Southeastern Bank Financial CORP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Southeastern Bank Financial CORP	Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - Southeastern Bank Financial CORP	t82091_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Southeastern Bank Financial CORP	t82091_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Southeastern Bank Financial CORP	t82091_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2015.

o	Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to ________________.

Commission File No. 0-24172

	Southeastern Bank Financial Corporation
(Exact name of registrant as specified in its charter)

	Georgia			58-2005097
(State of Incorporation)			(I.R.S. Employer Identification No.)

	3530 Wheeler Road, Augusta, Georgia 30909
(Address of principal executive offices)

	(706) 738-6990
(Issuer’s telephone number, including area code)

	Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the issuer is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Non-accelerated filer o
	(do not check if a smaller reporting company)

Accelerated filer o	Smaller reporting company x

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

6,744,843 shares of common stock, $3.00 par value per share, outstanding as of April 21, 2015.

SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX

			Page
Part I
	Item 1.	Financial Statements (Unaudited)

		Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014	3

		Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2015 and 2014	4

		Consolidated Statements of Cash Flows for the Three Months ended March 31, 2015 and 2014	6

		Notes to Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	69

	Item 4.	Controls and Procedures	69

Part II Other Information
	Item 1.	Legal Proceedings	70
	Item 1A.	Risk Factors	70
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
	Item 3.	Defaults Upon Senior Securities	71
	Item 4.	Mine Safety Disclosures	71
	Item 5.	Other Information	71
	Item 6.	Exhibits	71

Signature			72

PART I

FINANCIAL INFORMATION

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	March 31,
	2015			December 31,
Assets	(Unaudited)			2014
Cash and due from banks	$	51,873		$	33,286
Interest-bearing deposits in other banks		19,576			2,709
Cash and cash equivalents		71,449			35,995
Available-for-sale securities		675,321			644,465
Loans held for sale, at fair value		18,271			18,365
Loans		970,307			966,356
Less allowance for loan losses		25,391			25,506
Loans, net		944,916			940,850

Premises and equipment, net		28,020			27,842
Accrued interest receivable		6,311			5,898
Bank-owned life insurance		37,186			36,908
Restricted equity securities		4,276			4,398
Other real estate owned		955			1,107
Deferred tax asset		14,090			15,263
Other assets		2,549			1,690
	$	1,803,344		$	1,732,781
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	215,567		$	196,624
Interest-bearing:
NOW accounts		396,569			354,038
Savings		528,849			521,570
Money management accounts		16,528			15,824
Time deposits		379,506			375,808
		1,537,019			1,463,864

Securities sold under repurchase agreements		715			10,678
Advances from Federal Home Loan Bank		64,000			64,000
Accrued interest payable and other liabilities		19,033			18,953
Due to broker		1,586			-
Subordinated debentures		20,000			20,000
Total liabilities		1,642,353			1,577,495

Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 0 shares outstanding in 2015 and 2014, respectively		-			-
Common stock, $3.00 par value; 10,000,000 shares authorized; 6,744,891 and 6,744,891 shares issued in 2015 and 2014, respectively; 6,744,245 and 6,744,160 shares outstanding in 2015 and 2014, respectively		20,235			20,235
Additional paid-in capital		63,259			63,096
Retained earnings		75,097			71,902
Treasury stock, at cost; 646 and 731 shares in 2015 and 2014, respectively		(17	)		(18	)
Accumulated other comprehensive income, net		2,417			71
Total stockholders’ equity		160,991			155,286
	$	1,803,344		$	1,732,781

See accompanying notes to unaudited consolidated financial statements.

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Comprehensive Income

(Dollars in thousands, except share and per share data)

(Unaudited)


	Three Months Ended March 31,
	2015			2014
Interest income:
Loans, including fees	$	11,525		$	11,280
Investment securities		3,647			3,534
Interest-bearing deposits in other banks		17			15
Total interest income		15,189			14,829
Interest expense:
Deposits		1,460			1,588
Securities sold under repurchase agreements		3			1
Other borrowings		638			668
Total interest expense		2,101			2,257

Net interest income		13,088			12,572
Provision for loan losses		547			1,057
Net interest income after provision for loan losses		12,541			11,515

Noninterest income:
Service charges and fees on deposits		1,744			1,629
Gain on sales of loans		1,554			819
Gain (loss) on sale of fixed assets, net		1			(1	)
Investment securities gains, net (includes $57 and $251 accumulated other comprehensive income reclassifications for unrealized gains (losses) on available-for-sale securities)		57			251
Retail investment income		526			574
Trust service fees		336			323
Earnings from cash surrender value of bank-owned life insurance		278			278
Miscellaneous income		223			218
Total noninterest income		4,719			4,091
Noninterest expense:
Salaries and other personnel expense		6,587			5,766
Occupancy expenses		1,018			944
Other real estate gains, net		(66	)		(35	)
Other operating expenses		3,526			3,438
Total noninterest expense		11,065			10,113

Income before income taxes		6,195			5,493
Income tax expense		1,989			1,687
Net income	$	4,206		$	3,806

Other comprehensive income:
Unrealized loss on derivatives	$	(366	)	$	(355	)
Unrealized gain on securities available-for-sale		4,263			8,487
Reclassification adjustment for realized gain on securities, net of OTTI		(57	)		(251	)
Tax effect		(1,494	)		(3,066	)
Total other comprehensive income		2,346			4,815
Comprehensive income	$	6,552		$	8,621

(continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Comprehensive Income
(Dollars in thousands, except share and per share data)

(Unaudited)


	Three Months Ended March 31,
	2015		2014

Basic net income per share	$	0.63	$	0.57

Diluted net income per share	$	0.63	$	0.57

Weighted average common shares outstanding		6,695,011		6,680,634

Weighted average number of common and common equivalent shares outstanding		6,707,037		6,680,717

See accompanying notes to unaudited consolidated financial statements.

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Cash Flows
(Dollars in thousands)

(Unaudited)


	Three Months Ended March 31,
	2015			2014
Cash flows from operating activities:
Net income	$	4,206		$	3,806

Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		548			492
Deferred income tax benefit		(321	)		(148	)
Provision for loan losses		547			1,057
Net investment securities gains		(57	)		(251	)
Net amortization of premiums on investment securities		908			1,355
Earnings from CSV of bank-owned life insurance		(278	)		(278	)
Stock-based compensation expense		117			39
(Gain) loss on disposal of premises and equipment		(1	)		1
Deferred gain on the sale of other real estate		(77	)		-
Gain on the sale of other real estate		(67	)		(35	)
Provision for other real estate valuation allowance		1			-
Gain on sales of loans		(1,554	)		(819	)
Real estate loans originated for sale		(48,268	)		(30,621	)
Proceeds from sales of real estate loans		49,917			28,420
Increase in accrued interest receivable		(413	)		(136	)
(Increase) decrease in other assets		(859	)		3,654
Decrease in accrued interest payable and other liabilities		(285	)		(1,034	)
Net cash provided by operating activities		4,064			5,502

Cash flows from investing activities:
Proceeds from sales of available-for-sale securities		23,300			43,359
Proceeds from maturities and calls of available-for-sale securities		24,440			15,551
Purchase of available-for-sale securities		(73,655	)		(54,031	)
Purchase of FHLB stock		(38	)		-
Proceeds from redemption of FHLB stock		160			471
Net increase in loans		(4,526	)		(22,452	)
Additions to premises and equipment		(726	)		(807	)
Proceeds from sale of other real estate		206			140
Proceeds from sale of premises and equipment		1			4
Net cash used in investing activities		(30,838	)		(17,765	)

(continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Cash Flows
(Dollars in thousands)

(Unaudited)


	Three Months Ended March 31,
	2015			2014

Cash flows from financing activities:
Net increase in deposits		73,155			48,364
Net decrease in securities sold under repurchase agreements		(9,963	)		(96	)
Purchase of treasury stock		(11	)		-
Payment of cash dividends		(1,011	)		(868	)
Tax benefit from stock-based compensation		46			-
Proceeds from Directors’ stock purchase plan		12			13
Net cash provided by financing activities		62,228			47,413

Net increase in cash and cash equivalents		35,454			35,150
Cash and cash equivalents at beginning of period		35,995			47,336
Cash and cash equivalents at end of period	$	71,449		$	82,486

Supplemental disclosures of cash paid during the period for:
Interest	$	2,214		$	2,334
Income taxes		2,295			1,885

Supplemental information on noncash investing activities:
Loans transferred to other real estate owned	$	303		$	378
Loans provided for sales of other real estate owned		392			-
Due to broker		1,586			2,506

See accompanying notes to unaudited consolidated financial statements.

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Unaudited Consolidated Financial Statements

(Dollar amounts are expressed in thousands unless otherwise noted)

March 31, 2015

Note 1 – Summary of Significant Accounting Policies

(a) Nature of Operations and Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Southeastern Bank Financial Corporation and its wholly-owned subsidiary, Georgia Bank & Trust Company of Augusta, Georgia, together referred to as “the Company.” Significant intercompany transactions and accounts are eliminated in consolidation. Dollar amounts are rounded to thousands except share and per share data.

The Company provides financial services through its offices in Richmond and Columbia Counties, Georgia, and Aiken County, South Carolina. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. The Company has a significant concentration of loans with real estate developers. The ability of these customers to repay their loans is dependent on the real estate and general economic conditions in the area.

The financial statements for the three months ended March 31, 2015 and 2014 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2014.

In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations and cash flows for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results of operations which the Company may achieve for the entire year.

Some items in the prior period financial statements were reclassified to conform to the current presentation.

(b) Loans and Allowance for Loan Losses

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Non-Accrual Loan Procedures:

Interest income on loans of all segments and classes are generally discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment as measured from the loan’s contractual due date.

All interest, accrued but not received, for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Subsequent payments of interest are recognized on the cash basis as income when full collection of principal is expected. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured and there is a period of at least 6 months of repayment performance (1 year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with contractual terms.

Concentration of Credit Risk:

Most of the Company’s business activity is with customers located within the Augusta-Richmond County, GA-SC metropolitan statistical area, part of the Central Savannah River Area (“CSRA”). Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in this area. The Company also has a significant concentration of loans with real estate developers.

Allowance for Loan Losses:

The allowance for loan losses (ALLL) is a valuation allowance for probable incurred credit losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

Impaired Loans and Troubled Debt Restructurings:

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All lending relationships over $500 are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The following portfolio segments have been identified:

●

Acquisition Development and Construction (“ADC”) – CSRA

●

ADC – Other

●

Commercial Real Estate – Non owner occupied

●

Commercial Real Estate – Owner occupied

●

1-4 Family

●

Consumer

●

Other – Commercial, Financial and Agricultural

The following is a discussion of the risk characteristics of these portfolio segments.

Acquisition, Development & Construction (ADC) – CSRA (Primary Market) – ADC lending carries all of the normal risks involved in lending including the changing nature of borrower and guarantor financial conditions and the knowledge that the sale of the completed lots and/or structures is likely the sole source of repayment as opposed to other forms of borrower cash flow. In addition, this type of lending carries several additional risk factors including: (1) timely project completion (contractor financial condition, commodity prices, weather delays, prospective tenant financial condition); (2) market factors (changing economic conditions, unemployment rates, end-user financing availability, interest rates); (3) competition (similar product availability, bank foreclosed properties); and (4) end-product price stability.

ADC – Other – ADC lending in all other markets carries all of the ADC risks outlined for the CSRA plus the additional risk of lending outside of the Company’s traditional market area where our knowledge of these markets may not be as well developed.

Commercial Real Estate – Non Owner Occupied – This lending category includes loans for office, warehouse, retail, hotel/motel and other non-owner occupied properties. Loans in this category carry more risk than owner-occupied properties because the property’s cash flow is not derived from the owner of the property’s business, but from unrelated tenants. These outside tenants are each subject to their own set of business risks depending upon their own financial situation, competitors, industry segment and general economic conditions. Therefore, the cash flow from the property in the form of rent may not be as stable as a one-user, owner-occupied property.

