Southeastern Bank Financial CORP - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Southeastern Bank Financial CORP	t1600657_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Southeastern Bank Financial CORP	t1600657_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Southeastern Bank Financial CORP	t1600657_ex31-1.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 September 30, 2016.

¨	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 ¨

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 ¨

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

Accelerated filer x	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ 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:

6,800,714 shares of common stock, $3.00 par value per share, outstanding as of October 25, 2016.

SOUTHEASTERN BANK FINANCIAL CORPORATION

FORM 10-Q

INDEX

			Page
Part I

	Item 1.	Financial Statements (Unaudited)

		Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3

		Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2016 and 2015	4

		Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015	6

		Notes to Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	63

	Item 4.	Controls and Procedures	63

Part II Other Information

	Item 1.	Legal Proceedings	64

	Item 1A.	Risk Factors	64

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

	Item 3.	Defaults Upon Senior Securities	65

	Item 4.	Mine Safety Disclosures	65

	Item 5.	Other Information	65

	Item 6.	Exhibits	65

Signature			66

PART I

FINANCIAL INFORMATION

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	September 30,
	2016		December 31,
	(Unaudited)		2015
Assets
Cash and due from banks	$	70,963	$	40,181
Interest-bearing deposits in other banks		24,429		2,736
Cash and cash equivalents		95,392		42,917
Available-for-sale securities		658,445		691,563
Loans held for sale, at fair value		12,110		18,647
Loans		1,036,791		1,009,149
Less allowance for loan losses		21,368		21,367
Loans, net		1,015,423		987,782

Premises and equipment, net		25,934		27,398
Accrued interest receivable		5,492		6,331
Bank-owned life insurance		44,186		43,167
Restricted equity securities		5,478		5,169
Other real estate owned		276		360
Deferred tax asset		10,888		13,958
Other assets		1,905		3,073
	$	1,875,529	$	1,840,365
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing	$	258,164	$	229,002
Interest-bearing:
NOW accounts		419,538		401,674
Savings		566,426		548,729
Money management accounts		19,329		16,330
Time deposits		290,879		333,345
		1,554,336		1,529,080

Securities sold under repurchase agreements		550		15,684
Advances from Federal Home Loan Bank		90,000		85,000
Accrued interest payable and other liabilities		22,044		20,688
Subordinated debentures		20,000		20,000
Total liabilities		1,686,930		1,670,452

Stockholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; 0 shares outstanding in 2016 and 2015, respectively		-		-
Common stock, $3.00 par value; 10,000,000 shares authorized; 6,800,530 and 6,745,818 shares issued in 2016 and 2015, respectively; 6,800,530 and 6,745,818 shares outstanding in 2016 and 2015, respectively		20,402		20,237
Additional paid-in capital		65,834		63,637
Retained earnings		97,972		87,250
Treasury stock, at cost; 0 shares in 2016 and 2015, respectively		-		-
Accumulated other comprehensive income (loss), net		4,391		(1,211	)
Total stockholders' equity		188,599		169,913
	$	1,875,529	$	1,840,365

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						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Interest income:
Loans, including fees	$	11,867		$	11,584		$	35,644		$	35,296
Investment securities		3,819			3,945			11,562			11,390
Interest-bearing deposits in other banks		53			20			160			54
Total interest income		15,739			15,549			47,366			46,740
Interest expense:
Deposits		1,337			1,443			4,096			4,354
Securities sold under repurchase agreements		1			6			11			11
Other borrowings		641			562			1,900			1,826
Total interest expense		1,979			2,011			6,007			6,191

Net interest income		13,760			13,538			41,359			40,549
Provision (Credit) for loan losses		93			132			561			(2,011	)
Net interest income after provision (credit) for loan losses		13,667			13,406			40,798			42,560

Noninterest income:
Service charges and fees on deposits		1,833			1,831			5,403			5,418
Gain on sales of loans		2,087			2,007			6,156			5,319
(Loss) gain on sale of fixed assets, net		(5	)		58			(5	)		(3	)
Investment securities gains (losses), net		44			(165	)		413			(1,005	)
Retail investment income		680			589			1,772			1,635
Trust service fees		350			357			1,087			1,048
Earnings from cash surrender value of bank-owned life insurance		359			365			1,019			924
Miscellaneous income		236			265			866			709
Total noninterest income		5,584			5,307			16,711			14,045

Noninterest expense:
Salaries and other personnel expense		6,717			6,719			20,503			19,968
Occupancy expenses		1,101			1,040			3,265			3,088
Other real estate losses (gains), net		101			10			108			(102	)
Prepayment fees		-			-			-			955
Merger-related expenses		541			-			1,598			-
Other operating expenses		3,694			3,802			11,327			10,938
Total noninterest expense		12,154			11,571			36,801			34,847

Income before income taxes		7,097			7,142			20,708			21,758
Income tax expense		2,326			2,277			6,741			6,997
Net income	$	4,771		$	4,865		$	13,967		$	14,761

Other comprehensive income (loss):
Unrealized gain (loss) on derivatives	$	82		$	(502	)		(878	)		(260	)
Unrealized (loss) gain on securities available-for-sale		(3,499	)		5,472			10,460			2,006
Reclassification adjustment for realized (gain) loss on securities		(44	)		165			(413	)		1,005
Tax effect		1,346			(1,997	)		(3,567	)		(1,070	)
Total other comprehensive income (loss)		(2,115	)		3,138			5,602			1,681
Comprehensive income	$	2,656		$	8,003		$	19,569		$	16,442

(continued)

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Comprehensive Income

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

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015

Basic net income per share	$	0.70	$	0.73	$	2.07	$	2.20

Diluted net income per share	$	0.70	$	0.72		2.07		2.20

Weighted average common shares outstanding		6,771,388		6,703,371		6,738,601		6,700,439

Weighted average number of common and common equivalent shares outstanding		6,797,172		6,719,396		6,756,784		6,713,344

See accompanying notes to unaudited consolidated financial statements.

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	13,967		$	14,761
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		1,786			1,678
Deferred income tax (benefit) expense		(496	)		1,877
Provision (Credit) for loan losses		561			(2,011	)
Net investment securities (gains) losses		(413	)		1,005
Net amortization of premiums on investment securities		3,428			3,059
Earnings from CSV of bank-owned life insurance		(1,019	)		(924	)
Stock-based compensation expense		350			350
Prepayment fees on Federal Home Loan Bank advances		-			955
Loss on disposal of premises and equipment		5			3
Loss (gain) on the sale of other real estate		24			(116	)
Provision for other real estate valuation allowance		84			14
Gain on sales of loans		(6,156	)		(5,319	)
Real estate loans originated for sale		(180,985	)		(181,560	)
Proceeds from sales of real estate loans		193,678			172,906
Decrease (increase) in accrued interest receivable		839			(385	)
Decrease (increase) in other assets		1,168			(1,338	)
Increase in accrued interest payable and other liabilities		479			1,019
Net cash provided by operating activities		27,300			5,974

Cash flows from investing activities:
Proceeds from sales of available-for-sale securities		95,718			110,635
Proceeds from maturities and calls of available-for-sale securities		108,812			74,508
Purchase of available-for-sale securities		(164,381	)		(238,725	)
Proceeds from redemption of FHLB stock		-			500
Purchase of FHLB stock		(309	)		(463	)
Net (increase) decrease in loans		(28,505	)		2,407
Purchase of bank-owned life insurance		-			(5,000	)
Additions to premises and equipment		(327	)		(1,636	)
Proceeds from sale of other real estate		279			1,068
Proceeds from sale of premises and equipment		-			137
Net cash provided by (used in) investing activities		11,287			(56,569	)

(continued)

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2016			2015

Cash flows from financing activities:
Net increase in deposits		25,256			77,116
Net decrease in securities sold under repurchase agreements		(15,134	)		(10,045	)
Payments of Federal Home Loan Bank advances		-			(8,955	)
Advances from Federal Home Loan Bank		5,000			10,000
Purchase of treasury stock		(139	)		(11	)
Payment of cash dividends		(3,245	)		(3,035	)
Proceeds from stock options exercised		1,999			-
Tax benefit from stock-based compensation		102			46
Proceeds from directors' stock purchase plan		49			45
Net cash provided by financing activities		13,888			65,161

Net increase in cash and cash equivalents		52,475			14,566
Cash and cash equivalents at beginning of period		42,917			35,995
Cash and cash equivalents at end of period	$	95,392		$	50,561

Supplemental disclosures of cash paid during the period for:
Interest	$	6,086		$	6,443
Income taxes		6,040			5,181

Supplemental information on noncash investing activities:
Loans transferred to other real estate owned	$	303		$	611
Loans provided for sales of other real estate owned		-			392

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)

September 30, 2016

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 balances 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 commercial real estate loans. 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 and nine months ended September 30, 2016 and 2015 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, 2015.

