that have a material impact our business, see the “Supervision and Regulation” section in Part I of this Report. Our primary objective is to increase the return on our shareholders’ investment over the long-term by accepting deposits and borrowing additional funds as needed at low costs and investing those funds in a safe and sound manner in loans and investments at a higher yield. Competition, regulation, credit risk, and interest rate risk are the primary factors that we must manage in order to be successful.

Like many financial institutions across the United States, our operations have been severely affected by the economic recession and financial crisis that began in 2007. The recession has had a detrimental impact on the labor, capital and real estate markets. Dramatic declines in the housing market, specifically in our coastal markets, negatively affected the credit performance of our residential construction and development loans and the value of the underlying collateral on those loans. The economic recession has also lowered commercial real estate values in all of our markets and substantially reduced general business activity and investment. We are entering the fifth year of what may possibly be a seven- to ten-year local real estate market depression. Combined, the deterioration in the residential and the commercial real estate markets has materially increased our level of nonperforming assets and charge-offs of problem loans. These market conditions and the tightening of credit led to increased delinquencies in our loan portfolio, added pressure on our capital, a lower net interest margin and net losses in 2010 and 2011.

STATISTICAL DISCLOSURES

Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential

From September 2007 to December 2008, the Federal Open Market Committee of the Federal Reserve (“FOMC”) reduced the federal funds rate 10 times, in various increments, from 5.25% to 0.25%. The FOMC has held the federal funds rate at 0.25% since December 2008. Being in an asset-sensitive interest rate position on our statements of condition (our earning assets reprice more frequently than our rate-sensitive liabilities), we generally benefit during periods of rising interest rates and our earnings decrease during periods of declining interest rates. We discuss our interest rate risk in further detail in Item 7A of this Report. Below, we have summarized the impact that changes in interest rates and changes in the volume and composition of the assets and liabilities on our statements of condition have had on our earnings over the past three years.

Average Balances, Interest and Yields

The following table details the average balance of interest-earning assets and interest-bearing liabilities, the amount of interest earned and paid, and the average yields and rates realized for each of the last three years. Federally tax-exempt income is presented on a taxable-equivalent basis assuming a 34% Federal tax rate. Loan average balances include loans on nonaccrual status. Other interest-earning assets include interest-bearing deposits in other banks, federal funds sold and FHLB stock. Interest-bearing demand deposits includes NOW and money market accounts.


	2011								2010								2009
	Average Balance			Interest Income/ Expense		Average Yield/ Rate			Average Balance			Interest Income/ Expense		Average Yield/ Rate			Average Balance			Interest Income/ Expense		Average Yield/ Rate
For the Years Ended December 31, (Dollars in thousands)
ASSETS
Interest-earning assets:
Loans	$	227,413		$	13,159		5.79	%	$	256,088		$	14,449		5.64	%	$	282,946		$	16,935		5.99	%
Taxable securities		60,674			1,705		2.81	%		47,825			2,256		4.72	%		67,053			3,267		4.87	%
Nontaxable securities		12,282			795		6.48	%		17,320			1,126		6.50	%		22,589			1,494		6.61	%
Other interest-earning assets		77,959			220		0.28	%		71,105			171		0.24	%		7,430			25		0.34	%

Total interest-earning assets		378,328			15,879		4.20	%		392,338			18,002		4.59	%		380,018			21,721		5.72	%


Noninterest-earning assets:
Cash		15,643								10,500								14,247
Allowance for loan losses		(8,543	)							(7,647	)							(6,130	)
Unrealized gains (losses) on securities available-for-sale		739								434								(1,976	)
Other assets		36,963								36,002								27,798

Total assets	$	423,130							$	431,627							$	413,957


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	123,026		$	593		0.48	%	$	117,827		$	822		0.70	%	$	94,315		$	720		0.76	%
Savings deposits		57,715			268		0.46	%		54,991			384		0.70	%		59,030			426		0.72	%
Time deposits		129,734			2,213		1.71	%		137,640			3,248		2.36	%		132,135			4,286		3.24	%
FHLB advances		5,000			131		2.62	%		6,027			193		3.20	%		10,329			389		3.77	%
Other short-term borrowings		604			—		0.00	%		632			—		0.00	%		1,887			13		0.69	%

Total interest-bearing liabilities		316,079			3,205		1.01	%		317,117			4,647		1.47	%		297,696			5,834		1.96	%


Noninterest-bearing liabilities and shareholders’ equity:
Demand deposits		60,503								57,508								56,383
Other liabilities		2,693								2,146								2,732
Shareholders’ equity		43,855								54,856								57,146

Total liabilities and shareholders’ equity	$	423,130							$	431,627							$	413,957


Interest rate spread							3.19	%							3.12	%							3.76	%


Net interest income				$	12,674							$	13,355							$	15,887


Net interest margin							3.35	%							3.40	%							4.18	%

During 2011, we had an average investment in loans on nonaccrual status of $28.95 million. If these impaired loans had remained current and on accrual status during 2011, we would have recorded an additional $2.05 million of interest income compared to $1.75 million of lost interest income on an average investment of $38.57 million of nonaccrual loans during 2010.