Commercial Real Estate – Owner Occupied – This portfolio segment includes loans to finance office buildings, retail establishments, warehouses, convenience stores, churches, schools, daycare facilities, restaurants, health care facilities, golf courses and other owner-occupied properties. Loans in this category generally carry less risk than non-owner occupied properties because the cash flow to service the property’s debt is derived from the owner of the property’s business as opposed to unrelated third-party tenants. The cash flows and property values for one-user, owner-occupied properties tend to be more stable because they are based upon the operation of the owner’s business as opposed to rent from a variety of smaller tenants (each of which carries its own set of business and market risks).

1-4 Family – This lending category includes loans secured by improved residential real estate. Loans in this category are affected by local real estate markets, local & national economic factors affecting borrowers’ employment prospects & income levels, and levels & movement of interest rates and the general availability of mortgage financing.

Consumer – This portfolio segment includes loans secured by consumer goods (e.g. vehicles, recreational products, equipment, etc.), but also may be unsecured. Similar to the 1-4 family category, this segment of the loan portfolio depends on a variety of local & national economic factors affecting borrowers’ employment prospects, income levels and overall economic sentiment.

Commercial, Financial and Agricultural – This portfolio segment includes loans for a wide variety of business purposes. This segment also includes home equity lines of credit, loans secured by multi-family properties and loans to government entities. Loans in this category are affected by changes in national, regional and local economic factors that affect the businesses that operate in our market.

The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans that become uncollectible, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrower’s ability to pay. The allowance is evaluated on a regular basis utilizing estimated loss factors for specific types of loans. Such loss factors are periodically reviewed and adjusted as necessary based on actual losses.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may advise the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The process of assessing the adequacy of the allowance is necessarily subjective. Further, and particularly in terms of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates of probable incurred credit losses inherent within the loan portfolio. As such, there can be no assurance that future loan charge-offs will not exceed management’s current estimate of the allowance for loan losses.

ALLL Methodology:

The Company’s approach to ALLL reserve calculation uses two distinct perspectives, the guidelines of using Financial Accounting Standards ASC 450 (Accounting for Contingencies) and ASC 310 (Accounting by Creditors for Impairment of a Loan, for individual loans). The process is generally as follows and methodology applies to all classes of loans within the portfolio segments:

●

Loans are grouped in categories of similar risk characteristics (portfolio segments).

●

For each loan category, a four year average rolling historical net loss rate is calculated, with the loss rate more heavily weighted to the most recent two years loss history. The historical loss ratios are adjusted for internal and external qualitative factors within each loan category. The qualitative factor adjustment may be further increased for loan classifications of watch rated and substandard within each category. Factors include:

levels and trends in delinquencies and impaired/classified/graded loans;

changes in the quality of the loan review system;

trends in volume and terms of loans;

effects of changes in risk selection and underwriting standards, and other changes in lending policies, procedures and practices;

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

national and local economic trends and conditions;

changes in the value of underlying collateral;

other external factors-competition, legal and regulatory requirements; and

effects of changes in credit concentrations.

●

The resultant loss factor is applied to each respective loan pool to calculate the ALLL for each loan pool.

●

The total of each loan pool is then added to the ALLL determined for individual loans evaluated for impairment in accordance with ASC 310.

There have been no changes to the methodology during 2015 and 2014.

Loans Held for Sale:

Mortgage loans held for sale are generally sold with servicing rights released. The Company originates mortgages to be held for sale only for loans that have been individually pre-approved by the investor. Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors.

Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

The Company bears minimal interest rate risk on these loans and only holds the loans temporarily until documentation can be completed to finalize the sale to the investor.

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on sales of loans. Fair values of these derivatives were $43 and $6 as of March 31, 2015 and December 31, 2014, respectively.

At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

(d) Recent Accounting Pronouncements

In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

(e) Reclassifications

Some items in the prior period financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior period net income or shareholders’ equity.

Note 2 – Investment Securities

All investment securities held at March 31, 2015 and December 31, 2014 are classified as available-for-sale.

The following tables summarize the amortized cost and fair value of the available-for-sale investment securities portfolio at March 31, 2015 and December 31, 2014 and the corresponding amounts of unrealized gains and losses therein.

	March 31, 2015
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
Available-for-sale	(Dollars in thousands)
Obligations of U.S. Government agencies	$	192,330		541		(1,367	)		191,504
Obligations of states and political subdivisions		113,439		3,865		(216	)		117,088
Mortgage backed securities
U.S. GSE’s* MBS - residential		119,746		2,276		(199	)		121,823
U.S. GSE’s CMO		134,206		1,743		(186	)		135,763
Corporate bonds		109,319		1,173		(1,349	)		109,143
	$	669,040		9,598		(3,317	)		675,321

* Government sponsored entities


	December 31, 2014
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
Available-for-sale	(Dollars in thousands)
Obligations of U.S. Government agencies	$	181,104		307		(2,667	)		178,744
Obligations of states and political subdivisions		98,538		3,400		(183	)		101,755
Mortgage backed securities
U.S. GSE’s MBS - residential		128,891		1,672		(527	)		130,036
U.S. GSE’s CMO		123,921		983		(443	)		124,461
Corporate bonds		109,936		990		(1,457	)		109,469
	$	642,390		7,352		(5,277	)		644,465

As of March 31, 2015, except for the U.S. Government agencies and government sponsored entities, there was no issuer who represented 10% or more of stockholders’ equity within the investment portfolio.

As of December 31, 2014, except for the U.S. Government agencies and government sponsored entities, there was no issuer who represented 10% or more of stockholders’ equity within the investment portfolio.

Proceeds from sales of securities available-for-sale and the associated gains (losses), excluding gains (losses) on called securities, for the three months ended March 31, 2015 and 2014 were as follows:


	Three Months Ended March 31,
	2015			2014
	(Dollars in thousands)

Proceeds	$	23,300		$	43,359
Gross Gains		108			472
Gross Losses		(51	)		(221	)

The amortized cost and fair value of the investment securities portfolio, excluding equity securities, are shown below by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2015
	Amortized		Estimated
	cost		fair value
	(Dollars in thousands)
Available-for-sale:
One year or less	$	1,241		1,263
After one year through five years		102,726		104,251
After five years through ten years		169,965		169,983
After ten years		395,108		399,824
	$	669,040		675,321

The following tables summarize the investment securities with unrealized losses at March 31, 2015 and December 31, 2014, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.


	March 31, 2015
	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss		fair value		loss		fair value		loss
Temporarily impaired	(Dollars in thousands)
Obligations of U.S. Government agencies	$	30,789		105		87,136		1,262		117,925		1,367
Obligations of states and political subdivisions		13,669		166		3,495		50		17,164		216
Mortgage backed securities
U.S. GSE’s MBS - residential		3,157		3		19,760		196		22,917		199
U.S. GSE’s CMO		13,506		99		7,656		87		21,162		186
Corporate bonds		11,609		173		29,251		1,176		40,860		1,349
	$	72,730		546		147,298		2,771		220,028		3,317


		December 31, 2014
	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss		fair value		loss		fair value		loss
Temporarily impaired	(Dollars in thousands)
Obligations of U.S. Government agencies	$	19,108		98		112,541		2,569		131,649		2,667
Obligations of states and political subdivisions		11,285		49		6,048		134		17,333		183
Mortgage backed securities
U.S. GSE’s MBS - residential		9,041		44		35,529		483		44,570		527
U.S. GSE’s CMO		36,594		216		18,205		227		54,799		443
Corporate bonds		29,769		204		29,421		1,253		59,190		1,457
	$	105,797		611		201,744		4,666		307,541		5,277

Other-Than-Temporary Impairment – March 31, 2015

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under the provisions of ASC 320-10, Investments – Debt and Equity Securities. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income or loss, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of March 31, 2015, the Company’s security portfolio consisted of 411 securities, 114 of which were in an unrealized loss position. Of these securities with unrealized losses, 52.28% were related to the Company’s mortgage-backed and corporate securities as discussed below.

Mortgage-backed Securities

At March 31, 2015, all of the Company’s mortgage-backed securities were issued by U.S. government-sponsored entities and agencies, primarily the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Government National Mortgage Association (“Ginnie Mae”), institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2015.

Corporate Securities

The Company holds forty-seven corporate securities totaling $109,143, of which twenty had an unrealized loss of $1,349 at March 31, 2015. Nineteen of the securities with an unrealized loss of $1,237 were issued by entities rated lower medium investment grade or higher. Because the decline in fair value is attributable primarily to changes in interest rates and not credit quality and because the Company does not have the intent to sell the securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2015.

Included in the Company’s corporate bonds is one trust preferred security with an amortized cost of $250, which had an unrealized loss of $112, resulting in a fair value of $138 at March 31, 2015. This security is not rated. Although the issuer is not in default, in January of 2011 the Company was notified that the issuer had elected to defer interest payments in accordance with the terms of the instrument. The issuer is a bank holding company with operations in the Southeast. The Company considered several factors including the financial condition and near term prospects of the issuer and concluded that the decline in fair value was primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual security. The Company has considered the capital position of the subsidiary banks, the liquidity of the holding company, the existence and severity of publicly available regulatory agreements, and the fact that these deferrals began following the most severe point of the national and regional recession. Given the prospect of capital formation in the current market and improving operating results of the industry overall, the Company expects to recover the amortized cost of this security. Because the Company does not have the intent to sell this security and it is likely that it will not be required to sell the security before its anticipated recovery, the Company does not consider this security to be other-than-temporarily impaired at March 31, 2015.

There were no credit losses recognized in earnings for the three month periods ended March 31, 2015 and 2014.

Other-Than-Temporary Impairment – December 31, 2014

As of December 31, 2014, the Company’s security portfolio consisted of 378 securities, 145 of which were in an unrealized loss position. Of these securities with unrealized losses, 45.99% were related to the Company’s mortgage backed and corporate securities as discussed below.

Mortgage-backed Securities

At December 31, 2014, all of the Company’s mortgage-backed securities were issued by U.S. government-sponsored entities and agencies, primarily the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Government National Mortgage Association (“Ginnie Mae”), institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2014.

Corporate Securities

The Company holds forty-five corporate securities totaling $109,469, of which twenty-five had an unrealized loss of $1,457 at December 31, 2014. Twenty-four of the securities with an unrealized loss of $1,319 were issued by entities rated lower medium investment grade or higher. Because the decline in fair value is attributable primarily to changes in interest rates and not credit quality and because the Company does not have the intent to sell the securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2014.

Included in the Company’s corporate bonds is one trust preferred security with an amortized cost of $250, which had an unrealized loss of $138, resulting in a fair value of $112 at December 31, 2014. This security is not rated. Although the issuer is not in default, in January of 2011 the Company was notified that the issuer had elected to defer interest payments in accordance with the terms of the instrument. The issuer is a bank holding company with operations in the Southeast. The Company considered several factors including the financial condition and near term prospects of the issuer and concluded that the decline in fair value was primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual security. The Company has considered the capital position of the subsidiary banks, the liquidity of the holding company, the existence and severity of publicly available regulatory agreements, and the fact that these deferrals began following the most severe point of the national and regional recession. Given the prospect of capital formation in the current market and improving operating results of the industry overall, the Company expects to recover the amortized cost of this security. Because the Company does not have the intent to sell this security and it is likely that it will not be required to sell the security before its anticipated recovery, the Company does not consider this security to be other-than-temporarily impaired at December 31, 2014.

At December 31, 2014, the fair value of this same corporate security totaling $112 was measured using Level 3 inputs because the market for it has become illiquid, as indicated by few, if any, trades during the period. The discount rate used in the valuation model was based on a yield of 10% that the market would require for corporate debt obligations with maturities and risk characteristics similar to the subordinated debenture being measured.

There were no credit losses recognized in earnings for the year ended December 31, 2014.

Note 3 – Loans

The following table summarizes loans at March 31, 2015 and December 31, 2014.


	March 31, 2015			December 31, 2014
	(Dollars in thousands)

Commercial, financial, and agricultural	$	209,458			208,905
Real estate:
Commercial		377,488			371,488
Residential		203,238			204,097
Acquisition, development and construction		163,297			164,303
Consumer installment		16,587			17,248
	$	970,068			966,041
Less allowance for loan losses		25,391			25,506
Less deferred loan origination fees (costs)		(239	)		(315	)
	$	944,916			940,850

The following tables present the activity in the allowance for loan losses by portfolio segment as of and for the three month periods ended March 31, 2015 and 2014.


