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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

~~the~~ Securities Exchange Act of 1934

For the Quarterly Period Ended ~~September~~March 3031, ~~2011~~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 ~~preceeding~~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~~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~~Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of ~~November~~May 10, ~~2011~~2012, the Registrant had 3,129,388 shares of ~~the Registrant’s~~ common stock, par value $1.25 per share, ~~were~~ outstanding.

Table of Contents

		Page
Part I - Financial Information
Part I – Financial Information
Item 1.	Consolidated Financial Statements:
	Consolidated Balance Sheets		3
	Consolidated Statements of Condition		1
	Consolidated Statements of Operations		42
	Consolidated Statements of Shareholders’ Equity		5
	Consolidated Statements of Comprehensive Income (Loss)		3
	Consolidated Statements of Cash Flows		6
	Consolidated Statements of Shareholders’ Equity		4
	Consolidated Statements of Cash Flows		5
	Notes to Consolidated Financial Statements		7
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS	~~CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS~~		2423
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		2524
	Financial Condition		26
	Description of Business		24
	Results of Operations		40
	Financial Condition		25
	Liquidity and Capital Resources		46
	Results of Operations		42
	Liquidity and Capital Resources		47
	Critical Accounting Estimates		49
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.		5150
Item 4.	Controls and Procedures.		5251
Part II – Other Information
Part II - Other Information
Item 1.	Legal Proceedings.		5352
Item 1A.	Risk Factors.		5352
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		5352
Item 3.	Defaults ~~upon~~Upon Senior Securities.		5352
Item 4.	(Removed and Reserved).		5352
Item 5.	Other Information.		5352
Item 6.	Exhibits.		5352
Signatures			5453

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.

~~Part~~SOUTHEASTERN IBANKING -CORPORATION ~~Financial~~AND ~~Information~~ SUBSIDIARIES

~~Item~~CONSOLIDATED 1.STATEMENTS ~~Financial~~OF ~~Statements~~COMPREHENSIVE INCOME (LOSS)

~~Southeastern~~THREE ~~Banking~~MONTHS ~~Corporation~~ENDED MARCH 31, 2012 AND 2011

~~Consolidated~~(Unaudited) ~~Balance Sheets~~

	(Unaudited)September 30,2011			December 31,2010
	2012			2011
Assets
Net income (loss)	$	(388,583	)	$	26,187
Cash and due from banks	$	8,289,295		$	8,206,514
Other comprehensive income:
Interest-bearing deposits in other banks		87,765,886			70,511,991
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
Federal funds sold		2,150,000			2,150,000
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
Cash and cash equivalents		98,205,181			80,868,505
		240,375			39,831
Investment securities:
Comprehensive income (loss)	$	(148,208	)	$	66,018
Available-for-sale, at market value (amortized cost of $64,803,395 and $73,893,247 at September 30, 2011 and December 31, 2010)		65,958,580			74,299,903
Loans, gross		214,889,850			245,688,555
Unearned income		(49,205	)		(65,007	)
Allowance for loan losses		(8,563,900	)		(9,915,559	)
Net loans		206,276,745			235,707,989
Premises and equipment, net		11,875,560			12,107,464
Bank-owned life insurance, at cash surrender value		5,914,329			5,738,642
Other real estate		14,825,435			11,636,290
Other assets		6,081,549			7,274,264
Total Assets	$	409,137,379		$	427,633,057
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	64,071,059		$	55,377,519
Interest-bearing demand, savings, and time deposits		293,542,551			319,817,600
Total deposits		357,613,610			375,195,119
U. S. Treasury demand note		1,048,743			762,782
Federal Home Loan Bank advances		5,000,000			5,000,000
Other liabilities		2,329,086			1,869,597
Total liabilities		365,991,439			382,827,498
Shareholders’ Equity
Common stock, $1.25 par value		4,475,996			4,475,996
Additional paid-in-capital		1,529,687			1,495,668
Retained earnings		45,272,296			47,459,963
Treasury stock, at cost		(8,894,461	)		(8,894,461	)
Accumulated other comprehensive income		762,422			268,393
Total shareholders’ equity		43,145,940			44,805,559
Total Liabilities and Shareholders’ Equity	$	409,137,379		$	427,633,057
Common shares issued		3,580,797			3,580,797
Common shares authorized		10,000,000			10,000,000
Common shares outstanding		3,129,388			3,129,388
Treasury shares		451,409			451,409

See accompanying ~~Notes~~notes to ~~Consolidated~~consolidated ~~Financial~~financial ~~Statements~~statements.

~~Southeastern~~SOUTHEASTERN ~~Banking~~BANKING ~~Corporation~~CORPORATION AND SUBSIDIARIES

~~Consolidated~~CONSOLIDATED ~~Statements~~STATEMENTS ofOF ~~Operations~~SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)

	Three Months						Nine Months
	Common Stock						Additional									AccumulatedOther
Period Ended September 30,	2011			2010			2011			2010
	Shares			ParValue			Paid-InCapital			RetainedEarnings			TreasuryStock			ComprehensiveIncome		Total
Interest income:
Balance, December 31, 2010		3,129,388		$	4,475,996		$	1,495,668		$	47,459,963		$	(8,894,461	)	$	268,393	$	44,805,559
Interest and fees on loans	$	3,304,961		$	3,497,895		$	9,938,252		$	10,756,384
Net income		0			0			0			26,187			0			0		26,187
Interest on investment securities:
Other comprehensive income		0			0			0			0			0			39,831		39,831
Taxable		432,321			533,041			1,305,316			1,792,990
Stock-based compensation		0			0			11,340			0			0			0		11,340
Tax-exempt		128,210			180,200			406,770			580,585
Balance, March 31, 2011		3,129,388		$	4,475,996		$	1,507,008		$	47,486,150		$	(8,894,461	)	$	308,224	$	44,882,917
Other interest income		53,702			51,835			163,544			112,362
Balance, December 31, 2011		3,129,388		$	4,475,996		$	1,541,027		$	42,467,569		$	(8,894,461	)	$	534,524	$	40,124,655
Total interest income		3,919,194			4,262,971			11,813,882			13,242,321
Net loss		0			0			0			(388,583	)		0			0		(388,583	)
Interest expense:
Other comprehensive income		0			0			0			0			0			240,375		240,375
Interest on deposits		721,470			1,093,704			2,448,377			3,453,226
Stock-based compensation		0			0			8,201			0			0			0		8,201
Interest on Federal Home Loan Bank advances		33,019			33,019			97,981			159,647
Balance, March 31, 2012		3,129,388		$	4,475,996		$	1,549,228		$	42,078,986		$	(8,894,461	)	$	774,899	$	39,984,648
Interest on other borrowings		—			—			—			313
Total interest expense		754,489			1,126,723			2,546,358			3,613,186
Net interest income		3,164,705			3,136,248			9,267,524			9,629,135
Provision for loan losses		2,700,000			4,450,000			4,260,000			10,570,000
Net interest income (loss) after provision for loan losses		464,705			(1,313,752	)		5,007,524			(940,865	)
Noninterest income:
Service charges on deposit accounts		626,168			704,391			1,761,608			2,050,344
Net loss on sales of investment securities available-for-sale		—			—			(18,191	)		(143,408	)
Other noninterest income		354,096			324,383			1,040,874			1,013,702
Total noninterest income		980,264			1,028,774			2,784,291			2,920,638
Noninterest expense:
Salaries and employee benefits		1,727,271			1,747,115			5,089,502			5,364,874
Occupancy and equipment expense, net		643,233			665,640			1,907,128			2,020,188
Other-than-temporary impairment loss on debt security		—			—			—			45,059
Net (gain) loss on sales of other real estate		359			4,935			(21,625	)		3,430
Write-downs on other real estate		256,604			821,529			500,216			1,731,098
Other noninterest expense		806,051			770,061			2,504,261			2,597,287
Total noninterest expense		3,433,518			4,009,280			9,979,482			11,761,936
Loss before income tax benefit		(1,988,549	)		(4,294,258	)		(2,187,667	)		(9,782,163	)
Income tax benefit		—			(1,642,138	)		—			(3,905,624	)
Net loss	$	(1,988,549	)	$	(2,652,120	)	$	(2,187,667	)	$	(5,876,539	)
Basic and diluted loss per common share	$	(0.64	)	$	(0.85	)	$	(0.70	)	$	(1.88	)
Basic and diluted weighted average common shares outstanding		3,129,388			3,129,388			3,129,388			3,132,402

See accompanying ~~Notes~~notes to ~~Consolidated~~consolidated ~~Financial~~financial ~~Statements~~statements.

~~Southeastern~~SOUTHEASTERN ~~Banking~~BANKING ~~Corporation~~CORPORATION AND SUBSIDIARIES

~~Consolidated~~CONSOLIDATED ~~Statements~~STATEMENTS ofOF ~~Shareholders’~~CASH ~~Equity~~FLOWS

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)

															Accumulated
	2012			2011
	Common Stock						Additional								Other
CASH FLOWS FROM OPERATING ACTIVITIES
	Shares			StatedValue			Paid-InCapital		RetainedEarnings			TreasuryStock			ComprehensiveIncome (Loss)			Total
Net income (loss)	$	(388,583	)	$	26,187
Balance, December 31, 2009		3,138,531		$	4,475,996		$	1,449,696	$	60,512,342		$	(8,803,031	)	$	(1,076,320	)	$	56,558,683
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Comprehensive income (loss):
Depreciation, amortization and accretion, net		432,062			192,511
Net loss		—			—			—		(5,876,539	)		—			—			(5,876,539	)
Provision for loan losses		600,000			660,000
Unrealized holding gains on investment securities available- for-sale arising during the period, net of tax of $934,649		—			—			—		—			—			1,814,319			1,814,319
Net loss on sales of investment securities available-for-sale		10,866			18,191
Reclassification adjustment for net loss on sales of investment securities available-for-sale included in net loss, net of tax benefit of $48,759		—			—			—		—			—			94,649			94,649
Increase in cash surrender value of bank-owned life insurance		(58,722	)		(57,919	)
Reclassification adjustment for other-than-temporary impairment loss on debt security included in net loss, net of tax benefit of $15,321		—			—			—		—			—			29,738			29,738
Net (gain) loss on sales of assets		15,631			(22,029	)
Total comprehensive loss																			(3,937,833	)
Write-downs on other real estate		469,790			161,127
Cash dividends declared, $0.13 per share		—			—			—		(407,416	)		—			—			(407,416	)
Stock-based compensation		8,201			11,340
Stock-based compensation		—			—			35,550		—			—			—			35,550
(Increase) decrease in interest receivable		(6,954	)		100,213
Purchase of treasury stock		(9,143	)		—			—		—			(91,430	)		—			(91,430	)
Decrease in interest payable		(331,712	)		(102,013	)
Balance, September 30, 2010		3,129,388		$	4,475,996		$	1,485,246	$	54,228,387		$	(8,894,461	)	$	862,386		$	52,157,554
Net change in income tax receivable		28,496			9,953
Balance, December 31, 2010		3,129,388		$	4,475,996		$	1,495,668	$	47,459,963		$	(8,894,461	)	$	268,393		$	44,805,559
Decrease in prepaid FDIC assessments		132,000			189,000
Comprehensive income (loss):
Net decrease in other assets		27,298			36,557
Net loss		—			—			—		(2,187,667	)		—			—			(2,187,667	)
Net increase in other liabilities		108,890			65,740
Unrealized holding gains on investment securities available- for-sale arising during the period, net of tax of $248,315		—			—			—		—			—			482,023			482,023
Net cash provided by operating activities		1,047,263			1,288,858
Reclassification adjustment for net loss on sales of investment securities available-for-sale included in net loss, net of tax benefit of $6,185		—			—			—		—			—			12,006			12,006
CASH FLOWS FROM INVESTING ACTIVITIES
Total comprehensive loss																			(1,693,638	)
Purchase of investment securities available-for-sale		(5,113,194	)		(152,101,435	)
Stock-based compensation		—			—			34,019		—			—			—			34,019
Proceeds from sales of investment securities available-for-sale		2,834,050			474,000
Balance, September 30, 2011		3,129,388		$	4,475,996		$	1,529,687	$	45,272,296		$	(8,894,461	)	$	762,422		$	43,145,940
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

See accompanying Notes to Consolidated Financial Statements.