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 and nine months ended September 30, 2016 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) 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, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

In January 2016, the FASB issued an update (ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.) The guidance in this update affects any entity that holds financial assets or owes financial liabilities. It is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments by requiring (1) equity investments (except those accounted for under the equity method) to be measured at fair value with changes in fair value recognized in net income (2) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes (3) entities to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value (4) a separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes and eliminating (1) the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and (2) the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the impact on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued an update (ASU No. 2016-02, Leases) creating FASB Topic 842, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued an update (ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations.) The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers. The amendments do not change the core principal of the guidance, but rather clarify the implementation guidance on principal versus agent considerations. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the impact on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued an update (ASU No. 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting.) The guidance in this update affects any entity that issues share-based payment awards to its employees and is intended to simplify several aspects of the accounting for share-based payment awards including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact on the consolidated financial statements and related disclosures.

In June 2016, the FASB issued an update (ASU No. 2016-13, Financial Instruments: Credit Losses.) The guidance affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments in this update require timelier recording of credit losses on loans and other financial instruments and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact on the consolidated financial statements and related disclosures.

In August 2016, the FASB issued an update (ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments.) This guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact on the consolidated financial statements and related disclosures.

On June 16, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with South State Corporation, a South Carolina corporation (“South State”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into South State (the “Merger”), with South State as the surviving corporation in the Merger. Immediately following the Merger, the Company’s wholly-owned subsidiary bank, Georgia Bank & Trust Company of Augusta (“Georgia Bank & Trust”), will merge with and into South State’s wholly-owned subsidiary bank, South State Bank (the “Bank Merger”), with South State Bank as the surviving entity in the Bank Merger. As of October 17, 2016, South State received all regulatory approvals for the Merger and the Bank Merger. A special meeting of shareholders of Southeastern Bank Financial was held on October 18, 2016 where shareholders voted to approve the Merger. The Company expects to complete the Merger on or around January 3, 2017.

Note 2 – Investment Securities

All investment securities held at September 30, 2016 and December 31, 2015 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 September 30, 2016 and December 31, 2015 and the corresponding amounts of unrealized gains and losses therein.

	September 30, 2016
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
Available-for-sale	(Dollars in thousands)
Obligations of U.S. Government agencies	$	72,823		402		(159	)		73,066
Obligations of states and political subdivisions		118,630		5,050		(54	)		123,626
Mortgage backed securities
U.S. GSE's* MBS - residential		129,989		2,422		(162	)		132,249
U.S. GSE's* MBS - commercial		28,555		324		(5	)		28,874
U.S. GSE's* CMO		184,105		1,960		(348	)		185,717
Corporate bonds		114,267		1,567		(921	)		114,913
	$	648,369		11,725		(1,649	)		658,445

* Government sponsored entities

	December 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	$	147,135		274		(1,433	)		145,976
Obligations of states and political subdivisions		136,499		3,827		(266	)		140,060
Mortgage backed securities
U.S. GSE's* MBS - residential		121,646		752		(890	)		121,508
U.S. GSE's* MBS - commercial		21,805		125		(261	)		21,669
U.S. GSE's* CMO		146,782		437		(1,642	)		145,577
Corporate bonds		117,666		524		(1,417	)		116,773
	$	691,533		5,939		(5,909	)		691,563

* Government sponsored entities

As of September 30, 2016 and December 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.

Proceeds from sales of securities available-for-sale and the associated gains (losses), excluding gains (losses) on called securities, for the three and nine months ended September 30, 2016 and 2015 were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(Dollars in thousands)						(Dollars in thousands)
Proceeds from Sales	$	25,324		$	33,487		$	95,718		$	110,635
Gross Gains		187			110			847			329
Gross Losses		(157	)		(276	)		(455	)		(1,335	)

The amortized cost and fair value of the investment securities portfolio 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.

	September 30, 2016
	Amortized		Estimated
	cost		fair value
	(Dollars in thousands)
Available-for-sale:
One year or less	$	12,378		12,541
After one year through five years		106,685		108,612
After five years through ten years		145,868		147,257
After ten years		383,438		390,035
	$	648,369		658,445

The following tables summarize the investment securities with unrealized losses at September 30, 2016 and December 31, 2015, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.

	September 30, 2016
	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	$	5,005		28		16,988		131		21,993		159
Obligations of states and political subdivisions		4,101		27		1,278		27		5,379		54
Mortgage backed securities
U.S. GSE's MBS - residential		17,957		143		2,430		19		20,387		162
U.S. GSE's MBS - commercial		5,298		5		—		—		5,298		5
U.S. GSE's CMO		50,244		288		4,072		60		54,316		348
Corporate bonds		5,930		70		20,099		851		26,029		921
	$	88,535		561		44,867		1,088		133,402		1,649

	December 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	$	57,409		388		63,971		1,045		121,380		1,433
Obligations of states and political subdivisions		21,421		235		2,794		31		24,215		266
Mortgage backed securities
U.S. GSE's MBS - residential		71,185		607		11,105		283		82,290		890
U.S. GSE's MBS - commercial		9,428		261		—		—		9,428		261
U.S. GSE's CMO		102,082		1,463		6,584		179		108,666		1,642
Corporate bonds		69,459		705		17,683		712		87,142		1,417
	$	330,984		3,659		102,137		2,250		433,121		5,909

Other-Than-Temporary Impairment – September 30, 2016

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 September 30, 2016, the Company’s security portfolio consisted of 410 securities, 63 of which were in an unrealized loss position. Of these securities with unrealized losses, 87.08% were related to the Company’s mortgage-backed and corporate securities as discussed below.

Mortgage-backed Securities

At September 30, 2016, 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 not more likely than not that it will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2016.

Corporate Securities

The Company holds forty-two corporate securities totaling $114,913, of which thirteen had an unrealized loss of $921 at September 30, 2016. Twelve of the securities with an unrealized loss of $903 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 not more likely than not that it will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2016.

Included in the Company’s corporate bonds is one trust preferred security with an amortized cost of $250, which had an unrealized loss of $18, resulting in a fair value of $232 at September 30, 2016. 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. As of July of 2015, the issuer is no longer deferring interest and is current on all payments. Because the Company does not have the intent to sell this security and it is not more likely than not that it will be required to sell the security before its anticipated recovery, the Company does not consider this security to be other-than-temporarily impaired at September 30, 2016.

There were no credit losses recognized in earnings for the nine month periods ended September 30, 2016 and 2015.

Note 3 – Loans

The following table summarizes loans at September 30, 2016 and December 31, 2015.

	September 30, 2016		December 31, 2015
	(Dollars in thousands)
Commercial, financial, and agricultural	$	216,316		210,712
Real estate:
Commercial		381,882		366,566
Residential		250,111		229,161
Acquisition, development and construction		168,396		184,292
Consumer installment		20,107		18,584
	$	1,036,812		1,009,315
Less allowance for loan losses		21,368		21,367
Less deferred loan origination fees (costs)		21		166
	$	1,015,423		987,782

The following tables present the activity in the allowance for loan losses by portfolio segment as of and for the three and nine month periods ended September 30, 2016 and 2015.

	Three Months Ended September 30, 2016
	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	$	5,589			4,431		2,617		5,107		2,050			940			667			21,401
Charge-offs		(29	)		—		—		—		—			—			(209	)		(238	)
Recoveries		7			5		—		3		—			51			46			112
Provision		(918	)		1,034		37		255		(310	)		(184	)		179			93
Ending balance	$	4,649			5,470		2,654		5,365		1,740			807			683			21,368

	Three Months Ended September 30, 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	$	4,427			5,441			3,841			6,336			1,805		921			601			23,372
Charge-offs		(32	)		—			(1,119	)		(77	)		—		—			(166	)		(1,394	)
Recoveries		6			2			—			5			—		4			53			70
Provision		27			(434	)		(93	)		597			162		(266	)		139			132
Ending balance	$	4,428			5,009			2,629			6,861			1,967		659			627			22,180

	Nine Months Ended September 30, 2016
	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	$	4,908			4,667		2,709			5,027			2,469			914			673			21,367
Charge-offs		(56	)		—		—			(139	)		(60	)		(200	)		(544	)		(999	)
Recoveries		25			8		100			13			3			51			239			439
Provision		(228	)		795		(155	)		464			(672	)		42			315			561
Ending balance	$	4,649			5,470		2,654			5,365			1,740			807			683			21,368

	Nine Months Ended September 30, 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		(1,166	)		(74	)		(1,119	)		(363	)		(255	)		(20	)		(427	)		(3,424	)
Recoveries		223			4			—			17			—			1,699			166			2,109
Provision		(36	)		274			(69	)		616			279			(3,340	)		265			(2,011	)
Ending balance	$	4,428			5,009			2,629			6,861			1,967			659			627			22,180

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 September 30, 2016 and December 31, 2015.