Rate / Volume Analysis

The following table shows a summary of the changes in interest income and interest expense on a fully taxable-equivalent basis resulting from changes in volume and changes in rates for each category of interest-earning assets and interest-bearing liabilities. The change in interest attributable to rate has been determined by applying the change in rate between years to average balances outstanding in the later year. The change in interest due to volume has been determined by applying the rate from the earlier year to the change in average balances outstanding between years. Thus, changes that are not solely due to volume have been consistently attributed to rate.


	2011 vs. 2010									2010 vs. 2009
	Increase (Decrease)			Changes Due To						Increase (Decrease)			Changes Due To
For the Years Ended December 31,	Increase (Decrease)			Rate			Volume			Increase (Decrease)			Rate			Volume
(Dollars in thousands)
Increase (decrease) in income from interest-earning assets:
Loans	$	(1,290	)	$	328		$	(1,618	)	$	(2,486	)	$	(878	)	$	(1,608	)
Taxable securities		(551	)		(1,157	)		606			(1,011	)		(74	)		(937	)
Nontaxable securities		(331	)		(3	)		(328	)		(368	)		(20	)		(348	)
Other interest-earning assets		49			33			16			146			(68	)		214

Total interest income		(2,123	)		(799	)		(1,324	)		(3,719	)		(1,040	)		(2,679	)


Increase (decrease) in expense from interest-bearing liabilities:
Interest-bearing demand deposits		(229	)		(265	)		36			102			(77	)		179
Savings deposits		(116	)		(135	)		19			(42	)		(13	)		(29	)
Time deposits		(1,035	)		(848	)		(187	)		(1,038	)		(1,217	)		179
FHLB advances		(62	)		(29	)		(33	)		(196	)		(34	)		(162	)
Other short-term borrowings		—			—			—			(13	)		(4	)		(9	)

Total interest expense		(1,442	)		(1,277	)		(165	)		(1,187	)		(1,345	)		158


Net interest income	$	(681	)	$	478		$	(1,159	)	$	(2,532	)	$	305		$	(2,837	)

Investment Portfolio

The composition of our investment portfolio as of the indicated dates is presented below. Changes in the mix of our investment portfolio will vary over time in response to changes in market conditions, pledging requirements and liquidity needs of the Bank. During 2011, we reduced our exposure to direct obligations of U.S. Government-sponsored enterprises such as the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and increased our exposure to agency residential mortgage-backed securities. For regulatory capital purposes, shifting into agency mortgage-backed securities from direct agency obligations had no impact on our risk-weighted assets. We also increased our interest in investment pools issued by the U.S. Small Business Administration (“SBA”) included in the U.S. Government and agency securities category in an effort to diversify our portfolio and reduce our risk-weighted assets.


	2011						2010						2009
(As of December 31, Dollars in thousands)	Fair Value			% of Total			Fair Value			% of Total			Fair Value			% of Total
U.S. Government and agency securities	$	13,574			15.4	%	$	4,739			6.4	%	$	4,404			5.9	%
U.S. Government-sponsored enterprise securities		6,637			7.6	%		33,668			45.3	%		19,932			26.7	%
Agency residential mortgage-backed securities		41,985			47.7	%		10,965			14.8	%		17,566			23.5	%
Obligations of states and political subdivisions		17,012			19.3	%		16,821			22.6	%		22,647			30.4	%
Corporate debt obligations		8,794			10.0	%		8,107			10.9	%		10,077			13.5	%

Total investment securities	$	88,002			100.0	%	$	74,300			100.0	%	$	74,626			100.0	%

Total investments as a percentage of total assets		21.1	%					17.4	%					17.7	%

At December 31, 2011, the overall estimated fair market value of our investment portfolio was approximately $810,000 (or 1%) greater than our amortized cost; however, market values may fluctuate significantly as interest rates change.

The following table shows the maturities of non-equity investment securities at December 31, 2011 and the weighted-average yields (on a fully taxable basis assuming a 34% tax rate) on such securities. The maturities presented for mortgage-backed securities are based on the average lives of those bonds at the then projected prepayment speeds. Actual maturities usually differ from contractual maturities because certain security issuers have the right to call or prepay obligations with or without call or prepayment penalties.

Due within
One Year

Due from
One to Five Years

Due from
Five to Ten Years

Due after
Ten Years

Total
Portfolio

As of December 31, 2011

Fair
Value

Wtd.
Avg.
Yield

Fair
Value

Wtd.
Avg.
Yield

Fair
Value

Wtd.
Avg.
Yield

Fair
Value

Wtd.
Avg.
Yield

Fair
Value

Wtd.
Avg.
Yield

(Dollars in thousands)