~~Southeastern~~SOUTHEASTERN ~~Banking~~BANKING ~~Corporation~~CORPORATION AND SUBSIDIARIES

~~Consolidated~~CONSOLIDATED ~~Statements~~STATEMENTS ofOF ~~Cash~~CASH ~~Flows~~FLOWS

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited)

Nine Months Ended September 30,	2011			2010
	2012			2011
Cash flows from operating activities:
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net loss	$	(2,187,667	)	$	(5,876,539	)
Cash paid (received) during the period for:
Adjustments to reconcile net loss to net cash provided by operating activities:
Interest	$	868,028		$	1,052,081
Depreciation, amortization and accretion, net		610,860			766,005
Income taxes refunded	$	(28,496	)	$	(9,953	)
Provision for loan losses		4,260,000			10,570,000
NONCASH INVESTING AND FINANCING TRANSACTIONS
Deferred income tax benefit		—			(208,199	)
Change in unrealized gains on investment securities available-for-sale	$	364,204		$	60,350
Net loss on sales of investment securities available-for-sale		18,191			143,408
Property acquired through foreclosure or repossession	$	4,702,866		$	2,032,875
Other-than-temporary impairment loss on debt security		—			45,059
Loans made in connection with sales of other real estate	$	15,120		$	0
Increase in cash surrender value of bank-owned life insurance		(175,687	)		(178,403	)
Net (gain) loss on sales of other real estate		(21,625	)		3,430
Write-downs on other real estate		500,216			1,731,098
Stock-based compensation		34,019			35,550
Decrease in interest receivable		134,505			366,972
Decrease in interest payable		(204,264	)		(89,165	)
Net change in income tax receivable or payable		9,953			(3,707,906	)
Decrease in prepaid FDIC assessments		451,000			503,200
Net (increase) decrease in other assets		427,407			(297,588	)
Net increase in other liabilities		409,253			265,406
Net cash provided by operating activities		4,266,161			4,072,328
Cash flows from investing activities:
Purchase of investment securities available-for-sale		(296,666,514	)		—
Proceeds from sales of investment securities available-for-sale		474,000			4,591,930
Proceeds from maturities, calls, and paydowns of investment securities available-for-sale		305,191,706			10,905,604
Redemption of restricted equity securities		154,100			94,200
Net decrease in loans		19,864,693			13,118,582
Capital expenditures, net		(290,737	)		(178,144	)
Proceeds from sales of other real estate		1,638,815			355,386
Net cash provided by investing activities		30,366,063			28,887,558
Cash flows from financing activities:
Net increase (decrease) in deposits		(17,581,509	)		11,713,505
Net increase (decrease) in U. S. Treasury demand note		285,961			(139,754	)
Repayment of advances from Federal Home Loan Bank		—			(5,000,000	)
Purchase of treasury stock		—			(91,430	)
Dividends paid		—			(407,416	)
Net cash provided by (used in) financing activities		(17,295,548	)		6,074,905
Net increase in cash and cash equivalents		17,336,676			39,034,791
Cash and cash equivalents at beginning of period		80,868,505			42,632,459
Cash and cash equivalents at end of period	$	98,205,181		$	81,667,250
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest	$	2,750,622		$	3,702,351
Income taxes paid (refunded), net	$	(9,953	)	$	—
Noncash investing and financing transactions:
Change in unrealized gains (losses) on investment securities available-for-sale	$	748,529		$	2,937,435
Loans charged-off to allowance for loan losses	$	5,762,581		$	8,878,129
Real estate acquired through foreclosure	$	5,306,551		$	3,990,205
Loans made in connection with sales of other real estate	$	21,681		$	259,718

See accompanying ~~Notes~~notes to ~~Consolidated~~consolidated ~~Financial~~financial ~~Statements~~statements.

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~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 ~~principal~~business ~~activity~~ is ~~the ownership~~conducted ~~and~~primarily ~~management~~by of its wholly-owned commercial bank subsidiary, Southeastern Bank (the “Bank”). The ~~Company~~Bank ~~operates~~was ~~within~~founded ~~one~~in ~~business~~1888 ~~segment~~in Darien, ~~community~~McIntosh ~~banking~~County, ~~offering~~Georgia. Through the Bank’s 16 branch offices, the Company offers a broad range of ~~banking~~commercial ~~services~~and consumer tobanking ~~consumer~~products and ~~commercial~~ ~~customers~~services ~~through~~to 16customers ~~banking~~located ~~offices~~primarily in southeast Georgia and northeast Florida. The Company, ~~whose~~and ~~tradition~~the Bank are subject to the regulations of ~~service~~certain ~~spans~~federal ~~over~~and ~~120~~state ~~years,~~agencies isand ~~headquartered~~are inperiodically ~~Darien,~~examined ~~Georgia~~by those regulatory agencies.

The ~~accompanying unaudited consolidated financial statements of the~~ Company ~~have~~also ~~been~~owns ~~prepared~~SBC inFinancial ~~accordance~~Services, ~~with accounting principles generally accepted in the United States (“U~~Inc.S., ~~GAAP”)~~a ~~for~~Georgia ~~interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X~~corporation. ~~Accordingly,~~This ~~these~~subsidiary ~~financial~~was ~~statements~~created doto ~~not include all of the information and~~provide ~~footnotes~~insurance ~~required by U~~services.S. ~~GAAP~~However, ~~for~~there ~~complete~~has ~~financial~~been ~~statements~~no ~~and~~activity ~~should~~in bethis ~~read~~subsidiary in ~~conjunction~~recent ~~with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010~~years.

The ~~accounting and reporting policies followed in the presentation of the~~ accompanying unaudited consolidated financial statements ~~are consistent~~of ~~with~~the ~~those~~Company ~~described~~have inbeen ~~Note~~prepared 1in ofaccordance ~~the~~with ~~notes~~accounting toprinciples ~~the~~generally ~~consolidated~~accepted ~~financial statements included~~ in the ~~Company’s~~United ~~2010~~States ~~Form~~(“U.S. ~~10-K,~~GAAP”) asfor ~~updated~~interim byfinancial ~~the~~ information ~~contained~~and inthe ~~this~~instructions for Form 10-Q. Inand ~~the~~Article ~~opinion~~10 of ~~management~~Regulation S-X. Accordingly, these ~~consolidated~~ financial statements ~~reflect~~do ~~all~~not ~~adjustments~~include ~~necessary~~all toof ~~fairly~~the ~~present such~~ information ~~for the periods~~ and ~~dates~~footnotes ~~indicated.~~required ~~Such~~by ~~adjustments, which include transactions typically determined or settled at year-end, are normal and recurring in nature~~U. ~~All significant intercompany accounts and transactions have been eliminated~~S. ~~The~~GAAP ~~consolidated~~for ~~balance~~complete ~~sheet~~financial asstatements ofand ~~December 31,~~should ~~2010~~be ~~has~~read ~~been~~in ~~extracted~~conjunction ~~from~~with the ~~audited consolidated balance sheet included in the~~ Company’s ~~2010~~Annual Report on Form 10-K. ~~Certain~~for ~~reclassifications,~~the fiscal ~~with~~year noended ~~effect on total assets or net operating results~~December 31, ~~have been made to prior period amounts to conform to the current period presentation~~2011.

The ~~preparation~~accounting and reporting policies followed in the presentation of the accompanying unaudited consolidated financial statements inare ~~conformity~~consistent with ~~U.S.~~those ~~GAAP~~described ~~requires~~in ~~management~~Note 1 of the notes to ~~make~~the ~~estimates~~consolidated ~~and assumptions~~financial ~~that~~statements ~~affect~~included in the ~~amounts~~Company’s ~~reported~~2011 Form 10-K, as updated by the information contained in this Form 10-Q. In the opinion of management, these consolidated financial statements ~~and~~reflect ~~accompanying~~all ~~notes.~~adjustments ~~Results~~necessary ofto ~~operations~~fairly present such information for ~~interim~~the periods and dates indicated. Such adjustments, which include transactions typically determined or settled at year-end, are ~~not~~normal ~~necessarily~~and ~~indicative~~recurring in nature. All significant intercompany accounts and transactions have been eliminated. The consolidated balance sheet as of ~~trends~~December 31, or2011 ~~results~~has tobeen beextracted ~~expected~~from ~~for~~the audited consolidated balance sheet included in the ~~full~~Company’s ~~year~~2011 Form 10-K. Certain reclassifications, ~~due~~with inno ~~part~~ effect on total assets or net operating results, have been made to ~~seasonal~~prior ~~variations~~period ~~and~~amounts ~~unusual~~to orconform ~~infrequently~~to ~~occurring~~the ~~items~~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 ~~are~~represents ~~computed~~income by(loss) ~~dividing~~available ~~net~~to ~~income~~common stockholders divided by the weighted -average number of common shares outstanding during ~~each~~ the period. Diluted earnings ~~per~~(loss) per share ~~are~~reflects ~~based~~additional onpotential ~~the weighted average number of~~ common shares ~~outstanding~~that ~~adjusted~~would tohave ~~include~~been ~~the~~outstanding ~~effect~~if ~~of potentially~~ dilutive potential common shares. ~~Potentially~~had ~~dilutive~~been ~~common~~issued, ~~shares~~as ~~include~~well ~~incremental~~as ~~shares~~any ~~issuable upon~~adjustment ~~exercise~~to ofincome ~~outstanding~~(loss) ~~stock~~that ~~options~~would ~~using~~result from the ~~treasury~~assumed ~~stock method~~issuance. InPotential ~~any~~common ~~periods~~shares that ofmay ~~net~~be ~~loss,~~issued ~~diluted~~by ~~loss~~the ~~per~~Company ~~share~~relate issolely ~~calculated~~to inoutstanding ~~the~~stock ~~same~~options, ~~manner~~and asare ~~basic~~determined ~~earnings~~using ~~per~~the ~~share~~treasury stock method. Since they were non-dilutive, 70,250 ~~and 77,500~~ equivalent shares related to stock options were excluded from the computation of diluted earnings (loss) per share at ~~September~~March 3031, ~~2011~~2012 and ~~2010, respectively~~2011.