	September 30, 2016
	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	$	—		1,150		—		133		—		—		—		1,283
Collectively evaluated for impairment		4,649		4,320		2,654		5,232		1,740		807		683		20,085
	$	4,649		5,470		2,654		5,365		1,740		807		683		21,368

Loans:
Individually evaluated for impairment		742		7,789		3,256		2,573		935		—		—		15,295
Collectively evaluated for impairment		215,574		228,420		142,417		247,538		121,614		45,847		20,107		1,021,517
	$	216,316		236,209		145,673		250,111		122,549		45,847		20,107		1,036,812

	December 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		4,908		4,667		2,709		5,027		2,469		914		673		21,367
	$	4,908		4,667		2,709		5,027		2,469		914		673		21,367

Loans:
Individually evaluated for impairment		991		3,771		6,244		1,998		2,468		—		—		15,472
Collectively evaluated for impairment		209,721		225,592		130,959		227,163		138,649		43,175		18,584		993,843
	$	210,712		229,363		137,203		229,161		141,117		43,175		18,584		1,009,315

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2016 and December 31, 2015.

	September 30, 2016
	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	$	1,934		742		—		770
Financial		—		—		—		—
Agricultural		—		—		—		—
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		4,739		3,639		—		3,704
Non Owner occupied		3,527		3,256		—		3,314
Residential real estate:
Secured by first liens		2,541		1,918		—		1,963
Secured by junior liens		142		85		—		90
Acquisition, development and construction:
Residential		—		—		—		—
Other		1,288		935		—		1,003
Consumer		—		—		—		—
		14,171		10,575		—		10,844

With an allowance recorded:
Commercial real estate:
Owner occupied	$	4,150		4,150		1,150		4,160
Non Owner occupied		—		—		—		—
Residential real estate:
Secured by first liens		576		570		133		574
Secured by junior liens		—		—		—		—
		4,726		4,720		1,283		4,734
	$	18,897		15,295		1,283		15,578

(1) No specific allowance for credit losses is allocated to these loans since they are sufficiently collateralized or had sufficient cash flows

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

	December 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	$	1,948		810		—		1,222
Financial		—		—		—		—
Agricultural		251		181		—		193
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		4,773		3,771		—		4,656
Non Owner occupied		7,659		6,244		—		7,201
Residential real estate:
Secured by first liens		2,587		1,904		—		2,026
Secured by junior liens		147		94		—		100
Acquisition, development and construction:
Residential		—		—		—		—
Other		3,440		2,468		—		2,645
Consumer		—		—		—		—
		20,805		15,472		—		18,043

With an allowance recorded:		—		—		—		—

	$	20,805		15,472		—		18,043

(1) No specific allowance for credit losses is allocated to these loans since they are sufficiently collateralized or had sufficient cash flows

(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 and nine months ended September 30, 2016 and 2015.

	Three Months Ended Sept. 30, 2016				Three Months Ended Sept. 30, 2015
	Interest		Cash Basis		Interest		Cash Basis
	Income		Interest Income		Income		Interest Income
	Recognized		Recognized		Recognized		Recognized
	(Dollars in thousands)				(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	—		—		—		—
Financial		—		—		—		—
Agricultural		—		—		—		—
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		4		4		43		43
Non Owner occupied		13		13		52		52
Residential real estate:
Secured by first liens		8		8		7		7
Secured by junior liens		—		—		—		—
Acquisition, development and construction:
Residential		—		—		—		—
Other		10		10		6		6
Consumer		—		—		—		—
	$	35		35		108		108

	Nine Months Ended Sept. 30, 2016				Nine Months Ended Sept. 30, 2015
	Interest		Cash Basis		Interest		Cash Basis
	Income		Interest Income		Income		Interest Income
	Recognized		Recognized		Recognized		Recognized
	(Dollars in thousands)				(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	—		—		—		—
Financial		—		—		—		—
Agricultural		—		—		—		—
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		11		11		118		118
Non Owner occupied		58		58		161		161
Residential real estate:
Secured by first liens		39		39		37		37
Secured by junior liens		—		—		3		3
Acquisition, development and construction:
Residential		—		—		—		—
Other		26		26		19		19
Consumer		—		—		—		—
	$	134		134		338		338

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 sum of nonaccrual loans and loans past due 90 days still on accrual will differ from the total impaired loan amount.

The following tables present the aging of the recorded investment in past due loans as of September 30, 2016 and December 31, 2015 by class of loans.

	September 30, 2016
	30 - 89 Days		90 Days or		Nonaccrual		Total		Loans Not
	Past Due		More Past Due		Loans		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	—		—		742		742		137,587		138,329
Financial		—		—		—		—		3,871		3,871
Agricultural		—		—		—		—		10,141		10,141
Equity lines		15		—		87		102		41,034		41,136
Other		—		—		58		58		22,781		22,839
Commercial real estate:
Owner occupied		259		—		8,097		8,356		227,853		236,209
Non Owner occupied		1,199		—		2,210		3,409		142,264		145,673
Residential real estate:
Secured by first liens		507		—		3,963		4,470		241,205		245,675
Secured by junior liens		1		—		338		339		4,097		4,436
Acquisition, development and construction:
Residential		—		—		—		—		53,260		53,260
Other		778		—		745		1,523		113,613		115,136
Consumer		45		—		40		85		20,022		20,107
	$	2,804		—		16,280		19,084		1,017,728		1,036,812

	December 31, 2015
	30 - 89 Days		90 Days or		Nonaccrual		Total		Loans Not
	Past Due		More Past Due		Loans		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	39		—		831		870		125,735		126,605
Financial		—		—		—		—		4,678		4,678
Agricultural		—		—		182		182		10,712		10,894
Equity lines		—		—		75		75		40,536		40,611
Other		—		—		63		63		27,861		27,924
Commercial real estate:
Owner occupied		1,158		—		3,988		5,146		224,217		229,363
Non Owner occupied		226		127		2,775		3,128		134,075		137,203
Residential real estate:
Secured by first liens		2,207		—		3,192		5,399		218,742		224,141
Secured by junior liens		—		—		368		368		4,652		5,020
Acquisition, development and construction:
Residential		—		—		—		—		54,266		54,266
Other		8		—		2,537		2,545		127,481		130,026
Consumer		19		—		33		52		18,532		18,584
	$	3,657		127		14,044		17,828		991,487		1,009,315

Troubled Debt Restructurings:

The Company has troubled debt restructurings (TDRs) with a balance of $7,460 and $8,636 included in impaired loans at September 30, 2016 and December 31, 2015, respectively. No specific reserves were allocated to customers whose loan terms have been modified in TDRs as of September 30, 2016 and December 31, 2015. The Company is not committed to lend additional amounts as of September 30, 2016 and December 31, 2015 to customers with outstanding loans that are classified as TDRs.

The following tables present TDRs as of September 30, 2016 and December 31, 2015.

	September 30, 2016
	Number of		Recorded
	Loans		Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		1	$	742
Financial		-		-
Agricultural		-		-
Equity lines		-		-
Other		-		-
Commercial real estate:
Owner occupied		2		3,639
Non Owner occupied		3		1,694
Residential real estate:
Secured by first liens		9		1,009
Secured by junior liens		1		85
Acquisition, development and construction:
Residential		-		-
Other		1		291
Consumer		-		-
		17	$	7,460

	December 31, 2015
	Number of		Recorded
	Loans		Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		1	$	810
Financial		-		-
Agricultural		-		-
Equity lines		-		-
Other		-		-
Commercial real estate:
Owner occupied		1		273
Non Owner occupied		4		4,499
Residential real estate:
Secured by first liens		10		1,140
Secured by junior liens		1		94
Acquisition, development and construction:
Residential		-		-
Other		2		1,820
Consumer		-		-
		19	$	8,636

No loans were modified as TDRs during the three months ended September 30, 2016. During the nine months ended September 30, 2016, two loans were modified as TDRs. One modification involved a 2.25% reduction of the stated interest rate of the loan and an extension of the maturity date for 277 months while the other modification involved a 0.50% rate reduction.

During the three and nine months ended September 30, 2015, two loans were modified as TDRs. One modification involved a 2.50% reduction of the stated interest rate of the loan and an extension of the maturity date for 38 months while the other modification involved a 3.00% rate reduction and an extension of the maturity date for 42 months.

