Edgar Filing: SOUTHEASTERN BANKING CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2006

Commission File Number 2-83157

SOUTHEASTERN BANKING CORPORATION

(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 Northway, 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

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

As of July 31, 2006, 3,213,600 shares of the registrant’s common stock, par value $1.25 per share, were outstanding.

Table of Contents


		Page
Part I – Financial Information

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

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22

Item 4.	Controls and Procedures	22

Part II – Other Information

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults upon Senior Securities	23

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item 5.	Other Information	23

Item 6.	Exhibits	24

Signatures		25

Item I – Financial Statements

Southeastern Banking Corporation

Consolidated Balance Sheets


	(Unaudited) June 30, 2006			December 31, 2005
Assets
Cash and due from banks	$	24,543,722		$	21,587,266
Federal funds sold		11,478,000			15,003,000

Cash and cash equivalents		36,021,722			36,590,266

Investment securities
Available-for-sale, at market value		76,614,962			82,791,294
Held-to-maturity (market value of approximately $33,483,000 and $35,381,000 at June 30, 2006 and December 31, 2005)		33,291,549			34,584,741

Total investment securities		109,906,511			117,376,035

Loans, gross		238,091,075			223,947,365
Unearned income		(135,147	)		(155,731	)
Allowance for loan losses		(4,251,884	)		(4,311,007	)

Loans, net		233,704,044			219,480,627
Premises and equipment, net		9,163,379			8,817,550
Intangible assets		535,597			564,704
Other assets		6,511,126			5,861,990

Total Assets	$	395,842,379		$	388,691,172

Liabilities and Shareholders’ Equity

Liabilities

Deposits
Noninterest-bearing deposits	$	88,947,559		$	79,750,623
Interest-bearing deposits		248,744,460			249,050,465

Total deposits		337,692,019			328,801,088

U. S. Treasury demand note		488,841			1,355,559
Federal Home Loan Bank advances		5,000,000			5,000,000
Other liabilities		2,264,264			4,133,625

Total liabilities		345,445,124			339,290,272

Shareholders’ Equity

Common stock ($1.25 par value; 10,000,000 shares authorized; 3,580,797 shares issued; 3,213,600 and 3,235,002 shares outstanding at June 30, 2006 and December 31, 2005)		4,475,996			4,475,996
Additional paid-in-capital		1,391,723			1,391,723
Retained earnings		53,467,923			50,977,998
Treasury stock, at cost (367,197 and 345,795 shares at June 30, 2006 and December 31, 2005)		(7,356,329	)		(6,757,073	)

Realized shareholders’ equity		51,979,313			50,088,644
Accumulated other comprehensive loss		(1,582,058	)		(687,744	)

Total shareholders’ equity		50,397,255			49,400,900

Total Liabilities and Shareholders’ Equity	$	395,842,379		$	388,691,172

See accompanying notes to consolidated financial statements.

Southeastern Banking Corporation

Consolidated Statements of Income

(Unaudited)


	*Quarter*				*Six Months*
*Period Ended June 30,*	*2006*		*2005*		*2006*		*2005*
Interest income
Loans, including fees	$	5,267,390	$	4,244,511	$	10,098,474	$	8,191,914
Federal funds sold		36,906		138,411		123,904		283,476
Investment securities
Taxable		923,871		953,186		1,877,714		1,861,631
Tax-exempt		324,695		376,609		658,536		749,480
Other assets		16,071		15,181		31,899		26,194

Total interest income		6,568,933		5,727,898		12,790,527		11,112,695

Interest expense
Deposits		1,488,172		962,078		2,766,853		1,864,828
Federal funds purchased		17,075		—		18,222		—
U. S. Treasury demand note		8,745		3,527		13,868		6,915
Federal Home Loan Bank advances		74,822		74,822		148,822		148,822

Total interest expense		1,588,814		1,040,427		2,947,765		2,020,565

Net interest income		4,980,119		4,687,471		9,842,762		9,092,130

Provision for loan losses		—		132,500		59,500		225,833

Net interest income after provision for loan losses		4,980,119		4,554,971		9,783,262		8,866,297

Noninterest income
Service charges on deposit accounts		606,024		575,806		1,188,974		1,119,993
Other operating income		341,299		296,322		628,044		600,726

Total noninterest income		947,323		872,128		1,817,018		1,720,719

Noninterest expense
Salaries and employee benefits		2,035,755		1,953,822		4,020,017		3,864,173
Occupancy and equipment, net		662,904		642,855		1,297,847		1,285,256
Other operating expense		660,153		573,216		1,329,410		1,198,140

Total noninterest expense		3,358,812		3,169,893		6,647,274		6,347,569

Income before income tax expense		2,568,630		2,257,206		4,953,006		4,239,447
Income tax expense		838,214		694,645		1,592,518		1,297,967

Net income	$	1,730,416	$	1,562,561	$	3,360,488	$	2,941,480

Basic earnings per common share	$	0.54	$	0.47	$	1.04	$	0.89

Weighted average common shares outstanding		3,230,555		3,304,149		3,232,766		3,304,149

See accompanying notes to consolidated financial statements.

Southeastern Banking Corporation

Consolidated Statements of Shareholders’ Equity

(Unaudited)


	Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2004	$	4,475,996	$	1,391,723	$	47,828,636		$	(4,815,629	)	$	361,035		$	49,241,761

Comprehensive income:
Net income		—		—		2,941,480			—			—			2,941,480
Other comprehensive loss, net of tax effect of $32,178:
Change in unrealized gains on available-for-sale securities		—		—		—			—			(62,463	)		(62,463	)

Total comprehensive income															2,879,017

Cash dividends declared ($0.26 per share)		—		—		(859,079	)		—			—			(859,079	)

Balance, June 30, 2005	$	4,475,996	$	1,391,723	$	49,911,037		$	(4,815,629	)	$	298,572		$	51,261,699

Balance, December 31, 2005	$	4,475,996	$	1,391,723	$	50,977,998		$	(6,757,073	)	$	(687,744	)	$	49,400,900

Comprehensive income:
Net income		—		—		3,360,488			—			—			3,360,488
Other comprehensive loss, net of tax effect of $460,707:
Change in unrealized losses on available-for-sale securities		—		—		—			—			(894,314	)		(894,314	)

Total comprehensive income															2,466,174

Cash dividends declared ($0.27 per share)		—		—		(870,563	)		—			—			(870,563	)
Purchase of treasury stock		—		—		—			(599,256	)		—			(599,256	)

Balance, June 30, 2006	$	4,475,996	$	1,391,723	$	53,467,923		$	(7,356,329	)	$	(1,582,058	)	$	50,397,255

See accompanying notes to consolidated financial statements.