	Three Months Ended March 31, 2015
	Commercial,
	Financial, and			CRE - Owner		CRE - Non Owner		Residential			ADC			ADC
	Agricultural			Occupied		Occupied		Real Estate			CSRA			Other			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	5,407			4,805		3,817		6,591			1,943			2,320			623			25,506
Charge-offs		(617	)		—		—		(41	)		(5	)		—			(129	)		(792	)
Recoveries		30			1		—		11			—			29			59			130
Provision		475			567		21		(206	)		(307	)		(152	)		149			547
Ending balance	$	5,295			5,373		3,838		6,355			1,631			2,197			702			25,391


	Three Months Ended March 31, 2014
	Commercial,
	Financial, and			CRE - Owner		CRE - Non Owner			Residential			ADC			ADC
	Agricultural			Occupied		Occupied			Real Estate			CSRA			Other			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	5,774			5,706		3,275			5,590			3,107			2,379			578			26,409
Charge-offs		(135	)		—		(718	)		(140	)		(96	)		(69	)		(157	)		(1,315	)
Recoveries		21			4		24			7			—			—			93			149
Provision		(90	)		326		492			46			(254	)		479			58			1,057
Ending balance	$	5,570			6,036		3,073			5,503			2,757			2,789			572			26,300

The following tables present the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2015 and December 31, 2014.


	March 31, 2015
	Commercial, Financial, and		CRE - Owner		CRE - Non Owner		Residential		ADC		ADC
	Agricultural		Occupied		Occupied		Real Estate		CSRA		Other		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	—		—		—		—		—		—		—		—
Collectively evaluated for impairment		5,295		5,373		3,838		6,355		1,631		2,197		702		25,391
	$	5,295		5,373		3,838		6,355		1,631		2,197		702		25,391

Loans:
Individually evaluated for impairment		1,585		869		7,591		2,289		2,815		2,733		2		17,884
Collectively evaluated for impairment		207,873		222,003		147,025		200,949		103,536		54,213		16,585		952,184
	$	209,458		222,872		154,616		203,238		106,351		56,946		16,587		970,068


	December 31, 2014
	Commercial, Financial, and		CRE - Owner		CRE - Non Owner		Residential		ADC		ADC
	Agricultural		Occupied		Occupied		Real Estate		CSRA		Other		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	207		—		—		—		—		—		—		207
Collectively evaluated for impairment		5,200		4,805		3,817		6,591		1,943		2,320		623		25,299
	$	5,407		4,805		3,817		6,591		1,943		2,320		623		25,506

Loans:
Individually evaluated for impairment		2,995		1,289		7,687		2,285		2,849		3,082		2		20,189
Collectively evaluated for impairment		205,910		218,619		143,893		201,812		107,235		51,137		17,246		945,852
	$	208,905		219,908		151,580		204,097		110,084		54,219		17,248		966,041

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2015 and December 31, 2014.


	March 31, 2015
	Unpaid				Allowance for		Average
	Principal		Recorded		Loan Losses		Recorded
	Balance		Investment (2)		Allocated		Investment
	(Dollars in thousands)
With no related allowance recorded: (1)
Commercial, financial, and agricultural:
Commerical	$	3,388		1,391		—		2,315
Financial		—		—		—		—
Agricultural		255		194		—		201
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		966		869		—		1,014
Non Owner occupied		7,816		7,591		—		7,647
Residential real estate:
Secured by first liens		2,717		2,188		—		2,180
Secured by junior liens		150		101		—		103
Acquisition, development and construction:
Residential		—		—		—		—
Other		8,215		5,548		—		5,594
Consumer		2		2		—		2
		23,509		17,884		—		19,056

With an allowance recorded:		—		—		—		—

	$	23,509		17,884		—		19,056

(1) No specific allowance for credit losses is allocated to these loans since they are sufficiently collateralized or had charge-offs

(2) Excludes accrued interest receivable and loan origination fees, net due to immateriality


	December 31, 2014
	Unpaid				Allowance for		Average
	Principal		Recorded		Loan Losses		Recorded
	Balance		Investment (2)		Allocated		Investment
	(Dollars in thousands)
With no related allowance recorded: (1)
Commercial, financial, and agricultural:
Commerical	$	2,000		611		—		1,805
Financial		—		—		—		—
Agricultural		263		206		—		231
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		1,385		1,289		—		1,377
Non Owner occupied		7,907		7,687		—		7,792
Residential real estate:
Secured by first liens		2,711		2,181		—		2,229
Secured by junior liens		150		104		—		110
Acquisition, development and construction:
Residential		—		—		—		—
Other		8,518		5,931		—		7,326
Consumer		2		2		—		3
		22,936		18,011		—		20,873
With an allowance recorded:
Commercial, financial, and agricultural:
Commerical		2,245		2,178		207		2,203
		2,245		2,178		207		2,203

	$	25,181		20,189		207		23,076

(1) No specific allowance for credit losses is allocated to these loans since they are sufficiently collateralized or had charge-offs

(2) Excludes accrued interest receivable and loan origination fees, net due to immateriality

The following tables present interest income on impaired loans for the three months ended March 31, 2015 and 2014.


	Three Months Ended March 31, 2015
	Interest Income Recognized		Cash Basis Interest Income Recognized
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	—		—
Financial		—		—
Agricultural		—		—
Equity lines		—		—
Other		—		—
Commercial real estate:
Owner occupied		3		3
Non Owner occupied		104		104
Residential real estate:
Secured by first liens		20		20
Secured by junior liens		—		—
Acquisition, development and construction:
Residential		—		—
Other		7		7
Consumer		—		—
	$	134		134

	Three Months Ended March 31, 2014
	Interest Income Recognized		Cash Basis Interest Income Recognized
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	—		—
Financial		—		—
Agricultural		—		—
Equity lines		—		—
Other		—		—
Commercial real estate:
Owner occupied		4		4
Non Owner occupied		83		83
Residential real estate:
Secured by first liens		6		6
Secured by junior liens		2		2
Acquisition, development and construction:
Residential		—		—
Other		10		10
Consumer		—		—
	$	105		105

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following tables present the aging of the recorded investment in past due loans as of March 31, 2015 and December 31, 2014 by class of loans.


	March 31, 2015
	30 - 89 Days Past Due		90 Days or More Past Due		Nonaccrual Loans		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	4		—		1,513		1,517		118,850		120,367
Financial		—		—		—		—		11,060		11,060
Agricultural		—		—		194		194		10,916		11,110
Equity lines		71		—		78		149		35,102		35,251
Other		—		—		69		69		31,601		31,670
Commercial real estate:
Owner occupied		856		—		944		1,800		221,072		222,872
Non Owner occupied		—		—		862		862		153,754		154,616
Residential real estate:
Secured by first liens		1,505		—		2,921		4,426		192,521		196,947
Secured by junior liens		118		—		373		491		5,800		6,291
Acquisition, development and construction:
Residential		—		—		—		—		44,087		44,087
Other		10		—		5,604		5,614		113,596		119,210
Consumer		31		—		112		143		16,444		16,587
	$	2,595		—		12,670		15,265		954,803		970,068

		December 31, 2014
	30 - 89 Days Past Due		90 Days or More Past Due		Nonaccrual Loans		Total Past Due		Loans Not Past Due		Total
		(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	—		—		2,865		2,865		119,815		122,680
Financial		—		—		—		—		9,355		9,355
Agricultural		276		—		206		482		9,315		9,797
Equity lines		33		—		318		351		33,298		33,649
Other		—		—		69		69		33,355		33,424
Commercial real estate:
Owner occupied		1,638		—		620		2,258		217,650		219,908
Non Owner occupied		—		—		877		877		150,703		151,580
Residential real estate:
Secured by first liens		2,919		—		3,451		6,370		190,970		197,340
Secured by junior liens		347		—		188		535		6,222		6,757
Acquisition, development and construction:
Residential		—		—		—		—		45,264		45,264
Other		258		—		5,874		6,132		112,907		119,039
Consumer		44		—		136		180		17,068		17,248
	$	5,515		—		14,604		20,119		945,922		966,041

Troubled Debt Restructurings:

The Company has troubled debt restructurings (TDRs) with a balance of $9,550 and $9,669 included in impaired loans at March 31, 2015 and December 31, 2014, respectively. No specific reserves were allocated to customers whose loan terms had been modified in TDRs as of March 31, 2015 and December 31, 2014. The Company is not committed to lend additional amounts as of March 31, 2015 and December 31, 2014 to customers with outstanding loans that are classified as TDRs. The following tables present TDRs as of March 31, 2015 and December 31, 2014.


	March 31, 2015
	Number of Loans		Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		-	$	-
Financial		-		-
Agricultural		-		-
Equity lines		-		-
Other		-		-
Commercial real estate:
Owner occupied		2		353
Non Owner occupied		4		5,801
Residential real estate:
Secured by first liens		9		1,106
Secured by junior liens		1		101
Acquisition, development and construction:
Residential		-		-
Other		3		2,189
Consumer		-		-
		19	$	9,550


	December 31, 2014
	Number of Loans		Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		-	$	-
Financial		-		-
Agricultural		-		-
Equity lines		-		-
Other		-		-
Commercial real estate:
Owner occupied		2		354
Non Owner occupied		4		5,878
Residential real estate:
Secured by first liens		9		1,112
Secured by junior liens		1		104
Acquisition, development and construction:
Residential		-		-
Other		3		2,221
Consumer		-		-
		19	$	9,669

No loans were modified as TDRs during the three months ended March 31, 2015. One residential real estate loan was modified as a TDR during the three months ended March 31, 2014. This modification involved a 2.13% reduction of the stated interest rate of the loan and an extension of the maturity date for 192 months.

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2015 and 2014.


	Three Months Ended March 31, 2015						Three Months Ended March 31, 2014
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)						(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		-	$	-	$	-		-	$	-	$	-
Financial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Equity lines		-		-		-		-		-		-
Other		-		-		-		-		-		-
Commercial real estate:
Owner occupied		-		-		-		-		-		-
Non Owner occupied		-		-		-		-		-		-
Residential real estate:
Secured by first liens		-		-		-		1		287		223
Secured by junior liens		-		-		-		-		-		-
Acquisition, development and construction:
Residential		-		-		-		-		-		-
Other		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
		-	$	-	$	-		1	$	287	$	223

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no TDRs with payment defaults during the three months ended March 31, 2015 and March 31, 2014.

For the three months ended March 31, 2014, the TDR described in the previous table increased the allowance for loan losses by $53 and resulted in charge-offs of $53.

Charge-offs on such loans are factored into the rolling historical loss rate, which is used in the calculation of the allowance for loan losses.

The terms of certain other loans were modified during the three month periods ended March 31, 2015 and 2014 that did not meet the definition of a TDR. These loans have a total recorded investment as of March 31, 2015 and 2014 of $2,149 and $832, respectively, and had delays in payment ranging from 30 days to 3 months in 2015 and 2014. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company, through its originating account officer, places an initial credit risk rating on every loan. An annual review and analysis of loan relationships (irrespective of loan types included in the overall relationship) with total related exposure of $500 or greater is performed by the Credit Administration department in order to update risk ratings given current available information.

Through the review of delinquency reports, updated financial statements or other relevant information in the normal course of business, the lending officer and/or Credit Administration review personnel may determine that a loan relationship has weakened to the point that a criticized (Watch grade) or classified (Substandard & Doubtful grades) status is warranted. When a loan relationship with total related exposure of $200 or greater is adversely graded (Watch or above), the lending officer is then charged with preparing a Classified/Watch report which outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assisting the borrower in moving the loans to another institution and/or collateral liquidation. All such Classified/Watch reports are reviewed on a quarterly basis by members of Executive Management at a regularly scheduled meeting in which each lending officer presents the workout plans for their criticized credit relationships.

The Company uses the following definitions for risk ratings.

Watch: Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows.


