UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2012

Commission File Number 000-32627

LOGO

(Exact name of registrant as specified in its charter)

Georgia

58-1423423

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

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

(Address of principal executive offices) (Zip Code)

(912) 437-4141

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the 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 whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of May 10, 2012, the Registrant had 3,129,388 shares of common stock, par value $1.25 per share, outstanding.

Table of Contents


Part I - Financial Information

Item 1.	Consolidated Financial Statements:
	Consolidated Statements of Condition	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Income (Loss)	3
	Consolidated Statements of Shareholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	7

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS		23

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Description of Business	24
	Financial Condition	25
	Results of Operations	42
	Liquidity and Capital Resources	47
	Critical Accounting Estimates	49

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4.	Controls and Procedures	51

Part II - Other Information

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	52

Item 4.	(Removed and Reserved)	52

Item 5.	Other Information	52

Item 6.	Exhibits	52

Signatures		53

Part I – Financial Information

Item 1.

Consolidated Financial Statements.

SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

AS OF MARCH 31, 2012 AND DECEMBER 31, 2011


	March 31, 2012			December 31, 2011
	(Unaudited)
ASSETS
Cash and due from banks	$	8,658,466		$	13,054,299
Interest-bearing deposits in other banks		101,006,159			83,943,754
Federal funds sold		2,150,000			2,150,000

Cash and cash equivalents		111,814,625			99,148,053

Investment securities available-for-sale		85,235,183			88,001,673

Loans, gross		192,552,313			202,308,311
Unearned income		(43,476	)		(45,166	)
Allowance for loan losses		(6,511,814	)		(6,776,601	)

Net loans		185,997,023			195,486,544

Premises and equipment, net		11,515,253			11,710,593
Bank-owned life insurance, at cash surrender value		6,032,527			5,973,805
Other real estate		16,664,485			12,653,580
Other assets		3,429,062			3,635,630


Total assets	$	420,688,158		$	416,609,878


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand deposits	$	75,921,426		$	63,612,851
Interest-bearing demand, savings, and time deposits		298,267,646			306,258,941

Total deposits		374,189,072			369,871,792

Federal Home Loan Bank advances		5,000,000			5,000,000
Other liabilities		1,514,438			1,613,431

Total liabilities		380,703,510			376,485,223


Shareholders’ Equity:
Common stock, $1.25 par value		4,475,996			4,475,996
Additional paid-in-capital		1,549,228			1,541,027
Retained earnings		42,078,986			42,467,569
Treasury stock, at cost		(8,894,461	)		(8,894,461	)
Accumulated other comprehensive income		774,899			534,524

Total shareholders’ equity		39,984,648			40,124,655


Total liabilities and shareholders’ equity	$	420,688,158		$	416,609,878


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

See accompanying notes to consolidated financial statements.

SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)


	2012			2011

Interest income:
Interest and fees on loans	$	2,821,763		$	3,377,795
Interest on investment securities:
Taxable		494,364			455,343
Tax-exempt		109,887			146,520
Other interest income		54,199			51,186

Total interest income		3,480,213			4,030,844


Interest expense:
Interest on deposits		503,745			917,767
Interest on Federal Home Loan Bank advances		32,571			32,301

Total interest expense		536,316			950,068


Net interest income		2,943,897			3,080,776

Provision for loan losses		600,000			660,000

Net interest income after provision for loan losses		2,343,897			2,420,776


Noninterest income:
Service charges on deposit accounts		527,690			550,877
Net loss on sales of investment securities available-for-sale		(10,866	)		(18,191	)
Other noninterest income		350,659			337,434

Total noninterest income		867,483			870,120


Noninterest expense:
Salaries and employee benefits		1,709,092			1,682,707
Occupancy and equipment expense, net		637,663			612,777
Net (gain) loss on sales of assets		15,631			(22,029	)
Write-downs on other real estate		469,790			161,127
Other noninterest expense		767,787			830,127

Total noninterest expense		3,599,963			3,264,709


Income (loss) before income tax benefit		(388,583	)		26,187
Income tax benefit		0			0


Net income (loss)	$	(388,583	)	$	26,187


Basic and diluted earnings (loss) per common share	$	(0.12	)	$	0.01


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

See accompanying notes to consolidated financial statements.

SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)


	2012			2011

Net income (loss)	$	(388,583	)	$	26,187

Other comprehensive income:
Unrealized holding gains on investment securities available-for-sale arising during the period, net of tax of $120,135 and $14,334		233,203			27,825
Reclassification adjustment for net loss on sales of investment securities available-for-sale included in net income (loss), net of tax benefit of ($3,694) and ($6,185)		7,172			12,006

		240,375			39,831


Comprehensive income (loss)	$	(148,208	)	$	66,018

See accompanying notes to consolidated financial statements.

SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)


	Common Stock				Additional								Accumulated Other
	Shares		Par Value		Paid-In Capital		Retained Earnings			Treasury Stock			Comprehensive Income		Total

Balance, December 31, 2010		3,129,388	$	4,475,996	$	1,495,668	$	47,459,963		$	(8,894,461	)	$	268,393	$	44,805,559
Net income		0		0		0		26,187			0			0		26,187
Other comprehensive income		0		0		0		0			0			39,831		39,831
Stock-based compensation		0		0		11,340		0			0			0		11,340

Balance, March 31, 2011		3,129,388	$	4,475,996	$	1,507,008	$	47,486,150		$	(8,894,461	)	$	308,224	$	44,882,917


Balance, December 31, 2011		3,129,388	$	4,475,996	$	1,541,027	$	42,467,569		$	(8,894,461	)	$	534,524	$	40,124,655
Net loss		0		0		0		(388,583	)		0			0		(388,583	)
Other comprehensive income		0		0		0		0			0			240,375		240,375
Stock-based compensation		0		0		8,201		0			0			0		8,201

Balance, March 31, 2012		3,129,388	$	4,475,996	$	1,549,228	$	42,078,986		$	(8,894,461	)	$	774,899	$	39,984,648

See accompanying notes to consolidated financial statements.

SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)


	2012			2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(388,583	)	$	26,187
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion, net		432,062			192,511
Provision for loan losses		600,000			660,000
Net loss on sales of investment securities available-for-sale		10,866			18,191
Increase in cash surrender value of bank-owned life insurance		(58,722	)		(57,919	)
Net (gain) loss on sales of assets		15,631			(22,029	)
Write-downs on other real estate		469,790			161,127
Stock-based compensation		8,201			11,340
(Increase) decrease in interest receivable		(6,954	)		100,213
Decrease in interest payable		(331,712	)		(102,013	)
Net change in income tax receivable		28,496			9,953
Decrease in prepaid FDIC assessments		132,000			189,000
Net decrease in other assets		27,298			36,557
Net increase in other liabilities		108,890			65,740

Net cash provided by operating activities		1,047,263			1,288,858


CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale		(5,113,194	)		(152,101,435	)
Proceeds from sales of investment securities available-for-sale		2,834,050			474,000
Proceeds from maturities, calls, and paydowns of investment securities available-for-sale		5,168,700			150,115,547
Net decrease in loans		4,201,775			5,742,537
Capital expenditures, net		(1,200	)		(51,525	)
Proceeds from sales of assets		211,898			615,125

Net cash provided by investing activities		7,302,029			4,794,249


CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		4,317,280			6,393,214
Net increase in U. S. Treasury demand note		0			279,727

Net cash provided by financing activities		4,317,280			6,672,941


Net increase in cash and cash equivalents		12,666,572			12,756,048

Cash and cash equivalents at beginning of period		99,148,053			80,868,505


Cash and cash equivalents at end of period	$	111,814,625		$	93,624,553

SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)


	2012			2011

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest	$	868,028		$	1,052,081

Income taxes refunded	$	(28,496	)	$	(9,953	)


NONCASH INVESTING AND FINANCING TRANSACTIONS

Change in unrealized gains on investment securities available-for-sale	$	364,204		$	60,350

Property acquired through foreclosure or repossession	$	4,702,866		$	2,032,875

Loans made in connection with sales of other real estate	$	15,120		$	0

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.