Southeastern Banking Corporation

Consolidated Statements of Cash Flows

(Unaudited)


*Six Months Ended June 30,*	2006			2005
Operating activities
Net income	$	3,360,488		$	2,941,480
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		59,500			225,833
Depreciation		319,144			437,947
Amortization and accretion, net		101,410			197,411
Net gains on sales of other real estate		(6,019	)		(44,424	)
Changes in assets and liabilities:
Increase in other assets		(149,904	)		(370,566	)
Decrease in other liabilities		(265,146	)		(166,981	)

Net cash provided by operating activities		3,419,473			3,220,700

Investing activities
Principal collections and maturities of investment securities:
Available-for-sale		44,808,171			38,188,161
Held-to-maturity		1,947,400			742,000
Proceeds from sales of available-for-sale investment securities		—			4,373,125
Purchases of available-for-sale investment securities		(39,982,871	)		(48,830,169	)
Purchases of held-to-maturity investment securities		(720,000	)		(856,602	)
Net increase in loans		(14,367,255	)		(853,267	)
Proceeds from sales of other real estate		41,332			203,814
Capital expenditures, net		(664,974	)		(287,808	)

Net cash used in investing activities		(8,938,197	)		(7,320,746	)

Financing activities
Net increase (decrease) in deposits		8,890,931			(6,106,854	)
Net decrease in U. S. Treasury demand note		(866,718	)		(644,102	)
Purchase of treasury stock		(599,256	)		—
Dividends paid		(2,474,777	)		(2,494,633	)

Net cash provided by (used in) financing activities		4,950,180			(9,245,589	)

Net decrease in cash and cash equivalents		(568,544	)		(13,345,635	)
Cash and cash equivalents at beginning of period		36,590,266			49,041,519

Cash and cash equivalents at end of period	$	36,021,722		$	35,695,884

Supplemental disclosure
Cash paid during the period
Interest	$	2,858,308		$	2,082,269
Income taxes	$	1,700,000		$	1,360,000
Noncash investing and financing activities
Broker receivable for security sales	$	—		($	4,373,125	)
Broker payable for security purchases		—			(1,981,680	)
Real estate acquired through foreclosure		168,410			265,424
Loans made in connection with sales of foreclosed real estate		84,072			204,517

See accompanying notes to consolidated financial statements.

Southeastern Banking Corporation

Notes to Consolidated Financial Statements

(Unaudited)

1.	Accounting and Reporting Policy for Interim Periods

The accompanying unaudited consolidated financial statements of Southeastern Banking Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. These statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. In the opinion of management, all adjustments necessary for a fair presentation have been made. These adjustments, consisting of normal, recurring accruals, include estimates for various fringe benefits and other transactions normally determined or settled at year-end. Operating results for the quarter and six months ended June 30, 2006 are not necessarily indicative of trends or results to be expected for the full year 2006. For further information, refer to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. There have been no significant changes to the Company’s Accounting Policies as disclosed in the 2005 Form 10-K.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Analysis should be read in conjunction with the 2005 Annual Report on Form 10-K and the consolidated financial statements & related notes on pages 3 – 7 of this quarterly filing. 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 section entitled Forward-Looking Statements within this Analysis.

Description of Business

Southeastern Banking Corporation (the “Company”), with assets exceeding $395,800,000, is a financial services company with operations in southeast Georgia and northeast Florida. Southeastern Bank (“SEB”), the Company’s principal subsidiary, offers a full line of commercial and retail services to meet the financial needs of its customer base through its sixteen branch locations and ATM network. Services offered include traditional deposit and credit services, long-term mortgage originations, and credit cards. SEB also offers 24-hour delivery channels, including internet and telephone banking, and through an affiliation with Raymond James Financial Services, provides insurance agent and investment brokerage services.

Financial Condition

Consolidated assets totaled $395,842,379 at June 30, 2006, up $7,151,207 or 1.84% from year-end 2005. Asset growth was concentrated in the loan portfolio, particularly real estate – construction balances. Specifically, loans grew $14,223,417 or 6.48%; investment securities declined $7,469,524 and federal funds sold, $3,525,000. Loans comprised approximately 66%, investment securities, 31%, and federal funds sold, 3%, of earning assets at June 30, 2006 versus 63%, 33%, and 4% at December 31, 2005. Overall, earning assets approximated 91% of total assets at June 30, 2006. During the year-earlier period, total assets declined $8,515,233 or 2.12%. A decline in federal funds sold was the main factor in the 2005 results. Refer to the Liquidity section of this Analysis for details on deposits and other funding sources.

Investment Securities

On a carrying value basis, investment securities declined $7,469,524 or 6.36% since December 31, 2005. Purchases of securities during the six-month period, including short-term securities with original maturities of 90 days or less, approximated $40,703,000, and redemptions, $46,756,000. The effective repricing of redeemed securities impacts current and future earnings results; refer to the Interest Rate and Market Risk/Interest Rate Sensitivity and Operations sections of this Analysis for more details. In conjunction with asset/liability management, the Company continues to increase its proportionate holdings of mortgage-backed securities, corporates, and municipals when feasible to reduce its exposure to Agency securities with call features. At June 30, 2006, mortgage-backed securities, corporates, and municipals comprised 23%, 8%, and 30% of the portfolio. Overall, securities comprised 31% of earning assets at June 30, 2006, down from 33% at year-end 2005. The portfolio yield approximated 4.85% during the first half of 2006.

Management believes the credit quality of the investment portfolio remains sound, with 63.94% of the carrying value of debt securities being backed by the U.S. Treasury or other U.S. Government-sponsored agencies at June 30, 2006. The weighted average life of the portfolio was less than 3 years at June 30, 2006. The amortized cost and estimated fair value of investment securities are delineated in the table below:


*Investment Securities by Category* *June 30, 2006*	Amortized Cost		Unrealized Gains		Unrealized Losses		*Fair* *Value*
(In thousands)
Available-for-sale:
U. S. Government agencies	$	43,889	$	—	$	1,213	$	42,676
Mortgage-backed securities		25,976		12		1,115		24,873
Corporates		9,147		112		193		9,066

		79,012		124		2,521		76,615
Held-to-maturity:
States and political subdivisions		33,292		487		295		33,484

Total investment securities	$	112,304	$	611	$	2,816	$	110,099

As shown, the market value of the securities portfolio reflected $2,205,133 in net unrealized losses at June 30, 2006; refer to the Capital Adequacy section of this Analysis for more details on investment securities and related fair value. The Company does not have a concentration in the obligations of any issuer other than the U.S. Government and its agencies.