	March 31, 2015
	Pass		Watch		Substandard		Doubtful
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	108,582		8,304		3,481		—
Financial		11,060		—		—		—
Agricultural		7,981		2,491		638		—
Equity lines		34,553		348		350		—
Other		31,260		340		70		—
Commercial real estate:
Owner occupied		200,664		14,668		7,540		—
Non Owner occupied		141,188		5,139		8,289		—
Residential real estate:
Secured by first liens		183,537		8,627		4,783		—
Secured by junior liens		5,455		166		670		—
Acquisition, development and construction:
Residential		44,058		29		—		—
Other		105,756		7,038		6,416		—
Consumer		16,138		282		167		—
	$	890,232		47,432		32,404		—

	December 31, 2014
	Pass		Watch		Substandard		Doubtful
		(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	109,908		7,782		4,990		—
Financial		9,355		—		—		—
Agricultural		6,636		1,960		1,201		—
Equity lines		32,773		287		589		—
Other		33,012		343		69		—
Commercial real estate:
Owner occupied		201,840		14,593		3,475		—
Non Owner occupied		137,973		5,066		8,541		—
Residential real estate:
Secured by first liens		183,898		8,115		5,327		—
Secured by junior liens		6,125		149		483		—
Acquisition, development and construction:
Residential		45,264		—		—		—
Other		101,047		11,597		6,395		—
Consumer		16,919		154		175		—
	$	884,750		50,046		31,245		—

Note 4 – Fair Value Measurements

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

Level 1:

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:

Significant other observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3:

Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In determining the appropriate levels, the Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on matrix pricing which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities relationship to other benchmark quoted securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other non-observable market indicators (Level 3). The fair values of Level 3 investment securities are determined by an independent third party. These valuations are then reviewed by the Company’s Controller and CFO. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Interest Rate Swap Derivatives: The fair value of interest rate swap derivatives is determined based on discounted cash flow valuation models using observable market data as of the measurement date (Level 2 inputs). The fair value adjustment is included in other liabilities.

Mortgage Banking Derivatives: The fair value of mortgage banking derivatives is determined by individual third party sales contract prices for the specific loans held at each reporting period end (Level 2 inputs). The fair value adjustment is included in other assets.

Loans Held for Sale: Loans held for sale are carried at fair value, as determined by outstanding commitments, from third party investors (Level 2). None of the Company’s loans held for sale are past due 90 days or more or on nonaccrual as of March 31, 2015 and December 31, 2014.

Impaired Loans: The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. The fair value of other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral dependent impaired loans and other real estate owned are performed by certified general appraisers, certified residential appraisers or state licensed appraisers whose qualifications and licenses are annually reviewed and verified by the Company. Once received, a member of the Real Estate Valuation Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value and determines if reasonable. Appraisals for collateral dependent impaired loans and other real estate owned are updated annually. On an annual basis the Company compares the actual selling costs of collateral that has been liquidated to the selling price to determine what additional adjustment should be made to the appraisal value. The most recent analysis performed indicated that an additional discount of 10% should be applied to properties with appraisals performed within 12 months.

Assets and Liabilities Measured on a Recurring Basis

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy as of March 31, 2015 and December 31, 2014.


	March 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Available-for-sale securities
Obligations of U.S. Government agencies	$	191,504		-		191,504		-
Obligations of states and political subdivisions		117,088		-		117,088		-
Mortgage-backed securities
U.S. GSE’s MBS - residential		121,823		-		121,823		-
U.S. GSE’s CMO		135,763		-		135,763		-
Corporate bonds		109,143		-		109,143		-
Total available-for-sale securities	$	675,321		-		675,321		-

Loans held for sale		18,271		-		18,271		-

Mortgage banking derivatives		43		-		43		-

	$	693,635		-		693,635		-

Liabilities:
Interest rate swap derivatives		2,325		-		2,325		-

	$	2,325		-		2,325		-


	December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Available-for-sale securities
Obligations of U.S. Government agencies	$	178,744		-		178,744		-
Obligations of states and political subdivisions		101,755		-		101,755		-
Mortgage-backed securities
U.S. GSE’s MBS - residential		130,036		-		130,036		-
U.S. GSE’s CMO		124,461		-		124,461		-
Corporate bonds		109,469		-		109,357		112
Total available-for-sale securities	$	644,465		-		644,353		112

Loans held for sale		18,365		-		18,365		-

Mortgage banking derivatives		6		-		6		-

	$	662,836		-		662,724		112

Liabilities:
Interest rate swap derivatives		1,959		-		1,959		-

	$	1,959		-		1,959		-

The Company’s policy is to recognize transfers into or out of a level as of the end of the reporting period.

Transfers between Level 1 and Level 2:

No securities were transferred between Level 1 and Level 2 during the three months ended March 31, 2015 and the three months ended March 31, 2014.

Transfers between Level 2 and Level 3:

During the three months ended March 31, 2015, one corporate security was transferred out of Level 3 and into Level 2 based on observable market data for this security due to increased market activity for this security. This security with a market value of $138 as of March 31, 2015 was transferred on March 31, 2015. No securities were transferred between Level 2 and Level 3 during the three months ended March 31, 2014.

The following tables present a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2015 and 2014.


Fair Value Measurements Using Significant Unobservable
Inputs (Level 3)

	Total			Corporate bonds
	(Dollars in thousands)

Beginning balance, January 1, 2015	$	112		$	112
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales		-			-
Other-than-temporary impairment		-			-
Included in other comprehensive income		26			26
Purchases, sales, issuances and settlements
Purchases		-			-
Sales, Calls		-			-
Issuances		-			-
Settlements		-			-
Principal repayments		-			-
Transfers into Level 3		-			-
Transfers out of Level 3		(138	)		(138	)

Ending balance, March 31, 2015	$	-		$	-


Fair Value Measurements Using Significant Unobservable
Inputs (Level 3)

	Total		Corporate bonds
	(Dollars in thousands)

Beginning balance, January 1, 2014	$	110	$	110
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales		-		-
Other-than-temporary impairment		-		-
Included in other comprehensive income		1		1
Purchases, sales, issuances and settlements
Purchases		-		-
Sales, Calls		-		-
Issuances		-		-
Settlements		-		-
Principal repayments		-		-
Transfers into Level 3		-		-
Transfers out of Level 3		-		-

Ending balance, March 31, 2014	$	111	$	111

The Company uses an independent third party to value its U.S. government agencies, mortgage-backed securities, and corporate bonds. Their approach uses relevant information generated by transactions that have occurred in the market place that involve similar assets, as well as using cash flow information when necessary. These inputs are observable, either directly or indirectly in the market place for similar assets. The Company considers these valuations to be Level 2 pricing.

The fair value of the Company’s municipal securities is determined by another independent third party. Their approach uses relevant information generated by transactions that have occurred in the market place that involve similar assets. These inputs are observable, either directly or indirectly in the market place for similar assets. The Company considers these valuations to be Level 2 pricing.

For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3 pricing) as determined by an independent third party. The significant unobservable inputs used in the valuation model include prepayment rates, constant default rates, loss severity and yields.

On a quarterly basis, the Company selects a random sample of investment security valuations, as determined by the independent third party, to validate pricing and level assignments.

At March 31, 2015, there were no financial instruments measured at fair value on a recurring basis using level 3 inputs. The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a recurring basis at March 31, 2014.


	March 31, 2014	Valuation Technique	Unobservable Inputs	Range (Weighted Avg)
	(Dollars in thousands)
Available-for-sale securities
Corporate bonds	111	discounted cash flow	yield	10.00%

The significant unobservable inputs used in the fair value measurement of the Company’s corporate bonds are yields that the market would require for corporate debt obligations with similar maturities and risk characteristics.

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2015 and December 31, 2014 are summarized below.


	March 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Impaired loans (1)
Commercial, financial, and agricultural	$	1,391		-		-		1,391
Real estate:
Commercial		1,732		-		-		1,732
Residential		1,426		-		-		1,426
Acquisition, development and construction		4,973		-		-		4,973
Consumer installment		2		-		-		2
	$	9,524		-		-		9,524

Other real estate owned
Real estate:
Commercial	$	144		-		-		144
Acquisition, development and construction		434		-		-		434
	$	578		-		-		578
	$	10,102		-		-		10,102

(1) Includes loans directly charged down to fair value.


	December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Impaired loans
Commercial, financial, and agricultural	$	2,582		-		-		2,582
Real estate:
Commercial		2,166		-		-		2,166
Residential		1,421		-		-		1,421
Acquisition, development and construction		5,352		-		-		5,352
Consumer installment		2		-		-		2
	$	11,523		-		-		11,523

Other real estate owned
Real estate:
Commercial	$	144		-		-		144
Acquisition, development and construction		435		-		-		435
	$	579		-		-		579
	$	12,102		-		-		12,102

The following represents impairment charges recognized during the period:

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a recorded investment of $9,524, resulting in an additional provision for loan losses of $385 for the three months ended March 31, 2015.

As of December 31, 2014, impaired loans had a recorded investment of $11,730, with a valuation allowance of $207, resulting in an additional provision for loan losses of $2,038 for the year ending 2014.

Other real estate owned was $578 which consisted of the outstanding balance of $897, less a valuation allowance of $319, resulting in a write down of $1 for the three months ended March 31, 2015.

As of December 31, 2014, other real estate owned was $579 which consisted of the outstanding balance of $896, less a valuation allowance of $317, resulting in a write down of $266 for the year ending 2014.

The following tables present quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014.

		March 31,	Valuation	Unobservable	Range
		2015	Techniques	Inputs	(Weighted Avg)
		(Dollars in thousands)
Impaired loans
	Commercial, financial and agricultural	1,391	sales comparison	adjustment for	0.00% - 30.00% (15.00%)
				differences between
				the comparable sales

			income approach	capitalization rate	10.82%

			liquidation value

	Real estate:
	Commercial	1,732	sales comparison	adjustment for	0.00% - 70.99% (20.60%)
				differences between
				the comparable sales

			income approach	capitalization rate	8.25% - 10.00% (8.95%)

			liquidation value

	Residential	1,426	sales comparison	adjustment for	1.30% - 24.46% (7.21%)
				differences between
				the comparable sales

	Acquisition, development and
	construction	4,973	sales comparison	adjustment for	0.00% - 161.40% (29.84%)
				differences between
				the comparable sales

			income approach	discount rate	9.50%

	Consumer installment	2	liquidation value

Other real estate owned
	Real estate:
	Commercial	144	sales comparison	adjustment for	0.00% - 25.00% (12.50%)
				differences between
				the comparable sales
	Acquisition, development and
	construction	434	sales comparison	adjustment for	5.00% - 60.00% (27.11%)
				differences between
				the comparable sales

		Dec. 31,	Valuation	Unobservable	Range
		2014	Techniques	Inputs	(Weighted Avg)
		(Dollars in thousands)
Impaired loans
	Commercial, financial and agricultural	2,582	sales comparison	adjustment for	7.00% - 50.00% (28.50%)
				differences between
				the comparable sales

			income approach	capitalization rate	9.39%

			liquidation value

	Real estate:
	Commercial	2,166	sales comparison	adjustment for	0.00% - 70.99% (19.92%)
				differences between
				the comparable sales

			income approach	capitalization rate	8.25% - 10.00% (8.97%)

			liquidation value

	Residential	1,421	sales comparison	adjustment for	1.30% - 24.46% (7.24%)
				differences between
				the comparable sales

	Acquisition, development and
	construction	5,352	sales comparison	adjustment for	0.00% - 161.40% (28.55%)
				differences between
				the comparable sales

			income approach	discount rate	9.50% - 10.00% (9.69%)

	Consumer installment	2	liquidation value


Other real estate owned
	Real estate:
	Commercial	144	sales comparison	adjustment for	0.00% - 25.00% (12.50%)
				differences between
				the comparable sales
	Acquisition, development and
	construction	435	sales comparison	adjustment for	5.00% - 60.00% (27.12%)
				differences between
				the comparable sales

Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value is required. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather a good-faith estimate of the fair value of financial instruments held by the Company. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements.

The following methods and assumptions, not previously presented, were used by the Company in estimating the fair value of its financial instruments:

(a)

Cash and Cash Equivalents

Fair value equals the carrying value of such assets due to their nature and is classified as Level 1.