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

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

In ~~January~~May ~~2010~~2011, the Financial Accounting Standards Board (“FASB”) issued anadditional ~~accounting~~guidance on fair value measurement. The ~~standards~~new ~~update~~guidance ~~requiring~~results ~~additional~~in ~~disclosures~~common onfair ~~transfers~~value measurement and disclosure requirements in U.S. GAAP and ~~out~~International ofFinancial ~~the~~Reporting Standards. The amendments do not require additional fair value ~~hierarchy~~measurements and ~~activity~~are ~~within~~not ~~level~~intended 3to establish valuation standards or affect valuation practices outside of financial ~~instruments~~reporting. ~~This~~The ~~update~~amendments ~~also~~clarify ~~provides~~the ~~clarification~~proper onapplication ~~classification~~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 ~~and~~on the ~~discussion~~ basis of ~~inputs~~its ~~and~~net ~~valuation~~exposure, ~~techniques.~~rather ~~The~~than ~~new~~gross ~~disclosures~~exposure, to measure the underlying financial assets and ~~clarification~~liabilities ~~were~~at ~~effective~~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 ~~Company~~measurement asdate and clarify that premiums and discounts in fair value measurements relate to the unit of ~~December 31~~account, ~~2009~~and not size, ~~except~~as ~~for~~a ~~disclosures~~characteristic ~~related~~of toan ~~activity~~entity’s ~~within~~holding. ~~level~~Expanded 3disclosure ~~financial~~must ~~instruments.~~be ~~The~~provided about valuation processes used for level 3 instruments, including quantitative information on ~~disclosures~~unobservable ~~were~~inputs ~~effective~~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 ~~reporting~~and ~~period~~annual ~~ending~~periods ~~March~~beginning after December 3115, 2011. Adoption of the new ~~disclosure~~guidance ~~requirements~~ has not had a material impact on the Company’s financial position or results of operations.

In ~~May~~June 2011, the FASB ~~issued~~amended ~~additional~~existing guidance ~~on fair value measurement. The new guidance results in common fair value measurement~~ and ~~disclosure~~ ~~requirements~~eliminated inthe ~~U.S.~~option ~~GAAP and International Financial Reporting Standards. The amendments do not require additional fair value measurements and are not intended~~ to ~~establish~~present ~~valuation~~the ~~standards~~components ~~or affect valuation practices outside~~ of ~~financial~~ ~~reporting.~~other ~~The~~comprehensive ~~amendments~~income ~~clarify~~as ~~the~~part ~~proper application~~ of the statement ~~highest and best use and valuation premise concepts and the fair value measurement~~ of anchanges ~~instrument classified~~ in shareholders’ equity. ~~Additionally,~~The ~~the~~amendment ~~amendments permit~~requires ~~a reporting entity~~ that ~~manages~~comprehensive ~~financial~~income ~~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~~presented toin ~~sell~~either a ~~net~~single ~~asset~~continuous ~~position~~statement or ~~transfer~~ ~~a net liability position for a particular risk~~ in antwo ~~orderly~~separate ~~transaction~~consecutive ~~between~~statements. ~~market~~The ~~participants~~amendments ~~at the measurement date and clarify that premiums and discounts~~ in ~~fair~~this ~~value~~guidance ~~measurements~~are ~~relate~~effective ~~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 inthe ~~unobservable~~beginning ~~inputs; use~~ of ~~nonfinancial~~a ~~assets~~fiscal ifreporting ~~that~~year ~~use varies from its highest and best use, and~~ that anbegins asset is measured at fair value on the balance sheets or its fair value is based on highest and best use; and categorization by level of the fair value hierarchy for items not measured at fair value on the balance sheets but for which fair value must be disclosed. The amendments are effective for interim and annual periods beginning after December 15, 2011. ~~Adoption~~The adoption of ~~the~~this ~~new~~ guidance ishas not ~~expected~~had ~~to have~~ a material impact on the Company’s financial ~~position or results of operations~~statements.

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

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

InNOTE ~~April 2011, the FASB issued an accounting standards update clarifying the accounting guidance on a creditor’s evaluation of whether a restructuring constitutes a troubled debt restructuring~~3. ItINVESTMENT is the objective of the FASB that the clarifying guidance in this update will result in more consistent application of U.S. GAAP for debt restructurings. The amendments in this update are effective for interim and annual periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, the Company may identify loans that are newly considered impaired under the new guidance. For purposes of measuring impairment of those loans, the Company must apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Adoption of the new guidance, which became effective as of July 1, 2011, has not had a material impact on the Company’s financial position or results of operations. SECURITIES

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

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
*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

	AmortizedCost		GrossUnrealizedGains		GrossUnrealizedLosses		FairValue
September 30, 2011
Available-for-sale:
U. S. Government and agency securities	$	7,465,754	$	211,881	$	3,169	$	7,674,466
U. S. Government-sponsored enterprise securities		3,792,250		118,264		—		3,910,514
Agency residential mortgage-backed securities		30,738,582		827,941		24,108		31,542,415
Obligations of states and political subdivisions		13,377,102		526,696		—		13,903,798
Corporate debt obligations		9,429,707		85,728		588,048		8,927,387
Total investment securities	$	64,803,395	$	1,770,510	$	615,325	$	65,958,580
December 31, 2010
Available-for-sale:
U. S. Government and agency securities	$	4,551,010	$	187,524	$	—	$	4,738,534
U. S. Government-sponsored enterprise securities		33,549,865		118,203		31		33,668,037
Agency residential mortgage-backed securities		10,323,420		642,201		—		10,965,621
Obligations of states and political subdivisions		16,587,458		370,210		136,664		16,821,004
Corporate debt obligations		8,881,494		20,710		795,497		8,106,707
Total investment securities	$	73,893,247	$	1,338,848	$	932,192	$	74,299,903

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

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

~~The~~NOTE ~~amortized cost and fair value of debt securities by contractual maturity at September 30, 2011 are shown in the table below~~3. InINVESTMENT ~~some~~SECURITIES cases, issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date. Agency-issued mortgage-backed securities and U.S. Small Business Administration (~~“SBA”~~Continued) participation certificates (included in U. S. Government and agency securities) are shown separately from other debt securities due to customary prepayment features which cause average lives to differ significantly from contractual maturities.

	Available-for-Sale
September 30, 2011	AmortizedCost		FairValue
Due within one year	$	2,042,050	$	2,068,582
Due from one to five years		9,855,593		10,157,869
Due from five to ten years		4,111,044		4,288,532
Due after ten years		10,590,372		10,226,716
		26,599,059		26,741,699
Agency residential mortgage-backed securities		30,738,582		31,542,415
SBA participation certificates		7,465,754		7,674,466
Total investment securities	$	64,803,395	$	65,958,580

Securities with 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.

~~Securities~~Gains ~~with~~and ~~carrying~~losses ~~values~~on sales of investment ~~$49,277,556~~securities ~~and~~for ~~$65,127,641~~the atthree ~~September 30,~~months ~~2011~~ended ~~and December~~March 31, ~~2010,~~2012 ~~respectively,~~and ~~were~~2011 ~~pledged~~consist toof ~~secure~~the ~~public~~following: ~~deposits as required by law and certain borrowing arrangements.~~

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


Three Months 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	)

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

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.

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

~~The~~NOTE ~~following~~4. ~~table~~LOANS ~~shows~~AND ~~the~~ALLOWANCE ~~gross~~FOR ~~unrealized~~LOAN losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010. LOSSES

	Less Than Twelve Months				Over Twelve Months
	FairValue		GrossUnrealizedLosses		FairValue		GrossUnrealizedLosses		TotalUnrealizedLosses
September 30, 2011
Available-for-sale:
U.S. Government and federal agency securities	$	1,555,610	$	3,169	$	—	$	—	$	3,169
U.S. Government-sponsored enterprise securities		—		—		—		—		—
Agency residential mortgage-backed securities		4,488,450		24,108		—		—		24,108
Obligations of states and political subdivisions		—		—		—		—		—
Corporate debt obligations		1,030,363		21,618		3,882,211		566,430		588,048
Total investment securities	$	7,074,423	$	48,895	$	3,882,211	$	566,430	$	615,325
December 31, 2010
Available-for-sale:
U.S. Government and federal agency securities	$	—	$	—	$	—	$	—	$	—
U.S. Government-sponsored enterprise securities		22,099,730		31		—		—		31
Agency residential mortgage-backed securities		—		—		—		—		—
Obligations of states and political subdivisions		978,233		28,015		834,049		108,649		136,664
Corporate debt obligations		2,325,199		132,946		4,284,304		662,551		795,497
Total investment securities	$	25,403,162	$	160,992	$	5,118,353	$	771,200	$	932,192

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

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


	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

~~The~~In ~~Bank~~accordance with U.S. GAAP, the loan portfolio is adisaggregated ~~member~~into offour ~~the~~segments ~~Federal~~and ~~Home~~further ~~Loan~~disaggregated ~~Bank~~into classes offor ~~Atlanta~~certain (disclosures. A portfolio segment is defined as the ~~“FHLB”),~~level ~~and~~in ~~ownership~~which ofan ~~FHLB~~entity ~~stock~~develops isand documents a ~~membership~~systematic ~~requirement~~method for determining its allowance for loan losses. ~~This~~The ~~restricted~~segments ~~equity~~used ~~investment~~in ~~amounted~~the toportfolio ~~$1,019,600~~include ~~and~~commercial real $1estate; residential real estate – mortgage; other commercial,~~173~~ financial,~~700~~ atagricultural; ~~September 30~~and consumer. Commercial real estate has been divided into three classes, ~~2011~~including construction and ~~December 31~~development, ~~2010~~owner-occupied, ~~respectively~~and non owner-occupied credits. ~~The~~All ~~Company~~land ~~carries~~and ~~the~~lot ~~stock,~~development ~~which~~loans ishave been included in ~~other~~the ~~assets~~construction onand ~~its~~development ~~balance sheet~~class, atregardless ~~cost~~of ~~and~~whether ~~regularly~~the ~~evaluates~~underlying itreal ~~for~~estate ~~other-than-temporary~~is ~~impairment~~zoned commercial or residential. AsThis classification of ~~September 30,~~ ~~2011,~~construction ~~the~~and ~~Company~~development ~~concluded~~loans corresponds ~~that~~with ~~there~~definitions ~~was~~used noby ~~impairment~~banking inregulators ~~its~~for ~~holdings~~examination inand ~~FHLB~~other ~~stock~~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.

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

~~The~~An ~~composition~~aging of ~~the~~past ~~Company’s~~due ~~loan~~loans ~~portfolio~~ at ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011 is ~~shown~~presented by segment in ~~below:~~the following table. Balances presented are based on book balance, or recorded investment.