Loans

Loans, net of unearned income, grew 6.33% or $14,164,294 since year-end 2005. The net loans to deposits ratio aggregated 70.47% at June 30, 2006 versus 68.06% at December 31, 2005, and 65.77% a year ago. A $9,571,677 or 7.80% increase in real estate – construction and residential mortgage loans, particularly construction loans, was the primary factor in the 2006 results. The majority of the growth within the construction portfolio was residential in nature and concentrated in the Company’s coastal markets. Most of the loans in the real estate - construction portfolio are preparatory to customers’ attainment of permanent financing or developer’s sale and are, by nature, short-term and somewhat cyclical; swings in these account balances are normal and to be expected. Although the Company, like peer institutions of similar size, originates permanent mortgages for new construction, it traditionally does not hold or service long-term mortgage loans for its own portfolio. Rather, permanent mortgages are typically brokered through a mortgage underwriter or government agency. The Company receives mortgage origination fees for its participation in these origination transactions; refer to the disclosures provided under Results of Operations for more details. Reversing 2005 declines, consumer loans grew $3,790,742 at June 30, 2006 compared to year-end 2005; these loans comprised 8% of the total portfolio at June 30, 2006. Overall, the commercial portfolio grew $781,291 or 0.90% at June 30, 2006 compared to December 31, 2005. Nonfarm real estate, governmental, and agricultural loans within the commercial portfolio grew $5,979,727, $98,983, and $924,273; other commercial/industrial agricultural loans fell $6,221,692. Commercial balances are projected to improve further during the second half of 2006.

Despite economic uncertainties within the Company’s markets, management is optimistic that loan volumes will continue to grow in 2006. Managerial strategies to increase loan production include continuing competitive pricing on loan products, development of additional loan relationships, and purchase of loan participations from correspondent banks, all without compromising portfolio quality. Additionally, real estate financing in the Company’s coastal markets is expected to remain strong. During the same period in 2005, net loans increased a modest $657,659. Loans outstanding are presented by type in the table on the next page.


*Loans by Category*	June 30, 2006		December 31, 2005		June 30, 2005
(In thousands)
Commercial, financial, and agricultural¹	$	87,036	$	86,256	$	85,441
Real estate – construction³		92,760		64,549		62,065
Real estate – residential mortgage^2,3		39,577		58,215		56,663
Consumer, including credit cards		18,718		14,927		15,188

Loans, gross		238,091		223,947		219,357
Unearned income		135		156		195

Loans, net	$	237,956	$	223,791	$	219,162

¹	Includes obligations of states and political subdivisions.

²	Typically have final maturities of 15 years or less.

To comply with 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.

Although the Company’s loan portfolio is diversified, significant portions of its loans are collateralized by real estate. At June 30, 2006, real estate loans exceeded $189,600,000, and commitments to extend credit on such loans approximated $33,559,000. As required by policy, real estate loans are collateralized based on certain loan-to-appraised value ratios. A geographic concentration in loans arises given the Company’s operations within a regional area of southeast Georgia and northeast Florida. On an aggregate basis, commitments to extend credit and standby letters of credit approximated $50,993,000 at June 30, 2006; because a substantial amount of these contracts expire without being drawn upon, total contractual amounts do not represent future credit exposure or liquidity requirements. The Company has not funded or incurred any losses on letters of credit in 2006 year-to-date.

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, restructured loans, and foreclosed real estate and other assets. Overall, nonperforming assets approximated $1,350,000 at June 30, 2006, down $144,000 or 9.64% from year-end 2005 and 1.46% from a year ago. As a percent of total assets, nonperforming assets totaled 0.34% at June 30, 2006 versus 0.38% at year-end 2005 and 0.35% at June 30, 2005. No material credits have been transferred or removed from nonaccrual status during 2006 year-to-date. Industry or individual concentrations within nonaccrual balances at June 30, 2006 included:

Industry concentrations: Approximately 18% or $189,000 of nonaccrual balances at June 30, 2006 pertained to the shrimping industry. Collateral held varies but includes real estate and commercial fishing vessels. Management considers the allowance sufficient to absorb any additional losses that may result from these loans.

Individual concentrations: At June 30, 2006, nonaccrual balances also included loans to one other borrower averaging $85,000. Due to the underlying collateral coverage, no significant losses, if any, are expected on this balance.

Refer to the subsection entitled Policy Note for criteria used by management in classifying loans as nonaccrual. The allowance for loan losses approximated 3.97X the nonperforming loans balance at June 30, 2006 versus 3.35X at year-end 2005 and 3.98X a year ago. Significant activity within foreclosed real estate balances included foreclosure of one borrower’s residential real estate valued at $129,000. Management is unaware of any other material developments in nonperforming assets at June 30, 2006 that should be presented or otherwise discussed.

Loans past due 90 days or more approximated $466,000, or less than 1% of net loans, at June 30, 2006. Management is unaware of any material concentrations within these past due balances. The table below provides further information about nonperforming assets and loans past due 90 plus days:


*Nonperforming Assets*	June 30, 2006			December 31, 2005			June 30, 2005
(In thousands)
Nonaccrual loans:
Commercial, financial, and agricultural	$	224		$	327		$	255
Real estate – construction³		135			33			29
Real estate – mortgage³		420			818			639
Consumer, including credit cards		291			107			135

Total nonaccrual loans		1,070		$	1,285			1,058
Restructured loans¹		—			—			—

Total nonperforming loans		1,070		$	1,285			1,058
Foreclosed real estate²		236			187			295
Other repossessed assets		44			22			17

Total nonperforming assets	$	1,350		$	1,494		$	1,370

Accruing loans past due 90 days or more	$	466		$	579		$	743

Ratios:
Nonperforming loans to net loans		0.45	%		0.57	%		0.48	%

Nonperforming assets to net loans plus foreclosed/repossessed assets		0.57	%		0.67	%		0.62	%

¹	Does not include restructured loans that yield a market rate.

²	Includes only other real estate acquired through foreclosure or in settlement of debts previously contracted.