BASIS OF PRESENTATION

Southeastern Banking Corporation (the “Company”) is a bank holding company whose business is conducted primarily by its wholly-owned commercial bank subsidiary, Southeastern Bank (the “Bank”). The Bank was founded in 1888 in Darien, McIntosh County, Georgia. Through the Bank’s 16 branch offices, the Company offers a broad range of commercial and consumer banking products and services to customers located primarily in southeast Georgia and northeast Florida. The Company and the Bank are subject to the regulations of certain federal and state agencies and are periodically examined by those regulatory agencies.

The Company also owns SBC Financial Services, Inc., a Georgia corporation. This subsidiary was created to provide insurance services. However, there has been no activity in this subsidiary in recent years.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

The accounting and reporting policies followed in the presentation of the accompanying unaudited consolidated financial statements are consistent with those described in Note 1 of the notes to the consolidated financial statements included in the Company’s 2011 Form 10-K, as updated by the information contained in this Form 10-Q. In the opinion of management, these consolidated financial statements reflect all adjustments necessary to fairly present such information for the periods and dates indicated. Such adjustments, which include transactions typically determined or settled at year-end, are normal and recurring in nature. All significant intercompany accounts and transactions have been eliminated. The consolidated balance sheet as of December 31, 2011 has been extracted from the audited consolidated balance sheet included in the Company’s 2011 Form 10-K. Certain reclassifications, with no effect on total assets or net operating results, have been made to prior period amounts to conform to the current period presentation.

In preparing the consolidated financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of foreclosed assets, the valuation of deferred taxes, other-than-temporary impairment of securities, and fair value measurements. Results of operations for interim periods are not necessarily indicative of trends or results to be expected for the full year, due in part to seasonal variations and unusual or infrequently occurring items.

Earnings (Loss) Per Share

Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income (loss) that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. Since they were non-dilutive, 70,250 equivalent shares related to stock options were excluded from the computation of diluted earnings (loss) per share at March 31, 2012 and 2011.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2.

NEW ACCOUNTING PRONOUNCEMENTS

The following are summaries of recently issued accounting pronouncements that impact the accounting and reporting practices of the Company:

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

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year that begins after December 15, 2011. The adoption of this guidance has not had a material impact on the Company’s financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3.

INVESTMENT SECURITIES

The amortized cost and fair value of securities available-for-sale as of March 31, 2012 and December 31, 2011 are summarized as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
*March 31, 2012*
U. S. Government and agency securities	$	14,592,058	$	194,593	$	37,688	$	14,748,963
U. S. Government-sponsored enterprise securities		6,250,697		99,960		0		6,350,657
Agency residential mortgage-backed securities		41,356,751		731,242		53,070		42,034,923
Obligations of states and political subdivisions		14,877,161		352,454		48,987		15,180,628
Corporate debt obligations		6,984,426		64,260		128,674		6,920,012

Total investment securities	$	84,061,093	$	1,442,509	$	268,419	$	85,235,183


December 31, 2011
U. S. Government and agency securities	$	13,405,548	$	203,704	$	35,436	$	13,573,816
U. S. Government-sponsored enterprise securities		6,539,649		97,362		0		6,637,011
Agency residential mortgage-backed securities		41,362,196		703,588		81,120		41,984,664
Obligations of states and political subdivisions		16,539,431		474,377		1,486		17,012,322
Corporate debt obligations		9,344,963		26,158		577,261		8,793,860

Total investment securities	$	87,191,787	$	1,505,189	$	695,303	$	88,001,673

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2012 are shown in the table below. In some cases, issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date. Mortgage-backed securities and U.S. Small Business Administration (“SBA”) securities (included in U.S. Government and agency securities) are shown separately from other debt securities due to customary prepayment features which cause average lives to differ significantly from contractual maturities.


	Amortized Cost		Fair Value
Due within one year	$	2,065,680	$	2,082,964
Due from one to five years		12,691,253		12,975,272
Due from five to ten years		3,858,621		3,945,667
Due after ten years		9,496,730		9,447,394

		28,112,284		28,451,297
Agency residential mortgage-backed securities		41,356,751		42,034,923
SBA securities		14,592,058		14,748,963

Total investment securities	$	84,061,093	$	85,235,183

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3.

INVESTMENT SECURITIES (Continued)

Securities with a carrying value of $60,303,801 and $66,506,077 at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and certain borrowing arrangements.

Gains and losses on sales of investment securities for the three months ended March 31, 2012 and 2011 consist of the following:


Three Months Ended March 31,	2012			2011
Gross realized gains	$	67,880		$	0
Gross realized losses		78,746			18,191

Net realized gain (loss)	$	(10,866	)	$	(18,191	)

The following table shows the gross unrealized losses and fair value of the entity’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011.


	Less Than Twelve Months				Over Twelve Months				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Gross Unrealized Losses
*March 31, 2012*
U. S. Government and agency securities	$	4,512,163	$	37,688	$	0	$	0	$	37,688
U. S. Government-sponsored enterprise securities		0		0		0		0		0
Agency residential mortgage-backed securities		13,338,020		53,070		0		0		53,070
Obligations of states and political subdivisions		2,617,673		48,987		0		0		48,987
Corporate debt obligations		2,426,738		18,001		1,905,396		110,673		128,674

Total investment securities	$	22,894,594	$	157,746	$	1,905,396	$	110,673	$	268,419


December 31, 2011
U. S. Government and agency securities	$	6,411,426	$	35,436	$	0	$	0	$	35,436
U. S. Government-sponsored enterprise securities		0		0		0		0		0
Agency residential mortgage-backed securities		17,388,801		81,120		0		0		81,120
Obligations of states and political subdivisions		1,056,886		1,486		0		0		1,486
Corporate debt obligations		2,414,813		32,706		3,825,764		544,555		577,261

Total investment securities	$	27,271,926	$	150,748	$	3,825,764	$	544,555	$	695,303

Management evaluates the Company’s debt securities for other-than-temporary impairment at least on an annual basis, and more frequently when economic or market conditions warrant.

At March 31, 2012, there were three corporate debt securities with a fair value of $1,905,396 in the investment portfolio that had been in a continuous unrealized loss position for twelve months or longer. All three corporate debt securities were issued by corporations in the financial services sector in the southeastern United States. The unrealized losses are primarily caused by decreases in profitability and increases in nonperforming assets caused by the economic recession. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its par value, which may be at maturity, it does not consider these investments to be other-than-temporarily impaired at March 31, 2012.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio at March 31, 2012 and December 31, 2011 follows.


	March 31, 2012			December 31, 2011
Commercial real estate:
Construction and development	$	54,585,016		$	61,947,478
Owner-occupied		35,429,350			36,389,057
Non owner-occupied		28,449,221			27,772,007
Residential real estate - mortgage		43,198,837			44,201,750
Other commercial, financial, and agricultural		21,932,452			22,446,349
Consumer, including credit cards		8,957,437			9,551,670

Loans, gross		192,552,313			202,308,311
Unearned income		(43,476	)		(45,166	)
Allowance for loan losses		(6,511,814	)		(6,776,601	)

Net loans	$	185,997,023		$	195,486,544

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

Past Due and Nonaccrual Loans

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

•

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

•

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

•

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

An aging of past due loans at March 31, 2012 and December 31, 2011 is presented by segment in the following table. Balances presented are based on book balance, or recorded investment.