U.S. Government and agency securities

—

3,867

4.09

4,039

2.65

5,668

1.10

13,574

2.39

U.S. Government-sponsored enterprise securities

281

8.03

4,279

2.20

—

2,077

5.05

6,637

3.32

Agency residential mortgage-backed securities

5.79

39,687

2.04

1,445

2.60

809

2.59

41,985

2.07

Obligations of states and political subdivisions

2,799

5.44

6,559

5.06

4,549

4.99

3,105

5.34

17,012

5.16

Corporate debt obligations

—

2,553

4.17

—

6,241

7.11

8,794

6.31

Totals

3,124

5.68

56,945

2.62

10,033

3.68

17,900

4.54

88,002

3.25

The objectives of our investment portfolio policy stress quality and liquidity. At the time of acquisition, the bonds were either assigned an investment grade credit rating by a nationally-recognized statistical rating organization (“NSRO”) or reviewed for credit and market risk and deemed appropriate for the Company’s portfolio by management. The portfolio is monitored to assure there is no unreasonable concentration of securities in the obligations of a single issuer. We do not carry any “sub-prime” mortgages, structured investment vehicles, or collateralized debt obligations in our portfolio. We also monitor the insurers of our state and political subdivision securities, and the distribution of such securities among the insurers. At December 31, 2011, we had no obligations of state and political subdivisions rated below investment grade by an NSRO, but we had 11 issues of state and political subdivisions with an amortized cost of $3.35 million and a fair market value of $3.45 million that were not rated by an NSRO, of which 93% were issued by state and political subdivisions of Georgia or Florida. At December 31, 2011, we had two corporate debt obligations with an amortized cost of $3.36 million and a fair market value of $2.83 million rated below investment grade by an NSRO and three corporate debt obligations with an amortized cost of $3.46 million and a fair market value of $3.41 million that were not rated by an NSRO.

The corporate bond portfolio included debt issuances of banks and bank holding companies domiciled in the southeastern United States. The $551,000 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 the NSROs have downgraded certain of these securities since our acquisition and uncertainty and volatility continues to surround a few of these issuers, recent profitability and long-term earnings forecasts by industry analysts reflect continued improvement.

At December 31, 2011, approximately 71% of the fair market value of the Company’s investment 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”). 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 bonds issued by the U.S. Government, its federal agencies and GSEs in the Company’s investment portfolio remains fundamentally sound.

Approximately 44% of the fair market value of the Company’s investment portfolio is invested in mortgage-backed securities issued by GSEs Fannie Mae and Freddie Mac. In addition to the issuers’ guarantee, these obligations are collateralized by the underlying mortgages in each investment pool which serves to further enhance and diversify the credit risk of the investment. The U.S. Treasury continues to reiterate its support for Fannie Mae and Freddie Mac although changes are expected in these entities’ business model going forward.

Management evaluates investment securities for other-than-temporary impairment on an annual basis, and more frequently when conditions warrant. This analysis requires us 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, our intent to sell the security or whether it’s more likely than not that we would be required to sell the security before the anticipated recovery in market value. At December 31, 2011, we reviewed those securities with an unrealized loss and concluded that no material individual securities were other-than-temporarily impaired. However, 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.

Loan Portfolio

We make both secured and unsecured loans to individuals, corporations, and other entities with the goals of safety, soundness, profitability and responsiveness to community needs. Our loan portfolio contains no foreign or energy-related loans or significant concentrations in any one industry or loan type, with the exception of loans secured by residential and commercial real estate in our market areas.

Loans, net of unearned income, decreased $43.36 million (or 17.7%) since the end of 2010 to $202.26 million at December 31, 2011. The net loans-to-deposits ratio dropped to 54.7% at December 31, 2011 versus 65.5% at December 31, 2010. The largest decline within the loan portfolio in 2011 was in the construction and development segment. The decline in construction and development loans resulted from multiple factors, including pay-downs, and as further discussed in the next two subsections, significant charge-offs and foreclosures. These loans continued to be predominantly residential in nature and concentrated in our coastal markets. The elevated level of nonperforming assets attributable to these loans is expected to continue into 2012. Due to economic uncertainties within the Company’s markets, particularly in the real estate sector, and resultant concerns regarding credit opportunities, we expect loan volumes to flatten or decline further in 2012.

Although the Company, comparable to banking institutions of similar size, originates permanent mortgages for residential properties in its markets, it historically has not held or serviced long-term mortgage loans of any volume in its own portfolio. Rather, permanent mortgages are typically originated for a third party. The Company receives mortgage origination fees for its participation in these transactions.

Over the past five years, the composition of the loan portfolio has shifted as we have reduced our concentrations in construction and development lending and focused more on commercial real estate mortgages. The amount of loans outstanding at the indicated dates is presented in the following table according to type of loan.


As of December 31,	2011			2010			2009			2008			2007
(Dollars in thousands)
Commercial real estate:
Construction and development	$	61,947		$	86,972		$	111,103		$	121,194		$	123,095
Owner-occupied		36,389			35,301			36,819			7,219			2,518
Non owner-occupied		27,772			29,524			28,478			51,293			53,290
Residential real estate - mortgage		44,202			48,686			52,165			47,239			39,988
Other commercial, financial, and agricultural		22,446			33,505			33,776			37,980			33,036
Consumer, including credit cards		9,552			11,701			13,488			14,961			17,686

Loans, gross		202,308			245,689			275,829			279,886			269,613
Unearned income		(45	)		(65	)		(103	)		(129	)		(136	)
Allowance for loan losses		(6,777	)		(9,916	)		(7,170	)		(4,929	)		(4,510	)

Net loans	$	195,486		$	235,708		$	268,556		$	274,828		$	264,967

The percentage of loans outstanding at the indicated dates is presented in the following table according to type of loan.


