##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2006

Commission File Number 2-83157



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SOUTHEASTERN BANKING CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|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)



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



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##### Table of Contents

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                                                                              |  | 23  
|                               | 
|Signatures                     |  | 24                                                                                   



2



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##### Table of Contents

Item I - Financial Statements

Southeastern Banking Corporation

Consolidated Balance Sheets



|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                              |  | (Unaudited) September 30,2006 |             |   | December 31,2005 |  
|Assets                                                                                                                                                                        |  |                               |             |   |                  |   |             |  
|                                                                                                                                                                              |  |                              
|Cash and due from banks                                                                                                                                                       |  | $                             | 18,263,608  |   |                  | $ | 21,587,266  |  
|Federal funds sold                                                                                                                                                            |  |                               | 10,945,000  |   |                  |   | 15,003,000  |  
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                     |  |                               | 29,208,608  |   |                  |   | 36,590,266  |  
|                                                                                                                                                                              |  |                              
|Investment securities                                                                                                                                                         |  |                               |             |   |                  |   |             |  
|Available-for-sale, at market value                                                                                                                                           |  |                               | 80,564,860  |   |                  |   | 82,791,294  |  
|Held-to-maturity (market value of approximately $33,535,000 and $35,381,000 at September 30, 2006 and December 31,
2005)                                                      |  |                               | 32,971,992  |   |                  |   | 34,584,741  |  
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Total investment securities                                                                                                                                                   |  |                               | 113,536,852 |   |                  |   | 117,376,035 |  
|                                                                                                                                                                              |  |                              
|Loans, gross                                                                                                                                                                  |  |                               | 239,041,667 |   |                  |   | 223,947,365 |  
|Unearned income                                                                                                                                                               |  |                               | (123,960    | ) |                  |   | (155,731    | )
|Allowance for loan losses                                                                                                                                                     |  |                               | (4,244,754  | ) |                  |   | (4,311,007  | )
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Loans, net                                                                                                                                                                    |  |                               | 234,672,953 |   |                  |   | 219,480,627 |  
|                                                                                                                                                                              |  |                              
|Premises and equipment, net                                                                                                                                                   |  |                               | 9,461,573   |   |                  |   | 8,817,550   |  
|Intangible assets                                                                                                                                                             |  |                               | 521,044     |   |                  |   | 564,704     |  
|Other assets                                                                                                                                                                  |  |                               | 6,069,964   |   |                  |   | 5,861,990   |  
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Total Assets                                                                                                                                                                  |  | $                             | 393,470,994 |   |                  | $ | 388,691,172 |  
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Liabilities and Shareholders Equity                                                                                                                                          |  |                               |             |   |                  |   |             |  
|                                                                                                                                                                              |  |                              
|Liabilities                                                                                                                                                                   |  |                               |             |   |                  |   |             |  
|                                                                                                                                                                              |  |                              
|Deposits                                                                                                                                                                      |  |                               |             |   |                  |   |             |  
|Noninterest-bearing deposits                                                                                                                                                  |  | $                             | 84,001,931  |   |                  | $ | 79,750,623  |  
|Interest-bearing deposits                                                                                                                                                     |  |                               | 247,371,613 |   |                  |   | 249,050,465 |  
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Total deposits                                                                                                                                                                |  |                               | 331,373,544 |   |                  |   | 328,801,088 |  
|                                                                                                                                                                              |  |                              
|U. S. Treasury demand note                                                                                                                                                    |  |                               | 1,771,002   |   |                  |   | 1,355,559   |  
|Federal Home Loan Bank advances                                                                                                                                               |  |                               | 5,000,000   |   |                  |   | 5,000,000   |  
|Other liabilities                                                                                                                                                             |  |                               | 2,776,900   |   |                  |   | 4,133,625   |  
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                             |  |                               | 340,921,446 |   |                  |   | 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 September
30, 2006 and December 31, 2005) |  |                               | 4,475,996   |   |                  |   | 4,475,996   |  
|Additional paid-in-capital                                                                                                                                                    |  |                               | 1,391,723   |   |                  |   | 1,391,723   |  
|Retained earnings                                                                                                                                                             |  |                               | 54,680,456  |   |                  |   | 50,977,998  |  
|Treasury stock, at cost (367,197 and 345,795 shares at September 30, 2006 and December 31, 2005)                                                                              |  |                               | (7,356,329  | ) |                  |   | (6,757,073  | )
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Realized shareholders equity                                                                                                                                                 |  |                               | 53,191,846  |   |                  |   | 50,088,644  |  
|Accumulated other comprehensive loss                                                                                                                                          |  |                               | (642,298    | ) |                  |   | (687,744    | )
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Total shareholders equity                                                                                                                                                    |  |                               | 52,549,548  |   |                  |   | 49,400,900  |  
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  
|Total Liabilities and Shareholders Equity                                                                                                                                    |  | $                             | 393,470,994 |   |                  | $ | 388,691,172 |  
|                                                                                                                                                                              |  |                               |             |   |                  |   |             |  

See accompanying notes to consolidated financial statements.



3



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##### Table of Contents

Southeastern Banking Corporation

Consolidated Statements of Income

(Unaudited)