	Current		Accruing 30 – 89 Days Past Due		Accruing 90+ Days Past Due		Total Accruing Past Due		Nonaccrual		Total
*March 31, 2012*
Commercial real estate:
Construction and development	$	35,922,152	$	485,727	$	0	$	485,727	$	18,177,137	$	54,585,016
Owner-occupied		34,327,716		594,251		0		594,251		507,383		35,429,350
Non owner-occupied		25,852,023		2,309,519		0		2,309,519		287,679		28,449,221
Residential real estate - mortgage		36,472,947		637,898		0		637,898		6,087,992		43,198,837
Other commercial, financial, and agricultural		20,995,213		546,674		13,065		559,739		377,500		21,932,452
Consumer, including credit cards		8,503,168		223,669		8,086		231,755		222,514		8,957,437

Loans, gross	$	162,073,219	$	4,797,738	$	21,151	$	4,818,889	$	25,660,205	$	192,552,313


December 31, 2011
Commercial real estate:
Construction and development	$	37,244,104	$	1,237,685	$	15,241	$	1,252,926	$	23,450,448	$	61,947,478
Owner-occupied		35,577,301		296,252		202,945		499,197		312,559		36,389,057
Non owner-occupied		27,577,932		41,809		0		41,809		152,266		27,772,007
Residential real estate - mortgage		36,877,541		1,079,051		25,231		1,104,282		6,219,927		44,201,750
Other commercial, financial, and agricultural		21,862,254		199,638		0		199,638		384,457		22,446,349
Consumer, including credit cards		8,934,708		334,259		4,853		339,112		277,850		9,551,670

Loans, gross	$	168,073,840	$	3,188,694	$	248,270	$	3,436,964	$	30,797,507	$	202,308,311

The gross amount of interest income that would have been recorded on nonaccrual loans if all such loans had been accruing interest at their contractual rates approximated $394,000 and $410,000 in the three months ended March 31, 2012 and 2011, respectively. Cash basis interest income actually recognized on nonaccrual loans during the three months ended March 31, 2012 and 2011 totaled approximately $12,000 and $15,000, respectively. The average balance of loans on nonaccrual status during the three months ended March 31, 2012 and 2011 approximated $29,692,000 and $36,229,000, respectively.

Credit Quality Indicators

Internal risk-ratings, or grades, are assigned to each loan at origination (and renewal as applicable) based on an analysis of the financial strength, collateral, and other credit attributes underlying each loan. Subsequent to origination (and renewal), management periodically analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances. Loans with a risk-rating of Special Mention (Grade 5) or worse and a balance of $100,000 or more are reviewed at least annually for grading accuracy. The rating methodology complies with the asset classification system promulgated by the federal banking agencies.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Loan grades range from one to eight, with one-graded loans having the least credit risk, as defined as follows:

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

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

Substandard (Grade 6): These loans are inadequately supported by the current worth and paying capacity of the obligor or collateral pledged, if any. A distinct possibility of loss exists if the underlying deficiencies are not corrected. At March 31, 2012 and December 31, 2011, all nonaccrual loans were graded substandard.

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

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

Loans considered doubtful or loss are normally charged-off upon such determination and hence, no balances apply to these categories.

A summary of the loan portfolio by loan risk grade at March 31, 2012 and December 31, 2011 follows.


	Pass (1 – 4)		Special Mention (5)		Substandard (6)		Doubtful (7)		Loss (8)		Total
*March 31, 2012*
Commercial real estate:
Construction and development	$	27,107,196	$	3,979,384	$	23,498,436	$	0	$	0	$	54,585,016
Owner-occupied		31,623,726		2,552,395		1,253,229		0		0		35,429,350
Non owner-occupied		19,322,806		5,620,172		3,506,243		0		0		28,449,221
Residential real estate - mortgage		35,249,541		938,425		7,010,871		0		0		43,198,837
Other commercial, financial, and agricultural		18,858,212		673,654		2,400,586		0		0		21,932,452
Consumer, including credit cards		8,420,752		197,713		338,972		0		0		8,957,437

Loans, gross	$	140,582,233	$	13,961,743	$	38,008,337	$	0	$	0	$	192,552,313


December 31, 2011
Commercial real estate:
Construction and development	$	28,144,755	$	4,783,547	$	29,019,176	$	0	$	0	$	61,947,478
Owner-occupied		32,314,164		2,803,772		1,271,121		0		0		36,389,057
Non owner-occupied		15,730,741		8,655,785		3,385,481		0		0		27,772,007
Residential real estate - mortgage		34,213,755		2,157,630		7,830,365		0		0		44,201,750
Other commercial, financial, and agricultural		19,096,155		740,654		2,609,540		0		0		22,446,349
Consumer, including credit cards		9,053,857		145,613		352,200		0		0		9,551,670

Loans, gross	$	138,553,427	$	19,287,001	$	44,467,883	$	0	$	0	$	202,308,311

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Impaired Loans

A loan is considered impaired when it is probable, based on current information and events, the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans include loans placed on nonaccrual status as well as troubled debt restructurings (“TDRs”), loans past due 90 days or more and still accruing, and other accruing loans individually evaluated for impairment. All of the Company’s impaired loans have a valuation allowance. Impaired loans comprised the following at March 31, 2012 and December 31, 2011:


	March 31, 2012		December 31, 2011
Nonaccrual loans	$	25,660,205	$	30,797,507
Troubled debt restructurings not included above		10,150,434		9,777,841
Loans past due 90 days or more and still accruing		21,151		248,270
Other accruing loans individually evaluated for impairment		3,029,092		4,138,142

Total impaired loans	$	38,860,882	$	44,961,760


Valuation allowance related to total impaired loans	$	2,458,249	$	2,378,113

Total impaired loans are disaggregated by segment and class at March 31, 2012 and December 31, 2011 below:


	Recorded Investment		Unpaid Principal Balance		Related Allowance
*As of March 31, 2012*
Impaired loans with a valuation allowance:
Commercial real estate:
Construction and development	$	23,767,592	$	36,563,856	$	1,587,389
Owner-occupied		2,156,970		2,372,607		243,861
Non owner-occupied		3,506,243		3,614,308		116,796
Residential real estate - mortgage		6,784,513		9,697,931		408,418
Other commercial, financial, and agricultural		2,412,968		2,533,191		90,882
Consumer, including credit cards		232,596		349,235		10,903

Total impaired loans	$	38,860,882	$	55,131,128	$	2,458,249


As of December 31, 2011
Impaired loans with a valuation allowance:
Commercial real estate:
Construction and development	$	29,137,602	$	41,439,776	$	1,560,695
Owner-occupied		2,175,425		2,376,712		251,506
Non owner-occupied		3,385,481		3,386,699		119,603
Residential real estate - mortgage		7,557,085		10,455,670		337,994
Other commercial, financial, and agricultural		2,421,126		2,535,378		90,425
Consumer, including credit cards		285,041		406,508		17,890

Total impaired loans	$	44,961,760	$	60,600,743	$	2,378,113

The average investment in impaired loans for the three months ended March 31, 2012 and 2011 was $43,515,387 and $40,690,240, respectively.

Impaired loans with a valuation allowance include pools of impaired loans. At March 31, 2012, these pools had a recorded investment, or book balance, of $3,051,373, unpaid principal balance of $4,031,632, and related allowance of $114,505. The recorded investment, unpaid principal and related allowance in such pools totaled $3,028,009, $3,939,653, and $117,618, respectively, at December 31, 2011.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Troubled Debt Restructurings

The following table summarizes the carrying balances of TDRs as of March 31, 2012 and December 31, 2011.


	March 31, 2012		December 31, 2011
Performing	$	10,150,434	$	9,777,841
Nonperforming		9,665,864		9,304,350

Total troubled debt restructurings	$	19,816,298	$	19,082,191


Unfunded commitments to borrowers whose loans were modified in troubled debt restructurings	$	0	$	0

The following table summarizes loans that were modified and recognized as TDRs during the three months ended March 31, 2012.


