Southeastern Bank Financial (SBFC) 10-K 2014 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2014
	OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 0-24172

SOUTHEASTERN BANK FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

GEORGIA	58-2005097
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
3530 Wheeler Road	30909
Augusta, Georgia	(Zip Code)
(Address of principal executive offices)

(706) 738-6990

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $3.00 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes☐No☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 ☒ No☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

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

Large accelerated filer ☐	Non-accelerated filer ☐
	(do not check if smaller reporting company)
Accelerated filer ☐	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☒

As of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $73,002,353 based on the closing sale price of $23.10 per share as reported on the Over the Counter Bulletin Board.

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

Class	Outstanding at February 23, 2015
Common Stock, $3 par value per share	6,744,245 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held	Part III
April 22, 2015

Introductory Note:  Although the Company is classified as a “smaller reporting company” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, it has elected to file a report and attestation as to its internal controls over financial reporting in addition to management’s report on internal controls in this Annual Report on Form 10-K.

Throughout this report, dollar amounts (except per share amounts) are expressed in thousands unless otherwise noted.

Item 1.  Description of Business

General

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 had total consolidated assets of $1,732,781, total deposits of $1,463,864 and total stockholders’ equity of $155,286 at December 31, 2014.

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 operates its main office and eight full service branches in Augusta, Martinez, and Evans, Georgia, with mortgage origination offices located in Augusta and Savannah, 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” (“SB&T”).

The Company is community oriented and focuses primarily on offering real estate, commercial and consumer loans and various deposit and other services to individuals, small to medium sized businesses and professionals in its market area.  The Company is the largest locally owned and operated financial institution headquartered in Richmond and Columbia Counties of Georgia.  Each member of the Company’s management team is a banking professional with many years of experience in the Augusta or Aiken market with this and other banking organizations.  A large percentage of Company management has worked together for many years.  The Company competes against the larger regional and super-regional banks operating in its market by emphasizing the stability and accessibility of its management, management’s long-term familiarity with the market, immediate local decision making and the pride of local ownership.

The Company’s internet address is www.georgiabankandtrust.com.  It makes available free of charge through its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”).

The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.  The internet address of the SEC website is www.sec.gov.

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History

GB&T was organized by a group of local citizens from Richmond and Columbia Counties and commenced business from the main office location at 3530 Wheeler Road in Augusta on August 28, 1989.  GB&T became a subsidiary of the Company in February 1992 as a result of its holding company reorganization.  In December 1992, GB&T acquired FCS Financial Corporation (“FCS”) and First Columbia Bank (“First Columbia”) and in July 1993, First Columbia merged into GB&T.  The Company organized SB&T as a subsidiary in 2006 and then merged SB&T with and into GB&T in December 2011.

Employees

The Company had approximately 340 full-time equivalent employees at December 31, 2014.  The Company maintains training, educational and affirmative action programs designed to prepare employees for positions of increasing responsibility in both management and operations, and provides a variety of benefit programs, including group life, health, accident and other insurance and retirement plans.  None of the Company’s employees are covered by a collective bargaining agreement, and the Company believes its employee relations are generally good.

Management Team

GB&T was founded with an experienced management team, and that team has continued to expand with the growth of the bank.  GB&T’s Chief Executive Officer, R. Daniel Blanton, was involved in the organization of GB&T beginning in 1988 and previously served with a predecessor to Wells Fargo Bank, N.A. (“Wells Fargo”), Georgia State Bank, for over 13 years.  With the acquisition of FCS and First Columbia, GB&T obtained its President and Chief Operating Officer, Ronald L. Thigpen, who had served as Chief Executive Officer of FCS and First Columbia since 1991, and before that served in various capacities with Wells Fargo and its predecessors.  Darrell Rains, Group Vice President and Chief Financial Officer, joined GB&T in 2005.  He has over 30 years of financial experience, including service at Regions Bank as Regional Financial Officer for the Mid-Atlantic Region and at Palmetto Federal, a predecessor to Regions Bank in Aiken, S.C., as Chief Financial Officer.  GB&T’s Executive Vice President and Chief Loan Officer, Jay Forrester, has been associated with GB&T since 1995.  He previously served as Vice President, Commercial Lending for C & S National Bank and NationsBank, predecessors of Bank of America.  Regina W. Kennedy, Group Vice President, Bank Operations, has been with GB&T since the acquisition of First Columbia Bank.  With over 34 years of bank operations experience, she previously served First Columbia Bank and C & S National Bank, predecessor of Bank of America.  GB&T’s Group Vice President and Chief Risk Officer, James R. Riordan, Jr., joined the team in 2002.  For the prior ten years, he served in various capacities with SunTrust Bank in Augusta, most recently as senior lending officer.  He has 25 years of bank lending and credit administration experience.  Paula Tankersley, Group Vice President, Retail Banking, has been associated with GB&T since 1992.  Prior to joining GB&T, she was associated with the Bank of Columbia County and its successor, Allied Bank of Georgia.  Robert C. Osborne, Jr., Executive Vice President, Private Banking, joined GB&T in September 2004.  For the prior 28 years, he was associated with Wachovia Corporation in Atlanta and Augusta, most recently as head of their Wealth Management unit in Augusta.  Charles B. Thompson, III, Group Vice President, Wealth Management, joined the bank in 2000 as Senior Trust Officer and started the trust department.  He previously served over 19 years in various statewide and regional trust management capacities with First Union Corporation and its predecessors.  L. Bart Chandler, Group Vice President, Mortgage, joined the team in 2000 as Vice President of Mortgage Production.  He has over 30 years of experience in the banking industry, including service at Bankers First, a predecessor to Wells Fargo.

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Market Area

The Company’s primary market area 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 2013population of the Augusta-Richmond County, GA-SC MSA was 580,270, the second largest in Georgia and fourth largest in South Carolina.  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.  Significant medical facilities include Georgia Regents University Augusta, University Hospital, Veteran’s Administration Hospital, Dwight D. Eisenhower Hospital, Gracewood State School and Hospital, Doctors’ Hospital and Trinity Hospital.  Other major employers in the Augusta market area include U.S. Department of Energy Savannah River Site, the Fort Gordon military installation, E-Z Go/Textron (golf car manufacturer), the Richmond County school system and the Columbia County school system.  Major employers in the Aiken market include Savannah River Site, Aiken County Board of Education, Bechtel Savannah River Company (engineering construction firm), Wal-Mart Associates Inc., Kimberly Clark Corporation, and BFS North American Tire, LLC.  The area is served by Interstate 20, which connects it to Atlanta, 140 miles to the west and Columbia, South Carolina, 70 miles to the east.  Augusta is also served by a major commercial airport (Bush Field) and a commuter airport (Daniel Field).  The average unemployment rate for the Augusta-Richmond County MSA was 8.1% in 2013, down from 8.8% in 2012. Between June 2013 and June 2014 (the latest date for which FDIC information is available), total commercial bank and thrift deposits in the Augusta-Richmond County, GA-SC MSA decreased 0.54% from $7,631,529 to $7,590,316.Based on data reported as of June 30, 2014, the Company has 20.23% of all deposits in the Augusta-Richmond County, GA-SC MSA and is the second largest depository institution in that MSA.  The demographic information as presented above is based upon information and estimates provided by the U.S. Census Bureau, U.S. Department of Labor, the FDIC, Augusta Metro Chamber of Commerce, and the South Carolina Employment Security Commission.

Competition

The banking business generally is highly competitive, and sources of competition are varied.  The Company competes as a financial intermediary with other commercial banks, savings and loan associations, credit unions, mortgage banking companies, consumer finance companies, securities brokerages, insurance companies, and money market mutual funds operating in Richmond and Columbia Counties in Georgia, Aiken County in South Carolina and elsewhere.  In addition, customers conduct banking activities without regard to geographic barriers through computer-based banking and similar services.

Many of the financial organizations in competition with the Company have much greater financial resources, more diversified markets and larger branch networks than the Company and are able to offer similar services at varying costs with higher lending limits.  In addition, with the enactment of federal and state laws affecting interstate and bank holding company expansion, there have been major interstate acquisitions involving financial institutions which have offices in the Company’s market area but are headquartered in other states.  The effect of such acquisitions (and the possible increase in size of the financial institutions in the Company’s market areas) may further increase the competition faced by the Company.  The Company believes, however, that it will be able to use its local independent image to its advantage in competing for retail and commercial business.

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Lending Activities

Through its bank subsidiary, the Company offers a wide range of lending services, including real estate, commercial and consumer loans, to individuals, small to medium-sized businesses and professionals that are located in, or conduct a substantial portion of their business in, the Company’s market area.  The Company’s total loans, including loans held for sale, at December 31, 2014, were $984,721 or 60.18% of total interest-earning assets.  An analysis of the composition of the Company’s loan portfolio is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Composition of the Loan Portfolio.”

Real Estate Loans.  Loans secured by real estate are the primary component of the Company’s loan portfolio, constituting $739,888, or 76.56% of the Company’s total loans, at December 31, 2014.  These loans consist of commercial real estate loans, construction and development loans, residential real estate loans, and home equity loans.

Commercial Real Estate Loans (“CRE loans”).   At December 31, 2014, the Company held $371,488 of commercial real estate loans of various sizes secured by office buildings, warehouse facilities, retail establishments, and other types of property.  These commercial real estate loans represented 38.44% of the Company’s total loans at December 31, 2014.  Loan terms are generally limited to five years and often do not exceed three years, although the installment payments may be structured on a 20-year amortization basis with a balloon payment at maturity.  Interest rates may be fixed or adjustable.  The Company generally charges an origination fee.  Management attempts to reduce credit risk in the commercial real estate portfolio by originating owner occupied and non owner occupied loans subject to underwriting criteria that include: certified appraisal and valuation of collateral; loan-to-value margins (typically not exceeding 80%); cash equity requirements; evaluations of borrowers’ cash flows and alternative sources of repayment.  In addition, the Company requires personal guarantees from the principal owners of the property supported with an analysis by the Company of the guarantors’ personal financial statements in connection with a substantial majority of such loans.  The Company experienced $436 in net charge-offs on commercial real estate loans during 2014.  A number of the loans classified as commercial real estate loans are, in fact, commercial loans for which a security interest in real estate has been taken as additional collateral.  These loans are subject to underwriting as commercial loans as described below.

Acquisition Development and Construction Loans (“ADC loans”).  ADC real estate loans comprise $164,303, or 17.00% of the Company’s total loans at December 31, 2014.  A construction and development loan portfolio presents special problems and risks, requiring additional administration and monitoring.  This is necessary since most loans are originated as lines of credit and draws under the line require specific activities which add value to the asset, such as progress on the completion of a building or the placement of utilities and roads in a development.  This requires specialized knowledge on the part of our personnel to appraise and evaluate that progress, hence the higher level of administration and monitoring.  The level of construction and development loans are representative of the character of the Company’s market.  The Company subjects this type of loan to underwriting criteria that include: certified appraisal and valuation of collateral; loan-to-value margins (typically not exceeding 75%); cash equity requirements; evaluations of borrowers’ cash flows and alternative sources of repayment; and a determination that the market is able to absorb the project on schedule.

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To further reduce the risk related to construction and development loans, the Company generally relies upon the long-standing relationships between its loan officers and the developer/contractor borrowers.  In most cases, these relationships exceed ten years.  The Company targets seasoned developers and contractors who have experience in the local market.  Various members of the Company’s Board of Directors have close contacts with the construction industry:  Robert W. Pollard, Jr. owns and operates a lumber manufacturing company; E. G. Meybohm owns the largest local real estate brokerage firm; William J. Badger owns and operates a building supply company; Larry S. Prather owns a utility and grading company; and Patrick D. Cunning is an experienced real estate developer and has an MAI designation from the Appraisal Institute.  Through these connections to the industry, the Company attempts to monitor current economic conditions in the marketplace for residential real estate, and the financial standing and ongoing reputation of its construction and development borrowers.

Infrastructure development loans are generally made with an initial maturity of one year, although the Company may renew the loan for up to two additional one-year terms to allow the developer to complete the sale of the lots comprising the property before requiring the payment of the related loan.  These loans typically bear interest at a floating rate and the Company typically charges an origination fee.  These loans are repaid, interest only, on a monthly or quarterly basis until sales of lots begin, and then principal payments are made as each lot is sold at a rate allowing the Company to be repaid in full by the time 75% of the lots have been sold.  In order to reduce the credit risk associated with these loans, the Company requires the project’s loan to value ratio (on an as completed basis) to be not more than 75%.  The Company experienced $691 in net loan charge-offs on construction and development loans during 2014.

Residential construction loans are typically made for homes with a completed value in the range of $100 to $500 thousand.  Loans are typically made for a term of six months to twelve months.  Typically, these loans bear interest at a floating rate and the Company collects an origination fee.  The Company may renew these loans for an additional term (up to 24 months total) to allow the contractor time to market the home.  In order to reduce the credit risk with respect to these loans, the Company restricts the number and dollar amount of loans that are made for homes being built on a speculative basis and carefully manages its aggregate lending relationship with each borrower. The Company experienced $36 in net loan charge-offs on residential construction loans during 2014.

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 five loans with interest reserves at December 31, 2014. The following table details the loans and accompanying interest reserves as of December 31, 2014.

	December 31, 2014
			Reserves
	Balance		Original		Advanced		Remaining
			(Dollars in thousands)
Loan 1	$	10,592		330		277		53
Loan 2		10,500		250		232		18
Loan 3		5,952		82		64		18
Loan 4		4,939		62		62		-
Loan 5		3,972		100		19		81

These ADC or CRE loans have not been renewed or restructured and as of December 31, 2014, are not on nonaccrual.

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

Residential Loans.   The Company originates, on a selective basis, residential loans for its portfolio on single properties, both owner-occupied and non-owner-occupied.  At December 31, 2014, the Company held $204,097 of such loans representing 21.12% of the Company’s loan portfolio. This portfolio typically includes 15 or 30-year adjustable rate mortgage loans whose terms mirror those prevalent in the secondary market for mortgage loans or, less typically, floating rate non-amortized term loans for purposes other than acquisition of the underlying residential property.  Some 15 or 30 year fixed rate loans and 3, 5 and 10 year fixed rate balloon loans are maintained in the portfolio when there are compelling market reasons to do so.  Generally, all fixed rate residential loans are sold into the secondary market.  In the case of home equity loans and lines of credit, the underwriting criteria are the same as applied by the Company when making a first mortgage loan, as described above.  Home equity lines of credit typically mature ten years after their origination.  The Company experienced net loan charge-offs on residential loans of $1,001 during 2014.

The Company also originates both fixed and variable rate residential loans for sale into the secondary market, servicing released.  Loans originated for sale into the secondary market are approved for purchase by an investor prior to closing.  The Company generates loan origination fees, typically ranging from 1.00% to 1.50% of the loan balance, and servicing release fees, generally ranging from 0.25% to 0.75% of the loan balance. The Company bears minimal interest rate risk on these loans and only holds the loans temporarily until documentation can be completed to finalize the sale to the investor.  Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives.  Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked.  The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans.  Changes in the fair values of these derivatives are included in net gains on sales of loans.  Fair values of these derivatives were $6 and $31 as of December 31, 2014 and 2013, respectively.  The Company had $18,365 of loans held for sale at December 31, 2014.

Commercial, Financial and Agricultural Loans.  The Company makes loans for a wide variety of business purposes as well as home equity lines of credit, loans for multi-family properties and government entities.  At December 31, 2014, the Company held $208,905 of these loans, representing 21.62% of the total loan portfolio, excluding for these purposes commercial loans secured by real estate.  See “Real Estate Loans.”  Equipment loans are made for a term of up to seven years (more typically three to five years) at fixed or variable rates, with the loan being fully amortized over the term and secured by the financed equipment with a loan-to-value ratio based on the overall relationship and creditworthiness of the customer.  Working capital loans are made for a term typically not exceeding one year.  These loans are usually secured by accounts receivable or inventory, and principal is either repaid as the assets securing the loan are converted into cash, or principal is due at maturity.  The Company experienced net loan charge-offs on commercial, financial and agricultural loans of $1,938 during 2014.

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Consumer Loans.  The Company makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans, and revolving lines of credit such as overdraft protection.  At December 31, 2014, the Company held $17,248 of consumer loans, representing 1.79% of total loans.  These loans typically carry balances of less than $25,000 and earn interest at a fixed rate.  Non-revolving loans are either amortized over a period generally not exceeding 60 months or are ninety-day term loans.  Revolving loans require monthly payments of interest and a portion of the principal balance (typically 2 to 3% of the outstanding balance). The Company experienced net charge-offs on consumer loans of $329 during 2014.

Loan Approval and Review.  The Company’s loan approval policies provide for various levels of officer lending authority.  When the aggregate amount of outstanding loans to a single borrower exceeds that individual officer’s lending authority, the loan request must be considered and approved by an officer with a higher lending limit or by the Directors’ Loan Committee.  Individual officers’ lending limits range from $20 to $3,000 depending on seniority, type of loan and whether the loan is secured or unsecured.  Any loan in excess of the lending limit of senior bank officers must be approved by the Directors’ Loan Committee.

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.

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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.

Deposits

The Company offers a variety of deposit programs to individuals and small to medium-sized businesses and other organizations at interest rates generally consistent with local market conditions.  The following table sets forth the mix of depository accounts for the Company as a percentage of total deposits at December 31, 2014.

Deposit Mix
	(Dollars in thousands)
Noninterest-bearing	$	196,624	13.43	%
NOW accounts		354,038	24.18	%
Savings		521,570	35.63	%
Money management accounts		15,824	1.08	%
Time deposits		375,808	25.68	%
	$	1,463,864	100.00	%

The Company accepts deposits at the main office location and eleven branch banking offices, each of which maintain an automated teller machine.  The Company is a member of the MasterCard Maestro and Cirrus networks, VISA Plus, and the “STAR” network of automated teller machines, which permits customers to perform certain transactions in many cities worldwide.  The Company controls deposit volumes primarily through the pricing of deposits and to a certain extent through promotional activities such as “free checking” and “Impact checking” and “premium interest savings”.  The Company also utilizes other sources of funding, specifically repurchase agreements, Federal Home Loan Bank borrowings and brokered certificates of deposit.  Deposit rates are set weekly by executive management of the Company.  Management believes that the rates it offers are competitive with, or in some cases, slightly above those offered by other institutions in its market area.  The Company does not actively solicit deposits outside of its market area.

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Supervision and Regulation

Both the Company and GB&Tare subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of their operations.  These laws and regulations generally are intended to protect depositors and not shareholders.

Legislation and regulations authorized by legislation influences, among other things:

● how, when and where the Company may expand geographically;

● into what product or service markets it may enter;

● how it must manage its assets; and

● under what circumstances money may or must flow between the Company and its subsidiary.

Set forth below is a summary of the major pieces of legislation affecting the Company’s industry and how that legislation affects its actions.  The following summary is qualified by references to the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations may have a material effect on the Company’s business and prospects, and legislative changes and the policies of various regulatory authorities may significantly affect its operations.  We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on the Company’s business and earnings in the future.

The Company owns all of the capital stock of GB&T and is a bank holding company under the federal Bank Holding Company Act of 1956.  As a result, the Company is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Board of Governors of the Federal Reserve System.  Because the Company is a bank holding company located in Georgia, the Georgia Department of Banking and Finance (“GDBF”) also regulates and monitors all significant aspects of the Company’s operations.

GB&T is a commercial bank regulated by the GDBF and the FDIC.

Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve Board’s prior approval before:

● acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

● acquiring all or substantially all of the assets of any bank; or

● merging or consolidating with any other bank holding company.

Additionally, the Bank Holding Company Act provides that the Federal Reserve Board may not approve any of these transactions if it would result in or tend to create a monopoly or, substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served.  The Federal Reserve Board is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served.  The Federal Reserve Board’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

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Under the Bank Holding Company Act, if adequately capitalized and adequately managed, a bank holding company located in a given state may purchase a bank located outside that state, although restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.  Georgia law prohibits acquisitions of Georgia banks that have been incorporated for less than three years.

Change in Bank Control.Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company.  Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company.  Control is also presumed to exist, although rebuttable, if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

● the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or

● no other person owns a greater percentage of that class of voting securities immediately after the transaction.

The Company’s common stock is registered under the Securities Exchange Act of 1934.  The regulations provide a procedure for challenging the rebuttable presumption of control.

Permitted Activities.  The Bank Holding Company Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto.  Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company.  Under the regulations implementing the Gramm-Leach-Bliley Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activity.  Those activities include, among other activities, certain insurance and securities activities.

To qualify to become a financial holding company, any depository institution subsidiary of the Company must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.”  Additionally, the Company must file an election with the Federal Reserve Board to become a financial holding company and must provide the Federal Reserve Board with 30 days’ written notice prior to engaging in a permitted financial activity. While the Company meets the qualification standards applicable to financial holding companies, the Company has not elected to become a financial holding company at this time.

Capital Adequacy.  The Company and GB&T are required to comply with the capital adequacy standards established by the Federal Reserve Board, in the case of the Company, and the FDIC, in the case of GB&T.  The Federal Reserve Board has established risk-based and leverage measures of capital adequacy for bank holding companies.  GB&T is also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the Federal Reserve Board for bank holding companies.

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The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets.  Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights.  The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

Capital Requirements as of and prior to December 31, 2014.  The minimum guideline for the ratio of total capital to risk-weighted assets, and classification as “adequately capitalized,” is 8%.  A bank that fails to meet the required minimum guidelines is classified as “undercapitalized” and subject to operating and management restrictions.  However, a bank that exceeds its capital requirements and maintains a ratio of total capital to risk-weighted assets of 10% is classified as “well capitalized.”  As of December 31, 2014, GB&T was “well capitalized.”

Total capital consists of two components: Tier 1 Capital and Tier 2 Capital.  Tier 1 Capital includes common equity, qualifying non-cumulative perpetual preferred stock, qualifying minority interests in equity accounts of consolidated subsidiaries, and limited amount of qualifying trust preferred securities, certain minority interests and qualifying cumulative perpetual preferred stock.  Goodwill, most intangible assets and certain other assets are deducted.  Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan losses, subject to limitations.  The Company’s ratio of total capital to risk-weighted assets was 16.23% and the ratio of Tier 1 Capital to risk-weighted assets was 14.97% at December 31, 2014.

In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies.  These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve Board’s risk-based capital measure for market risk.  All other bank holding companies generally are required to maintain a leverage ratio of at least 4%.  At December 31, 2014, our leverage ratio was9.86%.  The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets.  The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

Capital Requirements as of January 1, 2015.  On July 2, 2013, the Federal Reserve Board of Governors approved a final rule implementing Basel III’s higher minimum capital standards for most banking organizations.  The FDIC followed suit, approving the new regulatory capital requirements as an interim final rule.

The new capital rules include a new minimum common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and Tier 2 risk-based capital requirements.   The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%.  The required minimum ratio of total capital to risk-weighted assets will remain 8.0%.

The new risk-based capital requirements (except for the capital conservation buffer) became effective on January 1, 2015 for banking organizations with less than $250 billion in consolidated assets or those with significant foreign exposures.  The capital conservation buffer will be phased in over four years beginning on January 1, 2016.

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Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business.  As described in “Prompt Corrective Action” below, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.

Payment of Dividends.  The Company is a legal entity separate and distinct from its subsidiary.  Under Georgia law, the Company is not permitted to pay dividends if, after giving effect to such payment, the Company would not be able to pay its debts as they become due in the usual course of business or if the Company’s total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if the Company were dissolving.  The Company will also be prohibited from paying dividends if it does not maintain the required capital conservation buffer, which is being phased in over four years beginning on January 1, 2016.

In addition to the foregoing restrictions, the Federal Reserve Board has the power to prohibit the payment of dividends by bank holding companies if such payment would constitute an unsafe or unsound practice.  The Federal Reserve Board has issued a policy statement that expresses its view that a bank holding company experiencing earnings weakness should not pay cash dividends that exceed its net income or that could only be funded in ways that weaken the bank holding company’s financial health, such as increasing its indebtedness.

The principal sources of the Company’s cash flow, including cash flow to pay dividends to its shareholders, are dividends paid by GB&T to the Company.   Statutory and regulatory limitations apply to GB&T’s payment of dividends.  If, in the opinion of the FDIC, GB&T were engaged in or about to engage in an unsafe or unsound practice, the FDIC could require, after notice and a hearing, that it stop or refrain from engaging in the questioned practice.  The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice.  Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized.  Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.  See “--Prompt Corrective Action.”

GB&T has additional restrictions for dividends imposed by the GDBF.  Cash dividends on GB&T’s common stock may be declared and paid only out of its retained earnings, and dividends may not be declared at any time when GB&T’s paid-in capital and appropriated earnings do not, in combination, equal at least 20% of its capital stock account.  In addition, the GDBF’s current rules and regulations require prior approval before cash dividends may be declared and paid if: (i) the bank’s ratio of equity capital to adjusted total assets is less than 6%; (ii) the aggregate amount of dividends declared or anticipated to be declared in that calendar year exceeds 50% of the bank’s net profits, after taxes but before dividends, for the previous calendar year; or (iii) the percentage of the bank’s loans classified as adverse as to repayment or recovery by the GDBF at the most recent examination of the bank exceeds 80% of the bank’s equity as reflected at such examination.

Restrictions on Transactions with Affiliates. The Company and GB&T are subject to the provisions of Section 23A of the Federal Reserve Act.  Section 23A places limits on the amount of:

● a bank’s loans or extensions of credit to affiliates;

● a bank’s investment in affiliates;

● assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve Board;

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● loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and

● a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus.  In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements.  GB&T must also comply with other provisions designed to avoid taking low-quality assets.

