UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2015

 

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 x

 

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 x

 

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

 

Indicate by check mark whether the registrant 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 x 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. x

 

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 x	Smaller Reporting Company x

 

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

 

As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $95,555,565 based on the closing sale price of $29.95 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 22, 2016
Common Stock, $3 par value per share		6,746,328 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Document		Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 2016		Part III

 

  

 

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 $1,840,365, total deposits of $1,529,080 and total stockholders’ equity of $169,913 at December 31, 2015.

 

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.

 

 

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 346 full-time equivalent employees at December 31, 2015. 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, Executive 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 and Government Relations, 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.

 

 

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 2014 population of the Augusta-Richmond County, GA-SC MSA was 583,632, 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 Augusta University Medical Center, 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, 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 7.3% in 2014, down from 8.1% in 2013. Between June 2014 and June 2015 (the latest date for which FDIC information is available), total commercial bank and thrift deposits in the Augusta-Richmond County, GA-SC MSA increased 4.35% from $7,590,316 to $7,920,814. Based on data reported as of June 30, 2015, the Company has 19.45% 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.

 

 

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, 2015, were $1,027,796 or 59.50% 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 $780,019, or 77.29% of the Company’s total loans, at December 31, 2015. These loans consist of commercial real estate loans, construction and development loans, and residential real estate loans.

 

Commercial Real Estate Loans (“CRE loans”). At December 31, 2015, the Company held $366,566 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 36.32% of the Company’s total loans at December 31, 2015. 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 $2,234 in net charge-offs on commercial real estate loans during 2015. 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 $184,292, or 18.26% of the Company’s total loans at December 31, 2015. 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.

 

 

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, Sr. 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 $1,413 in net loan recoveries on construction and development loans during 2015 due to the repayment of a previously written-down impaired loan during the second quarter that resulted in a $1,666 recovery.

 

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 $2 in net loan recoveries on residential construction loans during 2015.

 

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, 2015. The following table details the loans and accompanying interest reserves as of December 31, 2015.

 

		December 31, 2015
						Reserves
		Balance				Original				Advanced				Remaining
		(Dollars in thousands)
Loan 1		$	5,987				62				62				-
Loan 2			3,640				100				19				81
Loan 3			942				35				2				33
Loan 4			7,953				100				41				59
Loan 5			321				35				1				34

 

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

 

 

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

 

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, 2015, the Company held $229,161 of such loans representing 22.71% of the Company’s loan portfolio. This portfolio typically includes 15 or 30-year 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. The Company experienced net loan charge-offs on residential loans of $352 during 2015.

 

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 freestanding 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 $24 and $6 as of December 31, 2015 and 2014, respectively. The Company had $18,647 of loans held for sale at December 31, 2015.

 

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, 2015, the Company held $210,712 of these loans, representing 20.88% of the total loan portfolio, excluding for these purposes commercial loans secured by real estate. See “Commercial 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. 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 commercial, financial and agricultural loans of $955 during 2015.

 

 

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, 2015, the Company held $18,584 of consumer loans, representing 1.84% 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 $383 during 2015.

 

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.

 

 

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, 2015.

 

Deposit Mix

 

		(Dollars in thousands)
Noninterest-bearing		$	229,002				14.98	%
NOW accounts			401,674				26.27	%
Savings			548,729				35.88	%
Money management accounts			16,330				1.07	%
Time deposits			333,345				21.80	%
		$	1,529,080				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 adjusted as needed 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.

 

 

Supervision and Regulation

 

Both the Company and GB&T are 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 GB&T.

 

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.

 

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.

 

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.

 

 

In 2013, the Federal Reserve Board of Governors and FDIC approved new regulatory capital requirements implementing Basel III’s higher minimum capital standards for banks and bank holding companies. The minimum guidelines for a bank to be classified as “adequately capitalized” include a ratio of total capital to risk-weighted assets of 8.0%, a ratio of Tier 1 capital to risk-weighted assets of 6.0%, a ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a leverage ratio of 4.5%.

 

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 10.0%, a ratio of Tier 1 capital to risk-weighted assets of 8.0%, a ratio of common equity Tier 1 capital to risk-weighted assets ratio of 6.5%, and a leverage ratio of 5.0% is classified as “well capitalized.” In addition, the new regulatory capital requirements impose a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and total capital risk-based capital requirements. Failure to maintain the required capital conservation buffer results in limitations on capital distributions and on discretionary bonuses to executive officers. As of December 31, 2015, GB&T was “well capitalized.”

 

The new risk-based capital requirements (except for the capital conservation buffer) became effective on January 1, 2015. The capital conservation buffer is being phased in over four years beginning on January 1, 2016.

 

In addition to the capital requirements applicable to banks, the Federal Reserve Board has established minimum capital guidelines for bank holding companies to be considered “adequately capitalized.” These guidelines provide for a minimum ratio of total capital to risk-weighted assets of 8.0%, a ratio of Tier 1 capital to risk-weighted assets of 6.0%, a ratio of common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, and a leverage ratio of 4.0%. The Federal Reserve considers these capital and leverage ratios and other indicators of capital strength in evaluating proposals for expansion or new activities.

 

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” below.

 

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 retained 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;

·

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.

 

As of December 31, 2015, 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. Those 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 probable incurred credit losses on individually evaluated loans determined to be impaired as well as probable incurred 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.”

 

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 multi-family 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 Consumer Financial Protection Bureau (the “CFPB”) 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 CFPB 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 CFPB and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against state-chartered institutions.

 

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 Act 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.

 

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.

 

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.

 

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, 2015, approximately 77.29% 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, 2015, we had a total of $360 of OREO as compared to $1,107 at December 31, 2014 and $1,014 at December 31, 2013. 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 2016. 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.

 

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, 2015 and 2014, 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.

 

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. Interest rate spreads (the difference between interest rates earned on assets and interest rates paid on liabilities) have generally narrowed 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.

 

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.

 

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 Federal Reserve, the FDIC, the GDBF, 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 CFPB has broad powers to supervise and enforce consumer protection laws. The CFPB has rulemaking 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” (“UDAAP”). The CFPB’s rulemaking authority includes administering and carrying 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. 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. 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.

 

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 subsidiary. See “Business — Supervision and Regulation — Payment of Dividends.”

 

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, 2015, 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 52.82% of our diluted outstanding common stock as of February 22, 2016. 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

 

 

Item 2. Properties

 

The Company currently operates a main office, eleven branches, leased space for its trust and retail investment office 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 leases 4,500 square feet of office space near its main office for its trust and retail investment operations.

 

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 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.

 

 

PART II

 

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

 

As of February 22, 2016, there were approximately 483 holders of record of the Company’s common stock. As of February 22, 2016, there were 6,746,328 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, 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
Quarter ended
March 31, 2015			26.00				29.00				0.15
June 30, 2015			27.80				33.50				0.15
September 30, 2015			29.75				33.00				0.15
December 31, 2015			32.00				33.25				0.15
Period ended
February 22, 2016			32.75				33.25				0.16

 

The Company declared cash dividends of $0.13 per share in each quarter of 2014 and $0.15 per share in each quarter of 2015, an increase of 15.38% from the previous rate. In the first quarter of 2016, the Company declared a cash dividend of $0.16 per share, an increase of 6.67% from the quarterly dividends paid in 2015. 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 retained 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.

 

 

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, 2015, 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.

 

There were no shares repurchased under an existing stock repurchase plan or otherwise during the fourth quarter of 2015.

 

The Company did not sell any of its equity securities without registration under the Securities Act of 1933, as amended, during 2015.

 

 

Item 6. Selected Financial Data

 

The selected consolidated financial data presented on the following page as of December 31, 2015 and 2014 and for each of the years in the three-year period ended December 31, 2015 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, 2013, 2012, and 2011, and for the periods ending December 31, 2012 and 2011 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.

 

 

Selected Consolidated Financial Data		2015				2014				2013				2012				2011
Earnings		(Dollars in thousands, except per share data)
Total interest income		$	62,484			$	60,950			$	62,314			$	63,670			$	67,640
Total interest expense			8,227				8,886				9,514				12,034				17,078
Net interest income			54,257				52,064				52,800				51,636				50,562
(Credit) Provision for loan losses			(1,628	)			3,492				7,438				8,141				12,584
Noninterest income			18,688				19,030				18,497				21,494				19,671
Noninterest expense			46,040				43,488				40,366				44,068				42,041
Net income			19,395				16,632				16,346				14,435				11,045
Per Share Data
Net income - Diluted		$	2.89			$	2.49			$	2.45			$	2.16			$	1.65
Book value			25.19				23.03				19.70				20.34				17.53
Cash dividends declared per common share			0.60				0.52				0.39				0.00				0.00
Weighted average common and common equivalent shares outstanding			6,716,369				6,690,423				6,678,914				6,678,215				6,676,774
Selected Average Balances
Assets		$	1,803,835			$	1,741,271			$	1,693,257			$	1,652,251			$	1,605,489
Total loans (net of unearned income)			966,651				942,636				880,565				847,872				860,936
Deposits			1,531,827				1,493,413				1,451,693				1,426,282				1,406,494
Stockholders' equity			163,415				144,740				135,219				126,605				107,980
Selected Year-End Balances
Assets		$	1,840,365			$	1,732,781			$	1,689,326			$	1,662,502			$	1,614,773
Loans (net of unearned income)			1,009,149				966,356				905,713				871,447				846,010
Allowance for loan losses			21,367				25,506				26,409				28,846				29,046
Deposits			1,529,080				1,463,864				1,454,803				1,421,272				1,419,222
Short-term borrowings			15,684				10,678				2,355				976				701
Long-term borrowings			105,000				84,000				84,000				85,547				61,947
Stockholders' equity			169,913				155,286				131,569				135,783				117,029
Selected Ratios
Return on average total assets			1.08	%			0.96	%			0.97	%			0.87	%			0.69	%
Return on average equity			11.87	%			11.49	%			12.09	%			11.40	%			10.23	%
Average earning assets to average total assets			92.85	%			93.30	%			93.20	%			92.61	%			92.34	%
Average loans to average deposits			63.10	%			63.12	%			60.66	%			59.45	%			61.21	%
Average equity to average total assets			9.06	%			8.31	%			7.99	%			7.66	%			6.73	%
Net interest margin			3.24	%			3.20	%			3.35	%			3.37	%			3.41	%
Operating efficiency			62.29	%			61.78	%			55.52	%			59.53	%			59.65	%
Net charge-offs to average loans			0.26	%			0.47	%			1.12	%			0.98	%			1.18	%
Allowance for loan losses to net loans (year-end)			2.12	%			2.64	%			2.92	%			3.31	%			3.43	%
Risk-based capital
Common Equity Tier 1 capital			13.40	%			N/A				N/A				N/A				N/A
Tier 1 capital			14.97	%			14.97	%			14.18	%			13.66	%			13.01	%
Total capital			16.22	%			16.23	%			15.44	%			14.96	%			14.39	%
Tier 1 leverage ratio			10.34	%			9.86	%			9.37	%			8.87	%			8.21	%

 

 

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 19.45% of all deposits and was the second largest depository institution and the largest locally based institution at June 30, 2015 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 2015 was $19,395 compared to $16,632 in 2014. Earnings were positively impacted by a $1,628 credit for loan losses, primarily due to the repayment of a previously written down impaired loan during the second quarter of 2015 that resulted in a $1,666 recovery. In addition, net interest income increased $2,193 and gain on sales of loans increased $1,130. These increases were partially offset by a $2,552 increase in noninterest expense and investment securities losses of $1,043 compared to gains of $825 in the prior year.

 

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. Despite declining yields, interest income on loans increased slightly due to increased volumes in the loan portfolio. Interest income on investment securities increased $916 or 6.34% due to increased volume and yields. In addition, gain on sales of mortgage loans increased $1,130 or 20.68% due to increased mortgage originations and refinancing activity in 2015.

 

The Company continues to focus on the net interest margin, regulatory capital requirements, liquidity management, risk mitigation and expense control. Problem asset resolution, new consumer disclosure regulations, upgrades to operating systems, balance sheet management and investment purchases have been key areas of focus in 2015.

 

Over the past four years, assets grew $225,592 from $1,614,773 at December 31, 2011 to $1,840,365 at December 31, 2015. From year end 2011 to year end 2015, deposits increased $109,858, and loans increased $163,139. Net interest income for the year ended 2011 was $50,562 compared to net interest income of $54,257 in 2015. On April 24, 2013, the Company reinstated quarterly cash dividends of $0.13 per share. On January 14, 2015, the Company increased the cash dividend to $0.15 per share and on January 20, 2016 increased quarterly cash dividends to $0.16 per share.

 

 

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 various simulations up and down 400 basis points (4.00%) and as it applies to economic value of equity in a shock up and down 400 basis points (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.