	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate:
Construction and development		4	$	800,521	$	800,521
Owner-occupied		0		0		0
Non owner-occupied		0		0		0
Residential real estate - mortgage		1		75,031		75,031
Other commercial, financial, and agricultural		0		0		0
Consumer, including credit cards		0		0		0

Total loans modified and recognized as TDRs during the first quarter of 2012		5	$	875,552	$	875,552

There was one construction and development loan in the amount of $271,435 modified as a troubled debt restructuring during the prior twelve-month period ended March 31, 2012 for which there was a subsequent payment default. At the time of default, there was a $50,222 impact on the allowance for loan losses as a result of the default on this loan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Allowance for Loan Losses

Changes in the allowance for loan losses for the three months ended March 31, 2012 and 2011 are summarized by loan segment below:


	Commercial Real Estate			Residential Real Estate			Other Commercial, Financial, & Agricultural			Consumer			Unallocated			Total
*As of and for the Three Months Ended March 31, 2012*
Allowance for loan losses:
Balance, beginning of year	$	4,775,449		$	1,484,763		$	331,024		$	133,748		$	51,617		$	6,776,601
Provision for loan losses		350,065			316,822			(18,043	)		(19,488	)		(29,356	)		600,000
Charge-offs		(595,365	)		(289,265	)		(5,597	)		(22,954	)		0			(913,181	)
Recoveries		2,418			22,480			3,241			20,255			0			48,394

Ending balance	$	4,532,567		$	1,534,800		$	310,625		$	111,561		$	22,261		$	6,511,814


Ending balance, individually evaluated for impairment	$	1,881,790		$	374,195		$	85,763		$	1,996			n/a		$	2,343,744


Ending balance, collectively evaluated for impairment	$	2,650,777		$	1,160,605		$	224,862		$	109,565		$	22,261		$	4,168,070


Loans, gross:
Ending balance	$	118,463,587		$	43,198,837		$	21,932,452		$	8,957,437			n/a		$	192,552,313


Ending balance, individually evaluated for impairment	$	28,096,745		$	5,664,872		$	2,045,896		$	1,996			n/a		$	35,809,509


Ending balance, collectively evaluated for impairment	$	90,366,842		$	37,533,965		$	19,886,556		$	8,955,441			n/a		$	156,742,804


As of and for the Three Months Ended March 31, 2011
Allowance for loan losses:
Balance, beginning of year	$	7,442,941		$	1,747,843		$	405,830		$	262,223		$	56,722		$	9,915,559
Provision for loan losses		211,790			445,255			(49,913	)		(52,295	)		105,163			660,000
Charge-offs		(2,016,469	)		(180,426	)		(12,849	)		(36,111	)		0			(2,245,855	)
Recoveries		287			7,081			4,394			28,725			0			40,487

Ending balance	$	5,638,549		$	2,019,753		$	347,462		$	202,542		$	161,885		$	8,370,191


Ending balance, individually evaluated for impairment	$	1,123,722		$	1,277,339		$	562		$	0			n/a		$	2,401,623


Ending balance, collectively evaluated for impairment	$	4,514,827		$	742,414		$	346,900		$	202,542		$	161,885		$	5,968,568


Loans, gross:
Ending balance	$	145,534,917		$	47,971,601		$	31,380,986		$	10,816,136			n/a		$	235,703,640


Ending balance, individually evaluated for impairment	$	28,221,913		$	6,362,967		$	18,741		$	26,610			n/a		$	34,630,231


Ending balance, collectively evaluated for impairment	$	117,313,004		$	41,608,634		$	31,362,245		$	10,789,526			n/a		$	201,073,409

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Changes in the allowance for loan losses for the three months ended March 31, 2012 and 2011 within the commercial real estate loan segment are summarized below:


	Construction & Development			Owner- Occupied			Non Owner- Occupied			Total Commercial Real Estate
*As of and for the Three Months Ended March 31, 2012*
Allowance for loan losses:
Balance, beginning of year	$	4,226,536		$	368,114		$	180,799		$	4,775,449
Provision for loan losses		240,819			(20,564	)		129,810			350,065
Charge-offs		(490,804	)		0			(104,561	)		(595,365	)
Recoveries		1,118			1,300			0			2,418

Ending balance	$	3,977,669		$	348,850		$	206,048		$	4,532,567


Ending balance, individually evaluated for impairment	$	1,522,675		$	242,856		$	116,259		$	1,881,790


Ending balance, collectively evaluated for impairment	$	2,454,994		$	105,994		$	89,789		$	2,650,777


Loans, gross:
Ending balance	$	54,585,016		$	35,429,350		$	28,449,221		$	118,463,587


Ending balance, individually evaluated for impairment	$	22,901,908		$	1,838,573		$	3,356,264		$	28,096,745


Ending balance, collectively evaluated for impairment	$	31,683,108		$	33,590,777		$	25,092,957		$	90,366,842


As of and for the Three Months Ended March 31, 2011
Allowance for loan losses:
Balance, beginning of year	$	7,133,461		$	124,729		$	184,751		$	7,442,941
Provision for loan losses		(4,043	)		51,372			164,461			211,790
Charge-offs		(1,852,280	)		0			(164,189	)		(2,016,469	)
Recoveries		287			0			0			287

Ending balance	$	5,277,425		$	176,101		$	185,023		$	5,638,549


Ending balance, individually evaluated for impairment	$	966,023		$	55,106		$	102,593		$	1,123,722


Ending balance, collectively evaluated for impairment	$	4,311,402		$	120,995		$	82,430		$	4,514,827


Loans, gross:
Ending balance	$	80,361,545		$	36,197,929		$	28,975,443		$	145,534,917


Ending balance, individually evaluated for impairment	$	23,538,459		$	1,263,690		$	3,419,764		$	28,221,913


Ending balance, collectively evaluated for impairment	$	56,823,086		$	34,934,239		$	25,555,679		$	117,313,004

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5.

FAIR VALUE

Determination of Fair Value

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

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

Fair Value Hierarchy

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

Level 1

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

Level 2

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

Level 3

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5.

FAIR VALUE (Continued)

Assets Measured at Fair Value on a Recurring Basis

Fair value is the primary basis of accounting for investment securities available-for-sale. The Company does not currently measure any other assets or liabilities at fair value on a recurring basis. When quoted market prices for identical securities are available in an active market, these securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, such as U.S. Treasury notes, or exchange-traded equities. If quoted market prices for identical securities are not available, then fair values are estimated using matrix models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within level 2, include U.S. Government-sponsored enterprise securities, agency mortgage-backed securities, obligations of states and political subdivisions, and certain corporate debt obligations. Due to limited activity and less transparency regarding input factors, one corporate debt obligation was classified in level 3 at March 31, 2012 and December 31, 2011.

Securities measured at fair value on a recurring basis are presented as follows.


	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value
*March 31, 2012*
Investment securities available-for-sale:
U. S. Government and agency securities	$	0	$	14,748,963	$	0	$	14,748,963
U. S. Government-sponsored enterprise securities		0		6,350,657		0		6,350,657
Agency residential mortgage-backed securities		0		42,034,923		0		42,034,923
Obligations of states and political subdivisions		0		15,180,628		0		15,180,628
Corporate debt obligations		0		6,420,012		500,000		6,920,012

Total investment securities	$	0	$	84,735,183	$	500,000	$	85,235,183


December 31, 2011
Investment securities available-for-sale:
U. S. Government and agency securities	$	0	$	13,573,816	$	0	$	13,573,816
U. S. Government-sponsored enterprise securities		0		6,637,011		0		6,637,011
Agency residential mortgage-backed securities		0		41,984,664		0		41,984,664
Obligations of states and political subdivisions		0		17,012,322		0		17,012,322
Corporate debt obligations		0		8,293,860		500,000		8,793,860

Total investment securities	$	0	$	87,501,673	$	500,000	$	88,001,673

The corporate debt obligation measured at fair value using level 3 inputs at March 31, 2012 and December 31, 2011 comprised one trust preferred security with a cost basis of $500,000, for which there is currently no active market. Like most of the Company’s other corporate debt holdings, this security is also an issue of a bank/bank holding company domiciled in the southeastern United States. No transfers or activity involving other securities occurred within the level 3 category during the three months ended March 31, 2012 or 2011. Should transparency in input factors diminish, additional obligations could be classified as level 3 assets in the future. No transfers were made between level 1 or 2 assets measured at fair value on a recurring basis during the three months ended March 31, 2012 or 2011.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5.