	September 30, 2011						December 31, 2010
	Current			Accruing30 – 89 DaysPast Due			Accruing90+ DaysPast Due			TotalAccruingPast Due			Nonaccrual		Total
	Balance			Percentof Total			Balance			Percentof Total
March 31, 2012
Commercial real estate:
Construction and development	$	6435,~~994~~922,~~478~~152		$	~~30.2~~485,727	%	$	~~86,972,052~~0		$	~~35.4~~485,727	%	$	18,177,137	$	54,585,016
Owner-occupied		3734,~~533~~327,~~867~~716			~~17.5~~594,251			~~35,300,711~~0			~~14.4~~594,251			507,383		35,429,350
Non owner-occupied		2725,~~905~~852,~~306~~023			~~13.0~~2,309,519			~~29,523,640~~0			~~12.0~~2,309,519			287,679		28,449,221
Residential real estate - mortgage		4536,~~997~~472,~~850~~947			~~21.4~~637,898			~~48,686,595~~0			~~19.8~~637,898			6,087,992		43,198,837
Other commercial, financial, and agricultural		2820,~~644~~995,~~127~~213			~~13.3~~546,674			3313,~~504,726~~065			~~13.6~~559,739			377,500		21,932,452
Consumer, including credit cards		98,~~814~~503,~~222~~168			~~4.6~~223,669			118,~~700,831~~086			~~4.8~~231,755			222,514		8,957,437
Loans, gross	$	~~214~~162,~~889~~073,~~850~~219		$	~~100.0~~4,797,738	%	$	~~245~~21,~~688,555~~151		$	~~100.0~~4,818,889	%	$	25,660,205	$	192,552,313
Unearned income		(49,205	)					(65,007	)
December 31, 2011
Allowance for loan losses		(8,563,900	)					(9,915,559	)
Commercial real estate:
Net loans	$	206,276,745					$	235,707,989
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

InThe ~~accordance~~gross ~~with~~amount ~~U.S.~~of ~~GAAP,~~interest ~~the~~income ~~loan~~that ~~portfolio~~would ~~was~~have ~~disaggregated~~been ~~into~~recorded ~~four~~on ~~segments~~nonaccrual ~~and~~loans ~~further disaggregated~~if ~~into~~all ~~classes~~such ~~for~~loans ~~certain~~had ~~disclosures.~~been Aaccruing interest ~~portfolio~~at ~~segment~~their iscontractual ~~defined~~rates asapproximated ~~the~~$394,000 ~~level in which an entity develops~~ and ~~documents~~$410,000 ain ~~systematic~~the ~~method~~three ~~for~~months ~~determining~~ended ~~its~~March 31, ~~allowance~~2012 ~~for~~and ~~loan~~2011, ~~losses~~respectively. ~~The~~Cash ~~segments~~basis ~~used~~interest inincome ~~the~~actually ~~portfolio~~recognized ~~include commercial~~on ~~real~~nonaccrual ~~estate;~~loans ~~residential~~during ~~real~~the ~~estate~~three –months ~~mortgage; other commercial~~ended March 31, ~~financial,~~2012 ~~agricultural;~~ and ~~consumer.~~2011 ~~Commercial~~totaled ~~real~~approximately ~~estate has been divided into three classes~~$12,000 ~~including construction~~ and ~~development~~$15, ~~owner-occupied~~000, ~~and non owner-occupied credits~~respectively. ~~All~~The ~~land~~average ~~and~~balance ~~lot~~of ~~development~~ loans ~~have~~on ~~been~~nonaccrual ~~included~~status induring the ~~construction~~three ~~and~~months ~~development~~ended ~~class~~March 31, ~~regardless~~2012 ~~of whether the underlying real estate is zoned commercial or residential. This classification of construction~~ and ~~development~~ ~~loans~~2011 ~~corresponds~~approximated ~~with~~$29,692,000 ~~definitions used by banking regulators for examination~~ and ~~other purposes~~$36,229,000, respectively.

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

	Current		Accruing30 – 89 DaysPast Due		Accruing90+ DaysPast Due		TotalAccruingPast Due		Nonaccrual		Total
September 30, 2011
Commercial real estate:
Construction and development	$	41,605,657	$	638,251	$	16,092	$	654,343	$	22,734,478	$	64,994,478
Owner-occupied		36,908,555		206,972		—		206,972		418,340		37,533,867
Non owner-occupied		27,787,446		37,902		—		37,902		79,958		27,905,306
Residential real estate - mortgage		39,868,074		1,513,644		58,740		1,572,384		4,557,392		45,997,850
Other commercial, financial, and agricultural		27,915,600		466,140		—		466,140		262,387		28,644,127
Consumer, including credit cards		9,119,958		434,882		—		434,882		259,382		9,814,222
Loans, gross	$	183,205,290	$	3,297,791	$	74,832	$	3,372,623	$	28,311,937	$	214,889,850
December 31, 2010
Commercial real estate:
Construction and development	$	64,560,275	$	553,271	$	18,555	$	571,826	$	21,839,951	$	86,972,052
Owner-occupied		33,422,584		1,197,251		—		1,197,251		680,876		35,300,711
Non owner-occupied		28,745,303		81,151		—		81,151		697,186		29,523,640
Residential real estate - mortgage		43,425,467		678,612		75,848		754,460		4,506,668		48,686,595
Other commercial, financial, and agricultural		32,925,618		155,384		—		155,384		423,724		33,504,726
Consumer, including credit cards		10,890,188		410,570		26,536		437,106		373,537		11,700,831
Loans, gross	$	213,969,435	$	3,076,239	$	120,939	$	3,197,178	$	28,521,942	$	245,688,555

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.

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

InNOTE ~~accordance~~4. ~~with~~LOANS ~~bank~~AND ~~regulatory~~ALLOWANCE ~~guidance,~~FOR aLOAN ~~loan~~LOSSES ~~is placed on nonaccrual status if:~~ (Continued)

•Loan itgrades isrange ~~maintained~~from onone ato ~~cash~~eight, ~~basis~~with ~~because~~one-graded ofloans ~~deterioration~~having in the ~~financial~~least ~~condition~~credit ofrisk, ~~the~~as ~~borrower,~~defined as follows:

•Pass ~~payment~~(Grades 1 -4): Loans included in ~~full~~or migrating towards a “pass” grade of ~~principal~~one orto ~~interest~~four iscarry ~~not~~the ~~expected~~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 ~~principal~~Mention or(Grade ~~interest~~5): ~~has~~Loans ~~been~~ in ~~default~~this ~~for~~category ahave ~~period~~potential ofweaknesses 90requiring ~~days~~additional ormonitoring. ~~more~~These ~~unless~~loans ~~the~~are ~~loan~~not isadversely ~~both~~classified ~~well~~and ~~secured~~do ~~and~~not incurrently ~~the~~have ~~process~~sufficient ofrisk ~~collection~~to warrant adverse classification. Substantially all special mention loans are performing.

~~Internal~~Substandard ~~risk-ratings,~~(Grade or6): ~~grades,~~These loans are inadequately ~~assigned~~supported toby ~~each loan based on an analysis of~~ the ~~financial~~current ~~strength, collateral,~~worth and ~~other~~paying ~~credit~~capacity ~~attributes~~of ~~underlying each loan. Management analyzes~~ the ~~resulting~~obligor ~~ratings,~~or ascollateral ~~well as other external statistics and factors such as delinquency~~pledged, toif ~~track~~any. ~~the~~A ~~migration~~distinct ~~performance~~possibility of ~~the~~loss ~~portfolio~~exists ~~balances.~~if ~~The rating methodology complies with~~ the ~~asset~~underlying ~~classification~~deficiencies ~~system~~are ~~promulgated~~not ~~by the federal banking agencies~~corrected. ~~Loan~~At ~~grades~~March ~~range~~31, ~~from~~2012 ~~one~~and toDecember 31, ~~eight~~2011, ~~with~~all nonaccrual ~~one-graded~~ loans ~~having~~were ~~the~~graded ~~least~~substandard. ~~credit risk, as defined below:~~

~~Pass~~Doubtful (~~Grades~~Grade ~~1 -4~~7): -These ~~Loans~~loans ~~included~~have inall orthe ~~migrating~~weaknesses ~~towards~~of a ~~“pass”~~substandard ~~grade~~loan ofwith ~~one to four carry~~ the ~~lowest risk of loss. Such~~added ~~loans~~detriment ~~are~~that ~~well-protected~~full bycollection ~~the~~or ~~current~~liquidation ~~net~~is ~~worth~~highly questionable and ~~paying~~improbable ~~capacity~~on of the ~~obligor~~basis ~~(or~~of ~~guarantors,~~currently ifknown ~~any) or by the fair value~~facts, ~~less selling costs~~conditions, ofand ~~underlying collateral~~values.

~~Special~~Loss ~~Mention~~ (Grade 58): –These ~~Loans~~loans inare ~~this~~deemed ~~category~~uncollectible and have, ~~potential~~at ~~weaknesses~~best, ~~requiring~~nominal ~~additional monitoring~~value. ~~These~~Maintaining these loans ~~are~~on ~~not~~the ~~adversely~~books, ~~classified~~without ~~and~~establishment doof ~~not~~specific ~~currently~~valuation ~~have~~allowances, ~~sufficient~~is ~~risk to~~not ~~warrant adverse classification~~warranted. ~~Substantially all special mention loans are performing.~~

~~Substandard~~Loans ~~(Grade~~considered 6)doubtful ~~– 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~~normally ~~corrected.~~charged-off Atupon ~~September 30,~~such ~~2011~~determination and ~~December 31,~~ ~~2010~~hence, ~~all~~no ~~nonaccrual~~balances ~~loans~~apply ~~were~~to ~~graded substandard~~these categories.

~~Doubtful~~A ~~(Grade~~summary 7)of ~~– These loans have all~~ the ~~weaknesses~~ ofloan aportfolio ~~substandard~~by loan ~~with~~risk ~~the~~grade ~~added~~at ~~detriment~~March 31, ~~that~~2012 ~~full collection or liquidation is highly questionable~~ and ~~improbable on the basis of currently known facts~~December 31, ~~conditions,~~2011 ~~and values~~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

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

~~Loss~~NOTE ~~(Grade 8) – These loans are deemed uncollectible and have, at best, nominal value~~4. ~~Maintaining~~LOANS ~~these~~AND ~~loans~~ALLOWANCE onFOR ~~the~~LOAN ~~books,~~LOSSES ~~without establishment of specific valuation allowances, is not warranted.~~ (Continued)

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

	Pass(1 – 4)		SpecialMention(5)		Substandard(6)		Doubtful(7)		Loss(8)		Total
September 30, 2011
Commercial real estate:
Construction and development	$	28,814,138	$	8,457,943	$	27,722,397	$	—	$	—	$	64,994,478
Owner-occupied		33,341,014		3,016,914		1,175,939		—		—		37,533,867
Non owner-occupied		16,075,569		8,638,697		3,191,040		—		—		27,905,306
Residential real estate - mortgage		34,184,052		3,785,254		8,028,544		—		—		45,997,850
Other commercial, financial, and agricultural		25,183,210		2,932,373		528,544		—		—		28,644,127
Consumer, including credit cards		8,377,352		1,114,363		322,507		—		—		9,814,222
Loans, gross	$	145,975,335	$	27,945,544	$	40,968,971	$	—	$	—	$	214,889,850

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:

	Pass(1 – 4)		SpecialMention(5)		Substandard(6)		Doubtful(7)		Loss(8)		Total
	March 31,2012		December 31,2011
December 31, 2010
Nonaccrual loans	$	25,660,205	$	30,797,507
Commercial real estate:
Troubled debt restructurings not included above		10,150,434		9,777,841
Construction and development	$	35,170,540	$	21,525,120	$	30,276,392	$	—	$	—	$	86,972,052
Loans past due 90 days or more and still accruing		21,151		248,270
Owner-occupied		31,702,978		2,649,760		947,973		—		—		35,300,711
Other accruing loans individually evaluated for impairment		3,029,092		4,138,142
Non owner-occupied		22,531,694		3,242,934		3,749,012		—		—		29,523,640
Total impaired loans	$	38,860,882	$	44,961,760
Residential real estate - mortgage		35,813,611		5,194,612		7,678,372		—		—		48,686,595
Valuation allowance related to total impaired loans	$	2,458,249	$	2,378,113
Other commercial, financial, and agricultural		30,000,682		610,926		2,893,118		—		—		33,504,726
Consumer, including credit cards		10,988,957		240,987		470,887		—		—		11,700,831
Loans, gross	$	166,208,462	$	33,464,339	$	46,015,754	$	—	$	—	$	245,688,555

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.