The Company and GB&T are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enhances the requirements for certain transactions with affiliates under Section 23A and 23B, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

GB&T is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests.  These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.  Additionally, an insured depository institution is prohibited from engaging in asset purchases or sales transactions with its officers, directors or principal shareholders unless on market terms and, if the transaction represents greater than 10% of the capital and surplus of the bank, it has been approved by a majority of the disinterested directors.

Support of Subsidiary Institutions.Under Federal Reserve Board policy and the Dodd-Frank Act, the Company is expected to act as a source of financial strength for its subsidiary and to commit resources to support it.  This support may be required at times when, without this Federal Reserve Board policy,the Company might not be inclined to provide it.  In addition, any capital loans made by the Company to its subsidiary will be repaid only after the subsidiary’s deposits and various other obligations are repaid in full.  In the unlikely event of the Company’s bankruptcy, any commitment by it to a federal bank regulatory agency to maintain the capital of GB&T will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Prompt Corrective Action.  The FDICIA establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions.  Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of the other categories.

Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories.  The severity of the action depends upon the capital category in which the institution is placed.  Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

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As of December 31, 2014, GB&T qualified for the well capitalized category.A “well-capitalized” bank is one that is not required to meet and maintain a specific capital level for any capital measure pursuant to any written agreement, order, capital directive, or other remediation, and significantly exceeds all of its capital requirements.  Prior to January 1, 2015, those capital requirements included maintaining a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, and a Tier 1 leverage ratio of at least 5%.  Beginning on January 1, 2015, the capital requirements include maintaining a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a common equity Tier 1 risk-based capital ratio of at least 4.5% and a Tier 1 leverage ratio of at least 5%.  Generally, a classification as well capitalized will place a bank outside of the regulatory zone for purposes of prompt corrective action.  However, a well-capitalized bank may be reclassified as “adequately capitalized” based on criteria other than capital if the federal regulator determines that a bank is in an unsafe or unsound condition or is engaged in unsafe or unsound practices requiring certain remedial action.

FDIC Insurance Assessments.  GB&T’s deposits are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC up to the maximum amount permitted by law, which was permanently increased to $250,000 by the Dodd-Frank Act.  The FDIC uses the DIF to protect against the loss of insured deposits if an FDIC-insured bank or savings association fails.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

Branching.  Under current Georgia law, GB&T may open or acquire branch offices throughout Georgia with the prior approval of the GDBF.  Interstate branching is now permitted for all national and state-chartered banks as a result of the Dodd-Frank Act, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to establish a branch.

Community Reinvestment Act.  The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve or the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods.  These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.  Failure to adequately meet these criteria could impose additional requirements and limitations on our operations.Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements.

Allowance for Loan Losses.  The Allowance for Loan Losses (the “ALLL”) represents one of the most significant estimates in the Company’s financial statements and regulatory reports.  Because of its significance, the Company has developed a system by which it develops, maintains and documents a comprehensive, systematic and consistently applied process for determining the amounts of the ALLL and the provision for loan losses.  The Interagency Policy Statement on the Allowance for Loan Losses, issued in 2006, encourages all banks to ensure controls are in place to consistently determine the ALLL in accordance with generally accepted accounting principles in the United States (“GAAP”), the bank’s stated policies and procedures, management’s best judgment and relevant supervisory guidance.  Consistent with supervisory guidance, GB&T maintains a prudent and conservative, but not excessive, ALLL, that is at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan portfolio.  Management’s estimate of credit losses reflects consideration of all significant factors that affect the collectability of the portfolio as of the evaluation date.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.”

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Commercial Real Estate Lending.  Our lending operations may be subject to enhanced scrutiny by federal banking regulators based on its concentration of commercial real estate loans.  In 2006, the federal banking regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate lending concentrations.  CRE loans generally include land development, construction loans and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:

● total reported loans for construction, land development and other land represent 100% or more of the institution’s total capital, or

● total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.

Enforcement Powers.  The Financial Institution Reform Recovery and Enforcement Act (“FIRREA”) expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties.”  Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs.  These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1 million (or in the case of continuing violations, $1 million per day up to a $5 million maximum).  Criminal penalties for some financial institution crimes have been increased to 20 years.  In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties.

Possible enforcement actions include the termination of deposit insurance.  Furthermore, banking agencies’ power to issue regulatory orders were expanded.  Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss.  A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.  The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

The Consumer Financial Protection Bureau.  The Dodd-Frank Act creates the Consumer Financial Protection Bureau (the “Bureau”) within the Federal Reserve Board.  The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services.  The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers.  In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions.

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Limitations on Senior Executive Compensation.   In 2010, federal banking regulators issued guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking or undermined the safety and soundness of the organization.  In connection with this guidance, the regulatory agencies announced that they will review incentive compensation arrangements as part of the regular, risk-focused supervisory process.  Regulatory authorities may also take enforcement action against a banking organization if its incentive compensation arrangement or related risk management, control, or governance processes pose a risk to the safety and soundness of the organization and the organization is not taking prompt and effective measures to correct the deficiencies.  To ensure that incentive compensation arrangements do not undermine safety and soundness at insured depository institutions, the incentive compensation guidance sets forth the following key principles:

● Incentive compensation arrangements should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose the organization to imprudent risk;

● Incentive compensation arrangements should be compatible with effective controls and risk management; and

● Incentive compensation arrangements should be supported by strong corporate governance, including active and effective oversight by the board of directors.

The Dodd-Frank Act.The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in 2010, has had a broad impact on the financial services industry, including significant regulatory and compliance changes previously discussed and including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased regulatory examination fees; and (iii) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector.  Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC.

Some of the Dodd-Frank Act’s most far-reaching provisions, such as those regulating derivatives and proprietary trading activity and hedge funds, providing for enhanced supervision of “systemically significant” institutions, and phasing out Tier 1 capital treatment for trust preferred securities, apply only to institutions with over $10 billion in assets or to business lines in which the Company and GB&T do not engage.   Certain provisions do, however, apply to or affect us, including provisions that:

● Changed the assessment base for federal deposit insurance from a deposit-based to an asset-based calculation;

● Made permanent the $250,000 limit for federal deposit insurance;

● Repealed the federal prohibition on payment of interest on demand deposits;

● Imposed new mortgage lending requirements, including minimum underwriting standards, originator compensation restrictions, consumer protections for certain types of loans, and disclosure to borrowers;

● Apply to bank holding companies the same leverage and risk-based capital requirements that apply to insured depository institutions;

● Permit de novo and interstate branching as described in “—Branching” above; and

● Imposed new limits on affiliate transactions as described in “—Restrictions on Affiliate Transactions” above.

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Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on financial institutions’ operations is unclear.  The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business.  These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

Other Regulations.  Interest and other charges collected or contracted for are subject to state usury laws and federal laws concerning interest rates.

Our loan operations are also subject to federal laws applicable to credit transactions, such as the:

● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

● Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

● Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;

● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

● National Flood Insurance Act and Flood Disaster Protection Act, requiring flood insurance to extend or renew certain loans in flood plains;

● Real Estate Settlement Procedures Act, requiring certain disclosures concerning loan closing costs and escrows, and governing transfers of loan servicing and the amounts of escrows in connection with loans secured by one-to-four family residential properties;

● Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), imposing requirements and limitations on specific financial transactions and account relationships, intended to guard against money laundering and terrorism financing;

● Sections 22(g) and 22(h) of the Federal Reserve Act which set lending restrictions and limitations regarding loans and other extensions of credit made to executive officers, directors, principal shareholders and other insiders;

● Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended, governing the repayment terms of, and property rights underlying, secured obligations of persons currently on active duty with the U.S. military;

● Talent Amendment in the 2007 Defense Authorization Act, establishing a 36% annual percentage rate ceiling, which includes a variety of charges including late fees, for certain types of consumer loans to military service members and their dependents; and

● rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

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Our deposit operations are subject to federal laws applicable to depository accounts, such as the following:

● Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;

● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

● Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and,

● rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

Additionally, as part of their overall conduct of their business, the Company and GB&T must comply with:

● privacy and data security laws and regulations at both the federal and state level; and

● anti-money laundering laws, including the USA Patriot Act.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States.  We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.  The Federal Reserve Bank Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks and thrifts through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.  The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject.  We cannot predict the nature or impact of future changes in monetary and fiscal policies.

Item 1A. Risk Factors

An investment in our common stock involves risks.  If any of the following risks or other risks, which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results of operations could be harmed.  In such a case, the trading price of our common stock could decline, and investors could lose all or part of their investment.  The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

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Risks Associated with our Business

If the value of real estate in our core market were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our business, financial condition and results of operations.

In addition to considering the financial strength and cash flow characteristics of borrowers, we often secure loans with real estate collateral.  At December 31, 2014, approximately 76.56% of our loans had real estate as a primary or secondary component of collateral.  The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.  If we are required to liquidate the collateral securing a significant loan or collection of loans to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.   See the disclosure below under “An economic downturn, especially one affecting our market areas, could adversely affect our financial condition, results of operations, or cash flows.”

An economic downturn, especially one affecting our market areas, could adversely affect our financial condition, results of operations or cash flows.

Unpredictable economic conditions may have an adverse effect on the quality of our loan portfolio and our financial performance.  Economic recession over a prolonged period or other economic problems in our market areas could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services.

With most of our loans concentrated in Richmond, Columbia and Clarke counties in the state of Georgia and Aiken County in the state of South Carolina, a decline in local economic conditions could significantly reduce the values of our real estate collateral and could have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

Consequently, our success depends in part upon the growth in population, income levels, deposits and housing starts in our primary market areas.  If the communities in which we operate do not grow, or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed.  Furthermore, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas even if they do occur.

The amount of “other real estate owned” (“OREO”) may increase significantly, resulting in additional losses, and costs and expenses that will negatively affect our operations

At December 31, 2014, we had a total of $1,107 of OREO as compared to $1,014 at December 31, 2013 and $3,490 at December 31, 2012.  In general, OREO levels relate to the ongoing process of resolving problem credits, slow economic activity, and a slow residential real estate market.  If we experience an increase in these factors in our market area, the amount of OREO may increase in 2015.  Elevated levels of OREO increase our losses and the costs and expenses of maintaining the real estate.  Any increase in losses, maintenance costs and expenses due to OREO may have material adverse effects on our business, financial condition, and results of operations.  Such effects may be particularly pronounced in a market of reduced real estate values and excess inventory, which may make the disposition of OREO properties more difficult, increase maintenance costs and expenses, and reduce our ultimate realization from any OREO sales.

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Future impairment losses could be required on various investment securities, which may materially reduce the Company’s and the Banks’ regulatory capital levels.

The Company establishes fair value estimates of securities available-for-sale in accordance with GAAP. The Company’s estimates can change from reporting period to reporting period, and we cannot provide any assurance that the fair value estimates of our investment securities would be the realizable value in the event of a sale of the securities.

A number of factors could cause the Company to conclude in one or more future reporting periods that any difference between the fair value and the amortized cost of one or more of the securities that we own constitutes an other-than-temporary impairment. These factors include, but are not limited to, an increase in the severity of the unrealized loss on a particular security, an increase in the length of time unrealized losses continue without an improvement in value, a change in our intent or whether the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery, or changes in market conditions or industry or issuer specific factors that would render us unable to forecast a full recovery in value, including adverse developments concerning the financial condition of the companies in which we have invested.

The Company may be required to take other-than-temporary impairment charges on various securities in its investment portfolio.Any other-than-temporary impairment charges would negatively affect our regulatory capital levels, and may result in a change to our capitalization category, which could limit certain corporate practices and could compel us to take specific actions.

The Company did not recognize any other-than-temporary impairment charges for the years ended December 31, 2014 and 2013, respectively.

We could suffer loan losses from a decline in credit quality.

We could sustain losses if borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans.  We have adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for credit losses that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio.  These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations.  In particular, we face credit quality risks presented by past, current and potential economic and real estate market conditions as more fully described in the risk factors appearing in this report.

Our results of operations and financial condition would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses.  

Experience in the banking industry indicates that a portion of our loans in all categories of our lending business will become delinquent, and some may only be partially repaid or may never be repaid at all.  Our methodology for establishing the adequacy of the allowance for loan losses depends on subjective application of risk grades as indicators of borrowers’ ability to repay.  Deterioration in general economic conditions and unforeseen risks affecting customers may have an adverse effect on borrowers’ capacity to repay timely their obligations before risk grades could reflect those changing conditions.  In times of improving credit quality, with growth in our loan portfolio, the allowance for loan losses may decrease as a percent of total loans.  Changes in economic and market conditions may increase the risk that the allowance would become inadequate if borrowers experience economic and other conditions adverse to their businesses.

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Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations and capital adequacy.   Recognizing that many of our loans individually represent a significant percentage of our total allowance for loan losses, adverse collection experience in a relatively small number of loans could require an increase in our allowance.  Federal regulators, as an integral part of their respective supervisory functions, periodically review our allowance for loan losses.  The regulatory agencies may require us to change classifications or grades on loans, increase the allowance for loan losses with large provisions for loan losses and to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses required by these regulatory agencies could have a negative effect on our results of operations and financial condition.

Our profitability is vulnerable to interest rate fluctuations.

Our profitability depends substantially upon our net interest income.  Net interest income is the difference between the interest earned on assets, such as loans and investment securities, and the interest paid for liabilities, such as savings and time deposits and out-of-market certificates of deposit.  Market interest rates for loans, investments and deposits are highly sensitive to many factors beyond our control.  Our interest rate spread (the difference between interest rates earned on assets and interest rates paid on liabilities) narrowed slightly in 2014 as a result of changing market conditions, policies of various government and regulatory authorities and competitive pricing pressures, and we cannot predict whether these rate spreads will narrow even further.  Further narrowing of interest rate spreads could adversely affect our financial condition and results of operations.  In addition, we cannot predict whether interest rates will continue to remain at present levels.  Changes in interest rates may cause significant increases or decreases in our net interest income. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates.  See “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Asset/Liability Management, Interest Rate Sensitivity and Liquidity.”

We will realize additional future losses if the proceeds we receive upon liquidation of non-performing assets are less than the fair value of such assets.

Non-performing assets are recorded on our financial statements at our best estimate of fair value, as required under GAAP.  If the proceeds we receive upon dispositions of non-performing assets are less than the recorded fair value of such assets, then additional losses will be recognized.

Our use of appraisals in deciding whether to make a loan on or secured by real property or how to value such loan in the future may not accurately describe the net value of the real property collateral that we can realize.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values in our market area have experienced changes in value in relatively short periods of time, this estimate might not accurately describe the net value of the real property collateral after the loan has been closed. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. The valuation of the property may negatively impact the continuing value of such loan and could adversely affect our operating results and financial condition.

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A breach of information security, compliance breach by one of our employees or vendors, or employee or customer fraud could negatively affect our reputation and business.

Our business depends on data processing, communication, and information exchange on a variety of platforms and networks and over the internet.  We cannot be certain that all of our systems are entirely free from vulnerability to attack.  We do business with a number of third-party service providers and vendors with respect to our business, data, and communications needs.  If information security is breached, or one of our employees or vendors breaches compliance procedures, information could be lost or misappropriated, resulting in financial loss or costs to us or damages to others.  Computer break-ins, phishing, and other disruptions could jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us in excess of insurance coverage, and may cause existing and potential customers to refrain from doing business with us.  There can be no assurance that the security and operational procedures that we employ to prevent such damage will be successful.

We rely on other companies to provide key components of our business infrastructure.

Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.

We face potential difficulties in keeping pace with technological change.

The financial services industry is continually undergoing rapid technological change, with frequent introductions of new technology driven products, services and payment systems. Effective use of technology increases efficiency and enables us to better serve our customers and reduce costs.  Our future success depends, in part, on our ability to address our customers’ needs by using technology to provide products and services that are in demand and on our ability to use that technology to further improve our operational efficiency.  Many of our competitors have substantially greater resources to invest in technological improvements.  We may not be able to effectively implement new technology-driven products and services or be successful in marketing them to customers.  Failure to keep pace with technological changes affecting our services industry could result in a competitive disadvantage and could have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive industry and market area.

We face substantial competition in all areas of our operations from a variety of competitors, many of which are larger and may have more financial resources than we do.   Our competitors primarily include national, regional and community banks that operate in our market areas.  We also face competition from many other types of financial institutions, including credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries.

Our industry could become even more competitive as a result of legislative, regulatory and technological changes and potential consolidation.  Technology and other changes have lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks.  For example, consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds, or reloadable payroll or other prepaid cards, and can transfer funds directly without a bank’s assistance.   For banks, this can result in reduced fee income and deposits.

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Many of our non-bank competitors have fewer regulatory constraints than we do and may therefore have lower cost structures.  Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, offer a broader range of products and services or better pricing for those products and services than we can.

Our ability to compete successfully depends on a number of factors, including our ability to develop and retain long-term customer relationships, improve our market share, and develop and market products and services that meet customer needs.  Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth, profitability, results of operations and financial condition.

Our controls and procedures may fail or be circumvented.

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures.  Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objective of the system are met.  Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, which limitations or restrictions could adversely affect our profitability.

The Company and GB&T are subject to extensive federal and state regulation and supervision.  These regulations affect our lending practices, capital structure, investment practices, dividend policy, and growth, among other things.  Congress, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the FDIC, the GDBF, the Consumer Financial Protection Bureau (the “CFPB”) and other federal and state agencies continually review banking laws, regulations and policies for possible changes.  The Dodd-Frank Act, enacted in July 2010, instituted significant changes to the financial services regulatory scheme, and other changes to statutes, regulations, and policies (including changes in their interpretation or implementation) could affect us in substantial and unpredictable ways.  For example, such changes could subject us to additional costs, limit the types of products and services we can offer, or provide opportunities for non-banks to offer competing products and services.   If we fail to comply with laws, regulations and policies, we could be subject to regulatory sanctions, civil money penalties or reputational harm.

See the section of this report entitled “Supervision and Regulation” for additional information on the statutory and regulatory issues that affect our business.

The CFPB may reshape the consumer financial laws through rulemaking and enforcement of unfair, deceptive or abusive acts or practices, which may directly impact the business operations of depository institutions offering consumer financial products or services..

The Dodd-Frank Act was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal CFPB, and will require the CFPB and other federal agencies to implement many new rules.

The CFPB has broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit unfair, deceptive or abusive acts and practices. In addition, the Dodd-Frank Act enhanced the regulation of mortgage banking and gave to the CFPB oversight of many of the core laws which regulate the mortgage industry and the authority to implement mortgage regulations. New regulations adopted and anticipated to be adopted by the CFPB will significantly impact consumer mortgage lending and servicing.

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The CFPB has broad rulemaking authority to administer and carry out the purposes and objectives of the “Federal consumer financial laws, and to prevent evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The potential reach of the CFPB’s broad new rulemaking powers and UDAAP authority on the operations of financial institutions offering consumer financial products or services is currently unknown.

Environmental liability associated with lending activities could result in losses.

In the course of our business, we may foreclose on and take title to properties securing our loans.  If hazardous substances are discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage.  Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination.  In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site.  Environmental laws may require us to incur substantial expenses and may materially limit the use of properties that we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

Our business could be harmed if customers or counterparties provide us with inaccurate or incomplete information.

In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information.  We may also rely on representations of those customers, counterparties or other third parties as to the accuracy and completeness of that information.  Reliance on inaccurate or misleading financial statements, credit reports or other financial or identifying information could have a material adverse effect on our business, financial condition and results of operations.

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.

We may need to raise additional capital in the future in order to meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate.  Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance.  Adverse economic conditions, a loss of confidence in financial institutions, or competition with other financial institutions similarly seeking capital could increase our cost of funding or limit access to certain customary sources of capital.   As a result, we may not be able to raise capital on attractive or competitive terms or at all.

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Risks Associated with our Common Stock

The trading volume in our common stock is less than that of other larger financial services companies.

Although the Company’s common stock is traded on the Over-the-Counter Bulletin Board, the trading volume in our common stock is less than that of other larger financial services companies.  A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall more than would otherwise be expected.  Conversely, significant purchases of our common stock, or the absence of willing sellers, could cause our stock price to be greater than would otherwise be expected in a liquid trading market. Such pricing may make it more difficult for the Company to sell equity or equity-related securities in the future at a time and price that it deems appropriate.

Our stock price can be volatile.  

Stock price volatility may make it more difficult for investors to resell their common stock when they want to and at prices they find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

● actual or anticipated variations in quarterly results of operations;

● recommendations by securities analysts;

● the operating and stock price performance of other companies that investors deem comparable to the Company;

● perceptions in the marketplace regarding the Company and/or its competitors;

● new technology used, or services offered, by competitors;

● significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors;

● failure to integrate acquisitions or realize anticipated benefits from acquisitions;

● changes in government regulations; and

● geopolitical conditions such as acts or threats of terrorism or military conflicts.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results as evidenced by the current volatility and disruption of capital and credit markets.

Our ability to pay dividends is limited and we may be unable to pay future dividends.  As a result, capital appreciation, if any, of our common stock may be your sole opportunity for gains on your investment for the foreseeable future.

We make no assurances that we will pay any dividends in the future.  Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that our Board of Directors may deem relevant.  The holders of our common stock are entitled to receive dividends when, and if declared by our Board of Directors out of funds legally available for that purpose.  As part of our consideration of whether to pay cash dividends, we intend to retain adequate funds from future earnings to support the development and growth of our business.  In addition, our ability to pay dividends is restricted by federal policies and regulations and by the terms of our existing indebtedness.  It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.  Further, our principal source of funds to pay dividends are cash dividends that we receive from our subsidiaries.  See “Business — Supervision and Regulation — Payment of Dividends.”

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Holders of our subordinated debentures have rights that are senior to those of our common shareholders.

We have supported our continued growth by issuing trust preferred securities from special purpose trusts and accompanying subordinated debentures.  At December 31, 2014, we had outstanding subordinated debentures totaling $20,000 and may issue additional trust preferred securities or incur further indebtedness in the future.  We unconditionally guarantee the payment of principal and interest on the trust preferred securities.  The debentures described above are senior to our common stock.  As a result, we must make payments on the subordinated debentures before we can pay any dividends on our common stock.  In the event of our bankruptcy, dissolution or liquidation, holders of our subordinated debentures must be satisfied before any distributions can be made on our common stock.  We have the right to defer distributions on the subordinated debentures relating to our trust preferred securities (and dividend payments on the related trust preferred securities) for up to five years, but during that time we would not be able to pay dividends on our common stock.

Our directors and executive officers own a significant portion of our common stock and can influence shareholder decisions.

Our directors, executive officers and relatives of directors, as a group, beneficially owned approximately 53.11% of our fully diluted outstanding common stock as of February 23, 2015.  As a result of their ownership, the directors and executive officers will have the ability, if they voted their shares in concert, to control the outcome of all matters submitted to our shareholders for approval, including the election of directors.

Item 1B. Unresolved Staff Comments

None

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Item 2. Properties

The Company currently operates a main office, eleven branches and an operations center. The principal administrative offices of the Company are located at 3530 Wheeler Road, Augusta, Georgia.  Locations in Georgia include the main office, four branch offices in Augusta, Georgia, two branches in Martinez, Georgia and two branches in Evans, Georgia. Locations in South Carolina include two branches in Aiken, South Carolina, and one leased facility in North Augusta, South Carolina.  All banking offices except the leased facility are owned by the Company, are not subject to mortgage, and are covered by appropriate insurance for replacement value.

Each banking office is a brick building with a teller line, customer service area, offices for the Company’s lenders, drive-in teller lanes, a vault, and a walk-up or drive-up automated teller machine.  Ten offices also offer safe deposit boxes.  The banking offices are generally 3,000 to 5,000 square foot brick buildings.  Exceptions are the main office with approximately 14,000 square feet, the Washington Road branch with 1,800 square feet, the Cotton Exchange branch with 7,500 square feet of space, the Evans Express branch with 1,600 square feet, and the Laurens Street office which is a wood frame historic home.

The Company owns 24,000 square feet of commercial office space located at 3515 Wheeler Road, across the street from the main office.  This office space is partially leased but mainly occupied by the Company’s mortgage operations, wealth management and construction lending departments.

The Company also owns a commercial building with approximately 45,000 square feet of office space on Columbia Road in Martinez.  Operational functions including data processing, deposit operations, human resources, loan operations, credit administration and accounting are located in this facility.

The Company’s automated teller machine network includes two stand-alone ATMs located in the Augusta metro area as well as machines located at all twelve banking offices.

See Note 7 to the Consolidated Financial Statements for additional information concerning the Company’s premises and equipment and Note 8 to the Consolidated Financial Statements for additional information concerning the Company’s commitments under various equipment leases.

Item 3. Legal Proceedings

In the ordinary course of business, the Company and its subsidiary are parties to various legal proceedings.  Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, there is no proceeding pending or, to the knowledge of management, threatened in which an adverse decision would result in a material adverse change to the consolidated results of operations or financial condition of the Company or its subsidiary.

Item 4.  Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of February 23, 2015, there were approximately 918 holders of record of the Company’s common stock.  As of February 23, 2015, there were 6,744,245 shares of the Company’s common stock outstanding.   The Company’s common stock is traded on OTCQB, the marketplace for companies that are current in their reporting with a U.S. regulator, under the trading symbol “SBFC”.  The following table reflects the range of high and low bid quotations in the Company’s common stock and cash dividends paid per share of common stock for the past two years:

Southeastern Bank Financial Corporation Stock Price and Dividends
	Stock Price
	Low	High	Dividend
Quarter ended
March 31, 2013	16.30	20.50	0.00
June 30, 2013	19.05	24.00	0.13
September 30, 2013	19.42	20.75	0.13
December 31, 2013	20.05	21.42	0.13
Quarter ended
March 31, 2014	20.35	22.50	0.13
June 30, 2014	21.55	23.75	0.13
September 30, 2014	23.10	24.75	0.13
December 31, 2014	24.30	26.76	0.13
Period ended
February 23, 2015	26.00	27.50	0.15

In April 2013 the Company reinstated its quarterly cash dividends and declared cash dividends of $0.13 per share on April 24, 2013, July 17, 2013 and October 17, 2013.  The Company declared cash dividends of $0.13 per share in each quarter of 2014 and on January 14, 2015, the Company declared a cash dividend of $0.15 per share, an increase of 15.38% from the previous rate.  The Company’s primary sources of income are dividends and other payments received from its subsidiary.  The amount of dividends that may be paid by GB&T to the Company depends upon the subsidiary’s earnings and capital position and is limited by federal and state law, regulations and policies.  See “Business – Supervision and Regulation – Payment of Dividends.”