FAIR VALUE (Continued)

Assets Measured at Fair Value on a Nonrecurring Basis

Certain instruments are measured at fair value on a nonrecurring basis; in other words, these instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances – for example, when evidence of impairment exists. Such instruments include impaired loans and other real estate. Loan impairment is reported when full payment under the original loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral-dependent. When management believes the uncollectibility of all or any portion of a loan is confirmed, a loss is charged against the allowance. Any necessary increase to the allowance resulting from impaired loans is recorded as a component of the provision for loan losses.

During the three months ended March 31, 2012, the Company recognized losses of $944,512 on impaired loans outstanding through the allowance for loan losses. At March 31, 2012, impaired loans with an aggregate outstanding book balance of $38,860,882 were measured and reported net of specific allowances at a fair value of $36,402,633. During the three months ended March 31, 2011, the Company recognized losses of $836,916 on impaired loans outstanding through the allowance for loan losses. At March 31, 2011, impaired loans with an aggregate outstanding book balance of $37,466,216 were measured and reported net of specific allowances at a fair value of $34,968,803. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan impairment as a level 2 instrument. When an appraised value is not available or management determines the fair value of the collateral is impaired beyond appraised value and no observable market price exists, the Company records the loan impairment in level 3. Given the current difficulties in obtaining comparable sales and other observable inputs due to high inventories and distressed sales prevalent in the market, particularly for certain real estate collateral, the Company classified all impaired loans in level 3 at March 31, 2012 and December 31, 2011.

Other real estate is recorded at fair value upon transfer of the underlying loan to foreclosed balances. Fair value is based upon independent market prices, appraised values, or management’s estimate of collateral value. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company classifies other real estate as level 2; otherwise, other real estate is classified as level 3. Any write-down to fair value at foreclosure is charged to the allowance for loan losses while subsequent devaluations resulting primarily from updated appraisals or observations of comparable sales prices are included in noninterest expense. During the three months ended March 31, 2012, devaluations (or write-downs) of other real estate outstanding at March 31, 2012 totaled $469,790. In the first quarter of 2011, devaluations of other real estate outstanding at March 31, 2011 amounted to $161,127. Given the current difficulties in obtaining comparable sales and other observable inputs due to high inventories and distressed sales prevalent in the market, particularly for certain real estate types, the Company classified all foreclosed real estate that are measured at fair value in level 3 at March 31, 2012 and December 31, 2011.

Level 3 assets also include Federal Home Loan Bank of Atlanta (“FHLB”) stock, which is only redeemable with the issuer at par and cannot be traded in the market; as such, no observable market data for this holding is available. The Company evaluated its holding in FHLB stock at March 31, 2012 and December 31, 2011 and determined no impairment charge was necessary. Other assets are similarly evaluated under fair value accounting on a nonrecurring basis.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5.

FAIR VALUE (Continued)

The table below presents the Company’s outstanding assets for which a nonrecurring change in fair value was recorded during the three months ended March 31, 2012 and 2011, aggregated by the level in the fair value hierarchy within which those measurements fall. Assets reviewed for impairment such as level 3 FHLB stock, but for which no corresponding impairment charge was recorded, are not included in these totals.


	Fair Value Measurements Using
*For the Three Months Ended*	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Carrying Value		Total Losses for the Quarter
*March 31, 2012*
Impaired loans	$	0	$	0	$	36,402,633	$	36,402,633	$	(944,512	)
Other real estate		0		0		1,753,020		1,753,020		(469,790	)

Total fair value of assets on a nonrecurring basis	$	0	$	0	$	38,155,653	$	38,155,653	$	(1,414,302	)


March 31, 2011
Impaired loans	$	0	$	0	$	34,968,803	$	34,968,803	$	(836,916	)
Other real estate		0		0		1,188,740		1,188,740		(161,127	)

Total fair value of assets on a nonrecurring basis	$	0	$	0	$	36,157,543	$	36,157,543	$	(998,043	)

As disclosed above, the loss amount shown for impaired loans include charge-offs as well as the provision allocated for those loans during the three months ended March 31, 2012 and 2011. The loss amount for other real estate does not include charge-offs recognized on those credits prior to foreclosure of the underlying collateral. No transfers were made between level 1, 2, and 3 assets evaluated under fair value accounting on a nonrecurring basis during the three months ended March 31, 2012 or 2011. Additionally, no nonrecurring change in fair value was recognized on any liabilities during the three months ended March 31, 2012 or 2011.

Fair Value of Financial Instruments

Methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. For certain other financial assets and liabilities, fair value approximates carrying value due to the nature of the financial instrument. These instruments include cash and cash equivalents, demand and other non-maturity deposits, and overnight borrowings. The following methods and assumptions were used in estimating the fair value of other level 3 financial instruments:

•

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

•

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

•

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

•

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5.

FAIR VALUE (Continued)

The table below presents the fair value of financial assets and liabilities carried on the Company’s consolidated statements of condition at March 31, 2012 and December 31, 2011, including those financial assets and liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis:


	March 31, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	111,814,625	$	111,814,625	$	99,148,053	$	99,148,053
Investment securities available-for-sale		85,235,183		85,235,183		88,001,673		88,001,673
Net loans		185,997,023		186,873,409		195,486,544		196,444,309
Accrued interest receivable		1,251,463		1,251,463		1,244,509		1,244,509
Other financial assets		964,700		964,700		964,700		964,700

Financial liabilities:
Deposits	$	374,189,072	$	374,794,599	$	369,871,792	$	370,622,206
FHLB advances		5,000,000		5,131,125		5,000,000		5,130,998
Accrued interest payable		486,745		486,745		818,457		818,457

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

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements set forth in this Quarterly Report on Form 10-Q for the period ended March 31, 2012 (the “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” (the “Analysis”) 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 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 our Annual Report on Form 10-K for the year ended December 31, 2011. 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.

Item 2.

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

This Analysis should be read in conjunction with our 2011 Annual Report on Form 10-K and the Consolidated Financial Statements & related Notes included in this Report. The Company’s accounting policies, which are described in detail in Form 10-K, are integral to understanding the results reported. The Company’s accounting policies require management’s judgment in valuing assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. This Analysis contains forward-looking statements with respect to business and financial matters. Actual results may vary significantly from those contained in these forward-looking statements. See the sections entitled “Critical Accounting Estimates” and “Cautionary Notice Regarding Forward-Looking Statements” within this Report.

DESCRIPTION OF BUSINESS

Southeastern Banking Corporation, with assets exceeding $420 million, is a financial services company with operations in southeast Georgia and northeast Florida. Southeastern Bank (the “Bank”), the Company’s wholly-owned commercial bank subsidiary chartered in 1888, offers a full line of commercial and retail services to meet the financial needs of its customer base through its 16 branch locations and ATM network. Services offered include traditional deposit and credit services, long-term mortgage originations, and credit cards. The Bank also offers 24-hour delivery channels, including internet and telephone banking and through an affiliation with a third party broker-dealer, provides insurance and investment brokerage services.

The table below provides a summary of the Bank’s markets as of March 31, 2012.


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

Georgia
McIntosh		2	$	56,551	$	66,273		72.0		1
Brantley		2		16,508		58,928		70.8		1
Bryan		1		17,260		7,097		1.8		5
Camden		3		26,552		60,211		19.7		2
Charlton		1		2,803		52,954		55.3		1
Coffee		2		8,075		21,006		3.2		9
Glynn		1		41,000		18,079		1.2		15
Jeff Davis		1		2,728		22,027		17.0		3

		13	$	171,477	$	306,575		8.7		3


Florida
Nassau		3	$	21,075	$	67,614		7.6		5


Totals		16	$	192,552	$	374,189		8.5		3

¹	Dollar amounts are presented in thousands as of March 31, 2012.