(b)

Loans, net

The fair value of loans is calculated using discounted cash flows by loan type resulting in a Level 3 classification. The discount rate used to determine the present value of the loan portfolio is an estimated market rate that reflects the credit and interest rate risk inherent in the loan portfolio without considering widening credit spreads due to market illiquidity. The estimated maturity is based on the Company’s historical experience with repayments adjusted to estimate the effect of current market conditions. The carrying amount of related accrued interest receivable, due to its short-term nature, approximates its fair value, is not significant and is not disclosed. The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification. The allowance for loan losses is considered a reasonable discount for credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(c)

Restricted Equity Securities

The fair value of Federal Home Loan Bank (“FHLB”) stock was not practicable to determine due to restrictions placed on its transferability.

(d)

Deposits

Fair values for certificates of deposit have been determined using discounted cash flows. The discount rate used is based on estimated market rates for deposits of similar remaining maturities and are classified as Level 2. The carrying amounts of all other deposits, due to their short-term nature, approximate their fair values and are classified as Level 1. The carrying amount of related accrued interest payable, due to its short-term nature, approximates its fair value, is not significant and is not disclosed.

(e)

Securities Sold Under Repurchase Agreements

Fair value approximates the carrying value of such liabilities due to their short-term nature and is classified as Level 1.

(f)

Advances from FHLB

The fair value of the FHLB advances is obtained from the FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the Company for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.

(g)

Subordinated debentures

The fair value for subordinated debentures is calculated using discounted cash flows based upon current market spreads to LIBOR for debt of similar remaining maturities and collateral terms resulting in a Level 3 classification.

(h)

Commitments

The difference between the carrying values and fair values of commitments to extend credit are not significant and are not disclosed.

The carrying amounts and estimated fair values of the Company’s financial instruments at March 31, 2015 and December 31, 2014, not previously presented, are as follows:


	March 31, 2015

	Carrying		Fair Value Measurements
	amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	71,449		71,449		71,449		-		-
Loans, net		935,392		934,412		-		-		934,412
Restricted equity securities		4,276		N/A
Financial liabilities:
Deposits with stated maturities		379,506		382,161		-		382,161		-
Deposits without stated maturities		1,157,513		1,157,513		1,157,513		-		-
Securities sold under repurchase agreements		715		715		715		-		-
Advances from FHLB		64,000		67,713		-		67,713		-
Subordinated debentures		20,000		14,930		-		-		14,930


	December 31, 2014

	Carrying		Fair Value Measurements
	amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	35,995		35,995		35,995		-		-
Loans, net		929,327		925,997		-		-		925,997
Restricted equity securities		4,398		N/A
Financial liabilities:
Deposits with stated maturities		375,808		376,607		-		376,607		-
Deposits without stated maturities		1,088,056		1,088,056		1,088,056		-		-
Securities sold under repurchase agreements		10,678		10,678		10,678		-		-
Advances from FHLB		64,000		67,551		-		67,551		-
Subordinated debentures		20,000		14,886		-		-		14,886

Note 5 – Stock-Based Compensation

The Company’s 2006 Long Term Incentive Plan provides for the issuance of restricted stock awards to officers and directors. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.

On March 19, 2014, the Compensation Committee of the Company approved grants of 63,000 shares to certain of its directors and executive officers. The fair value of the stock was determined using the closing price on date of grant. The shares vest in equal one-third increments on each of February 1, 2015; February 1, 2016; and February 1, 2017.

A summary of changes in the Company’s nonvested shares for the three month period ended March 31, 2015 is as follows:


				Weighted Avg
	Number of			Grant-Date
	Shares			Fair Value

Nonvested at January 1, 2015		63,000		$	21.60
Granted		-			-
Vested		(21,000	)		21.60
Forfeited		-			-
Nonvested at March 31, 2015		42,000		$	21.60

As of March 31, 2015, there was $855 of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is being recognized over a period of twenty-two months.

The total fair value of shares vested during the three month period ended March 31, 2015 was $567.

Note 6 – Interest Rate Swap Derivatives

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

During May 2011, the Company entered into two interest rate swaps with notional amounts totaling $10,000 which were designated as cash flow hedges of certain subordinated debentures and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other liabilities with changes in fair value recorded in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain highly effective during the remaining terms of the swaps.

Summary information about the interest rate swaps designated as cash flow hedges as of March 31, 2015 and December 31, 2014 is as follows:


	March 31, 2015			December 31, 2014
	(Dollars in thousands)

Notional Amounts	$	10,000		$	10,000
Weighted average pay rates		5.35	%		5.35	%
Weighted average receive rates		1.67	%		1.64	%
Weigted average maturity	13.83 years			14.08 years
Unrealized losses	$	2,325		$	1,959

The swaps were forward starting and had effective dates of March 15, 2012 and June 15, 2012. Interest expense recorded on these swap transactions totaled $92 and $93 for the three months ended March 31, 2015 and March 31, 2014, respectively, and is reported as a component of interest expense in other borrowings.

If the fair value falls below specified levels, the Company is required to pledge collateral against these derivative contract liabilities. As of March 31, 2015, the Company had pledged $2,235 with the counterparty. Under certain circumstances, including a downgrade of its credit rating below specified levels, the counterparty is required to pledge collateral against these derivative contract liabilities. As of March 31, 2015, no collateral had been received from the counterparty.

Note 7 – Other Comprehensive Income (Loss)

Other comprehensive income (loss) for the Company consists of changes in net unrealized gains and losses on investment securities available-for-sale and interest rate swap derivatives. The following tables present a summary of the accumulated other comprehensive income balances, net of tax, as of March 31, 2015 and 2014.


	Unrealized Gain (Loss) on Derivatives			Unrealized Gain (Loss) on Securities		Accumulated Other Comprehensive Income (Loss)
	(Dollars in thousands)

Balance, December 31, 2014	$	(1,197	)	$	1,268	$	71

Current Year change		(223	)		2,569		2,346
Balance, March 31, 2015	$	(1,420	)	$	3,837	$	2,417


	Unrealized Gain (Loss) on Derivatives			Unrealized Gain (Loss) on Securities			Accumulated Other Comprehensive Income (Loss)
	(Dollars in thousands)

Balance, December 31, 2013	$	(469	)	$	(9,632	)	$	(10,101	)

Current Year change		(217	)		5,032			4,815
Balance, March 31, 2014	$	(686	)	$	(4,600	)	$	(5,286	)

The following table presents reclassifications out of accumulated other comprehensive income (loss).


	Three Months Ended March 31,
	2015			2014
Details about Accumulated Other Comprehensive Income Components	Amount reclassified from Accumulated Other Comprehensive Income			Amount reclassified from Accumulated Other Comprehensive Income			Affected line item in the Statement where Net Income is presented
(Dollars in thousands)
Unrealized gains and losses on available-for-sale securities
	$	57		$	251		Investment securities gains, net
		(18	)		(77	)	Tax expense
	$	39		$	174		Net of tax

Note 8 – Dividends

On January 14, 2015, the Company declared a quarterly cash dividend of $0.15 per share on outstanding shares. The dividend was paid on February 13, 2015 to shareholders of record as of January 30, 2015.

On April 22, 2015, the Company declared a quarterly cash dividend of $0.15 per share on outstanding shares. The dividend is payable on May 22, 2015 to shareholders of record as of May 8, 2015.

Item 2.

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

(Dollar amounts, except per share amounts, are expressed in thousands unless otherwise noted)

Overview

Southeastern Bank Financial Corporation (the “Company”) is a Georgia corporation that is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Southeastern Bank Financial Corporation (OTCQB: SBFC) trades on OTCQB, the marketplace for companies that are current in their reporting with a U.S. regulator. Investors can find Real-Time quotes and market information for the Company on www.otcmarkets.com.

The Company’s wholly-owned subsidiary, Georgia Bank & Trust Company of Augusta (“GB&T”), primarily does business in the Augusta-Richmond County, GA-SC metropolitan area. GB&T was organized by a group of local citizens and commenced business on August 28, 1989, with one branch location. Today, it is Augusta’s largest community banking company, operating nine full service branches in Augusta, Martinez, and Evans, Georgia. GB&T also operates three full service branches in North Augusta and Aiken, South Carolina under the name “Southern Bank & Trust, a division of Georgia Bank & Trust Company of Augusta.” Mortgage origination offices are located in Augusta and Savannah, Georgia and in Aiken, South Carolina. The Company’s Operations Center is located in Martinez, Georgia.

The Company’s primary market includes Richmond and Columbia Counties in Georgia and Aiken County in South Carolina, all part of the Augusta-Richmond County, GA-SC metropolitan statistical area (MSA). The Augusta market area has a diversified economy based principally on government, public utilities, health care, manufacturing, construction, and wholesale and retail trade. Augusta is one of the leading medical centers in the Southeast.

The Company’s services include the origination of residential and commercial real estate loans, construction and development loans, and commercial and consumer loans. The Company also offers a variety of deposit programs, including noninterest-bearing demand, interest checking, money management, savings, and time deposits. In its primary market area, the Augusta-Richmond County, GA-SC metropolitan area, the Company had 20.23% of all deposits and was the second largest depository institution and the largest locally based institution at June 30, 2014, as cited from the Federal Deposit Insurance Corporation’s (“FDIC”) website. Securities sold under repurchase agreements are also offered. Additional services include wealth management, trust, retail investment, and mortgage. As a matter of practice, most mortgage loans are sold in the secondary market; however, some mortgage loans are placed in the portfolio based on asset/liability management strategies. The Company continues to concentrate on increasing its market share through various new deposit and loan products and other financial services and by focusing on its customer relationship management philosophy. The Company is committed to building life-long relationships with its customers, employees, shareholders, and the communities it serves.

The Company’s primary source of income is from its lending activities, followed by interest income from its investment activities, service charges and fees on deposits and gain on sales of mortgage loans in the secondary market. Interest income on loans including loans held for sale increased $245 or 2.17% for the first three months of 2015 as compared to the first three months of 2014 and was due primarily to increased loan volume offset in part by lower yields. Interest income on investment securities increased $113 or 3.20% due primarily to higher yields offset in part by decreased volume. Gain on sales of loans increased $735 or 89.74% due primarily to increased mortgage originations and refinancing activity during the first three months of the year.


Table 1 - Selected Financial Data

	March 31,			December 31,			March 31,
	2015			2014			2014
	(Dollars in thousands)

Assets	$	1,803,344		$	1,732,781		$	1,747,226
Investment securities		675,321			644,465			654,738
Loans		970,307			966,356			926,754
Deposits		1,537,019			1,463,864			1,503,167

Annualized return on average total assets		0.97	%		0.96	%		0.91	%
Annualized return on average equity		10.82	%		11.49	%		11.36	%

Annualized return on average total assets was 0.97% for the three months ended March 31, 2015, an increase from 0.91% for the same period last year and annualized return on average equity was 10.82% for the three months ended March 31, 2015, a decline from 11.36% for the same period last year. The decreased return on average equity was due primarily to a higher level of retained earnings. Net income for the three months ended March 31, 2015 was $4,206 compared to $3,806 for the same period in 2014.

Table 2 highlights significant changes in the balance sheet at March 31, 2015 as compared to December 31, 2014. Total assets increased $70,563 and reflect increases in cash and equivalents of $35,454, investment securities of $30,856 and loans of $3,951. The deferred tax asset decreased $1,173 and was due primarily to the tax effect of the change in value of unrealized gains and losses on securities available-for-sale recognized through other comprehensive income. Total liabilities increased $64,858 and reflect an increase in deposits of $73,155. Stockholders’ equity increased $5,705 and was due primarily to an increase in retained earnings of $3,195 and a $2,346 increase in accumulated other comprehensive income.