|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|--------------------------------------------------- |  | ------- | --------- | ----------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                                    |  | Quarter |           | Nine Months
|Period Ended September 30,                          |  | 2006    |           | 2005        |   | 2006      |  | 2005
|Interest income                                     |  |         |           |             |   |           |  |      |            |  |   |           
|Loans, including fees                               |  | $       | 5,376,231 |             | $ | 4,381,715 |  | $    | 15,474,705 |  | $ | 12,573,629
|Federal funds sold                                  |  |         | 68,024    |             |   | 84,375    |  |      | 191,928    |  |   | 367,851   
|Investment securities                               |  |         |           |             |   |           |  |      |            |  |   |           
|Taxable                                             |  |         | 904,881   |             |   | 987,731   |  |      | 2,782,595  |  |   | 2,849,362 
|Tax-exempt                                          |  |         | 320,590   |             |   | 372,216   |  |      | 979,126    |  |   | 1,121,696 
|Other assets                                        |  |         | 16,985    |             |   | 10,793    |  |      | 48,884     |  |   | 36,987    
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Total interest income                               |  |         | 6,686,711 |             |   | 5,836,830 |  |      | 19,477,238 |  |   | 16,949,525
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Interest expense                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Deposits                                            |  |         | 1,691,911 |             |   | 992,589   |  |      | 4,458,764  |  |   | 2,857,417 
|Federal funds purchased                             |  |         | 1,479     |             |   | 2,840     |  |      | 19,701     |  |   | 2,840     
|U. S. Treasury demand note                          |  |         | 8,854     |             |   | 4,772     |  |      | 22,722     |  |   | 11,687    
|Federal Home Loan Bank advances                     |  |         | 75,644    |             |   | 75,644    |  |      | 224,466    |  |   | 224,466   
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Total interest expense                              |  |         | 1,777,888 |             |   | 1,075,845 |  |      | 4,725,653  |  |   | 3,096,410 
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Net interest income                                 |  |         | 4,908,823 |             |   | 4,760,985 |  |      | 14,751,585 |  |   | 13,853,115
|                                                    |  |         |           |            
|Provision for loan losses                           |  |         |          |             |   | 33,000    |  |      | 59,500     |  |   | 258,833   
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Net interest income after provision for loan losses |  |         | 4,908,823 |             |   | 4,727,985 |  |      | 14,692,085 |  |   | 13,594,282
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Noninterest income                                  |  |         |           |             |   |           |  |      |            |  |   |           
|Service charges on deposit accounts                 |  |         | 623,500   |             |   | 609,671   |  |      | 1,812,474  |  |   | 1,729,664 
|Other operating income                              |  |         | 328,355   |             |   | 363,215   |  |      | 956,399    |  |   | 963,941   
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Total noninterest income                            |  |         | 951,855   |             |   | 972,886   |  |      | 2,768,873  |  |   | 2,693,605 
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Noninterest expense                                 |  |         |           |             |   |           |  |      |            |  |   |           
|Salaries and employee benefits                      |  |         | 2,019,385 |             |   | 1,919,915 |  |      | 6,039,402  |  |   | 5,784,088 
|Occupancy and equipment, net                        |  |         | 746,292   |             |   | 610,335   |  |      | 2,044,139  |  |   | 1,895,591 
|Other operating expense                             |  |         | 658,351   |             |   | 676,502   |  |      | 1,987,761  |  |   | 1,874,642 
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Total noninterest expense                           |  |         | 3,424,028 |             |   | 3,206,752 |  |      | 10,071,302 |  |   | 9,554,321 
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Income before income tax expense                    |  |         | 2,436,650 |             |   | 2,494,119 |  |      | 7,389,656  |  |   | 6,733,566 
|                                                    |  |         |           |            
|Income tax expense                                  |  |         | 790,281   |             |   | 792,636   |  |      | 2,382,799  |  |   | 2,090,603 
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Net income                                          |  | $       | 1,646,369 |             | $ | 1,701,483 |  | $    | 5,006,857  |  | $ | 4,642,963 
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Basic earnings per common share                     |  | $       | 0.51      |             | $ | 0.52      |  | $    | 1.55       |  | $ | 1.41      
|                                                    |  |         |           |             |   |           |  |      |            |  |   |           
|Weighted average common shares outstanding          |  |         | 3,213,600 |             |   | 3,299,978 |  |      | 3,226,307  |  |   | 3,302,743 

See accompanying notes to consolidated financial statements.



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##### Table of Contents

Southeastern Banking Corporation

Consolidated Statements of Shareholders Equity

(Unaudited)



|                                                                     |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  
|-------------------------------------------------------------------- |  | ----------- | --------- | ------------------------ | - | ---------------- |  | - | ------------- | - |  | ------------------------------------------ | ---------- | - | ----- | - | -------- | - |  | - | ---------- | -
|                                                                     |  | CommonStock |           | AdditionalPaid-InCapital |   | RetainedEarnings |  |   | TreasuryStock |   |  | AccumulatedOtherComprehensiveIncome (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                                                           |  |             |          |                          |   |                 |  |   | 4,642,963     |   |  |                                            |           |   |       |   |         |   |  |   | 4,642,963  |  
|Other comprehensive loss, net of tax effect of $265,371:             |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  
|Change in unrealized gains (losses) on available-for-sale securities |  |             |          |                          |   |                 |  |   |              |   |  |                                            |           |   |       |   | (515,131 | ) |  |   | (515,131   | )
|                                                                     |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  
|Total comprehensive income                                           |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   | 4,127,832  |  
|                                                                     |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  
|Cash dividends declared ($0.39 per share)                            |  |             |          |                          |   |                 |  |   | (1,287,221    | ) |  |                                            |           |   |       |   |         |   |  |   | (1,287,221 | )
|Purchase of treasury stock                                           |  |             |          |                          |   |                 |  |   |              |   |  |                                            | (291,641   | ) |       |   |         |   |  |   | (291,641   | )
|                                                                     |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  
|Balance, September 30, 2005                                          |  | $           | 4,475,996 |                          | $ | 1,391,723        |  | $ | 51,184,378    |   |  | $                                          | (5,107,270 | ) |       | $ | (154,096 | ) |  | $ | 51,790,731 |  
|                                                                     |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  
|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                                                           |  |             |          |                          |   |                 |  |   | 5,006,857     |   |  |                                            |           |   |       |   |         |   |  |   | 5,006,857  |  
|Other comprehensive loss, net of tax effect of $23,412:              |  |             |          |                          |   |                 |  |   |              |   |  |                                            |           |   |       |   |         |   |  |   |           |  
|Change in unrealized losses on available-for-sale securities         |  |             |          |                          |   |                 |  |   |              |   |  |                                            |           |   |       |   | 45,446   |   |  |   | 45,446     |  
|                                                                     |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  
|Total comprehensive income                                           |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   | 5,052,303  |  
|                                                                     |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  
|Cash dividends declared ($0.405 per share)                           |  |             |          |                          |   |                 |  |   | (1,304,399    | ) |  |                                            |           |   |       |   |         |   |  |   | (1,304,399 | )
|Purchase of treasury stock                                           |  |             |          |                          |   |                 |  |   |              |   |  |                                            | (599,256   | ) |       |   |         |   |  |   | (599,256   | )
|                                                                     |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  
|Balance, September 30, 2006                                          |  | $           | 4,475,996 |                          | $ | 1,391,723        |  | $ | 54,680,456    |   |  | $                                          | (7,356,329 | ) |       | $ | (642,298 | ) |  | $ | 52,549,548 |  
|                                                                     |  |             |           |                          |   |                  |  |   |               |   |  |                                            |            |   |       |   |          |   |  |   |            |  

See accompanying notes to consolidated financial statements.