Policy Note. Loans classified as nonaccrual have been placed in nonperforming, or impaired, status because the borrower’s ability to make future principal and/or interest payments has become uncertain. The Company considers a loan to be nonaccrual with the occurrence of any one of the following events: a) interest or principal has been in default 90 days or more, unless the loan is well-collateralized and in the process of collection; b) collection of recorded interest or principal is not anticipated; or c) income on the loan is recognized on a cash basis due to deterioration in the financial condition of the borrower. Smaller balance consumer loans are generally not subject to the above-referenced guidelines and are normally placed on nonaccrual status or else charged-off when payments have been in default 90 days or more. Nonaccrual loans are reduced to the lower of the principal balance of the loan or the market value of the underlying real estate or other collateral net of selling costs. Any impairment in the principal balance is charged against the allowance for loan losses. Accrued interest on any loan placed on nonaccrual status is reversed. Interest income on nonaccrual loans, if subsequently recognized, is recorded on a cash basis. No interest is subsequently recognized on nonaccrual (or former nonaccrual) loans until all principal has been collected. Loans are classified as restructured when either interest or principal has been reduced or deferred because of deterioration in the borrower’s financial position. Foreclosed real estate represents real property acquired by foreclosure or directly by title or deed transfer in settlement of debt. Provisions for subsequent devaluations of foreclosed real estate are charged to operations, while costs associated with improving the properties are generally capitalized.

Allowance for Loan Losses

The Company continuously reviews its loan portfolio and maintains an allowance for loan losses available to absorb losses inherent in the portfolio. The six-month provision for loan losses at June 30, 2006 totaled $59,500, and net charge-offs, $118,623. The comparable provision and charge-off amounts at June 30, 2005 were $225,833 and $149,325. Net charge-offs represented 0.10% of average loans at June 30, 2006 compared to 0.14% at June 30, 2005 and 0.24% in 2004. No single charge-off exceeded

$65,000 at June 30, 2006. The Company is committed to the early recognition of problem loans and to an appropriate and adequate level of allowance. The adequacy of the allowance is further discussed in the next subsection of this Analysis. Activity in the allowance is presented in the table below:


*Allowance for Loan Losses* *Six Months Ended June 30,*	2006			2005			2004
(Dollars in thousands)
Allowance for loan losses at beginning of year	$	4,311		$	4,134		$	3,833
Provision for loan losses		60			226			424
Charge-offs:
Commercial, financial, and agricultural		72			107			126
Real estate – construction		1			—			12
Real estate – mortgage		23			15			62
Consumer, including credit cards		115			136			166

Total charge-offs		211			258			366

Recoveries:
Commercial, financial, and agricultural		10			14			5
Real estate – construction		—			4			—
Real estate – mortgage		9			3			27
Consumer, including credit cards		73			88			86

Total recoveries		92			109			118

Net charge-offs		119			149			248

Allowance for loan losses at end of period	$	4,252		$	4,211		$	4,009

Net loans outstanding¹ at end of period	$	237,956		$	219,162		$	211,250

Average net loans outstanding¹ at end of period	$	232,717		$	218,507		$	205,781

Ratios:
Allowance to net loans		1.79	%		1.92	%		1.90	%

Net charge-offs to average loans²		0.10	%		0.14	%		0.24	%

Provision to average loans²		0.05	%		0.21	%		0.41	%

Recoveries to total charge-offs		43.60	%		42.25	%		32.24	%

¹	Net of unearned income

²	Annualized.

The Company prepares a comprehensive analysis of the allowance for loan losses at least quarterly. SEB’s Board of Directors is responsible for affirming the allowance methodology and assessing the general and specific allowance factors in relation to estimated and actual net charge-off trends. The allowance for loan losses consists of three elements: a) specific allowances for individual loans; b) general allowances for loan pools based on historical loan loss experience and current trends; and c) allowances based on economic conditions and other risk factors in the Company’s markets. The specific allowance is based on a regular analysis of classified loans where the internal risk ratings are below a predetermined classification. The specific allowance established for these classified loans is based on a careful analysis of probable and potential sources of repayment, including cash flow, collateral value, and guarantor capacity. The general allowance is determined by the mix of loan products within the portfolio, an internal loan grading process, and associated allowance factors. These general allowance factors are updated at least annually and are based on a statistical loss analysis and current loan charge-off trends. The loss analysis examines loss experience for loan portfolio segments in relation to internal loan grades. Charge-off trends are analyzed for homogeneous loan categories (e.g., residential real estate, consumer loans, etc.). While formal loss and charge-off trend analyses are conducted annually, the Company continually monitors credit quality in all portfolio segments and revises the general

allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan category. The third element, comprised of economic conditions, concentrations, and other risk factors, is based on marketplace conditions and/or events that may affect loan repayment in the near-term. This element requires a high degree of managerial judgment to anticipate the impact that economic trends, legislative or governmental actions, or other unique market and/or portfolio issues will have on credit losses. Consideration of other risk factors typically includes such issues as recent loss experience in specific portfolio segments, trends in loan quality, changes in market focus, and concentrations of credit. These factors are based on the influence of current external variables on portfolio risk, so there will typically be some movement between this element and the specific allowance component during various stages of the economic cycle. Because of their subjective nature, these risk factors are carefully reviewed by management and revised as conditions indicate. Based on its analyses, management believes the allowance was adequate at June 30, 2006.

Other Commitments

Other than construction of a permanent branch building to replace the temporary facility in Brunswick, Georgia, renovation of other SEB offices, and the purchase of new core banking software, the Company had no material plans or commitments for capital expenditures as of June 30, 2006. Estimated remaining costs associated with new construction and renovations in progress at June 30, 2006 were $3,200,000; remaining costs associated with the new operating system, which will include both teller and deposit platforms, approximate $400,000.

Liquidity

Liquidity is managed to ensure sufficient cash flow to satisfy demands for credit, deposit withdrawals, and other corporate needs. The Company’s sources of funds include a large, stable deposit base and secured advances from the Federal Home Loan Bank. Additional liquidity is provided by payments and maturities, including both principal and interest, of the loan and investment securities portfolios. At June 30, 2006, loans¹ and investment securities with carrying values exceeding $124,153,000 and $11,380,000 were scheduled to mature in one year or less. The investment portfolio has also been structured to meet liquidity needs prior to asset maturity when necessary. The Company’s liquidity position is further strengthened by its access, on both a short- and long-term basis, to other local and regional funding sources.