Table 2 - Selected Balance Sheet Data


	March 31,		December 31,		Variance
	2015		2014		Amount			%
	(Dollars in thousands)

Cash, due from banks and interest-bearing deposits	$	71,449	$	35,995	$	35,454			98.50	%
Investment securities		675,321		644,465		30,856			4.79	%
Loans		970,307		966,356		3,951			0.41	%
Other real estate owned		955		1,107		(152	)		(13.73	%)
Deferred tax asset		14,090		15,263		(1,173	)		(7.69	%)
Assets		1,803,344		1,732,781		70,563			4.07	%
Deposits		1,537,019		1,463,864		73,155			5.00	%
Securities sold under repurchase agreements		715		10,678		(9,963	)		(93.30	%)
Advances from Federal Home Loan Bank		64,000		64,000		-			0.00	%
Liabilities		1,642,353		1,577,495		64,858			4.11	%
Stockholders’ equity		160,991		155,286		5,705			3.67	%

The Company meets its liquidity needs by managing cash and due from banks, federal funds purchased and sold, maturity of investment securities, principal repayments from mortgage-backed securities, and draws on lines of credit. Additionally, liquidity can be managed through structuring deposit and loan maturities. The Company funds loan and investment growth with core deposits, securities sold under repurchase agreements, Federal Home Loan Bank advances and other wholesale funding including brokered certificates of deposit. During inflationary periods, interest rates generally increase and operating expenses generally rise. When interest rates rise, variable rate loans and investments produce higher earnings; however, deposit and other borrowings interest expense also rise. The Company monitors its interest rate risk as it applies to net interest income in a ramp up and down annually 400 basis points (4.00%) scenario and as it applies to economic value of equity in a shock up and down 400 basis points (4.00%) scenario. The Company monitors operating expenses through responsibility center budgeting.

Forward-Looking Statements

Southeastern Bank Financial Corporation may, from time to time, make written or oral forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission (the “Commission”) and its reports to shareholders. Statements made in such documents, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The Company’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including unanticipated changes in the Company’s local economies, the national economy, governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values and securities portfolio values; difficulties in interest rate risk management; the effects of competition in the banking business; difficulties in expanding the Company’s business into new markets; changes in governmental regulation relating to the banking industry, including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III international capital accord; failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans; and other factors. The Company cautions that such factors are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, the Company.

Critical Accounting Estimates

The accounting and financial reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Of these policies, management has identified the allowance for loan losses, determining the fair values of financial instruments including other real estate owned, interest rate swap derivatives, investment securities, and other-than-temporary impairment as critical accounting estimates that requires difficult, subjective judgment and are important to the presentation of the financial condition and results of operations of the Company.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects the Company’s earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management’s estimate of the level of probable incurred losses in the portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to: (1) detailed reviews of individual loans; (2) historical and current trends in loan charge-offs for the various portfolio segments evaluated; (3) the level of the allowance in relation to total loans and to historical loss levels; (4) levels and trends in non-performing and past due loans; (5) collateral values of properties securing loans; and (6) management’s assessment of economic conditions. The Company’s Board of Directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors.

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. The Company has developed policies and procedures for evaluating the overall quality of its loan portfolio and the timely identification of problem credits. Management continues to review these policies and procedures and makes further improvements as needed. The adequacy of the Company’s allowance for loan losses and the effectiveness of the Company’s internal policies and procedures are also reviewed periodically by the Company’s regulators and the Company’s internal loan review personnel. The Company’s regulators may advise the Company to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is considered, and the Company may recognize additions to the allowance as a result.

The Company continues to refine the methodology on which the level of the allowance for loan losses is based by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to the Company.

Fair Value of Financial Instruments

A significant portion of the Company’s assets are financial instruments carried at fair value. This includes securities available-for-sale, loans held for sale, certain impaired loans, mortgage banking derivatives and other real estate owned. At March 31, 2015 and December 31, 2014 the percentage of total assets measured at fair value was 39.02% and 38.95%, respectively. The majority of assets carried at fair value are based on either quoted market prices or market prices for similar instruments. At March 31, 2015, 1.44% of assets measured at fair value were based on significant unobservable inputs. This consisted primarily of impaired loans and other real estate and represents approximately 0.56% of the Company’s total assets. See Note 4 “Fair Value Measurements” in the “Notes to Consolidated Financial Statements” herein for additional disclosures regarding the fair value of financial instruments.

Other Real Estate Owned

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Costs related to the development and improvement of real estate owned are capitalized.

Interest Rate Swap Derivatives

The fair value of interest rate swap derivatives is determined based on discounted cash flow valuation models using observable market data as of the measurement date. The fair value adjustment is included in other liabilities. See Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” herein for additional disclosures regarding the fair value of financial instruments.

Investment Securities

The fair values for available-for-sale securities are generally based upon quoted market prices or observable market prices for similar instruments. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment. The Company conducts periodic reviews to identify and evaluate each available-for-sale security that has an unrealized loss for other-than-temporary impairment. An unrealized loss exists when the fair value of an individual security is less than its amortized cost basis. The primary factors the Company considers in determining whether an impairment is other-than-temporary are the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether the Company intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. As of March 31, 2015, the Company had no securities valued using unobservable inputs (Level 3).

Results of Operations

Net income for the first three months of 2015 was $4,206, an increase of $400 or 10.51% compared with net income of $3,806 for the first three months of 2014. Increases in net interest income, gain on sales of loans and reduced provision for loan losses were partially offset by increased operating expenses.

Total other comprehensive income for the first three months of 2015 was $2,346 compared to other comprehensive income of $4,815 in the first three months of 2014. The change was due primarily to a lower unrealized gain on securities available-for-sale of $4,263 during the three months ended March 31, 2015 as compared to $8,487 for the same period last year which was caused by a decrease in market interest rates and therefore an increase in the market value of the portfolio.

Noninterest income increased $628 or 15.35% for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 and resulted primarily from increased gain on sales of loans of $735. Partially offsetting the increase were investment securities gains which decreased $194.

Noninterest expense totaled $11,065 for the three months ended March 31, 2015, an increase of $952, or 9.41% compared to the same period ended March 31, 2014. The change was primarily due to an increase in salaries and other personnel expense of $821 due to a combination of new positions, salary increases, and benefit accruals. In addition, other operating expenses increased $88 and occupancy costs increased $74.

Net Interest Income

The primary source of earnings for the Company is net interest income, which is the difference between income on interest-earning assets, such as loans and investment securities, and interest expense incurred on interest-bearing sources of funds, such as deposits and borrowings. The following table shows the average balances of interest-earning assets and interest-bearing liabilities, annualized average yields earned and rates paid on those respective balances, and the actual interest income and interest expense for the periods indicated. Average balances are calculated based on daily balances, yields on non-taxable investments are not reported on a tax equivalent basis and average balances for loans include nonaccrual loans even though interest was not earned.

Table 3 - Average Balances, Income and Expenses, Yields and Rates


	Three Months Ended March 31, 2015						Three Months Ended March 31, 2014
	Average Amount		Annualized Average Yield or Rate		Amount Paid or Earned		Average Amount		Annualized Average Yield or Rate		Amount Paid or Earned
	(Dollars in thousands)
Interest-earning assets:
Loans	$	967,594	4.73	%	$	11,402	$	914,418	4.92	%	$	11,201
Loans held for sale		15,481	3.22	%		123		9,533	3.36	%		79
Investment securities
Taxable		541,684	2.19	%		2,964		565,399	2.01	%		2,837
Tax-exempt		92,421	2.96	%		683		88,055	3.17	%		697
Interest-bearing deposits in other banks		12,316	0.56	%		17		15,983	0.38	%		15
Total interest-earning assets	$	1,629,496	3.74	%	$	15,189	$	1,593,388	3.73	%	$	14,829

Interest-bearing liabilities:
Deposits	$	1,292,351	0.46	%	$	1,460	$	1,276,149	0.50	%	$	1,588
Securities sold under repurchase agreements		3,078	0.39	%		3		770	0.52	%		1
Other borrowings		84,000	3.08	%		638		85,547	3.17	%		668
Total interest-bearing liabilities	$	1,379,429	0.62	%	$	2,101	$	1,362,466	0.67	%	$	2,257

Net interest margin/income:			3.22	%	$	13,088			3.16	%	$	12,572

Net interest income increased $516 (4.10%) during the three month period as compared to the same period in 2014 and resulted primarily from higher levels of interest earning assets and lower rates paid on deposits.

Loan interest income increased $245 (2.17%) in the three month period as compared to the same period in the prior year. The change resulted primarily from a $53,176 increase in average loans offset in part by lower yields, which decreased from 4.92% to 4.73%, Interest on loans held for sale increased $44 and resulted primarily from a $5,948 increase in average loans offset by a decrease in yields from 3.36% to 3.22%.

Interest income on taxable investment securities increased $127 or 4.48% and interest income on tax-exempt investment securities decreased $14 or 2.01%. The changes were due to both volume and rate. Average taxable investment balances decreased $23,715 or 4.19% and average tax-exempt balances increased $4,366 or 4.96%. The average yield on the taxable investment portfolio increased from 2.01% in the first quarter of 2014 to 2.19% in the first quarter of 2015 and the average yield on the tax-exempt investment portfolio declined from 3.17% in the first quarter of 2014 to 2.96% in the first quarter of 2015.

Total interest income increased $360 (2.43%) and average yields on interest-earning assets remained nearly unchanged from 3.73% in 2014 to 3.74% in 2015.

Deposit interest expense decreased $128 (8.06%) in the three month period as compared to the same period in the prior year, primarily as a result of lower rates paid on deposits offset in part by an increase in average deposits of $16,202. Due to these reductions and the low interest rate environment, the annualized average rate of interest bearing liabilities decreased from 0.67% in the first quarter of 2014 to 0.62% in the first quarter of 2015.

The Company’s net interest margin for the three months ended March 31, 2015 increased 6 basis points to 3.22% compared to 3.16% for the three months ended March 31, 2014. The increase in the net interest margin was due a larger volume of average interest earning assets and reduced liability costs.

Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average rates earned and paid on such assets and liabilities, the ability to manage the earning asset portfolio, and the availability of particular sources of funds, such as noninterest-bearing deposits.

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted the Company’s interest income and interest expense during the period indicated. Information is provided in each category with respect to changes attributable to change in volume (change in volume multiplied by prior rate), changes attributable to change in rate (change in rate multiplied by prior volume), and changes in rate/volume (change in rate multiplied by change in volume).

Table 4 - Rate/Volume Analysis


	Three Months Ended March 31, 2015
	compared to Three Months Ended March 31, 2014
	Increase (Decrease) due to
	Volume			Rate			Combined			Total
	(Dollars in thousands)
Interest-earning assets:
Loans		652			(426	)		(25	)		201
Loans held for sale		49			(3	)		(2	)		44
Investment securities
Taxable		(119	)		257			(11	)		127
Tax-exempt		34			(46	)		(2	)		(14	)
Interest-bearing deposits in other banks		(3	)		7			(2	)		2
Total interest-earning assets		613			(211	)		(42	)		360

Interest-bearing liabilities:
Deposits		20			(146	)		(2	)		(128	)
Securities sold under repurchase agreements		3			-			(1	)		2
Other borrowings		(12	)		(18	)		-			(30	)
Total interest-bearing liabilities		11			(164	)		(3	)		(156	)

Net change in net interest income										$	516

Provision for Loan Losses

The provision for loan losses is the charge to operating earnings necessary to maintain the allowance for loan losses at a level which, in management’s estimate, is adequate to cover the estimated amount of probable incurred losses in the loan portfolio. The provision for loan losses totaled $547 for the three months ended March 31, 2015 compared to $1,057 for the three months ended March 31, 2014. See “Allowance for Loan Losses” for further analysis of the provision for loan losses.

Noninterest Income

Table 5 - Noninterest Income


	Three Months Ended March 31,					Variance
	2015		2014			Amount			%
	(Dollars in thousands)

Service charges and fees on deposits	$	1,744	$	1,629		$	115			7.06	%
Gain on sales of loans		1,554		819			735			89.74	%
Gain (loss) on sale of fixed assets, net		1		(1	)		2			(200.00	%)
Investment securities gains, net		57		251			(194	)		(77.29	%)
Retail investment income		526		574			(48	)		(8.36	%)
Trust service fees		336		323			13			4.02	%
Earnings from cash surrender value of bank-owned life insurance		278		278			-			0.00	%
Miscellaneous income		223		218			5			2.29	%
Total noninterest income	$	4,719	$	4,091		$	628			15.35	%

Noninterest income increased $628 (15.35%) during the three month period as compared to the same period in 2014. The change was mostly due to an increase in gain on sales of loans of $735 (89.74%) and an increase in service charges and fees on deposits of $115, offset in part by reduced net gains on investment securities.