 

 

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, 2015 and December 31, 2014 the percentage of total assets measured at fair value was 39.16% and 38.95%, respectively. The majority of assets carried at fair value are based on either quoted market prices or market prices for similar instruments. At December 31, 2015, 1.46% of assets measured at fair value were based on significant unobservable inputs. This consisted primarily of impaired loans and other real estate owned. This represents approximately 0.57% 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, 2015, the Company had no securities valued using unobservable inputs (Level 3).

 

 

Results of Operations

 

The Company recorded net income of $19,395 in 2015 compared to $16,632 in 2014. The increase in net income is primarily attributable to a credit for loan losses of $1,628 compared to a provision for loan losses of $3,492 in 2014. In addition, net interest income increased $2,193 and gain on sales of loans increased $1,130. Partially offsetting these were a $2,552 increase in noninterest expense and investment securities losses of $1,043 compared to a gain of $825 in the prior year.

 

Interest income increased $1,534 or 2.52% to $62,484 in 2015. Interest income on tax-exempt investment securities increased $548 or 21.31% primarily due to an increase in average balance of $21,793 or 25.88%. Interest income on taxable investment securities increased $368 or 3.10% in 2015 caused primarily by an increase in yield. The average rate on taxable investments increased from 2.09% in 2014 to 2.16% in 2015, an increase of 7 basis points. Interest income on loans increased $447 from 2014 due to an increase in average balance partially offset by a decline in yield. Average loans increased from $942,636 in 2014 to $966,651 in 2015, an increase of $24,015 or 2.55%. The average rate on loans dropped from 4.86% in 2014 to 4.79% in 2015, a decrease of 7 basis points.

 

Interest expense decreased $659 or 7.42% to $8,227 in 2015. Interest expense on deposits decreased $462 or 7.39% to $5,790 and was due primarily to declines in rates paid on deposits and a $22,278 decline in average time deposits. Due to the low interest rate environment many customers have transferred out of time deposits to more liquid NOW and savings accounts. Brokered CDs decreased $28,914 or 15.37% and totaled $159,180 at year end 2015.

 

Noninterest income decreased $342 in 2015 and was due primarily to investment securities losses of $1,043, partially offset by increased gain on sales of loans of $1,130. Also offsetting the investment losses were increased service charges and deposit fees of $135, trust service fees, which increased $98, and cash surrender value of bank-owned life insurance, which increased $96.

 

Noninterest expense increased $2,552 or 5.87% in 2015 mostly due to a $1,337 increase in salaries and other personnel expense and a $955 prepayment penalty fee on an FHLB Advance. The operating efficiency ratio increased from 61.78% in 2014 to 62.29% in 2015.

 

The earnings performance of the Company is reflected in its return on average assets and average equity of 1.08% and 11.87%, respectively, during 2015 compared to 0.96% and 11.49%, respectively, during 2014. Basic and diluted net income per share on weighted average common shares outstanding increased to $2.89 in 2015 compared to $2.49 in 2014 and $2.45 in 2013.

 

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, 2015												Year Ended Dec. 31, 2014												Year Ended Dec. 31, 2013
		Average Amount				Average Yield or Rate				Amount Paid or Earned				Average Amount				Average Yield or Rate				Amount Paid or Earned				Average Amount				Average Yield or Rate				Amount Paid or Earned
		(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans		$	966,651				4.79	%		$	46,291			$	942,636				4.86	%		$	45,844			$	880,565				5.21	%		$	45,863
Loans held for sale			23,416				3.22	%			755				18,027				3.33	%			600				20,113				3.06	%			616
Investments
Taxable			566,652				2.16	%			12,236				566,706				2.09	%			11,868				571,532				2.26	%			12,918
Tax-exempt			106,000				2.94	%			3,119				84,207				3.05	%			2,571				88,012				3.23	%			2,846
Interest-bearing deposits in other banks			12,153				0.68	%			83				12,961				0.52	%			67				17,937				0.40	%			71
Total interest-earning assets			1,674,872				3.73	%			62,484				1,624,537				3.75	%			60,950				1,578,159				3.95	%			62,314
Cash and due from banks			53,682												53,048												47,160
Premises and equipment			27,741												27,333												26,167
Other			71,796												63,207												69,894
Allowance for loan losses			(24,256	)											(26,854	)											(28,123	)
Total assets		$	1,803,835											$	1,741,271											$	1,693,257
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts		$	393,129				0.27	%		$	1,073			$	374,024				0.28	%		$	1,048			$	354,827				0.31	%		$	1,086
Savings and money management accounts			554,991				0.29	%			1,622				538,005				0.31	%			1,661				536,734				0.35	%			1,889
Time deposits			363,407				0.85	%			3,095				385,685				0.92	%			3,543				386,045				0.99	%			3,819
Federal funds purchased / securities sold under repurchase agreements			2,464				0.49	%			12				1,206				0.41	%			5				1,247				0.48	%			6
Other borrowings			85,159				2.85	%			2,425				84,570				3.11	%			2,629				86,725				3.13	%			2,714
Total interest-bearing liabilities			1,399,150				0.59	%			8,227				1,383,490				0.64	%			8,886				1,365,578				0.70	%			9,514
Noninterest-bearing demand deposits			220,300												195,699												174,087
Other liabilities			20,970												17,342												18,373
Stockholders' equity			163,415												144,740												135,219
Total liabilities and stockholders' equity		$	1,803,835											$	1,741,271											$	1,693,257
Net interest spread							3.14	%											3.11	%											3.25	%
Benefit of noninterest sources							0.10	%											0.09	%											0.10	%
Net interest margin/income							3.24	%		$	54,257								3.20	%		$	52,064								3.35	%		$	52,800

 

2015 compared with 2014:

 

Interest earning asset yields declined 2 basis points from 3.75% in 2014 to 3.73% in 2015 while interest bearing liability rates declined 5 basis points from 0.64% in 2014 to 0.59% in 2015. As a result, the Company’s average interest rate spread improved to 3.14% in 2015 as compared to 3.11% in 2014. The year over year decline in asset yields and liability costs were a result of low market interest rates. These factors have contributed to an improvement in the net interest margin from 3.20% in 2014 to 3.24% in 2015.

 

Average interest earning assets increased $50,335 and was funded principally by an increase in average noninterest-bearing demand deposits of $24,601 and an increase in average interest bearing deposits of $13,813. Average interest-earning assets for 2015 were $1,674,872 or 92.85% of average total assets.

 

 

Interest income is the largest contributor to income and totaled $62,484 in 2015 compared to $60,950 in 2014, an increase of $1,534 or 2.52%. The largest component is interest income on loans, including loan fees, which increased slightly from $45,844 in 2014 to $46,291 in 2015. The increase was due primarily to higher average balances which increased from $942,636 in 2014 to $966,651 in 2015. Partially offsetting these higher balances were declining yields, which dropped from 4.86% in 2014 to 4.79% in 2015. 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 increased $368 or 3.10% and interest income on tax-exempt investment securities increased $548 or 21.31%. Average taxable investment balances remained relatively flat while average tax-exempt investment balances increased $21,793 or 25.88%. The average yield on the taxable investment portfolio increased from 2.09% in 2014 to 2.16% in 2015 while the average yield on the tax-exempt investment portfolio declined from 3.05% in 2014 to 2.94% in 2015.

 

Interest expense totaled $8,227 for 2015 compared to $8,886 in 2014, a decrease of $659 or 7.42% due primarily to interest expense on deposits which decreased $462 from $6,252 in 2014 to $5,790 in 2015. This decrease in deposit interest expense was primarily attributable to a decrease in rates paid. The average rate paid on NOW accounts decreased from 0.28% in 2014 to 0.27% in 2015. The average rate paid on savings and money management accounts decreased from 0.31% in 2014 to 0.29% in 2015 and the average rate paid on time deposits decreased from 0.92% in 2014 to 0.85% in 2015. The mix of interest bearing deposits also affects the interest rate spread. During 2015 average time deposits decreased $22,278 while average NOW accounts increased $19,105 and average savings and money management accounts increased $16,986.

 

The overall result was an increase in net interest income of $2,193 or 4.21% in 2015 over 2014 due mostly to 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 increased 3 bps to 3.14% in 2015. The net interest margin also increased from 3.20% in 2014 to 3.24% in 2015. 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.

 

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.

 

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.

 

The Company’s net interest spread decreased 14 bps 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.

 

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 2014 to 2015, and from 2013 to 2014. The low interest rate environment in 2015 resulted in continued decreases in yields on interest-earning assets, but also in the cost of interest-bearing liabilities. The analysis indicates that, on an overall basis in 2015, increased volumes of interest-earning assets created a positive impact on income but was partially offset by decreases in average rates earned. When combined with reduced expense due to lower average rates paid on interest bearing liabilities, the result was an increase in net interest income of $2,193. 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.

 

 

Analysis of Changes in Net Interest Income

 

		2015 vs. 2014																2014 vs. 2013
		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		$	1,168			$	(703	)		$	(18	)		$	447			$	3,233			$	(3,038	)		$	(214	)		$	(19	)
Loans held for sale			179				(19	)			(5	)			155				(64	)			54				(6	)			(16	)
Investments, taxable			(1	)			369				-				368				(109	)			(949	)			8				(1,050	)
Investments, tax-exempt			665				(93	)			(24	)			548				(123	)			(159	)			7				(275	)
Interest-bearing deposits in other banks			(4	)			22				(2	)			16				(20	)			22				(6	)			(4	)
Total			2,007				(424	)			(49	)			1,534				2,917				(4,070	)			(211	)			(1,364	)
Interest-bearing liabilities:
NOW accounts		$	53			$	(27	)		$	(1	)		$	25			$	59			$	(92	)		$	(5	)		$	(38	)
Savings and money management accounts			53				(89	)			(3	)			(39	)			4				(232	)			-				(228	)
Time deposits			(205	)			(258	)			15				(448	)			(4	)			(272	)			-				(276	)
Federal funds purchased / securities sold under repurchase agreements			5				1				1				7				-				(1	)			-				(1	)
Other borrowings			19				(221	)			(2	)			(204	)			(67	)			(18	)			-				(85	)
Total			(75	)			(594	)			10				(659	)			(8	)			(615	)			(5	)			(628	)
Change in net interest income														$	2,193															$	(736	)

 

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).

 

Provision for Loan Losses

 

The provision for loan losses is the charge to operating earnings necessary to maintain the allowance for loan losses at a level which, in management’s estimate, is adequate to cover the estimated amount of probable incurred losses in the loan portfolio. A credit for loan losses totaling $1,628 was recognized for the year ended December 31, 2015 compared to a provision for loan losses of $3,492 for the year ended December 31, 2014. The credit resulted in part from a $1,666 recovery in the second quarter of 2015 related to the repayment of a nonaccrual acquisition, development and construction loan. 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.

 

2015 compared with 2014:

 

Noninterest income totaled $18,688 in 2015 compared to $19,030 in 2014, a decrease of $342 or 1.80%. The decrease was due primarily to investment securities losses of $1,043 in 2015 compared to investment gains of $825 in 2014. Partially offsetting this decrease was an increase in gain on sales of loans, which increased $1,130 or 20.68% due to increased mortgage originations and refinancing activity. Other factors included an increase in service charges and deposit fees of $135, and increase in trust service fees of $98 and an increase in cash surrender value of bank-owned life insurance of $96.

 

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.

 

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

 

Noninterest Income

 

		Year Ended December 31,
		2015				2014				2013
		(Dollars in thousands)
Service charges and fees on deposits		$	7,315			$	7,180			$	7,155
Gain on sales of loans			6,595				5,465				6,843
Gain on sale of fixed assets, net			36				64				26
Investment securities (losses) gains, net of OTTI			(1,043	)			825				(895	)
Retail investment income			2,182				2,188				2,099
Trust service fees			1,408				1,310				1,185
Earnings from cash surrender value of bank-owned life insurance			1,259				1,163				1,187
Miscellaneous income			936				835				897
Total noninterest income		$	18,688			$	19,030			$	18,497
Noninterest income as a percentage of total average assets			1.04	%			1.09	%			1.09	%
Noninterest income as a percentage of total income			23.02	%			23.79	%			22.89	%

 

 

Noninterest Expense

 

2015 compared with 2014:

 

Noninterest expense totaled $46,040 in 2015, an increase of $2,552 or 5.87% over 2014. The primary reasons for the increase were salaries and other personnel expense, which increased $1,337, and a $955 prepayment penalty fee on an FHLB Advance during the second quarter of 2015.

 

Salaries and other personnel expense increased $1,337 or 5.34%. The increase was attributable in large part to salary increases, increased incentive compensation and commission expense. These increases were partially offset by a $966 reduction in deferred compensation expense caused by an increase in the discount rate used to value the salary continuation liability.

 

Other operating expenses increased $412 or 2.90% and included a $428 increase in processing expense due in part to the migration to an outsourced mainframe computer system and a $552 increase in operational losses due primarily to fraudulent charges on customer debit cards partially offset by a $490 decrease in loan costs excluding OREO.