Funding sources primarily comprise customer-based core deposits but also include borrowed funds and cash flows from operations. Customer-based core deposits, the Company’s largest and most cost-effective source of funding, comprised 91% of the funding base at June 30, 2006, virtually unchanged from 2005 levels. Borrowed funds, which variously encompass U.S. Treasury demand notes, federal funds purchased, and FHLB advances, totaled $5,488,841 at June 30, 2006 versus $6,355,559 at year-end 2005. More specifically, the maximum amount of U.S. Treasury demand notes available to the Company at June 30, 2006 totaled $3,000,000, of which $488,841 was outstanding. Unused borrowings under unsecured federal funds lines of credit from other banks, each with varying terms and expiration dates, totaled $23,000,000. Additionally, under a credit facility with the FHLB, the Company can borrow up to 16% of SEB’s total assets; at June 30, 2006, unused borrowings approximated $58,121,000. Refer to the subsection entitled FHLB Advances for details on the Company’s outstanding balance with the FHLB. Cash flows from operations also constitute a significant source of liquidity. Net cash from operations derives primarily from net income adjusted for noncash items such as depreciation and amortization, accretion, and the provision for loan losses.

Management believes the Company has the funding capacity, from operating activities or otherwise, to meet its financial commitments in 2006. Refer to the Capital Adequacy section of this Analysis for

details on treasury stock purchases and intercompany dividend policy and the Financial Condition section for details on unfunded loan commitments.

¹	No cash flow assumptions other than final contractual maturities have been made for installment loans. Nonaccrual loans are excluded.

Deposits

Deposits grew $8,890,931 or 2.70% since year-end 2005. Noninterest-bearing deposits increased $9,196,936 or 11.53%, while interest-bearing deposits fell $306,005. The decline in interest-bearing balances was reflected in two categories, NOW/money market and savings. The NOW/money market decline was due to seasonal variation in local government and commercial balances; the savings decline, mostly in the SmartSaver product, resulted from customers taking advantage of higher market rates for CDs and other investment opportunities in this rising rate environment. Overall, interest-bearing deposits comprised 73.66%, and noninterest-bearing deposits, 26.34%, of total deposits at June 30, 2006. The distribution of interest-bearing balances at June 30, 2006 and certain comparable quarter-end dates is shown in the table below:


	June 30, 2006				December 31, 2005				June 30, 2005
*Deposits*	*Balances*		Percent of Total		*Balances*		Percent of Total		*Balances*		Percent of Total
(Dollars in thousands)
Interest-bearing demand deposits¹	$	90,770	36.49	%	$	93,954	37.72	%	$	90,541	35.13	%
Savings		75,855	30.50	%		82,107	32.97	%		90,680	35.19	%
Time certificates < $100,000		49,235	19.79	%		46,891	18.83	%		44,632	17.32	%
Time certificates >= $100,000		32,884	13.22	%		26,098	10.48	%		31,848	12.36	%

Total interest-bearing deposits	$	248,744	100.00	%	$	249,050	100.00	%	$	257,701	100.00	%

¹	NOW and money market accounts.

Deposits of one local governmental body comprised approximately $27,459,000 and $31,527,000 of the overall deposit base at June 30, 2006 and December 31, 2005. The Company had no brokered deposits at June 30, 2006.

Approximately 83% of time certificates at June 30, 2006 were scheduled to mature within the next twelve months. The composition of average deposits and the fluctuations therein at June 30 for the last two years is shown in the Average Balances table included in the Operations section of this Analysis.

FHLB Advances

Advances outstanding with the FHLB totaled $5,000,000 at June 30, 2006, unchanged from year-end 2005. The outstanding advance, which matures March 17, 2010, accrues interest at an effective rate of 6.00%, payable quarterly. The advance is convertible into a three-month Libor-based floating rate anytime at the option of the FHLB. Year-to-date, interest expense on the advance approximated $149,000. Mortgage-backed securities were pledged to collateralize advances under this line of credit.

Interest Rate and Market Risk/Interest Rate Sensitivity

The normal course of business activity exposes the Company to interest rate risk. Fluctuations in interest rates may result in changes in the fair market value of the Company’s financial instruments, cash flows, and net interest income. The asset/liability committee regularly reviews the Company’s exposure to interest rate risk and formulates strategy based on acceptable levels of interest rate risk. The overall objective of this process is to optimize the Company’s financial position, liquidity, and net interest income, while limiting volatility to net interest income from changes in interest rates. The Company uses gap analysis and simulation modeling to measure and manage interest rate sensitivity.

An indicator of interest rate sensitivity is the difference between interest rate sensitive assets and interest rate sensitive liabilities; this difference is known as the interest rate sensitivity gap. In an asset sensitive, or positive, gap position, the amount of interest-earning assets maturing or repricing within a given period exceeds the amount of interest-bearing liabilities maturing or repricing within that same period. Conversely, in a liability sensitive, or negative, gap position, the amount of interest-bearing liabilities maturing or repricing within a given period exceeds the amount of interest-earning assets maturing or repricing within that time period. During a period of rising rates, a negative gap would tend to affect net interest income adversely, while a positive gap would theoretically result in increased net interest income. In a falling rate environment, a negative gap would tend to result in increased net interest income, while a positive gap would affect net interest income adversely. The gap analysis below provides a snapshot of the Company’s interest rate sensitivity position at June 30, 2006:


	*Repricing Within*												*Total*
*Interest Rate Sensitivity* *June 30, 2006*	0 - 3 Months			4 - 12 Months			One - Five Years			*More* Than Five Years			*Total*
(Dollars in thousands)
Interest Rate Sensitive Assets
Federal funds sold	$	11,478											$	11,478
Securities¹		999		$	11,105		$	74,473		$	25,727			112,304
Loans, gross²		135,550			23,861			75,266			2,344			237,021
Other assets		1,092			—			—			—			1,092

Total interest rate sensitive assets		149,119			34,966			149,739			28,071			361,895

Interest Rate Sensitive Liabilities
Deposits³	$	185,245			49,606			13,883			10			248,744
U.S. Treasury demand note		489			—			—			—			489
Federal Home Loan Bank advances		—			—			5,000			—			5,000

Total interest rate sensitive liabilities		185,734			49,606			18,883			10			254,233

Interest rate sensitivity gap	$	(36,615	)	$	(14,640	)	$	130,856		$	28,061		$	107,662

Cumulative gap	$	(36,615	)	$	(51,255	)	$	79,601		$	107,662

Ratio of cumulative gap to total rate sensitive assets		(10.12	)%		(14.16	)%		22.00	%		29.75	%

Ratio of cumulative rate sensitive assets to rate sensitive liabilities		80.29	%		78.22	%		131.31	%		142.35	%

Cumulative gap at December 31, 2005	$	(50,409	)	$	(59,043	)	$	71,366		$	101,779

Cumulative gap at June 30, 2005	$	(66,479	)	$	(79,309	)	$	63,248		$	97,261

¹	Distribution of maturities for available-for sale-securities is based on amortized cost. Additionally, distribution of maturities for mortgage-backed securities is based on expected average lives which may be different from the contractual terms. Equity securities, if any, are excluded.