Cash dividends on GB&T’s common stock may be declared and paid only out of its retained earnings, and dividends may not be declared at any time when GB&T’s paid-in capital and appropriated earnings do not, in combination, equal at least 20% of its capital stock account.  In addition, the GDBF’s current rules and regulations require prior approval before cash dividends may be declared and paid if: (i) the bank’s ratio of equity capital to adjusted total assets is less than 6%; (ii) the aggregate amount of dividends declared or anticipated to be declared in that calendar year exceeds 50% of the bank’s net profits, after taxes but before dividends, for the previous calendar year; or (iii) the percentage of the bank’s loans classified as adverse as to repayment or recovery by the GDBF at the most recent examination of the bank exceeds 80% of the bank’s equity as reflected at such examination.

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The Company’s ability to pay cash dividends is further subject to continued payment of interest that is owed on subordinated debentures issued in connection with the Southeastern Bank Financial Statutory Trust I issuance in December 2005 of $10,000 of trust preferred securities and the Southeastern Bank Financial Trust II issuance in March 2006 of $10,000 of trust preferred securities.  As of December 31, 2014, the Company had approximately $20,000 of subordinated debentures outstanding.  The Company has the right to defer payment of interest for a period not exceeding 20 consecutive quarters.  If the Company defers, or fails to make, interest payments on the subordinated debentures, the Company will be prohibited, subject to certain exceptions, from paying cash dividends on common stock until all deferred interest is paid and interest payments on the subordinated debentures resumes.

The following table sets forth information regarding the Company’s repurchases of its common stock on a monthly basis during the fourth quarter of 2014.  All 146 shares repurchased during the fourth quarter were privately negotiated.

					Total Number of Shares		Maximum Number (or Appropriate
	Total Number		Average		Purchased as Part of		Dollar Value) of Shares Yet To Be
	of Shares		Price Paid		Publicly Announced Plans		Purchased Under the Plans or
Period	Purchased (1)		Per Share (1)		or Programs (1)		Programs (1)		��
October 1 through
October 31, 2014		-		-		-		300,000
November 1 through
November 30, 2014		146		26.49		146		299,854
December 1 through
December 31, 2014		-		-		146		299,854
Total		146		26.49		146		299,854

(1) On April 15, 2004, the Company announced the commencement of a stock repurchase program (the “2004 Program”), pursuant to which it will, from time to time, repurchase up to 100,000 shares of its outstanding common stock.

The 2004 Program did not have a stated expiration date, but on October 15, 2014, the Company’s Board of Directors terminated the 2004 Program and replaced it with a new program, which was publicly announced in the Quarterly Report on Form 10-Q filed October 31, 2014 (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 new program does not have a stated expiration date.  These repurchases were made under the 2014 Program.

The Company did not sell any of its equity securities without registration under the Securities Act of 1933, as amended, during 2014.

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Item 6. Selected Financial Data

The selected consolidated financial data presented on the following page as of December 31, 2014 and 2013 and for each of the years in the three-year period ended December 31, 2014 is derived from the audited consolidated financial statements and related notes included in this report and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  The selected consolidated financial data as of December 31, 2012, 2011, and 2010, and for the periods ending December 31, 2011 and 2010 is derived from audited consolidated financial statements that are not included in this report but that are included in the Annual Reports on Form 10-K filed with the Securities and Exchange Commission for those years.

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Selected Consolidated Financial Data	2014			2013			2012			2011			2010
Earnings	(Dollars in thousands, except per share data)
Total interest income	$	60,950		$	62,314		$	63,670		$	67,640		$	69,874
Total interest expense		8,886			9,514			12,034			17,078			23,998
Net interest income		52,064			52,800			51,636			50,562			45,876
Provision for loan losses		3,492			7,438			8,141			12,584			15,801
Noninterest income		19,030			18,497			21,494			19,671			21,086
Noninterest expense		43,488			40,366			44,068			42,041			41,815
Net income		16,632			16,346			14,435			11,045			6,856
Per Share Data
Net income - Diluted	$	2.49		$	2.45		$	2.16		$	1.65		$	1.03
Book value		23.03			19.70			20.34			17.53			14.97
Cash dividends declared per common share		0.52			0.39			0.00			0.00			0.00
Weighted average common and common equivalent shares outstanding		6,690,423			6,678,914			6,678,215			6,676,774			6,674,224
Selected Average Balances
Assets	$	1,741,271		$	1,693,257		$	1,652,251		$	1,605,489		$	1,575,360
Total loans (net of unearned income)		942,636			880,565			847,872			860,936			902,346
Deposits		1,493,413			1,451,693			1,426,282			1,406,494			1,367,416
Stockholders’ equity		144,740			135,219			126,605			107,980			100,719
Selected Year-End Balances
Assets	$	1,732,781		$	1,689,326		$	1,662,502		$	1,614,773		$	1,607,105
Loans (net of unearned income)		966,356			905,713			871,447			846,010			874,095
Allowance for loan losses		25,506			26,409			28,846			29,046			26,657
Deposits		1,463,864			1,454,803			1,421,272			1,419,222			1,410,737
Short-term borrowings		10,678			2,355			976			701			8,818
Long-term borrowings		84,000			84,000			85,547			61,947			74,947
Stockholders’ equity		155,286			131,569			135,783			117,029			99,958
Selected Ratios
Return on average total assets		0.96	%		0.97	%		0.87	%		0.69	%		0.44	%
Return on average equity		11.49	%		12.09	%		11.40	%		10.23	%		6.81	%
Average earning assets to average total assets		93.30	%		93.20	%		92.61	%		92.34	%		91.73	%
Average loans to average deposits		63.12	%		60.66	%		59.45	%		61.21	%		65.99	%
Average equity to average total assets		8.31	%		7.99	%		7.66	%		6.73	%		6.39	%
Net interest margin		3.20	%		3.35	%		3.37	%		3.41	%		3.18	%
Operating efficiency		61.78	%		55.52	%		59.53	%		59.65	%		62.66	%
Net charge-offs to average loans		0.47	%		1.12	%		0.98	%		1.18	%		1.27	%
Allowance for loan losses to net loans (year-end)		2.64	%		2.92	%		3.31	%		3.43	%		3.05	%
Risk-based capital
Tier 1 capital		14.97	%		14.18	%		13.66	%		13.01	%		12.14	%
Total capital		16.23	%		15.44	%		14.96	%		14.39	%		13.59	%
Tier 1 leverage ratio		9.86	%		9.37	%		8.87	%		8.21	%		7.39	%

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Item 7.  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)

The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company and its subsidiary, Georgia Bank & Trust Company of Augusta (“GB&T”), during the past three years.   The discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and related notes to the consolidated financial statements.

Overview

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 the Augusta-Richmond County, GA-SC metropolitan statistical area, the Company had 20.23% of all deposits and was the second largest depository institution and the largest locally based institution at June 30, 2014 based on deposit levels, as cited from the FDIC’s 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 lifelong relationships with its customers, employees, shareholders, and the communities it serves.

Net income in 2014 was $16,632 compared to $16,346 in 2013. Although economic conditions continued to contribute to problems with loan quality, earnings were positively impacted by a $3,946 decrease in provision for loan loss expense, primarily due to decreased losses on nonperforming assets.  This decrease was partially offset by a $3,122 increase in noninterest expense.

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 decreased slightly due to declining yields.  These declines were offset by increased volumes in the loan portfolio.  Interest income on investment securities decreased $1,325 or 8.41% due to declining yields and volume.  In addition, gain on sales of mortgage loans decreased $1,378 or 20.14% primarily due to a decline in production in 2014 compared to 2013.

The Company continues to focus on the net interest margin, regulatory capital requirements, liquidity management, risk mitigation and expense control.  Problem asset resolution and balance sheet management, including rate changes on deposits, investment purchases and liability mix including wholesale funds levels have been key areas of focus in 2014.

Over the past four years, assets grew $125,676 from $1,607,105 at December 31, 2010 to $1,732,781 at December 31, 2014.  From year end 2010 to year end 2014, deposits increased $53,127, and loans increased $92,261.  Net interest income for the year ended 2010 was $45,876 compared to net interest income of $52,064 in 2014.  The Company paid cash dividends of $0.13 per share each quarter beginning in 2004, but elected to suspend dividends effective April 22, 2009 to conserve capital.  On April 24, 2013, the Company reinstated quarterly cash dividends of $0.13 per share and on January 14, 2015 increased quarterly cash dividends to $0.15 per share.

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

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.

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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.

Please see “Allowance for Loan Losses” and “Non-Performing Assets” for a further discussion of the Company’s loans, loss experience, and methodology in determining the allowance.

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 December 31, 2014 and December 31, 2013 the percentage of total assets measured at fair value was 38.95% and 39.66%, respectively.  The majority of assets carried at fair value are based on either quoted market prices or market prices for similar instruments.  At December 31, 2014, 1.81% of assets measured at fair value were based on significant unobservable inputs.  This consisted primarily of available-for-sale securities, impaired loans and other real estate.  This represents approximately 0.70% of the Company’s total assets. See Note 6 “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 December 31, 2014, the Company had one available-for-sale security with a fair value of $112, which is approximately 0.01% of total assets, valued using unobservable inputs (Level 3). This security was a single issuer subordinated debenture issued by a financial institution.

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Results of Operations

The Company recorded net income of $16,632 in 2014 compared to $16,346 in 2013. The increase in net income is primarily attributable to a decrease in provision for loan losses of $3,946 and to a lesser extent increases in investment securities gains (losses) of $1,720.  Partially offsetting these were a $3,122 increase in noninterest expense, a $1,378 decrease in gain on sales of loans and a $736 decline in net interest income.

Interest income decreased $1,364 or 2.19% to $60,950 in 2014.  The decrease was primarily due to interest income on taxable investment securities which decreased $1,050 or 8.13% in 2014 caused primarily by a decline in yield.  The average rate on taxable investments declined from 2.26% in 2013 to 2.09% in 2014, a decrease of 17 basis points.  Interest income on tax-exempt investment securities decreased $275 or 9.66% in 2014 as a result of a decline in yield from 3.23% in 2013 to 3.05% in 2014, a decrease of 18 basis points, and a $3,805 decrease in average balance in 2014. Interest income on loans decreased $19 from 2013, primarily the result of a decline in yield offset by additional volume. The average rate on loans dropped from 5.21% in 2013 to 4.86% in 2014, a decrease of 35 basis points.  Average loans increased from $880,565 in 2013 to $942,636 in 2014, an increase of $62,071 or 7.05%.

Interest expense decreased $628 or 6.60% to $8,886 in 2014.  Interest expense on deposits decreased $542 or 7.98% to $6,252 and was due primarily to declines in rates paid on deposits.  Increases in deposit balances partially offset the decline in yields.  Average interest bearing deposits increased $20,108 with the most significant shift in products being average NOW accounts, which increased $19,197. Due to the low interest rate environment many customers have transferred out of time deposits to more liquid NOW and savings accounts.  Brokered CDs increased $26,388 or 14.03% and totaled $188,094 at year end 2014.

Noninterest income increased $533 in 2014 and was due primarily to increased investment securities gains of $1,720 partially offset by decreased gain on sales of loans of $1,378. Also contributing to the increase was trust service fees, which increased $125 and retail investment income, which increased $89.

Noninterest expense increased $3,122 or 7.73% in 2014 mostly due to salaries and other personnel expense, which increased $1,968 and other operating expenses, which increased $1,290.  A $414 decrease in other real estate losses partially offset these increases. The operating efficiency ratio increased from 55.52% in 2013 to 61.78% in 2014.

The earnings performance of the Company is reflected in its return on average assets and average equity of 0.96% and 11.49%, respectively, during 2014 compared to 0.97% and 12.09%, respectively, during 2013.  Basic and diluted net income per share on weighted average common shares outstanding increased to $2.49 in 2014 compared to $2.45 in 2013 and $2.16 in 2012.

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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, average yields earned and rates paid on those respective balances, and the resulting 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.

	Average Balances, Income and Expenses, Yields and Rates
	Year Ended Dec. 31, 2014								Year Ended Dec. 31, 2013								Year Ended Dec. 31, 2012
				Average			Amount					Average			Amount					Average			Amount
	Average			Yield or			Paid or		Average			Yield or			Paid or		Average			Yield or			Paid or
	Amount			Rate			Earned		Amount			Rate			Earned		Amount			Rate			Earned
									(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans		942,636			4.86	%		45,844		880,565			5.21	%		45,863		847,872			5.42	%		45,931
Loans held for sale		18,027			3.33	%		600		20,113			3.06	%		616		26,756			2.85	%		762
Investments
Taxable		566,706			2.09	%		11,868		571,532			2.26	%		12,918		565,469			2.54	%		14,358
Tax-exempt		84,207			3.05	%		2,571		88,012			3.23	%		2,846		70,792			3.58	%		2,537
Interest-bearing deposits in other banks		12,961			0.52	%		67		17,937			0.40	%		71		19,243			0.43	%		82
Total interest-earning assets		1,624,537			3.75	%	$	60,950		1,578,159			3.95	%	$	62,314		1,530,132			4.16	%	$	63,670
Cash and due from banks		53,048								47,160								47,269
Premises and equipment		27,333								26,167								26,734
Other		63,207								69,894								77,859
Allowance for loan losses		(26,854	)							(28,123	)							(29,743	)
Total assets	$	1,741,271							$	1,693,257							$	1,652,251
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW accounts	$	374,024			0.28	%	$	1,048	$	354,827			0.31	%	$	1,086	$	349,347			0.44	%	$	1,527
Savings and money management accounts		538,005			0.31	%		1,661		536,734			0.35	%		1,889		523,576			0.54	%		2,807
Time deposits		385,685			0.92	%		3,543		386,045			0.99	%		3,819		401,505			1.27	%		5,091
Federal funds purchased / securities sold under repurchase agreements		1,206			0.41	%		5		1,247			0.48	%		6		1,895			0.63	%		12
Other borrowings		84,570			3.11	%		2,629		86,725			3.13	%		2,714		80,182			3.24	%		2,597
Total interest-bearing liabilities		1,383,490			0.64	%		8,886		1,365,578			0.70	%		9,514		1,356,505			0.89	%		12,034
Noninterest-bearing demand deposits		195,699								174,087								151,854
Other liabilities		17,342								18,373								17,287
Stockholders’ equity		144,740								135,219								126,605
Total liabilities and stockholders’ equity	$	1,741,271							$	1,693,257							$	1,652,251
Net interest spread					3.11	%							3.25	%							3.27	%
Benefit of noninterest sources					0.09	%							0.10	%							0.10	%
Net interest margin/income					3.20	%	$	52,064					3.35	%	$	52,800					3.37	%	$	51,636

2014 compared with 2013:

Interest earning asset yields declined 20 basis points from 3.95% in 2013 to 3.75% in 2014 while interest bearing liability rates declined 6 basis points from 0.70% in 2013 to 0.64% in 2014.  As a result the Company’s average interest rate spread contracted to 3.11% in 2014 as compared to 3.25% in 2013.  The year over year decline in asset yields and liability costs were a result of low market interest rates.  These factors have contributed to a decrease in the net interest margin from 3.35% in 2013 to 3.20% in 2014.

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Average interest earning assets increased $46,378 and was funded principally by an increase in average noninterest-bearing demand deposits of $21,612 and an increase in average interest bearing deposits of $20,108. Average interest-earning assets for 2014 were $1,624,537 or 93.30% of average total assets.
 

Interest income is the largest contributor to income and totaled $60,950 in 2014 compared to $62,314 in 2013, a decrease of $1,364 or 2.19%. The largest component is interest income on loans, including loan fees, which decreased slightly from $46,479 in 2013 to $46,444 in 2014. The decline was due primarily to lower average yields which declined from 5.21% in 2013 to 4.86% in 2014. The average yield decreased in part due to the low interest rate environment for new and renewing loans. The Company has attempted to slow the decline in yields by enforcing established floors on loans but as loans mature the yields have fallen due to competitive reasons.

Interest income on taxable investment securities declined $1,050 or 8.13% and interest income on tax-exempt investment securities decreased $275 or 9.66%.  Average taxable and tax-exempt investment balances decreased $4,826 and $3,805 or 0.84% and 4.32%, respectively, but the effect on income was less severe than the decline in the average portfolio yield. The average yield on the taxable investment portfolio declined from 2.26% in 2013 to 2.09% in 2014 and the average yield on the tax-exempt investment portfolio declined from 3.23% in 2013 to 3.05% in 2014. Yields on investments purchased during the year were generally lower in 2014 and were impacted by a high level of proceeds from maturities and calls and sales of available for sale securities which totaled $76,649 and $211,188, respectively. Some securities sales occurred based on asset liability strategies.

Interest expense totaled $8,886 for 2014 compared to $9,514 in 2013, a decrease of $628 or 6.60%. The decline was due primarily to interest expense on deposits which decreased $542 from $6,794 in 2013 to $6,252 in 2014.  The decrease was primarily attributable to a decrease in rates paid on deposits. The average rate paid on NOW accounts decreased from 0.31% in 2013 to 0.28% in 2014. The average rate paid on savings and money management accounts decreased from 0.35% in 2013 to 0.31% in 2014 and the average rate paid on time deposits decreased from 0.99% in 2013 to 0.92% in 2014. The mix of interest bearing deposits also affects the interest rate spread.  During 2014 average time deposits decreased $360 while average NOW accounts increased $19,197 and average savings and money management accounts increased $1,271.

The overall result was a decrease in net interest income of $736 or 1.39% in 2014 over 2013 due to asset yields declining faster than liability costs partially offset by an increase in volume of average interest earning assets.

A key performance measure for net interest income is the “net interest margin”, or net interest income divided by average interest-earning assets. Unlike the “net interest spread” (the difference between interest rates earned on assets and interest rates paid on liabilities), the net interest margin is affected by the level of non-interest sources of funding used to support interest-earning assets.  The Company’s net interest spread decreased 14 bp to 3.11% in 2014.  The net interest margin also decreased from 3.35% in 2013 to 3.20% in 2014.  The high level of competition in the local market for both loans and particularly deposits continues to influence the net interest margin.  The net interest margin continues to be partially supported by demand deposits which provide a noninterest-bearing source of funds.  The Company continues to focus on demand deposits and NOW accounts to help prevent further deterioration in the net interest margin.

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2013 compared with 2012:

Interest earning asset yields declined 21 basis points while interest bearing liability rates declined 19 basis points.  As a result the Company’s average interest rate spread contracted to 3.25% in 2013 as compared to 3.27% in 2012.  The year over year decline in asset yields and liability costs were a result of low market interest rates.  These factors have contributed to a decrease in the net interest margin from 3.37% in 2012 to 3.35% in 2013.

Average interest earning assets increased $48,027 and was funded principally by an increase in noninterest-bearing demand deposits of $22,233, an increase in average stockholders’ equity of $8,614, and an increase in average interest bearing liabilities of $9,073. Average interest-earning assets for 2013 were $1,578,159 or 93.21% of average total assets.

Interest income is the largest contributor to income and totaled $62,314 in 2013 compared to $63,670 in 2012, a decrease of $1,356 or 2.13%. The largest component is interest income on loans, including loan fees, which decreased $214 from $46,693 in 2012 to $46,479 in 2013. The decline was due primarily to lower average yields which declined from 5.42% in 2012 to 5.21% in 2013. The average yield decreased in part due to the low interest rate environment for new and renewing loans The Company has attempted to slow the decline in yields by enforcing established floors on loans but as loans mature the yields have fallen due to competitive reasons.

Interest income on taxable investment securities declined $1,440 or 10.03% and interest income on tax-exempt investment securities increased $309 or 12.18%.  Average taxable and tax-exempt investment balances increased $6,063 and $17,220 or 1.07% and 24.32% respectively, but the effect on income was substantially reduced due to a decline in the average portfolio yield. The average yield on the taxable investment portfolio declined from 2.54% in 2012 to 2.26% in 2013 and the average yield on the tax-exempt investment portfolio declined from 3.58% in 2012 to 3.23% in 2013. Yields on investments purchased during the year were generally lower in 2013 and were impacted by a high level of proceeds from maturities and calls and sales of available for sale securities which totaled $93,530 and $175,524, respectively. Some securities sales occurred based on asset liability strategies. Average yields on interest-earning assets were 3.95% in 2013, compared to 4.16% in 2012.

Interest expense totaled $9,514 for 2013 compared to $12,034 in 2012, a decrease of $2,520 or 20.94%. The decline was due primarily to interest expense on deposits which decreased $2,631 from $9,425 in 2012 to $6,794 in 2013.  The decrease was primarily attributable to a decrease in rates paid on deposits. The average rate paid on NOW accounts decreased from 0.44% in 2012 to 0.31% in 2013. The average rate paid on savings and money management accounts decreased from 0.54% in 2012 to 0.35% in 2013 and the average rate paid on time deposits decreased from 1.27% in 2012 to 0.99% in 2013. The mix of interest bearing deposits also affects the interest rate spread.  During 2013 average time deposits decreased $15,460 while average savings and money management accounts increased $13,158.

The overall result was an increase in net interest income of $1,164 or 2.25% in 2013 over 2012.

The Company’s net interest spread decreased 2bp to 3.25% in 2013 as did the net interest margin which decreased from 3.37% in 2012 to 3.35% in 2013.  The high level of competition in the local market for both loans and particularly deposits continues to influence the net interest margin.  The net interest margin continues to be partially supported by demand deposits which provide a noninterest-bearing source of funds.  The Company continues to focus on demand deposits and NOW accounts to help prevent further deterioration in the net interest margin.

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Changes in the net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average rates earned and paid on such assets and liabilities, the ability to manage the earning asset portfolio, and the availability of particular sources of funds, such as noninterest-bearing deposits.  The following table: “Analysis of Changes in Net Interest Income” indicates the changes in the Company’s net interest income as a result of changes in volume and rate from 2013 to 2014, and 2012 to 2013. The low interest rate environment in 2014 resulted in continued decreases in yields on interest-earning assets, but also the cost of interest-bearing liabilities.  The analysis indicates that on an overall basis in 2014, decreases in average rates on interest earning assets reduced income more than the positive effect of increased volumes.  Lower average rates paid on interest bearing liabilities reduced expense, but not enough to offset the reduction in income resulting in a decrease in net interest income of $736.  Declining rates in 2013 resulted in rate decreases on interest-earning assets and interest-bearing liabilities and resulted in an overall positive impact to net interest income.

Analysis of Changes in Net Interest Income
	2014 vs. 2013												2013 vs. 2012
	Increase (Decrease)												Increase (Decrease)
	Average Volume			Average Rate			Combined			Total			Average Volume			Average Rate			Combined			Total
	(Dollars in thousands)												(Dollars in thousands)
Interest-earning assets:
Loans	$	3,233		($	3,038	)	($	214	)	($	19	)	$	1,771		($	1,771	)	($	68	)	($	68	)
Loans held for sale		(64	)		54			(6	)		(16	)		(189	)		57			(14	)		(146	)
Investments, taxable		(109	)		(949	)		8			(1,050	)		154			(1,577	)		(17	)		(1,440	)
Investments, tax-exempt		(123	)		(159	)		7			(275	)		617			(248	)		(60	)		309
Interest-bearing deposits in
other banks		(20	)		22			(6	)		(4	)		(6	)		(5	)		-			(11	)
Total		2,917			(4,070	)		(211	)		(1,364	)		2,347			(3,544	)		(159	)		(1,356	)
Interest-bearing liabilities:
NOW accounts	$	59		($	92	)	($	5	)	($	38	)	$	24		($	458	)	($	7	)	($	441	)
Savings and money management accounts		4			(232	)		-			(228	)		70			(964	)		(24	)		(918	)
Time deposits		(4	)		(272	)		-			(276	)		(196	)		(1,119	)		43			(1,272	)
Federal funds purchased /securities sold under repurchase agreements		-			(1	)		-			(1	)		(4	)		(3	)		1			(6	)
Other borrowings		(67	)		(18	)		-			(85	)		212			(88	)		(7	)		117
Total		(8	)		(615	)		(5	)		(628	)		106			(2,632	)		6			(2,520	)
Change in net interest income										($	736	)										$	1,164

The variances for each major category of interest-earning assets and interest-bearing liabilities are attributable to (a) changes in volume (changes in volume times prior year rate), (b) changes in rate (changes in rate times prior year volume) and (c) combined (changes in rate times the change in volume).

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Provision for Loan Losses

The provision for loan losses is the charge to operating earnings necessary to maintain the allowance for loan losses at a level which, in management’s estimate, is adequate to cover the estimated amount of probable incurred losses in the loan portfolio.  The provision for loan losses totaled $3,492 for the year ended December 31, 2014 compared to $7,438 for the year ended December 31, 2013.  See “Allowance for Loan Losses” for further analysis of the provision for loan losses.

Noninterest Income

Noninterest income consists of revenues generated from a broad range of financial services and activities, including service charges on deposit accounts, gain on sales of loans, fee-based services, and products where commissions are earned through sales of products such as real estate mortgages, retail investment services, trust services, and other activities.  In addition, increases in cash surrender value of bank-owned life insurance, gain on sale of fixed assets, gains or losses realized from the sale of investment securities and other-than-temporary losses are included in noninterest income.