 

Occupancy expense increased $178 or 4.45% in 2015 due primarily to increased depreciation expense associated with new equipment purchases.

 

OREO gains totaled $102 in 2015 compared to OREO losses of $228 in 2014. This reflects a $257 reduction in write-downs on such properties this year and included a gain of $116 related to sales, as compared to a gain of $43 in 2014.

 

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.

 

 

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, 2015, 2014 and 2013.

 

Noninterest Expense

 

		Year Ended December 31,
		2015				2014				2013
		(Dollars in thousands)
Salaries and other personnel expense		$	26,384			$	25,047			$	23,079
Occupancy expense			4,178				4,000				3,722
Marketing & business development			2,027				1,840				1,821
Processing expense			3,443				3,015				2,127
Legal and professional fees			1,639				1,980				1,552
Data processing expense			1,600				1,484				1,566
FDIC insurance			859				1,047				1,147
Communication expense			1,112				937				816
Prepayment fees			955				-				-
Teller & operational losses			911				336				287
(Gain) loss on sale of other real estate owned, net			(116	)			(43	)			42
Other real estate valuation allowance			14				271				600
Loan costs			773				1,263				1,333
Other expense			2,261				2,311				2,274
Total noninterest expense		$	46,040			$	43,488			$	40,366
Noninterest expense as a percentage of total average assets			2.55	%			2.50	%			2.38	%
Operating efficiency ratio			62.29	%			61.78	%			55.52	%

 

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 62.29% in 2015 as compared to 61.78% in 2014, and 55.52% in 2013.

 

Income Taxes

 

Income tax expense totaled $9,138 in 2015 compared to $7,482 in 2014. The effective tax rate as a percentage of pre-tax income was 32.03% in 2015, 31.03% in 2014, and 30.42% in 2013. 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 $966,651 in 2015 compared to $942,636 in 2014 and $880,565 in 2013. At December 31, 2015, loans totaled $1,009,149 compared to $966,356 at December 31, 2014, an increase of $42,793 or 4.43%.

 

In 2015 growth in loans occurred in most categories, but primarily in residential real estate loans which increased $25,064 or 12.28% and acquisition, development and construction loans which increased $19,989 or 12.17%. Residential loans increased as the Bank elected to hold some permanent mortgages on its books and the increase in acquisition, development and construction loans occurred in its primary market area mainly in the fourth quarter of 2015. 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. As a result, the out of market ADC portfolio decreased $11,044 or 20.37% in 2015.

 

The following table sets forth the composition of the Company’s loan portfolio as of December 31^st 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 31^st of any of the years presented.

 

Loan Portfolio Composition

 

		December 31,
		2015								2014								2013								2012								2011
		Amount				%				Amount				%				Amount				%				Amount				%				Amount				%
										(Dollars in thousands)
Commercial, financial and agricultural		$	210,712				20.88	%		$	208,905				21.62	%		$	202,074				22.31	%		$	174,553				20.03	%		$	171,750				20.30	%
Real estate
Commercial			366,566				36.32	%			371,488				38.44	%			353,353				39.01	%			343,663				39.44	%			332,666				39.32	%
Residential			229,161				22.71	%			204,097				21.12	%			175,295				19.36	%			168,039				19.28	%			159,022				18.80	%
Acquisition, development and construction			184,292				18.26	%			164,303				17.00	%			160,498				17.72	%			171,750				19.71	%			168,050				19.86	%
Total real estate			780,019				77.29	%			739,888				76.56	%			689,146				76.09	%			683,452				78.43	%			659,738				77.98	%
Consumer
Direct			17,947				1.78	%			16,581				1.72	%			13,619				1.50	%			12,785				1.47	%			13,600				1.61	%
Indirect			-				0.00	%			1				0.00	%			29				0.00	%			105				0.01	%			384				0.05	%
Revolving			637				0.06	%			666				0.07	%			612				0.07	%			502				0.05	%			428				0.05	%
Total consumer			18,584				1.84	%			17,248				1.79	%			14,260				1.57	%			13,392				1.53	%			14,412				1.71	%
Deferred loan origination costs (fees)			(166	)			(0.01	)%			315				0.03	%			233				0.03	%			50				0.01	%			110				0.01	%
Total		$	1,009,149				100.00	%		$	966,356				100.00	%		$	905,713				100.00	%		$	871,447				100.00	%		$	846,010				100.00	%

 

 

Loans may be periodically renewed with principal reductions and appropriate interest rate adjustments. Loan maturities as of December 31, 2015 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, 2015

 

		Within				One to Five				After Five
		One Year				Years				Years				Total
		(Dollars in thousands)
Commercial, financial and agricultural		$	50,637			$	102,331			$	57,744			$	210,712
Real Estate
Commercial			42,472				183,011				141,083				366,566
Residential			34,438				44,802				149,921				229,161
Acquisition, development and construction			108,236				61,205				14,851				184,292
Consumer			2,885				12,420				3,279				18,584
Deferred loan origination costs (fees)			(166	)			-				-				(166	)
Total loans		$	238,502			$	403,769			$	366,878			$	1,009,149

 

The following table presents an interest rate sensitivity analysis of the Company’s loan portfolio as of December 31, 2015. 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, 2015

 

		Within				One to Five				After Five
		One year				Years				Years				Total
		(Dollars in thousands)
Loans maturing or repricing with:
Predetermined interest rates		$	129,075			$	321,301			$	221,826			$	672,202
Floating or adjustable interest rates			144,917				128,258				63,772				336,947
Total loans		$	273,992			$	449,559			$	285,598			$	1,009,149

 

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.

 

 

Gross interest income that would have been recorded for the years ended December 31, 2015, 2014, and 2013 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 $864, $973 and $1,224, respectively. The amount of interest income on these loans that was included in net income for December 31, 2015, 2014 and 2013 was approximately $735, $400 and $945, 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, 2015 and 2014, the Company had total impaired loans of $15,472 and $20,189, respectively, which includes loans carried at fair value with a recorded investment of $10,171 and $11,730, respectively at December 31, 2015 and 2014. Charge-offs of $3,546 and $1,831 were taken on these impaired loans during 2015 and 2014.

 

Non-performing assets include nonaccrual loans, restructured loans and other real estate owned. The following table, “Non-Performing Assets”, presents information on these assets as of December 31^st, for the past five years. Non-performing assets were $17,766 at December 31, 2015 or 1.76% of period end loans and other real estate owned. This compares to $21,903 or 2.26% of total loans and other real estate owned at December 31, 2014.

 

At December 31, 2015 there were $127 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 the loan is well-secured and in process of collection, in which case the loan continues to accrue interest.

 

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 $8,636 in TDRs at December 31, 2015, of which $5,274 were on nonaccrual status. TDRs totaled $9,669 at December 31, 2014, of which $3,477 were on nonaccrual status.

 

 

		Non-Performing Assets
		Year Ended December 31,
		2015				2014				2013				2012				2011
		(Dollars in thousands)
Nonaccrual loans:
Commercial, financial and agricultural		$	1,151			$	3,458			$	728			$	2,358			$	2,325
Real Estate:
Commercial			6,763				1,497				4,827				11,736				20,956
Residential			3,560				3,639				5,894				6,291				4,553
Acquisition, development and construction			2,537				5,874				7,907				9,712				14,732
Consumer			33				136				71				100				331
Total Nonaccrual loans		$	14,044			$	14,604			$	19,427			$	30,197			$	42,897
Restructured loans (1)		$	3,362			$	6,192			$	6,236			$	915			$	2,330
Other real estate owned			360				1,107				1,014				3,490				6,209
Total Nonperforming assets		$	17,766			$	21,903			$	26,677			$	34,602			$	51,436
Loans past due 90 days or more and still accruing interest		$	127			$	-			$	-			$	-			$	-
Allowance for loan losses to period end total loans			2.12	%			2.64	%			2.92	%			3.31	%			3.43	%
Allowance for loan losses to period end nonaccrual loans			152.14	%			174.65	%			135.94	%			95.53	%			67.71	%
Net charge-offs to average loans			0.26	%			0.47	%			1.12	%			0.98	%			1.18	%
Nonperforming assets to period end loans			1.76	%			2.27	%			2.95	%			3.97	%			6.08	%
Nonperforming assets to period end loans and other real estate owned			1.76	%			2.26	%			2.94	%			3.95	%			6.04	%

 

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

 

While total nonaccrual loans remained relatively flat in 2015 as compared to 2014, nonaccrual commercial real estate loans increased $5,266 due primarily to one troubled loan and one impaired loan that were moved to nonaccrual status during the last half of the year. Decreases in nonaccrual acquisition, development and construction loans of $3,337 and nonaccrual commercial, financial and agricultural loans of $2,307 more than offset this increase. The decrease in nonaccrual acquisition, development and construction loans was mostly due to the repayment of a $4,544 participation loan made to finance a retail center that was sold in the second quarter of 2015. The decrease in nonaccrual commercial, financial and agricultural loans was due in part to write downs of $500 taken in both the first and second quarters of 2015 on a defaulted loan that was moved to nonaccrual status during the fourth quarter of 2014.

 

 

The table below provides additional detail on nonaccrual loans greater than $1,000 at December 31, 2015.

 

Nonaccrual Loans

 

Nonaccrual

Appraisal

Appraised

Balance

Originated

Date

Trigger

Collateral

Allowance

Method

Date

Value

(Dollars in thousands)

Commercial real estate

$

1,673

01/06/11

09/18/15

financial condition

motel

-

collateral value

09/15

$

2,050

Commercial real estate

3,498

01/17/12

12/21/15

financial condition

land & gym

-

income approach

12/11

8,000

ADC Loan - CSRA

1,372

12/28/11

12/28/12

financial condition

land

-

collateral value

03/15

1,800

$

6,543

Other, net

7,501

Nonaccrual loans at December 31, 2015

$

14,044

 

The table below presents a roll forward of other real estate owned for the years ended December 31, 2015 and 2014, respectively.

 

Other Real Estate Owned

 

		2015				2014
		(Dollars in thousands)
Beginning balance, January 1		$	1,107			$	1,014
Additions			611				1,256
Increase in valuation allowance			(14	)			(271	)
Sales			(1,460	)			(935	)
Gain on sale of OREO, net			116				43
Ending balance, December 31		$	360			$	1,107

 

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

 

Other Real Estate Owned

 

		2015				2014
		(Dollars in thousands)
Other Real Estate:
Real Estate
Commercial		$	-			$	200
Residential			-				364
Acquisition, development and construction			607				860
			607				1,424
Valuation allowance			(247	)			(317	)
		$	360			$	1,107

 

The net decrease in other real estate owned is attributable to both reduced additions and increased sales in 2015 as compared to 2014.

 

 

Potential Problem Loans

 

In addition to loans disclosed above as past due, nonaccrual and restructured as of December 31, 2015, management identified weaknesses in $6,641 of classified loans. These loans, principally classified for regulatory purposes as substandard, are principally commercial real estate loans in the company’s primary market area. Estimated probable incurred losses from these potential credit weaknesses have been provided for in determining the allowance for loan losses at December 31, 2015.

 

Allowance for Loan Losses

 

The allowance for loan losses represents an allocation for the estimated amount of probable incurred losses in the loan portfolio. The 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 had a credit for loan losses of $1,628 in 2015 compared to a provision of $3,492 in 2014. The credit in 2015 resulted primarily from a $1,666 recovery in the second quarter of 2015 related to the repayment of a previously written-down impaired loan.

 

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; 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 is further increased for such classifications within each category.

 

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,
		2015								2014								2013								2012								2011
		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		$	4,908				20.87	%		$	5,407				21.65	%		$	5,774				22.34	%		$	4,368				15.14	%		$	4,183				14.40	%
Real estate
Commercial			7,376				36.32	%			8,622				38.44	%			8,981				39.01	%			10,872				37.69	%			10,761				37.05	%
Residential			5,027				22.71	%			6,591				21.12	%			5,590				19.36	%			5,677				19.68	%			5,607				19.30	%
Acquisition, development and construction			3,383				18.26	%			4,263				17.00	%			5,486				17.72	%			7,436				25.78	%			8,055				27.73	%
Consumer loans to individuals			673				1.84	%			623				1.79	%			578				1.57	%			493				1.71	%			440				1.52	%
Balance at end of year		$	21,367				100.00	%		$	25,506				100.00	%		$	26,409				100.00	%		$	28,846				100.00	%		$	29,046				100.00	%

 

(1)  Percent of gross loans in each category to total loans adjusted for loans recorded at fair value

 

 

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 2015 represented 0.26% of average loans outstanding, compared to 0.47% for 2014 and 1.12% for 2013.