As of December 31,	2011			2010			2009			2008			2007
Commercial real estate:
Construction and development		30.62	%		35.40	%		40.28	%		43.30	%		45.66	%
Owner-occupied		17.99	%		14.37	%		13.35	%		2.58	%		0.93	%
Non owner-occupied		13.73	%		12.02	%		10.32	%		18.33	%		19.77	%
Residential real estate - mortgage		21.85	%		19.81	%		18.91	%		16.88	%		14.83	%
Other commercial, financial, and agricultural		11.09	%		13.64	%		12.25	%		13.57	%		12.25	%
Consumer, including credit cards		4.72	%		4.76	%		4.89	%		5.34	%		6.56	%

Loans, gross		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%
Unearned income		-0.02	%		-0.03	%		-0.04	%		-0.05	%		-0.05	%
Allowance for loan losses		-3.35	%		-4.04	%		-2.60	%		-1.76	%		-1.67	%

Net loans		96.63	%		95.93	%		97.36	%		98.19	%		98.28	%

Although we seek to diversify the risk within our loan portfolio, a significant portion of our loans are collateralized by real estate in our markets. At December 31, 2011, loans with real estate as the primary collateral comprised approximately 85.6% 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.

A schedule of loans maturing, based on contractual terms, is presented in the following table for selected loan types.

Due
within
One
Year

Due
from
One to
Five
Years

Due
after
Five
Years

Total

Maturing after One Year

As of December 31, 2011

with Pre-
determined
Fixed Rates

with Floating
or Adjustable
Rates

(Dollars in thousands)

Commercial real estate:

Construction and development

45,131

16,512

304

61,947

10,197

6,619

Owner-occupied

10,556

20,167

5,666

36,389

14,074

11,759

Non owner-occupied

9,998

17,091

683

27,772

5,262

12,512

Residential real estate - mortgage

21,600

16,877

5,725

44,202

12,466

10,136

Other commercial, financial, and agricultural

13,797

7,652

997

22,446

5,587

3,062

Consumer, including credit cards

4,625

4,327

600

9,552

4,289

638

Loans, gross

105,707

82,626

13,975

202,308

51,875

44,726

At December 31, 2011, approximately 74.4% of our loan portfolio will either mature or reprice within the next 12 months. As interest rates fell in 2008, we began implementing interest rate floors on our variable rate commercial loans. As of December 31, 2011, excluding loans on nonaccrual status, we had included interest rate floors on approximately $88.74 million of our variable rate loans with a weighted average floor of 5.70%. In contrast, the remaining approximately $4.57 million variable rate loans without interest rate floors carried a weighted average rate of 5.10%.

On an aggregate basis, commitments to extend credit and standby letters of credit approximated $22.53 million at December 31, 2011, compared to $31.68 million at year-end 2010. The decline in overall commitments is a general reflection of the weaker commercial loan demand in our markets as well as our decision to reduce our exposure to construction and development lending. 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, other accruing loans past due 90 days or more, foreclosed real estate, and other repossessions, totaled $52.92 million at December 31, 2011. The aggregate balance of nonperforming assets increased $558,000 (or 1.1%) since December 31, 2010. As a percent of total assets, nonperforming assets totaled 12.70% at December 31, 2011 versus 12.24% at December 31, 2010.

Since 2008, the elevated level of nonperforming assets has materially and adversely affected our business, resources, and operating results, and we expect continued adverse effects until real estate markets, particularly the coastal markets, stabilize and improve. Construction and development loans secured by land tracts and lots remained the primary factor in the nonperforming trends. Summary information about our nonperforming assets is provided in the following table.


As of December 31,	2011			2010			2009			2008			2007
(Dollars in thousands)
Nonaccrual loans:
Commercial real estate:
Construction and development	$	23,450		$	21,840		$	13,410		$	3,594		$	109
Owner-occupied		313			681			195			—			—
Non owner-occupied		152			697			848			907			—
Residential real estate - mortgage		6,220			4,507			2,312			1,595			350
Other commercial, financial, and agricultural		385			424			440			325			112
Consumer, including credit cards		278			373			459			241			161

Total nonaccrual loans		30,798			28,522			17,664			6,662			732
Troubled debt restructurings not included above		9,778			12,669			3,998			468			—
Accruing loans past due 90 days or more		248			121			211			135			776

Total nonperforming loans		40,824			41,312			21,873			7,265			1,508
Foreclosed real estate		12,063			11,034			7,916			3,005			305
Other repossessed assets		32			15			5			10			30

Total nonperforming assets	$	52,919		$	52,361		$	29,794		$	10,280		$	1,843

Nonperforming loans to total loans, net of unearned income		20.18	%		16.82	%		7.93	%		2.60	%		0.56	%

Nonperforming assets to total assets		12.70	%		12.24	%		7.08	%		2.36	%		0.42	%

Nonaccrual Loans

Nonaccrual loans totaled $30.80 million at December 31, 2011, a $2.28 million (or 7.9%) increase since the end of 2010. During 2011, approximately $20.76 million of loans were placed on nonaccrual status, $9.29 million charged-off, $5.71 million transferred out by foreclosure or repossession, and $3.48 million reduced by payments or other activity. As of December 31, 2011, the unpaid principal balance owed on nonaccrual loans totaled $46.47 million. Thus, as a result of partial charge-offs, the $30.80 million in recorded balances on our books represented 66.3% of the balances owed by our customers.

Loans restructured in troubled debt restructurings that are on nonaccrual status at December 31, 2011 totaled $9.30 million, a 29.1% increase compared to $7.20 million at December 31, 2010.

At December 31, 2011, real estate-secured loans comprised 98.7% of total nonaccrual balances. The collateral underlying nonaccrual balances at December 31, 2011 and 2010 is presented in the following table.