2014 compared with 2013:

Noninterest income totaled $19,030 in 2014 compared to $18,497 in 2013, an increase of $533 or 2.88%.  The increase was due primarily to increased investment securities gains of $1,720 partially offset by decreased gain on sales of loans, which decreased $1,378 or 20.14% due to lower volume of loans originated for sale in 2014 compared to 2013. Other factors included an increase in trust service fees of $125 and an increase in retail investment income of $89.

2013 compared with 2012:

Noninterest income totaled $18,497 in 2013 compared to $21,494 in 2012, a decrease of $2,997 or 13.94%. The decrease was due primarily to gain on sale of loans which decreased $2,525 or 26.95% due to lower volume of loans originated for sale in third and fourth quarters. Other factors included a decrease in investment securities gains of $1,216. Partially offsetting were increased service charges and fees on deposits of $306 which was primarily due to increased interchange fees and increased consumer and commercial overdraft fees. Retail investment income increased $158, cash surrender value of bank-owned life insurance increased $75 and miscellaneous income increased $141.

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  ��   The following table presents the principal components of noninterest income for the last three years:

Noninterest Income
	Year Ended December 31,
	2014			2013			2012
	(Dollars in thousands)
Service charges and fees on deposits	$	7,180		$	7,155		$	6,849
Gain on sales of loans		5,465			6,843			9,368
Gain on sale of fixed assets, net		64			26			10
Investment securities gains (losses), net of OTTI		825			(895	)		312
Retail investment income		2,188			2,099			1,941
Trust service fees		1,310			1,185			1,146
Earnings from cash surrender value of bank-owned life insurance		1,163			1,187			1,112
Miscellaneous income		835			897			756
Total noninterest income	$	19,030		$	18,497		$	21,494
Noninterest income as a percentage of total average assets		1.09	%		1.09	%		1.30	%
Noninterest income as a percentage of total income		23.79	%		22.89	%		25.24	%

Noninterest Expense

2014 compared with 2013:

Noninterest expense totaled $43,488 in 2014, an increase of $3,122 or 7.73% over 2013.  The primary reasons for the increase were salaries and other personnel expense, which increased $1,968 and other operating expense, which increased $1,290.

Salaries and other personnel expense increased $1,968 or 8.53%. The increase was attributable in large part to increased retirement and other benefit plan costs of $1,856.

Other operating expenses increased $1,290 or 9.98% and included an $888 increase in processing expense due to the migration to an outsourced mainframe computer system and a $428 increase in legal and professional fees due to regulatory compliance issues.

Occupancy expense increased $278 or 7.47% in 2014 due primarily to increased depreciation expense associated with new computer and automated teller machines.

OREO losses totaled $228 compared to $642 in 2013.  This included a gain of $43 related to sales in 2014, as compared to a loss of $42 in 2013, and $271 related to further write-downs on such properties due to either updated appraisals or other indications of value.

42

2013 compared with 2012:

Noninterest expense totaled $40,366 in 2013, a decrease of $3,702 or 8.40% over 2012.  The primary reason for the decrease was due to salaries and other personnel expense.

Salaries and other personnel expense decreased $2,810 or 10.85%. The decrease was attributable in large part to $1,925 reduction in deferred compensation expense caused by an increase in the discount rate used to value the salary continuation liability. In addition, commissions, incentive compensation, stock option expense and employer 401k contributions all decreased in 2013. Retirements and staffing changes in 2013 resulted in a decrease in full-time equivalent employees of approximately 4 and contributed to the overall decrease in expense.

OREO losses totaled $642 and included $42 related to sales and $600 related to further write-downs on such properties due to either updated appraisals or other indications of value, compared to other real estate losses of $1,785 in 2012. Marketing expenses increased $160 or 9.63% due to higher levels of billboard and television advertising as well as increased business development expenditures.

FDIC insurance expense decreased $370 or 24.39% due to reductions in the assessment rate during 2013 and refunds received due to reclassification of certain corporate bonds for insurance assessment purposes. Occupancy expense decreased $372 or 9.09% in 2013 due primarily to reduced depreciation expense on furniture fixtures and equipment which became fully depreciated during the year. Data processing and other processing costs increased $94 or 6.39% and $178 or 9.13% respectively due primarily to increased software maintenance and automated teller processing expenses. Other operating expenses increased $223 or 7.07% and included $64 increase in staff development expenses for training and a $61 increase in operational losses primarily in unauthorized usage of customer credit cards.

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The Company continues to monitor expenditures in all organizational units by utilizing specific cost-accounting and reporting methods as well as responsibility center budgeting.  The following table presents the principal components of noninterest expense for the years ended December 31, 2014, 2013 and 2012.

Noninterest Expense
	Year Ended December 31,
	2014			2013			2012
	(Dollars in thousands)
Salaries and other personnel expense	$	25,047		$	23,079		$	25,889
Occupancy expense		4,000			3,722			4,094
Marketing & business development		1,840			1,821			1,661
Processing expense		3,015			2,127			1,949
Legal and professional fees		1,980			1,552			1,561
Data processing expense		1,484			1,566			1,472
FDIC insurance		1,047			1,147			1,517
(Gain) loss on sale of other real estate owned, net		(43	)		42			635
Other real estate valuation allowance		271			600			1,150
Loan costs		1,263			1,333			986
Communication expense		937			816			724
Other expense		2,647			2,561			2,430
Total noninterest expense	$	43,488		$	40,366		$	44,068
Noninterest expense as a percentage of total average assets		2.50	%		2.38	%		2.67	%
Operating efficiency ratio		61.78	%		55.52	%		59.53	%

The Company’s efficiency ratio (noninterest expense as a percentage of net interest income and noninterest income, excluding gains and losses on the sale of investments) increased to 61.78% in 2014 as compared to 55.52% in 2013, and 59.53% in 2012.

Income Taxes

Income tax expense totaled $7,482 in 2014 compared to $7,147 in 2013.  The effective tax rate as a percentage of pre-tax income was 31.03% in 2014, 30.42% in 2013, and 31.00% in 2012.  The primary reason for the increase in the effective tax rate this year was a smaller percentage of tax exempt interest income on investment securities and income related to bank-owned life insurance relative to total income.

Financial Condition

Composition of the Loan Portfolio

Loans are the primary component of the Company’s interest-earning assets and generally are expected to provide higher yields than the other categories of earning assets.  Those higher yields reflect the inherent credit risks associated with the loan portfolio.  Management attempts to control and balance those risks with the rewards associated with higher returns.

Loans outstanding averaged $942,636 in 2014 compared to $880,565 in 2013 and $847,872 in 2012.  At December 31, 2014, loans totaled $966,356 compared to $905,713 at December 31, 2013, an increase of $60,643 or 6.70%.

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The Company experienced significant decreases in loan volumes and balances during 2010 and 2011. Loan demand remained weak until the latter part of 2012 when loans began to increase. Loans continued to increase moderately during 2013 and 2014 and resulted in a $62,071 or 7.05% increase in average loans outstanding in 2014.  Growth in loans occurred in all categories, but primarily in residential real estate loans which increased $28,802 or 16.43% and commercial real estate loans which increased $18,135 or 5.13% in 2014. Residential loans increased as the Bank elected to hold some permanent mortgages on its books and the increase in commercial real estate loans occurred primarily in the non-owner occupied segment as loans moved from the construction phase into permanent loans.

In response to the economic environment over the last several years, management curtailed the origination and participation of new out of market ADC lending opportunities. Management also curtailed ADC lending in its primary market, but has recently pursued new loans in these categories primarily to those borrowers with longstanding superior credit relationships with the bank, having a manageable number of speculative houses in inventory.  The Company now also selectively pursues loans in the commercial construction segment of ADC for owner occupied and non-owner occupied properties when there is a committed permanent takeout or when the Bank will hold the permanent loan.  As a result of these strategies, in 2014 the out of market ADC portfolio increased $17,286 or 46.80% and the Central Savannah River Area (“CSRA”) ADC portfolio decreased $13,481 or 10.91%.

The following table sets forth the composition of the Company’s loan portfolio as of December 31st for the past five years.  The Company’s loan portfolio does not contain any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed as a category of loans in this table.  The Company has not invested in loans to finance highly-leveraged transactions (“HLT”), such as leveraged buy-out transactions, as defined by the Federal Reserve and other regulatory agencies.  Loans made by a bank for recapitalization or acquisitions (including acquisitions by management or employees) which result in a material change in the borrower’s financial structure to a highly-leveraged condition are considered HLT loans.  The Company had no foreign loans or loans to lesser-developed countries as of December 31st of any of the years presented.

	Loan Portfolio Composition
	December 31,
	2014					2013					2012					2011					2010
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
	(Dollars in thousands)
Commercial, financial and  agricultural	$	208,905		21.62	%	$	202,074		22.31	%	$	174,553		20.03	%	$	171,750		20.30	%	$	189,128		21.64	%
Real estate
Commercial		371,488		38.44	%		353,353		39.01	%		343,663		39.44	%		332,666		39.32	%		327,458		37.46	%
Residential		204,097		21.12	%		175,295		19.36	%		168,039		19.28	%		159,022		18.80	%		157,680		18.04	%
Acquisition, development and construction		164,303		17.00	%		160,498		17.72	%		171,750		19.71	%		168,050		19.86	%		182,412		20.87	%
Total real estate		739,888		76.56	%		689,146		76.09	%		683,452		78.43	%		659,738		77.98	%		667,550		76.37	%
Consumer
Direct		16,581		1.72	%		13,619		1.50	%		12,785		1.47	%		13,600		1.61	%		15,643		1.79	%
Indirect		1		0.00	%		29		0.00	%		105		0.01	%		384		0.05	%		899		0.10	%
Revolving		666		0.07	%		612		0.07	%		502		0.05	%		428		0.05	%		870		0.10	%
Total consumer		17,248		1.79	%		14,260		1.57	%		13,392		1.53	%		14,412		1.71	%		17,412		1.99	%
Deferred loan origination costs (fees)		315		0.03	%		233		0.03	%		50		0.01	%		110		0.01	%		5		0.00	%
Total	$	966,356		100.00	%	$	905,713		100.00	%	$	871,447		100.00	%	$	846,010		100.00	%	$	874,095		100.00	%

45

Loans may be periodically renewed with principal reductions and appropriate interest rate adjustments.  Loan maturities as of December 31, 2014 are set forth in the following table based upon contractual terms.  Actual cash flows may differ as borrowers generally have the right to prepay without prepayment penalties.

Loan Maturity Schedule
At December 31, 2014
	Within		One to Five		After Five
	One Year		Years		Years		Total
	(Dollars in thousands)
Commercial, financial and agricultural	$	66,882	$	86,563	$	55,460	$	208,905
Real Estate
Commercial		77,473		152,506		141,509		371,488
Residential		30,441		58,939		114,717		204,097
Acquisition, development and construction		90,700		72,473		1,130		164,303
Consumer		3,244		11,475		2,529		17,248
Deferred loan origination costs (fees)		315		-		-		315
Total loans	$	269,055	$	381,956	$	315,345	$	966,356

The following table presents an interest rate sensitivity analysis of the Company’s loan portfolio as of December 31, 2014.  The loans outstanding are shown in the time period where they are first subject to repricing.

Sensitivity of Loans to Changes in Interest Rates
At December 31, 2014
	Within		One to Five		After Five
	One year		Years		Years		Total
	(Dollars in thousands)
Loans maturing or repricing with:
Predetermined interest rates	$	155,097	$	311,298	$	218,244	$	684,639
Floating or adjustable interest rates		136,962		114,630		30,125		281,717
Total loans	$	292,059	$	425,928	$	248,369	$	966,356

Non-Performing Assets

As a result of management’s ongoing review of the loan portfolio, loans are classified as nonaccrual when it is not reasonable to expect collections of interest and principal under the original terms, generally when a loan becomes 90 days or more past due.  These loans are classified as nonaccrual, even though the presence of collateral or the borrower’s financial strength may be sufficient to provide for ultimate repayment.  When a loan is placed on nonaccrual, the interest which has been accrued but remains unpaid is reversed and deducted from current period interest income.  No additional interest is accrued and recognized as income on the loan balance until the collection of both principal and interest becomes reasonably certain.  Also, there may be write downs, and ultimately, the total charge-off of the principal balance of the loan, which could necessitate additional charges to earnings through the provision for loan losses.

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Gross interest income that would have been recorded for the years ended December 31, 2014, 2013, and 2012 if non-accruing loans and accruing troubled debt restructurings (TDRs) had been current in accordance with their original terms and had been outstanding throughout the year or since origination, if held for part of the year, was approximately $973, $1,224 and $1,688, respectively. The amount of interest income on these loans that was included in net income for December 31, 2014, 2013 and 2012 was approximately $400, $945 and $285, respectively.

The Company is required to identify impaired loans and evaluate the collectability of both contractual interest and principal of loans when assessing the need for a loss allowance.  Large pools of smaller balance homogeneous loans are collectively evaluated for impairment.  A loan is considered impaired, when based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. The amount of the impairment is measured based on the present value of future cash flows discounted at the loan’s effective interest rate or, if the loan is collateral dependent or foreclosure is probable, the fair value of collateral, less estimated selling expenses. Regulatory guidance is also considered.  At December 31, 2014 and 2013, the Company had total impaired loans of $20,189 and $24,316, respectively, which includes loans carried at fair value with a recorded investment of $11,730 and $9,135, respectively at December 31, 2014 and 2013.  Charge-offs of $1,831 and $2,879 were taken on these impaired loans during 2014 and 2013.

Non-performing assets include nonaccrual loans, loans past due 90 days or more, restructured loans and other real estate owned.  The following table, “Non-Performing Assets”, presents information on these assets as of December 31st, for the past five years.  Non-performing assets were $21,903 at December 31, 2014 or 2.26% of period end loans and other real estate owned.  This compares to $26,677 or 2.94% of total loans and other real estate owned at December 31, 2013.

At December 31, 2010 there were $69 of loans past due 90 days or more and still accruing.  There were no loans past due 90 days or more and still accruing at December 31, 2014, 2013, 2012 and 2011.  All loans past due 90 days or more are classified as nonaccrual loans unless lending management believes that both principal and interest are collectible, in which case the loan continues to accrue interest.

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Troubled Debt Restructurings (TDRs) are troubled loans in which the original terms have been modified in favor of the borrower or either principal or interest has been forgiven, due to deterioration in the borrower’s financial condition.  There were $9,669 in TDRs at December 31, 2014, of which $3,477 were on nonaccrual status.  TDRs totaled $8,132 at December 31, 2013, of which $1,896 were on nonaccrual status.

	Non-Performing Assets Year Ended December 31,
	2014			2013			2012			2011			2010
	(Dollars in thousands)
Nonaccrual loans:
Commercial, financial and agricultural	$	3,458		$	728		$	2,358		$	2,325		$	2,924
Real Estate:
Commercial		1,497			4,827			11,736			20,956			3,793
Residential		3,639			5,894			6,291			4,553			4,734
Acquisition, development and construction		5,874			7,907			9,712			14,732			11,953
Consumer		136			71			100			331			301
Total Nonaccrual loans	$	14,604		$	19,427		$	30,197		$	42,897		$	23,705
Restructured loans (1)	$	6,192		$	6,236		$	915		$	2,330		$	2,544
Other real estate owned		1,107			1,014			3,490			6,209			7,751
Total Nonperforming assets	$	21,903		$	26,677		$	34,602		$	51,436		$	34,000
Loans past due 90 days or more and still accruing interest	$	-		$	-		$	-		$	-		$	69
Allowance for loan losses to period end total loans		2.64	%		2.92	%		3.31	%		3.43	%		3.05	%
Allowance for loan losses to period end nonaccrual loans		174.65	%		135.94	%		95.53	%		67.71	%		112.45	%
Net charge-offs to average loans		0.47	%		1.12	%		0.98	%		1.18	%		1.27	%
Nonperforming assets to period end loans		2.27	%		2.95	%		3.97	%		6.08	%		3.89	%
Nonperforming assets to period end loans and other real estate owned		2.26	%		2.94	%		3.95	%		6.04	%		3.86	%

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

Nonaccrual loans decreased $4,823 or 24.83% to $14,604 at December 31, 2014.

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The table below provides additional detail on nonaccrual loans greater than $1,000 at December 31, 2014.

Nonaccrual Loans

Nonaccrual

Appraisal

Appraised

Balance

Originated

Date

Trigger

Collateral

Allowance

Method

Date

Value

(Dollars in thousands)

ADC Loan - Other

$

2,717

03/23/07

05/06/13

financial condition

retail centers

-

collateral value

08/14

$

4,950

Commercial, financial and agricultural

2,062

01/29/08

12/30/14

financial condition

apartments

204

collateral value

04/14

2,295

ADC Loan - CSRA

1,668

12/28/11

12/28/12

financial condition

land

-

collateral value

03/14

1,920

$

6,447

Other, net

8,157

Nonaccrual loans at December 31, 2014

$

14,604

The table below presents a roll forward of other real estate owned for the years ended December 31, 2014 and 2013, respectively.

Other Real Estate Owned
	2014			2013
	(Dollars in thousands)
Beginning balance, January 1	$	1,014		$	3,490
Additions		1,256			1,074
Increase in valuation allowance		(271	)		(600	)
Sales		(935	)		(2,908	)
Gain (loss) on sale of OREO, net		43			(42	)
Ending balance, December 31	$	1,107		$	1,014

The following table provides details of other real estate owned as of December 31, 2014 and 2013, respectively.

Other Real Estate Owned
	2014			2013
	(Dollars in thousands)
Other Real Estate:
Real Estate
Commercial	$	200		$	433
Residential		364			24
Acquisition, development and construction		860			608
		1,424			1,065
Valuation allowance		(317	)		(51	)
	$	1,107		$	1,014

The net increase in other real estate owned is primarily due to decreased sales in 2014 as compared to 2013.

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Potential Problem Loans

In addition to loans disclosed above as past due, nonaccrual and restructured as of December 31, 2014, management identified weaknesses in $10,449 of classified loans.  These loans, principally classified for regulatory purposes as substandard, are principally commercial real estate and commercial, financial and agricultural loans in the company’s primary market area.  Estimated potential losses from these potential credit weaknesses have been provided for in determining the allowance for loan losses at December 31, 2014.

Allowance for Loan Losses

The allowance for loan losses represents an allocation for the estimated amount of probable incurred losses in the loan portfolio.  The 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’s Board of Directors, with the recommendation of management, approves the appropriate level for the allowance for loan losses based upon internal policies and procedures, historical loan loss ratios, loan volume, size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, value of the collateral underlying the loans, specific problem loans and present or anticipated economic conditions and trends.  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.

For significant problem loans, management’s review consists of the evaluation of the financial condition and strengths of the borrower, cash flows available for debt repayment, related collateral supporting the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with the individual problem loan, management classifies the loan accordingly and allocates a portion of the allowance for loan losses for that loan based on the results of the evaluations described above.

Additions to the allowance for loan losses, which are expensed on the Company’s income statement as the “provision for loan losses”, are made periodically to maintain the allowance for loan losses at an appropriate level based upon management’s analysis of risk in the loan portfolio. The Company’s provision for loan losses in 2014 was $3,492, a decrease of $3,946, or 53.05% from the 2013 provision of $7,438.

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

 ● Loans are grouped accordingly in categories of similar risk characteristics (Portfolio segments).

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 ● For each loan category, a four year average rolling historical net loss rate is calculated, with the loss rate more heavily weighted to the most recent two years loss history.

 ● The historical loss ratios are adjusted for internal and external qualitative factors within each loan category.  Factors include:

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

o changes in the quality of the loan review system;

o trends in volume and terms of loans;

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

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

o national and local economic trends and conditions;

o changes in the value of underlying collateral;

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

o effects of changes in credit concentrations.

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

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

Due to the added risks associated with loans, which are graded as special mention or substandard, that are not classified as impaired, the qualitative factor adjustment may be further increased for such classifications within each category.  This created an additional $1,560 in needed allowance for loan loss.

The table below indicates the allocated allowance for all loans according to loan type determined through the Company’s comprehensive allowance methodology for the years indicated.  Because these allocations are based upon estimates and subjective judgment, it is not necessarily indicative of the specific amounts or loan categories in which loan losses may occur.

	Allocation of the Allowance for Loan Loss
	December 31,
	2014					2013					2012					2011					2010
	Amount		Percent(1)			Amount		Percent(1)			Amount		Percent(1)			Amount		Percent(1)			Amount		Percent(1)
	(Dollars in thousands)
Balance at end of year
Applicable to:
Commercial, financial and agricultural	$	5,407		21.65	%	$	5,774		22.34	%	$	4,368		15.14	%	$	4,183		14.40	%	$	3,463		21.73	%
Real estate
Commercial		8,622		38.44	%		8,981		39.01	%		10,872		37.69	%		10,761		37.05	%		8,698		37.50	%
Residential		6,591		21.12	%		5,590		19.36	%		5,677		19.68	%		5,607		19.30	%		5,372		18.00	%
Acquisition, development and construction		4,263		17.00	%		5,486		17.72	%		7,436		25.78	%		8,055		27.73	%		8,493		20.87	%
Consumer loans to individuals		623		1.79	%		578		1.57	%		493		1.71	%		440		1.52	%		631		1.90	%
Balance at end of year	$	25,506		100.00	%	$	26,409		100.00	%	$	28,846		100.00	%	$	29,046		100.00	%	$	26,657		100.00	%
(1) Percent of gross loans in each category to total loans adjusted for loans recorded at fair value

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The following table provides details regarding charge-offs and recoveries by loan category during the most recent five year period, as well as supplemental information relating to both net loan losses, the provision and the allowance for loan losses during each of the past five years.  Net charge-offs for 2014 represented 0.47% of average loans outstanding, compared to 1.12% for 2013 and 0.98% for 2012.

	Allowances for Loan Losses
	At December 31,
	2014			2013			2012			2011			2010
	(Dollars in thousands)
Total loans outstanding at end of period, net of unearned income	$	966,356		$	905,713		$	871,447		$	846,010		$	874,095
Average loans outstanding, net of unearned income	$	942,636		$	880,565		$	847,872		$	860,936		$	902,346
Balance of allowance for loan losses at beginning of year	$	26,409		$	28,846		$	29,046		$	26,657		$	22,338
Charge-offs:
Commercial, financial and agricultural		2,005			335			919			2,296			1,139
Real estate - commercial		807			3,469			2,281			1,472			1,048
Real estate - residential mortgage		1,038			1,404			2,211			2,489			1,306
Real estate - acquisition, development and construction		691			5,098			3,151			4,118			8,656
Consumer		604			620			812			699			439
Total charge-offs		5,145			10,926			9,374			11,074			12,588
Recoveries of previous loan losses:
Commercial, financial and agricultural		67			88			241			162			234
Real estate - commercial		371			21			169			120			13
Real estate - residential mortgage		37			117			88			56			58
Real estate - acquisition, development and construction		-			477			209			106			543
Consumer		275			348			326			435			258
Total recoveries		750			1,051			1,033			879			1,106
Net loan losses		4,395			9,875			8,341			10,195			11,482
Provision for loan losses		3,492			7,438			8,141			12,584			15,801
Balance of allowance for loan losses at end of period	$	25,506		$	26,409		$	28,846		$	29,046			26,657
Allowance for loan losses to period end loans		2.64	%		2.92	%		3.31	%		3.43	%		3.05	%
Net charge-offs to average loans		0.47	%		1.12	%		0.98	%		1.18	%		1.27	%

At December 31, 2014, the allowance for loan losses declined to 2.64% of outstanding loans, from 2.92% at December 31, 2013 and 3.31% at December 31, 2012.  This is due to decreased non-performing loans, a decline in the average historical net loss rate and improving economic conditions.  Although net charge-offs have decreased significantly from prior years, the Company continued to experience elevated levels of net charge-offs in the commercial, financial and agricultural and residential real estate categories in 2014.  Collateral dependent impaired loans are evaluated based on recent appraisals of the collateral.  Collateral values are monitored and further charge-offs are taken if it is determined that collateral values have continued to decline.

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Net charge-offs totaled $4,395 at December 31, 2014, of which $1,938, or 44.10%, were related to commercial, financial and agricultural loans and $1,001 or 22.78% were related to residential real estate 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 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.  See “Critical Accounting Estimates.”

Investment Securities

The Company’s investment securities portfolio decreased $5,514 to $644,465 at year-end 2014 from 2013.  The Company maintains an investment strategy of seeking portfolio yields within acceptable risk levels, as well as providing liquidity.  The Company maintains “Available for Sale” investment securities.  “Available for Sale” securities are carried at fair market value with related unrealized gains or losses included in stockholders’ equity as accumulated other comprehensive income.  As a consequence, the Company’s stockholders’ equity is more volatile than it would be if a large percentage of investment securities were “Held to Maturity.”  Although equity is more volatile, management has discretion, with respect to the “Available for Sale” securities, to proactively adjust to favorable market conditions in order to provide liquidity and realize gains on the sales of securities.  The changes in values in the investment securities portfolio are not taken into account in determining regulatory capital requirements.  As of December 31, 2014, except for the U.S. Government agencies and government sponsored entities, there was no issuer who represented 10% or more of stockholders’ equity within the investment portfolio.  As of December 31, 2013, in addition to the U.S. Government agencies and government sponsored entities, there were four issuers who represented 10% or more of stockholders’ equity within the investment portfolio.  At December 31, 2013 the Company’s holdings of investment securities issued by GE Capital totaled $15,595 or 11.85% of stockholders equity, securities issued by JP Morgan Chase totaled $14,610 or 11.10% of stockholders’ equity, Goldman Sachs totaled $13,616 or 10.35% of stockholder’s equity and Wells Fargo totaled $13,399 or 10.18% of stockholders’ equity.  As of December 31, 2014 and 2013, the estimated fair value of investment securities as a percentage of their amortized cost was 100.32% and 97.63%, respectively.  At December 31, 2014, the investment securities portfolio had gross unrealized gains of $7,352 and gross unrealized losses of $5,277, for a net unrealized gain of $2,075.  As of December 31, 2013 and 2012, the investment securities portfolio had a net unrealized loss of $15,765 and a net unrealized gain of $15,431, respectively.  The following table presents the amortized cost of investment securities held by the Company at December 31, 2014, 2013 and 2012.