 

		Allowances for Loan Losses
		At December 31,
		2015				2014				2013				2012				2011
		(Dollars in thousands)
Total loans outstanding at end of period, net of unearned income		$	1,009,149			$	966,356			$	905,713			$	871,447			$	846,010
Average loans outstanding, net of unearned income		$	966,651			$	942,636			$	880,565			$	847,872			$	860,936
Balance of allowance for loan losses at beginning of year		$	25,506			$	26,409			$	28,846			$	29,046			$	26,657
Charge-offs:
Commercial, financial and agricultural			1,184				2,005				335				919				2,296
Real estate - commercial			2,238				807				3,469				2,281				1,472
Real estate - residential mortgage			371				1,038				1,404				2,211				2,489
Real estate - acquisition, development and construction			286				691				5,098				3,151				4,118
Consumer			610				604				620				812				699
Total charge-offs			4,689				5,145				10,926				9,374				11,074
Recoveries of previous loan losses:
Commercial, financial and agricultural			229				67				88				241				162
Real estate - commercial			4				371				21				169				120
Real estate - residential mortgage			19				37				117				88				56
Real estate - acquisition, development and construction			1,699				-				477				209				106
Consumer			227				275				348				326				435
Total recoveries			2,178				750				1,051				1,033				879
Net loan losses			2,511				4,395				9,875				8,341				10,195
Provision for loan losses			(1,628	)			3,492				7,438				8,141				12,584
Balance of allowance for loan losses at end of period		$	21,367			$	25,506			$	26,409			$	28,846			$	29,046
Allowance for loan losses to period end loans			2.12	%			2.64	%			2.92	%			3.31	%			3.43	%
Net charge-offs to average loans			0.26	%			0.47	%			1.12	%			0.98	%			1.18	%

 

At December 31, 2015, the allowance for loan losses declined to 2.12% of outstanding loans, from 2.64% at December 31, 2014 and 2.92% at December 31, 2013. The decline in 2015 was due to a decline in the average historical net loss rate, the level of recoveries 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 real estate and commercial, financial and agricultural categories in 2015. 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.

 

Net charge-offs totaled $2,511 at December 31, 2015, of which $2,234 were related to commercial real estate loans and $955 were related to commercial, financial and agricultural loans. Also included were net recoveries of $1,413 for acquisition, development and construction 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 increased $47,098 to $691,563 at year-end 2015 from 2014. 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, 2015 and 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, 2015 and 2014, the estimated fair value of investment securities as a percentage of their amortized cost was 100.00% and 100.32%, respectively. At December 31, 2015, the investment securities portfolio had gross unrealized gains of $5,939 and gross unrealized losses of $5,909, for a net unrealized gain of $30. As of December 31, 2014 and 2013, the investment securities portfolio had a net unrealized gain of $2,075 and a net unrealized loss of $15,765, respectively. The following table presents the amortized cost of investment securities held by the Company at December 31, 2015, 2014 and 2013.

 

Investment Securities

 

		December 31,
		2015				2014				2013
		(Dollars in thousands)
Available for sale:
U.S. Government Agencies		$	147,135			$	181,104			$	233,697
Obligations of states and political subdivisions			136,499				98,538				112,408
Mortgage-backed securities
U.S. GSE's MBS - residential			121,646				113,016				132,586
U.S. GSE's MBS - commercial			21,805				15,875				-
U.S. GSE's CMO			146,782				123,921				81,031
Corporate bonds			117,666				109,936				106,022
Total		$	691,533			$	642,390			$	665,744

 

 

The following table represents maturities and weighted average yields of debt securities at December 31, 2015. 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, 2015
		Amortized Cost				Yield
		(Dollars in thousands)
Available for Sale:
Obligations of U.S. Government agencies
Over one through five years		$	9,523				1.90	%
Over five through ten years			68,111				2.33	%
Over ten years			69,501				1.52	%
Total		$	147,135				1.92	%
Obligations of states and political subdivisions (1)
One year or less		$	1,962				4.86	%
Over one through five years			14,838				3.16	%
Over five through ten years			39,175				3.55	%
Over ten years			80,524				4.88	%
Total		$	136,499				4.31	%
U.S. GSE's MBS - residential
Over five through ten years		$	11,973				2.07	%
Over ten years			109,673				2.33	%
Total		$	121,646				2.30	%
U.S. GSE's MBS - commercial
Over one through five years		$	6,357				2.18	%
Over five through ten years			15,448				2.00	%
Total		$	21,805				2.05	%
U.S. GSE's CMO
Over one through five years		$	2,474				2.13	%
Over five through ten years			13,425				2.31	%
Over ten years			130,883				2.30	%
Total		$	146,782				2.30	%
Corporate bonds
One year or less		$	8,962				2.55	%
Over one through five years			74,239				2.50	%
Over five through ten years			34,215				2.01	%
Over ten years			250				3.50	%
Total		$	117,666				2.36	%
Total Investment Securities		$	691,533				2.62	%

 

(1)  Tax-equivalent yield

 

Deposits

 

The Company's average interest bearing liabilities increased $15,660 or 1.13% from 2014 to 2015. Average noninterest-bearing deposits increased $24,601 or 12.57%. Average borrowings increased $1,847 or 2.15% from 2014 to 2015. 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 CenterState Bank, federal funds purchased, subordinated debentures and borrowings from the Federal Home Loan Bank.

 

 

Average interest-bearing liabilities increased $17,912 or 1.31% from 2013 to 2014, while average noninterest-bearing deposits increased $21,612 or 12.41% during the same period.

 

The following table presents the average amount outstanding and the average rate paid on deposits and borrowings by the Company for the years 2015, 2014 and 2013:

  

		Average Deposit and Borrowing Balances and Rates
		Year ended December 31,
		2015								2014								2013
		Average				Average				Average				Average				Average				Average
		Amount				Rate				Amount				Rate				Amount				Rate
		(Dollars in thousands)
Noninterest-bearing demand deposits		$	220,300				0.00	%		$	195,699				0.00	%		$	174,087				0.00	%
Interest-bearing liabilities:
NOW accounts			393,129				0.27	%			374,024				0.28	%			354,827				0.31	%
Savings, money management accounts			554,991				0.29	%			538,005				0.31	%			536,734				0.35	%
Time deposits			363,407				0.85	%			385,685				0.92	%			386,045				0.99	%
Federal funds purchased / securities sold under repurchase agreements			2,464				0.49	%			1,206				0.41	%			1,247				0.48	%
Other borrowings			85,159				2.85	%			84,570				3.11	%			86,725				3.13	%
Total interest-bearing liabilities		$	1,399,150				0.59	%		$	1,383,490				0.64	%		$	1,365,578				0.70	%
Total noninterest & interest-bearing liabilities		$	1,619,450							$	1,579,189							$	1,539,665

 

The following table presents the maturities of the Company’s time deposits over $100 at December 31, 2015:

 

Maturities of Time Deposits

 

		Time Certificates
		of Deposit of
		$100 or More
		(Dollars in thousands)
Months to Maturity
Within 3 months		$	35,330
After 3 through 6 months			27,000
After 6 through 12 months			25,732
Within one year			88,062
After 12 months			27,605
Total		$	115,667

 

This table indicates that the majority 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. At December 31, 2015, the Company had $71,099 of brokered certificates of deposit that mature after 12 months.

 

 

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 $226,331 and $171,911 at December 31, 2015 and 2014, respectively. This includes standby letters of credit of $4,494 at December 31, 2015 and $5,730 at December 31, 2014. 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 (1)		$	221,837				-				-				-
Standby letters of credit (1)			4,494				-				-				-
Lease agreements			263				244				18				-
Deposits			1,400,048				110,791				18,241				-
Securities sold under repurchase agreements			15,684				-				-				-
Salary continuation agreements			551				1,457				1,636				31,550
FHLB advances			-				74,000				11,000				-
Subordinated debentures			-				-				-				20,000
Total commitments and contractual obligations		$	1,642,877				186,492				30,895				51,550

 

(1)

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

 

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

 

 

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.

 

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 twenty-four month simulation of net interest income is performed, as well as the economic value of equity, 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, 2015 and 2014.

 

 

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 $30,000 of which $15,000 was outstanding at December 31, 2015 and a $10,000 repurchase line of credit with CenterState Bank, Orlando, Florida, of which none was outstanding at December 31, 2015. GB&T has a federal funds purchased accommodation with SunTrust Bank, Atlanta, Georgia, for advances up to $10,000, of which none was outstanding at December 31, 2015 and a federal funds purchased accommodation with CenterState Bank, Orlando, Florida, for advances up to $10,000, of which none was outstanding at December 31, 2015. The Company also maintains a borrowing facility at the Federal Reserve Bank, under the Borrower-In-Custody Program, of which none was outstanding at December 31, 2015. Additionally, liquidity needs can be supplemented by the structuring of the maturities of investment securities and the pricing and maturities on loans and deposits offered to customers. The Company also uses retail securities sold under repurchase agreements to fund operations. Retail securities sold under repurchase agreements were $684 at December 31, 2015.

 

Capital

 

Total stockholders’ equity was $169,913 at December 31, 2015, an increase of $14,627 or 9.42% from the previous year. The change in stockholders equity resulted from an increase in retained earnings of $15,348 partially offset by a decrease in accumulated other comprehensive income (loss), which decreased $1,282 from 2014 due primarily to a decrease in market values of investment securities available for sale. The Company purchased 400 and 1,282 shares of treasury stock in 2015 and 2014 at a cost of $11 and $32, respectively, which is shown as a reduction of stockholders’ equity. The Company issued 1,131 and 794 shares of treasury stock in 2015 and 2014 at a price of $29 and $17, respectively, for the Director Stock Purchase Plan.

 

The Company’s average equity to average total assets was 9.06% in 2015 compared to 8.31% in 2014 and 7.99% in 2013. 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 2015, 2014 and 2013.

 

Return on Equity and Assets

 

		Years ended December 31,
		2015				2014				2013
Return on average total assets			1.08	%			0.96	%			0.97	%
Return on average equity			11.87	%			11.49	%			12.09	%

 

 

At December 31, 2015, the Bank 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 the Bank.

 

ANALYSIS OF CAPITAL

 

																		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
12/31/2015
Risk-based capital:
Common Equity Tier I capital		$	170,985				13.40	%		$	57,416				4.50	%			N/A				N/A
Tier I capital			190,985				14.97	%			76,555				6.00	%			N/A				N/A
Total capital			207,001				16.22	%			102,073				8.00	%			N/A				N/A
Tier I capital - leverage			190,985				10.34	%			73,899				4.00	%			N/A				N/A
12/31/2014
Risk-based capital:
Tier I capital		$	175,075				14.97	%		$	46,793				4.00	%			N/A				N/A
Total capital			189,832				16.23	%			93,586				8.00	%			N/A				N/A
Tier I capital - leverage			175,075				9.86	%			71,039				4.00	%			N/A				N/A
Georgia Bank & Trust Company
12/31/2015
Risk-based capital:
Common Equity Tier I capital		$	179,517				14.09	%		$	57,321				4.50	%		$	82,797				6.50	%
Tier I capital			179,517				14.09	%			76,428				6.00	%			101,904				8.00	%
Total capital			195,507				15.35	%			101,904				8.00	%			127,380				10.00	%
Tier I capital - leverage			179,517				9.74	%			82,933				4.50	%			92,148				5.00	%
12/31/2014
Risk-based capital:
Tier I capital		$	167,385				14.33	%		$	46,707				4.00	%		$	70,061				6.00	%
Total capital			182,116				15.60	%			93,414				8.00	%			116,768				10.00	%
Tier I capital - leverage			167,385				9.44	%			79,798				4.50	%			88,665				5.00	%

 

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

 

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

 

 

Cash Flows from Operating, Investing and Financing Activities

 

Net cash provided by operating activities was $26,975 in 2015, an increase of $8,279 from 2014. Net cash provided by operating activities was $18,696 in 2014, a decrease of $30,631 from 2013.

 

Net cash used in investing activities was $106,367 in 2015 compared to net cash used in investing activities of $43,945 in 2014. The change was primarily due to growth in the investment portfolio in 2015 as compared to 2014. 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 provided by financing activities in 2015 was $86,314 as compared to net cash provided by financing activities of $13,908 in 2014. The primary reason for the change was a $65,216 increase in deposits and a $21,000 net increase in FHLB advances. 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.

 

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.

 

Adoption of New Accounting Standards

 

In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

 

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.

 

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, 2015 and 2014. 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
December 31, 2015		(Dollars in thousands)
Base			54,330
+100 basis points			53,155				(1,175	)			(2.16	)%
+200 basis points			52,149				(2,181	)			(4.01	)%
+300 basis points			50,713				(3,617	)			(6.66	)%
+400 basis points			49,013				(5,317	)			(9.79	)%
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	)%

 

 

Item 8. Financial Statements and Supplementary Data

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

 

Table of Contents

 

	Page
Report of Independent Registered Public Accounting Firm	64
Consolidated Balance Sheets	65
Consolidated Statements of Comprehensive Income (Loss)	66
Consolidated Statements of Stockholders’ Equity	68
Consolidated Statements of Cash Flows	69
Notes to Consolidated Financial Statements	71

 

 

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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, 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 26, 2016 expressed an unqualified opinion thereon.