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

~~Activity~~NOTE in4. ~~the~~LOANS ~~allowance~~AND ~~for~~ALLOWANCE ~~loan~~FOR ~~losses~~LOAN isLOSSES ~~summarized by loan segment below:~~ (Continued)

As of and for the Nine Months Ended September 30, 2011	CommercialReal Estate			ResidentialReal Estate			OtherCommercial,Financial, &Agricultural			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of year	$	7,442,941		$	1,747,843		$	405,830		$	262,223		$	56,722	$	9,915,559
Provision for loan losses		2,868,437			1,384,676			46,716			(52,220	)		12,391		4,260,000
Charge-offs		(4,558,904	)		(973,800	)		(66,370	)		(163,507	)		—		(5,762,581	)
Recoveries		18,417			35,363			16,948			80,194			—		150,922
Ending balance	$	5,770,891		$	2,194,082		$	403,124		$	126,690		$	69,113	$	8,563,900
Ending balance, individually evaluated for impairment	$	2,736,204		$	1,380,321		$	26,866		$	—			n/a	$	4,143,391
Ending balance, collectively evaluated for impairment	$	3,034,687		$	813,761		$	376,258		$	126,690		$	69,113	$	4,420,509
Loan, gross:
Ending balance	$	130,433,651		$	45,997,850		$	28,644,127		$	9,814,222			n/a	$	214,889,850
Ending balance, individually evaluated for impairment	$	32,125,463		$	7,119,412		$	84,299		$	—			n/a	$	39,329,174
Ending balance, collectively evaluated for impairment	$	98,308,188		$	38,878,438		$	28,559,828		$	9,814,222			n/a	$	175,560,676

Troubled Debt Restructurings

~~Within~~The following table summarizes the ~~commercial~~carrying ~~real~~balances ~~estate~~of ~~segment~~TDRs as of March 31, ~~activity~~2012 ~~included:~~and December 31, 2011.

As of & for the Nine Months Ended September 30, 2011	Construction&Development			Owner-Occupied			Non Owner-Occupied			TotalCommercialReal Estate
	March 31,2012			December 31,2011
Allowance for loan losses:
Performing	$	10,150,434		$	9,777,841
Balance, beginning of year	$	7,133,461		$	124,729		$	184,751		$	7,442,941
Nonperforming		9,665,864			9,304,350
Provision for loan losses		2,406,703			410,326			51,408			2,868,437
Total troubled debt restructurings	$	19,816,298		$	19,082,191
Charge-offs		(4,341,944	)		(170,431	)		(46,529	)		(4,558,904	)
Unfunded commitments to borrowers whose loans were modified in troubled debt restructurings	$	0		$	0
Recoveries		18,417			—			—			18,417
Ending balance	$	5,216,637		$	364,624		$	189,630		$	5,770,891
Ending balance, individually evaluated for impairment	$	2,366,445		$	247,640		$	122,119		$	2,736,204
Ending balance, collectively evaluated for impairment	$	2,850,192		$	116,984		$	67,511		$	3,034,687
Loan, gross:
Ending balance	$	64,994,478		$	37,533,867		$	27,905,306		$	130,433,651
Ending balance, individually evaluated for impairment	$	27,155,677		$	1,858,705		$	3,111,081		$	32,125,463
Ending balance, collectively evaluated for impairment	$	37,838,801		$	35,675,162		$	24,794,225		$	98,308,188

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.

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

ANOTE 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 agreement4. ~~Impaired~~LOANS ~~loans~~AND ~~include~~ALLOWANCE ~~loans~~FOR ~~placed~~LOAN onLOSSES nonaccrual status as well as TDRs, loans past due 90 days or more and still accruing, and other accruing loans individually evaluated for impairment. All of the Company’s impaired loans have a valuation allowance. Impaired loans comprised the following at September 30, 2011 and December 31, 2010: (Continued)

	September 30, 2011		December 31, 2010
Nonaccrual loans	$	28,311,937	$	28,521,942
Troubled debt restructurings not included above		6,774,918		12,669,230
Loans past due 90 days or more and still accruing		74,832		120,939
Other accruing loans individually evaluated for impairment		6,946,021		4,520,331
Total impaired loans	$	42,107,708	$	45,832,442
Valuation allowance related to total impaired loans	$	4,246,000	$	3,580,409

Allowance for Loan Losses

~~Total~~Changes ~~impaired~~in ~~loans~~the ~~are~~allowance ~~disaggregated~~for byloan ~~segment~~losses for the three months ended March 31, 2012 and ~~class~~2011 are summarized by loan segment below:

As of and for the Nine Months Ended September 30, 2011	RecordedInvestment			UnpaidPrincipalBalance			RelatedAllowance
	CommercialReal Estate			ResidentialReal Estate			OtherCommercial,Financial, &Agricultural			Consumer			Unallocated			Total
Impaired loans with a valuation allowance:
As of and for the Three Months Ended March 31, 2012
Commercial real estate:
Allowance for loan losses:
Construction and development	$	27,972,186		$	38,463,450		$	2,426,245
Balance, beginning of year	$	4,775,449		$	1,484,763		$	331,024		$	133,748		$	51,617		$	6,776,601
Owner-occupied		2,083,260			2,243,201			248,376
Provision for loan losses		350,065			316,822			(18,043	)		(19,488	)		(29,356	)		600,000
Non owner-occupied		3,191,039			3,191,040			122,337
Charge-offs		(595,365	)		(289,265	)		(5,597	)		(22,954	)		0			(913,181	)
Residential real estate - mortgage		8,262,426			9,647,226			1,403,856
Recoveries		2,418			22,480			3,241			20,255			0			48,394
Other commercial, financial, and agricultural		339,415			463,135			31,497
Ending balance	$	4,532,567		$	1,534,800		$	310,625		$	111,561		$	22,261		$	6,511,814
Consumer, including credit cards		259,382			388,863			13,689
Ending balance, individually evaluated for impairment	$	1,881,790		$	374,195		$	85,763		$	1,996			n/a		$	2,343,744
Total impaired loans	$	42,107,708		$	54,396,915		$	4,246,000
Ending balance, collectively evaluated for impairment	$	2,650,777		$	1,160,605		$	224,862		$	109,565		$	22,261		$	4,168,070
Average investment in impaired loans	$	40,857,455
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

As of December 31, 2010	RecordedInvestment		UnpaidPrincipalBalance		RelatedAllowance
Impaired loans with a valuation allowance:
Commercial real estate:
Construction and development	$	30,017,176	$	39,673,998	$	2,459,478
Owner-occupied		1,337,701		1,483,080		35,631
Non owner-occupied		3,749,011		3,869,208		117,131
Residential real estate - mortgage		7,544,914		8,558,866		881,587
Other commercial, financial, and agricultural		2,751,545		2,882,978		80,651
Consumer, including credit cards		432,095		812,241		5,931
Total impaired loans	$	45,832,442	$	57,280,371	$	3,580,409

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

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

~~The~~NOTE ~~following~~4. ~~table~~LOANS ~~summarizes~~AND ~~the~~ALLOWANCE ~~carrying~~FOR ~~balances~~LOAN ofLOSSES ~~TDRs as of September 30, 2011 and December 31, 2010.~~ (Continued)

	September 30,2011		December 31,2010
Performing	$	6,771,953	$	12,669,230
Nonperforming		7,893,947		7,204,307
Total troubled debt restructurings	$	14,665,900	$	19,873,537
Unfunded commitments to borrowers whose loans were modified in troubled debt restructurings	$	—	$	17,918

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:

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


	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

	Number ofContracts		Pre-ModificationOutstandingRecordedInvestment		Post-ModificationOutstandingRecordedInvestment
For the Three Months Ended September 30, 2011:
Commercial real estate:
Construction and development		1	$	271,935	$	271,935
Owner-occupied		—		—		—
Non owner-occupied		—		—		—
Residential real estate - mortgage		—		—		—
Other commercial, financial, and agricultural		—		—		—
Consumer, including credit cards		—		—		—
Total		1	$	271,935	$	271,935
For the Nine Months Ended September 30, 2011:
Commercial real estate:
Construction and development		2	$	492,513	$	492,513
Owner-occupied		2		1,253,349		1,253,349
Non owner-occupied		—		—		—
Residential real estate - mortgage		—		—		—
Other commercial, financial, and agricultural		—		—		—
Consumer, including credit cards				—		—
Total		4	$	1,745,862	$	1,745,862

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

~~The~~NOTE ~~following tables summarize how loans that were considered troubled debt restructurings were modified during the periods indicated~~5. FAIR VALUE

	Number ofContracts		Pre-ModificationOutstandingRecordedInvestment		Post-ModificationOutstandingRecordedInvestment
For the Three Months Ended September 30, 2011:
Rate concession		—	$	—	$	—
Term concession		1		271,935		271,935
Rate and term concessions		—		—		—
Required principal paydowns concession		—		—		—
Other		—		—		—
Total		1	$	271,935	$	271,935
For the Nine Months Ended September 30, 2011:
Rate concession		—	$	—	$	—
Term concession		4		1,745,862		1,745,862
Rate and term concessions		—		—		—
Required principal paydowns concession		—		—		—
Other		—		—		—
Total		4	$	1,745,862	$	1,745,862

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

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

5. FAIR VALUE

Determination of Fair Value

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

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

Fair Value Hierarchy

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

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

~~Level 2 –~~ Valuation is based on ~~inputs~~unadjusted ~~other~~quoted ~~than level 1~~ prices ~~that~~in ~~are~~active ~~observable~~ markets for ~~the~~identical ~~asset~~assets or ~~liability,~~ ~~either~~liabilities ~~directly~~that orthe ~~indirectly.~~Company ~~The~~has ~~valuation~~the ~~may~~ability beto ~~based~~access. onLevel ~~quoted~~1 ~~prices for similar~~ assets orand liabilities, ~~quoted~~generally ~~prices~~include indebt ~~markets~~and equity securities that are ~~not~~traded ~~active,~~on oran ~~other~~active ~~inputs~~exchange. ~~that~~Valuations are ~~observable~~obtained orfrom ~~can~~readily beavailable ~~corroborated by observable market~~pricing ~~data~~sources for ~~substantially~~market ~~the~~transactions ~~full~~involving ~~term~~such ofassets ~~the asset~~ or ~~liability~~liabilities. ~~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 32 – 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.

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.

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

~~Assets~~NOTE ~~and~~5. ~~Liabilities~~FAIR ~~Measured~~VALUE ~~at Fair Value on a Recurring Basis~~ (Continued)

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

~~Securities~~Certain instruments are measured at fair value on a ~~recurring~~nonrecurring basis; in other words, these instruments are ~~presented~~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 ~~next~~loan ~~table~~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.

	Fair Value Measurements Using
	Quoted Prices inActive Marketsfor IdenticalAssets(Level 1)		SignificantOtherObservableInputs (Level 2)		SignificantUnobservableInputs(Level 3)		TotalCarryingValue
September 30, 2011
Investment securities available-for-sale:
Debt securities:
U. S. Government and agency securities	$	—	$	7,674,466	$	—	$	7,674,466
U. S. Government-sponsored enterprise securities		—		3,910,514		—		3,910,514
Agency residential mortgage-backed securities		—		31,542,415		—		31,542,415
Obligations of states and political subdivisions		—		13,903,798		—		13,903,798
Corporate debt obligations		—		8,427,387		500,000		8,927,387
Total investment securities	$	—	$	65,458,580	$	500,000	$	65,958,580
December 31, 2010
Investment securities available-for-sale:
Debt securities:
U. S. Government and agency securities	$	—	$	4,738,534	$	—	$	4,738,534
U. S. Government-sponsored enterprise securities		—		33,668,037		—		33,668,037
Agency residential mortgage-backed securities		—		10,965,621		—		10,965,621
Obligations of states and political subdivisions		—		16,821,004		—		16,821,004
Corporate debt obligations		—		7,606,707		500,000		8,106,707
Total investment securities	$	—	$	73,799,903	$	500,000	$	74,299,903

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.