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Investment Securities
	December 31,
	2014		2013		2012
	(Dollars in thousands)
Available for sale:
U.S. Government Agencies	$	181,104	$	233,697	$	230,609
Obligations of states and political subdivisions		98,538		112,408		127,913
Mortgage-backed securities
U.S. GSE’s MBS - residential		128,891		132,586		106,757
U.S. GSE’s CMO		123,921		81,031		78,101
Other CMO		-		-		1,915
Corporate bonds		109,936		106,022		94,013
Total	$	642,390	$	665,744	$	639,308

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The following table represents maturities and weighted average yields of debt securities at December 31, 2014.  Yields are based on the amortized cost of securities.  Maturities are based on the contractual maturities.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Maturity Distribution and Yields of Investment Securities
	December 31, 2014
	Amortized Cost		Yield
	(Dollars in thousands)
Available for Sale:
Obligations of U.S. Government agencies
Over one through five years	$	3,770		1.97	%
Over five through ten years		78,660		2.33	%
Over ten years		98,674		1.77	%
Total	$	181,104		2.01	%
Obligations of states and political subdivisions (1)
One year or less	$	500		3.10	%
Over one through five years		10,662		3.76	%
Over five through ten years		31,373		3.41	%
Over ten years		56,003		5.00	%
Total	$	98,538		4.35	%
U.S. GSE’s MBS - residential
Over one through five years	$	7,969		2.02	%
Over five through ten years		9,830		2.75	%
Over ten years		111,092		2.39	%
Total	$	128,891		2.40	%
U.S. GSE’s CMO
Over one through five years	$	2,468		2.14	%
Over five through ten years		12,787		2.21	%
Over ten years		108,666		2.39	%
Total	$	123,921		2.37	%
Corporate bonds
One year or less	$	7,003		2.43	%
Over one through five years		65,305		2.29	%
Over five through ten years		36,364		2.05	%
Over ten years		1,264		6.87	%
Total	$	109,936		2.27	%
Total Investment Securities	$	642,390		2.56	%
(1)Tax-equivalent yield

Deposits

The Company’s average interest bearing liabilities increased $17,912 or 1.31% from 2013 to 2014.  Average noninterest-bearing deposits increased $21,612 or 12.41%.  Average borrowings decreased $2,196 or 2.50% from 2013 to 2014.  The majority of the growth in deposits reflects the Company’s strategy of consistently emphasizing deposit growth, as deposits are the primary source of funding for balance sheet growth.  Borrowed funds consist of short-term borrowings, securities sold under agreements to repurchase with the Company’s commercial customers and reverse repurchase agreements with SunTrust Robinson Humphrey and Center State Bank, federal funds purchased, subordinated debentures and borrowings from the Federal Home Loan Bank.

Average interest-bearing liabilities increased $9,073 or 0.67% from 2012 to 2013, while average noninterest-bearing deposits increased $22,233 or 14.64% during the same period.

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The following table presents the average amount outstanding and the average rate paid on deposits and borrowings by the Company for the years 2014, 2013 and 2012:

	Average Deposit and Borrowing Balances and Rates
	Year ended December 31,
	2014					2013					2012
	Average		Average			Average		Average			Average		Average
	Amount		Rate			Amount		Rate			Amount		Rate
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	195,699		0.00	%	$	174,087		0.00	%	$	151,854		0.00	%
Interest-bearing liabilities:
NOW accounts		374,024		0.28	%		354,827		0.31	%		349,347		0.44	%
Savings, money management accounts		538,005		0.31	%		536,734		0.35	%		523,576		0.54	%
Time deposits		385,685		0.92	%		386,045		0.99	%		401,505		1.27	%
Federal funds purchased / securities
sold under repurchase agreements		1,206		0.41	%		1,247		0.48	%		1,895		0.63	%
Other borrowings		84,570		3.11	%		86,725		3.13	%		80,182		3.24	%
Total interest-bearing liabilities	$	1,383,490		0.64	%	$	1,365,578		0.70	%	$	1,356,505		0.89	%
Total noninterest & interest-bearing liabilities	$	1,579,189				$	1,539,665				$	1,508,359

The following table presents the maturities of the Company’s time deposits over $100 at December 31, 2014:

Maturities of Time Deposits
	Time Certificates
	of Deposit of
	$100 or More
	(Dollars in thousands)
Months to Maturity
Within 3 months	$	68,419
After 3 through 6 months		28,949
After 6 through 12 months		52,318
Within one year		149,686
After 12 months		149,613
Total	$	299,299

This table indicates that approximately half of time deposits of $100 or more have a maturity of less than twelve months.  This is reflective of both the Company’s market and recent interest rate environments.  In addition, the Company has issued brokered certificates of deposit in terms of two to five years to take advantage of the current low interest rate environment and thereby extend the maturity date of a portion of its liabilities.  At December 31, 2014, the Company had $115,761 of brokered certificates of deposit that mature after 12 months.

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Off-Balance Sheet Arrangements

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 follows the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Unfunded commitments to extend credit where contractual amounts represent potential credit risk totaled $171,911 and $188,919 at December 31, 2014 and 2013, respectively.  This includes standby letters of credit of $5,730 at December 31, 2014 and $4,050 at December 31, 2013.  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’ contractual obligations, consisting of deposits, FHLB advances, which are subject to early termination options, borrowed funds and benefit plans by contractual maturity date.

Commitments and Contractual Obligations
	Less than		1 - 3		3 - 5		More than
	1 Year		Years		Years		5 Years
	(Dollars in thousands)
Lines of credit	$	166,181		-		-		-
Standby letters of credit		5,730		-		-		-
Lease agreements		298		383		73		-
Deposits		1,267,832		168,921		26,139		972
Securities sold under repurchase agreements		10,678		-		-		-
Salary continuation agreements		125		1,197		1,579		27,153
FHLB advances		-		35,000		29,000		-
Subordinated debentures		-		-		-		20,000
Total commitments and contractual obligations	$	1,450,844		205,501		56,791		48,125

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.

Asset/Liability Management, Interest Rate Sensitivity and Liquidity

General.  It is the objective of the Company to manage assets and liabilities to preserve the integrity and safety of the deposit and capital base of the Company by protecting the Company from undue exposure to poor asset quality and interest rate risk.  Additionally, the Company pursues a consistent level of earnings as further protection for the depositors and to provide an appropriate return to stockholders on their investment.

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These objectives are achieved through compliance with an established framework of asset/liability, interest rate risk, loan, investment, and capital policies.  Management is responsible for monitoring policies and procedures that result in proper management of the components of the asset/liability function to achieve stated objectives.  The Company’s philosophy is to support quality asset growth primarily through growth of core deposits, which include non-volatile deposits of individuals, partnerships and corporations. Management seeks to invest the largest portion of the Company’s assets in loans that meet the Company’s quality standards.  Alternative investments are made in the investment portfolio.  The Company’s asset/liability function and related components of liquidity and interest rate risk are monitored on a continuous basis by management.  The Board of Directors reviews and monitors these functions on a monthly basis.

Interest Rate Risk

The purpose of the Company’s interest rate risk management process is to quantify and control interest rate risk while, at the same time, focusing on the net interest margin and net income for profit.  Changes in interest rates can affect the earnings of the bank and can also affect the economic value of the underlying financial instruments.  For this reason, the institution’s interest rate risk measurement process measures earnings at risk as well as economic value at risk.   The Company’s interest rate risk policy works in conjunction with other policies (namely: loan, funds management, capital and investment) in order to achieve the Bank’s overall goals. An objective of the policy is to maintain a balanced risk profile so that variations to net interest income and economic value of equity stay within policy limits.

On a quarterly basis, a twelve month simulation of net interest income and economic value of equity is performed based upon level plus and minus 100, 200, 300 and 400 basis point shocks. The primary method is a static simulation model based on current exposures to interest rates and assumes a constant balance sheet with no new growth. The results of the shocks are presented to a Board Committee on a quarterly basis and compared to the related policy limits. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” for the net interest income simulation results for December 31, 2014 and 2013.

Liquidity

Management of the Company’s liquidity position is closely related to the process of asset/liability management.  Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to provide sufficient funds to cover deposit withdrawals and payment of debt and operating obligations.  The Company intends to meet its liquidity needs by managing cash and due from banks, federal funds sold and purchased, maturity of investment securities, principal repayments received from mortgage-backed securities and lines of credit as necessary.  GB&T maintains a line of credit with the Federal Home Loan Bank approximating 10% of its total assets.  Federal Home Loan Bank advances are collateralized by eligible first mortgages, commercial real estate loans and investment securities.  GB&T maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20,000 of which $10,000 was outstanding at December 31, 2014 and a $10,000 repurchase line of credit with Center State Bank, Orlando, Florida, of which none was outstanding at December 31, 2014.  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 December 31, 2014 and a federal funds purchased accommodation with Center State Bank, Orlando, Florida, for advances up to $10,000, of which none was outstanding at December 31, 2014.  The Company also maintains a borrowing facility at the Federal Reserve Bank, under the Borrower-In-Custody Program, of which none was outstanding at December 31, 2014.  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 $10,678 at December 31, 2014.

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Capital

Total stockholders’ equity was $155,286 at December 31, 2014, an increase of $23,717 or 18.03% from the previous year.  The change in stockholders equity resulted from an increase in retained earnings of $13,133 and an increase in accumulated other comprehensive income (loss), which increased $10,172 from 2013 due primarily to an increase in market values of investment securities available for sale.   The Company purchased 1,282 shares of treasury stock in 2014 at a cost of $32, which is shown as a reduction of stockholders’ equity.  No shares of treasury stock were purchased in 2013.  The Company issued 794 and 2,562 shares of treasury stock in 2014 and 2013 at a price of $17 and $36, respectively, for the Director Stock Purchase Plan and issued 2,420 shares of treasury stock in 2013 at a price of $34 for stock options which were exercised.

The Company’s average equity to average total assets was 8.31% in 2014 compared to 7.99% in 2013 and 7.66% in 2012. Capital is considered to be adequate to meet present operating needs and anticipated future operating requirements.

The following table presents the return on equity and assets for the years 2014, 2013 and 2012.

Return on Equity and Assets
	Years ended December 31,
	2014			2013			2012
Return on average total assets		0.96	%		0.97	%		0.87	%
Return on average equity		11.49	%		12.09	%		11.40	%
Average equity to average assets ratio		8.31	%		7.99	%		7.66	%

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At December 31, 2014, the Company was well above the minimum capital ratios required under the regulatory risk-based capital guidelines and was considered well capitalized.  The following table presents the capital ratios for the Company and its subsidiary.

ANALYSIS OF CAPITAL
	Required					Actual					Excess
	Amount		%			Amount		%			Amount		%
	(Dollars in thousands)
Southeastern Bank Financial Corporation
12/31/2014
Risk-based capital:
Tier 1 capital	$	46,793		4.00	%	$	175,075		14.97	%	$	128,282		10.97	%
Total capital		93,586		8.00	%		189,832		16.23	%		96,246		8.23	%
Tier 1 leverage ratio		71,039		4.00	%		175,075		9.86	%		104,036		5.86	%
12/31/2013
Risk-based capital:
Tier 1 capital	$	45,562		4.00	%	$	161,530		14.18	%	$	115,968		10.18	%
Total capital		91,124		8.00	%		175,918		15.44	%		84,794		7.44	%
Tier 1 leverage ratio		68,977		4.00	%		161,530		9.37	%		92,553		5.37	%
Georgia Bank & Trust Company
12/31/2014
Risk-based capital:
Tier 1 capital	$	46,707		4.00	%	$	167,385		14.33	%	$	120,678		10.33	%
Total capital		93,414		8.00	%		182,116		15.60	%		88,702		7.60	%
Tier 1 leverage ratio		79,798		4.50	%		167,385		9.44	%		87,587		4.94	%
12/31/2013
Risk-based capital:
Tier 1 capital	$	45,509		4.00	%	$	156,227		13.73	%	$	110,718		9.73	%
Total capital		91,018		8.00	%		170,599		14.99	%		79,581		6.99	%
Tier 1 leverage ratio		77,489		4.50	%		156,227		9.07	%		78,738		4.57	%

On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank.  On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the Federal Reserve.   The final rules implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act.

The final rules include new risk-based capital and leverage ratios that will be phased in from 2015 to 2019.  The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and Tier 2 risk-based capital requirements.  The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%.  The required minimum ratio of total capital to risk-weighted assets will remain 8.0%.  The new risk-based capital requirements (except for the capital conservation buffer) became effective for the Company on January 1, 2015.  The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter.  Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.

The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital.  The final rules provide that depository holding companies with less than $15 billion in total assets as of December 31, 2009, such as the Company, may permanently include trust preferred securities and certain other non-qualifying instruments issued and included in Tier 1 or Tier 2 capital before May 19, 2010 in additional Tier 1 (subject to a maximum of 25% of Tier 1 capital) or Tier 2 capital until maturity or redemption

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The final rules also set forth certain changes for the calculation of risk-weighted assets that the Company is required to implement beginning January 1, 2015.  Management is currently evaluating the provisions of the final rules and their expected impact on the Company.  Based on the Company’s current capital composition and levels, management does not presently anticipate that the final 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.

Cash Flows from Operating, Investing and Financing Activities

Net cash provided by operating activities was $18,696 in 2014, a decrease of $30,631 from 2013.  Net cash provided by operating activities was $49,327 in 2013, an increase of $15,818 from 2012.

Net cash used in investing activities was $43,945 in 2014 compared to net cash used in investing activities of $76,729 in 2013. Changes included a lower investment securities portfolio in 2014 compared to 2013 and an increase in loans.  Loans increased $61,963 in 2014 compared to an increase in loans of $44,929 in 2013.  Net cash used in investing activities was $76,729 in 2013 compared to net cash used in investing activities of $85,345 in 2012. Changes included a lower investment securities portfolio in 2013 compared to 2012 and an increase in loans.  Loans increased $44,929 in 2013 compared to an increase in loans of $41,337 in 2012.  In addition, the Company received proceeds from sale of other real estate of $2,622.

Net cash provided by financing activities in 2014 was $13,908 as compared to net cash provided by financing activities of $30,850 in 2013.  Contributing to this change was an increase in deposits of $9,061 and an increase in federal funds purchased and securities sold of $9,870.  Net cash provided by financing activities in 2013 was $30,850 as compared to net cash provided by financing activities of $25,883 in 2012.  The primary reason for the change was an increase in deposits of $33,531.

Forward-Looking Statements

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

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Adoption of New Accounting Standards

In January 2014, the FASB amended existing guidance to clarify when a creditor should derecognize a loan receivable and recognize a collateral asset. An in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendment requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  This amendment is effective for interim and annual reporting periods beginning after December 15, 2014.  We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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

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.

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Various information shown elsewhere herein will assist in the understanding of how well the Company is positioned to react to changing interest rates and inflationary trends. In particular, the summary of net interest income, the maturity distributions and compositions of the loan and security portfolios and the data on the interest sensitivity of loans and deposits should be considered.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

Market risk reflects the risk of loss due to changes in the market prices and interest rates.  This loss could be reflected in diminished current market values or reduced net interest income in future periods.

The Company’s market risk arises primarily from the interest rate risk inherent in its lending and deposit activities.  This risk is managed primarily by careful periodic analysis and modeling of the various components of the entire balance sheet.  The investment portfolio is utilized to assist in minimizing interest rate risk in both loans and deposits due to the flexibility afforded in structuring the investment portfolio with regards to various maturities, cash flows and fixed or variable rates.

The following table presents the Company’s projected changes in net interest income for the various rate shock levels as of December 31, 2014 and 2013.  Net interest income simulations for 100, 200, 300 and 400 basis point declines in market rates were not considered meaningful, given the current levels of short term market interest rates.

	Amount		Dollar Change			Percent Change
	(Dollars in thousands)
December 31, 2014
Base		51,748
+100 basis points		50,139		(1,609	)		(3.11	%)
+200 basis points		49,049		(2,699	)		(5.22	%)
+300 basis points		48,201		(3,547	)		(6.85	%)
+400 basis points		47,231		(4,517	)		(8.73	%)
December 31, 2013
Base		49,417
+100 basis points		49,391		(26	)		(0.05	%)
+200 basis points		49,772		355			0.72	%
+300 basis points		50,604		1,187			2.40	%
+400 basis points		51,451		2,034			4.12	%

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Item 8. Financial Statements and Supplementary Data

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SOUTHEASTERN BANK FINANCIAL CORPORATION

Table of Contents

	Page
Report of Independent Registered Public Accounting Firm	66
Consolidated Balance Sheets	67
Consolidated Statements of Comprehensive Income (Loss)	68
Consolidated Statements of Stockholders’ Equity	70
Consolidated Statements of Cash Flows	71
Notes to Consolidated Financial Statements	73

65

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Southeastern Bank Financial Corporation

Augusta, Georgia

We have audited the accompanying consolidated balance sheets of Southeastern Bank Financial Corporation as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southeastern Bank Financial Corporation as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Southeastern Bank Financial Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2015 expressed an unqualified opinion thereon.

/s/Crowe Horwath LLP

Franklin, Tennessee

February 27, 2015

66

SOUTHEASTERN BANK FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 2014 and 2013
	2014			2013
	(Dollars in thousands, except share data)
Assets
Cash and due from banks	$	33,286			36,766
Interest-bearing deposits in other banks		2,709			10,570
Cash and cash equivalents		35,995			47,336
Available-for-sale securities		644,465			649,979
Loans held for sale		18,365			10,638
Loans		966,356			905,713
Less allowance for loan losses		25,506			26,409
Loans, net		940,850			879,304
Premises and equipment, net		27,842			27,003
Accrued interest receivable		5,898			6,221
Goodwill, net		140			140
Bank-owned life insurance		36,908			35,745
Restricted equity securities		4,398			4,870
Other real estate owned		1,107			1,014
Deferred tax asset		15,263			21,023
Other assets		1,550			6,053
	$	1,732,781			1,689,326
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing		196,624			187,287
Interest-bearing:
NOW accounts		354,038			351,799
Savings		521,570			521,656
Money management accounts		15,824			16,065
Time deposits		375,808			377,996
		1,463,864			1,454,803
Securities sold under repurchase agreements		10,678			808
Advances from Federal Home Loan Bank		64,000			64,000
Accrued interest payable and other liabilities		18,953			16,599
Subordinated debentures		20,000			21,547
Total liabilities		1,577,495			1,557,757
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 0 shares outstanding in 2014 and 2013, respectively		—			—
Common stock, $3.00 par value; 10,000,000 shares authorized; 6,744,891 and 6,680,225 shares issued in 2014 and 2013, respectively; 6,744,160 and 6,679,982 shares outstanding in 2014 and 2013, respectively		20,235			20,041
Additional paid-in capital		63,096			62,863
Retained earnings		71,902			58,769
Treasury stock, at cost; 731 and 243 shares in 2014 and 2013, respectively		(18	)		(3	)
Accumulated other comprehensive income (loss), net		71			(10,101	)
Total stockholders’ equity		155,286			131,569
	$	1,732,781			1,689,326
See accompanying notes to consolidated financial statements.

67

SOUTHEASTERN BANK FINANCIAL CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2014, 2013 and 2012
	2014			2013			2012
	(Dollars in thousands, except share data)
Interest income:
Loans, including fees	$	46,444			46,479			46,693
Investment securities:
Taxable		11,868			12,918			14,358
Tax-exempt		2,571			2,846			2,537
Interest-bearing deposits in other banks		67			71			82
Total interest income		60,950			62,314			63,670
Interest expense:
Deposits		6,252			6,794			9,425
Securities sold under repurchase agreements		5			6			12
Other borrowings		2,629			2,714			2,597
Total interest expense		8,886			9,514			12,034
Net interest income		52,064			52,800			51,636
Provision for loan losses		3,492			7,438			8,141
Net interest income after provision for loan losses		48,572			45,362			43,495
Noninterest income:
Service charges and fees on deposits		7,180			7,155			6,849
Gain on sales of loans		5,465			6,843			9,368
Gain on sale of fixed assets, net		64			26			10
Investment securities gains (losses), net (includes $825, ($895) and $312 accumulated other comprehensive income (loss) reclassifications for unrealized gains (losses) on available-for-sale securities)		825			(895	)		321
Other-than-temporary loss
Total impairment loss		—			—			(13	)
Less loss recognized in other comprehensive income		—			—			(4	)
Net impairment loss recognized in earnings		—			—			(9	)
Retail investment income		2,188			2,099			1,941
Trust services fees		1,310			1,185			1,146
Earnings from cash surrender value of bank-owned life insurance		1,163			1,187			1,112
Miscellaneous income		835			897			756
Total noninterest income		19,030			18,497			21,494
Noninterest expense:
Salaries and other personnel expense		25,047			23,079			25,889
Occupancy expenses		4,000			3,722			4,094
Other real estate losses, net		228			642			1,785
Other operating expenses		14,213			12,923			12,300
Total noninterest expense		43,488			40,366			44,068
Income before income taxes		24,114			23,493			20,921
Income tax expense		7,482			7,147			6,486
Net income	$	16,632			16,346			14,435
Other comprehensive income (loss):
Unrealized gain (loss) on derivatives		(1,191	)		1,648			(154	)
Unrealized gain (loss) on securities available-for-sale		18,664			(32,090	)		7,530
Reclassification adjustment for realized (gain) loss on securities, net of OTTI		(825	)		895			(312	)
Tax effect		(6,476	)		11,494			(2,748	)
Total other comprehensive income (loss)		10,172			(18,053	)		4,316
Comprehensive income (loss)	$	26,804			(1,707	)		18,751
							(continued)

68

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Comprehensive Income (Loss)

Years ended December 31, 2014, 2013 and 2012

(continued)

	2014		2013		2012
Basic net income per share	$	2.49		2.45		2.16
Diluted net income per share		2.49		2.45		2.16
Weighted average common shares outstanding		6,681,220		6,678,914		6,678,215
Weighted average number of common and common equivalent shares outstanding		6,690,423		6,678,914		6,678,215

See accompanying notes to consolidated financial statements.

69

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2014, 2013 and 2012

(In thousands)

													Accumulated
	Common stock				Additional								other			Total
	Number				paid-in		Retained			Treasury			comprehensive			stockholders’
	of shares		Amount		capital		earnings			stock			income (loss), net			equity
Balance, January 1, 2012		6,678	$	20,033		62,767		30,593			—			3,636			117,029
Net income		—		—		—		14,435			—			—			14,435
Other comprehensive income		—		—		—		—			—			4,316			4,316
Stock options compensation cost		—		—		45		—			—			—			45
Directors’ stock purchase plan		2		8		23		—			10			—			41
Purchase of treasury stock		—		—		—		—			(83	)		—			(83	)
Balance, December 31, 2012		6,680	$	20,041		62,835		45,028			(73	)		7,952			135,783
Net income		—		—		—		16,346			—			—			16,346
Other comprehensive income (loss)		—		—		—		—			—			(18,053	)		(18,053	)
Stock options compensation cost		—		—		6		—			—			—			6
Directors’ stock purchase plan		—		—		13		—			36			—			49
Cash dividends ($0.39 per common share)		—		—		—		(2,605	)		—			—			(2,605	)
Stock options exercised		—		—		9		—			34			—			43
Balance, December 31, 2013		6,680	$	20,041		62,863		58,769			(3	)		(10,101	)		131,569
Net income		—		—		—		16,632			—			—			16,632
Other comprehensive income		—		—		—		—			—			10,172			10,172
Stock-based compensation		63		189		200		—			—			—			389
Directors’ stock purchase plan		2		5		33		—			16			—			54
Cash dividends ($0.52 per common share)		—		—		—		(3,499	)		—			—			(3,499	)
Purchase of treasury stock		—		—		—		—			(31	)		—			(31	)
Balance, December 31, 2014		6,745	$	20,235		63,096		71,902			(18	)		71			155,286

See accompanying notes to consolidated financial statements.