 

/s/ Crowe Horwath LLP

 

Franklin, Tennessee

February 26, 2016

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Balance Sheets

December 31, 2015 and 2014

 

		2015				2014
		(Dollars in thousands, except share data)
Assets
Cash and due from banks		$	40,181				33,286
Interest-bearing deposits in other banks			2,736				2,709
Cash and cash equivalents			42,917				35,995
Available-for-sale securities			691,563				644,465
Loans held for sale, at fair value			18,647				18,365
Loans			1,009,149				966,356
Less allowance for loan losses			21,367				25,506
Loans, net			987,782				940,850
Premises and equipment, net			27,398				27,842
Accrued interest receivable			6,331				5,898
Goodwill, net			140				140
Bank-owned life insurance			43,167				36,908
Restricted equity securities			5,169				4,398
Other real estate owned			360				1,107
Deferred tax asset			13,958				15,263
Other assets			2,933				1,550
		$	1,840,365				1,732,781
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing			229,002				196,624
Interest-bearing:
NOW accounts			401,674				354,038
Savings			548,729				521,570
Money management accounts			16,330				15,824
Time deposits			333,345				375,808
			1,529,080				1,463,864
Securities sold under repurchase agreements			15,684				10,678
Advances from Federal Home Loan Bank			85,000				64,000
Accrued interest payable and other liabilities			20,688				18,953
Subordinated debentures			20,000				20,000
Total liabilities			1,670,452				1,577,495
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 0 shares outstanding in 2015 and 2014, respectively			—				—
Common stock, $3.00 par value; 10,000,000 shares authorized; 6,745,818 and 6,744,891 shares issued in 2015 and 2014, respectively; 6,745,818 and 6,744,160 shares outstanding in 2015 and 2014, respectively			20,237				20,235
Additional paid-in capital			63,637				63,096
Retained earnings			87,250				71,902
Treasury stock, at cost; 0 and 731 shares in 2015 and 2014, respectively			—				(18	)
Accumulated other comprehensive (loss) income, net			(1,211	)			71
Total stockholders’ equity			169,913				155,286
		$	1,840,365				1,732,781

 

See accompanying notes to consolidated financial statements.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Comprehensive Income (Loss)

Years ended December 31, 2015, 2014 and 2013

 

		2015				2014				2013
		(Dollars in thousands, except share data)
Interest income:
Loans, including fees		$	47,046				46,444				46,479
Investment securities:
Taxable			12,236				11,868				12,918
Tax-exempt			3,119				2,571				2,846
Interest-bearing deposits in other banks			83				67				71
Total interest income			62,484				60,950				62,314
Interest expense:
Deposits			5,790				6,252				6,794
Securities sold under repurchase agreements			12				5				6
Other borrowings			2,425				2,629				2,714
Total interest expense			8,227				8,886				9,514
Net interest income			54,257				52,064				52,800
(Credit) Provision for loan losses			(1,628	)			3,492				7,438
Net interest income after provision for loan losses			55,885				48,572				45,362
Noninterest income:
Service charges and fees on deposits			7,315				7,180				7,155
Gain on sales of loans			6,595				5,465				6,843
Gain on sale of fixed assets, net			36				64				26
Investment securities (losses) gains, net (includes ($1,043), $825 and ($895) accumulated other comprehensive income (loss) reclassifications for unrealized gains (losses) on available-for-sale securities)			(1,043	)			825				(895	)
Retail investment income			2,182				2,188				2,099
Trust services fees			1,408				1,310				1,185
Earnings from cash surrender value of bank-owned life insurance			1,259				1,163				1,187
Miscellaneous income			936				835				897
Total noninterest income			18,688				19,030				18,497
Noninterest expense:
Salaries and other personnel expense			26,384				25,047				23,079
Occupancy expenses			4,178				4,000				3,722
Other real estate (gains) losses, net			(102	)			228				642
Prepayment fees			955				—				—
Other operating expenses			14,625				14,213				12,923
Total noninterest expense			46,040				43,488				40,366
Income before income taxes			28,533				24,114				23,493
Income tax expense			9,138				7,482				7,147
Net income		$	19,395				16,632				16,346
Other comprehensive income (loss):
Unrealized (loss) gain on derivatives			(53	)			(1,191	)			1,648
Unrealized (loss) gain on securities available-for-sale			(3,089	)			18,664				(32,090	)
Reclassification adjustment for realized loss (gain) on securities, net of OTTI			1,043				(825	)			895
Tax effect			817				(6,476	)			11,494
Total other comprehensive income (loss)			(1,282	)			10,172				(18,053	)
Comprehensive income (loss)		$	18,113				26,804				(1,707	)

 

(continued)

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Comprehensive Income (Loss)

Years ended December 31, 2015, 2014 and 2013

 

(continued)
		2015				2014				2013
Basic net income per share		$	2.89				2.49				2.45
Diluted net income per share			2.89				2.49				2.45
Weighted average common shares outstanding			6,701,291				6,681,220				6,678,914
Weighted average number of common and common equivalent shares outstanding			6,716,369				6,690,423				6,678,914

 

See accompanying notes to consolidated financial statements.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2015, 2014 and 2013

(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, 2013			6,680			$	20,041				62,835				45,028				(73	)			7,952				135,783
Net income			—				—				—				16,346				—				—				16,346
Other comprehensive 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
Net income			—				—				—				19,395				—				—				19,395
Other comprehensive loss			—				—				—				—				—				(1,282	)			(1,282	)
Stock-based compensation			—				—				467				—				—				—				467
Tax benefit from stock-based compensation			—				—				46				—				—				—				46
Directors' stock purchase plan			1				2				28				—				29				—				59
Cash dividends ($0.60 per common share)			—				—				—				(4,047	)			—				—				(4,047	)
Purchase of treasury stock			—				—				—				—				(11	)			—				(11	)
Balance, December 31, 2015			6,746			$	20,237				63,637				87,250				—				(1,211	)			169,913

 

See accompanying notes to consolidated financial statements.

 

  

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

Years ended December 31, 2015, 2014 and 2013

 

		2015				2014				2013
		(Dollars in thousands)
Cash flows from operating activities:
Net income		$	19,395				16,632				16,346
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			2,264				2,061				1,869
Deferred income tax expense (benefit)			2,121				(717	)			877
(Credit) Provision for loan losses			(1,628	)			3,492				7,438
Investment securities losses (gains), net			1,043				(825	)			895
Net amortization of premium on investment securities			4,170				4,457				5,235
Earnings from cash surrender value of bank-owned life insurance			(1,259	)			(1,163	)			(1,187	)
Bank-owned life insurance death benefits in excess of CSV			—				—				(150	)
Stock-based compensation expense			467				389				6
Prepayment fees on Federal Home Loan Bank advances			955				—				—
Gain on disposal of premises and equipment			(36	)			(64	)			(26	)
(Gain) loss on the sale of other real estate			(116	)			(43	)			42
Provision for other real estate valuation allowance			14				271				600
Gain on sales of loans			(6,595	)			(5,465	)			(6,843	)
Real estate loans originated for sale			(223,844	)			(187,008	)			(222,747	)
Proceeds from sales of real estate loans			230,157				180,691				249,003
(Increase) decrease in accrued interest receivable			(433	)			323				382
(Increase) decrease in other assets			(1,382	)			4,503				(1,735	)
Increase (decrease) in accrued interest payable and other liabilities			1,682				1,162				(678	)
Net cash provided by operating activities			26,975				18,696				49,327
Cash flows from investing activities:
Proceeds from sales of available for sale securities			128,439				207,299				175,524
Proceeds from maturities and calls of available for sale securities			106,298				80,538				93,530
Purchase of available for sale securities			(289,094	)			(268,116	)			(301,618	)
Purchase of restricted equity securities			(1,271	)			—				(900	)
Proceeds from redemption of FHLB stock			500				472				1,326
Net increase in loans			(45,523	)			(61,963	)			(44,929	)
Purchase of bank-owned life insurance			(5,000	)			—				—
Proceeds from bank-owned life insurance death benefits			—				—				417
Additions to premises and equipment			(1,960	)			(2,969	)			(2,790	)
Proceeds from sale of other real estate			1,068				661				2,622
Proceeds from sale of premises and equipment			176				133				89
Net cash used in investing activities			(106,367	)			(43,945	)			(76,729	)

 

(continued)

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

Years ended December 31, 2015, 2014 and 2013

 

(continued)

 

		2015				2014				2013
Cash flows from financing activities:
Net increase in deposits			65,216				9,061				33,531
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements			5,006				9,870				(168	)
Advances from Federal Home Loan Bank			29,000				—				20,000
Payments of Federal Home Loan Bank advances			(8,955	)			—				(20,000	)
Payments of subordinated debentures			—				(1,547	)			—
Tax benefit from stock-based compensation			46				—				—
Proceeds from directors' stock purchase plan			59				54				49
Purchase of treasury stock			(11	)			(31	)			—
Payment of cash dividends			(4,047	)			(3,499	)			(2,605	)
Proceeds from stock options exercised, net of stock redeemed			—				—				43
Net cash provided by financing activities			86,314				13,908				30,850
Net increase (decrease) in cash and cash equivalents			6,922				(11,341	)			3,448
Cash and cash equivalents at beginning of year			35,995				47,336				43,888
Cash and cash equivalents at end of year		$	42,917				35,995				47,336
Supplemental disclosures of cash paid during the year for:
Interest		$	8,456				8,960				9,704
Income taxes			7,291				8,366				6,740
Supplemental information on noncash investing activities:
Loans transferred to other real estate owned		$	611				1,256				1,074
Loans provided for sales of other real estate owned			392				274				286

 

See accompanying notes to consolidated financial statements.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

(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 (loss), net of tax.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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”) at least on 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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

Concentration of Credit Risk:

 

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

 

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 a 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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

·

Residential Real Estate

·

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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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).

 

Residential Real Estate – This lending category includes loans secured by improved 1-4 family 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 residential real estate 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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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.

 

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; 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 is further increased for such classifications within each category.

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 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 held for sale, for which the fair value option has been elected, are recorded at fair value as of each balance sheet date.

 

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 freestanding 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 $24 and $6 as of December 31, 2015 and 2014, respectively.

 

(f)

Transfers of Financial Assets

 

Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

(g)

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.

 

(h)

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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

(i)

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.

 

(j)

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, on December 31^st, for impairment and any such impairment will be recognized in the period identified. The Company’s goodwill is not considered impaired at December 31, 2015.

 

(k)

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.

 

(l)

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.

 

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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

(m)

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 2015, 2014 and 2013 excludes the dilutive effect of stock options outstanding of 80,850, 134,750 and 145,250 at December 31, 2015, 2014 and 2013, respectively, as the effect is anti-dilutive for all periods. The calculation for 2015 and 2014 does include the dilutive effect of 63,000 in restricted stock awards at December 31, 2015 and 2014, respectively.

 

		December 31,
		2015				2014				2013
Weighted average common shares outstanding for basic earnings per common share			6,701,291				6,681,220				6,678,914
Add: Dilutive effects of assumed exercises of stock options and restricted stock awards			15,078				9,203				-
Weighted average number of common and common equivalent shares outstanding			6,716,369				6,690,423				6,678,914

 

(n)

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.

 

(o)

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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

(p)

Adoption of New Accounting Standards

 

In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

(q)

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.

 

(r)

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.

 

(s)

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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

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

 

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

 

(t)

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.

 

(u)

Rounding

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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 $8,614 at December 31, 2015 and $7,929 at December 31, 2014.

 

Note 3 – Investment Securities

 

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

 

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

 

		2015
						Gross				Gross
		Amortized				unrealized				unrealized				Estimated
		cost				gains				losses				fair value
		(Dollars in thousands)
Available-for-sale:
Obligations of U.S. Government agencies		$	147,135				274				(1,433	)			145,976
Obligations of states and political subdivisions			136,499				3,827				(266	)			140,060
Mortgage-backed securities
U.S. GSE's* MBS - residential			121,646				752				(890	)			121,508
U.S. GSE's MBS - commercial			21,805				125				(261	)			21,669
U.S. GSE's CMO			146,782				437				(1,642	)			145,577
Corporate bonds			117,666				524				(1,417	)			116,773
		$	691,533				5,939				(5,909	)			691,563

 

*Government sponsored entities

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

		2014
						Gross				Gross
		Amortized				unrealized				unrealized				Estimated
		cost				gains				losses				fair value
		(Dollars in thousands)
Available-for-sale:
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			113,016				1,542				(466	)			114,092
U.S. GSE's MBS - commercial			15,875				130				(61	)			15,944
U.S. GSE's CMO			123,921				983				(443	)			124,461
Corporate bonds			109,936				990				(1,457	)			109,469
		$	642,390				7,352				(5,277	)			644,465

 

As of December 31, 2015 and 2014, except for the U.S. Government agencies and government sponsored entities, there was no issuer who represented 10% or more of stockholders’ equity within the investment portfolio.