Noninterest Expense

Table 6 - Noninterest Expense


	Three Months Ended March 31,						Variance
	2015			2014			Amount			%
	(Dollars in thousands)

Salaries and other personnel expense	$	6,587		$	5,766		$	821			14.24	%
Occupancy expenses		1,018			944			74			7.84	%
Marketing & business development		497			504			(7	)		(1.39	%)
Processing expense		827			583			244			41.85	%
Legal and professional fees		412			476			(64	)		(13.45	%)
Data processing expense		389			418			(29	)		(6.94	%)
FDIC insurance		241			274			(33	)		(12.04	%)
Communications expense		263			227			36			15.86	%
Gain on sale of other real estate		(67	)		(35	)		(32	)		91.43	%
Provision for other real estate losses		1			-			1			N/A
Loan costs (excluding OREO)		274			376			(102	)		(27.13	%)
Other operating expenses		623			580			43			7.41	%
Total noninterest expense	$	11,065		$	10,113		$	952			9.41	%

Noninterest expense increased $952 (9.41%) during the three month period as compared to the same period in 2014. The most significant increase in expense for the three month period was salaries and other personnel expense which increased $821 (14.24%) due to additional staff, salary increases, increased retirement and other benefit plan costs and higher commission expense. Processing expense increased $244 (41.85%) due to migration to an outsourced mainframe computer system.

Partially offsetting these increases were loan costs (excluding OREO) which decreased $102 (27.13%) due primarily to a $135 decrease in estimated losses on mortgage loans sold to investors, partially offset by an increase of $30 in mortgage origination and closing costs.

Income Taxes

The Company recognized income tax expense of $1,989 for the three months ended March 31, 2015 as compared to an income tax expense of $1,687 for the same period in 2014. The effective income tax rate for the three months ended March 31, 2015 was 32.11% compared to 30.71% for the three months ended March 31, 2014. The primary reason for the increase in the effective tax rate this year was a smaller percentage of tax exempt interest income on investment securities and income related to bank-owned life insurance relative to total income.

Loans

The following table presents the composition of the Company’s loan portfolio as of March 31, 2015 and December 31, 2014.

Table 7 - Loan Portfolio Composition


	March 31, 2015					December 31, 2014
	Amount		%			Amount		%
	(Dollars in thousands)

Commercial, financial and agricultural	$	209,458		21.59	%	$	208,905		21.62	%
Real estate
Commercial		377,488		38.90	%		371,488		38.44	%
Residential		203,238		20.95	%		204,097		21.12	%
Acquisition, development and construction		163,297		16.83	%		164,303		17.00	%
Total real estate		744,023		76.68	%		739,888		76.56	%
Consumer
Direct		15,947		1.64	%		16,581		1.72	%
Indirect		-		0.00	%		1		0.00	%
Revolving		640		0.07	%		666		0.07	%
Total consumer		16,587		1.71	%		17,248		1.79	%
Deferred loan origination costs (fees)		239		0.02	%		315		0.03	%
Total	$	970,307		100.00	%	$	966,356		100.00	%

At March 31, 2015, 76.68% of the loan portfolio is comprised of real estate loans. Commercial, financial and agricultural loans comprise 21.59%, and consumer loans comprise 1.71% of the portfolio.

Commercial real estate comprises 38.90% of the loan portfolio and consists of both non-owner occupied and owner occupied properties, where the operations of the commercial entity provide the necessary cash flow to service the debt. For this portion of the real estate loan portfolio, repayment is generally not dependent upon the sale of the real estate held as collateral. Acquisition, development and construction loans comprise 16.83% of the loan portfolio. The Company carefully monitors the loans in this category since the repayment of these loans is generally dependent upon the sale of the real estate in the normal course of business and can be impacted by national and local economic conditions. The residential category, 20.95% of the portfolio, represents those loans that the Company chooses to maintain in its portfolio rather than selling into the secondary market for marketing and competitive reasons and commercial loans secured by residential real estate.

The Company has no large loan concentrations to individual borrowers. Unsecured loans at March 31, 2015 totaled $44,188.

Interest reserves are established for certain acquisition, development and construction (“ADC”) loans and certain commercial real estate (“CRE”) loans with major renovations based on the feasibility of the project, the timeframe for completion, the creditworthiness of the borrower and guarantors, and collateral. An interest reserve allows the borrower’s interest cost to be capitalized and added to the loan balance. As a matter of practice GB&T does not generally establish loan funded interest reserves on ADC or CRE loans; however, the Company’s loan portfolio includes five loans with interest reserves at March 31, 2015. The following table details the loans and accompanying interest reserves as of March 31, 2015.

	March 31, 2015
			Reserves
	Balance		Original		Advanced		Remaining
	(Dollars in thousands)

Loan 1	$	10,777		330		277		53
Loan 2		10,500		250		232		18
Loan 3		5,952		82		64		18
Loan 4		5,533		62		62		-
Loan 5		3,891		100		19		81

These ADC or CRE loans have not been renewed or restructured and, as of March 31, 2015, are not on nonaccrual.

Underwriting for ADC and CRE loans with interest reserves follows the same process as those loans without reserves. In order for GB&T to establish a loan-funded interest reserve, the borrower must have the ability to repay without the use of a reserve and a history of developing and stabilizing similar properties. All ADC or CRE loans, including those with interest reserves, are carefully monitored through periodic construction site inspections by bank employees or third party inspectors to ensure projects are moving along as planned. Management assesses the appropriateness of the use of interest reserves during the entire term of the loan as well as the adequacy of the reserve. Collateral inspections are completed before approval of advances.

Loan Review and Classification Process

The Company maintains a loan review and classification process which involves multiple officers of the Company and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans. All loan officers are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. Risk ratings are selected from an 8-point scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful and rating 8 Loss.

When a loan officer originates a new loan, he or she documents the credit file with an offering sheet summary, supplemental underwriting analyses, relevant financial information and if applicable, collateral evaluations. All of this information is used in the determination of the initial loan risk rating. Then, the Company’s Credit Administration department undertakes an independent credit review of that relationship in order to validate the lending officer’s rating. Lending relationships with total related exposure of $500 or greater are also placed into a tracking database and reviewed by Credit Administration personnel on an annual basis in conjunction with the receipt of updated borrower and guarantor financial information. The individual loan reviews analyze such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current/anticipated performance of the loan. The results of such reviews are presented to Executive Management.

Through the review of delinquency reports, updated financial statements or other relevant information in the normal course of business, the lending officer and/or Credit Administration review personnel may determine that a loan relationship has weakened to the point that a criticized (loan grade 5) or classified (loan grade 6 through 8) status is warranted. When a loan relationship with total related exposure of $200 or greater is adversely graded (5 or above), the lending officer is then charged with preparing a Classified/Watch report which outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assisting the borrower in moving the loans to another institution and/or collateral liquidation. All such Classified/Watch reports are reviewed on a quarterly basis by members of Executive Management at a regularly scheduled meeting in which each lending officer presents the workout plans for their criticized credit relationships.

Depending upon the individual facts, circumstances and the result of the Classified/Watch review process, Executive Management may categorize the loan relationship as impaired. Once that determination has occurred, Executive Management in conjunction with Credit Administration personnel, will complete an evaluation of the collateral (for collateral-dependent loans) based upon appraisals on file adjusting for current market conditions and other local factors that may affect collateral value. This subjective evaluation may produce an initial specific allowance for placement in the Company’s Allowance for Loan Losses calculation. As soon as practical, updated appraisals on the collateral backing that impaired loan relationship are ordered. When the updated appraisals are received, Executive Management with assistance from Credit Administration department personnel reviews the appraisal, and updates the specific allowance analysis for each loan relationship accordingly. The Director’s Loan Committee reviews on a quarterly basis the Classified/Watch reports including changes in credit grades of 5 or higher as well as all impaired loans, the related allowances and other real estate owned (“OREO”).

In general, once the specific allowance has been finalized, Executive Management will authorize a charge-off prior to the following calendar quarter-end in which that reserve calculation is finalized.

The review process also provides for the upgrade of loans that show improvement since the last review.

Nonperforming Assets

Non-performing assets include nonaccrual loans, loans past due 90 days or more, restructured loans and other real estate owned. Table 8 shows the current and prior period amounts of non-performing assets. Non-performing assets were $19,961 at March 31, 2015, compared to $21,903 at December 31, 2014 and $24,062 at March 31, 2014. The change from March 2014 to March 2015 was due primarily to a $3,766 decrease in nonaccrual loans.

There were no loans past due 90 days or more and still accruing at March 31, 2015, December 31, 2014 and March 31, 2014.

Troubled debt restructurings (TDRs) are troubled loans in which the original terms have been modified in favor of the borrower or either principal or interest has been forgiven due to deterioration in the borrower’s financial condition. There was $9,550 in TDRs at March 31, 2015, of which $3,214 were on nonaccrual status. TDRs totaled $9,669 at December 31, 2014, of which $3,477 were on nonaccrual status, and $8,033 at March 31, 2014, of which $1,694 were on nonaccrual status.

Table 8 - Non-Performing Assets


	March 31, 2015			December 31, 2014			March 31, 2014
	(Dollars in thousands)
Nonaccrual loans:
Commercial, financial and agricultural	$	1,854		$	3,458		$	850
Real Estate:
Commercial		1,806			1,497			4,071
Residential		3,294			3,639			4,284
Acquisition, development and construction		5,604			5,874			7,165
Consumer		112			136			66
Total Nonaccrual loans		12,670			14,604			16,436
Restructured loans (1)		6,336			6,192			6,339
Other real estate owned		955			1,107			1,287
Total Non-performing assets	$	19,961		$	21,903		$	24,062

Loans past due 90 days or more and still accruing interest	$	-		$	-		$	-

Non-performing assets to total assets		1.11	%		1.26	%		1.38	%

Non-performing assets to period end loans and OREO		2.06	%		2.26	%		2.59	%

Allowance for loan loss to period end nonaccrual loans		200.40	%		174.65	%		160.01	%

(1) Restructured loans on nonaccrual status at period end are included under nonaccrual loans in the table.

The ratio of non-performing assets to total loans and other real estate was 2.06% at March 31, 2015 compared to 2.26% at December 31, 2014 and 2.59% at March 31, 2014. The ratio of allowance for loan losses to total nonaccrual loans was 200.40% at March 31, 2015 compared to 174.65% at December 31, 2014 and 160.01% at March 31, 2014. The resolution of non-performing assets continues to be a priority of management.

Nonaccrual loans decreased $3,766 (22.91%) from March 31, 2014 due primarily to a decline in nonaccrual commercial real estate loans, nonaccrual acquisition, development and construction loans, and nonaccrual residential real estate loans of $2,265, $1,561 and $990, respectively. Partially offsetting these declines were an increase in nonaccrual commercial, financial and agricultural loans of $1,004.

The decrease in nonaccrual commercial real estate loans was due in part to the bank negotiated short sale of a troubled Thomson, Georgia hotel property of approximately $2,587. The decrease in nonaccrual acquisition, development and construction loans was due in part to the $1,928 borrower negotiated sale of a Hamburg, Kentucky lifestyle center and outparcel held as additional collateral on a large participation loan and the $379 bank negotiated short sale of a North Augusta, South Carolina spec house, partially offset by the $1,105 downgrade of an Augusta, Georgia builder relationship consisting of several spec houses and lots. The decrease in nonaccrual residential real estate loans was the combined result of the upgrade and/or foreclosure of several smaller loan relationships.

The increase in nonaccrual commercial, financial and agricultural loans was due in part to a defaulted loan on a multifamily property totaling approximately $1,358 after a $500 write down.

Although the exposure has declined, a significant portion of nonaccrual loans continues to be collateral-dependent ADC loans. The following table provides further information regarding the Company’s most significant nonaccrual loans.