70

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

Years ended December 31, 2014, 2013 and 2012

	2014			2013			2012
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	16,632			16,346			14,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,061			1,869			2,101
Deferred income tax expense (benefit)		(717	)		877			(431	)
Provision for loan losses		3,492			7,438			8,141
Investment securities (gains) losses, net		(825	)		895			(321	)
Other-than-temporary impairment losses		—			—			9
Net amortization of premium on investment securities		4,457			5,235			5,215
Earnings from cash surrender value of bank-owned life insurance		(1,163	)		(1,187	)		(1,112	)
Bank-owned life insurance death benefits in excess of CSV		—			(150	)		—
Stock-based compensation expense		389			6			45
Gain on disposal of premises and equipment		(64	)		(26	)		(10	)
(Gain) loss on the sale of other real estate		(43	)		42			635
Provision for other real estate valuation allowance		271			600			1,150
Gain on sales of loans		(5,465	)		(6,843	)		(9,368	)
Real estate loans originated for sale		(187,008	)		(222,747	)		(298,448	)
Proceeds from sales of real estate loans		180,691			249,003			307,379
Decrease (increase) in accrued interest receivable		323			382			(356	)
Decrease (increase) in other assets		4,503			(1,735	)		1,549
Increase (decrease) in accrued interest payable and other liabilities		1,162			(678	)		2,896
Net cash provided by operating activities		18,696			49,327			33,509
Cash flows from investing activities:
Proceeds from sales of available for sale securities		207,299			175,524			170,284
Proceeds from maturities and calls of available for sale securities		80,538			93,530			208,707
Purchase of available for sale securities		(268,116	)		(301,618	)		(427,656	)
Purchase of restricted equity securities		—			(900	)		(500	)
Proceeds from redemption of FHLB stock		472			1,326			290
Net increase in loans		(61,963	)		(44,929	)		(41,337	)
Purchase of bank-owned life insurance		—			—			(3,000	)
Proceeds from bank-owned life insurance death benefits		—			417			—
Additions to premises and equipment		(2,969	)		(2,790	)		(640	)
Proceeds from sale of other real estate		661			2,622			8,495
Proceeds from sale of premises and equipment		133			89			12
Net cash used in investing activities		(43,945	)		(76,729	)		(85,345	)

(continued)

71

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

Years ended December 31, 2014, 2013 and 2012

(continued)

	2014			2013			2012
Cash flows from financing activities:
Net increase in deposits		9,061			33,531			2,050
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements		9,870		��	(168	)		275
Advances from Federal Home Loan Bank		—			20,000			37,000
Payments of Federal Home Loan Bank advances		—			(20,000	)		(12,000	)
Payments of subordinated debentures		(1,547	)		—			(1,400	)
Proceeds from directors’ stock purchase plan		54			49			41
Purchase of treasury stock		(31	)		—			(83	)
Payment of cash dividends		(3,499	)		(2,605	)		—
Proceeds from stock options exercised, net of stock redeemed		—			43			—
Net cash provided by financing activities		13,908			30,850			25,883
Net (decrease) increase in cash and cash equivalents		(11,341	)		3,448			(25,953	)
Cash and cash equivalents at beginning of year		47,336			43,888			69,841
Cash and cash equivalents at end of year	$	35,995			47,336			43,888
Supplemental disclosures of cash paid during the year for:
Interest	$	8,960			9,704			12,280
Income taxes, net of refunds		8,366			6,740			5,944
Supplemental information on noncash investing activities:
Loans transferred to other real estate owned	$	1,256			1,074			7,561
Loans provided for sales of other real estate owned		274			286			1,553

See accompanying notes to consolidated financial statements.

72

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Note 1 – Summary of Significant Accounting Policies

(a) Nature of Operations and Principles of Consolidation

The 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.

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

  (b) Use of Estimates

To prepare financial statements in conformity with United States generally accepted accounting principles, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

(c) Cash Flows

Cash and cash equivalents include cash and due from banks, Federal funds sold, and short-term interest-bearing deposits in other banks.  Generally, Federal funds are sold for one-day periods.  Net cash flows are reported for loan and deposit transactions and for short term borrowings with an original maturity of 90 days or less.

(d) Securities

Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.  Debt securities are classified as available for sale when they might be sold before maturity.  Equity securities with readily determinable fair values are classified as available for sale.  Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

73

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Interest income includes amortization of purchase premium or discount.  Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.  Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

(e) Loans and Allowance for Loan Losses

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

Non-Accrual Loan Procedures:

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

74

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

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

Concentration of Credit Risk:

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

Allowance for Loan Losses:

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

Impaired Loans and Troubled Debt Restructurings:

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

75

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

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

The following portfolio segments have been identified:

● Acquisition Development and Construction (“ADC”) – CSRA

● ADC – Other

● Commercial Real Estate – Non owner occupied

● Commercial Real Estate – Owner occupied

● 1-4 Family

● Consumer

● Other – Commercial, Financial and Agricultural

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

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

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

76

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

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

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

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

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

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

77

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

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

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

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

ALLL Methodology

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

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

● For each loan category, a four year average rolling historical net loss rate is calculated, with the loss rate more heavily weighted to the most recent two years loss history.  The historical loss ratios are adjusted for internal and external qualitative factors within each loan category.  Factors include:

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

o changes in the quality of the loan review system;

o trends in volume and terms of loans;

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

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

o national and local economic trends and conditions;

o changes in the value of underlying collateral;

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

o effects of changes in credit concentrations

78

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

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

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

Due to the added risks associated with loans, which are graded as special mention or substandard, that are not classified as impaired, the qualitative factor adjustment may be further increased for such classifications within each category.  This created an additional $1,560 in needed allowance for loan loss.

There have been no changes to the methodology during 2014 and 2013.

Loans Held for Sale:

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

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

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

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives.  Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked.  The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans.  Changes in the fair values of these derivatives are included in net gains on sales of loans.  Fair values of these derivatives were $6 and $31 as of December 31, 2014 and 2013, respectively.

(f) Premises and Equipment

Land is carried at cost.  Premises and equipment are stated at cost less accumulated depreciation.  Buildings and related components are depreciated using the straight-line method with useful lives ranging from three to thirty-nine years.Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from three to ten years.

79

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

(g) Federal Home Loan Bank (FHLB) Stock

The Bank is a member of the FHLB system.  Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.  FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.  Both cash and stock dividends are reported as income.

(h) Other Real Estate

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.

(i) Goodwill

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets.  Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.  The Company’s goodwill is not considered impaired at December 31, 2014.

(j) Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 (k) Income Taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

80

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense.

(l) Income Per Share

Basic net income per share is net income divided by the weighted average number of common shares outstanding during the period.  Common shares issuable under restricted stock awards are not considered outstanding for this calculation until vested.  Diluted net income per share includes the dilutive effect of additional potential common shares issuable under stock options and restricted stock awards.  The calculation of diluted earnings per share for 2014, 2013 and 2012 excludes the dilutive effect of all stock options outstanding of 134,750, 145,250 and 214,490 at December 31, 2014, 2013 and 2012, respectively, as the effect is anti-dilutive for all periods presented.  The calculation for 2014 does include the dilutive effect of 63,000 in restricted stock awards at December 31, 2014.

	December 31,
	2014		2013		2012
Weighted average common shares outstanding for basic earnings per common share		6,681,220		6,678,914		6,678,215
Add:  Dilutive effects of assumed exercises of stock options and restricted stock awards		9,203		-		-
Weighted average number of common and common equivalent shares outstanding		6,690,423		6,678,914		6,678,215

 (m) Other Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss).  Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and interest rate swap derivatives which are also recognized as separate components of equity.

(n) Segment Disclosures

While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis.  Discrete financial information is not available other than on a Company wide basis.  Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

81

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

(o) Adoption of New Accounting Standards

In January 2014, the FASB amended existing guidance to clarify when a creditor should derecognize a loan receivable and recognize a collateral asset. An in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendment requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  This amendment is effective for interim and annual reporting periods beginning after December 15, 2014.  We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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

82

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

(p) Bank Owned Life Insurance

The Company has purchased life insurance policies on certain key executives.  Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

(q) Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are reported as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.  Management does not believe there now are such matters that will have a material effect on the consolidated financial statements.

(r) Derivatives

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

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

83

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

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

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

(s) Reclassifications

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

(t) Rounding

Dollar amounts are rounded to thousands except per share amounts unless otherwise noted.

Note 2 – Cash and Due From Banks

The Company’s subsidiary is required by the Federal Reserve Bank to maintain average daily cash balances.  These required balances were $7,929 at December 31, 2014 and $6,957 at December 31, 2013.

84

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Note 3 – Investment Securities

The following tables summarize the amortized cost and fair value of the available-for-sale investment securities portfolio at December 31, 2014 and 2013 and the corresponding amounts of unrealized gains and losses therein.

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

	2013
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
Available-for-sale:	(Dollars in thousands)
Obligations of U.S. Government agencies	$	233,697		597		(10,232	)		224,062
Obligations of states and political subdivisions		112,408		1,293		(3,267	)		110,434
Mortgage-backed securities
U.S. GSE’s MBS - residential		132,586		968		(3,583	)		129,971
U.S. GSE’s CMO		81,031		456		(1,765	)		79,722
Corporate bonds		106,022		1,519		(1,751	)		105,790
	$	665,744		4,833		(20,598	)		649,979

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

As of December 31, 2013, in addition to the U.S. Government agencies and government sponsored entities, there were four issuers who represented 10% or more of stockholders’ equity within the investment portfolio.  The Company’s holdings of investment securities issued by GE Capital totaled $15,595 or 11.85% of stockholders’ equity at December 31, 2013.  The Company also had holdings of investment securities issued by JP Morgan Chase totaling $14,610 or 11.10% of stockholders’ equity, Goldman Sachs totaling $13,616 or 10.35% of stockholders’ equity and Wells Fargo totaling $13,399 or 10.18% of stockholders’ equity at December 31, 2013.

85

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Proceeds from sales of securities available-for-sale and the associated gains (losses), excluding gains (losses) on called securities, during 2014, 2013 and 2012 were as follows:

	December 31,
	2014			2013			2012
	(Dollars in thousands)
Proceeds	$	207,299		$	175,524		$	170,284
Gross Gains		2,034			1,981			1,655
Gross Losses		(1,356	)		(2,914	)		(1,349	)

Investment securities with a carrying amount of approximately $222,782 and $238,948 at December 31, 2014 and 2013, respectively, were pledged to secure public and trust deposits, and for other purposes required or permitted by law.

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

	Amortized		Estimated
	cost		fair value
	(Dollars in thousands)
Available-for-sale:
One year or less	$	7,503		7,515
After one year through five years		90,174		91,130
After five years through ten years		169,014		167,698
After ten years		375,699		378,122
	$	642,390		644,465

86

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The following tables summarize the investment securities with unrealized losses at year-end 2014 and 2013, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.

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

87

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

	December 31, 2013
	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss		fair value		loss		fair value		loss
	(Dollars in thousands)
Temporarily impaired
Obligations of U.S. Government agencies	$	142,173		7,149		29,452		3,083		171,625		10,232
Obligations of states and political      subdivisions		55,273		2,765		6,911		502		62,184		3,267
Mortgage-backed securities
U.S. GSE’s MBS - residential		90,413		3,496		1,681		87		92,094		3,583
U.S. GSE’s CMO		56,620		1,765		-		-		56,620		1,765
Corporate bonds		28,688		912		20,663		839		49,351		1,751
	$	373,167		16,087		58,707		4,511		431,874		20,598

Other-Than-Temporary Impairment – December 31, 2014

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

Mortgage-backed Securities

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

Corporate Securities

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

88

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

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

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

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

Other-Than-Temporary Impairment – December 31, 2013

As of December 31, 2013, the Company’s security portfolio consisted of 397 securities, 230 of which were in an unrealized loss position.  Of these securities with unrealized losses, 34.46% were related to the Company’s mortgage backed and corporate securities as discussed below.

Mortgage-backed Securities

At December 31, 2013, all of the Company’s mortgage-backed securities were issued by U.S. government-sponsored entities and agencies, primarily the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Government National Mortgage Association (“Ginnie Mae”), institutions which the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2013.

89

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Corporate Securities

The Company holds forty-five corporate securities totaling $105,790, of which twenty-three had an unrealized loss of $1,751 at December 31, 2013.  Twenty-one of the securities with an unrealized loss of $1,549 were issued by entities rated lower medium investment grade or higher.  Because the decline in fair value is attributable primarily to changes in interest rates and not credit quality and because the Company does not have the intent to sell the securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2013.

Included in the Company’s corporate bonds are two trust preferred securities totaling $1,067, which had an unrealized loss of $202 at December 31, 2013.  These two securities to two issuers were not rated.  Neither of the issuers were in default, but in January of 2011 the Company was notified that one of the trust preferred securities totaling $250 to one issuer not rated had elected to defer interest payments.  The issuer is a bank holding company with operations in the Southeast.  The Company considered several factors including the financial condition and near term prospects of the issuer and concluded that the decline in fair value was primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual security.  The Company has considered the capital position of the subsidiary banks, the liquidity of the holding company, the existence and severity of publicly available regulatory agreements, and the fact that these deferrals are coming after the most severe impact of the national and regional recession.  The prospect of capital formation in the current market, improving operating results of the industry overall have caused the Company to conclude that a return to normal subsidiary dividends and thus interest payments on the debt for this issuer is reasonably assured at this time.  Because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2013.

At December 31, 2013, the fair value of one corporate security totaling $110 was measured using Level 3 inputs because the market for it has become illiquid, as indicated by few, if any, trades during the period.  The discount rates used in the valuation model was based on a yield of 10% that the market would require for corporate debt obligations with maturities and risk characteristics similar to the subordinated debenture being measured.

90

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The following table presents a rollforward of the credit losses recognized in earnings for the year ended December 31, 2013:

Beginning balance, January 1, 2013	$	586
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		-
Additions/Subtractions
Amounts realized for securities sold during the period		(586	)
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis		-
Reductions for previous credit losses on securities charged off		-
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security		-
Increases to the amount related to the credit loss for which other-than-temporary was previously recognized		-
Ending balance, December 31, 2013	$	-

91

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Note 4 – Loans

Loans at year end were as follows:

	2014			2013
	(Dollars in thousands)
Commercial, financial and agricultural	$	208,905		$	202,074
Real estate:
Commercial		371,488			353,353
Residential		204,097			175,295
Acquisition, development and construction		164,303			160,498
Consumer installment		17,248			14,260
		966,041			905,480
Less allowance for loan losses		25,506			26,409
Less deferred loan origination fees (costs)		(315	)		(233	)
	$	940,850		$	879,304

92

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The following tables present the activity in the allowance for loan losses by portfolio segment as of and for the years ended December 31, 2014, 2013 and 2012.

	2014
	Commercial,
	Financial and			CRE - Owner			CRE - Non Owner			Residential			ADC			ADC
	Agricultural			Occupied			Occupied			Real Estate			CSRA			Other			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	5,774			5,706			3,275			5,590			3,107			2,379			578			26,409
Charge-offs		(2,005	)		(89	)		(718	)		(1,038	)		(622	)		(69	)		(604	)		(5,145	)
Recoveries		67			96			275			37			—			—			275			750
Provision		1,571			(908	)		985			2,002			(542	)		10			374			3,492
Ending balance	$	5,407			4,805			3,817			6,591			1,943			2,320			623			25,506
	2013
	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	$	4,368			6,825			4,047			5,677			4,533			2,903			493			28,846
Charge-offs		(335	)		(3,286	)		(183	)		(1,404	)		(2,663	)		(2,435	)		(620	)		(10,926	)
Recoveries		88			9			12			117			283			194			348			1,051
Provision		1,653			2,158			(601	)		1,200			954			1,717			357			7,438
Ending balance	$	5,774			5,706			3,275			5,590			3,107			2,379			578			26,409
	2012
	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	$	4,183			6,285			4,476			5,607			4,236			3,819			440			29,046
Charge-offs		(919	)		(1,671	)		(610	)		(2,211	)		(2,095	)		(1,056	)		(812	)		(9,374	)
Recoveries		241			43			126			88			41			168			326			1,033
Provision		863			2,168			55			2,193			2,351			(28	)		539			8,141
Ending balance	$	4,368			6,825			4,047			5,677			4,533			2,903			493			28,846

93

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

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 December 31, 2014 and 2013.

	2014
	Commercial,
	Financial and		CRE - Owner		CRE - Non Owner		Residential		ADC		ADC
	Agricultural		Occupied		Occupied		Real Estate		CSRA		Other		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	207		—		—		—		—		—		—		207
Collectively evaluated for impairment		5,200		4,805		3,817		6,591		1,943		2,320		623		25,299
	$	5,407		4,805		3,817		6,591		1,943		2,320		623		25,506
Loans:
Individually evaluated for impairment		2,995		1,289		7,687		2,285		2,849		3,082		2		20,189
Collectively evaluated for impairment		205,910		218,619		143,893		201,812		107,235		51,137		17,246		945,852
	$	208,905		219,908		151,580		204,097		110,084		54,219		17,248		966,041

	2013
	Commercial,
	Financial and		CRE - Owner		CRE - Non Owner		Residential		ADC		ADC
	Agricultural		Occupied		Occupied		Real Estate		CSRA		Other		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	—		—		—		—		—		—		—		—
Collectively evaluated for impairment		5,774		5,706		3,275		5,590		3,107		2,379		578		26,409
	$	5,774		5,706		3,275		5,590		3,107		2,379		578		26,409
Loans:
Individually evaluated for impairment		257		791		10,985		4,228		2,585		5,470		—		24,316
Collectively evaluated for impairment		201,817		215,516		126,061		171,067		120,980		31,463		14,260		881,164
	$	202,074		216,307		137,046		175,295		123,565		36,933		14,260		905,480

94

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2014 and 2013.

	2014
	Unpaid				Allowance for		Average
	Principal		Recorded		Loan Losses		Recorded
	Balance		Investment (2)		Allocated		Investment
	(Dollars in thousands)
With no related allowance recorded: (1)
Commercial, financial and agricultural:
Commerical	$	2,000		611		—		1,805
Financial		—		—		—		—
Agricultural		263		206		—		231
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		1,385		1,289		—		1,377
Non Owner occupied		7,907		7,687		—		7,792
Residential real estate:
Secured by first liens		2,711		2,181		—		2,229
Secured by junior liens		150		104		—		110
Acquisition, development and construction:
Residential		—		—		—		—
Other		8,518		5,931		—		7,326
Consumer		2		2		—		3
		22,936		18,011		—		20,873
With an allowance recorded:
Commercial, financial and agricultural:
Commerical		2,245		2,178		207		2,203
		2,245		2,178		207		2,203
	$	25,181		20,189		207		23,076

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

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

95

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

		2013
		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		$	—		—		—		—
Financial			—		—		—		—
Agricultural			300		257		—		280
Equity lines			—		—		—		—
Other			—		—		—		—
Commercial real estate:
Owner occupied			861		791		—		775
Non Owner occupied			11,385		10,985		—		10,964
Residential real estate:
Secured by first liens			6,080		4,045		—		4,626
Secured by junior liens			254		183		—		190
Acquisition, development and construction:
Residential			290		290		—		289
Other			10,520		7,765		—		9,383
Consumer			—		—		—		—
			29,690		24,316		—		26,507
With an allowance recorded:			—		—		—		—
		$	29,690		24,316		—		26,507
(1) No specific allowance for credit losses is allocated to these loans since they are sufficiently collateralized or had charge-offs
(2) Excludes accrued interest receivable and loan origination fees, net due to immateriality

96

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The following tables present interest income on impaired loans for the years ended December 31, 2014, 2013 and 2012.

	2014
	Interest		Cash Basis
	Income		Interest Income
	Recognized		Recognized
	(Dollars in thousands)
Commercial, financial and agricultural:
Commerical	$	—		—
Financial		—		—
Agricultural		—		—
Equity lines		—		—
Other		—		—
Commercial real estate:
Owner occupied		15		15
Non Owner occupied		324		324
Residential real estate:
Secured by first liens		25		25
Secured by junior liens		—		—
Acquisition, development and construction:
Residential		—		—
Other		43		43
Consumer		—		—
	$	407		407

	2013
	Interest		Cash Basis
	Income		Interest Income
	Recognized		Recognized
	(Dollars in thousands)
Commercial, financial and agricultural:
Commerical	$	—		—
Financial		—		—
Agricultural		—		—
Equity lines		—		—
Other		—		—
Commercial real estate:
Owner occupied		8		8
Non Owner occupied		751		751
Residential real estate:
Secured by first liens		19		19
Secured by junior liens		5		5
Acquisition, development and construction:
Residential		—		—
Other		36		36
Consumer		—		—
	$	819		819

97

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

	2012
	Interest		Cash Basis
	Income		Interest Income
	Recognized		Recognized
	(Dollars in thousands)
Commercial, financial and agricultural:
Commerical	$	—		—
Financial		—		—
Agricultural		—		—
Equity lines		—		—
Other		—		—
Commercial real estate:
Owner occupied		9		9
Non Owner occupied		120		120
Residential real estate:
Secured by first liens		4		4
Secured by junior liens		6		6
Acquisition, development and construction:
Residential		—		—
Other		—		—
Consumer		—		—
	$	139		139

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.

98

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The following tables present the aging of the recorded investment in past due loans as of December 31, 2014 and 2013 by class of loans.

	2014
	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	$	—		—		2,865		2,865		119,815		122,680
Financial		—		—		—		—		9,355		9,355
Agricultural		276		—		206		482		9,315		9,797
Equity lines		33		—		318		351		33,298		33,649
Other		—		—		69		69		33,355		33,424
Commercial real estate:
Owner occupied		1,638		—		620		2,258		217,650		219,908
Non Owner occupied		—		—		877		877		150,703		151,580
Residential real estate:
Secured by first liens		2,919		—		3,451		6,370		190,970		197,340
Secured by junior liens		347		—		188		535		6,222		6,757
Acquisition, development and construction:
Residential		—		—		—		—		45,264		45,264
Other		258		—		5,874		6,132		112,907		119,039
Consumer		44		—		136		180		17,068		17,248
	$	5,515		—		14,604		20,119		945,922		966,041

	2013
	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	$	536		—		64		600		115,193		115,793
Financial		—		—		—		—		6,048		6,048
Agricultural		567		—		257		824		9,833		10,657
Equity lines		310		—		332		642		33,953		34,595
Other		13		—		75		88		34,893		34,981
Commercial real estate:
Owner occupied		525		—		394		919		215,388		216,307
Non Owner occupied		30		—		4,433		4,463		132,583		137,046
Residential real estate:
Secured by first liens		4,821		—		5,607		10,428		156,584		167,012
Secured by junior liens		235		—		287		522		7,761		8,283
Acquisition, development and construction:
Residential		—		—		290		290		44,939		45,229
Other		263		—		7,617		7,880		107,389		115,269
Consumer		91		—		71		162		14,098		14,260
	$	7,391		—		19,427		26,818		878,662		905,480

99

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Troubled Debt Restructurings:

The Company has troubled debt restructurings (TDRs) with a balance of $9,669 and $8,132 included in impaired loans at December 31, 2014 and 2013, respectively.  No specific reserves were allocated to customers whose loan terms had been modified in TDRs as of December 31, 2014 and 2013.  The Company is not committed to lend additional amounts as of December 31, 2014 and 2013 to customers with outstanding loans that are classified as TDRs.  The following tables present TDRs as of December 31, 2014 and 2013.

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

100

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

	2013
	Number of		Recorded
	Loans		Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial and agricultural:
Commerical		-	$	-
Financial		-		-
Agricultural		-		-
Equity lines		-		-
Other		-		-
Commercial real estate:
Owner occupied		3		791
Non Owner occupied		4		5,782
Residential real estate:
Secured by first liens		8		1,307
Secured by junior liens		2		182
Acquisition, development and construction:
Residential		-		-
Other		1		70
Consumer		-		-
		18	$	8,132

During the years ended December 31, 2014 and 2013, the terms of certain loans were modified as TDRs.  The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for rate reductions ranging from 1.00% to 3.15%.  Modifications involving an extension of the maturity date were for periods ranging from 23 months to 192 months.

101

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The following table presents loans by class modified as TDRs that occurred during the years ended December 31, 2014 and 2013.

	Twelve Months Ended December 31, 2014						Twelve Months Ended December 31, 2013
			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		-	$	-	$	-		-	$	-	$	-
Financial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Equity lines		-		-		-		-		-		-
Other		-		-		-		-		-		-
Commercial real estate:
Owner occupied		-		-		-		2		762		632
Non Owner occupied		-		-		-		3		5,779		5,662
Residential real estate:
Secured by first liens		1		287		212		2		552		402
Secured by junior liens		-		-		-		-		-		-
Acquisition, development and construction:
Residential		-		-		-		-		-		-
Other		2		2,628		2,155		1		130		70
Consumer		-		-		-		-		-		-
		3	$	2,915	$	2,367		8	$	7,223	$	6,766

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.  During the year ended December 31, 2014, one commercial real estate loan with a recorded investment of $147 prior to default resulted in a $71 charge-off during the fourth quarter of 2014 and one commercial real estate loan with a recorded investment of $330 defaulted during the third quarter of 2014.   Both defaults occurred after the twelve month period following the loan modification.

During the year ended December 31, 2013, one residential real estate loan with a recorded investment of $492 defaulted during the second quarter of 2013 and the default occurred within the twelve month period following the loan modification.

The TDRs described in the previous table increased the allowance for loan losses by $280 and resulted in charge-offs of $280 for the year ended December 31, 2014.

For the year ended December 31, 2013, the TDRs described in the previous table increased the allowance for loan losses by $151 and resulted in charge-offs of $151.

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.

102

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The terms of certain other loans were modified during the year ended December 31, 2014 and 2013 that did not meet the definition of a TDR.  These loans have a total recorded investment as of December 31, 2014 and 2013 of $4,091 and $17,695, respectively.  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.

Certain loans which were modified during the year ended December 31, 2014 and 2013 and did not meet the definition of a TDR, as the modification was a delay in a payment that was considered to be insignificant, had delays in payment ranging from 30 days to 3 months in 2014 and 2013.

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.

103

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

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 December 31, 2014 and 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows.

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

104

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

	2013
	Pass		Watch		Substandard		Doubtful
			(Dollars in thousands)
Commercial, financial and agricultural:
Commerical	$	101,134		9,707		4,952		—
Financial		6,048		—		—		—
Agricultural		9,705		—		952		—
Equity lines		33,576		486		533		—
Other		34,545		322		114		—
Commercial real estate:
Owner occupied		199,218		10,888		6,201		—
Non Owner occupied		119,057		5,654		12,335		—
Residential real estate:
Secured by first liens		146,379		13,226		7,407		—
Secured by junior liens		7,426		501		356		—
Acquisition, development and construction:
Residential		44,939		—		290		—
Other		93,071		13,310		8,888		—
Consumer		13,911		225		124		—
	$	809,009		54,319		42,152		—

Related Party Loans:

The Company has direct and indirect loans outstanding to certain executive officers and directors, including affiliates, and principal holders of the Company’s securities.