 

Proceeds from sales of securities available-for-sale and the associated gains (losses), excluding gains (losses) on called securities, during 2015, 2014 and 2013 were as follows:

 

		December 31,
		2015				2014				2013
		(Dollars in thousands)
Proceeds		$	128,439			$	207,299			$	175,524
Gross Gains			375				2,034				1,981
Gross Losses			(1,419	)			(1,356	)			(2,914	)

 

Investment securities with a carrying amount of approximately $275,782 and $222,782 at December 31, 2015 and 2014, respectively, were pledged to secure public and trust deposits, and for other purposes required or permitted by law.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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		$	10,924				10,998
After one year through five years			107,431				107,848
After five years through ten years			182,347				181,171
After ten years			390,831				391,546
		$	691,533				691,563

 

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

 

		December 31, 2015
		Less than 12 months								12 months or longer								Total
		Estimated				Unrealized				Estimated				Unrealized				Estimated				Unrealized
		fair value				loss				fair value				loss				fair value				loss
		(Dollars in thousands)
Temporarily impaired
Obligations of U.S. Government agencies		$	57,409				388				63,971				1,045				121,380				1,433
Obligations of states and political subdivisions			21,421				235				2,794				31				24,215				266
Mortgage-backed securities
U.S. GSE's MBS - residential			71,185				607				11,105				283				82,290				890
U.S. GSE's MBS - commercial			9,428				261				-				-				9,428				261
U.S. GSE's CMO			102,082				1,463				6,584				179				108,666				1,642
Corporate bonds			69,459				705				17,683				712				87,142				1,417
		$	330,984				3,659				102,137				2,250				433,121				5,909

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

		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			1,112				4				31,546				462				32,658				466
U.S. GSE's MBS - commercial			7,929				40				3,983				21				11,912				61
U.S. GSE's CMO			36,594				216				18,205				227				54,799				443
Corporate bonds			29,769				204				29,421				1,253				59,190				1,457
		$	105,797				611				201,744				4,666				307,541				5,277

 

Other-Than-Temporary Impairment – December 31, 2015

 

As of December 31, 2015, the Company’s security portfolio consisted of 449 securities, 204 of which were in an unrealized loss position. Of these securities with unrealized losses, 58.64% were related to the Company’s mortgage-backed and corporate securities as discussed below.

 

Mortgage-backed Securities

 

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

 

Corporate Securities

 

The Company holds fifty corporate securities totaling $116,773, of which thirty-eight had an unrealized loss of $1,417 at December 31, 2015. Thirty-seven of the securities with an unrealized loss of $1,384 were issued by entities rated lower medium investment grade or higher. Because the decline in fair value is attributable primarily to changes in interest rates and not credit quality and because the Company does not have the intent to sell the securities and it is not more likely than not that it will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2015.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Included in the Company’s corporate bonds is one trust preferred security with an amortized cost of $250, which had an unrealized loss of $33, resulting in a fair value of $217 at December 31, 2015. This security is not rated. Although the issuer is not in default, in January of 2011 the Company was notified that the issuer had elected to defer interest payments in accordance with the terms of the instrument. As of July 2015, the issuer is no longer deferring interest and is current on all payments. Because the Company does not have the intent to sell this security and it is not more likely than not that it will be required to sell the security before its anticipated recovery, the Company does not consider this security to be other-than-temporarily impaired at December 31, 2015.

 

There were no credit losses recognized in earnings for the year ended December 31, 2015.

 

Note 4 – Loans

 

Loans at year end were as follows:

 

		2015				2014
		(Dollars in thousands)
Commercial, financial and agricultural		$	210,712			$	208,905
Real estate:
Commercial			366,566				371,488
Residential			229,161				204,097
Acquisition, development and construction			184,292				164,303
Consumer installment			18,584				17,248
			1,009,315				966,041
Less allowance for loan losses			21,367				25,506
Less deferred loan origination fees (costs)			166				(315	)
		$	987,782			$	940,850

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

The following tables present the activity in the allowance for loan losses by portfolio segment as of and for the years ended December 31, 2015, 2014 and 2013.

 

		2015
		Commercial,
		Financial and				CRE - Owner				CRE - Non Owner				Residential				ADC				ADC
		Agricultural				Occupied				Occupied				Real Estate				CSRA				Other				Consumer				Total
		(Dollars in thousands)
Allowance for loan losses:
Beginning balance		$	5,407				4,805				3,817				6,591				1,943				2,320				623				25,506
Charge-offs			(1,184	)			(1,076	)			(1,162	)			(371	)			(255	)			(31	)			(610	)			(4,689	)
Recoveries			229				4				—				19				—				1,699				227				2,178
Provision			456				934				54				(1,212	)			781				(3,074	)			433				(1,628	)
Ending balance		$	4,908				4,667				2,709				5,027				2,469				914				673				21,367

 

		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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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, 2015 and 2014.

 

		2015
		Commercial,
		Financial and				CRE - Owner				CRE - Non Owner				Residential				ADC				ADC
		Agricultural				Occupied				Occupied				Real Estate				CSRA				Other				Consumer				Total
		(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment		$	—				—				—				—				—				—				—				—
Collectively evaluated for impairment			4,908				4,667				2,709				5,027				2,469				914				673				21,367
		$	4,908				4,667				2,709				5,027				2,469				914				673				21,367
Loans:
Individually evaluated for impairment			991				3,771				6,244				1,998				2,468				—				—				15,472
Collectively evaluated for impairment			209,721				225,592				130,959				227,163				138,649				43,175				18,584				993,843
		$	210,712				229,363				137,203				229,161				141,117				43,175				18,584				1,009,315

 

		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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

		2015
		Unpaid								Allowance for				Average
		Principal				Recorded				Loan Losses				Recorded
		Balance				Investment (2)				Allocated				Investment
		(Dollars in thousands)
With no related allowance recorded: (1)
Commercial, financial and agricultural:
Commerical		$	1,948				810				—				1,222
Financial			—				—				—				—
Agricultural			251				181				—				193
Equity lines			—				—				—				—
Other			—				—				—				—
Commercial real estate:
Owner occupied			4,773				3,771				—				4,656
Non Owner occupied			7,659				6,244				—				7,201
Residential real estate:
Secured by first liens			2,587				1,904				—				2,026
Secured by junior liens			147				94				—				100
Acquisition, development and   construction:
Residential			—				—				—				—
Other			3,440				2,468				—				2,645
Consumer			—				—				—				—
			20,805				15,472				—				18,043
With an allowance recorded:			—				—				—				—
		$	20,805				15,472				—				18,043

 

(1)

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

(2)

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 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 sufficient cash flows

(2)

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

The following tables present interest income on impaired loans for the years ended December 31, 2015, 2014 and 2013.

 

		2015
		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			13				13
Non Owner occupied			311				311
Residential real estate:
Secured by first liens			48				48
Secured by junior liens			3				3
Acquisition, development and construction:
Residential			—				—
Other			29				29
Consumer			—				—
		$	404				404

 

		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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

		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

 

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The sum of nonaccrual loans and loans past due 90 days still on accrual will differ from the total impaired loan amount.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

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

 

		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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Troubled Debt Restructurings:

 

The Company has troubled debt restructurings (TDRs) with a balance of $8,636 and $9,669 included in impaired loans at December 31, 2015 and 2014, respectively. No specific reserves were allocated to customers whose loan terms had been modified in TDRs as of December 31, 2015 and 2014. The Company is not committed to lend additional amounts as of December 31, 2015 and 2014 to customers with outstanding loans that are classified as TDRs. The following tables present TDRs as of December 31, 2015 and 2014.

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 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

 

During the year ended December 31, 2015, two loans were modified as TDRs. One modification involved a 2.50% reduction of the stated interest rate of the loan and an extension of the maturity date for 38 months while the other modification involved a 3.00% rate reduction and an extension of the maturity date for 42 months.

 

During the year ended December 31, 2014, three loans were modified as TDRs. One modification involved a 2.13% reduction of the stated interest rate of the loan and an extension of the maturity date for 192 months. The second modification involved a 1.00% rate reduction and an extension of the maturity date for 25 months and the last modification involved a 2.00% rate reduction and an extension of the maturity date for 23 months.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

The following tables presents loans by class modified as TDRs that occurred during the years ended December 31, 2015, 2014 and 2013.

 

		Twelve Months Ended December 31, 2015
						Pre-Modification				Post-Modification
		Number of				Outstanding				Outstanding
		Loans				Recorded Investment				Recorded Investment
		(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial and agricultural:
Commerical			1			$	2,046			$	810
Financial			-				-				-
Agricultural			-				-				-
Equity lines			-				-				-
Other			-				-				-
Commercial real estate:
Owner occupied			-				-				-
Non Owner occupied			-				-				-
Residential real estate:
Secured by first liens			1				86				80
Secured by junior liens			-				-				-
Acquisition, development and construction:
Residential			-				-				-
Other			-				-				-
Consumer			-				-				-
			2			$	2,132			$	890

 

There was no increase to the allowance for loan losses or resultant charge-offs on the TDRs described in the previous table for the year ended December 31, 2015.

 

		Twelve Months Ended December 31, 2014
						Pre-Modification				Post-Modification
		Number of				Outstanding				Outstanding
		Loans				Recorded Investment				Recorded Investment
		(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial and agricultural:
Commerical			-			$	-			$	-
Financial			-				-				-
Agricultural			-				-				-
Equity lines			-				-				-
Other			-				-				-
Commercial real estate:
Owner occupied			-				-				-
Non Owner occupied			-				-				-
Residential real estate:
Secured by first liens			1				287				212
Secured by junior liens			-				-				-
Acquisition, development and construction:
Residential			-				-				-
Other			2				2,628				2,155
Consumer			-				-				-
			3			$	2,915			$	2,367

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

		Twelve Months Ended December 31, 2013
						Pre-Modification				Post-Modification
		Number of				Outstanding				Outstanding
		Loans				Recorded Investment				Recorded Investment
		(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			2				552				402
Secured by junior liens			-				-				-
Acquisition, development and construction:
Residential			-				-				-
Other			1				130				70
Consumer			-				-				-
			8			$	7,223			$	6,766

 

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.

 

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, 2015, one ADC loan with a recorded investment of $1,372 defaulted during the third quarter of 2015 and the default occurred within the twelve month period following the loan modification and one commercial real estate loan with a recorded investment of $315 defaulted during the fourth quarter of 2015 and the default occurred after the twelve month period following the modification.

 

During the year ended December 31, 2014, one commercial real estate loan with a recorded investment of $330 defaulted during the third quarter of 2014 and 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. Both defaults occurred after the twelve month period following the loan modification.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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 terms of certain other loans were modified during the years ended December 31, 2015 and 2014 that did not meet the definition of a TDR. These loans have a total recorded investment as of December 31, 2015 and 2014 of $7,184 and $4,091, respectively, and had delays in payment ranging from 30 days to 3 months in 2015 and 2014. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

 

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

 

Credit Quality Indicators:

 

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

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

The Company uses the following definitions for risk ratings.

 

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

 

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

 

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

 

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

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

		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				—

 

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, 2015:

 

		Dollars in thousands
Balance at beginning of year		$	18,696
New loans			30,464
Effect of changes in composition of related parties			(17	)
Principal repayments			(30,149	)
Balance at end of year		$	18,994

 

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, 2015, available balances on these commitments to these persons aggregated approximately $10,521.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Note 5 – Real Estate Owned

 

The following table presents a roll forward of other real estate owned as of December 31, 2015, 2014 and 2013, respectively.

 

		2015				2014				2013
		(Dollars in thousands)
Beginning balance, January 1		$	1,107			$	1,014			$	3,490
Additions			611				1,256				1,074
Provision charged to expense			(14	)			(271	)			(600	)
Sales			(1,460	)			(935	)			(2,908	)
Gain (loss) on sale of OREO			116				43				(42	)
Ending balance, December 31		$	360			$	1,107			$	1,014

 

Activity in the valuation allowance was as follows:

 

		2015				2014				2013
		(Dollars in thousands)
Beginning balance		$	317			$	51			$	1,087
Provision charged to expense			14				271				600
Sales			(84	)			(5	)			(1,636	)
Ending balance		$	247			$	317			$	51

 

Expenses related to foreclosed assets include:

 

		2015				2014				2013
		(Dollars in thousands)
(Gain) loss on sale of OREO		$	(116	)		$	(43	)		$	42
OREO expenses, net of rental income			23				88				85
Provision charged to expense			14				271				600
		$	(79	)		$	316			$	727

 

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:

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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).

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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 8% should be applied to properties with appraisals performed within 12 months.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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, 2015 and 2014.