As of December 31,	2011		2010
(Dollars in thousands)
Collateral type:
Real estate:
Land tracts	$	6,527	$	6,027
Lots within developments		13,363		11,682
Residential dwellings		10,040		8,828
Commercial buildings		476		1,385

Total real estate		30,406		27,922
Equipment		263		442
Other		129		158

Total nonaccrual loans	$	30,798	$	28,522

Relationships above $250,000 comprised 85.5% or $26.34 million of nonaccrual balances at December 31, 2011. The table below presents nonaccrual loans by relationship tiers.


(Dollars in thousands)	Number of Relationships		Balances		Percent of Total Balance			Average Balance within Tier
*As of December 31, 2011*
Relationship tier:
£ $250,000		181	$	4,457		14.5	%	$	25
> $250,000 - £ $750,000		3		1,408		4.6	%		469
> $750,000		11		24,933		80.9	%		2,267

Total nonaccrual loans		195	$	30,798		100.0	%		158


As of December 31, 2010
Relationship tier:
£ $250,000		145	$	4,244		14.9	%	$	29
> $250,000 - £ $750,000		5		2,223		7.8	%		445
> $750,000		9		22,055		77.3	%		2,451

Total nonaccrual loans		159	$	28,522		100.0	%		179

At December 31, 2011, the largest relationship within this group had a $4.35 million book balance. It is anticipated that the majority of the collateral securing the loans in this relationship will be foreclosed on in 2012. 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.

The accrual of interest on loans is discontinued when, in our judgment, the borrower may be unable to meet payments as they become due, unless the loan is well secured. All interest accrued on loans that are placed on nonaccrual status is reversed against interest income. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received or until the loan is returned to accrual status. For the year ended December 31, 2011, the gross interest income that would have been recorded if our nonaccrual loans had been current in accordance with their original terms was approximately $2.05 million. The amount of interest income on the above nonaccrual loans that was included in net income for the year ended December 31, 2011 was approximately $54,000. The allowance for loan losses related to our nonaccrual loans amounted to approximately $1.12 million at December 31, 2011.

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 may be utilized.

•

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 December 31, 2011, the Company had $19.08 million in TDRs. Based on performance in accordance with the restructured terms, the Company has elected to accrue interest on $9.78 million in TDRs outstanding at December 31, 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 December 31, 2011 totaled $9.30 million. These TDRs are included with other nonaccrual loans in this Report.

Since the end of 2010, the amount of accruing TDRs outstanding decreased $2.89 million (or 22.8%). The material changes in accruing TDRs during 2011 include: three loan relationships totaling approximately $7.6 million were placed on nonaccrual status; one loan relationship with a balance of $2.3 million was “upgraded” out of TDR status based on performance; and five loan relationships totaling $7.3 million were added to the pool of TDRs.

At December 31, 2011, the specific allowance allocated to the accruing TDR balance approximated $797,000.

Potential Problem Loans

At December 31, 2011, we had $3.19 million in loans past due 30-89 days and still accruing interest, or 1.58% of total loans, representing a slight increase from $3.08 million, or 1.25% at December 31, 2010. Approximately 38.8% of the loans past due 30-89 days at December 31, 2011 were construction and development loans. Another 33.9% of the loans past due 30-89 days at December 31, 2011 were residential real estate loans.

Accruing loans classified as individually impaired under accounting guidance to creditors on impairment of loans totaled $4.14 million at December 31, 2011, a $382,000 (or 8.5%) decrease since 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 we have 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. We review all classified loans with total credit exposure of $250,000 or more on a monthly basis and evaluate 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 approximated $460,000 at December 31, 2011.

All of these loans are at a higher risk of becoming nonperforming loans in future periods.

Other Real Estate Owned

During 2011, the balance of real estate acquired through foreclosure or in settlement of debts previously contracted (“foreclosed real estate”) increased $1.03 million (or 9.3%) to $12.06 million at December 31, 2011. Of the $12.65 million reported as other real estate owned (or “OREO”) on our books at December 31, 2011, $591,000 is not categorized as “foreclosed real estate”. This property was acquired by the Bank as a real estate venture, and it is under a lease-purchase agreement with a local municipality. Foreclosures, sales, and subsequent devaluations (or “write-downs”) within foreclosed real estate balances totaled $5.50 million, $2.30 million, and $2.17 million, respectively, during 2011. The total life-to-date write-downs taken on our year-end OREO portfolio subsequent to foreclosure amounted to $4.22 million through December 31, 2011, a 25.9% discount to the amounts recorded when the properties were initially taken into OREO.

A schedule of the foreclosed real estate by asset type held at December 31, 2011 and 2010 is presented in the following table.


As of December 31,	2011		2010
(Dollars in thousands)
Land tracts	$	6,349	$	5,584
Lots within developments		2,490		2,025
Residential dwellings		2,394		2,986
Commercial buildings		830		439

Total foreclosed real estate	$	12,063	$	11,034

Approximately 83.1% of these holdings were located in Georgia with the balance in Nassau County, Florida.

At December 31, 2011, we owned 13 properties valued in excess of $250,000 per property with an aggregate basis of $8.76 million, representing 72.6% of the total foreclosed real estate portfolio. The table below presents foreclosed real estate by property valuations.