The following is a summary of the activity in loans outstanding to executive officers and directors, including affiliates, and principal holders of the Company’s securities for the year ended December 31, 2014:

	Dollars in thousands
Balance at beginning of year	$	26,821
New loans		27,255
Effect of changes in composition of related parties		(767	)
Principal repayments		(34,613	)
Balance at end of year	$	18,696

105

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The Company is also committed to extend credit to certain directors and executives of the Company, including companies in which they are principal owners, through personal lines of credit, letters of credit, and other loan commitments.  As of December 31, 2014, available balances on these commitments to these persons aggregated approximately $11,880.

Note 5 – Real Estate Owned

The following table presents a roll forward of other real estate owned as of December 31, 2014, 2013 and 2012, respectively.

	2014			2013			2012
	(Dollars in thousands)
Beginning balance, January 1	$	1,014		$	3,490		$	6,209
Additions		1,256			1,074			7,561
Provision charged to expense		(271	)		(600	)		(1,150	)
Sales		(935	)		(2,908	)		(8,495	)
Gain (loss) on sale of OREO		43			(42	)		(635	)
Ending balance, December 31	$	1,107		$	1,014		$	3,490

Activity in the valuation allowance was as follows:

	2014			2013			2012
	(Dollars in thousands)
Beginning balance	$	51		$	1,087		$	2,538
Provision charged to expense		271			600			1,150
Sales		(5	)		(1,636	)		(2,601	)
Ending balance	$	317		$	51		$	1,087

Expenses related to foreclosed assets include:

	2014			2013		2012
	(Dollars in thousands)
(Gain) loss on sale of OREO	$	(43	)	$	42	$	635
OREO expenses, net of rental income		88			85		196
Provision charged to expense		271			600		1,150
	$	316		$	727	$	1,981

106

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Note 6 – 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) as more fully discussed in Note 3.  The fair values of Level 3 investment securities are determined by an independent third party.  These valuations are then reviewed by the Company’s Controller and CFO.  Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality.  During times when trading is more liquid, broker quotes are used (if available) to validate the model.  Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

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

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

Loans Held for Sale: Loans held for sale are carried at fair value, as determined by outstanding commitments, from third party investors (Level 2).

107

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

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 a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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

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

108

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

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 December 31, 2014 and 2013.

	December 31,		Quoted Prices in Active Markets for  Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available-for-sale securities
Obligations of U.S. Government agencies	$	178,744		-		178,744		-
Obligations of states and political subdivisions		101,755		-		101,755		-
Mortgage-backed securities
U.S. GSE’s MBS - residential		130,036		-		130,036		-
U.S. GSE’s CMO		124,461		-		124,461		-
Corporate bonds		109,469		-		109,357		112
Total available-for-sale securities		644,465		-		644,353		112
Loans held for sale		18,365		-		18,365		-
Mortgage banking derivatives		6		-		6		-
	$	662,836		-		662,724		112
Liabilities:
Interest rate swap derivatives		1,959		-		1,959		-
	$	1,959		-		1,959		-

109

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available-for-sale securities
Obligations of U.S. Government agencies	$	224,062		-		224,062		-
Obligations of states and political subdivisions		110,434		-		110,434		-
Mortgage-backed securities
U.S. GSE’s MBS - residential		129,971		-		129,971		-
U.S. GSE’s CMO		79,722		-		79,722		-
Corporate bonds		105,790		-		105,680		110
Total available-for-sale securities		649,979		-		649,869		110
Loans held for sale		10,638		-		10,638		-
Mortgage banking derivatives		31		-		31		-
	$	660,648		-		660,538		110
Liabilities:
Interest rate swap derivatives		768		-		768		-
	$	768		-		768		-

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 twelve months ended December 31, 2014 and 2013.

Transfers between Level 2 and Level 3:

No securities were transferred between Level 2 and Level 3 during the twelve months ended December 31, 2014 and 2013.

110

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

The following tables present a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2014 and 2013.

Fair Value Measurements Using Significant Unobservable
Inputs (Level 3)
	Total		Corporate bonds
	(Dollars in thousands)
Beginning balance, January 1, 2014	$	110		110
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales		-		-
Other-than-temporary impairment		-		-
Included in other comprehensive income		2		2
Purchases, sales, issuances and settlements
Purchases		-		-
Sales, Calls		-		-
Issuances		-		-
Settlements		-		-
Principal repayments		-		-
Transfers into Level 3		-		-
Transfers out of Level 3		-		-
Ending balance, December 31, 2014	$	112		112

Fair Value Measurements Using Significant Unobservable
Inputs (Level 3)
	Total			Other CMO			Corporate bonds
	(Dollars in thousands)
Beginning balance, January 1, 2013	$	1,684			1,576			108
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales		129			129			-
Other-than-temporary impairment		-			-			-
Included in other comprehensive income		42			40			2
Purchases, sales, issuances and settlements
Purchases		-			-			-
Sales, Calls		(1,620	)		(1,620	)		-
Issuances		-			-			-
Settlements		-			-			-
Principal repayments		(125	)		(125	)		-
Transfers into Level 3		-			-			-
Transfers out of Level 3		-			-			-
Ending balance, December 31, 2013	$	110		$	-			110

111

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

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

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

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

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

The following tables present quantitative information about level 3 fair value measurements at December 31, 2014 and 2013.

	Dec. 31,		Valuation	Unobservable	Range
	2014		Technique	Inputs	(Weighted Avg)
	(Dollars in thousands)
Available-for-sale securities Corporate bonds		112	discounted cash flow	yield	10.00%
	Dec. 31,		Valuation	Unobservable	Range
		2013	Technique	Inputs	(Weighted Avg)
	(Dollars in thousands)
Available-for-sale securities Corporate bonds		110	discounted cash flow	yield	10.00%

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

112

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

The following table summarizes changes in unrealized gains and losses recorded in earnings for the twelve months ended December 31, 2014, 2013 and 2012 for Level 3 assets that are still held at December 31, 2014, 2013 and 2012.

			Other CMO
	2014		2013		2012
	(Dollars in thousands)
Changes in unrealized gains (losses) included in earnings	$	-	$	-	$	(9	)
Other changes in fair value		-		-		-
	$	-	$	-	$	(9	)

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2014 and 2013 are summarized below.

	December 31,		Quoted Prices in Active Markets for  Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans (1)
Commercial, financial and agricultural	$	2,582		-		-		2,582
Real estate:
Commercial		2,166		-		-		2,166
Residential		1,421		-		-		1,421
Acquisition, development and construction		5,352		-		-		5,352
Consumer installment		2		-		-		2
	$	11,523		-		-		11,523
Other real estate owned
Real estate:
Commercial	$	144		-		-		144
Acquisition, development and construction		435		-		-		435
	$	579		-		-		579
	$	12,102		-		-		12,102

(1) Includes loans directly charged down to fair value

113

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans
Real estate:
Commercial	$	939		-		-		939
Residential		2,505		-		-		2,505
Acquisition, development and construction		5,691		-		-		5,691
	$	9,135		-		-		9,135
Other real estate owned
Real estate:
Commercial	$	149		-		-		149
	$	149		-		-		149
	$	9,284		-		-		9,284

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 $11,730, with a valuation allowance of $207, resulting in an additional provision for loan losses of $2,038 for the year ended December 31, 2014.

As of December 31, 2013, impaired loans had a recorded investment of $9,135, resulting in an additional provision for loan losses of $2,879 for the year ending 2013.

Other real estate owned, which is carried at fair value less costs to sell, was $579 which consisted of the outstanding balance of $896, less a valuation allowance of $317, resulting in a write down of $266 for the year ending 2014.

As of December 31, 2013, other real estate owned was $149 which consisted of the outstanding balance of $200, less a valuation allowance of $51, resulting in a write down of $51 for the year ending 2013.

114

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

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 December 31, 2014 and 2013.

		Dec. 31,	Valuation	Unobservable	Range
		2014	Techniques	Inputs	(Weighted Avg)
		(Dollars in thousands)
Impaired loans
	Commercial, financial and agricultural	2,582	sales comparison	adjustment for	7.00% - 50.00% (28.50%)
				differences between
				the comparable sales
			income approach	capitalization rate	9.39%
			liquidation value
	Real estate:
	Commercial	2,166	sales comparison	adjustment for	0.00% - 70.99% (19.92%)
				differences between
				the comparable sales
			income approach	capitalization rate	8.25% - 10.00% (8.97%)
			liquidation value
	Residential	1,421	sales comparison	adjustment for	1.30% - 24.46% (7.24%)
				differences between
				the comparable sales
	Acquisition, development and construction	5,352	sales comparison	adjustment for	0.00% - 161.40% (28.55%)
				differences between
				the comparable sales
			income approach	discount rate	9.50% - 10.00% (9.69%)
	Consumer installment	2	liquidation value
Other real estate owned
	Real estate:
	Commercial	144	sales comparison	adjustment for	0.00% - 25.00% (12.50%)
				differences between
				the comparable sales
	Acquisition, development and construction	435	sales comparison	adjustment for	5.00% - 60.00% (27.12%)
				differences between
				the comparable sales

115

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

		Dec. 31,	Valuation	Unobservable	Range
		2013	Techniques	Inputs	(Weighted Avg)
		(Dollars in thousands)
Impaired loans
	Real estate:
	Commercial	939	sales comparison	adjustment for	0.00% - 70.99% (20.38%)
				differences between
				the comparable sales
			income approach	capitalization rate	9.00%
	Residential	2,505	sales comparison	adjustment for	0.00% - 18.76% (6.85%)
				differences between
				the comparable sales
	Acquisition, development and construction	5,691	sales comparison	adjustment for	0.00% - 65.00% (20.85%)
				differences between
				the comparable sales
			income approach	discount rate	12.00%
			income approach	capitalization rate	7.25%
Other real estate owned
	Real estate:
	Commercial	149	sales comparison	adjustment for	5.00% - 50.00% (27.50%)
				differences between
				the comparable sales

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

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

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

116

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

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 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.

117

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

(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 December 31, 2014 and 2013, not previously presented, are as follows:

	December 31, 2014
	Carrying		Fair Value Measurements
	amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	35,995		35,995		35,995		-		-
Loans, net		929,327		925,997		-		-		925,997
Restricted equity securities		4,398		N/A
Financial liabilities:
Deposits with stated maturities		375,808		376,607		-		376,607		-
Deposits without stated maturities		1,088,056		1,088,056		1,088,056		-		-
Securities sold under repurchase agreements		10,678		10,678		10,678		-		-
Advances from FHLB		64,000		67,551		-		67,551		-
Subordinated debentures		20,000		14,886		-		-		14,886

118

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

	December 31, 2013
	Carrying		Fair Value Measurements
	amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	47,336		47,336		47,336		-		-
Loans, net		870,169		869,348		-		-		869,348
Restricted equity securities		4,870		N/A
Financial liabilities:
Deposits with stated maturities		377,996		379,247		-		379,247		-
Deposits without stated maturities		1,076,807		1,076,807		1,076,807		-		-
Securities sold under repurchase agreements		808		808		808		-		-
Advances from FHLB		64,000		68,309		-		68,309		-
Subordinated debentures		21,547		16,258		-		-		16,258

Note 7 – Premises and Equipment

Premises and equipment at December 31, 2014 and 2013 are summarized as follows:

	2014		2013
	(Dollars in thousands)
Land	$	9,109	$	8,402
Buildings		24,620		24,654
Furniture and equipment		16,278		18,482
		50,007		51,538
Less accumulated depreciation		22,165		24,535
	$	27,842	$	27,003

Depreciation expense amounted to $2,061, $1,869 and $2,101, in 2014, 2013 and 2012, respectively.

119

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

Note 8 – Commitments

The Company is committed under various operating leases for office space and equipment.  At December 31, 2014, minimum future lease payments under non-cancelable real property and equipment operating leases are as follows:

	(Dollars in thousands)
2015	$	298
2016		239
2017		144
2018		73
2019		-
2020 & Beyond		-
	$	754

Rent and lease expense for all building, equipment, and furniture rentals totaled $237, $258, and $280, for the years ended December 31, 2014, 2013, and 2012, respectively.

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 follows the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Unfunded commitments to extend credit where contract amounts represent potential credit risk totaled $171,911 and $188,919, at December 31, 2014 and 2013, respectively. This includes standby letters of credit of $5,730 at December 31, 2014 and $4,050 at December 31, 2013.  These commitments are primarily at variable interest rates. Fixed rate commitments totaled $36,924 and $50,202 at December 31, 2014 and 2013, respectively.  The rates on these commitments ranged from 1.90% to 16.00% at December 31, 2014 and at December 31, 2013.  Maturity dates ranged from 1/2/2015 to 7/21/2024, at December 31, 2014, and 1/2/2014 to 7/21/2024 at December 31, 2013.

Lines of credit are legally binding contracts to lend to a customer, as long as there is no violation of any condition established in the contract. These commitments have fixed termination dates and generally require payment of a fee.  As commitments often expire prior to being drawn, the amounts above do not necessarily represent the future cash requirements of the commitments.  Credit worthiness is evaluated on a case by case basis, and if necessary, collateral is obtained to support the commitment.

120

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

Note 9 – Deposits

Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at December 31, 2014 and 2013 totaled $58,396 and $70,133, respectively.

At December 31, 2014, scheduled maturities of certificates of deposit are as follows:

	Dollars in thousands
2015	$	179,775
2016		102,371
2017		66,551
2018		17,913
2019		8,226
Thereafter		972
Total	$	375,808

Brokered deposits as of December 31, 2014 and 2013 totaled $188,094 and $161,706, respectively.

Note 10 – Borrowings

Securities Sold Under Repurchase Agreements

The securities sold under repurchase agreements are collateralized by obligations of the U.S. Government or its corporations and agencies, state and municipal securities, corporate bonds, or mortgage-backed securities. The aggregate carrying value of such agreements for corporate customers at December 31, 2014 and 2013 was $15,448 and $1,755, respectively.  The repurchase agreements at December 31, 2014 mature on demand.  The following table summarizes pertinent data related to the securities sold under the agreements to repurchase as of and for the years ended December 31, 2014, 2013 and 2012.

	2014			2013			2012
	(Dollars in thousands)
Securities Sold Under Repurchase Agreements
Weighted average borrowing rate at year-end		0.40	%		0.40	%		0.40	%
Weighted average borrowing rate during the year		0.41	%		0.50	%		0.63	%
Average daily balance during the year	$	1,206			1,247			1,895
Maximum month-end balance during the year		10,711			10,718			10,745
Balance at year-end		10,678			808			976

121

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

Advances from Federal Home Loan Bank

The Company has an available line of credit from the Federal Home Loan Bank of Atlanta (FHLB) in an amount not to exceed 10% of total assets.  The line of credit is reviewed annually by the FHLB.  The following advances were outstanding under this line at December 31, 2014 and 2013.

	2014			Rate			2013			Rate
	(Dollars in thousands)
Due January 18, 2017	$	15,000			1.290	%	$	15,000			1.290	%
Due July 17, 2017		10,000			1.033	%		10,000			1.033	%
Due July 26, 2017		10,000			4.406	%		10,000			4.406	%
Due January 31, 2018		10,000			2.475	%		10,000			2.475	%
Due January 27, 2019 convertible flipper		5,000			4.100	%		5,000			4.100	%
Due April 22, 2019 convertible flipper		8,000			4.750	%		8,000			4.750	%
Due May 22, 2019  convertible flipper		6,000			4.680	%		6,000			4.680	%
	$	64,000					$	64,000
Total weighted average rate		2.89	%					2.89	%

The FHLB has the option to convert the fixed-rate advances and convertible advances to three-month, LIBOR-based floating-rate advances at various dates throughout the terms of the advances.

122

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

At December 31, 2014, the Company has pledged, under a blanket floating lien, eligible first mortgage loans with unpaid balances which, when discounted at approximately 79% of such unpaid principal balances, total $116,786.  The Company has also pledged for this lien eligible commercial real estate loans with unpaid balances which, when discounted at approximately 56% of such unpaid principal balances, total $51,138.

Other Borrowed Funds

The Company maintains a borrowing facility at the Federal Reserve Bank, under the Borrower-In-Custody Program, which had $0 outstanding at December 31, 2014 and 2013.  The borrowing capacity is based upon the loan collateral value.  At December 31, 2014, the Company pledged eligible loans with unpaid balances, which when discounted at approximately 76% of such unpaid principal balances, total $65,393.

Note 11 – Subordinated Debentures

In December 2005 the Company issued $10,000 of unsecured subordinated debentures to Southeastern Bank Financial Statutory Trust I (“Trust I”) and in March 2006 the Company issued $10,000 of unsecured subordinated debentures to Southeastern Bank Financial Trust II (“Trust II”).  These debentures bear interest at three-month LIBOR plus 1.40% (1.64% at December 31, 2014), adjusted quarterly.  Trust I and Trust II are wholly owned subsidiaries of the Company, but are not considered the primary beneficiaries of these trusts (variable interest entities); therefore, the trusts are not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.  Trust I and Trust II acquired these debentures using the proceeds of their offerings of $10,000 of Trust Preferred Securities to outside investors.  The Trust Preferred Securities qualify as Tier 1 capital under Federal Reserve Board guidelines up to certain limits and accrue and pay distributions quarterly at a variable per annum rate of interest, reset quarterly, equal to LIBOR plus 1.40% of the stated liquidation amount of $1 thousand dollars per Capital Security.  The Company has entered into contractual arrangements which constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of Trust I and Trust II under the Trust Preferred Securities.

The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on December 15, 2035 and June 15, 2036, or upon earlier redemption as provided in the indenture.  The Company has the right to redeem the debentures purchased by Trust I and Trust II in whole or in part at any time. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be 100% of their principal amount plus accrued and unpaid interest.

123

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

In May 2009 the Company issued a $2,947 unsecured subordinated debenture, which bears interest at a rate of 8.0% per annum, to a related party, R.W. Pollard Enterprises, LLLP.  The Company is not considered the primary beneficiary of this entity (variable interest entity); therefore, the entity is not consolidated in the Company’s financial statements, but rather the subordinated debenture is shown as a liability.  The Company used the proceeds to increase capital at the Bank.  The debenture matured on May 14, 2014 but the Company had the right to redeem the debenture, in whole or in part, at any time after May 14, 2012.  As specified in the indenture, if the debenture was redeemed prior to maturity, the redemption price would be the principal amount plus any accrued and unpaid interest.   On May 14, 2012, the Company redeemed $1,400 of the debenture and on May 14, 2014, the Company redeemed the remaining $1,547 upon maturity.

Note 12 – Income Taxes

Income tax (benefit) expense for the years ended December 31, 2014, 2013 and 2012 consists of the following:

	2014			2013		2012
	(Dollars in thousands)
Current tax (benefit) expense:
Federal	$	7,484		$	5,838	$	6,531
State		715			432		386
Total current		8,199			6,270		6,917
Deferred tax expense (benefit)
Federal		(606	)		761		(533	)
State		(111	)		116		102
Total deferred		(717	)		877		(431	)
Total income tax (benefit) expense	$	7,482		$	7,147	$	6,486

124

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

Income tax (benefit) expense differed from the amount computed by applying the statutory Federal corporate tax rate of 35% in 2014, 2013 and 2012 to income before income taxes as follows:

	Years ended December 31
	2014			2013			2012
	(Dollars in thousands)
Computed “expected” tax (benefit) expense	$	8,440		$	8,223		$	7,322
Increase (decrease) resulting from:
Tax-exempt interest income		(1,005	)		(1,040	)		(927	)
Nondeductible interest expense		32			33			35
State income tax, net of Federal tax effect		393			356			286
Earnings on cash surrender value of bank-owned life insurance		(407	)		(415	)		(389	)
Life insurance proceeds from bank-owned life insurance		—			(51	)		—
Nondeductible stock compensation expense		—			2			16
Meals, entertainment, and club dues		80			80			72
Other, net		(51	)		(41	)		71
	$	7,482		$	7,147		$	6,486

125

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 are presented below:

	2014			2013
	(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses	$	9,797		$	10,098
Deferred compensation		4,988			4,064
Writedowns of Other Real Estate		122			—
Fair value adjustment on cash flow hedge		762			299
Unrealized loss on investment securities available for sale		—			6,132
Other		868			872
Total deferred tax assets		16,537			21,465
Deferred tax liabilities:
Unrealized gain on investment securities available for sale		(807	)		—
Writedowns of Other Real Estate		—			(20	)
Depreciation		(115	)		(18	)
Prepaid assets and other		(181	)		(316	)
Other		(171	)		(88	)
Total deferred tax liabilities		(1,274	)		(442	)
Net deferred tax asset	$	15,263		$	21,023

A valuation allowance is required for deferred tax assets if, based on available evidence, it is more likely than not that all or some portion of the asset may not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the deferred tax asset.  In making this assessment, all sources of taxable income available to realize the deferred tax asset are considered including taxable income in prior carry-back years, future reversals of existing temporary differences, tax planning strategies and future taxable income exclusive of reversing temporary differences and carryforwards.  Based on management’s assessment, no valuation allowance was deemed necessary at December 31, 2014.

The Company and its subsidiary are subject to U.S. federal income tax as well as income tax of the state of Georgia and South Carolina.  The Company is no longer subject to examination by federal and state taxing authorities for years before 2011.

The total amount of interest and penalties related to income taxes recorded in the consolidated statements of comprehensive income for the year ended December 31, 2014, 2013 and 2012 was not material.

126

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

Note 13 – Related Party Transactions

Deposits include accounts with certain directors and executives of the Company, including affiliates, and principal holders of the Company’s securities.  As of December 31, 2014 and 2013, these deposits totaled approximately $23,336 and $34,478, respectively.  See Note 4 for discussion of related party loans and Note 11 for discussion of related party debt.

Note 14 – Regulatory Capital Requirements

The Company and its subsidiary are subject to various regulatory capital requirements administered by the Federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).  Management believes, as of December 31, 2014, that the Company meets all capital adequacy requirements to which it is subject.

As of December 31, 2014, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.  Management is not aware of the existence of any conditions or events occurring subsequent to December 31, 2014 which would affect the Bank’s well capitalized classification.

127

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

Actual capital amounts and ratios for the Company are presented in the following table as of December 31, 2014 and 2013, on a consolidated basis and for GB&T individually:

											To be well capitalized
						For capital adequacy					under prompt corrective
	Actual					purposes					action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Southeastern Bank Financial Corporation
As of December 31, 2014:
Total Capital (to risk-weighted assets)	$	189,832		16.23	%	$	93,586		8.00	%		N/A		N/A
Tier I Capital - risk-based (to risk-weighted assets)		175,075		14.97	%		46,793		4.00	%		N/A		N/A
Tier I Capital - leverage (to qtrly average assets)		175,075		9.86	%		71,039		4.00	%		N/A		N/A
As of December 31, 2013:
Total Capital (to risk-weighted assets)	$	175,918		15.44	%	$	91,124		8.00	%		N/A		N/A
Tier I Capital - risk-based (to risk-weighted assets)		161,530		14.18	%		45,562		4.00	%		N/A		N/A
Tier I Capital - leverage (to qtrly average assets)		161,530		9.37	%		68,977		4.00	%		N/A		N/A
Georgia Bank & Trust Company:
As of December 31, 2014:
Total Capital (to risk-weighted assets)	$	182,116		15.60	%	$	93,414		8.00	%	$	116,768		10.00	%
Tier I Capital - risk-based (to risk-weighted assets)		167,385		14.33	%		46,707		4.00	%		70,061		6.00	%
Tier I Capital - leverage (to qtrly average assets)		167,385		9.44	%		79,798		4.50	%		88,665		5.00	%
As of December 31, 2013:
Total Capital (to risk-weighted assets)	$	170,599		14.99	%	$	91,018		8.00	%	$	113,772		10.00	%
Tier I Capital - risk-based (to risk-weighted assets)		156,227		13.73	%		45,509		4.00	%		68,263		6.00	%
Tier I Capital - leverage (to qtrly average assets)		156,227		9.07	%		77,489		4.50	%		86,099		5.00	%

Southeastern Bank Financial Corporation and Georgia Bank and Trust Company are 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%) for banks and four percent (4.00%) for holding companies.  These ratios are shown in the preceding table as Tier 1 Capital – leverage (to quarterly average assets).  The Company’s ratio at 9.86% and the Bank’s ratio at 9.44% exceed the minimum required, at December 31, 2014.

Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies to 50% of the preceding year’s earnings.  Based on this limitation, the amount of cash dividends available for payment in 2015 from GB&T is approximately $8,702, subject to maintenance of the minimum capital requirements and compliance with other banking regulations regarding the payment of dividends.

128

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

 December 31, 2014, 2013 and 2012

Note 15 – Employee Benefit Plans

The Company has an employee savings plan (the Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.  Under the Plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit.  The Company has the option to make discretionary payments to the Plan. For the years ended December 31, 2014, 2013 and 2012, the Company contributed $874, $910 and $944, respectively, to the Plan, which is 5% of the annual salary of all eligible employees for 2014, 2013 and 2012.

Salary Continuation Agreements

The Company also has salary continuation agreements in place with certain key officers. Such agreements are structured with differing benefits based on the participant’s overall position and responsibility.  These agreements provide the participants with a supplemental income upon retirement at age 65, additional incentive to remain with the Company in order to receive these deferred retirement benefits and a compensation package that is competitive in the market.  These agreements vest over a ten year period, require a minimum number of years service, and contain change of control provisions.  All benefits would cease in the event of termination for cause, and if the participant’s employment were to end due to disability, voluntary termination or termination without cause, the participant would be entitled to receive certain reduced benefits based on vesting and other conditions.  The estimated cost of an annuity to pay this obligation is being accrued over the vesting period for each officer.  The Company recognized expense of $2,126, $324 and $2,249, during 2014, 2013 and 2012, respectively, related to these agreements.  The total amount accrued at December 31, 2014 and 2013 was $12,598 and $10,628, respectively.