5



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##### Table of Contents

Southeastern Banking Corporation

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                  |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|Nine Months Ended September 30,                                                   |  | 2006 |             |   | 2005 |  
|Operating activities                                                              |  |      |             |   |      |   |             |  
|Net income                                                                        |  | $    | 5,006,857   |   |      | $ | 4,642,963   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |             |   |      |   |             |  
|Provision for loan losses                                                         |  |      | 59,500      |   |      |   | 258,833     |  
|Depreciation                                                                      |  |      | 467,109     |   |      |   | 593,079     |  
|Amortization and accretion, net                                                   |  |      | 174,213     |   |      |   | 298,993     |  
|Net gains on sales of other real estate                                           |  |      | (9,410      | ) |      |   | (89,869     | )
|Changes in assets and liabilities:                                                |  |      |             |   |      |   |             |  
|Increase in other assets                                                          |  |      | (140,994    | ) |      |   | (101,503    | )
|Increase in other liabilities                                                     |  |      | 247,490     |   |      |   | 129,087     |  
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash provided by operating activities                                         |  |      | 5,804,765   |   |      |   | 5,731,583   |  
|                                                                                  |  |      |             |   |      |   |             |  
|Investing activities                                                              |  |      |             |   |      |   |             |  
|Principal collections and maturities of investment securities:                    |  |      |             |   |      |   |             |  
|Available-for-sale                                                                |  |      | 47,386,709  |   |      |   | 42,263,613  |  
|Held-to-maturity                                                                  |  |      | 3,109,400   |   |      |   | 2,737,000   |  
|Proceeds from sales of available-for-sale investment securities                   |  |      |            |   |      |   | 4,373,125   |  
|Purchases of available-for-sale investment securities                             |  |      | (45,112,871 | ) |      |   | (55,818,378 | )
|Purchases of held-to-maturity investment securities                               |  |      | (1,590,000  | ) |      |   | (1,438,414  | )
|Net (increase) decrease in loans                                                  |  |      | (15,437,815 | ) |      |   | 118,585     |  
|Proceeds from sales of other real estate                                          |  |      | 89,257      |   |      |   | 376,846     |  
|Capital expenditures, net                                                         |  |      | (1,111,132  | ) |      |   | (305,063    | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash used in investing activities                                             |  |      | (12,666,452 | ) |      |   | (7,692,686  | )
|                                                                                  |  |      |             |   |      |   |             |  
|Financing activities                                                              |  |      |             |   |      |   |             |  
|Net increase (decrease) in deposits                                               |  |      | 2,572,456   |   |      |   | (22,988,823 | )
|Net increase in federal funds purchased                                           |  |      |            |   |      |   | 1,319,000   |  
|Net increase (decrease) in U. S. Treasury demand note                             |  |      | 415,443     |   |      |   | (473,637    | )
|Purchase of treasury stock                                                        |  |      | (599,256    | ) |      |   | (291,641    | )
|Dividends paid                                                                    |  |      | (2,908,614  | ) |      |   | (2,924,172  | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash used in financing activities                                             |  |      | (519,971    | ) |      |   | (25,359,273 | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net decrease in cash and cash equivalents                                         |  |      | (7,381,658  | ) |      |   | (27,320,376 | )
|Cash and cash equivalents at beginning of period                                  |  |      | 36,590,266  |   |      |   | 49,041,519  |  
|                                                                                  |  |      |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                        |  | $    | 29,208,608  |   |      | $ | 21,721,143  |  
|                                                                                  |  |      |             |   |      |   |             |  
|Supplemental disclosure                                                           |  |      |             |   |      |   |             |  
|Cash paid during the period                                                       |  |      |             |   |      |   |             |  
|Interest                                                                          |  | $    | 4,493,172   |   |      | $ | 3,119,586   |  
|Income taxes                                                                      |  | $    | 2,615,000   |   |      | $ | 2,105,000   |  
|                                                                                  |  |     
|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                                          |  |      | 297,060     |   |      |   | 275,961     |  
|Loans made in connection with sales of foreclosed real estate                     |  |      | 111,072     |   |      |   | 213,517     |  

See accompanying notes to consolidated financial statements.



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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 and subsidiaries (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 nine months ended September 30, 2006 are not necessarily indicative of trends or results to be expected for the full year 2006. The Company operates within one business segment,
community banking, providing a full range of services to individual, corporate, and government customers in southeast Georgia and northeast Florida. The condensed consolidated balance sheet as of December 31, 2005 has been extracted from the
audited financial statements included in the Companys 2005 Annual Report to Shareholders. For further information, refer to the consolidated financial statements and related notes included in the 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.



|2. | Recent Accounting Standards
|-- | ---------------------------

In June 2006, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, a clarification of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. This interpretation clarifies the application of SFAS 109 by defining a recognition threshold and measurement criterion that an individual tax position must meet for any part of the benefit of that tax position to be recognized in a
companys financial statements. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of Interpretation 48 on its financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement provides enhanced guidance for
using fair value to measure assets and liabilities. The statement also responds to investors requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on earnings. The statement applies whenever other statements require or permit assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 on its financial position and results of operations.



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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 sections entitled Critical Accounting Policies and Forward-Looking Statements within this Analysis.

Description of Business

Southeastern Banking Corporation, with assets exceeding $393,400,000, 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 $393,470,994 at September 30, 2006, up $4,779,822 from year-end 2005. Asset growth was
concentrated in the loan portfolio, particularly real estate  construction balances. Specifically, loans grew $15,192,326 or 6.92%; investment securities declined $3,839,183 and federal funds sold declined $4,058,000. Loans comprised
approximately 65%, investment securities, 32%, and federal funds sold, 3%, of earning assets at September 30, 2006 versus 63%, 33%, and 4% at December 31, 2005. Overall, earning assets approximated 91% of total assets at September 30,
2006. During the year-earlier period, total assets declined $23,084,034 or 5.76%. 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 $3,839,183 or 3.27% since December 31, 2005. Purchases of securities during the nine-month period, including short-term securities with original maturities of 90 days or less,
approximated $46,703,000, and redemptions, $50,496,000. 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 September 30, 2006, mortgage-backed securities, corporates, and municipals comprised 21%, 8%, and 29% of the portfolio. Overall, securities comprised 32% of earning assets at September 30, 2006, down from
33% at year-end 2005. The portfolio yield approximated 4.87% during the first nine months of 2006.