The following tables present loans by class modified as TDRs that occurred during the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30, 2016						Three Months Ended September 30, 2015
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number of		Outstanding		Outstanding		Number of		Outstanding		Outstanding
	Loans		Recorded Investment		Recorded Investment		Loans		Recorded Investment		Recorded Investment
	(Dollars in thousands)						(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		-	$	-	$	-		1	$	2,046	$	846
Financial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Equity lines		-		-		-		-		-		-
Other		-		-		-		-		-		-
Commercial real estate:
Owner occupied		-		-		-		-		-		-
Non Owner occupied		-		-		-		-		-		-
Residential real estate:
Secured by first liens		-		-		-		1		86		82
Secured by junior liens		-		-		-		-		-		-
Acquisition, development and construction:
Residential		-		-		-		-		-		-
Other		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
		-	$	-	$	-		2	$	2,132	$	928

	Nine Months Ended September 30, 2016						Nine Months Ended September 30, 2015
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number of		Outstanding		Outstanding		Number of		Outstanding		Outstanding
	Loans		Recorded Investment		Recorded Investment		Loans		Recorded Investment		Recorded Investment
	(Dollars in thousands)						(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		-	$	-	$	-	$	1	$	2,046	$	846
Financial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Equity lines		-		-		-		-		-		-
Other		-		-		-		-		-		-
Commercial real estate:
Owner occupied		1		4,508		3,370		-		-		-
Non Owner occupied		1		1,824		1,335		-		-		-
Residential real estate:
Secured by first liens		-		-		-		1		86		82
Secured by junior liens		-		-		-		-		-		-
Acquisition, development and construction:
Residential		-		-		-		-		-		-
Other		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
		2	$	6,332	$	4,705		2	$	2,132	$	928

There was no increase to the allowance for loan losses or resultant charge-offs on the TDRs described in the previous two tables during the three and nine months ended September 30, 2016 and 2015.

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.

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 and nine months ended September 30, 2016.

During the three and nine months ended September 30, 2015, one ADC loan with a recorded investment of $1,372 defaulted during the third quarter of 2015 and the default occurred within the twelve month period following the loan modification.

The terms of certain other loans were modified during the three and nine month periods ended September 30, 2016 and 2015 that did not meet the definition of a TDR. Loans modified during the three month periods have a total recorded investment as of September 30, 2016 and 2015 of $1,265 and $2,791, respectively, and had delays in payment of 30 days in 2016 and delays of 30 days to 2 months in 2015. Loans modified during the nine month periods have a total recorded investment as of September 30, 2016 and 2015 of $4,862 and $6,810, respectively, and had delays in payment ranging from 30 days to 3 months in 2016 and 2015. 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 September 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows.

	September 30, 2016
	Pass		Watch		Substandard		Doubtful
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	132,336		4,882		1,111		—
Financial		3,871		—		—		—
Agricultural		6,315		1,065		2,761		—
Equity lines		39,654		1,176		306		—
Other		22,474		307		58		—
Commercial real estate:
Owner occupied		215,769		9,667		10,773		—
Non Owner occupied		135,485		6,779		3,409		—
Residential real estate:
Secured by first liens		236,950		3,433		5,292		—
Secured by junior liens		3,922		115		399		—
Acquisition, development and construction:
Residential		53,181		79		—		—
Other		108,515		5,260		1,361		—
Consumer		19,740		306		61		—
	$	978,212		33,069		25,531		—

	December 31, 2015
	Pass		Watch		Substandard		Doubtful
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	120,385		4,469		1,751		—
Financial		4,678		—		—		—
Agricultural		7,758		2,641		495		—
Equity lines		39,576		691		344		—
Other		27,532		329		63		—
Commercial real estate:
Owner occupied		208,370		14,545		6,448		—
Non Owner occupied		124,945		5,632		6,626		—
Residential real estate:
Secured by first liens		213,167		6,370		4,604		—
Secured by junior liens		4,455		134		431		—
Acquisition, development and construction:
Residential		54,168		98		—		—
Other		119,330		7,354		3,342		—
Consumer		18,156		358		70		—
	$	942,520		42,621		24,174		—

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 Chief Financial Officer. 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).

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 8% 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 September 30, 2016 and December 31, 2015.

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	September 30,		Identical Assets		Observable Inputs		Inputs
	2016		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available-for-sale securities
Obligations of U.S. Government agencies	$	73,066		-		73,066		-
Obligations of states and political subdivisions		123,626		-		123,626		-
Mortgage-backed securities
U.S. GSE's MBS - residential		132,249		-		132,249		-
U.S. GSE's MBS - commercial		28,874		-		28,874		-
U.S. GSE's CM O		185,717		-		185,717		-
Corporate bonds		114,913		-		114,913		-
Total available-for-sale securities	$	658,445		-		658,445		-
Loans held for sale		12,110		-		12,110		-
Mortgage banking derivatives		19		-		19		-
	$	670,574		-		670,574		-
Liabilities:
Interest rate swap derivatives		2,890		-		2,890		-
	$	2,890		-		2,890		-

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
	2015		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available-for-sale securities
Obligations of U.S. Government agencies	$	145,976		-		145,976		-
Obligations of states and political subdivisions		140,060		-		140,060		-
Mortgage-backed securities
U.S. GSE's MBS - residential		121,508		-		121,508		-
U.S. GSE's MBS - commercial		21,669		-		21,669		-
U.S. GSE's CM O		145,577		-		145,577		-
Corporate bonds		116,773		-		116,773		-
Total available-for-sale securities	$	691,563		-		691,563		-
Loans held for sale		18,647		-		18,647		-
Mortgage banking derivatives		24		-		24		-
	$	710,234		-		710,234		-
Liabilities:
Interest rate swap derivatives		2,013		-		2,013		-
	$	2,013		-		2,013		-

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 and nine months ended September 30, 2016 and 2015.

Transfers between Level 2 and Level 3:

No securities were transferred between Level 2 and Level 3 during the three months ended September 30, 2016 and 2015. No securities were transferred between Level 2 and Level 3 during the nine months ended September 30, 2016. During the nine months ended September 30, 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.

During the nine months ended September 30, 2016, there were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

The following table presents 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 nine months ended September 30, 2015.

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, September 30, 2015	$	-		$	-

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.

At September 30, 2016 and December 31, 2015, there were no financial instruments measured at fair value on a recurring basis using level 3 inputs.

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2016 and December 31, 2015 are summarized below.

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	September 30,		Identical Assets		Observable Inputs		Inputs
	2016		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans (1)	$	7,621		-		-		7,621

Other real estate owned		276		-		-		276

	$	7,897		-		-		7,897

(1) Includes loans directly charged down to fair value and loans with specific reserves

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
	2015		(Level 1)		(Level 2)		(Level 3)
			(Dollars in thousands)
Assets:
Impaired loans (1)	$	10,171		-		-		10,171

Other real estate owned		360		-		-		360

	$	10,531		-		-		10,531

(1) Includes loans directly charged down to fair value and loans with specific reserves

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 $8,904, with a valuation allowance of $1,283, resulting in an additional provision for loan losses of $1,084 and $1,317 for the three and nine months ended September 30, 2016.

As of December 31, 2015, impaired loans had a recorded investment of $10,171, resulting in an additional provision for loan losses of $3,342 for the year ending 2015.

Other real estate owned was $276 which consisted of the outstanding balance of $607, less a valuation allowance of $331, resulting in a write down of $84 for the three and nine months ended September 30, 2016.

As of December 31, 2015, other real estate owned was $360 which consisted of the outstanding balance of $607, less a valuation allowance of $247. There were no write downs on this property during the year ended 2015.

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 September 30, 2016 and December 31, 2015.

Sept. 30,

Valuation

Unobservable

Range

2016

Techniques

Inputs

(Weighted Avg)

(Dollars in thousands)

Impaired loans

7,621

sales comparison

adjustment for

0.00% - 146.92% (18.33%)

differences between

the comparable sales

income approach

capitalization rate

8.25% - 9.75% (9.38%)

liquidation value

Other real estate owned

276

sales comparison

adjustment for

10.00% - 30.00% (20.00%)

differences between

the comparable sales

Dec. 31,

Valuation

Unobservable

Range

2015

Techniques

Inputs

(Weighted Avg)

(Dollars in thousands)

Impaired loans

10,171

sales comparison

adjustment for

0.00% - 70.99% (15.71%)

differences between

the comparable sales

income approach

capitalization rate

8.25% - 10.82% (9.69%)

income approach

discount rate

4.75

liquidation value

Other real estate owned

360

sales comparison

adjustment for

11.00% - 25.00% (18.00%)

differences between

the comparable sales

Fair Value Option:

The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. None of these loans are past due 90 days or more or on nonaccrual as of September 30, 2016 and December 31, 2015.

As of September 30, 2016 and December 31, 2015, the aggregate fair value, unpaid principal balance (including accrued interest), and gain or loss was as follows:

	Sept. 30, 2016		Dec. 31, 2015
	(Dollars in thousands)

Aggregate fair value	$	12,110		18,647
Unpaid principal balance		11,796		18,344
Gain		314		303

Interest income on loans held for sale is recognized based on contractual rates and is reflected in loan interest income in the consolidated statements of comprehensive income. The following table details gains and losses from changes in fair value included in earnings for the three and nine months ended September 30, 2016 and 2015 for loans held for sale.