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

~~The~~NOTE corporate debt obligation measured at fair value using level 3 inputs at September 30, 2011 and December 31, 2010 comprised one trust preferred security with a cost basis of $500,000, for which there is currently no active market5. ~~Like~~FAIR ~~the~~VALUE Company’s other corporate debt holdings, this security is also an issue of a bank/bank holding company domiciled in the southeastern United States. No transfers or activity involving other securities occurred within the level 3 category during the first nine months of 2011. Should transparency in input factors diminish, additional obligations could be classified as level 3 assets in the future. No transfers were made between level 1 or 2 assets measured at fair value on a recurring basis during the first nine months of 2011. (Continued)

~~Assets~~The ~~and~~table ~~Liabilities~~below ~~Measured~~presents atthe ~~Fair~~Company’s ~~Value~~outstanding onassets for which a ~~Nonrecurring~~nonrecurring ~~Basis~~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.

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


	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	)

~~Other~~As ~~real~~disclosed ~~estate~~above, isthe ~~recorded~~loss atamount ~~fair~~shown ~~value~~for ~~upon~~impaired ~~transfer~~loans ofinclude ~~the~~charge-offs ~~underlying~~as ~~loan~~well ~~to foreclosed~~as ~~balances.~~the ~~Fair~~provision ~~value~~allocated isfor those ~~based~~loans ~~upon~~during ~~independent~~the ~~market~~three ~~prices,~~months ~~appraised~~ended ~~values~~March 31, or2012 ~~management’s~~and ~~estimate of collateral value~~2011. ~~When~~The ~~the~~loss ~~fair~~amount ~~value~~for ~~of the collateral is based on an observable market price or a current appraised value, the Company classifies~~ other real estate asdoes ~~level~~not 2;include ~~otherwise,~~charge-offs ~~other~~recognized ~~real~~on ~~estate~~those iscredits ~~classified~~prior ~~as level 3. Any write-down~~ to ~~fair value at~~ foreclosure isof ~~charged to~~ the ~~allowance~~underlying ~~for~~collateral. ~~loan~~No ~~losses~~transfers ~~while~~were ~~subsequent~~made ~~devaluations resulting primarily~~between ~~from~~level ~~updated~~1, ~~appraisals~~2, orand ~~observations~~3 ofassets ~~comparable~~evaluated ~~sales~~under ~~prices~~fair ~~are~~value ~~included~~accounting inon ~~noninterest~~a ~~expense.~~nonrecurring ~~During~~basis during the ~~nine~~three months ended ~~September~~March 3031, ~~2011,~~2012 ~~devaluations (~~or ~~write-downs)~~2011. ~~of other real estate totaled $500~~Additionally,~~216.~~ ~~Given~~no ~~the~~nonrecurring ~~current difficulties~~change in ~~obtaining~~fair ~~comparable~~value ~~sales~~was ~~and~~recognized ~~other~~on ~~observable~~any ~~inputs~~liabilities ~~due~~during ~~to high inventories and distressed sales prevalent in~~ the ~~market,~~three months ~~particularly~~ended ~~for certain real estate types~~March 31, ~~the~~2012 ~~Company~~or ~~classified all foreclosed real estate in level 3 at September 30,~~ 2011.

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

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

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

	Fair Value Measurements Using
September 30, 2011	Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1)		SignificantOtherObservableInputs (Level 2)		SignificantUnobservableInputs (Level 3)		NetCarryingValue		Total Gains(Losses) for theNine Months
Assets:
Impaired loans	$	—	$	—	$	37,861,708	$	37,861,708	$	(5,315,588	)
Other real estate		—		—		2,448,225		2,448,225		(500,216	)
Total fair value of assets on a nonrecurring basis	$	—	$	—	$	40,309,933	$	40,309,933	$	(5,815,804	)
September 30, 2010
Assets:
Impaired loans	$	—	$	—	$	46,559,479	$	46,559,479	$	(9,654,999	)
Other real estate		—		—		6,564,618		6,564,618		(1,702,598	)
Total fair value of assets on a nonrecurring basis	$	—	$	—	$	53,124,097	$	53,124,097	$	11,357,597

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

Fair Value of Financial Instruments

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

• ~~The~~ U. S. Treasury demand ~~note~~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.

2221

~~Southeastern~~NOTES ~~Banking~~TO ~~Corporation~~CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

(Unaudited)

~~The~~NOTE ~~table~~5. ~~below~~FAIR ~~presents~~VALUE the fair value of financial assets and liabilities carried on the Company’s consolidated balance sheet, including those financial assets and liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis: (Continued)

	September 30, 2011				December 31, 2010
	CarryingAmount		Fair Value		CarryingAmount		FairValue
Financial assets:
Cash and cash equivalents	$	98,205,181	$	98,205,181	$	80,868,505	$	80,868,505
Investment securities available-for-sale		65,958,580		65,958,580		74,299,903		74,299,903
Net loans		206,276,745		206,034,344		235,707,989		237,411,612
Accrued interest receivable		1,352,621		1,352,621		1,487,126		1,487,126
Other financial assets		1,019,600		1,019,600		1,173,700		1,173,700
Financial liabilities:
Deposits	$	357,613,610	$	358,280,111	$	375,195,119	$	376,619,703
U.S. Treasury demand note		1,048,743		1,048,743		762,782		762,782
FHLB advances		5,000,000		5,128,190		5,000,000		5,191,353
Accrued interest payable		1,083,652		1,083,652		1,287,916		1,287,916

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.

2322

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 (~~this~~the “Report”) or incorporated herein by reference, including, ~~matters discussed~~without inlimitation, ~~Item 2~~matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” ~~are~~(the “Analysis”) are “forward-looking statements” within the meaning of the federal securities laws, including, without limitation, statements regarding ~~the~~our ~~Company’s~~ outlook on earnings, stock performance, asset quality, ~~capital position, plans regarding nonperforming assets,~~ economic conditions, real estate markets, and projected growth, and are based upon management’s beliefs as well as assumptions 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, ~~they~~you should beconsider ~~considered~~them as identifying forward-looking statements. These forward-looking statements are ~~subject~~not toguarantees ~~significant~~of ~~risks~~future performance, and ~~uncertainties~~a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements. ~~Investors~~Many of these factors are beyond our ability to control or predict, and readers are cautioned ~~against~~not ~~placing~~to put undue reliance on such forward-looking statements. ~~Actual~~The ~~results~~following ~~may~~list, ~~differ~~which ~~materially~~is ~~from~~not ~~those~~intended ~~set~~to ~~forth~~be ~~in forward~~an all-~~looking~~encompassing ~~statements.~~list ~~Factors~~of risks and uncertainties affecting us, summarizes several factors that could cause our actual results to differ materially from those ~~described~~anticipated or expected in ~~the~~these forward-looking statements ~~include~~: (1) ~~difficult~~general economic conditions, (both generally and in ~~local~~our markets,) may ~~persist~~be less favorable than expected, resulting in, among other things, ~~further~~ a continued deterioration in credit quality, a further reduction in demand for credit, and/or ~~additional~~a ~~declines~~further decline in real estate values; (2) the ~~severe~~general decline in the real estate and lending market, particularly in the ~~Company’s~~market ~~coastal~~areas ~~markets~~of ~~and~~Coastal ~~primarily comprising~~Georgia ~~acquisition~~ and ~~development~~North ~~loans~~Florida, may continue to negatively affect our financial results; (3) ~~the~~our ~~allowance~~ability ~~for~~to ~~loan~~raise ~~losses~~additional capital may ~~not~~ be ~~adequate~~impaired ~~to cover eventual loss; (4) future losses will be realized~~ if ~~proceeds~~current ~~received~~levels ~~upon liquidation~~ of ~~nonperforming~~market ~~assets~~disruption ~~are~~and ~~less~~volatility ~~than~~continue ~~carrying~~or ~~values of such assets~~worsen; (54) restrictions or conditions imposed by our regulators on ~~the~~our ~~Company’s~~ operations may make it more difficult for ~~the~~us ~~Company~~ to achieve ~~its~~our goals; ~~(6) the~~ ~~Company’s recovery of its deferred tax asset could be delayed for an extended period;~~ (75) ~~the Company’s ability to raise any needed capital in a prolonged economic downturn may be impaired if market disruption and volatility continue or worsen; (8)~~ legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect the ~~Company’s~~businesses ~~business,~~in ~~revenue,~~which ~~and~~we ~~profit~~are ~~margins~~engaged; (96) ~~poor financial results may negatively affect liquidity, including liquidity from core deposits; (10)~~ competitive pressures among depository and other financial institutions may increase ~~significantly, resulting in lost business relationships or reduced~~ ~~margins~~significantly; (117) changes in the interest rate environment may reduce margins or the volumes or values of the loans ~~made~~we make; (128) competitors may have greater financial resources and develop products that enable ~~them~~those tocompetitors to compete more successfully than we can; (139) ~~the~~our ~~Company’s~~ ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry; (1410) adverse changes may occur in the bond ~~markets, affecting portfolio~~and ~~valuation~~equity ~~and causing impairment~~markets; (1511) war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; and (1612) ~~economic,~~the ~~governmental,~~risk orfactors ~~other~~discussed ~~factors~~from ~~may~~time ~~prevent~~to ~~growth~~time in the Company’s ~~markets;~~periodic ~~(17) changes~~reports infiled ~~consumer~~with the ~~spending~~Securities and ~~savings~~Exchange ~~habits~~Commission ~~could~~(the ~~impede~~“SEC”), ~~the~~including ~~Company’s~~but ~~ability~~not limited to, ~~grow~~this ~~its~~Report. ~~loan~~We ~~and~~undertake ~~deposit~~no ~~portfolios;~~obligation ~~(18) the~~to, ~~Company~~and ~~may~~we bedo ~~unfavorably~~not ~~impacted~~intend ~~by litigation~~to, ~~which~~update ~~depends~~or ~~on judicial~~revise ~~interpretations~~these statements following the date of ~~law~~this ~~and~~filing, ~~findings~~whether as a result of ~~juries;~~new ~~(19) the~~information, ~~dividend~~future ~~suspension~~events or otherwise, except as may ~~adversely~~be ~~affect~~required ~~the~~by ~~market~~law. ~~price~~All ofwritten ~~the~~or ~~Company’s~~oral ~~stock;~~forward-looking ~~(20) third~~statements ~~party~~attributable ~~vendors~~to ~~who~~us ~~provide~~are ~~key~~expressly ~~components~~qualified ofin ~~the~~their ~~Company’s~~entirety ~~business infrastructure~~by this Cautionary Notice. Our actual results may ~~have~~differ significantly ~~system~~from ~~failures~~those orwe ~~other~~discuss ~~difficulties~~in ~~which~~these ~~could~~forward-looking ~~materially~~statements. ~~affect~~For ~~operations;~~other factors, risks and ~~(21) the~~uncertainties ~~risk~~that ~~factors~~could ~~discussed~~cause ~~from~~our ~~time~~actual results to ~~time~~differ materially from estimates and projections contained in these forward-looking statements, please read the ~~Company’s~~“Risk ~~periodic~~Factors” ~~reports~~section ~~filed~~of ~~with~~our Annual Report on Form 10-K for the ~~SEC~~year ended December 31, ~~including~~2011. ~~but~~Any ~~not~~forward-looking ~~limited to,~~statement ~~this~~speaks ~~Report.~~only ~~The~~as ~~Company~~of ~~undertakes~~the nodate ~~obligation~~that tothe statement was made, and, ~~does~~except ~~not~~as required ~~intend~~by tolaw, ~~update~~we orexpressly ~~revise~~disclaim ~~these~~any ~~statements~~obligation ~~following~~or ~~the~~undertaking ~~date~~to ofdisseminate ~~this~~any ~~filing,~~updates ~~whether~~or asrevisions ato ~~result~~any offorward-looking ~~new~~statement ~~information,~~to ~~future~~reflect events or ~~otherwise,~~circumstances ~~except~~after asthe ~~may~~date beon ~~required~~which bywe made the statement or to reflect the ~~law~~occurrence of unanticipated events.