Management believes the credit quality of the
investment portfolio remains sound, with 62.66% of the carrying value of debt securities being backed by the U.S. Treasury or other U.S. Government-sponsored agencies at September 30, 2006. The weighted average life of the portfolio
approximated 3 years at September 30, 2006. The amortized cost and estimated fair value of investment securities are delineated in the table below:



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|                                                                    |  |               |         |                 |   |                  |  |            |       |  |   |        
|------------------------------------------------------------------- |  | ------------- | ------- | --------------- | - | ---------------- |  | ---------- | ----- |  | - | -------
|Investment Securities by Category September 30, 2006 (In thousands) |  | AmortizedCost |         | UnrealizedGains |   | UnrealizedLosses |  | Fair Value
|Available-for-sale:                                                 |  |               |         |                 |   |                  |  |            |       |  |   |        
|U. S. Government agencies                                           |  | $             | 48,000  |                 | $ | 54               |  | $          | 625   |  | $ | 47,429 
|Mortgage-backed securities                                          |  |               | 24,408  |                 |   | 32               |  |            | 727   |  |   | 23,713 
|Corporates                                                          |  |               | 9,131   |                 |   | 344              |  |            | 52    |  |   | 9,423  
|                                                                    |  |               |         |                 |   |                  |  |            |       |  |   |        
|                                                                    |  |               | 81,539  |                 |   | 430              |  |            | 1,404 |  |   | 80,565 
|Held-to-maturity:                                                   |  |               |         |                 |   |                  |  |            |       |  |   |        
|States and political subdivisions                                   |  |               | 32,972  |                 |   | 734              |  |            | 171   |  |   | 33,535 
|                                                                    |  |               |         |                 |   |                  |  |            |       |  |   |        
|Total investment securities                                         |  | $             | 114,511 |                 | $ | 1,164            |  | $          | 1,575 |  | $ | 114,100
|                                                                    |  |               |         |                 |   |                  |  |            |       |  |   |        

As shown, the market value of the securities portfolio reflected $411,143 in net unrealized losses at
September 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 6.76% or $15,126,073 since year-end 2005. The net loans to deposits ratio aggregated 72.10% at September 30, 2006 versus 68.06% at December 31, 2005, and 68.99% a year ago. A $12,831,282 or
10.45% 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 $2,344,926 at September 30, 2006 compared to year-end 2005; these loans comprised 7% of the total portfolio at
September 30, 2006. Overall, the commercial portfolio fell a nominal $81,906 at September 30, 2006 compared to December 31, 2005. Nonfarm real estate and governmental loans within the commercial portfolio grew $3,483,792 and $704,891;
other commercial/industrial and agricultural loans fell $4,003,635 and $266,954. Commercial balances are projected to improve during the fourth quarter of 2006.

Despite economic uncertainties within the Companys markets, management is optimistic that loan volumes will continue to grow the remainder of 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 declined a negligible $268,549. Loans outstanding are presented by type in the table on the next page.



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|                                         |  |                   |         |                  |   |                   |  |   |        
|---------------------------------------- |  | ----------------- | ------- | ---------------- | - | ----------------- |  | - | -------
|Loans by Category (In thousands)         |  | September 30,2006 |         | December 31,2005 |   | September 30,2005
|Commercial, financial, and agricultural1 |  | $                 | 86,174  |                  | $ | 86,256            |  | $ | 82,953 
|Real estate  construction3              |  |                   | 96,807  |                  |   | 64,549            |  |   | 60,452 
|Real estate  residential mortgage2,3    |  |                   | 38,789  |                  |   | 58,215            |  |   | 59,813 
|Consumer, including credit cards         |  |                   | 17,272  |                  |   | 14,927            |  |   | 15,185 
|                                         |  |                   |         |                  |   |                   |  |   |        
|Loans, gross                             |  |                   | 239,042 |                  |   | 223,947           |  |   | 218,403
|Unearned income                          |  |                   | 124     |                  |   | 156               |  |   | 167    
|                                         |  |                   |         |                  |   |                   |  |   |        
|Loans, net                               |  | $                 | 238,918 |                  | $ | 223,791           |  | $ | 218,236
|                                         |  |                   |         |                  |   |                   |  |   |        

---

|1 | Includes obligations of states and political subdivisions.
|- | ----------------------------------------------------------

|2 | Typically have final maturities of 15 years or less.
|- | ----------------------------------------------------

|3 | 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 September 30, 2006, real estate loans exceeded $190,387,000, and commitments to
extend credit on such loans approximated $37,535,000. 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 $56,943,000 at September 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 aggregated $1,377,507 at September 30, 2006, down $116,324 or 7.79% from year-end 2005. As a percent of total assets, nonperforming assets
totaled 0.35% at September 30, 2006 versus 0.38% at year-end 2005 and 0.36% at September 30, 2005. Other than the addition of a $108,000 commercial loan, no material credits have been transferred or removed from nonaccrual status during
2006 year-to-date. Industry or individual concentrations within nonaccrual balances at September 30, 2006 included:



| | a) | Industry concentrations: Approximately 17% or $178,000 of nonaccrual balances at September 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Individual concentrations: At September 30, 2006, nonaccrual balances also included loans to two other borrowers averaging $96,000 each. 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 4.01X the nonperforming loans balance at September 30, 2006 versus 3.35X at year-end 2005 and 3.65X a year ago. Significant activity within foreclosed
real estate balances included foreclosure of one borrowers residential real estate valued at approximately $130,000. Management is unaware of any other material developments in nonperforming assets at September 30, 2006 that should be
presented or otherwise discussed.

Loans past due 90 days or more approximated $476,000, or less than 1% of net loans, at September 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:



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|                                                                     |  |                   |       |   |                  |   |       |                   |  |   |       |  
|-------------------------------------------------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | ----------------- |  | - | ----- | -
|Nonperforming Assets (In thousands)                                  |  | September 30,2006 |       |   | December 31,2005 |   |       | September 30,2005 | 
|Nonaccrual loans:                                                    |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Commercial, financial, and agricultural                              |  | $                 | 250   |   |                  | $ | 327   |                   |  | $ | 302   |  
|Real estate  construction3                                          |  |                   | 126   |   |                  |   | 33    |                   |  |   | 28    |  
|Real estate  mortgage3                                              |  |                   | 347   |   |                  |   | 818   |                   |  |   | 726   |  
|Consumer, including credit cards                                     |  |                   | 336   |   |                  |   | 107   |                   |  |   | 120   |  
|                                                                     |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Total nonaccrual loans                                               |  |                   | 1,059 |   |                  | $ | 1,285 |                   |  |   | 1,176 |  
|Restructured loans1                                                  |  |                   |      |   |                  |   |      |                   |  |   |      |  
|                                                                     |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Total nonperforming loans                                            |  |                   | 1,059 |   |                  | $ | 1,285 |                   |  |   | 1,176 |  
|Foreclosed real estate2                                              |  |                   | 293   |   |                  |   | 187   |                   |  |   | 170   |  
|Other repossessed assets                                             |  |                   | 26    |   |                  |   | 22    |                   |  |   | 27    |  
|                                                                     |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Total nonperforming assets                                           |  | $                 | 1,378 |   |                  | $ | 1,494 |                   |  | $ | 1,373 |  
|                                                                     |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Accruing loans past due 90 days or more                              |  | $                 | 476   |   |                  | $ | 579   |                   |  | $ | 809   |  
|                                                                     |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Ratios:                                                              |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Nonperforming loans to net loans                                     |  |                   | 0.44  | % |                  |   | 0.57  | %                 |  |   | 0.54  | %
|                                                                     |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Nonperforming assets to net loans plus foreclosed/repossessed assets |  |                   | 0.58  | % |                  |   | 0.67  | %                 |  |   | 0.63  | %
|                                                                     |  |                   |       |   |                  |   |       |                   |  |   |       |  

---

|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.
|- | -------------------------------------------------------------------------------------------------------------

|3 | 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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 nine-month provision for loan losses at September 30, 2006 totaled $59,500, and net charge-offs, $125,753. The comparable provision and charge-off amounts at September 30,
2005 were $258,833 and $102,144. Net charge-offs represented 0.07% of average loans at September 30, 2006 compared to 0.06% at September 30, 2005 and 0.22% in 2004. No single charge-off exceeded $65,000 at September 30, 2006. The
Company is committed to the early recognition of problem loans and to an appropriate and adequate level of allowance. The adequacy



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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

|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Nine Months Ended September 30, (Dollars in thousands) |  | 2006 |         |   | 2005 |   |         | 2004 | 
|Allowance for loan losses at beginning of year         |  | $    | 4,311   |   |      | $ | 4,134   |      |  | $ | 3,833   |  
|Provision for loan losses                              |  |      | 60      |   |      |   | 259     |      |  |   | 612     |  
|Charge-offs:                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Commercial, financial, and agricultural                |  |      | 80      |   |      |   | 113     |      |  |   | 197     |  
|Real estate  construction                             |  |      | 1       |   |      |   |        |      |  |   | 12      |  
|Real estate  mortgage                                 |  |      | 23      |   |      |   | 35      |      |  |   | 48      |  
|Consumer, including credit cards                       |  |      | 152     |   |      |   | 155     |      |  |   | 256     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total charge-offs                                      |  |      | 256     |   |      |   | 303     |      |  |   | 513     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Recoveries:                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Commercial, financial, and agricultural                |  |      | 15      |   |      |   | 70      |      |  |   | 5       |  
|Real estate  construction                             |  |      |        |   |      |   |        |      |  |   |        |  
|Real estate  mortgage                                 |  |      | 12      |   |      |   | 13      |      |  |   | 32      |  
|Consumer, including credit cards                       |  |      | 103     |   |      |   | 118     |      |  |   | 135     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total recoveries                                       |  |      | 130     |   |      |   | 201     |      |  |   | 172     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Net charge-offs                                        |  |      | 126     |   |      |   | 102     |      |  |   | 341     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Allowance for loan losses at end of period             |  | $    | 4,245   |   |      | $ | 4,291   |      |  | $ | 4,104   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Net loans outstanding1at end of period                 |  | $    | 238,918 |   |      | $ | 218,236 |      |  | $ | 219,771 |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Average net loans outstanding1at end of period         |  | $    | 234,098 |   |      | $ | 217,817 |      |  | $ | 208,063 |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Ratios:                                                |  |      |         |   |      |   |         |      |  |   |         |  
|Allowance to net loans                                 |  |      | 1.78    | % |      |   | 1.97    | %    |  |   | 1.87    | %
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Net charge-offs to average loans2                      |  |      | 0.07    | % |      |   | 0.06    | %    |  |   | 0.22    | %
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Provision to average loans2                            |  |      | 0.03    | % |      |   | 0.16    | %    |  |   | 0.39    | %
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Recoveries to total charge-offs                        |  |      | 50.78   | % |      |   | 66.34   | %    |  |   | 33.53   | %
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  

---

|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,



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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 September 30, 2006.

Other Commitments

Other than a)
construction of a permanent branch building to replace the temporary facility at Scranton Road in Brunswick, Georgia, b) preparation of leased space at Southport, also in Brunswick, to open as a new branch by year-end 2006, c) renovation of other
SEB offices, and d) the purchase of new core banking software, the Company had no material plans or commitments for capital expenditures as of September 30, 2006. Estimated remaining costs associated with new construction and renovations in
progress at September 30, 2006 were $3,100,000; remaining costs associated with the new operating system, which will include both teller and deposit platforms, approximate $350,000.

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 September 30, 2006, loans1and investment
securities with carrying values exceeding $119,776,000 and $15,348,000 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 90% of the funding
base at September 30, 2006, virtually unchanged from 2005 levels. Borrowed funds, which variously encompass U.S. Treasury demand notes, federal funds purchased, and FHLB advances, totaled $6,771,002 at September 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 September 30, 2006 totaled $3,000,000, of which $1,771,002 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 September 30, 2006, unused
borrowings approximated $57,720,000. 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.
|- | -------------------------------------------------------------------------------------------------------------------------------------



13



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##### Table of Contents

Deposits

Deposits grew $2,572,456 or 0.78% since year-end 2005. Noninterest-bearing deposits increased $4,251,308 or 5.33%, while interest-bearing deposits fell $1,678,852. 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 the present rate environment. Overall, interest-bearing deposits comprised 74.65%, and noninterest bearing deposits, 25.35%, of total deposits at September 30, 2006.
The distribution of interest-bearing balances at September 30, 2006 and certain comparable quarter-end dates is shown in the table below:

|                                  |  |                    |         |                 |                   |   |          |                    |                 |  |        |          |  |                 |         |  |        |  
|--------------------------------- |  | ------------------ | ------- | --------------- | ----------------- | - | -------- | ------------------ | --------------- |  | ------ | -------- |  | --------------- | ------- |  | ------ | -
|                                  |  | September 30, 2006 |         |                 | December 31, 2005 |   |          | September 30, 2005 |                
|Deposits (Dollars in thousands)   |  | Balances           |         | Percentof Total |                   |   | Balances |                    | Percentof Total |  |        | Balances |  | Percentof Total |        
|Interest-bearing demand deposits1 |  | $                  | 88,447  |                 | 35.75             | % |          | $                  | 93,954          |  | 37.72  | %        |  | $               | 77,548  |  | 32.44  | %
|Savings                           |  |                    | 72,915  |                 | 29.48             | % |          |                    | 82,107          |  | 32.97  | %        |  |                 | 88,902  |  | 37.19  | %
|Time certificates < $100,000      |  |                    | 51,888  |                 | 20.98             | % |          |                    | 46,891          |  | 18.83  | %        |  |                 | 46,282  |  | 19.36  | %
|Time certificates >= $100,000     |  |                    | 34,122  |                 | 13.79             | % |          |                    | 26,098          |  | 10.48  | %        |  |                 | 26,303  |  | 11.01  | %
|                                  |  |                    |         |                 |                   |   |          |                    |                 |  |        |          |  |                 |         |  |        |  
|Total interest-bearing deposits   |  | $                  | 247,372 |                 | 100.00            | % |          | $                  | 249,050         |  | 100.00 | %        |  | $               | 239,035 |  | 100.00 | %
|                                  |  |                    |         |                 |                   |   |          |                    |                 |  |        |          |  |                 |         |  |        |  

---

|1 | NOW and money market accounts.
|- | ------------------------------

Deposits of one local
governmental body comprised approximately $25,528,000 and $31,527,000 of the overall deposit base at September 30, 2006 and December 31, 2005. The Company had no brokered deposits at September 30, 2006.

Approximately 83% of time certificates at September 30, 2006 were scheduled to mature within the next twelve months. The composition of average deposits and the
fluctuations therein at September 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 September 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 $224,000. 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.



14



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##### Table of Contents

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 September 30, 2006:

|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|----------------------------------------------------------------------- |  | ---------------- | ------- | -- | ------------ | - | ------- | --------------- |  | - | ------------------ | - |  | ----- | ------- | - |  | - | -------
|                                                                        |  | Repricing Within |         |    |             
|Interest Rate Sensitivity September 30, 2006 (Dollars in
thousands)     |  | 0 - 3Months      |         |    | 4 - 12Months |   |         | One - FiveYears |  |   | MoreThan FiveYears |   |  | Total
|Interest Rate Sensitive Assets                                          |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Federal funds sold                                                      |  | $                | 10,945  |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  | $ | 10,945 
|Securities1                                                             |  |                  | 2,186   |    |              | $ | 15,188  |                 |  | $ | 69,002             |   |  | $     | 28,135  |   |  |   | 114,511
|Loans, gross2                                                           |  |                  | 137,818 |    |              |   | 20,725  |                 |  |   | 77,475             |   |  |       | 1,965   |   |  |   | 237,983
|Other assets                                                            |  |                  | 1,088   |    |              |   |        |                 |  |   |                   |   |  |       |        |   |  |   | 1,088  
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Total interest rate sensitive assets                                    |  |                  | 152,037 |    |              |   | 35,913  |                 |  |   | 146,477            |   |  |       | 30,100  |   |  |   | 364,527
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Interest Rate Sensitive Liabilities                                     |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Deposits3                                                               |  | $                | 174,026 |    |              |   | 59,054  |                 |  |   | 14,282             |   |  |       | 10      |   |  |   | 247,372
|U.S. Treasury demand note                                               |  |                  | 1,771   |    |              |   |        |                 |  |   |                   |   |  |       |        |   |  |   | 1,771  
|Federal Home Loan Bank advances                                         |  |                  |        |    |              |   |        |                 |  |   | 5,000              |   |  |       |        |   |  |   | 5,000  
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Total interest rate sensitive liabilities                               |  |                  | 175,797 |    |              |   | 59,054  |                 |  |   | 19,282             |   |  |       | 10      |   |  |   | 254,143
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Interest rate sensitivity gap                                           |  | $                | (23,760 | )  |              | $ | (23,141 | )               |  | $ | 127,195            |   |  | $     | 30,090  |   |  | $ | 110,384
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Cumulative gap                                                          |  | $                | (23,760 | )  |              | $ | (46,901 | )               |  | $ | 80,294             |   |  | $     | 110,384 |   |  |   |        
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Ratio of cumulative gap to total rate sensitive assets                  |  |                  | (6.52   | )% |              |   | (12.87  | )%              |  |   | 22.03              | % |  |       | 30.28   | % |  |   |        
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Ratio of cumulative rate sensitive assets to rate sensitive liabilities |  |                  | 86.48   | %  |              |   | 80.03   | %               |  |   | 131.60             | % |  |       | 143.43  | % |  |   |        
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Cumulative gap at December 31, 2005                                     |  | $                | (50,409 | )  |              | $ | (59,043 | )               |  | $ | 71,366             |   |  | $     | 101,779 |   |  |   |        
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        
|Cumulative gap at September 30, 2005                                    |  | $                | (53,074 | )  |              | $ | (73,722 | )               |  | $ | 67,354             |   |  | $     | 99,399  |   |  |   |        
|                                                                        |  |                  |         |    |              |   |         |                 |  |   |                    |   |  |       |         |   |  |   |        

---

|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 September 30,
2006, totaling $(23,760) at three months and $(46,901) through one-year. Excluding traditionally nonvolatile NOW balances from the gap calculation, the cumulative gap at September 30, 2006 totaled $54,107 at three months and $30,966 at twelve
months. The narrowing of the short-term gap position at September 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 the
remainder of 2006. Shortcomings are inherent in any gap analysis since certain



15



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##### Table of Contents

assets and liabilities may not move proportionally as rates change. For example, the gap analysis presumes that all
loans2and securities1will 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.