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2016			2015		2016		2015
	(Dollars in thousands)					(Dollars in thousands)

Change in fair value	$	(124	)		30		11		124

Fair Value of Financial Instruments:

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 September 30, 2016 and December 31, 2015, not previously presented, are as follows:

	September 30, 2016
	Carrying		Fair Value Measurements
	amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	95,392		95,392		95,392		-		-
Loans, net		1,007,802		1,006,186		-		-		1,006,186
Restricted equity securities		5,478		N/A
Financial liabilities:
Deposits with stated maturities		290,879		291,581		-		291,581		-
Deposits without stated maturities		1,263,457		1,263,457		1,263,457		-		-
Securities sold under repurchase agreements		550		550		550		-		-
Advances from FHLB		90,000		91,418		-		91,418		-
Subordinated debentures		20,000		15,213		-		-		15,213

	December 31, 2015
	Carrying		Fair Value Measurements
	amount		Total		Level 1		Level 2		Level 3
			(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	42,917		42,917		42,917		-		-
Loans, net		977,611		981,011		-		-		981,011
Restricted equity securities		5,169		N/A
Financial liabilities:
Deposits with stated maturities		333,345		334,920		-		334,920		-
Deposits without stated maturities		1,195,735		1,195,735		1,195,735		-		-
Securities sold under repurchase agreements		15,684		15,691		15,691		-		-
Advances from FHLB		85,000		86,854		-		86,854		-
Subordinated debentures		20,000		15,065		-		-		15,065

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. For the nine months ended September 30, 2016 and 2015, the Company recognized $350 in compensation expense related to the restricted stock awards.

A summary of changes in the Company’s nonvested shares for the nine month period ended September 30, 2016 is as follows:

			Weighted Avg
	Number of			Grant-Date
	Shares			Fair Value

Nonvested at January 1, 2016	42,000		$	21.60
Granted	-			-
Vested	(21,000	)		21.60
Forfeited	-			-
Nonvested at September 30, 2016	21,000		$	21.60

As of September 30, 2016, there was $156 of total unrecognized compensation cost related to nonvested shares granted under the Plan. This cost is being recognized over a period of four months.

The total fair value of shares vested during the nine month period ended September 30, 2016 was $693 based on the market price as of the vesting date.

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 September 30, 2016 and December 31, 2015 is as follows:

	September 30, 2016			December 31, 2015
	(Dollars in thousands)

Notional Amounts	$	10,000		$	10,000
Weighted average pay rates		5.35	%		5.35	%
Weighted average receive rates		2.25	%		1.91	%
Weigted average maturity		12.33 years			13.08 years
Unrealized losses	$	2,890		$	2,013

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 $83 and $93 for the three months ended September 30, 2016 and 2015 and $253 and $279 for the nine months ended September 30, 2016 and 2015, 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 September 30, 2016, the Company had pledged $3,134 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 September 30, 2016, no collateral had been pledged by 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 (loss) balances, net of tax, as of September 30, 2016 and 2015.

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

Balance, June 30, 2016	$	(1,816	)	$	8,322		$	6,506

Current Quarter change		50			(2,165	)		(2,115	)
Balance, September 30, 2016	$	(1,766	)	$	6,157		$	4,391

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

Balance, June 30, 2015	$	(1,049	)	$	(337	)	$	(1,386	)

Current Quarter change		(307	)		3,445			3,138
Balance, September 30, 2015	$	(1,356	)	$	3,108		$	1,752

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

Balance, December 31, 2015	$	(1,229	)	$	18	$	(1,211	)

Current Year change		(537	)		6,139		5,602
Balance, September 30, 2016	$	(1,766	)	$	6,157	$	4,391

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

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

Current Year change		(159	)		1,840		1,681
Balance, September 30, 2015	$	(1,356	)	$	3,108	$	1,752

The following tables present reclassifications out of accumulated other comprehensive income (loss).

	Three Months Ended September 30,
	2016			2015
Details about Accumulated Other Comprehensive Income (Loss) 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
	$	44		$	(165	)	Investment securities gains (losses), net
		(14	)		53		Tax (expense) benefit
	$	30		$	(112	)	Net of tax

	Nine Months Ended September 30,
	2016			2015
Details about Accumulated Other Comprehensive Income (Loss) 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
	$	413		$	(1,005	)	Investment securities gains (losses), net
		(134	)		323		Tax (expense) benefit
	$	279		$	(682	)	Net of tax

Note 8 – Dividends

On January 21, 2016, the Company declared a quarterly cash dividend of $0.16 per share on outstanding shares. The dividend was paid on February 19, 2016 to shareholders of record as of February 5, 2016.

On April 20, 2016, the Company declared a quarterly cash dividend of $0.16 per share on outstanding shares. The dividend was paid on May 20, 2016 to shareholders of record as of May 6, 2016.

On July 20, 2016, the Company declared a quarterly cash dividend of $0.16 per share on outstanding shares. The dividend was paid on August 19, 2016 to shareholders of record as of August 5, 2016.

On October 19, 2016, the Company declared a quarterly cash dividend of $0.16 per share on outstanding shares. The dividend is payable on November 18, 2016 to shareholders of record as of November 4, 2016.

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 19.93% of all deposits and was the second largest depository institution and the largest locally based institution at June 30, 2016, 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 $348 or 0.99% for the first nine months of 2016 as compared to the first nine months of 2015 and was due to higher average balances of loans offset by lower yields. Interest income on investment securities increased $172 or 1.51% due to higher yields. Gain on sales of loans increased $837 or 15.74% due primarily to increased mortgage originations and refinancing activity during the first nine months of the year.

Table 1 - Selected Financial Data

	September 30,			December 31,			S eptember 30,
	2016			2015			2015
	(Dollars in thousands)

Assets		1,875,529		$	1,840,365		$	1,816,968
Investment securities		658,445			691,563			696,994
Loans		1,036,791			1,009,149			962,414
Deposits		1,554,336			1,529,080			1,540,980

Annualized return on average total assets		1.00	%		1.08	%		1.10	%
Annualized return on average equity		10.31	%		11.87	%		12.23	%

Annualized return on average total assets was 1.00% for the nine months ended September 30, 2016, a decrease from 1.10% for the same period last year and annualized return on average equity was 10.31% for the nine months ended September 30, 2016, a decrease from 12.23% for the same period last year. Net income for the nine months ended September 30, 2016 was $13,967 compared to $14,761 for the same period in 2015.

Table 2 highlights significant changes in the balance sheet at September 30, 2016 as compared to December 31, 2015. Total assets increased $35,164 and reflect increases in cash and equivalents of $52,475 and loans of $27,642. Partially offsetting these increases were decreases in investment securities of $33,118 and a $3,070 decrease in deferred tax asset. Total liabilities increased $16,478 and reflect increases in deposits of $25,256 and advances from FHLB of $5,000 offset by a $15,134 decrease in securities sold under repurchase agreements. Stockholders’ equity increased $18,686 and was due primarily to an increase in retained earnings of $10,722 and an increase in accumulated other comprehensive income, net of $5,602.

Table 2 - Selected Balance Sheet Data

	September 30,		December 31,		Variance
	2016		2015		Amount			%
	(Dollars in thousands)
Cash, due from banks and interest-bearing deposits	$	95,392	$	42,917	$	52,475			122.27	%
Investment securities		658,445		691,563		(33,118	)		(4.79	%)
Loans		1,036,791		1,009,149		27,642			2.74	%
Other real estate owned		276		360		(84	)		(23.33	%)
Deferred tax asset		10,888		13,958		(3,070	)		(21.99	%)
Assets		1,875,529		1,840,365		35,164			1.91	%
Deposits		1,554,336		1,529,080		25,256			1.65	%
Securities sold under repurchase agreements		550		15,684		(15,134	)		(96.49	%)
Advances from Federal Home Loan Bank		90,000		85,000		5,000			5.88	%
Liabilities		1,686,930		1,670,452		16,478			0.99	%
Stockholders' equity		188,599		169,913		18,686			11.00	%

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, FHLB 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 various simulations up and down 400 basis points (4.00%) and as it applies to economic value of equity in a shock up and down 400 basis points 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; a material delay or inability to obtain regulatory approval of the Merger and meet the other conditions to the Merger; business disruption due to the proposed Merger; disruptions due to uncertainty or other factors related to the proposed Merger making it more difficult to maintain relationships with employees, customers, other business partners, or governmental entities; 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 September 30, 2016 and December 31, 2015 the percentage of total assets measured at fair value was 36.17% and 39.16%, respectively. The majority of assets carried at fair value are based on either quoted market prices or market prices for similar instruments. At September 30, 2016, 1.16% of assets measured at fair value were based on significant unobservable inputs. This consisted primarily of impaired loans and other real estate owned and represents approximately 0.42% 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 September 30, 2016, the Company had no securities valued using unobservable inputs (Level 3).

Results of Operations

Net income for the first nine months of 2016 was $13,967, a decrease of $794 or 5.38% compared with net income of $14,761 for the first nine months of 2015. Increases in net interest income, gain on sales of loans and investment securities gains (losses), net, as well as a reduction in prepayment fees were offset by increased provision for loan losses and merger-related expenses.