2423

Item 2.

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

This Analysis should be read in conjunction with ~~the~~our ~~2010~~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~~DESCRIPTION ofOF ~~Business~~BUSINESS

Southeastern Banking Corporation, with assets exceeding $~~409~~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 ~~September~~March 3031, ~~2011~~ 2012.

Market/ County	NumberofOffices		~~TotalLoans1~~		TotalLoans1		~~TotalDeposits1~~		TotalDeposits1		~~MarketShare(%)2~~		MarketShare(%)2		~~MarketShareRank2~~	MarketShare Rank2
Georgia
McIntosh	2	2	$	~~74,445~~	$	56,551	$	~~64,144~~	$	66,273		~~72.0~~		72.0	1		1
Brantley	2	2		~~17,193~~		16,508		~~55,155~~		58,928		~~70.8~~		70.8	1		1
Bryan	1	1		~~16,244~~		17,260		~~7,370~~		7,097		~~1.8~~		1.8	5		5
Camden	3	3		~~29,217~~		26,552		~~47,881~~		60,211		~~19.7~~		19.7	2		2
Charlton	1	1		~~2,852~~		2,803		~~53,380~~		52,954		~~55.3~~		55.3	1		1
Coffee	2	2		~~9,308~~		8,075		~~21,202~~		21,006		~~3.2~~		3.2	9		9
Glynn	1	1		~~41,937~~		41,000		~~18,304~~		18,079		~~1.2~~		1.2	15		15
Jeff Davis	1	1		~~2,584~~		2,728		~~22,187~~		22,027		~~17.0~~		17.0	3		3
	13	13	$	~~193,780~~	$	171,477	$	~~289,623~~	$	306,575		~~8.7~~		8.7	3		3
Florida
Nassau	3	3	$	~~21,110~~	$	21,075	$	~~67,991~~	$	67,614		~~7.6~~		7.6	5		5
Totals	16	16	$	~~214,890~~	$	192,552	$	~~357,614~~	$	374,189		~~8.5~~		8.5	3		3

1 Dollar amounts are presented in thousands as of ~~September~~March 3031, ~~2011~~2012.

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

2524

FINANCIAL CONDITION

Overview

Consolidated assets totaled $~~409~~420.17 million at ~~September~~March 3031, ~~2011~~2012, aan ~~decrease~~increase of $184.51 million (or 41.30%) since ~~December 31,~~the ~~2010~~end of 2011. The ~~decline~~increase in total assets was driven largely by a $234.23 million (or 331.52%) ~~decrease~~increase in ~~public funds on deposit at the Bank. In addition to the decline in~~ total ~~assets, the Company realized a significant shift in its asset mix since the end of 2010~~deposits. Net loans decreased $299.45 million (or 124.59%) and cash and cash equivalents increased $1712.37 million (or 2112.48%) since December 31, ~~2010~~ 2011. The ~~Company~~increase ~~elected~~in todeposits ~~retain~~during ~~liquidity~~the ~~rather~~first ~~than~~quarter ~~reinvest~~is ~~its~~expected ~~funds~~to reverse trend in ~~riskier~~the ~~financial~~second ~~assets~~and ~~during~~third ~~this~~quarters ~~weakened~~as ~~economic~~public ~~environment~~deposit customers draw down on their tax receipts for operating and capital expenditures. ~~This~~The ~~shift~~continued ~~from~~decline ~~higher-yielding~~in loans tooutstanding ~~lower-yielding~~and ~~earning~~low ~~assets~~interest ~~had~~yields available on other investment alternatives coupled with our election to maintain a ~~detrimental~~highly ~~impact~~liquid onbalance sheet during this ~~the~~weak ~~Company’s~~economic environment has hampered our ability to improve our net interest margin and earnings. The elevated level of nonperforming assets further hampered ~~the~~our ~~Company’s~~ profitability in the first ~~nine~~quarter ~~months~~ of ~~2011~~2012, and this factor is expected to continue to create a drag on earnings through the remainder of ~~2011 and into the first half of~~ 2012.

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

Investment Securities

The ~~amortized cost~~composition ~~and~~of ~~estimated~~our ~~fair~~investment ~~value~~portfolio as of the indicated dates is presented below. Changes in the mix of our investment ~~securities~~portfolio will vary over time in response to changes in market conditions, ~~all~~interest ~~available-for-sale~~rates, ~~are~~pledging ~~summarized~~requirements inand ~~the~~liquidity ~~following~~needs ~~table~~of the Bank.

Investment Securities by Category September 30, 2011	AmortizedCost			UnrealizedGains			UnrealizedLosses			FairValue
	March 31,2012						December 31,2011
	FairValue			% ofTotal			FairValue			% ofTotal
(Dollars in thousands)
U. S. Government and agency securities	$	7,466		$	212		$	3		$	7,675
U.S. Government and agency securities	$	14,749			17.3	%	$	13,574			15.4	%
U. S. Government-sponsored enterprise securities		3,792			118			—			3,910
U.S. Government-sponsored enterprise securities		6,351			7.5	%		6,637			7.6	%
Agency residential mortgage-backed securities		3042,~~739~~035			~~828~~49.3	%		2441,985			~~31,543~~47.7	%
Obligations of states and political subdivisions		1315,~~377~~180			~~527~~17.8	%		—17,012			~~13,904~~19.3	%
Corporate debt obligations		96,~~429~~920			868.1	%		~~588~~8,794			~~8,927~~10.0	%
Total investment securities	$	6485,~~803~~235		$	~~1,771~~100.0	%	$	~~615~~88,002		$	~~65,959~~100.0	%
Total investments as a percentage of total assets		20.3	%					21.1	%

The ~~amortized~~objectives ~~cost~~ of our investment ~~securities~~portfolio ~~decreased~~policy ~~$9.1~~stress ~~million~~quality ~~(or~~and 12liquidity.~~3%)~~ ~~since~~At ~~December 31,~~the ~~2010~~time ~~primarily~~of ~~due~~acquisition, the bonds towere either assigned an investment grade credit rating by a ~~decrease~~nationally-recognized instatistical ~~the~~rating ~~need~~organization (“NSRO”) or reviewed for ~~securities~~credit toand ~~pledge~~market asrisk ~~collateral~~and ondeemed ~~public~~appropriate ~~deposits~~for the Company’s portfolio by management. ~~While~~The portfolio is monitored to assure there ~~was~~is ano ~~decrease~~unreasonable concentration of securities in the ~~amount~~obligations of ~~funds~~a ~~invested~~single inissuer. ~~securities~~We ~~during~~do ~~the~~not ~~first~~carry ~~nine~~any ~~months~~“sub-prime” ofmortgages, ~~2011~~structured investment vehicles, ~~there~~or ~~was~~collateralized ~~significant~~debt ~~volume~~obligations in our ~~trading~~portfolio. ~~activity within~~We also monitor the ~~portfolio~~insurers ~~during~~of our state and political subdivision securities, and the ~~period~~distribution inof ~~short-term~~such ~~(one-to-three~~securities ~~months)~~among ~~Agency~~the ~~discount~~insurers. ~~notes~~At March 31, 2012, we had no obligations of state and ~~U.S.~~political ~~Treasury~~subdivisions ~~Bills~~rated ~~acquired~~below investment tograde ~~collateralize~~by ~~public~~an ~~funds.~~NSRO, ~~Purchases~~but we had 11 issues of ~~securities~~state inand ~~the~~political ~~first~~subdivisions ~~nine~~with ~~months~~an amortized cost of ~~2011~~$3.0 ~~totaled~~million and a fair market value of $~~296~~3.71 million that were not rated by an NSRO, of which 93% were issued by state and political ~~redemptions~~subdivisions ~~totaled~~of Georgia or Florida. At March 31, 2012, we had one corporate debt obligation with an amortized cost of $~~305~~1.20 million. ~~With~~and ~~the~~a ~~relief~~fair ~~from~~market ~~pledging~~value ~~requirements~~of ~~abated,~~$0.9 ~~the~~million ~~Company~~rated ~~began~~below ~~investing~~investment ~~funds~~grade inby ~~the~~an ~~two-to-five~~NSRO ~~year~~and ~~time~~three ~~horizon~~corporate todebt obligations ~~improve~~with ~~its~~an ~~yield~~amortized oncost ~~earning~~of ~~assets~~$3.5 inmillion ~~the~~and ~~third~~a ~~quarter~~fair market value of ~~2011~~$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.

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

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


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

~~At September 30, 2011, all holdings in the municipal bond portfolio were rated investment grade securities except for twelve non-rated issues with fair values aggregating $3.2 million.~~ The ~~majority,~~percentage orof ~~84%,~~gross ofloans at the ~~non-rated~~indicated ~~issues~~dates ~~were~~is ~~based~~presented in ~~Georgia. In analyzing non-rated municipals, management considers debt service coverage and whether~~ the ~~bonds~~following ~~support~~table ~~essential~~according ~~services~~to ~~such~~type asof ~~water/sewer systems and education~~loan.

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


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.

~~Loans~~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.

~~Loans,~~On ~~net~~an ofaggregate ~~unearned income~~basis, commitments ~~decreased~~to ~~$30.8~~extend ~~million~~credit ~~(or~~and ~~12.5%)~~standby ~~since~~letters ~~the end~~ of ~~2010~~credit toapproximated $~~214~~19.89 million at ~~September~~March 3031, ~~2011.~~2012, ~~The~~compared ~~net loans-~~to~~-deposits~~ ~~ratio aggregated 60~~$22.~~1% at September 30, 2011 versus 65.~~5% million at ~~December 31,~~the ~~2010~~end ~~and~~of 682011.8% aThe ~~year~~decline ~~ago.~~in ~~Due~~overall tocommitments ~~economic~~results ~~uncertainties~~from ~~within~~ the Company’s ~~markets,~~decision ~~particularly~~to inreduce ~~the~~its exposure ~~real~~to ~~estate~~higher ~~sector~~risk areas, including acquisition and ~~resultant~~development ~~concerns~~lending, ~~regarding~~as ~~credit~~well ~~opportunities,~~as ~~management~~customer ~~expects~~decisions ~~loan volumes~~not to ~~flatten~~renew ortheir ~~decline~~lines. ~~further~~Because ~~for~~a ~~the~~substantial ~~remainder~~amount of ~~2011.~~these ~~The~~contracts ~~table~~expire ~~below~~without ~~summarizes~~being ~~the~~drawn ~~categorical~~upon, ~~changes~~total ~~within~~contractual ~~the~~amounts ~~loan~~do ~~portfolio~~not necessarily ~~since~~represent ~~the~~future ~~end~~credit ofexposure ~~2010~~or liquidity requirements.