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

FINANCIAL CONDITION

Overview

Consolidated assets totaled $420.7 million at March 31, 2012, an increase of $4.1 million (or 1.0%) since the end of 2011. The increase in total assets was driven largely by a $4.3 million (or 1.2%) increase in total deposits. Net loans decreased $9.5 million (or 4.9%) and cash and cash equivalents increased $12.7 million (or 12.8%) since December 31, 2011. The increase in deposits during the first quarter is expected to reverse trend in the second and third quarters as public deposit customers draw down on their tax receipts for operating and capital expenditures. The continued decline in loans outstanding and low interest yields available on other investment alternatives coupled with our election to maintain a highly liquid balance sheet during this weak economic environment has hampered our ability to improve our net interest margin and earnings. The elevated level of nonperforming assets further hampered our profitability in the first quarter of 2012, and this factor is expected to continue to create a drag on earnings through the remainder of 2012.

Investment Securities

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, interest rates, pledging requirements and liquidity needs of the Bank.


	March 31, 2012						December 31, 2011
	Fair Value			% of Total			Fair Value			% of Total
(Dollars in thousands)
U.S. Government and agency securities	$	14,749			17.3	%	$	13,574			15.4	%
U.S. Government-sponsored enterprise securities		6,351			7.5	%		6,637			7.6	%
Agency residential mortgage-backed securities		42,035			49.3	%		41,985			47.7	%
Obligations of states and political subdivisions		15,180			17.8	%		17,012			19.3	%
Corporate debt obligations		6,920			8.1	%		8,794			10.0	%

Total investment securities	$	85,235			100.0	%	$	88,002			100.0	%


Total investments as a percentage of total assets		20.3	%					21.1	%

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 March 31, 2012, 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 $3.0 million and a fair market value of $3.1 million that were not rated by an NSRO, of which 93% were issued by state and political subdivisions of Georgia or Florida. At March 31, 2012, we had one corporate debt obligation with an amortized cost of $1.0 million and a fair market value of $0.9 million rated below investment grade by an NSRO and three corporate debt obligations with an amortized cost of $3.5 million and a fair market value of $3.4 million that were not rated by an NSRO.

The corporate bond portfolio primarily includes debt issuances of banks and bank holding companies domiciled in the southeastern United States. During the first quarter of 2012, we sold one corporate bond for a loss of $79,000. There is a $64,000 net unrealized loss on the remainder of the corporate bond portfolio. 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. To illustrate this fact, those bonds with a $64,000 net unrealized loss at March 31, 2012 were carried at a $223,000 net unrealized loss position at December 31, 2011.

At March 31, 2012, $63.1 million (or approximately 74%) 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”). In 2011, Standard & Poor’s rating agency, an NSRO, 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.

At March 31, 2012, $39.0 million (or approximately 46%) of the fair market value of the Company’s investment portfolio is invested in mortgage-backed securities issued by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE. 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 March 31, 2012, 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.

Loans

Loans, net of unearned income, decreased $9.8 million (or 4.8%) since the end of 2011 to $192.5 million at March 31, 2012. The net loans-to-deposits ratio dropped to 51.5% at March 31, 2012 versus 54.7% at December 31, 2011. Due to economic uncertainties within the Company’s markets, particularly in the real estate sector, and resultant concerns regarding credit opportunities, management does not expect loan volumes to materially increase for the remainder of 2012.

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


Quarters Ended	March 31, 2012			December 31, 2011			September 30, 2011			June 30, 2011			March 31, 2011
(Dollars in thousands)
Commercial real estate:
Construction and development	$	54,585		$	61,947		$	64,995		$	77,178		$	80,362
Owner-occupied		35,429			36,389			37,534			36,406			36,198
Non owner-occupied		28,449			27,772			27,905			28,624			28,975
Residential real estate - mortgage		43,199			44,202			45,998			47,383			47,972
Other commercial, financial, and agricultural		21,933			22,446			28,644			29,720			31,381
Consumer, including credit cards		8,957			9,552			9,814			10,462			10,816

Loans, gross		192,552			202,308			214,890			229,773			235,704
Unearned income		(43	)		(45	)		(49	)		(59	)		(61	)
Allowance for loan losses		(6,512	)		(6,777	)		(8,564	)		(8,604	)		(8,370	)

Net loans	$	185,997		$	195,486		$	206,277		$	221,110		$	227,273

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


Quarters Ended	March 31, 2012			December 31, 2011			September 30, 2011			June 30, 2011			March 31, 2011
Commercial real estate:
Construction and development		28.3	%		30.6	%		30.2	%		33.6	%		34.1	%
Owner-occupied		18.4	%		18.0	%		17.5	%		15.8	%		15.4	%
Non owner-occupied		14.8	%		13.7	%		13.0	%		12.5	%		12.3	%
Residential real estate - mortgage		22.4	%		21.9	%		21.4	%		20.6	%		20.3	%
Other commercial, financial, and agricultural		11.4	%		11.1	%		13.3	%		12.9	%		13.3	%
Consumer, including credit cards		4.7	%		4.7	%		4.6	%		4.6	%		4.6	%

Loans, gross		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Commercial real estate loans, which included construction and development loans, represented approximately 61.5% and 62.3% of the total loan portfolio at March 31, 2012 and December 31, 2011, respectively. Due to continued instability of real estate values, loans in the commercial real estate portfolio may have a greater risk of uncollectability than other loans. Additionally, because a substantial portion of the loan portfolio is secured by real estate in southeast Georgia and northeast Florida, the loan portfolio is particularly susceptible to changes in market conditions in those areas.

The largest change within the portfolio since the end of 2011 was in construction and development loans, which declined $7.4 million (or 11.9%) due primarily to collections, foreclosures and charge-offs of delinquent loans during the first three months of 2012. These loans, which are primarily loans for the acquisition and development of residential properties, are concentrated in the Company’s coastal markets. With the exception of existing commitments, the Company is only originating new construction and development loans to customers with extraordinary equity injections, outside financial strength, or other performance metrics with low dependence on the underlying collateral.

Many commercial and commercial real estate loans with floating rates have reached their contractual floors. Additionally, many recent originations and renewals have been priced at fixed rather than adjustable rates, unless floors applied. Loans with floating rates that had reached a contractual floor approximated $86.2 million at March 31, 2012 compared to $88.7 million at December 31, 2011. The average yield on these particular outstanding loans, which included all loan types, was 5.81% or 256 basis points above the Company’s prime rate of interest (3.25%), at March 31, 2012. Management continues to shorten maturity options on commercial loans as feasible, a move that should mitigate the Company’s interest sensitivity position when the prime rate adjusts upward.

Although the Company’s loan portfolio is diversified, significant portions of its loans are collateralized by real estate. At March 31, 2012, loans with real estate as the primary collateral comprised approximately 85.3% of the loan portfolio. As required by policy, real estate loans are collateralized based on certain loan-to-appraised value ratios at origination. A geographic concentration in loans exists given the Company’s operations within a regional area of southeast Georgia and northeast Florida. The Company continues to closely monitor real estate valuations in its markets and consider any implications on the allowance for loan losses and the related provision.

On an aggregate basis, commitments to extend credit and standby letters of credit approximated $19.9 million at March 31, 2012, compared to $22.5 million at the end of 2011. The decline in overall commitments results from the Company’s decision to reduce its exposure to higher risk areas, including acquisition and development lending, as well as customer decisions not to renew their lines. Because a substantial amount of these contracts expire without being drawn upon, total contractual amounts do not necessarily represent future credit exposure or liquidity requirements.