Total other comprehensive income for the first nine months of 2016 was $5,602 compared to total other comprehensive income of $1,681 in the first nine months of 2015. The change was due primarily to an increase in the unrealized gain on securities available-for-sale of $8,454 during the nine months ended September 30, 2016 as compared to 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 $2,666 or 18.98% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 and resulted primarily from increases in gain on sales of loans of $837 and investment securities gains (losses), net of $1,418.

Noninterest expense totaled $36,801 for the nine months ended September 30, 2016, an increase of $1,954, or 5.61% compared to the same period ended September 30, 2015. The change was primarily due to merger-related expenses of $1,598 and an increase in salaries and other personnel expense of $535 partially offset by reduction in prepayment fees of $955.

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 Sept. 30, 2016							Three Months Ended Sept. 30, 2015
	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		1,024,469		4.51	%		11,748		944,967		4.70	%		11,302
Loans held for sale		17,326		2.72	%		119		34,849		3.21	%		282
Investment securities
Taxable		559,982		2.18	%		3,051		582,274		2.15	%		3,123
Tax-exempt		104,746		2.93	%		768		111,353		2.95	%		822
Interest-bearing deposits in other banks		18,276		1.15	%		53		5,204		1.52	%		20
Total interest-earning assets	$	1,724,799		3.60	%	$	15,739	$	1,678,647		3.66	%	$	15,549

Interest-bearing liabilities:
Deposits	$	1,309,136		0.41	%	$	1,337	$	1,315,421		0.44	%	$	1,443
Securities sold under repurchase agreements		635		0.63	%		1		3,843		0.62	%		6
Other borrowings		110,000		2.31	%		641		79,043		2.82	%		562
Total interest-bearing liabilities	$	1,419,771		0.55	%	$	1,979	$	1,398,307		0.57	%	$	2,011

Net interest margin/income:				3.15	%	$	13,760				3.18	%	$	13,538

Table 4 - Average Balances, Income and Expenses, Yields and Rates

	Nine Months Ended Sept. 30, 2016							Nine Months Ended Sept. 30, 2015
	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		1,021,887		4.55	%		35,247		958,103		4.80	%		34,707
Loans held for sale		17,671		2.99	%		397		25,119		3.13	%		589
Investment securities
Taxable		555,344		2.20	%		9,177		564,598		2.16	%		9,128
Tax-exempt		108,823		2.92	%		2,385		102,330		2.95	%		2,262
Interest-bearing deposits in other banks		20,542		1.04	%		160		8,996		0.80	%		54
Total interest-earning assets	$	1,724,267		3.63	%	$	47,366	$	1,659,146		3.74	%	$	46,740

Interest-bearing liabilities:
Deposits	$	1,310,057		0.42	%	$	4,096	$	1,305,290		0.45	%	$	4,354
Securities sold under repurchase agreements		2,265		0.66	%		11		2,933		0.51	%		11
Other borrowings		109,331		2.31	%		1,900		81,920		2.98	%		1,826
Total interest-bearing liabilities	$	1,421,653		0.56	%	$	6,007	$	1,390,143		0.60	%	$	6,191

Net interest margin/income:				3.17	%	$	41,359				3.24	%	$	40,549

Third Quarter 2016 compared to Third Quarter 2015:

Net interest income increased $222 (1.64%) during the three month period ended September 30, 2016 as compared to the same period in 2015 and resulted from increased interest on loans offset by decreased interest on investment securities and lower rates paid on deposits.

Loan interest income increased $446 (3.95%) in the three month period as compared to the same period in the prior year. The change resulted primarily from a $79,502 increase in average balances offset by a decrease in yields from 4.70% to 4.51%. Interest on loans held for sale decreased $163 (57.80%) and resulted from both a $17,523 decrease in average loans and a decrease in yields from 3.21% to 2.72%.

Interest income on taxable investment securities decreased $72 or 2.31% and interest income on tax-exempt investment securities decreased $54 or 6.57%. The decreases were due primarily to decreased volumes. Average taxable investment balances decreased $22,292 or 3.83% and average tax-exempt balances decreased $6,607 or 5.93%. The average yield on the taxable investment portfolio increased from 2.15% in the third quarter of 2015 to 2.18% in the third quarter of 2016 while the average yield on the tax-exempt investment portfolio decreased from 2.95% in the third quarter of 2015 to 2.93% in the third quarter of 2016.

Total interest income increased $190 (1.22%) and average yields on interest-earning assets decreased from 3.66% in 2015 to 3.60% in 2016.

Deposit interest expense decreased $106 (7.35%) 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. Due to these reductions and the low interest rate environment, the annualized average rate of interest bearing liabilities decreased from 0.57% in the third quarter of 2015 to 0.55% in the third quarter of 2016.

The Company’s net interest margin for the three months ended September 30, 2016 decreased 3 basis points to 3.15% compared to 3.18% for the three months ended September 30, 2015. The decrease in the net interest margin was due primarily to reduced loan yields.

Nine Months Ended September 30, 2016 compared to Nine Months Ended September 30, 2015:

Net interest income increased $810 (2.00%) during the nine month period ended September 30, 2016 as compared to the same period in 2015 and resulted from higher levels of interest earning assets and lower rates paid on deposits.

Loan interest income increased $540 (1.56%) in the nine month period as compared to the same period in the prior year. The change resulted primarily from a $63,784 increase in average loans offset by a decrease in yields from 4.80% to 4.55%. Interest on loans held for sale decreased $192 (32.60%) and resulted primarily from a $7,448 decrease in average loans and to a lesser degree a decrease in yields from 3.13% to 2.99%.

Interest income on taxable investment securities increased $49 or 0.54% and interest income on tax-exempt investment securities increased $123 or 5.44%. The increases were due primarily to yields for taxable securities and volume for tax-exempt securities. Average taxable investment balances decreased $9,254 or 1.64% and average tax-exempt balances increased $6,493 or 6.35%. The average yield on the taxable investment portfolio increased from 2.16% in 2015 to 2.20% in 2016 and the average yield on the tax-exempt investment portfolio decreased from 2.95% in 2015 to 2.92% in 2016.

Total interest income increased $626 (1.34%) and average yields on interest-earning assets decreased from 3.74% in 2015 to 3.63% in 2016.

Deposit interest expense decreased $258 (5.93%) in the nine 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 $4,767. Due to these reductions and the low interest rate environment, the annualized average rate of interest bearing liabilities decreased from 0.60% in 2015 to 0.56% in 2016.

The Company’s net interest margin for the nine months ended September 30, 2016 decreased 7 basis points to 3.17% compared to 3.24% for the nine months ended September 30, 2015. The decrease in the net interest margin was due primarily to reduced loan yields.

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 tables present 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 periods 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 5 - Rate/Volume Analysis

	Three Months Ended Sept. 30, 2016
	compared to Three Months Ended Sept. 30, 2015
	Increase (Decrease) due to
	Volume			Rate			Combined			Total
	(Dollars in thousands)
Interest-earning assets:
Loans		951			(466	)		(39	)		446
Loans held for sale		(142	)		(42	)		21			(163	)
Investment securities
Taxable		(119	)		49			(2	)		(72	)
Tax-exempt		(49	)		(5	)		-			(54	)
Interest-bearing deposits in other banks		50			(5	)		(12	)		33
Total interest-earning assets		691			(469	)		(32	)		190

Interest-bearing liabilities:
Deposits		(7	)		(100	)		1			(106	)
Securities sold under repurchase agreements		(5	)		-			-			(5	)
Other borrowings		220			(101	)		(40	)		79
Total interest-bearing liabilities		208			(201	)		(39	)		(32	)

Net change in net interest income										$	222

Table 6- Rate/Volume Analysis

	Nine Months Ended Sept. 30, 2016
	compared to Nine Months Ended Sept. 30, 2015
	Increase (Decrease) due to
	Volume			Rate			Combined			Total
				(Dollars in thousands)
Interest-earning assets:
Loans		2,311			(1,660	)		(111	)		540
Loans held for sale		(175	)		(24	)		7			(192	)
Investment securities
Taxable		(150	)		202			(3	)		49
Tax-exempt		144			(20	)		(1	)		123
Interest-bearing deposits in other banks		69			16			21			106
Total interest-earning assets		2,199			(1,486	)		(87	)		626

Interest-bearing liabilities:
Deposits		16			(273	)		(1	)		(258	)
Securities sold under repurchase agreements		(3	)		3			-			-
Other borrowings		611			(402	)		(135	)		74
Total interest-bearing liabilities		624			(672	)		(136	)		(184	)

Net change in net interest income										$	810

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. A provision for loan losses totaling $93 was recognized for the three months ended September 30, 2016 compared to $132 for the three months ended September 30, 2015 and a provision of $561 for the nine months ended September 30, 2016 compared to a credit for loan losses of $2,011 for the same period in 2015. See “Allowance for Loan Losses” for further analysis of the provision for loan losses.