(Dollars in thousands)	Number of Properties		Carrying Values		Percent of Total Value			Average Value within Tier
*As of December 31, 2011*
Property value:
£ $250,000		68	$	3,303		27.4	%	$	49
> $250,000 - £ $750,000		7		3,128		25.9	%		447
> $750,000		6		5,632		46.7	%		939

Total foreclosed real estate		81	$	12,063		100.0	%		149

As of December 31, 2010
Property value:
£ $250,000		49	$	2,940		26.7	%	$	60
> $250,000 - £ $750,000		4		2,365		21.4	%		591
> $750,000		5		5,729		51.9	%		1,146

Total foreclosed real estate		58	$	11,034		100.0	%		190

Our foreclosed real estate holdings can be viewed via a link from our website at www.southeasternbank.com or directly at www.liveatthecoast.com.

Although foreclosed properties continue to be marketed aggressively, when estimating their carrying value, we expect 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 $766,000 at December 31, 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 may 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.

Allowance for Loan Losses

The following table summarizes the activity in the allowance for loan losses, the average balance of loans outstanding, and the ratio of net losses experienced for each of the last five years.


Years Ended December 31,	2011			2010			2009			2008			2007
(Dollars in thousands)
Allowance for loan losses at beginning of year	$	9,916		$	7,170		$	4,929		$	4,510		$	4,240
Provision for loan losses		6,185			14,265			5,890			1,348			305
Charge-offs:
Commercial real estate:
Construction and development		6,444			9,511			3,305			388			16
Owner-occupied		170			119			105			—			—
Non owner-occupied		86			—			1			7			—
Residential real estate - mortgage		2,524			1,443			239			211			10
Other commercial, financial, and agricultural		95			406			291			240			33
Consumer, including credit cards		213			211			300			197			208

Total charge-offs		9,532			11,690			4,241			1,043			267

Recoveries:
Commercial real estate:
Construction and development		23			43			446			1			1
Owner-occupied		1			—			1			—			—
Non owner-occupied		—			—			1			—			—
Residential real estate - mortgage		60			16			7			9			45
Other commercial, financial, and agricultural		9			47			61			21			71
Consumer, including credit cards		115			65			76			83			115

Total recoveries		208			171			592			114			232

Net charge-offs		9,324			11,519			3,649			929			35

Allowance for loan losses at end of year	$	6,777		$	9,916		$	7,170		$	4,929		$	4,510


Net loans outstanding at end of year	$	202,263		$	245,624		$	275,726		$	279,757		$	269,477


Average net loans outstanding during year	$	227,413		$	256,088		$	282,946		$	270,133		$	268,445


Ratios:
Allowance to net loans		3.35	%		4.04	%		2.60	%		1.76	%		1.67	%

Net charge-offs to average loans		4.10	%		4.50	%		1.29	%		0.34	%		0.01	%

Provision to average loans		2.72	%		5.57	%		2.08	%		0.50	%		0.11	%

Recoveries to total charge-offs		2.18	%		1.46	%		13.96	%		10.93	%		86.89	%

The Company continuously reviews its loan portfolio and maintains an allowance for loan losses available to absorb estimated losses inherent in the portfolio. We prepare 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.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While we use the best information available to make the evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or other environmental factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

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.

Impaired loans comprised the following at December 31, 2011 and 2010:


As of December 31,	2011			2010
(Dollars in thousands)
Nonaccrual loans	$	30,798		$	28,522
Troubled debt restructurings not included above		9,778			12,669
Loans past due 90 days or more and still accruing		248			121
Other accruing loans individually evaluated for impairment		4,138			4,520

Total impaired loans	$	44,962		$	45,832


Valuation allowance related to total impaired loans	$	2,378		$	3,580


Valuation allowance as a percentage of impaired loans		5.29	%		7.81	%

The following table summarizes the carrying value and unpaid principal balance of impaired loans and the allowance for loan losses allocated to those loans by loan type as of December 31, 2011 and 2010.


(Dollars in thousands)	Carrying Value			Unpaid Principal Balance		Related Allowance		% Allowance to Carrying Value
*As of December 31, 2011*
Impaired loans with a valuation allowance:
Commercial real estate:
Construction and development	$	29,138		$	41,440	$	1,561		5.36	%
Owner-occupied		2,175			2,377		251		11.54	%
Non owner-occupied		3,386			3,387		120		3.54	%
Residential real estate - mortgage		7,557			10,456		338		4.47	%
Other commercial, financial, and agricultural		2,421			2,535		90		3.72	%
Consumer, including credit cards		285			406		18		6.32	%

Total impaired loans	$	44,962		$	60,601	$	2,378		5.29	%


Carrying value as a percentage of the unpaid principal balance of impaired loans		74.2	%


As of December 31, 2010
Impaired loans with a valuation allowance:
Commercial real estate:
Construction and development	$	30,017		$	39,674	$	2,459		8.19	%
Owner-occupied		1,338			1,483		36		2.69	%
Non owner-occupied		3,749			3,869		117		3.12	%
Residential real estate - mortgage		7,545			8,559		881		11.68	%
Other commercial, financial, and agricultural		2,751			2,883		81		2.94	%
Consumer, including credit cards		432			812		6		1.39	%

Total impaired loans	$	45,832		$	57,280	$	3,580		7.81	%


Carrying value as a percentage of the unpaid principal balance of impaired loans		80.0	%