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 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			114,092				-				114,092				-
U.S. GSE's MBS - commercial			15,944				-				15,944				-
U.S. GSE's CMO			124,461				-				124,461				-
Corporate bonds			109,469				-				109,357				112
Total available-for-sale securities			644,465				-				644,353				112
Loans held for sale			18,365				-				18,365				-
Mortgage banking derivatives			6				-				6				-
		$	662,836				-				662,724				112
Liabilities:
Interest rate swap derivatives			1,959				-				1,959				-
		$	1,959				-				1,959				-

 

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

 

Transfers between Level 1 and Level 2:

 

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

 

Transfers between Level 2 and Level 3:

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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, 2015 and 2014.

 

Fair Value Measurements Using Significant Unobservable

Inputs (Level 3)

 

		Total				Corporate bonds
		(Dollars in thousands)
Beginning balance, January 1, 2015		$	112				112
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales			-				-
Other-than-temporary impairment			-				-
Included in other comprehensive income			26				26
Purchases, sales, issuances and settlements
Purchases			-				-
Sales, Calls			-				-
Issuances			-				-
Settlements			-				-
Principal repayments			-				-
Transfers into Level 3			-				-
Transfers out of Level 3			(138	)			(138	)
Ending balance, December 31, 2015		$	-			$	-

 

Fair Value Measurements Using Significant Unobservable

Inputs (Level 3)

 

		Total				Corporate bonds
		(Dollars in thousands)
Beginning balance, January 1, 2014		$	110				110
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales			-				-
Other-than-temporary impairment			-				-
Included in other comprehensive income			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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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.

 

As of December 31, 2015, there were no financial instruments measured at fair value on a recurring basis using Level 3 inputs.

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a recurring basis at December 31, 2014.

 

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

%

 

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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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, 2015 and 2014 are summarized below.

 

		December 31,				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		2015				(Level 1)				(Level 2)				(Level 3)
		(Dollars in thousands)
Assets:
Impaired loans (1)
Commercial, financial and agricultural		$	810				-				-				810
Real estate:
Commercial			6,241				-				-				6,241
Residential			1,166				-				-				1,166
Acquisition, development and construction			1,954				-				-				1,954
		$	10,171				-				-				10,171
Other real estate owned
Real estate:
Acquisition, development and construction		$	360				-				-				360
		$	360				-				-				360
		$	10,531				-				-				10,531

 

(1)

Includes loans directly charged down to fair value

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 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:
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

 

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 $10,171, resulting in an additional provision for loan losses of $3,342 for the year ended December 31, 2015.

 

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

 

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

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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, 2015 and 2014.

 

		Dec. 31,				Valuation		Unobservable		Range
		2015				Techniques		Inputs		(Weighted Avg)
		(Dollars in thousands)
Impaired loans
Commercial, financial and agricultural			810			sales comparison		adjustment for		0.00% - 30.00% (15.00%)
								differences between
								the comparable sales
						income approach		capitalization rate		10.82%
Real estate:
Commercial			6,241			sales comparison		adjustment for		0.00% - 70.99% (17.70%)
								differences between
								the comparable sales
						income approach		capitalization rate		8.25% - 9.50% (9.31%)
						income approach		discount rate		4.75%
Residential			1,166			sales comparison		adjustment for		0.00% - 37.00% (8.06%)
								differences between
								the comparable sales
						liquidation value
Acquisition, development and construction			1,954			sales comparison		adjustment for		0.00% - 40.00% (17.31%)
								differences between
								the comparable sales
Other real estate owned
Real estate:
Acquisition, development and construction			360			sales comparison		adjustment for		11.00% - 25.00% (18.00%)
								differences between
								the comparable sales

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 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

 

Fair Value Option:

 

The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. None of these loans are past due 90 days or more or on nonaccrual as of December 31, 2015 and 2014.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

As of December 31, 2015 and 2014, the aggregate fair value, unpaid principal balance (including accrued interest), and gain or loss was as follows:

 

		2015				2014
		(Dollars in thousands)
Aggregate fair value		$	18,647				18,365
Unpaid principal balance			18,345				17,979
Gain			303				388

 

Interest income on loans held for sale is recognized based on contractual rates and is reflected in loan interest income in the consolidated statements of comprehensive income (loss). The following table details gains and losses from changes in fair value included in earnings for the years ended December 31, 2015, 2014 and 2013 for loans held for sale.

 

		2015				2014				2013
		(Dollars in thousands)
Change in fair value		$	(85	)			142				(456	)

 

Fair Value of Financial Instruments:

 

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

 

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

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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 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.

 

(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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

(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, 2015 and 2014, not previously presented, are as follows:

 

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

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

Note 7 – Premises and Equipment

 

Premises and equipment at December 31, 2015 and 2014 are summarized as follows:

 

		2015				2014
		(Dollars in thousands)
Land		$	9,149			$	9,109
Buildings			24,708				24,620
Furniture and equipment			17,353				16,278
			51,210				50,007
Less accumulated depreciation			23,812				22,165
		$	27,398			$	27,842

 

Depreciation expense amounted to $2,264, $2,061 and $1,869, in 2015, 2014 and 2013, respectively.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Note 8 – Commitments

 

The Company is committed under various operating leases for office space and equipment. At December 31, 2015, minimum future lease payments under non-cancelable real property and equipment operating leases are as follows:

 

		(Dollars in thousands)
2016		$	263
2017			159
2018			85
2019			13
2020			5
2021 & Beyond			-
		$	525

 

Rent and lease expense for all building, equipment, and furniture rentals totaled $299, $237, and $258, for the years ended December 31, 2015, 2014, and 2013, 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 $226,331 and $171,911, at December 31, 2015 and 2014, respectively. This includes standby letters of credit of $4,494 at December 31, 2015 and $5,730 at December 31, 2014. These commitments are primarily at variable interest rates. Fixed rate commitments totaled $51,774 and $36,924 at December 31, 2015 and 2014, respectively. The rates on these commitments ranged from 2.63% to 16.00% at December 31, 2015 and 1.90% to 16.00% at December 31, 2014. Maturity dates ranged from 1/5/2016 to 7/21/2024, at December 31, 2015, and 1/2/2015 to 7/21/2024 at December 31, 2014.

 

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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Note 9 – Deposits

 

Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at December 31, 2015 and 2014 totaled $64,169 and $58,396, respectively.

 

At December 31, 2015, scheduled maturities of certificates of deposit are as follows:

 

		Dollars in thousands
2016		$	204,313
2017			96,273
2018			14,518
2019			8,190
2020			10,051
Total		$	333,345

 

Brokered deposits as of December 31, 2015 and 2014 totaled $159,180 and $188,094, 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, 2015 and 2014 was $19,324 and $15,448, respectively. The repurchase agreements at December 31, 2015 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, 2015, 2014 and 2013.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

		2015				2014				2013
		(Dollars in thousands)
Securities Sold Under Repurchase Agreements
Weighted average borrowing rate at year-end			0.73	%			0.40	%			0.40	%
Weighted average borrowing rate during the year			0.49	%			0.41	%			0.50	%
Average daily balance during the year		$	2,464				1,206				1,247
Maximum month-end balance during the year			15,684				10,711				10,718
Balance at year-end			15,684				10,678				808

 

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, 2015 and 2014.

 

		2015				Rate				2014				Rate
		(Dollars in thousands)
Due January 18, 2017		$	15,000				1.290	%		$	15,000				1.290	%
Due June 16, 2017			10,000				0.980	%			-				-
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 September 5, 2017			10,000				0.890	%			-				-
Due October 20, 2017			9,000				0.800	%			-				-
Due January 31, 2018			10,000				2.475	%			10,000				2.475	%
Due January 28, 2019 convertible flipper			5,000				4.100	%			5,000				4.100	%
Due April 22, 2019 convertible flipper			-				-				8,000				4.750	%
Due May 22, 2019 convertible flipper			6,000				4.680	%			6,000				4.680	%
		$	85,000							$	64,000

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. 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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

At December 31, 2015 and 2014, the Company has pledged, under a blanket floating lien, eligible first mortgage loans with unpaid balances which, when discounted at approximately 76% and 79% of such unpaid principal balances, total $129,129 and $116,786, respectively. The Company has also pledged for this lien eligible commercial real estate loans with unpaid balances which, when discounted at approximately 59% and 56% of such unpaid principal balances, total $47,932 and $51,138, respectively, at December 31, 2015 and 2014. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to a total of $90,768 at December 31, 2015.

 

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, 2015 and 2014. The borrowing capacity is based upon the loan collateral value. At December 31, 2015 and 2014, the Company pledged eligible loans with unpaid balances, which when discounted at approximately 71% and 76% of such unpaid principal balances, total $74,554 and $65,393, respectively.

 

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% (1.91% at December 31, 2015), 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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Note 12 – Income Taxes

Income tax expense for the years ended December 31, 2015, 2014 and 2013 consists of the following:

 

		2015				2014				2013
		(Dollars in thousands)
Current tax expense:
Federal		$	6,282			$	7,484			$	5,838
State			735				715				432
Total current			7,017				8,199				6,270
Deferred tax expense
Federal			1,954				(606	)			761
State			167				(111	)			116
Total deferred			2,121				(717	)			877
Total income tax expense		$	9,138			$	7,482			$	7,147

 

Income tax expense differed from the amount computed by applying the statutory Federal corporate tax rate of 35% in 2015, 2014 and 2013 to income before income taxes as follows:

 

		Years ended December 31
		2015				2014				2013
		(Dollars in thousands)
Computed "expected" tax expense		$	9,987			$	8,440			$	8,223
Increase (decrease) resulting from:
Tax-exempt interest income			(1,175	)			(1,005	)			(1,040	)
Nondeductible interest expense			76				32				33
State income tax, net of Federal tax effect			586				393				356
Earnings on cash surrender value of bank-owned life insurance			(441	)			(407	)			(415	)
Other, net			105				29				(10	)
		$	9,138			$	7,482			$	7,147

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2015 and 2014 are presented below:

 

		2015				2014
		(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses		$	8,263			$	9,797
Deferred compensation			5,440				4,988
Writedowns of other real estate			96				122
Fair value adjustment on cash flow hedge			783				762
Other			978				868
Total deferred tax assets			15,560				16,537
Deferred tax liabilities:
Unrealized gain on investment securities available for sale			(12	)			(807	)
Depreciation			(1,427	)			(115	)
Prepaid assets and other			(114	)			(181	)
Other			(49	)			(171	)
Total deferred tax liabilities			(1,602	)			(1,274	)
Net deferred tax asset		$	13,958			$	15,263

 

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, 2015.

 

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 2012.

 

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, 2015, 2014 and 2013 was not material.

 

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, 2015 and 2014, these deposits totaled approximately $26,086 and $23,336, respectively. See Note 4 for discussion of related party loans.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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 following table) of Total, Tier 1 and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Capital amounts and ratios for December 31, 2014 are calculated using Basel I rules. Management believes, as of December 31, 2015, that the Company meets all capital adequacy requirements to which it is subject.

 

As of December 31, 2015, 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 1 risk-based, Common Equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. Management is not aware of the existence of any conditions or events occurring subsequent to December 31, 2015 which would affect the Bank’s well capitalized classification.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Actual capital amounts and ratios for the Company are presented in the following table as of December 31, 2015 and 2014, 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, 2015:
Risk-based capital:
Common Equity Tier I capital		$	170,985				13.40	%		$	57,416				4.50	%			N/A				N/A
Tier I capital			190,985				14.97	%			76,555				6.00	%			N/A				N/A
Total capital			207,001				16.22	%			102,073				8.00	%			N/A				N/A
Tier I capital - leverage			190,985				10.34	%			73,899				4.00	%			N/A				N/A
As of December 31, 2014:
Risk-based capital:
Tier I capital		$	175,075				14.97	%		$	46,793				4.00	%			N/A				N/A
Total capital			189,832				16.23	%			93,586				8.00	%			N/A				N/A
Tier I capital - leverage			175,075				9.86	%			71,039				4.00	%			N/A				N/A
Georgia Bank & Trust Company
As of December 31, 2015:
Risk-based capital:
Common Equity Tier I capital		$	179,517				14.09	%		$	57,321				4.50	%		$	82,797				6.50	%
Tier I capital			179,517				14.09	%			76,428				6.00	%			101,904				8.00	%
Total capital			195,507				15.35	%			101,904				8.00	%			127,380				10.00	%
Tier I capital - leverage			179,517				9.74	%			82,933				4.50	%			92,148				5.00	%
As of December 31, 2014:
Risk-based capital:
Tier I capital		$	167,385				14.33	%		$	46,707				4.00	%		$	70,061				6.00	%
Total capital			182,116				15.60	%			93,414				8.00	%			116,768				10.00	%
Tier I capital - leverage			167,385				9.44	%			79,798				4.50	%			88,665				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. The Company’s ratio at 10.34% and the Bank’s ratio at 9.74% exceed the minimum required, at December 31, 2015.