²	No cash flow assumptions other than final contractual maturities have been made for installment loans with fixed rates. Nonaccrual loans are excluded.

³	NOW, money market, and savings account balances are included in the 0-3 months repricing category.

As shown in the preceding table, the Company’s gap position ($ in thousands) remained negative through the short-term repricing intervals at June 30, 2006, totaling $(36,615) at three months and $(51,255) through one-year. Excluding traditionally nonvolatile NOW balances from the gap calculation, the

cumulative gap at June 30, 2006 totaled $44,926 at three months and $30,286 at twelve months. The narrowing of the short-term gap position at June 30, 2006 versus year-end 2005 was primarily attributable to an increase in variable rate loans tied to prime. No significant changes are anticipated in the gap position for the remainder of 2006. Shortcomings are inherent in any gap analysis since certain assets and liabilities may not move proportionally as rates change. For example, the gap analysis presumes that all loans² and securities¹ will perform according to their contractual maturities when, in many cases, actual loan terms are much shorter than the original terms and securities are subject to early redemption.

In addition to gap analysis, the Company uses simulation modeling to test the interest rate sensitivity of net interest income and the balance sheet. Contractual maturity and repricing characteristics of loans are incorporated into the model, as are prepayment assumptions, maturity data, and call options within the investment portfolio. Non-maturity deposit accounts are modeled based on past experience. Simulation results quantify interest rate risks under various interest rate scenarios. In estimating the impact of these rate movements on the Company’s net interest income, the following general assumptions were made: a) Spreads on all loans, investment securities, and deposit products remain constant; b) Interest rate movements occur gradually over an extended period versus rapidly; and c) Loans and deposits are projected to grow at constant speeds. Limitations inherent with these assumptions include: a) Certain deposit accounts, in particular, interest-bearing demand deposits, infrequently reprice and historically, have had limited impact on net interest income from a rate perspective; b) In a down rate environment, competitive and other factors constrain timing of rate cuts on other deposit products whereas loans tied to prime and other variable indexes reprice instantaneously and, as amply demonstrated the last few years, securities with call or other prepayment features are likely to be redeemed prior to stated maturity and replaced at lower rates (lag effect); c) Changes in balance sheet mix, for example, unscheduled pay-offs of large commercial loans, are oftentimes difficult to forecast; and d) Rapid and aggressive rate movements by the Federal Reserve can materially impact estimated results. Management is optimistic that initiatives taken to increase loan production and diversify the securities portfolio have reduced the interest rate sensitivity of net interest income and the balance sheet, and such actions will continue.

The Company has not in the past, but may in the future, utilize interest rate swaps, financial options, financial futures contracts, or other rate protection instruments to reduce interest rate and market risks.

Impact of Inflation

The effects of inflation on the local economy and the Company’s operating results have been relatively modest the last several years. Because substantially all the Company’s assets and liabilities, including cash, securities, loans, and deposits, are monetary in nature, their values are less sensitive to the effects of inflation than to changing interest rates. As discussed in the preceding section, the Company attempts to control the impact of interest rate fluctuations by managing the relationship between its interest sensitive assets and liabilities.

Capital Adequacy

Federal banking regulators have established certain capital adequacy standards required to be maintained by banks and bank holding companies. These regulations define capital as either Tier 1 (primarily shareholders’ equity) or Tier 2 (certain debt instruments and a portion of the allowance for loan losses). The Company and SEB are subject to a minimum Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) of 4%, total capital ratio (Tier 1 plus Tier 2 to risk-weighted assets) of 8%, and Tier 1 leverage ratio (Tier 1 to average quarterly assets) of 4%. To be considered a “well-capitalized” institution, the Tier 1 capital, total capital, and Tier 1 leverage ratios must equal or exceed 6%, 10%, and 5%,

respectively. Banks and bank holding companies are prohibited from including unrealized gains and losses on debt securities in the calculation of risk-based capital but are permitted to include up to 45 percent of net unrealized pre-tax holding gains on equity securities in Tier 2 capital. The Company did not have any unrealized gains on equity securities includible in the risk-based capital calculations for any of the periods presented. The Company is committed to maintaining its well-capitalized status.

The Company’s capital ratios for the most recent periods are presented in the table below:


*Capital Ratios*	June 30, 2006			December 31, 2005			June 30, 2005
(Dollars in thousands)
Tier 1 capital:
Realized shareholders’ equity	$	51,979		$	50,089		$	50,963
Intangible assets and other adjustments		(536	)		(565	)		(594	)

Total Tier 1 capital		51,443			49,524			50,369

Tier 2 capital:
Portion of allowance for loan losses		3,440			3,152			3,134
Allowable long-term debt		—			—			—

Total Tier 2 capital		3,440			3,152			3,134

Total risk-based capital	$	54,883		$	52,676		$	53,503

Risk-weighted assets	$	274,417		$	251,024		$	249,889

Risk-based ratios:
Tier 1 capital		18.75	%		19.73	%		20.16	%

Total risk-based capital		20.00	%		20.98	%		21.41	%

Tier 1 leverage ratio		12.77	%		13.10	%		12.73	%

Realized shareholders’ equity to assets		13.08	%		12.86	%		13.00	%

Book value per share grew $0.69 or 4.46% during the first six months of 2006 to $16.17 at June 30, 2006. Dividends declared totaled $0.27, up 3.85% or $0.01 from 2005. For more specifics on the Company’s dividend policy, refer to the subsection immediately following. Accumulated other comprehensive loss, which measures net fluctuations in the fair values of investment securities, increased $894,314 at June 30, 2006 compared to year-end 2005. Movement in interest rates remained a dominant factor in the fair value results. Further details on investment securities and associated fair values are contained in the Financial Condition section of this Analysis.

Under existing authorization, the Company can purchase up to $10,000,000 in treasury stock. From 2000-2005, the Company repurchased 345,795 shares on the open market and through private transactions at an average price of $19.54 per share. During the first half of 2006, the Company purchased an additional 21,402 shares at an aggregate purchase price of $599,256 or $28.00 per share. The maximum consideration available for additional purchases, at prices to be determined in the future, is $2,643,671. Any acquisition of additional shares will be dictated by market conditions. There is no expiration date for the treasury authorization.