Table 9 - Nonaccrual Loans

Balance

Originated

Nonaccrual
Date

Trigger

Collateral

Allowance

Method

Appraisal
Date

Appraised

Value

(Dollars in thousands)

ADC Loan - Other

2,667

03/23/07

05/06/13

financial condition

retail centers

collateral value

08/14

4,950

Commercial, financial and agricultural

1,358

01/29/08

12/30/14

financial condition

apartments

collateral value

03/15

1,510

ADC Loan - CSRA

1,646

12/28/11

12/28/12

financial condition

land

collateral value

03/15

1,800

5,671

Other, net

6,999

Nonaccrual loans at March 31, 2015

12,670

The following table presents a roll forward of other real estate owned for the three month periods ended March 31, 2015 and 2014, respectively.

Table 10 - Other Real Estate Owned

	2015			2014
	(Dollars in thousands)

Beginning balance, January 1	$	1,107		$	1,014
Additions		303			378
Increase in valuation allowance		(1	)		-
Sales		(598	)		(140	)
Deferred gain on sale of OREO		77			-
Gain on sale of OREO		67			35
Ending balance, March 31	$	955		$	1,287

The following table provides details of other real estate owned as of March 31, 2015, December 31, 2014 and March 31, 2014, respectively.

	March 31, 2015			December 31, 2014			March 31, 2014
	(Dollars in thousands)
Other Real Estate:
Real Estate
Commercial	$	378		$	200		$	429
Residential		74			364			56
Acquisition, development and construction		822			860			853
		1,274			1,424			1,338

Valuation allowance		(319	)		(317	)		(51	)
	$	955		$	1,107		$	1,287

The change in other real estate owned is due to the continuing process of resolving problem loans. In the first three months of 2015, additions to other real estate owned totaled $303 compared to $378 for the same period in 2014. Proceeds from sales of other real estate totaled $598 for the three months ended March 31, 2015 compared to $140 for the three months ended March 31, 2014.

Allowance for Loan Losses

The allowance for loan losses represents an allocation for the estimated amount of probable incurred losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with particular emphasis on impaired, non-accruing, past due, and other loans that management believes require special attention. The determination of the allowance for loan losses is considered a critical accounting estimate of the Company. See “Critical Accounting Estimates.”

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may advise additions to the allowance based on their judgments about information available to them at the time of their examination. Such regulatory guidance is considered, and the Company may recognize additions to the allowance as a result.

Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based upon management’s analysis of risk in the loan portfolio. Loans determined to be uncollectible are charged to the allowance for loan losses and subsequent recoveries are added to the allowance. A provision for losses in the amount of $547 was charged to expense for the three months ended March 31, 2015 compared to $1,057 for the three months ended March 31, 2014.

At March 31, 2015 the ratio of allowance for loan losses to period end loans was 2.62% compared to 2.64% at December 31, 2014 and 2.84% at March 31, 2014. The decline in overall level of allowance as a percentage of the portfolio is due in part to the decline in the average historical net loss rate (see Note 1 -- ALLL Methodology in the Notes to Consolidated Financial Statements).

Net charge-offs totaled $663 for the three months ended March 31, 2015, of which $587 or 88.54% were related to commercial, financial and agricultural loans. The provisions for loan losses allocated to individual portfolio segments are affected by the calculation of average historical net loss rate factors and by the internal and external qualitative factors within each category.

Management considers the current allowance for loan losses appropriate based upon its analysis of risk in the portfolio using the methods previously discussed. Management’s judgment is based upon a number of assumptions about events which are believed to be reasonable, but which may or may not prove correct. While it is the Company’s policy to charge off in the current period the loans in which a loss is considered probable, there are additional risks of losses which cannot be quantified precisely or attributed to a particular loan or class of loans. Because management evaluates such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrower’s ability to repay, management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance will not be required.

Liquidity and Capital Resources

The Company has maintained adequate liquidity to meet operating and loan funding requirements. The loan to deposit ratio at March 31, 2015 was 63.13% compared to 66.01% at December 31, 2014 and 61.65% at March 31, 2014. Deposits at March 31, 2015 and December 31, 2014 include $200,550 and $188,094 of brokered certificates of deposit, respectively. GB&T has also utilized borrowings from the Federal Home Loan Bank. GB&T maintains a line of credit with the Federal Home Loan Bank approximating 10% of its total assets. Federal Home Loan Bank advances are collateralized by eligible first mortgage loans, commercial real estate loans and investment securities. Federal Home Loan Bank advances totaled $64,000 at March 31, 2015. GB&T maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20,000, of which none was outstanding at March 31, 2015 and a $10,000 repurchase line of credit with CenterState Bank, Orlando, Florida, of which none was outstanding at March 31, 2015. GB&T has a federal funds purchased accommodation with SunTrust Bank, Atlanta, Georgia for advances up to $10,000, of which none was outstanding at March 31, 2015 and a federal funds purchased accommodation with CenterState Bank, Orlando, Florida, for advances up to $10,000, of which none was outstanding at March 31, 2015. The Company also maintains a borrowing facility at the Federal Reserve Bank, under the Borrower-In-Custody Program, of which none was outstanding at March 31, 2015. Additionally, liquidity needs can be supplemented by the structuring of the maturities of investment securities and the pricing and maturities on loans and deposits offered to customers. The Company also uses retail securities sold under repurchase agreements to fund operations. Retail securities sold under repurchase agreements were $715 at March 31, 2015.

Stockholders’ equity to total assets was 8.93% at March 31, 2015 compared to 8.96% at December 31, 2014 and 7.98% at March 31, 2014. The capital of the Company exceeded all required regulatory guidelines at March 31, 2015. The Company’s common equity Tier 1, Tier 1 risk-based, total risk-based and leverage capital ratios were 13.09%, 14.74%, 16.00%, and 10.13%, respectively, at March 31, 2015.

The following table reflects the current regulatory capital levels in more detail, including comparisons to the regulatory minimums.

Table 11 - Regulatory Capital Requirements

March 31, 2015


	Actual					Required					Excess
	Amount		Percent			Amount		Percent			Amount		Percent
						(Dollars in thousands)
Southeastern Bank Financial Corporation

Risk-based capital:
Common equity tier 1 capital	$	158,435		13.09	%		54,480		4.50	%		103,955		8.59	%
Tier 1 capital		178,435		14.74	%		72,639		6.00	%		105,796		8.74	%
Total capital		193,695		16.00	%		96,852		8.00	%		96,843		8.00	%
Tier 1 leverage ratio		178,435		10.13	%		70,454		4.00	%		107,981		6.13	%

Georgia Bank & Trust Company

Risk-based capital:
Common equity tier 1 capital	$	170,019		14.07	%		54,371		4.50	%		115,648		9.57	%
Tier 1 capital		170,019		14.07	%		72,494		6.00	%		97,525		8.07	%
Total capital		185,249		15.33	%		96,659		8.00	%		88,590		7.33	%
Tier 1 leverage ratio		170,019		9.67	%		79,096		4.50	%		90,923		5.17	%

Georgia Bank & Trust Company is regulated by the Department of Banking and Finance of the State of Georgia (DBF). The DBF requires that state banks in Georgia generally maintain a minimum ratio of Tier 1 capital to total assets of four and one-half percent (4.50%).

On July 2, 2013, the Federal Reserve and the FDIC approved rules that implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act. The rules include a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and Tier 2 risk-based capital requirements. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. Based on the Company’s current capital composition and levels, management does not presently anticipate that the rules present a material risk to the Company’s financial condition or results of operations.

Except as set forth above, management is not aware of any other events or uncertainties that are reasonably likely to have a material effect on the Company’s liquidity, capital resources or operations.

Commitments and Contractual Obligations

The Company is party to lines of credit with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Lines of credit are unfunded commitments to extend credit. These instruments involve, in varying degrees, exposure to credit and interest rate risk in excess of the amounts recognized in the financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unfunded commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company evaluates acquisition, development and construction loans for the percentage completed before extending additional credit. The Company follows the same credit policies in making commitments and contractual obligations as it does for on-balance sheet instruments.

Unfunded commitments to extend credit where contractual amounts represent potential credit risk totaled $186,102 at March 31, 2015. This includes standby letters of credit of $4,690 at March 31, 2015. These commitments are primarily at variable interest rates.

The Company’s commitments are funded through internal funding sources of scheduled repayments of loans and sales and maturities of investment securities available-for-sale or external funding sources through acceptance of deposits from customers or borrowings from other financial institutions.

The following table is a summary of the Company’s commitments to extend credit, commitments under contractual leases as well as the Company’s contractual obligations, consisting of deposits, FHLB advances, which are subject to early termination options, borrowed funds and benefit plans by contractual maturity date.

Table 12 - Commitments and Contractual Obligations


	Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
	(Dollars in thousands)

Lines of credit	$	181,412		-		-		-
Standby letters of credit		4,690		-		-		-
Lease agreements		299		348		48		-
Deposits		1,331,598		184,215		20,176		1,030
Securities sold under repurchase agreements		715		-		-		-
Salary continuation agreements		232		1,282		1,610		32,160
FHLB advances		-		45,000		19,000		-
Due to broker		1,585		-		-		-
Subordinated debentures		-		-		-		20,000
Total commitments and contractual obligations	$	1,520,531	$	230,845	$	40,834	$	53,190

Although management regularly monitors the balance of outstanding commitments to fund loans to ensure funding availability should the need arise, management believes that the risk of all customers fully drawing on all these lines of credit at the same time is remote.

Effects of Inflation and Changing Prices

Inflation generally increases the cost of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction and to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation can increase a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and stockholders’ equity. Mortgage originations and refinances tend to slow as interest rates increase, and can reduce the Company’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of March 31, 2015, there were no substantial changes in the interest rate sensitivity analysis or the sensitivity of market value of portfolio equity for various changes in interest rates calculated as of December 31, 2014. A detailed discussion of market risk is provided in the Company’s 2014 Annual Report on Form 10-K.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (principal executive officer) and its Group Vice President and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, such officers concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) that is required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There have been no changes in the Company’s internal controls or, to the Company’s knowledge, in other factors during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Part II

OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is subject.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect its business, financial condition or future results. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

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

Issuer Purchases of Equity Securities

The following table sets forth information regarding the Company’s purchases of its common stock on a monthly basis during the first quarter of 2015.

					Total Number of Shares		Maximum Number (or Appropriate
	Total Number		Average		Purchased as Part of		Dollar Value) of Shares Yet To Be
	of Shares		Price Paid		Publicly Announced Plans		Purchased Under the Plans or
Period	Purchased (1)		Per Share (1)		or Programs (1)		Programs (1)
January 1 through
January 31, 2015		400	$	27.30		400		299,454
February 1 through
February 28, 2015		-		-		-		299,454
March 1 through
March 31, 2015		-		-		-		299,454
Total		400	$	27.30		400		299,454

(1) On October 15, 2014, the Company’s Board of Directors announced the commencement of a stock repurchase program (the “2014 Program”), pursuant to which it will, from time to time, repurchase up to 300,000 shares of its outstanding common stock in the open market or in private transactions. The 2014 Program does not have a stated expiration date and no stock repurchase programs were terminated during the first quarter of 2015.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

10.1 Amended and Restated Key Officer Compensation Agreement, dated March 18, 2015 and effective January 1, 2015, by and between Georgia Bank & Trust Company of Augusta and R. Daniel Blanton (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K Filed March 23, 2015).

10.2 Amended and Restated Key Officer Compensation Agreement, dated March 18, 2015 and effective January 1, 2015, by and between Georgia Bank & Trust Company of Augusta and Ronald L. Thigpen (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K Filed March 23, 2015).

10.3 Amended and Restated Employment Agreement, dated March 18, 2015 and effective January 1, 2015, by and between Georgia Bank & Trust Company of Augusta and Darrell R. Rains (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K Filed March 23, 2015).

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 Interactive Data Files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 in XBRL (eXtensible Business Reporting Language).

SOUTHEASTERN BANK FINANCIAL CORPORATION

Form 10-Q Signatures

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


	SOUTHEASTERN BANK FINANCIAL CORPORATION


Date: April 24, 2015	By:	/s/ Darrell R. Rains
	Darrell R. Rains
	Group Vice President, Chief Financial Officer (Duly Authorized Officer of Registrant and Principal Financial Officer)

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