The aggregate amount of impaired loans decreased $870,000 (or 1.9%) since the end of 2010. Due primarily to partial charge-offs taken in 2011, the allowance allocated to these loans decreased $1.20 million from 7.81% at December 31, 2010 to 5.29% of impaired loans at the end of 2011. At December 31, 2011, our recorded investment in impaired loans represented 74.2% of the unpaid principal balance on those loans. Effectively, we have already recognized a $15.64 million (or 25.8%) 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 – These loans include 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 29 days on a monthly basis and updated as necessary. Secured loans that reach 90 days past due are placed on nonaccrual status and downgraded to substandard. In addition, during the normal course of monitoring loan relationships, when we obtain 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 our internal reviews of risk rating, as discussed above, we have 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 our loan policy; and 3) documentation and enforceability of borrower obligations and our interest in collateral. On an annual basis, the external loan review plan includes a minimum of:

•

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 our internal risk rating process. At December 31, 2011, we used a trailing eleven-quarter historical average loss rate for each pool of loans. At December 31, 2010, we used a trailing six-quarter historical average loss rate for each pool of loans. At December 31, 2009, we 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. We believe 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. The environmental factors considered in developing our loss measurements include:

•

lending policies and procedures, including changes in underwriting standards and collection, charge-off and recovery practices;

•

changes in international, national, regional and local economic and business conditions that affect the collectability of the portfolio;

•

changes in the nature and volume of the loan portfolio;

•

experience, ability, and depth of lending management and other relevant staff;

•

levels of and trends in delinquencies and impaired loans;

•

changes in the quality of our loan review system;

•

value of underlying collateral for collateral-dependent loans;

•

existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

•

other external factors such as competition and legal and regulatory requirements.

This component 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.

Loan Loss Experience

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 December 31, 2011 and 2010.


	2011		2010
As of December 31, Loan Segment	Eleven- Quarter Historical Loss Rate	Adjustments for Qualitative/ Environmental Factors	Six- Quarter Historical Loss Rate	Adjustments for Qualitative/ Environmental Factors

Commercial real estate:
Construction and development	7.79%	0.04%	7.96%	0.04%
Owner-occupied	0.30%	0.04%	0.22%	0.04%
Non owner-occupied	0.21%	0.04%	0.22%	0.04%
Residential real estate - mortgage	3.05%	0.04%	2.03%	0.04%
Commercial, financial, and agricultural	0.03 - 1.76%	0.04 - 0.06%	0.22 - 2.85%	0.04 - 0.06%
Consumer, including credit cards	4.62 - 5.42%	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 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. We expect additional losses to occur in 2012 in our portfolio of loans for land acquisition and development as many of those loans migrate into OREO and/or updated appraisals are obtained on the underlying collateral. Additional provisions for loan losses in 2012 may be warranted if, among other factors, further weakness in real estate is observed in our markets, if our asset quality continues to deteriorate from current levels or if we aggressively liquidate the collateral on our impaired loans under the current adverse market conditions. Net charge-offs represented 4.10% of average loans in 2011, a 40 basis point improvement from 4.50% in 2010.

A loan is charged-off our books at any point in time when it is not considered a bankable asset within the parameters of policy. Our charge-off policy is differentiated between unsecured and secured loans. The general parameters of the 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 we 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.

•

We are in the process of re-evaluating the fair value of the collateral. A write-down decision would be premature in such instances.

•

We are in the process of 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 December 31, 2011 and 2010.


	2011							2010
As of December 31,	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	$	17,373	$	29,441	$	11,980		$	15,122	$	24,341	$	9,209
Owner-occupied		191		265		50			217		265		44
Non owner-occupied		—		—		—			—		—		—
Residential real estate - mortgage		3,468		6,081		2,552			1,876		2,570		658
Other commercial, financial, and agricultural		—		—		—			12		27		11
Consumer, including credit cards		—		—		—			73		339		265

Total impaired loans	$	21,032	$	35,787	$	14,582		$	17,300	$	27,542		10,187


Partial charge-offs as a % of unpaid principal balance						40.7	%						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 December 31, 2011.

As of December 31, 2011

As
Reported

Partial
Charge-offs

Proforma
Adjusted

(Dollars in thousands)

Allowance for loan losses

6,777

14,582

21,359

Nonperforming loans

40,824

14,582

55,406

Coverage ratio

16.6

38.5

Allocation of the Allowance for Loan Losses

We have allocated the allowance for loan losses according to the amount deemed to be reasonably necessary at each year end to provide for the possibility of losses being incurred within the categories of loans set forth in the following table. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category. The components of the allowance for loan losses for each of the past five years are presented below. Prior to 2010, we combined loans for owner- and non owner-occupied commercial real estate with commercial, financial and agricultural loans in our allowance for loan loss methodology. Therefore, those loan categories have been combined for comparative purposes in this table.