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##### Table of Contents

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



|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|--------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | ----------------- |  | - | ------- | -
|Capital Ratios (Dollars in thousands)   |  | September 30,2006 |         |   | December 31,2005 |   |         | September 30,2005 | 
|Tier 1 capital:                         |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Realized shareholders equity           |  | $                 | 53,192  |   |                  | $ | 50,089  |                   |  | $ | 51,945  |  
|Intangible assets and other adjustments |  |                   | (521    | ) |                  |   | (565    | )                 |  |   | (579    | )
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Total Tier 1 capital                    |  |                   | 52,671  |   |                  |   | 49,524  |                   |  |   | 51,366  |  
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Tier 2 capital:                         |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Portion of allowance for loan losses    |  |                   | 3,463   |   |                  |   | 3,152   |                   |  |   | 3,067   |  
|Allowable long-term debt                |  |                   |        |   |                  |   |        |                   |  |   |        |  
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Total Tier 2 capital                    |  |                   | 3,463   |   |                  |   | 3,152   |                   |  |   | 3,067   |  
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Total risk-based capital                |  | $                 | 56,134  |   |                  | $ | 52,676  |                   |  | $ | 54,433  |  
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Risk-weighted assets                    |  | $                 | 276,286 |   |                  | $ | 251,024 |                   |  | $ | 244,337 |  
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Risk-based ratios:                      |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Tier 1 capital                          |  |                   | 19.06   | % |                  |   | 19.73   | %                 |  |   | 21.02   | %
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Total risk-based capital                |  |                   | 20.32   | % |                  |   | 20.98   | %                 |  |   | 22.28   | %
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Tier 1 leverage ratio                   |  |                   | 13.67   | % |                  |   | 13.10   | %                 |  |   | 13.39   | %
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  
|Realized shareholders equity to assets |  |                   | 13.50   | % |                  |   | 12.86   | %                 |  |   | 13.75   | %
|                                        |  |                   |         |   |                  |   |         |                   |  |   |         |  

Book value per share grew $1.07 or 6.91% during the first nine months of 2006 to $16.55 at September 30,
2006. Dividends declared totaled $0.405, up 3.85% or $0.015 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, fell $45,446 at September 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 nine months 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 75% or $2,434,530 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.



17



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##### Table of Contents

Results of Operations

Net income for the 2006 third quarter totaled $1,646,369, down a marginal $55,114 or 3.24% from September 30, 2005 and down 4.86% from June 30, 2006. On a per share basis, quarterly earnings totaled $0.51 at September 30,
2006 versus $0.52 at September 30, 2005 and $0.54 at June 30, 2006. Year-to-date, net income grew $363,894 to $5,006,857 at September 30, 2006 from $4,642,963 in 2005. Similarly, per share income for the nine-month period improved
$0.14 to $1.55 at September 30, 2006 from $1.41 in 2005. The return on beginning equity for the nine-month period totaled 13.33% at September 30, 2006 versus 12.66% 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 $147,838 or 3.11% during the third quarter of 2006 compared to 2005. For the year-to-date period, net interest income grew $898,470 or 6.49% from 2005. The net interest margin approximated 5.73% at September 30, 2006 versus 5.32% a
year ago; the interest rate spread, 4.97% versus 4.89%. Interest earnings on loans and other earning assets improved $2,901,076 and $11,897, while earnings on investments and federal funds sold declined $209,337 and $175,923 from same period results
in 2005. Overall improvements in asset yields precipitated the 2006 results. Asset yields averaged 7.50% at September 30, 2006 versus 6.46% in 2005; see the interest differential table on page 20 for more details on changes in interest income
attributable to volume and rates at September 30, 2006 versus 2005. Interest expense on deposits and other borrowed funds increased $702,043 or 65.26% during the 2006 third quarter versus 2005 and $1,629,243 year-to-date. Cost of funds
increased 96 basis points from 2005 levels, totaling 2.53% at September 30, 2006 versus 1.57% at September 30, 2005. The jump in cost of funds resulted from higher rates on all deposit types at September 30, 2006 compared to 2005.
Given the rate environment currently propelled by the Federal Reserve, management expects costs of funds and corresponding interest expense to continue increasing as deposits and other funds reprice at higher levels. Anticipated loan growth in
Brunswick and other markets are expected to alleviate projected 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 54% of total loans at September 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:



18



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##### Table of Contents

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

|                                                                         |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|------------------------------------------------------------------------ | --------------- | ---- | -------------- |  | ------------ | ------ |  | --------------- | - | -------------- | - | ------------ |  | - | ------ |  | ---- | -
|Average Balances6 Nine Months Ended
September 30, (Dollars in thousands) |                 | 2006 |                |  | 2005         |       
|                                                                         | AverageBalances |      | Income/Expense |  | Yields/Rates |        |  | AverageBalances |   | Income/Expense |   | Yields/Rates | 
|Assets                                                                   |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Interest-earning assets:                                                 |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Loans, net1,2,4                                                          |                 | $    | 234,098        |  | $            | 15,517 |  | 8.86            | % |                | $ | 217,817      |  | $ | 12,616 |  | 7.72 | %
|Federal funds sold                                                       |                 |      | 5,373          |  |              | 192    |  | 4.78            | % |                |   | 17,796       |  |   | 368    |  | 2.76 | %
|Taxable investment securities3                                           |                 |      | 86,094         |  |              | 2,783  |  | 4.32            | % |                |   | 92,036       |  |   | 2,849  |  | 4.13 | %
|Tax-exempt investment securities3,4                                      |                 |      | 30,313         |  |              | 1,476  |  | 6.51            | % |                |   | 33,887       |  |   | 1,697  |  | 6.68 | %
|Other assets                                                             |                 |      | 1,105          |  |              | 49     |  | 5.93            | % |                |   | 1,157        |  |   | 37     |  | 4.26 | %
|                                                                         |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Total interest-earning assets                                            |                 | $    | 356,983        |  | $            | 20,017 |  | 7.50            | % |                | $ | 362,693      |  | $ | 17,567 |  | 6.46 | %
|                                                                         |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Liabilities                                                              |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Interest-bearing liabilities:                                            |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Interest-bearing demand deposits5                                        |                 | $    | 86,066         |  | $            | 1,340  |  | 2.08            | % |                | $ | 88,392       |  | $ | 914    |  | 1.38 | %
|Savings                                                                  |                 |      | 77,451         |  |              | 890    |  | 1.54            | % |                |   | 93,147       |  |   | 615    |  | 0.88 | %
|Time deposits                                                            |                 |      | 79,871         |  |              | 2,229  |  | 3.73            | % |                |   | 75,748       |  |   | 1,328  |  | 2.34 | %
|Federal funds purchased                                                  |                 |      | 486            |  |              | 20     |  | 5.50            | % |                |   | 105          |  |   | 3      |  | 3.81 | %
|U. S. Treasury demand note                                               |                 |      | 646            |  |              | 23     |  | 4.76            | % |                |   | 567          |  |   | 12     |  | 2.82 | %
|Federal Home Loan Bank advances                                          |                 |      | 5,000          |  |              | 224    |  | 6.00            | % |                |   | 5,000        |  |   | 224    |  | 6.00 | %
|                                                                         |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Total interest-bearing liabilities                                       |                 | $    | 249,520        |  | $            | 4,726  |  | 2.53            | % |                | $ | 262,959      |  | $ | 3,096  |  | 1.57 | %
|                                                                         |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Excess of interest-earning assets over interest-bearing liabilities      |                 | $    | 107,463        |  |              |        |  |                 |   |                | $ | 99,734       |  |   |        |  |      |  
|                                                                         |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Interest rate spread                                                     |                 |      |                |  |              |        |  | 4.97            | % |                |   |              |  |   |        |  | 4.89 | %
|                                                                         |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Net interest income                                                      |                 |      |                |  | $            | 15,291 |  |                 |   |                |   |              |  | $ | 14,471 |  |      |  
|                                                                         |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  
|Net interest margin                                                      |                 |      |                |  |              |        |  | 5.73            | % |                |   |              |  |   |        |  | 5.32 | %
|                                                                         |                 |      |                |  |              |        |  |                 |   |                |   |              |  |   |        |  |      |  