Loans by Category	September 30,2011			December 31,2010			September 30,2010
(Dollars in thousands)
Commercial, financial, and agricultural1	$	28,644		$	33,505		$	31,814
Real estate – construction3		64,995			86,972			91,691
Real estate – commercial mortgage		65,439			64,824			65,291
Real estate – residential mortgage2,3		45,998			48,687			49,404
Consumer, including credit cards		9,814			11,701			12,007
Loans, gross		214,890			245,689			250,207
Unearned income		(49	)		(65	)		(78	)
Net loans	$	214,841		$	245,624		$	250,129

Nonperforming Assets

1Nonperforming ~~Includes~~assets, ~~obligations~~which consist of ~~states~~nonaccrual loans, restructured loans, other accruing loans past due 90 days or more, foreclosed real estate, and other ~~political~~repossessions, ~~subdivisions~~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.

2Since ~~Typically~~2008, ~~have~~the ~~final~~elevated ~~maturities~~level of 15nonperforming ~~years~~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 ~~less~~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.

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


	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	%

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

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

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

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

~~based~~Nonaccrual onLoans 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.

OnNonaccrual anloans ~~aggregate~~totaled ~~basis~~$25.66 million at March 31, ~~commitments~~2012; toa ~~extend~~$5.14 ~~credit~~million ~~and~~(or ~~standby~~16.7%) ~~letters~~decrease ofsince ~~credit~~the ~~approximated~~end ~~$28~~of 2011.8 ~~million~~During atthe ~~September 30,~~first ~~2011,~~quarter ~~compared~~of to2012, approximately $312.728 million atof ~~year-end~~loans ~~2010~~were placed ~~and~~on nonaccrual status, $360.391 million ~~at September 30~~charged-off, ~~2010~~$4.70 ~~The~~million ~~decline~~transferred inout ~~overall~~by ~~commitments~~foreclosure ~~results~~or ~~from~~repossession, ~~the~~and ~~Company’s~~$1.81 ~~decision~~million toreduced ~~reduce~~by ~~its~~payments ~~exposure~~or toother ~~higher~~activity. ~~risk~~As ~~areas~~of March 31, ~~including~~2012, ~~acquisition~~the ~~and~~unpaid ~~development~~principal ~~lending,~~balance asowed ~~well~~on asnonaccrual loans ~~customer~~totaled ~~decisions~~$40.66 ~~not~~million. toThus, ~~renew~~as ~~their~~a ~~lines. Because~~result aof ~~substantial~~partial ~~amount~~charge-offs, ofthe ~~these~~$25.66 ~~contracts~~million ~~expire~~in ~~without~~recorded ~~being~~balances ~~drawn~~on ~~upon,~~our ~~total~~books ~~contractual~~represented ~~amounts~~63.1% doof ~~not~~the ~~necessarily~~balances ~~represent~~owed ~~future~~by ~~credit~~our ~~exposure~~customers, ora ~~liquidity~~36.9% ~~requirements~~discount.

~~Nonperforming~~Loans ~~Assets~~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.

~~Nonperforming~~At ~~assets~~March 31, ~~which consist of nonaccrual loans~~2012, ~~restructured loans, foreclosed~~ real estate,-secured ~~and~~loans ~~other~~comprised ~~repossessions, totaled $49~~98.~~3 million at September 30, 2011. The aggregate balance of nonperforming assets declined~~ 5.6% ~~since December 31, 2010 and 8.0% since September 30, 2010. As a percent~~ of total ~~assets,~~nonaccrual ~~nonperforming assets totaled 12~~balances.1% The atcollateral ~~September 30,~~underlying ~~2011~~nonaccrual ~~versus~~balances ~~12.2%~~ at ~~December~~March 31, ~~2010~~2012 and ~~12.7% at September~~December 3031, ~~2010. Nonperforming assets materially and adversely affected the Company’s business, resources, and operating results during the first nine months of~~ 2011, and management expects continuing adverse effects until real estate markets, particularly coastal markets, improve. Construction and development loans secured by land tracts and lots remained the primary factor in the nonperforming trends. Summary information about nonperforming assets and accruing loans past due 90 days or more is ~~provided~~presented in the following table.

Nonperforming Assets1	September 30,2011			December 31,2010			September 30,2010
	March 31,			December 31,
(Dollars in thousands)
	2012			2011
Nonaccrual loans:
(Dollars in thousands)
Commercial, financial, and agricultural	$	262		$	424		$	306
Collateral type:
Real estate – construction		22,735			21,840			24,843
Real estate:
Real estate – commercial mortgage		498			1,378			1,567
Land tracts	$	7,955		$	6,527
Real estate – residential mortgage		4,558			4,507			3,726
Lots within developments		8,145			13,363
Consumer, including credit cards		259			373			295
Residential dwellings		8,514			10,040
Total nonaccrual loans		28,312		$	28,522			30,737
Commercial buildings		664			476
Troubled debt restructured loans2		6,772			12,669			13,271
Total real estate		25,278			30,406
Total nonperforming loans		35,084		$	41,191			44,008
Equipment		267			263
Foreclosed real estate3		14,232			11,034			9,565
Other		115			129
Other repossessed assets		15			15			35
Total nonaccrual loans	$	25,660		$	30,798
Total nonperforming assets	$	49,331		$	52,240		$	53,608
Accruing loans past due 90 days or more	$	75		$	121		$	106
Ratios:
Nonperforming loans to net loans4		16.3	%		16.8	%		17.6	%
Nonperforming assets to net loans4 plus foreclosed/repossessed assets		21.5	%		20.4	%		20.6	%

1Relationships ~~See~~above ~~Note~~$250,000 4comprised to82.3% ~~the~~or ~~consolidated~~$21.13 ~~financial~~million ~~statements~~of ~~for~~nonaccrual ~~definitional~~balances ~~variance~~at ~~between impaired and nonperforming loans and also~~March 31, ~~categorization~~2012. ~~differences~~The ~~resulting~~table below ~~from~~presents ~~disaggregation~~nonaccrual ofloans ~~loan~~by ~~portfolio~~relationship ~~required in footnote disclosure~~tiers.

2 Does not include restructured loans reported as nonaccrual.


(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

3At ~~Includes~~March 31, ~~only~~2012, ~~other~~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 ~~acquired~~markets ~~through~~improve, ~~foreclosure~~management orexpects other borrowers, including other borrowers with collateral-dependent loan balances above $250,000, may also stop servicing their loans. This expectation is factored in ~~settlement~~the methodology for determining the adequacy of ~~debts~~the ~~previously~~allowance ~~contracted~~for loan losses at March 31, 2012.

4 Net of unearned income.

~~Nonaccrual~~The ~~Loans~~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.

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

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

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

Nonaccrual Loans by Collateral Type	September 30,2011		December 31,2010
(Dollars in thousands)
Collateral type:
Real estate:
Land tracts	$	6,555	$	6,027
Lots within developments		11,841		11,682
Residential dwellings		9,029		8,828
Commercial buildings		510		1,385
Total real estate	$	27,935		27,922
Equipment		249		442
Other		128		158
Total nonaccrual loans	$	28,312	$	28,522

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

Nonaccrual Loans by Relationship Tiers	Number ofRelationships		Balances		Percent ofTotalBalance			AverageBalancewithin Tier
(Dollars in thousands)
September 30, 2011
Relationship tier:
£ $250,000		145	$	4,032		14.3	%	$	28
> $250,000 - £ $750,000		4		1,363		4.8	%		341
> $750,000		9		22,917		80.9	%		2,546
Total		158	$	28,312		100.0	%		179
December 31, 2010
Relationship tier:
£ $250,000		145	$	4,244		14.88	%	$	29
> $250,000 - £ $750,000		5		2,223		7.79	%		445
> $750,000		9		22,055		77.33	%		2,451
Total		159	$	28,522		100.00	%		179

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

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

•

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

•

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

• Balances less than $250,000 – Updated external appraisals are obtained at least every two years on more complex properties. For less complex properties, such as single-family residences, internal evaluations ~~are~~may ~~permitted~~be ~~on an annual basis~~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 ~~September~~March 3031, ~~2011~~2012, the Company had $1419.782 million in TDRs. Based on performance in accordance with the restructured terms, the Company has elected to accrue interest on $610.815 million in TDRs outstanding at ~~September~~March 3031, ~~2011~~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 ~~September~~March 3031, ~~2011~~2012 totaled $7.9.67 million. These TDRs are included inwith other nonaccrual loans in this Report.

Since the end of ~~2010~~2011, the amount of accruing TDRs outstanding ~~decreased~~increased $~~5.9~~373,000 ~~million~~ (or 463.58%). The material changes in accruing TDRs during the first nine months of 2011 include: two loans totaling approximately $4.7 million were placed on nonaccrual status; one loan with a balance of $2.3 million was “upgraded” out of TDR status based on performance; and three loans totaling $1.5 million were added to the pool of TDRs. At ~~September~~March 3031, ~~2011~~2012, the specific allowance allocated to the accruing TDR balance ~~totaled~~approximated $1938,000.1 ~~million.~~

~~Foreclosed~~30 ~~Real Estate~~

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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.

~~The~~At ~~following~~March 31, ~~table~~2012, ~~summarizes~~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. byThe table below presents foreclosed real estate ~~type~~by property valuations.

Foreclosed Real Estate by Type	September 30,2011		December 31,2010
(Dollars in thousands)	Number ofProperties		CarryingValues		Percentof TotalValue			AverageValuewithinTier
(Dollars in thousands)
As of March 31, 2012
Real estate:
Property value:
Land tracts	$	8,326	$	5,584
£ $250,000		61	$	3,321		20.7	%	$	54
Lots within developments		2,637		2,025
> $250,000 and £ $750,000		10		4,326		26.9	%		433
Residential dwellings		2,414		2,986
> $750,000		7		8,430		52.4	%		1,204
Commercial buildings		855		439
Total foreclosed real estate		78	$	16,077		100.0	%		206
Total foreclosed real estate	$	14,232	$	11,034
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

~~Approximately~~Our 82.3% of these holdings were located in Georgia with the balance in Nassau County, Florida at September 30, 2011. At September 30, 2011, the Company owned eight properties valued in excess of $500,000 per property with an aggregate basis of $8.1 million, representing 57.1% of the total foreclosed real estate ~~portfolio. The Company’s foreclosed real estate~~ holdings can be viewed via a link from ~~its~~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, ~~management~~we ~~expects~~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 $~~782 thousand~~ 759,000 at ~~September~~March 3031, ~~2011~~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 ~~made~~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.


(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	%

	September 30, 2011		December 31, 2010
Loan Segment	10-QuarterHistoricalLoss Rate	Adjustmentsfor Qualitative/EnvironmentalFactors	6-QuarterHistoricalLoss Rate	Adjustments forQualitative/EnvironmentalFactors
Commercial, financial, and agricultural	0.03 – 1.94%	0.04 - 0.06%	0.22 – 2.85%	0.04 – 0.06%
Real estate – construction	7.28%	0.04%	7.96%	0.04%
Real estate – commercial mortgage:
Owner-occupied	0.29%	0.04%	0.22%	0.04%
Non owner-occupied	0.23%	0.04%	0.22%	0.04%
Real estate – residential mortgage	2.02%	0.04%	2.03%	0.04%
Consumer, including credit cards	4.93 – 5.20%	0.08%	4.14 – 5.74%	0.08%

As of September 30, 2011	AsReported			PartialCharge-offs		ProformaAdjusted
(Dollars in thousands)
Allowance for loan losses	$	8,564		$	11,469	$	20,033
Nonperforming loans		35,084			11,469		46,553
Coverage ratio		24.4	%				43.0	%

Filing Compare · SOUTHEASTERN BANKING CORP