The following tables set forth the status of the salary continuation agreements at December 31, 2014, 2013 and 2012.

	2014			2013			2012
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	10,628		$	10,404		$	8,226
Service cost		553			780			783
Interest cost		532			468			438
Cumulative effect of change in discount rate		1,041			(924	)		1,029
Benefits paid		(156	)		(100	)		(72	)
Projected benefit obligation at end of year	$	12,598		$	10,628		$	10,404

129

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Assumptions used to determine the benefit obligation at year end:

	2014			2013
Discount rate		4.50	%		5.25	%

Total contractual obligation at year end assuming no forfeitures or terminations:

	2014		2013
Full benefit	$	30,054	$	30,210
Vested benefit		21,395		20,286

At December 31, 2014 the estimated payments to be made over the next five years are as follows:

2015	$	125
2016		535
2017		662
2018		774
2019		806
	$	2,902

Note 16 – Stock-Based Compensation

The purpose of these plans is to enhance stockholder investment by attracting, retaining and motivating key employees, officers, directors and independent contractors of the Company, and to encourage stock ownership by such persons by providing them with a means to acquire a proprietary interest in the Company’s success, and to align the interests of management with those of stockholders.

Stock Option Plan

During 2000, the Company adopted the 2000 Long-Term Incentive Plan (the 2000 Plan) which allows for stock option awards for up to 278,300 shares of the Company’s common stock to employees and officers of the Company.  Under the provisions of the 2000 Plan, the option price is determined by a committee of the board of directors at the time of grant and may not be less than 100% of the fair value of the common stock on the date of the grant of such option.  Generally, when granted, these options vest over a five-year period.  However, there were 11,000 options granted in 2005, that vest based on specific loan growth performance targets.  All options must be exercised within a ten-year period.  As of December 31, 2007, all options under this plan had been issued.  As of December 31, 2014, due to employee terminations and expiration of granted options, 135,093 options have reverted back to the option pool and are available for re-granting as non-qualified options under the 2000 Plan.

130

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

During 2006, the Company adopted the 2006 Long-Term Incentive Plan (the 2006 Plan), approved by shareholders at the annual meeting, which allows for stock options awards for up to 275,000 shares of the Company’s common stock to key employees, officers, directors and independent contractors providing material services to the Company.  Under the provisions of the 2006 Plan, the option price is determined by a committee of the board of directors at the time of grant and may not be less than 100% of the fair value of the common stock on the date of the grant of such option.  Notwithstanding the foregoing, in the case of an Incentive Stock Option granted to a Participant who is a Ten Percent or more Stockholder, the Option Price shall not be less than one hundred and ten percent (110%) of the Fair Market Value of the Common Stock on the Date of Grant.  Generally, when granted, these options vest over a five-year period.  All options must be exercised within a ten year period from the date of the grant; however, options issued to a ten percent or more stockholder must be exercised within a five year period from its date of grant.  As of December 31, 2014 and 2013, total options, issued and outstanding, granted under this Plan were 83,967 and 88,967, respectively. As of December 31, 2014, 128,033 shares remain available for future grants under this Plan.

The Company periodically purchases treasury stock and may use it for stock option exercises, when available.  If treasury stock is not available, additional stock is issued.  The Company repurchased 1,282 shares of treasury stock during 2014 and did not repurchase shares of treasury stock during 2013.  The Company did not issue any shares of treasury stock or additional stock in relation to exercised stock options in 2014 and issued 2,420 shares of treasury stock in relation to exercised stock options in 2013.

The Company is required to compute the fair value of options at the date of grant and to recognize such costs as compensation expense ratably over the vesting period of the options.  For the year ended December 31, 2014, no expense was recognized.  For the years ended December 31, 2013 and 2012, the Company recognized $6 and $45, respectively, as compensation expense resulting from all stock options.

The fair value of each option is estimated on the date of grant using the Black-Scholes valuation model.  Expected volatility is the measure of the amount by which the share price is expected to fluctuate during a period.   The method used to calculate historical average annualized volatility is based on the closing price of the first trade of each month.  Expected dividends are based on the Company’s historical pattern of dividend payments.  The Company uses historical data to estimate option exercise and employee termination within the valuation model.  The risk-free rate is the U.S. Treasury note at the time of grant for the expected term of the option.

There were no stock options granted during 2014, 2013 and 2012.

131

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

A summary of activity for stock options with a specified vesting period follows:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
Options outstanding - December 31, 2013		139,750		$	33.79		2.59
Granted in 2014		-			-		-
Options exercised in 2014		-			-		-
Options lapsed in 2014		(5,000	)		28.35		-
Options expired in 2014		(5,500	)		26.36		-
Options Outstanding - December 31, 2014		129,250		$	34.32		1.59		-
Fully vested or expected to vest		129,250		$	34.32		1.59		-
Exercisable at December 31, 2014		129,250		$	34.32		1.59		-

Information related to the stock options that vest over a specified period follows:

	2014		2013		2012
	(Dollars in thousands, except per share data)
Intrinsic value of options exercised	$	—		3		—
Cash received from option exercises		—		43		—
Fair market value of stock received from option exercises		—		46		—

All stock options issued are incentive stock options and therefore, no tax benefit is realized.

As of December 31, 2014, there was no unrecognized compensation cost related to nonvested options that vest over a five year period.

132

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

The following table provides information for stock options that vest based on specific loan growth performance targets.

						Weighted
			Weighted			Average
			Average			Remaining		Aggregate
			Exercise			Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
Options outstanding - December 31, 2013		5,500		$	31.18		1.50		-
Options lapsed in 2014		-			-		-		-
Options Outstanding - December 31, 2014		5,500		$	31.18		0.50	$	-
Exercisable at December 31, 2014		2,750		$	31.18		0.50	$	-

As of December 31, 2014 and December 31, 2013, there was no unrecognized compensation cost related to nonvested options granted based on performance.

Restricted Stock Award Plan

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

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

A summary of changes in the Company’s nonvested shares for the year ended December 31, 2014 is as follows:

			Weighted Avg
	Number of		Grant-Date
	Shares		Fair Value
Nonvested at January 1, 2014		-	$	-
Granted		63,000		21.60
Vested		-		-
Forfeited		-		-
Nonvested at December 31, 2014		63,000	$	21.60

As of December 31, 2014, there was $972 of total unrecognized compensation cost related to nonvested shares granted under the Plan.  The cost is being recognized over a period of thirty-five months.

133

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Note 17 – Other Operating Expenses

Components of other operating expenses exceeding 1% of total revenues include the following for the years ended December 31, 2014, 2013, and 2012:

	2014		2013		2012
	(Dollars in thousands)
Marketing and business development	$	1,840	$	1,821	$	1,661
Processing expense		3,015		2,127		1,949
Legal and professional fees		1,980		1,552		1,561
Data processing expense		1,484		1,566		1,472
FDIC Insurance		1,047		1,147		1,517
Loan costs (excluding ORE)		1,263		1,333		986
Communication expense		937		816		724
Other expense		2,647		2,561		2,430
Total other operating expense	$	14,213	$	12,923	$	12,300

Note 18 – 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.

134

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Summary information about the interest rate swaps designated as cash flow hedges as of December 31, 2014 and December 31, 2013 is as follows:

	December 31, 2014			December 31, 2013
	(Dollars in thousands)
Notional Amounts	$	10,000		$	10,000
Weighted average pay rates		5.35	%		5.35	%
Weighted average receive rates		1.64	%		1.64	%
Weighted average maturity	14.08 years			15.08 years
Unrealized losses	$	1,959		$	768

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 $376, $372 and $237 at December 31, 2014, 2013 and 2012, 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 December 31, 2014, the Company had pledged $2,085 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 December 31, 2014, no collateral had been received from the counterparty.

135

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Note 19 – Parent Company Only Condensed Financial Statements

The following represents Parent Company only condensed financial information of Southeastern Bank Financial Corporation:

Condensed Balance Sheets

	December 31
	2014		2013
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	6,759		6,209
Investment in banking subsidiaries		168,793		146,735
Premises and equipment, net		586		631
Deferred tax asset, net		983		353
Income tax receivable		158		-
Other assets		24		23
	$	177,303		153,951
Liabilities and Stockholders’ Equity
Liabilities:
Interest rate swap derivatives	$	1,959		768
Accrued interest and other liabilities		58		67
Subordinated debentures		20,000		21,547
Total liabilities		22,017		22,382
Stockholders’ equity		155,286		131,569
	$	177,303		153,951

136

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Condensed Statements of Income
	Years ended December 31
	2014			2013			2012
	(Dollars in thousands)
Income:
Dividend income	$	6,310			4,211			4,062
Interest income on interest-bearing deposits in other banks		1			2			4
Miscellaneous income		102			102			102
		6,413			4,315			4,168
Expense:
Interest expense		763			846			792
Salaries and other personnel expense		389			-			-
Occupancy expense		59			60			59
Other operating expense		160			145			138
		1,371			1,051			989
Income before equity in undistributed earnings of banking subsidiaries		5,042			3,264			3,179
Equity in undistributed earnings of banking subsidiaries		11,104			12,722			10,913
Income tax benefit		(486	)		(360	)		(343	)
Net income	$	16,632			16,346			14,435

137

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Condensed Statements of Cash Flows
	Year Ended December 31
	2014			2013			2012
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	16,632			16,346			14,435
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		45			45			45
Deferred income tax benefit		(166	)		-			(54	)
Equity in undistributed earnings of banking subsidiaries		(11,104	)		(12,722	)		(10,913	)
Stock-based compensation expense		389			-			-
Decrease in accrued interest payable and other liabilities		(10	)		(4	)		(35	)
(Increase) decrease in other assets		(159	)		629			(250	)
Net cash provided by operating activities		5,627			4,294			3,228
Cash flows from financing activities:
Payments of subordinated debentures		(1,547	)		-			(1,400	)
Purchase of treasury stock		(31	)		-			(83	)
Payment of cash dividends		(3,499	)		(2,605	)		-
Proceeds from stock options exercised, net of stock redeemed		-			43			-
Net cash used in financing activities		(5,077	)		(2,562	)		(1,483	)
Net increase in cash and cash equivalents		550			1,732			1,745
Cash and cash equivalents at beginning of year		6,209			4,477			2,732
Cash and cash equivalents at end of year	$	6,759			6,209			4,477

138

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Note 20 – 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 table presents a summary of the accumulated other comprehensive income balances, net of tax.

	Unrealized			Unrealized			Accumulated Other
	Gain (Loss) on			Gain (Loss) on			Comprehensive
	Derivatives			Securities			Income (Loss)
	(Dollars in thousands)
Balance, December 31, 2011	$	(1,382	)	$	5,018		$	3,636
Current Year change		(94	)		4,410			4,316
Balance, December 31, 2012	$	(1,476	)	$	9,428		$	7,952
Current Year change		1,007			(19,060	)		(18,053	)
Balance, December 31, 2013	$	(469	)	$	(9,632	)	$	(10,101	)
Current Year change		(728	)		10,900			10,172
Balance, December 31, 2014	$	(1,197	)	$	1,268		$	71

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

	Years Ended December 31,
	2014			2013			2012
	Amount reclassified			Amount reclassified			Amount reclassified
Details about Accumulated	from Accumulated			from Accumulated			from Accumulated			Affected line item in the
Other Comprehensive Income	Other Comprehensive			Other Comprehensive			Other Comprehensive			Statement where Net Income is
Components	Income			Income			Income			presented
(Dollars in thousands)
Unrealized gains and losses on
available-for-sale securities
	$	825		$	(895	)	$	321		Realized gain (loss) on sale of securities
		-			-			(9	)	Impairment expense
		825			(895	)		312		Total before tax
	$	(256	)	$	272		$	(97	)	Tax (expense) benefit
	$	569		$	(623	)	$	215		Net of tax

139

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

Note 21 – Quarterly Financial Data (Unaudited)

The supplemental quarterly financial data for the years ended December 31, 2014 and 2013 is summarized as follows:

	Quarters ended
	March 31,		June 30,		September 30,		December 31,
	2014		2014		2014		2014
	(Dollars in thousands)
Interest income	$	14,829		15,277		15,243		15,601
Interest expense		2,257		2,247		2,187		2,195
Net interest income		12,572		13,030		13,056		13,406
Provision for loan losses		1,057		1,011		876		548
Noninterest income		4,091		4,523		5,216		5,200
Noninterest expense		10,113		10,641		11,055		11,679
Net income		3,806		4,044		4,382		4,400
Net income per share - basic		0.57		0.61		0.66		0.66
Net income per share - diluted		0.57		0.60		0.65		0.66

	Quarters ended
	March 31,		June 30,		September 30,		December 31,
	2013		2013		2013		2013
	(Dollars in thousands)
Interest income	$	15,689		15,662		15,556		15,407
Interest expense		2,500		2,360		2,326		2,328
Net interest income		13,189		13,302		13,230		13,079
Provision for loan losses		1,745		2,414		1,887		1,392
Noninterest income		4,814		5,226		4,862		3,595
Noninterest expense		10,761		10,288		10,214		9,103
Net income		3,776		4,002		4,202		4,366
Net income per share - basic		0.57		0.60		0.63		0.65
Net income per share - diluted		0.57		0.60		0.63		0.65

140

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.   Controls and Procedures

As of the end of the period covered by this report, our management, including our Chief Executive Officer and Chief Financial Officer, reviewed and evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer 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.  During the fourth quarter of 2014, there were no significant changes in the Company’s internal controls that materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

141

Management’s Report on Internal Control over Financial Reporting

The management of Southeastern Bank Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  Internal control over financial reporting is a process designed to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with appropriate management authorization and accounting records are reliable for the preparation of financial statements in accordance with generally accepted accounting principles.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Southeastern Bank Financial Corporation’s internal control over financial reporting as of December 31, 2014.  In making our assessment, management has utilized the framework published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in the 2013 “Internal Control-Integrated Framework”.  Based on our assessment, management has concluded that, as of December 31, 2014, internal control over financial reporting was effective. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by Crowe Horwath LLP, an independent registered public accounting firm, as stated in their report which is included herein.

/s/ R. Daniel Blanton

Chief Executive Officer

(principal executive officer)

/s/ Ronald L. Thigpen

President and Chief Operating Officer

/s/ Darrell R. Rains

Chief Financial Officer

(principal financial officer)

Date:  February 27, 2015

142

Report of Independent Registered Public Accounting Firm on Internal Control

Over Financial Reporting

We have audited Southeastern Bank Financial Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Southeastern Bank Financial Corporation’s  management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, included in Item 9.A. of the Company’s Annual Report on Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Southeastern Bank Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

143

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Southeastern Bank Financial Corporation as of December 31, 2014 and 2013 and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014, and our report dated February 27, 2015 expressed an unqualified opinion on those consolidated financial statements.

/s/ Crowe Horwath LLP

Franklin, Tennessee

February 27, 2015

144

Item 9B.  Other Information

None.

PART III

Item 10.  Directors and Executive Officers and Corporate Governance

The Company has adopted a Code of Ethics applicable to its senior financial officers. A copy is available, without charge, upon telephonic or written request addressed to Ronald L. Thigpen, President, Chief Operating Officer and Assistant Corporate Secretary, Southeastern Bank Financial Corporation, 3530 Wheeler Road, Augusta, Georgia 30909, telephone (706) 738-6990.  The Code of Ethics is also incorporated by reference as an exhibit to this Annual Report on Form 10-K. The remaining information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2015 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2015).

Item 11.  Executive Compensation

Information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2015 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2015).

145

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table provides information regarding compensation plans under which equity securities of the Company are authorized for issuance. All data is presented as of December 31, 2014.

Equity Compensation Plan Table
	(a)		(b)			(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		134,750		$	34.19		263,126
Equity compensation plans not approved by security holders		0			0		0
TOTAL		134,750		$	34.19		263,126

Additional information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2015 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2015).

Item 13.  Certain Relationships and Related Transactions, and Director Independence

Information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2015 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2015).

Item 14.  Principal Accountant Fees and Services

Information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2015 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the Commission not later than April 30, 2015).

146

PART IV

Item 15.  Exhibits and Financial Statement Schedules

(a)(1)	See Item 8 for a list of the financial statements as filed as a part of this report.
(2)	No financial statement schedules are applicable as the required information is included in the financial statements in Item 8.
(3)	The following exhibits are filed as part of this report. Documents incorporated by reference have been filed with the Securities and Exchange Commission. The Company’s Commission file number is: 0-24172. See “Item 1 - Description of Business – General” for additional information regarding the Company’s filings with the Commission.

 Exhibit No. and Document

3.1	Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)
3.2	Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)
4.1	Indenture  dated  December 5, 2005 between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 8, 2005.)
4.2	Indenture dated March 31, 2006 between the Company and La Salle Bank National Association (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 6, 2006.)
10.1	Key Officer Compensation Agreement dated January 1, 2000 between the Bank & R. Daniel Blanton (Incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)*
10.2	First Amendment dated October 15, 2003 to Key Officer Compensation Agreement dated January 1, 2000 between the Bank and R. Daniel Blanton. (Incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)*

147

10.3	Second Amendment dated December 31, 2008 to Key Officer Compensation Agreement dated January 1, 2000 between the Bank and R. Daniel Blanton (Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*
10.4	Key Officer Compensation Agreement dated January 1, 2000 between the Bank & Ronald L. Thigpen (Incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)*
10.5	First Amendment dated October 15, 2003 to Key Officer Compensation Agreement dated January 1, 2000 between the Bank and Ronald L. Thigpen (Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)*
10.6	Second Amendment dated December 31, 2008 to Key Officer Compensation Agreement dated January 1, 2000 between the Bank and Ronald L. Thigpen (Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*
10.7	2006 Long-term Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)*
10.8	Form of incentive stock option agreement under the 2006 Long-term Incentive Plan (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)*
10.9	Form of non-qualified stock option agreement under the 2006 Long-term Incentive Plan (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)*
10.10	2000 Long Term Incentive Plan (Incorporated by reference to Appendix A to the Company’s definitive Proxy Statement, filed on March 29, 2001.)*
10.11	Form of option agreement under 2000 Long Term Incentive Plan. (Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*

148

10.12	1997 Long-term Incentive Plan. (Incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*
10.13	Form of stock appreciation rights agreement under 1997 Long-term Incentive Plan. (Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*
10.14	Non-Qualified Defined Benefit Plan dated October 1, 2000.  (Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.)*
10.15	Salary Continuation Agreement dated October 1, 2000 between the Company, the Bank and R. Daniel Blanton.  (Incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.)*
10.16	First Amendment dated as of October 15, 2003 to Salary Continuation Agreement dated October 1, 2000 between the Company, the Bank and R. Daniel Blanton. (Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)*
10.17	Salary Continuation Agreement dated October 15, 2003 between the Company, the Bank and Ronald L. Thigpen.  (Incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.)*
10.18	Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between the Bank and R. Daniel Blanton (Incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*
10.19	Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between the Bank and Ronald L. Thigpen (Incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*
10.20	Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between the Bank and Darrell R. Rains (Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*

149

10.21	First Amendment dated March 30, 2009 to Supplemental Executive Retirement Benefits Agreement between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.)*
10.22	Second Amendment dated February 11, 2010 to Supplemental Executive Retirement Benefits Agreement between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.)*
10.23	Third Amendment dated March 21, 2011 to Supplemental Executive Retirement Benefits Agreement between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.)*
10.24	Employment Agreement dated April 30, 2007 between the Bank and  Darrell R. Rains. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 4, 2007.)*
10.25	First Amendment dated December 31, 2008 to Employment Agreement dated April 30, 2007 between the Bank and Darrell R. Rains (Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*
10.26	Southeastern Bank Financial Corporation Director Stock Purchase Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 27, 2007.)
10.27	Fourth Amendment dated March 5, 2013 to Supplemental Executive Retirement Benefits Agreement between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 11, 2013.)*
14.1	Code of Ethics (Incorporated by reference to Exhibit 14.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.)
21.1	Subsidiaries of the Company (Incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.)
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Certification by the Chief Executive Officer (principal executive officer)
31.2	Certification by the Chief Financial Officer (principal financial officer)
32.1	Certification by the Chief Executive Officer and Chief Financial Officer

150

101 Interactive Data Files providing financial information from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 in XBRL (eXtensible Business Reporting Language).

* Denotes a management compensatory agreement or arrangement.

151

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SOUTHEASTERN BANK FINANCIAL CORPORATION

By:	/s/ Robert W. Pollard, Jr.
Robert W. Pollard, Jr.
Chairman of the Board

February 27, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.

February 27, 2015

SIGNATURE		TITLE
	/s/ Robert W. Pollard, Jr.	Chairman of the Board
Robert W. Pollard, Jr.		and Director

	/s/ Randolph R. Smith, M.D.	Vice Chairman of the Board
Randolph R. Smith, M.D.		and Director

	/s/ R. Daniel Blanton	Chief Executive Officer
R. Daniel Blanton		and Director (Principal Executive Officer)

	/s/ Ronald L. Thigpen	President, Chief
Ronald L. Thigpen		Operating Officer and Director

	/s/ Darrell R. Rains	Group Vice President and Chief
Darrell R. Rains		Financial Officer (Principal Financial and Accounting Officer)

	/s/ William J. Badger	Director
William J. Badger

152

	/s/ Warren A. Daniel	Director
Warren A. Daniel

	/s/ Edward G. Meybohm	Director
Edward G. Meybohm

	/s/ John W. Trulock, Jr.	Director
John W. Trulock, Jr.

	/s/ Patrick D. Cunning	Director
Patrick D. Cunning

	/s/ Larry S. Prather, Sr.	Director
Larry S. Prather, Sr.

153

EXHIBIT INDEX

(a) Exhibits

3.1	Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)
3.2	Bylaws of the Company (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)
4.1	Indenture  dated  December 5, 2005 between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 8, 2005.)
4.2	Indenture dated March 31, 2006 between the Company and La Salle Bank National Association (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 6, 2006.)
10.1	Key Officer Compensation Agreement dated January 1, 2000 between the Bank & R. Daniel Blanton (Incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)*
10.2	First Amendment dated October 15, 2003 to Key Officer Compensation Agreement dated January 1, 2000 between the Bank and R. Daniel Blanton. (Incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)*
10.3	Second Amendment dated December 31, 2008 to Key Officer Compensation Agreement dated January 1, 2000 between the Bank and R. Daniel Blanton (Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*

154

10.4	Key Officer Compensation Agreement dated January 1, 2000 between the Bank & Ronald L. Thigpen (Incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)*
10.5	First Amendment dated October 15, 2003 to Key Officer Compensation Agreement dated January 1, 2000 between the Bank and Ronald L. Thigpen. (Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)*
10.6	Second Amendment dated December 31, 2008 to Key Officer Compensation Agreement dated January 1, 2000 between the Bank and Ronald L. Thigpen (Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*
10.7	2006 Long-term Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)*
10.8	Form of incentive stock option agreement under the 2006 Long-term Incentive Plan (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)*
10.9	Form of non-qualified stock option agreement under the 2006 Long-term Incentive Plan (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)*
10.10	2000 Long Term Incentive Plan (Incorporated by reference to Appendix A to the Company’s definitive Proxy Statement, filed on March 29, 2001.)*
10.11	Form of option agreement under 2000 Long Term Incentive Plan. (Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*

155

10.12	1997 Long-term Incentive Plan. (Incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*
10.13	Form of stock appreciation rights agreement under 1997 Long-term Incentive Plan. (Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.)*
10.14	Non-Qualified Defined Benefit Plan dated October 1, 2000.  (Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.)*
10.15	Salary continuation agreement dated October 1, 2000 between the Company, the Bank and R. Daniel Blanton.  (Incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.)*
10.16	First Amendment dated as of October 15, 2003 to Salary Continuation Agreement dated October 1, 2000 between the Company, the Bank and R. Daniel Blanton. (Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)*
10.17	Salary continuation agreement dated October 15, 2003 between the Company, the Bank and Ronald L. Thigpen.  (Incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.)*
10.18	Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between the Bank and R. Daniel Blanton (Incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*

156

10.19	Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between the Bank and Ronald L. Thigpen (Incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*
10.20	Supplemental Executive Retirement Benefits Agreement dated December 31, 2008 between the Bank and Darrell R. Rains (Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*
10.21	First Amendment dated March 30, 2009 to Supplemental Executive Retirement Benefits Agreement between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.)*
10.22	Second Amendment dated February 11, 2010 to Supplemental Executive Retirement Benefits Agreement between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.)*
10.23	Third Amendment dated March 21, 2011 to Supplemental Executive Retirement Benefits Agreement between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.)*
10.24	Employment Agreement dated April 30, 2007 between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 4, 2007.)*
10.25	First Amendment dated December 31, 2008 to Employment Agreement dated April 30, 2007 between the Bank and Darrell R. Rains (Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.)*

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10.26	Southeastern Bank Financial Corporation Director Stock Purchase Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 27, 2007.)
10.27	Fourth Amendment dated March 5, 2013 to Supplemental Executive Retirement Benefits Agreement between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 11, 2013.)*
14.1	Code of Ethics (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.)
21.1	Subsidiaries of the Company (Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.)
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Certification by the Chief Executive Officer (principal executive officer)
31.2	Certification by the Chief Financial Officer (principal financial officer)
32.1	Certification by the Chief Executive Officer and Chief Financial Officer
101	Interactive Data Files providing financial information from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 in XBRL (eXtensible Business Reporting Language).

* Denotes a management compensatory agreement or arrangement.

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