---

|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 adjustments have been made
for any state tax benefits or the nondeductible portion of interest expense.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 nine months ended September 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.



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##### Table of Contents

|                                  |  |                            |      |   |      |   |       |     |  |   |       |  
|--------------------------------- |  | -------------------------- | ---- | - | ---- | - | ----- | --- |  | - | ----- | -
|Interest Differential1            |  | 2006 Compared to 2005      |     
|Nine Months Ended September 30,   |  | Increase (Decrease) Due to |     
|(In thousands)                    |  | Volume                     |      |   | Rate |   |       | Net | 
|Interest income                   |  |                            |      |   |      |   |       |     |  |   |       |  
|Loans2,3                          |  | $                          | 989  |   |      | $ | 1,912 |     |  | $ | 2,901 |  
|Federal funds sold                |  |                            | (348 | ) |      |   | 172   |     |  |   | (176  | )
|Taxable investment securities     |  |                            | (189 | ) |      |   | 123   |     |  |   | (66   | )
|Tax-exempt investment securities3 |  |                            | (175 | ) |      |   | (46   | )   |  |   | (221  | )
|Other interest-earning assets     |  |                            | (2   | ) |      |   | 14    |     |  |   | 12    |  
|                                  |  |                            |      |   |      |   |       |     |  |   |       |  
|Total interest income             |  |                            | 275  |   |      |   | 2,175 |     |  |   | 2,450 |  
|                                  |  |                            |      |   |      |   |       |     |  |   |       |  
|Interest expense                  |  |                            |      |   |      |   |       |     |  |   |       |  
|Interest-bearing demand deposits4 |  |                            | (25  | ) |      |   | 451   |     |  |   | 426   |  
|Savings                           |  |                            | (118 | ) |      |   | 393   |     |  |   | 275   |  
|Time deposits                     |  |                            | 76   |   |      |   | 825   |     |  |   | 901   |  
|Federal funds purchased5          |  |                            | 15   |   |      |   | 2     |     |  |   | 17    |  
|U.S. Treasury demand note         |  |                            | 2    |   |      |   | 9     |     |  |   | 11    |  
|Federal Home Loan Bank advances   |  |                            |     |   |      |   |      |     |  |   |      |  
|                                  |  |                            |      |   |      |   |       |     |  |   |       |  
|Total interest expense            |  |                            | (50  | ) |      |   | 1,680 |     |  |   | 1,630 |  
|                                  |  |                            |      |   |      |   |       |     |  |   |       |  
|Net change in net interest income |  | $                          | 325  |   |      | $ | 495   |     |  | $ | 820   |  
|                                  |  |                            |      |   |      |   |       |     |  |   |       |  

---

|1 | 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 declined $21,031 or 2.16% during the third quarter of 2006 compared to 2005 but grew $75,268 year-to-date. A decline in commissions on sales of insurance and investment products through our Raymond James affiliation was the predominant factor
in the quarterly results. Year-to-date, an $82,810 or 4.79% increase in service charges on deposit accounts was the main factor. The 2006 improvement in service charges was primarily attributable to higher volume of NSF fees. The other operating
portion of noninterest income declined $7,542 or 0.78% year-to-date. By type and amount, the chief components of other operating income at September 30, 2006 were mortgage origination fees, $325,569; income on sale of check products, $123,961;
surcharge fees  ATM, $113,781; commissions on the sale of credit life insurance, $79,705; and safe deposit box rentals, $54,421. Together, these five income items comprised 72.92% of other operating income at September 30, 2006. In 2005,
these same five income components comprised 78.32% of other operating income. Overall, noninterest expense increased $516,981 or 5.41% in 2006 year-to-date. Personnel costs accounted for $255,314 or 49% of the increase. The vast majority, or 84%, of
employee expenses remained concentrated in salaries and other direct compensation, including related payroll taxes, at September 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 $148,548 or
7.84% during the first nine months of 2006 compared to 2005. Costs associated with renovations at four branch facilities comprised the majority of the 2006 increase. Other operating expenses increased $113,119 or 6.03% at September 30, 2006
compared to 2005; increases in advertising and various legal and accounting expenses were the primary variables. Besides advertising expense, which approximated $245,000 in 2006 and $187,000 in 2005, no individual component of other operating
expenses aggregated or exceeded 10% of the total in 2006 or 2005.

Critical Accounting Policies

The Companys consolidated financial statements are prepared applying certain critical accounting policies. Critical accounting policies affect accounts
such as the allowance for loan losses, income taxes,



20



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##### Table of Contents

investment securities, and goodwill and other intangibles and require numerous estimates and strategic or economic
assumptions that may prove inaccurate or subject to variations and may significantly affect the Companys reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in
any of these areas could have a material impact on the Companys future financial condition and results of operations. The Companys critical accounting policies are further discussed in the 2005 Form 10-K. There have been no material
changes in the Companys critical accounting policies since December 31, 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.
| | - |  | ------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | 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.



22



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##### Table of Contents

Part II - Other Information

Item 1. Legal Proceedings.

Not Applicable

Item 1A. Risk Factors.

There were no material changes to the Companys risk factors during the first
nine months 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.

Not Applicable

Item 3. Defaults Upon Senior Securities.

Not Applicable

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

Not Applicable

Item 5. Other Information.

Not Applicable

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                                                                                                       



23



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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)By:

/s/ ALYSON G. BEASLEYAlyson G. Beasley, Vice President & Treasurer(Chief Accounting Officer)


Date: November 14, 2006



24