Nonperforming Assets

Nonperforming assets, which consist of nonaccrual loans, restructured loans, other accruing loans past due 90 days or more, foreclosed real estate, and other repossessions, totaled $51.92 million at March 31, 2012. The aggregate balance of nonperforming assets decreased $1.00 million (or 1.9%) since the end of 2011. As a percent of total assets, nonperforming assets totaled 12.34% at March 31, 2012 versus 12.70% at December 31, 2011.

Since 2008, the elevated level of nonperforming assets has materially and adversely affected our business, financial resources, and operating results, and we expect continued adverse effects until real estate markets, particularly the coastal markets, stabilize and improve. The gradual transition of defaulted construction and development loans to troubled debt restructurings or foreclosed real estate and the increase in residential real estate loans on nonaccrual status are the primary factor in the nonperforming trends. A summary of trends in our nonperforming assets over the last five quarters is provided in the following table.


	March 31,			December 31,			September 30,			June 30,			March 31,
Quarters Ended	2012			2011			2011			2011			2011
(Dollars in thousands)
Nonaccrual loans:
Commercial real estate:
Construction and development	$	18,177		$	23,450		$	22,735		$	23,550		$	20,609
Owner-occupied		507			313			418			521			377
Non owner-occupied		288			152			80			6			533
Residential real estate - mortgage		6,088			6,220			4,558			4,506			4,538
Other commercial, financial, and agricultural		377			385			262			289			338
Consumer, including credit cards		223			278			259			276			257

Total nonaccrual loans		25,660			30,798			28,312			29,148			26,652
Troubled debt restructurings not included above		10,151			9,778			6,772			6,781			5,670
Accruing loans past due 90 days or more		21			248			75			65			68

Total nonperforming loans		35,832			40,824			35,159			35,994			32,390
Foreclosed real estate		16,077			12,063			14,232			15,185			12,315
Other repossessed assets		12			32			15			26			28

Total nonperforming assets	$	51,921		$	52,919		$	49,406		$	51,205		$	44,733

Nonperforming loans to total loans, net of unearned income		18.61	%		20.18	%		16.37	%		15.67	%		13.75	%

Nonperforming assets to total assets		12.34	%		12.70	%		12.08	%		11.92	%		10.30	%

Nonaccrual Loans

Nonaccrual loans totaled $25.66 million at March 31, 2012; a $5.14 million (or 16.7%) decrease since the end of 2011. During the first quarter of 2012, approximately $2.28 million of loans were placed on nonaccrual status, $0.91 million charged-off, $4.70 million transferred out by foreclosure or repossession, and $1.81 million reduced by payments or other activity. As of March 31, 2012, the unpaid principal balance owed on nonaccrual loans totaled $40.66 million. Thus, as a result of partial charge-offs, the $25.66 million in recorded balances on our books represented 63.1% of the balances owed by our customers, a 36.9% discount.

Loans restructured in troubled debt restructurings that are on nonaccrual status at March 31, 2012 totaled $9.67 million, a 3.9% increase compared to $9.30 million at December 31, 2011.

At March 31, 2012, real estate-secured loans comprised 98.5% of total nonaccrual balances. The collateral underlying nonaccrual balances at March 31, 2012 and December 31, 2011 is presented in the following table.


	March 31,		December 31,
	2012		2011
(Dollars in thousands)
Collateral type:
Real estate:
Land tracts	$	7,955	$	6,527
Lots within developments		8,145		13,363
Residential dwellings		8,514		10,040
Commercial buildings		664		476

Total real estate		25,278		30,406
Equipment		267		263
Other		115		129

Total nonaccrual loans	$	25,660	$	30,798

Relationships above $250,000 comprised 82.3% or $21.13 million of nonaccrual balances at March 31, 2012. 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 March 31, 2012*
Relationship tier:
£ $250,000		159	$	4,529		17.7	%	$	28
> $250,000 and £ $750,000		7		2,883		11.2	%		412
> $750,000		9		18,248		71.1	%		2,028

Total nonaccrual loans		175	$	25,660		100.0	%		147


As of December 31, 2011
Relationship tier:
£ $250,000		181	$	4,457		14.5	%	$	25
> $250,000 and £ $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

At March 31, 2012, the largest nonaccrual loan relationship had a $4.34 million book balance. It is anticipated that the majority of the collateral securing the loans in this relationship will be foreclosed on in the second quarter of 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. This expectation is factored in the methodology for determining the adequacy of the allowance for loan losses at March 31, 2012.

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 quarter ended March 31, 2012, the gross interest income that would have been recorded if our nonaccrual loans had been current in accordance with their original terms was approximately $394,000. The amount of interest income on the above nonaccrual loans that was included in net income for the quarter ended March 31, 2012 was approximately $12,000. The average balance of loans on nonaccrual status during the first quarter of 2012 was $29.69 million. The allowance for loan losses related to our nonaccrual loans amounted to approximately $1.20 million at March 31, 2012.

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 March 31, 2012, the Company had $19.82 million in TDRs. Based on performance in accordance with the restructured terms, the Company has elected to accrue interest on $10.15 million in TDRs outstanding at March 31, 2012. 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 March 31, 2012 totaled $9.67 million. These TDRs are included with other nonaccrual loans in this Report.

Since the end of 2011, the amount of accruing TDRs outstanding increased $373,000 (or 3.8%). At March 31, 2012, the specific allowance allocated to the accruing TDR balance approximated $938,000.

Potential Problem Loans

At March 31, 2012, we had $2.65 million in loans not counted as TDRs that were past due 30-89 days and still accruing interest, or 1.37% of total loans, representing a decrease from $3.19 million, or 1.58% at December 31, 2011.

Accruing loans classified as individually impaired under accounting guidance to creditors on impairment of loans totaled $3.03 million at March 31, 2012, a $1.11 million (or 26.8%) decrease since the end of 2011. 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 $317,000 at March 31, 2012.

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

Other Real Estate Owned

During the first quarter of 2012, the balance of real estate acquired through foreclosure or in settlement of debts previously contracted (“foreclosed real estate”) increased $4.02 million (or 33.3%) to $16.08 million at March 31, 2012. Of the $16.66 million reported as other real estate owned (or “OREO”) on our books at March 31, 2012, $587,000 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 $4.69 million, $176,000, and $470,000, respectively, during the first quarter of 2012. The total life-to-date write-downs taken on our quarter-end OREO portfolio subsequent to foreclosure amounted to $4.55 million through March 31, 2012, a 22.0% 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 March 31, 2012 and December 31, 2011 is presented in the following table.


	March 31,		December 31,
	2012		2011
(Dollars in thousands)
Land tracts	$	6,690	$	6,349
Lots within developments		5,663		2,490
Residential dwellings		2,969		2,394
Commercial buildings		755		830

Total foreclosed real estate	$	16,077	$	12,063

Approximately 87.4% of these holdings were located in Georgia with the balance in Nassau County, Florida.

At March 31, 2012, we owned 17 properties valued in excess of $250,000 per property with an aggregate basis of $12.76 million, representing 79.3% 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 March 31, 2012*
Property value:
£ $250,000		61	$	3,321		20.7	%	$	54
> $250,000 and £ $750,000		10		4,326		26.9	%		433
> $750,000		7		8,430		52.4	%		1,204

Total foreclosed real estate		78	$	16,077		100.0	%		206

As of December 31, 2011
Property value:
£ $250,000		68	$	3,303		27.4	%	$	49
> $250,000 and £ $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

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 $759,000 at March 31, 2012), 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 quarters.