Noninterest Income

Table 7 - Noninterest Income

	Three Months Ended												Nine Months Ended
	September 30,						Variance						September 30,						Variance
	2016			2015			Amount			%			2016			2015			Amount			%
	(Dollars in thousands)												(Dollars in thousands)

Service charges and fees on deposits	$	1,833		$	1,831		$	2			0.11	%	$	5,403		$	5,418		$	(15	)		(0.28	%)
Gain on sales of loans		2,087			2,007			80			3.99	%		6,156			5,319			837			15.74	%
(Loss) gain on sale of fixed assets, net		(5	)		58			(63	)		(108.62	%)		(5	)		(3	)		(2	)		66.67	%
Investment securities gains (losses), net		44			(165	)		209			(126.67	%)		413			(1,005	)		1,418			(141.09	%)
Retail investment income		680			589			91			15.45	%		1,772			1,635			137			8.38	%
Trust service fees		350			357			(7	)		(1.96	%)		1,087			1,048			39			3.72	%
Earnings from cash surrender value of bank-owned life insurance		359			365			(6	)		(1.64	%)		1,019			924			95			10.28	%
Miscellaneous income		236			265			(29	)		(10.94	%)		866			709			157			22.14	%
Total noninterest income	$	5,584		$	5,307		$	277			5.22	%	$	16,711		$	14,045		$	2,666			18.98	%

Third Quarter 2016 compared to Third Quarter 2015:

Noninterest income increased $277 (5.22%) during the three month period ended September 30, 2016 as compared to the same period in 2015. The change was mostly due to an increase in investment securities gains (losses), net of $209 (126.67%). In addition, retail investment income increased $91 (15.45%) and gain on sales of loans increased $80 (3.99%).

Nine Months Ended September 30, 2016 compared to Nine Months Ended September 30, 2015:

Noninterest income increased $2,666 (18.98%) during the nine month period ended September 30, 2016 as compared to the same period in 2015. The change was mostly due to an increase in investment securities gains (losses), net of $1,418 (141.09%) and gain on sales of loans of $837 (15.74%).

Noninterest Expense

Table 8 - Noninterest Expense

	Three Months Ended											Nine Months Ended
	September 30,					Variance						September 30,					Variance
	2016		2015			Amount			%			2016		2015			Amount			%
	(Dollars in thousands)											(Dollars in thousands)
Salaries and other personnel expense	$	6,717	$	6,719		$	(2	)		(0.03	%)	$	20,503	$	19,968		$	535			2.68	%
Occupancy expenses		1,101		1,040			61			5.87	%		3,265		3,088			177			5.73	%
Marketing & business development		484		597			(113	)		(18.93	%)		1,632		1,590			42			2.64	%
Processing expense		964		872			92			10.55	%		2,724		2,557			167			6.53	%
Legal and professional fees		388		422			(34	)		(8.06	%)		1,219		1,234			(15	)		(1.22	%)
Merger-related expenses		541		-			541			100.00	%		1,598		-			1,598			100.00	%
Data processing expense		515		404			111			27.48	%		1,512		1,181			331			28.03	%
FDIC insurance		239		201			38			18.91	%		693		633			60			9.48	%
Communications expense		297		266			31			11.65	%		961		825			136			16.48	%
Prepayment fees		-		-			-			0.00	%		-		955			(955	)		(100.00	%)
Loss (gain) on sale of other real estate, net		17		(2	)		19			(950.00	%)		24		(116	)		140			(120.69	%)
Provision for other real estate losses		84		12			72			600.00	%		84		14			70			500.00	%
Loan costs (excluding OREO)		244		274			(30	)		(10.95	%)		591		787			(196	)		(24.90	%)
Other operating expenses		563		766			(203	)		(26.50	%)		1,995		2,131			(136	)		(6.38	%)
Total noninterest expense	$	12,154	$	11,571		$	583			5.04	%	$	36,801	$	34,847		$	1,954			5.61	%

Third Quarter 2016 compared to Third Quarter 2015:

Noninterest expense increased $583 (5.04%) during the three month period ended September 30, 2016 as compared to the same period in 2015. The increase was mainly due to merger-related expenses of $541 (100.00%) from the South State Merger announced in the second quarter of 2016. In addition, data processing expense increased $111 (27.48%) due to increased investment in technology and was offset by a $113 decrease in marketing and business development expense.

Nine Months Ended September 30, 2016 compared to Nine Months Ended September 30, 2015:

Noninterest expense increased $1,954 (5.61%) during the nine month period ended September 30, 2016 as compared to the same period in 2015. The increase was mainly due to merger-related expenses of $1,598 (100.00%) from the South State Merger announced in the second quarter of 2016, salaries and other personnel expense which increased $535 (2.68%) due to salary increases and increased retirement, incentive and other benefit plan costs and higher commission expense offset by reduction in prepayment fees of $955 (100.00%) due to the penalty incurred on the repayment of an FHLB advance during the second quarter of 2015. In addition, data processing expense increased $331 (28.03%) due to increased investment in technology.

Income Taxes

The Company recognized income tax expense of $2,326 and $6,741 for the three and nine months ended September 30, 2016 as compared to an income tax expense of $2,277 and $6,997 for the same periods in 2015. The effective income tax rate for the three and nine months ended September 30, 2016 was 32.77% and 32.55% compared to 31.88% and 32.16% for the three and nine months ended September 30, 2015. The primary reason for the increase in the effective tax rate as compared to the same periods in 2015 is due to the non-deductibility of certain merger-related transaction costs partially offset by higher levels of tax exempt interest income and an increase in state tax credits utilized.

Loans

The following table presents the composition of the Company’s loan portfolio as of September 30, 2016 and December 31, 2015.

Table 9 - Loan Portfolio Composition

	September 30, 2016						December 31, 2015
	Amount			%			Amount			%
	(Dollars in thousands)
Commercial, financial and agricultural	$	216,316			20.86	%	$	210,712			20.88	%
Real estate
Commercial		381,882			36.83	%		366,566			36.32	%
Residential		250,111			24.13	%		229,161			22.71	%
Acquisition, development and construction		168,396			16.24	%		184,292			18.26	%
Total real estate		800,389			77.20	%		780,019			77.29	%
Consumer
Direct		19,413			1.87	%		17,947			1.78	%
Revolving		694			0.07	%		637			0.06	%
Total consumer		20,107			1.94	%		18,584			1.84	%
Deferred loan origination fees		(21	)		(0.00	%)		(166	)		(0.01	%)
Total	$	1,036,791			100.00	%	$	1,009,149			100.00	%

At September 30, 2016, 77.20% of the loan portfolio is comprised of real estate loans. Commercial, financial and agricultural loans comprise 20.86%, and consumer loans comprise 1.94% of the portfolio.

Commercial real estate (“CRE”) comprises 36.83% 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 (“ADC”) loans comprise 16.24% 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, 24.13% 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 September 30, 2016 totaled $33,991.

Interest reserves are established for certain ADC loans and certain 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 six loans with interest reserves at September 30, 2016. The following table details the loans and accompanying interest reserves as of September 30, 2016.

	September 30, 2016
			Reserves
	Balance		Approved		Advanced		Remaining
	(Dollars in thousands)

Loan 1	$	1,074		35		8		27
Loan 2		8,300		256		256		-
Loan 3		797		31		5		26
Loan 4		1,167		13		5		8
Loan 5		2,410		200		-		200
Loan 6		268		2		2		-

These ADC and CRE loans have not been renewed or restructured and, as of September 30, 2016, 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 and 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, restructured loans, and other real estate owned. Table 10 shows the current and prior period amounts of non-performing assets. Non-performing assets were $17,482 at September 30, 2016, compared to $17,766 at December 31, 2015 and $13,966 at September 30, 2015. The change from September 2015 to September 2016 was due primarily to a $2,456 decrease in restructured loans and a net increase of $6,056 in nonaccrual loans.

There were no loans past due 90 days or more and still accruing interest at September 30, 2016 and 2015. At December 31, 2015 there were $127 of loans past due 90 days or more and still accruing interest.

Troubled debt restructurings (TDRs) are troubled loans in which the original terms have been modified in favor of the borrower and either principal or interest has been forgiven due to deterioration in the borrower’s financial condition. There was $7,460 in TDRs at September 30, 2016, of which $6,534 were on nonaccrual status. TDRs totaled $8,636 at December 31, 2015, of which $5,274 were on nonaccrual status, and $8,851 at September 30, 2015, of which $5,469 were on nonaccrual status.