Refer to the Financial Condition and Liquidity sections of this Analysis for details on planned capital expenditures.

Dividend Policy

The Parent Company is a legal entity separate and distinct from its subsidiaries, and its revenues and liquidity position depend primarily on the payment of dividends from its subsidiaries. State banking

regulations limit the amount of dividends SEB may pay without prior approval of the regulatory agencies. Year-to-date, SEB has paid 50% or $1,623,020 of the $3,246,040 in cash dividends available to the Company in 2006 without such prior approval. The Company uses regular dividends paid by SEB in order to pay quarterly dividends to its own shareholders. Management anticipates that the Company will continue to pay cash dividends on a recurring basis.

Results of Operations

Net income for the 2006 second quarter totaled $1,730,416, up $167,855 or 10.74% from June 30, 2005 and 6.16% from March 31, 2006. On a per share basis, quarterly earnings totaled $0.54 at June 30, 2006 versus $0.47 at June 30, 2005 and $0.50 at March 31, 2006. Year-to-date, net income grew $419,008 to $3,360,488 at June 30, 2006 from $2,941,480 in 2005. Similarly, per share income for the six-month period improved $0.15 to $1.04 at June 30, 2006 from $0.89 in 2005. The return on beginning equity for the six-month period totaled 13.42% at June 30, 2006 versus 12.04% in 2005. Variations in net interest income and noninterest income/expense are further discussed within the next two subsections of this Analysis; the provision for loan losses is separately discussed within the Financial Condition section.

Net Interest Income

Net interest income increased $292,648 or 6.24% during the second quarter of 2006 compared to 2005. For the year-to-date period, net interest income grew $750,632 or 8.26% from 2005. The net interest margin approximated 5.75% at June 30, 2006 versus 5.19% a year ago; the interest rate spread, 5.05% versus 4.78%. Interest earnings on loans and other earning assets improved $1,906,560 and $5,705, while earnings on investments and federal funds sold declined $74,861 and $159,572 from same period results in 2005. Overall improvements in asset yields precipitated the 2006 results. Asset yields averaged 7.41% at June 30, 2006 versus 6.29% in 2005; see the interest differential table on page 20 for more details on changes in interest income attributable to volume and rates at June 30, 2006 versus 2005. Interest expense on deposits and other borrowed funds increased $548,387 or 52.71% during the 2006 second quarter versus 2005 and $927,200 year-to-date. Cost of funds increased 83 basis points from 2005 levels, totaling 2.36% at June 30, 2006 versus 1.51% at June 30, 2005. The jump in cost of funds resulted from higher rates on all deposit types at June 30, 2006 compared to 2005. Given the rising rate environment currently propelled by the Federal Reserve, management expects costs of funds and corresponding interest expense to increase throughout 2006 as deposits and other funds reprice at higher levels. Anticipated loan growth in Brunswick and other markets are expected to alleviate anticipated declines in margins and spreads. Additionally, because most of the loans in the variable portfolio are tied to prime and similar indexes, the portfolio is positioned to take advantage of rate hikes promulgated by the Federal Reserve in 2006; variable loans comprised approximately 53% of total loans at June 30, 2006.

The intense competition for loans and deposits continues in 2006 and shows no sign of abating. The high number of new and existing financial institutions in the Company’s market areas essentially guarantees downward pressure on net interest spreads and margins as all participants struggle to amass and grow market share. Volume of assets and deposits will become even more important as margins decline. Strategies implemented by management to increase average loans outstanding emphasize competitive pricing on loan products and development of additional loan relationships, all without compromising portfolio quality. Management’s strategy for deposits is to closely manage anticipated market increases and maintain a competitive position with respect to pricing and products. Comparative details about average balances, income/expense, and average yields earned and rates paid on interest-earning assets and liabilities for the last two years are provided in the table below:

Selected Average Balances, Income/Expense, and Average Yields Earned and Rates Paid


	2006						2005
*Average Balances⁶ Six Months Ended June 30,*	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
(Dollars in thousands)
Assets
Interest-earning assets:
Loans, net^1,2,4	$	232,717	$	10,120	8.77	%	$	218,507	$	8,211	7.52	%
Federal funds sold		5,474		124	4.57	%		21,822		283	2.59	%
Taxable investment securities³		87,599		1,878	4.32	%		90,777		1,862	4.10	%
Tax-exempt investment securities^3,4		30,629		991	6.52	%		33,940		1,134	6.68	%
Other assets		1,107		32	5.83	%		1,141		26	4.56	%

Total interest-earning assets	$	357,526	$	13,145	7.41	%	$	366,187	$	11,516	6.29	%

Liabilities
Interest-bearing liabilities:
Interest-bearing demand deposits⁵	$	88,644	$	875	1.99	%	$	90,765	$	612	1.35	%
Savings		78,884		534	1.37	%		95,033		417	0.88	%
Time deposits		77,691		1,358	3.52	%		76,196		836	2.19	%
Federal funds purchased		684		18	5.31	%		—		—	—
U. S. Treasury demand note		626		14	4.51	%		562		7	2.49	%
Federal Home Loan Bank advances		5,000		149	6.00	%		5,000		149	6.00	%

Total interest-bearing liabilities	$	251,529	$	2,948	2.36	%	$	267,556	$	2,021	1.51	%

Excess of interest-earning assets over interest-bearing liabilities	$	105,997					$	98,631

Interest rate spread					5.05	%					4.78	%

Net interest income			$	10,197					$	9,495

Net interest margin					5.75	%					5.19	%

¹	Average loans are shown net of unearned income. Nonperforming loans are included.

²	Includes loan fees and late charges.

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

⁴	Interest income on tax-exempt loans and securities is presented on a taxable-equivalent basis, using a federal income tax rate of 34%. No adjustment has been made for any state tax benefits.

⁵	NOW and money market accounts.

⁶	Averages presented generally represent average daily balances.

Analysis of Changes in Net Interest Income

The average balance table above provides detailed information about average balances, income/expense, and average yields earned and rates paid on interest-earning assets and interest-bearing liabilities for the six months ended June 30, 2006 and 2005. The table on the next page summarizes the changes in interest income and interest expense attributable to volume and rates during this period.