	March 31,			December 31,			September 30,			June 30,			March 31,
Quarters Ended	2012			2011			2011			2011			2011
(Dollars in thousands)
Allowance for loan losses at beginning of quarter	$	6,777		$	8,564		$	8,604		$	8,370		$	9,916
Provision for loan losses		600			1,925			2,700			900			660
Charge-offs:
Commercial real estate:

Construction and development		491			2,102			2,076			414			1,852
Owner-occupied		—			—			—			6			164
Non owner-occupied		105			39			41			6			—
Residential real estate - mortgage		289			1,550			590			203			181
Other commercial, financial, and agricultural		5			29			11			42			13
Consumer, including credit cards		23			49			69			59			36

Total charge-offs		913			3,769			2,787			730			2,246

Recoveries:
Commercial real estate:
Construction and development		1			4			1			18			—
Owner-occupied		1			1			—			—			—
Non owner-occupied		—			—			—			—			—
Residential real estate - mortgage		23			25			21			7			7
Other commercial, financial, and agricultural		3			(8	)		4			9			4
Consumer, including credit cards		20			35			21			30			29

Total recoveries		48			57			47			64			40

Net charge-offs		865			3,712			2,740			666			2,206

Allowance for loan losses at end of quarter	$	6,512		$	6,777		$	8,564		$	8,604		$	8,370


Net loans outstanding at end of quarter	$	192,509		$	202,263		$	214,841		$	229,715		$	235,643


Average net loans outstanding during quarter	$	198,391		$	210,497		$	225,928		$	233,018		$	240,554


Ratios:
Allowance to net loans		3.38	%		3.35	%		3.99	%		3.75	%		3.55	%

Net charge-offs to average loans (annualized)		1.75	%		7.00	%		4.81	%		1.15	%		3.67	%

Provision to average loans (annualized)		1.22	%		3.63	%		4.74	%		1.55	%		1.11	%

Recoveries to total charge-offs		5.26	%		1.51	%		1.69	%		8.77	%		1.78	%

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 March 31, 2012 and December 31, 2011:


	March 31,			December 31,
	2012			2011
(Dollars in thousands)
Nonaccrual loans	$	25,660		$	30,798
Troubled debt restructurings not included above		10,151			9,778
Loans past due 90 days or more and still accruing		21			248
Other accruing loans individually evaluated for impairment		3,029			4,138

Total impaired loans	$	38,861		$	44,962


Valuation allowance related to total impaired loans	$	2,458		$	2,378


Valuation allowance as a percentage of impaired loans		6.33	%		5.29	%

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 March 31, 2012 and December 31, 2011.

(Dollars in thousands)

Carrying
Value

Unpaid
Principal
Balance

Related
Allowance

%
Allowance
to Carrying
Value

As of March 31, 2012

Impaired loans with a valuation allowance:

Commercial real estate:

Construction and development

23,768

36,564

1,587

6.68

Owner-occupied

2,157

2,373

244

11.31

Non owner-occupied

3,506

3,614

117

3.34

Residential real estate - mortgage

6,784

9,698

408

6.01

Other commercial, financial, and agricultural

2,413

2,533

3.77

Consumer, including credit cards

233

349

4.72

Total impaired loans

38,861

55,131

2,458

6.33

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

70.5


(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	%

The aggregate amount of impaired loans decreased $6.10 million (or 13.6%) since the end of 2011 due primarily to foreclosures and partial charge-offs taken during the first quarter of 2012. At March 31, 2012, our recorded investment in impaired loans represented 70.5% of the unpaid principal balance on those loans. Effectively, we have already recognized a $16.27 million (or 29.5%) 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 March 31, 2012, we used a trailing twelve-quarter historical average loss rate for each pool of loans. At December 31, 2011, we used a trailing eleven-quarter historical average loss rate for each pool of loans. By comparison, at December 31, 2010, we used a trailing six-quarter historical average loss rate for each pool of loans, and 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. However, we do not expect to expand the historical look-back period beyond the current twelve-quarter period.

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 and environmental factors used in assessing the general reserves for all loans not individually evaluated for impairment at March 31, 2012 and December 31, 2011.


	March 31,		December 31,
	2012		2011
	Twelve- Quarter Historical Loss Rate	Adjustments for Qualitative/ Environmental Factors	Eleven- Quarter Historical Loss Rate	Adjustments for Qualitative/ Environmental Factors
Loan Segment:
Commercial real estate:
Construction and development	7.44%	0.04%	7.79%	0.04%
Owner-occupied	0.28%	0.04%	0.30%	0.04%
Non owner-occupied	0.32%	0.04%	0.21%	0.04%
Residential real estate - mortgage	3.02%	0.04%	3.05%	0.04%
Commercial, financial, and agricultural	0.09 - 1.61%	0.04 - 0.06%	0.03 - 1.76%	0.04 - 0.06%
Consumer, including credit cards	4.37 - 5.27%	0.08%	4.62 - 5.42%	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. Annualized net charge-offs represented 1.75% of average loans in the first quarter of 2012, a 192 basis point improvement from 3.67% in the same period of 2011.

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 March 31, 2012 and December 31, 2011.


	March 31,							December 31,
	2012							2011
	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	$	12,277	$	24,813	$	12,444		$	17,373	$	29,441	$	11,980
Owner-occupied		189		265		50			191		265		50
Non owner-occupied		138		244		106			—		—		—
Residential real estate - mortgage		3,376		5,962		2,523			3,468		6,081		2,552
Other commercial, financial, and agricultural		—		—		—			—		—		—
Consumer, including credit cards		—		—		—			—		—		—

Total impaired loans	$	15,980	$	31,284	$	15,123		$	21,032	$	35,787	$	14,582


Partial charge-offs as a % of unpaid principal balance						48.3	%						40.7	%

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 March 31, 2012.

As of March 31, 2012

As
Reported

Partial
Charge-
offs

Proforma
Adjusted

(Dollars in thousands)

Allowance for loan losses

6,512

15,123

21,635

Nonperforming loans

35,832

15,123

50,955

Coverage ratio

18.2

42.5

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 quarters are presented below.


	March 31,			December 31,			September 30,			June 30,			March 31,
As of Quarter Ended	2012			2011			2011			2011			2011
(Dollars in thousands)
Allocation of allowance for loan losses by loan category:
Commercial real estate:
Construction and development	$	3,978		$	4,226		$	5,217		$	5,438		$	5,277
Owner-occupied		349			368			364			254			176
Non owner-occupied		206			181			190			219			185
Residential real estate - mortgage		1,535			1,485			2,194			2,081			2,020
Commercial, financial, and agricultural		311			331			403			448			347
Consumer, including credit cards		111			134			127			200			203
Unallocated		22			52			69			(36	)		162

Total allowance for loan losses	$	6,512		$	6,777		$	8,564		$	8,604		$	8,370


Allowance by category as a percentage of total allowance:
Commercial real estate:
Construction and development		61.1	%		62.3	%		60.9	%		63.2	%		63.1	%
Owner-occupied		5.3	%		5.4	%		4.3	%		3.0	%		2.1	%
Non owner-occupied		3.2	%		2.7	%		2.2	%		2.5	%		2.2	%
Residential real estate - mortgage		23.6	%		21.9	%		25.6	%		24.2	%		24.1	%
Commercial, financial, and agricultural		4.8	%		4.9	%		4.7	%		5.2	%		4.2	%
Consumer, including credit cards		1.7	%		2.0	%		1.5	%		2.3	%		2.4	%
Unallocated		0.3	%		0.8	%		0.8	%		-0.4	%		1.9	%

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


Loans by category as a percentage of total loans:
Commercial real estate:
Construction and development		28.3	%		30.6	%		30.2	%		33.6	%		34.1	%
Owner-occupied		18.4	%		18.0	%		17.5	%		15.8	%		15.4	%
Non owner-occupied		14.8	%		13.7	%		13.0	%		12.5	%		12.3	%
Residential real estate - mortgage		22.4	%		21.9	%		21.4	%		20.6	%		20.3	%
Commercial, financial, and agricultural		11.4	%		11.1	%		13.3	%		12.9	%		13.3	%
Consumer, including credit cards		4.7	%		4.7	%		4.6	%		4.6	%		4.6	%

Total loans		100.0	%

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

SOUTHEASTERN BANKING CORP 10-Q