Table 10 - Non-Performing Assets

	September 30, 2016			December 31, 2015			September 30, 2015
	(Dollars in thousands)
Nonaccrual loans:
Commercial, financial and agricultural	$	887		$	1,151		$	1,204
Real Estate:
Commercial		10,307			6,763			3,040
Residential		4,301			3,560			3,324
Acquisition, development and construction		745			2,537			2,622
Consumer		40			33			34
Total Nonaccrual loans		16,280			14,044			10,224
Restructured loans (1)		926			3,362			3,382
Other real estate owned		276			360			360
Total Non-performing assets	$	17,482		$	17,766		$	13,966


Loans past due 90 days or more and still accruing interest	$	-		$	127		$	-

Non-performing assets to total assets		0.93	%		0.97	%		0.77	%

Non-performing assets to period end loans and OREO		1.69	%		1.76	%		1.45	%

Allowance for loan loss to period end nonaccrual loans		131.25	%		152.14	%		216.94	%

(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 1.69% at September 30, 2016 compared to 1.76% at December 31, 2015 and 1.45% at September 30, 2015. The ratio of allowance for loan losses to total nonaccrual loans was 131.25% at September 30, 2016 compared to 152.14% at December 31, 2015 and 216.94% at September 30, 2015. The resolution of non-performing assets continues to be a priority of management.

Nonaccrual loans increased $6,056 (59.23%) from September 30, 2015 due primarily to an increase in nonaccrual CRE loans, which increased $7,267. Partially offsetting this increase was a decrease in nonaccrual ADC loans of $1,877.

The increase in nonaccrual CRE was due to one troubled loan that moved to nonaccrual status during the last half of the 2015 and one impaired loan that moved to nonaccrual status during the third quarter of 2016. The decrease in restructured loans since September 30, 2015 was due primarily to the repayment of a $2,423 restructured loan.

The following table provides further information regarding the Company’s most significant nonaccrual loans.

Table 11 - Nonaccrual Loans

Nonaccrual

Appraisal

Appraised

Balance

Originated

Date

Trigger

Collateral

Allowance

Method

Date

Value

(Dollars in thousands)

Commercial real estate

4,150

08/03/12

09/27/16

financial condition

amusement park

1,150

collateral value

In Process

Commercial real estate

1,335

01/06/11

09/18/15

financial condition

motel

collateral value

09/15

2,050

Commercial real estate

3,370

01/17/12

12/21/15

financial condition

land & gym

discounted cash flows

8,855

Other, net

7,425

Nonaccrual loans at Sept. 30, 2016

16,280

The following table presents a roll forward of other real estate owned for the nine month periods ended September 30, 2016 and 2015, respectively.

Table 12 - Other Real Estate Owned

	2016			2015
	(Dollars in thousands)

Beginning balance, January 1	$	360		$	1,107
Additions		303			611
Increase in valuation allowance		(84	)		(14	)
Sales		(279	)		(1,460	)
(Loss) gain on sale of OREO		(24	)		116
Ending balance, September 30	$	276		$	360

The following table provides details of other real estate owned as of September 30, 2016, December 31, 2015 and September 30, 2015, respectively.

	September 30, 2016			December 31, 2015			September 30, 2015
	(Dollars in thousands)
Other Real Estate:
Real Estate
Acquisition, development and construction	$	607		$	607		$	608
		607			607			608
Valuation allowance		(331	)		(247	)		(248	)
	$	276		$	360		$	360

In the first nine months of 2016, additions to other real estate owned totaled $303 compared to $611 for the same period in 2015. There was $279 in sales of other real estate for the nine months ended September 30, 2016 compared to $1,460 for the nine months ended September 30, 2015.

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 $93 was charged to expense for the three months ended September 30, 2016 compared to a provision of $132 for the three months ended September 30, 2015 and a $561 provision for losses was charged to expense for the nine months ended September 30, 2016 compared to a negative provision of $2,011 credited to expense for the nine months ended September 30, 2015.

At September 30, 2016 the ratio of allowance for loan losses to period end loans was 2.06% compared to 2.12% at December 31, 2015 and 2.30% at September 30, 2015. The decline in the overall level of allowance as a percentage of the portfolio is due in part to the decline in the average historical loss rate and the level of recoveries during the quarter.

For the nine months ended September 30, 2016 charge-offs net of recoveries totaled $560 on all loans. This included charge-offs net of recoveries of $305 for consumer loans, 206 for ADC loans, $126 for residential real estate loans and $31 for commercial, financial and agricultural loans. These were partially offset by recoveries net of charge-offs of $108 for CRE 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 September 30, 2016 was 66.70% compared to 66.00% at December 31, 2015 and 62.45% at September 30, 2015. Deposits at September 30, 2016 and December 31, 2015 include $136,605 and $159,180 of brokered certificates of deposit, respectively. GB&T has also utilized borrowings from the FHLB. GB&T maintains a line of credit with the FHLB approximating 10% of its total assets. FHLB advances are collateralized by eligible first mortgage loans and CRE loans. FHLB advances totaled $90,000 at September 30, 2016. GB&T maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $30,000, of which none was outstanding at September 30, 2016 and a $10,000 repurchase line of credit with CenterState Bank, Orlando, Florida, of which none was outstanding at September 30, 2016. 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 September 30, 2016 and a federal funds purchased accommodation with CenterState Bank, Orlando, Florida, for advances up to $10,000, of which none was outstanding at September 30, 2016. The Company also maintains a borrowing facility at the Federal Reserve Bank, under the Borrower-In-Custody Program, of which none was outstanding at September 30, 2016. 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 $550 at September 30, 2016.

Stockholders’ equity to total assets was 10.06% at September 30, 2016 compared to 9.23% at December 31, 2015 and 9.31% at September 30, 2015. The capital of the Company exceeded all required regulatory guidelines at September 30, 2016. The Company’s common equity Tier 1, Tier 1 risk-based, total risk-based and Tier 1 leverage capital ratios were 14.19%, 15.73%, 16.99%, and 10.91%, respectively, at September 30, 2016.

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

Table 13 - Regulatory Capital Requirements

September 30, 2016

											To be well capitalized
						For capital adequacy					under prompt corrective
	Actual					purposes (1)					action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Southeastern Bank Financial Corporation
Risk-based capital:
Common equity tier 1 capital	$	183,957		14.19	%	$	66,433		5.125	%		N/A		N/A
Tier 1 capital		203,957		15.73	%		85,877		6.625	%		N/A		N/A
Total capital		220,224		16.99	%		111,803		8.625	%		N/A		N/A
Tier 1 leverage ratio		203,957		10.91	%		74,751		4.00	%		N/A		N/A


Georgia Bank & Trust Company:
Risk-based capital:
Common equity tier 1 capital	$	188,458		14.57	%	$	66,302		5.125	%	$	84,090		6.50	%
Tier 1 capital		188,458		14.57	%		85,707		6.625	%		103,495		8.00	%
Total capital		204,693		15.82	%		111,581		8.625	%		129,369		10.00	%
Tier 1 leverage ratio		188,458		10.11	%		83,850		4.50	%		93,167		5.00	%

(1) Risk-based capital includes a capital conservation buffer of 0.625%.

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, common equity Tier 1 and total risk-based capital requirements. The capital conservation buffer is being 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 ADC 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 $253,231 at September 30, 2016. This includes standby letters of credit of $4,732 at September 30, 2016. 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 14 - Commitments and Contractual Obligations

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

Lines of credit (1)	$	248,499		-		-		-
Standby letters of credit (1)		4,732		-		-		-
Lease agreements		241		240		33		-
Deposits		1,475,363		58,881		20,092		-
Securities sold under repurchase agreements		550		-		-		-
Salary continuation agreements		383		1,528		1,705		33,768
FHLB advances		60,000		30,000		-		-
Subordinated debentures		-		-		-		20,000
Total commitments and contractual obligations	$	1,789,768	$	90,649	$	21,830	$	53,768

(1)

Presented at contractual amounts; however, since many of these are expected to expire unused or partially used, the total amounts do not necessarily reflect future cash requirements

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 September 30, 2016, 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, 2015. A detailed discussion of market risk is provided in the Company’s 2015 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 Executive 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, 2015, which could materially affect its business, financial condition or future results. There are no material changes from the factors previously disclosed in the Company’s Annual Report on Form 10-K. 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 third quarter of 2016.

Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share (1)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number (or Appropriate Dollar Value) of Shares Yet To Be Purchased Under the Plans or Programs (1)
July 1 through July 31, 2016	2,750	50.54	2,750	296,704
August 1 through August 31, 2016	-	-	-	296,704
September 1 through September 30, 2016	-	-	-	296,704
Total	2,750	50.54	2,750	296,704

(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.

Item 3.

Defaults Upon Senior Securities

Not applicable

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None

Item 6.

Exhibits

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 September 30, 2016 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: October 28, 2016		By:	/s/ Darrell R. Rains
		Darrell R. Rains
		Executive Vice President, Chief
		Financial Officer (Duly Authorized
		Officer of Registrant and Principal
		Financial Officer)

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