Interest Differential¹

2006 Compared to 2005

Increase (Decrease) Due to

Six Months Ended June 30,

Volume

Rate

Net

(In thousands)

Interest income

Loans^2,3

559

1,350

1,909

Federal funds sold

(291

)

132

(159

)

Taxable investment securities

(66

)

Tax-exempt investment securities³

(108

)

(35

)

(143

)

Other interest-earning assets

)

Total interest income

1,536

1,629

Interest expense

Interest-bearing demand deposits⁴

(15

)

278

263

Savings

(80

)

197

117

Time deposits

505

522

Federal funds purchased⁵

—

U.S. Treasury demand note

Federal Home Loan Bank advances

—

Total interest expense

(77

)

1,004

927

Net change in net interest income

170

532

702

Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is change in rate times the previous volume. The rate/volume change, change in rate times change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of their total.

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

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

⁴	Now and money market accounts.

⁵

The entire change in net interest income attributable to the Company’s initial borrowings under these credit facilities has been allocated to the change in volume. Similarly, when these facilities are unutilized in subsequent years, the change in net interest income is allocated to the change in volume.

Noninterest Income and Expense

Noninterest income increased $75,195 or 8.62% during the second quarter of 2006 compared to 2005 and $96,299 year-to-date. An improvement in service charges on deposit accounts was the main factor in both the quarterly and six-month results. Specifically, service charges on deposit account increased $30,218 on a quarterly basis and $68,981 or 6.16% year-to-date; the 2006 increase was primarily attributable to higher volume of NSF fees. The other operating portion of noninterest income grew $27,318 or 4.55% year-to-date. By type and amount, the chief components of other operating income at June 30, 2006 were mortgage origination fees, $207,740; income on sale of check products, $83,276; surcharge fees – ATM, $76,614; commissions on the sale of credit life insurance, $49,272; commissions on sales of other insurance and investment products through our Raymond James affiliation, $39,622; and safe deposit box rentals, $37,029. Together, these six income items comprised 78.59% of other operating income at June 30, 2006. In 2005, these same six income components comprised 82.08% of other operating income. Overall, noninterest expense increased $299,705 or 4.72% in 2006 year-to-date. Personnel costs accounted for $155,844 or 52% of the increase. The vast majority, or 84%, of employee expenses remained concentrated in salaries and other direct compensation, including related payroll taxes, at June 30, 2006. Profit-sharing accruals and other fringe benefits constituted the remaining 6% and 10% of employee expenses. The division of employee expenses between compensation, profit sharing, and other fringe benefits remained consistent with historical norms in 2006. When compared to the prior year, net occupancy and equipment expense increased $12,591, or less than 1%, during the first six months of 2006 compared to 2005. Other operating expenses increased $131,270 or 10.96% at June 30, 2006 compared to 2005; increases in advertising, supplies, and various legal and accounting expenses were the primary variables. Besides advertising expense, which approximated $168,000 in 2006 and $123,000 in 2005, no individual component of other operating expenses aggregated or exceeded 10% of the total in 2006 or 2005.

Recent Accounting Pronouncements

Recent accounting pronouncements affecting the Company are discussed in the 2005 Form 10-K previously filed with the Securities and Exchange Commission.

Various other accounting proposals affecting the banking industry are pending with the Financial Accounting Standards Board. Given the inherent uncertainty of the proposal process, the Company cannot assess the impact of any such proposals on its financial condition or results of operations.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives have made, and may continue to make, various written or oral forward-looking statements with respect to business and financial matters, including statements contained in this report, filings with the Securities and Exchange Commission, and press releases. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “should,” and similar expressions identify forward-looking statements. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements related to loan growth, deposit growth, per share growth, and statements expressing general sentiment about future operating results and non-historical information, are forward-looking statements within the meaning of the Act. The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and operating performance. The Company undertakes no obligation to publicly update or revise any forward-looking statements in light of new information or future events.

Forward-looking statements involve inherent risks and uncertainties. Certain factors that could cause actual results to differ materially from estimates contained in or underlying forward-looking statements include:

•

Competitive pressures between depository and other financial institutions may increase significantly.

•

Changes in the interest rate environment may reduce margins and impact funding sources.

•

General economic or business conditions in the geographic regions and industry in which the Company operates may lead to a deterioration in credit quality or a reduced demand for credit.

•

Legislative or regulatory changes, including changes in accounting standards, monetary policies, and taxation requirements, may adversely affect the Company’s business.

Other factors include:

•

Changes in consumer spending and saving habits as well as real estate markets.

•

Management of costs associated with expansion of existing and development of new distribution channels, and ability to realize increased revenues from these distribution channels.

•

The outcome of litigation which depends on judicial interpretations of law and findings of juries.

•

The effect of mergers, acquisitions, and/or dispositions and their integration into the Company.

•

Other risks and uncertainties as detailed from time to time in Company filings with the Securities and Exchange Commission.

The foregoing list of factors is not exclusive. Many of the factors that will determine actual financial performance and values are beyond the Company’s ability to predict or control. This Analysis should be read in conjunction with the consolidated financial statements and related notes.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The discussion on market risk is included in the Interest Rate and Market Risk/Interest Rate Sensitivity section of Part I, Item 2.

Item 4. Controls and Procedures.

The Company’s management, with the participation of the Company’s Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO or Treasurer), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the CEO and Treasurer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective.

Part II - Other Information

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

There were no material changes to the Company’s risk factors during the first half of 2006, but the Company did add an additional factor:

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

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

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

Treasury purchases made during the quarter and six months ended June 30, 2006 are summarized in the table below:


Share Repurchases – Six Months Ended June 30, 2006	Total Number of Shares Purchased	Average Price Paid per Share		Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet be Purchased under the Plans or Programs¹
January 1 – May 31	—		—	—	$	3,242,927
June 1 - 30	21,402	$	28.00	21,402		2,643,671

Total	21,402	$	28.00	21,402	$	2,643,671

The Board of Directors approved the repurchase of up to $10,000,000 in Company common stock at its December 9, 2003 meeting. This action increased the previous repurchase resolution of $7,000,000, which was approved by the Company’s Board on March 14, 2000 and had a remaining balance of $2,399,833. There is no expiration date for the treasury authorization.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None

Item 6. Exhibits.

(a) Index to Exhibits:


Exhibit 3		Articles of Incorporation and Bylaws, incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 1990

Exhibit 31.1		Rule 13a-14(a) Certification of CEO

Exhibit 31.2		Rule 13a-14(a) Certification of Treasurer

Exhibit 32		Section 1350 Certification of CEO/Treasurer

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


SOUTHEASTERN BANKING CORPORATION (Registrant)
SOUTHEASTERN BANKING CORPORATION (Registrant)

By:		/s/ ALYSON G. BEASLEY
		Alyson G. Beasley, Vice President & Treasurer
		(Chief Accounting Officer)

Date: August 14, 2006