As of December 31,	2011			2010			2009			2008			2007
(Dollars in thousands)
Allocation of allowance for loan losses by loan category:
Construction and development	$	4,226		$	7,133		$	5,300		$	2,339		$	1,825
Residential real estate - mortgage		1,485			1,748			562			866			686
Commercial, financial, and agricultural		880			716			853			1,109			1,281
Consumer, including credit cards		134			262			455			615			636
Unallocated		52			57			—			—			82

Total allowance for loan losses	$	6,777		$	9,916		$	7,170		$	4,929		$	4,510


Allowance by category as a percentage of total allowance:
Construction and development		62.3	%		71.9	%		73.9	%		47.4	%		40.5	%
Residential real estate - mortgage		21.9	%		17.6	%		7.8	%		17.6	%		15.2	%
Commercial, financial, and agricultural		13.0	%		7.2	%		11.9	%		22.5	%		28.4	%
Consumer, including credit cards		2.0	%		2.7	%		6.4	%		12.5	%		14.1	%
Unallocated		0.8	%		0.6	%		0.0	%		0.0	%		1.8	%

Total allowance for loan losses		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%


Loans by category as a percentage of total loans:
Construction and development		30.6	%		35.4	%		40.3	%		43.3	%		45.6	%
Residential real estate - mortgage		21.9	%		19.8	%		18.9	%		16.9	%		14.8	%
Commercial, financial, and agricultural		42.8	%		40.0	%		35.9	%		34.5	%		33.0	%
Consumer, including credit cards		4.7	%		4.8	%		4.9	%		5.3	%		6.6	%

Total loans		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Deposits

Total deposits decreased $5.32 million (or 1.4%) in 2011. Noninterest-bearing demand deposits increased $8.24 million (or 14.9%), while time deposits decreased $19.62 million (or 14.2%) and interest-bearing demand and savings increased $6.06 million (or 3.3%). We believe the increase in noninterest-bearing demand deposits can be attributed in part to the unlimited deposit insurance provided in these accounts by the FDIC through the end of 2012. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general deposit insurance rules. The decrease in time deposits in 2011 is due primarily to lower rates offered by the Bank relative to other local financial institutions and other investment options for time deposit funds. Also, the low interest rate environment and the temporary FDIC insurance protection are reasons why some of our customers may have transferred funds previously held in time deposits into other interest-bearing and noninterest-bearing deposit accounts at the Bank in 2011. The average rate paid on time deposits decreased 65 basis points from 2.36% in 2010 to 1.71% in 2011. As with most community banks, loan demand and loan volume is the driver for the remainder of our statements of condition. When we have had strong loan demand, we have been more competitive for retail time deposits within our markets and when loan demand is less, we have been less competitive in pricing for retail time deposits in our markets.

The amounts on deposit at the indicated dates are presented in the following table according to type of deposit account:


As of December 31,	2011		2010		2009		2008		2007
(Dollars in thousands)
Noninterest-bearing demand	$	63,613	$	55,377	$	55,320	$	55,628	$	64,436
Interest-bearing demand		129,875		127,631		111,553		95,160		116,154
Savings		57,854		54,033		53,624		65,166		62,772
Time under $100,000		63,166		68,538		67,614		66,942		66,148
Time $100,000 and over		55,364		69,616		63,660		66,914		52,546

Total deposits	$	369,872	$	375,195	$	351,771	$	349,810	$	362,056

The percentage of total deposits at the indicated dates is presented in the following table according to type of deposit account.

		00000			00000			00000			00000			00000
As of December 31,	2011			2010			2009			2008			2007
Noninterest-bearing demand		17.2	%		14.8	%		15.7	%		15.9	%		17.8	%
Interest-bearing demand		35.1	%		34.0	%		31.7	%		27.2	%		32.1	%
Savings		15.6	%		14.4	%		15.3	%		18.6	%		17.3	%
Time under $100,000		17.1	%		18.3	%		19.2	%		19.2	%		18.3	%
Time $100,000 and over		15.0	%		18.5	%		18.1	%		19.1	%		14.5	%

Total deposits		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

The local municipalities and governmental agencies hold public funds on deposit at the Bank. At December 31, 2011 and 2010, these public funds totaled $68.06 million (or 18.3% of total deposits) and $69.19 million (or 18.4% of total deposits), respectively. The deposits of one local municipality totaled $24.57 million and $24.40 million at December 31, 2011 and 2010, respectively. The Company had no brokered, Internet or other out-of-market deposits as of December 31, 2011 or 2010.

The following table summarizes average balances of deposits and related weighted average rates of interest paid for each of the three years presented.

		00000000		00000000			00000000		00000000			00000000		00000000
	2011					2010					2009
Years Ended December 31,	Avg. Balance		Wtd. Avg. Rate			Avg. Balance		Wtd. Avg. Rate			Avg. Balance		Wtd. Avg. Rate
(Dollars in thousands)
Noninterest-bearing demand	$	60,503		—		$	57,508		—		$	56,383		—
Interest-bearing demand		123,026		0.48	%		117,827		0.70	%		94,315		0.76	%
Savings		57,715		0.46	%		54,991		0.70	%		59,030		0.72	%
Time under $100,000		66,640		1.63	%		69,663		2.31	%		68,188		3.18	%
Time $100,000 and over		63,094		1.79	%		67,977		2.42	%		63,947		3.31	%

Total deposits	$	370,978		0.83	%	$	367,966		1.21	%	$	341,863		1.59	%

The Bank’s time deposit customers have typically preferred one-year terms. At December 31, 2011, approximately 92.7% of time deposits mature within one year. The maturities of time deposits as of December 31, 2011 are summarized below.

(Dollars in thousands)

Years Ended December 31,

Less
Than
$100,000

$100,000
& Over

Total

2012

56,614

53,300

109,914

2013

4,208

1,264

5,472

2014

1,161

300

1,461

2015

567

—

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SOUTHEASTERN BANKING CORP 10-K