 

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 2016 from GB&T is approximately $10,140, subject to maintenance of the minimum capital requirements and compliance with other banking regulations regarding the payment of dividends.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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, 2015, 2014 and 2013, the Company contributed $982, $874 and $910, respectively, to the Plan, which is 5% of the annual salary of all eligible employees for 2015, 2014 and 2013.

 

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 $1,160, $2,126 and $324, during 2015, 2014 and 2013, respectively, related to these agreements. The total amount accrued at December 31, 2015 and 2014 was $13,637 and $12,598, respectively.

 

The following tables set forth the status of the salary continuation agreements at December 31, 2015, 2014 and 2013.

 

		2015				2014				2013
		(Dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year		$	12,598			$	10,628			$	10,404
Service cost			609				553				780
Interest cost			589				532				468
Prior service cost			105				-				-
Cumulative effect of change in discount rate			(144	)			1,041				(924	)
Benefits paid			(120	)			(156	)			(100	)
Projected benefit obligation at end of year		$	13,637			$	12,598			$	10,628

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Assumptions used to determine the benefit obligation at year end:

 

		2015				2014
Discount rate			4.62	%			4.50	%

 

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

 

		2015				2014
Full benefit		$	35,194			$	30,054
Vested benefit			22,725				21,395

 

At December 31, 2015 the estimated payments to be made over the next five years are as follows:

 

2016		$	551
2017			673
2018			784
2019			817
2020			819
		$	3,644

 

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, 2015, due to employee terminations and expiration of granted options, 175,793 options have reverted back to the option pool and are available for re-granting as non-qualified options under the 2000 Plan.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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 option 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, 2015 and 2014, total options, issued and outstanding, granted under this Plan were 83,967. As of December 31, 2015, 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 400 shares of treasury stock during 2015 and 1,282 shares of treasury stock during 2014. The Company did not issue any shares of treasury stock or additional stock in relation to exercised stock options in 2015 and 2014.

 

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 years ended December 31, 2015 and 2014, no expense was recognized. For the year ended December 31, 2013, the Company recognized $6 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 2015, 2014 and 2013.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Options outstanding - December 31, 2014			129,250			$	34.32				1.59
Granted in 2015			-				-				-
Options exercised in 2015			-				-				-
Options lapsed in 2015			-				-				-
Options expired in 2015			(35,200	)			33.50				-
Options Outstanding - December 31, 2015			94,050			$	34.62				0.97				-
Fully vested or expected to vest			94,050			$	34.62				0.97				-
Exercisable at December 31, 2015			94,050			$	34.62				0.97				-

 

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

 

		2015				2014				2013
		(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, 2015, there was no unrecognized compensation cost related to nonvested options that vest over a five year period.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Options outstanding - December 31, 2014			5,500			$	31.18				0.50				-
Options expired in 2015			(5,500	)			31.18				-				10
Options Outstanding - December 31, 2015			-			$	-				-			$	-
Exercisable at December 31, 2015			-			$	-				-			$	-

 

As of December 31, 2015 and December 31, 2014, 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. For the years ended December 31, 2015 and 2014, the Company recognized $467 and $389 in compensation expense related to the restricted stock awards.

 

A summary of changes in the Company’s nonvested shares for the year ended December 31, 2015 is as follows:

 

						Weighted Avg
		Number of				Grant-Date
		Shares				Fair Value
Nonvested at January 1, 2015			63,000			$	21.60
Granted			-				-
Vested			(21,000	)			21.60
Forfeited			-				-
Nonvested at December 31, 2015			42,000			$	21.60

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

As of December 31, 2015, there was $505 of total unrecognized compensation cost related to nonvested shares granted under the Plan. This cost is being recognized over a period of thirteen months.

 

The total fair value of shares vested during the year ended December 31, 2015 was $567 based on the market price as of the vesting date.

 

Note 17 – Other Operating Expenses

 

Components of other operating expenses exceeding 1% of total revenues include the following for the years ended December 31, 2015, 2014, and 2013:

 

		2015				2014				2013
		(Dollars in thousands)
Marketing and business development		$	2,027			$	1,840			$	1,821
Processing expense			3,443				3,015				2,127
Legal and professional fees			1,639				1,980				1,552
Data processing expense			1,600				1,484				1,566
FDIC Insurance			859				1,047				1,147
Communication expense			1,112				937				816
Teller & operational losses			911				336				287
Loan costs (excluding ORE)			773				1,263				1,333
Other expense			2,261				2,311				2,274
Total other operating expense		$	14,625			$	14,213			$	12,923

 

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.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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

 

		December 31, 2015				December 31, 2014
		(Dollars in thousands)
Notional Amounts		$	10,000			$	10,000
Weighted average pay rates			5.35	%			5.35	%
Weighted average receive rates			1.91	%			1.64	%
Weighted average maturity			13.08 years				14.08 years
Unrealized losses		$	2,013			$	1,959

 

The swaps were forward starting and had effective dates of March 15, 2012 and June 15, 2012. Interest expense recorded on these swap transactions totaled $370, $376 and $372 at December 31, 2015, 2014 and 2013, 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, 2015, the Company had pledged $2,237 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, 2015, no collateral had been pledged by the counterparty.

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

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
		2015				2014
		(Dollars in thousands)
Assets
Cash and cash equivalents		$	10,728				6,759
Investment in banking subsidiaries			179,675				168,793
Premises and equipment, net			541				586
Deferred tax asset, net			995				983
Income tax receivable			13				158
Other assets			25				24
		$	191,977				177,303
Liabilities and Stockholders' Equity
Liabilities:
Interest rate swap derivatives		$	2,013				1,959
Accrued interest and other liabilities			51				58
Subordinated debentures			20,000				20,000
Total liabilities			22,064				22,017
Stockholders' equity			169,913				155,286
		$	191,977				177,303

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Condensed Statements of Income

 

		Years ended December 31
		2015				2014				2013
		(Dollars in thousands)
Income:
Dividend income		$	8,211				6,310				4,211
Interest income on interest-bearing deposits in other banks			3				1				2
Miscellaneous income			102				102				102
			8,316				6,413				4,315
Expense:
Interest expense			725				763				846
Salaries and other personnel expense			467				389				-
Occupancy expense			59				59				60
Other operating expense			294				160				145
			1,545				1,371				1,051
Income before equity in undistributed earnings of banking subsidiaries			6,771				5,042				3,264
Equity in undistributed earnings of banking subsidiaries			12,072				11,104				12,722
Income tax benefit			(552	)			(486	)			(360	)
Net income		$	19,395				16,632				16,346

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Condensed Statements of Cash Flows

 

		Year Ended December 31
		2015				2014				2013
		(Dollars in thousands)
Cash flows from operating activities:
Net income		$	19,395				16,632				16,346
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation			45				45				45
Deferred income tax expense (benefit)			8				(166	)			-
Equity in undistributed earnings of banking subsidiaries			(12,072	)			(11,104	)			(12,722	)
Stock-based compensation expense			467				389				-
Decrease in accrued interest payable and other liabilities			(6	)			(10	)			(4	)
Decrease (increase) in other assets			144				(159	)			629
Net cash provided by operating activities			7,981				5,627				4,294
Cash flows from financing activities:
Payments of subordinated debentures			-				(1,547	)			-
Purchase of treasury stock			(11	)			(31	)			-
Payment of cash dividends			(4,047	)			(3,499	)			(2,605	)
Tax benefit from stock-based compensation			46				-				-
Proceeds from stock options exercised, net of stock redeemed			-				-				43
Net cash used in financing activities			(4,012	)			(5,077	)			(2,562	)
Net increase in cash and cash equivalents			3,969				550				1,732
Cash and cash equivalents at beginning of year			6,759				6,209				4,477
Cash and cash equivalents at end of year		$	10,728				6,759				6,209

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Note 20 – Other Comprehensive (Loss) Income

 

Other comprehensive (loss) income 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 (loss) income balances, net of tax.

 

		Unrealized Gain (Loss) on Derivatives				Unrealized Gain (Loss) on Securities				Accumulated Other Comprehensive Income (Loss)
		(Dollars in thousands)
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
Current Year change			(32	)			(1,250	)			(1,282	)
Balance, December 31, 2015		$	(1,229	)		$	18			$	(1,211	)

 

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

 

		Years Ended December 31,
		2015				2014				2013
Details about Accumulated Other Comprehensive (Loss) Income Components		Amount reclassified from Accumulated Other Comprehensive Loss				Amount reclassified from Accumulated Other Comprehensive Income				Amount reclassified from Accumulated Other Comprehensive Loss				Affected line item in the Statement where Net Income is presented
(Dollars in thousands)
Unrealized gains and losses on available-for-sale securities
		$	(1,043	)		$	825			$	(895	)		Investment securities (losses) gains, net
		$	334			$	(256	)		$	272			Tax benefit (expense)
		$	(709	)		$	569			$	(623	)		Net of tax

 

 

SOUTHEASTERN BANK FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2015, 2014 and 2013

 

Note 21 – Quarterly Financial Data (Unaudited)

 

The supplemental quarterly financial data for the years ended December 31, 2015 and 2014 is summarized as follows:

 

		Quarters ended
		March 31,				June 30,				September 30,				December 31,
		2015				2015				2015				2015
		(Dollars in thousands)
Interest income		$	15,189				16,002				15,549				15,744
Interest expense			2,101				2,079				2,011				2,036
Net interest income			13,088				13,923				13,538				13,708
Provision (Credit) for loan losses			547				(2,690	)			132				383
Noninterest income			4,719				4,019				5,307				4,643
Noninterest expense			11,065				12,211				11,571				11,193
Net income			4,206				5,689				4,865				4,635
Net income per share - basic			0.63				0.85				0.73				0.69
Net income per share - diluted			0.63				0.85				0.72				0.69

 

		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

 

 

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 2015, 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.

 

 

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, 2015. 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, 2015, internal control over financial reporting was effective. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 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 26, 2016

 

 

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, 2015, 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, 2015, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

 

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, 2015 and 2014 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, 2015, and our report dated February 26, 2016 expressed an unqualified opinion on those consolidated financial statements.

 

/s/ Crowe Horwath LLP

 

Franklin, Tennessee

February 26, 2016

 

 

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 2016 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 29, 2016).

 

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 2016 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 29, 2016).

 

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, 2015.

 

 

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			94,050			$	34.62				303,826
Equity compensation plans not approved by security holders			0				0				0
TOTAL			94,050			$	34.62				303,826

  

Additional information in response to this item is incorporated by reference to the Company’s definitive Proxy Statement for use in connection with the 2016 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 29, 2016).

 

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 2016 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 29, 2016).

 

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 2016 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the Commission not later than April 29, 2016).

 

 

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, 2015 between the Bank & R. Daniel Blanton (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 23, 2015.)*
	10.2		Key Officer Compensation Agreement dated January 1, 2015 between the Bank & Ronald L. Thigpen (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 23, 2015.)*
	10.3		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.)*
	10.4		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.)*

 

 

	10.5		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.)*
	10.6		2000 Long Term Incentive Plan (Incorporated by reference to Appendix A to the Company’s definitive Proxy Statement, filed on March 29, 2001.)*
	10.7		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.)*
	10.8		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.)*
	10.9		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.)*
	10.10		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.)*
	10.11		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.)*
	10.12		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.)*
	10.13		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.)*
	10.14		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.)*

 

 

	10.15		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.)*
	10.16		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.)*
	10.17		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.)*
	10.18		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.)*
	10.19		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.)*
	10.20		Employment Agreement dated January 1, 2015 between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 23, 2015.)*
	10.21		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.)
	10.22		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
	101		Interactive Data Files providing financial information from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 in XBRL (eXtensible Business Reporting Language).

 

* Denotes a management compensatory agreement or arrangement.

 

 

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 26, 2016

 

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 26, 2016

 

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		Executive Vice President and Chief
Darrell R. Rains		Financial Officer (Principal Financial
		and Accounting Officer)

 

 

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

 

 

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, 2015 between the Bank & R. Daniel Blanton (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 23, 2015.)*
10.2		Key Officer Compensation Agreement dated January 1, 2015 between the Bank & Ronald L. Thigpen (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 23, 2015.)*
10.3		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.)*
10.4		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.)*

 

 

10.5		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.)*
10.6		2000 Long Term Incentive Plan (Incorporated by reference to Appendix A to the Company’s definitive Proxy Statement, filed on March 29, 2001.)*
10.7		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.)*
10.8		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.)*
10.9		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.)*
10.10		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.)*
10.11		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.)*
10.12		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.)*

 

 

10.13		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.)*
10.14		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.)*
10.15		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.)*
10.16		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.)*
10.17		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.)*
10.18		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.)*
10.19		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.)*

 

 

10.20		Employment Agreement dated January 1, 2015 between the Bank and Darrell R. Rains. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 23, 2015.)*
10.21		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.)
10.22		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, 2015 in XBRL (eXtensible Business Reporting Language).

 

* Denotes a management compensatory agreement or arrangement.