Note 6 - FDIC For Loss Share Agreements

3 Months Ended

Mar. 31, 2013

Note 6 – FDIC Loss Share Agreements

In connection with the Citizens South acquisition, the Bank assumed two purchase and assumption agreements with the FDIC that cover approximately $91.9 million of loans (the “covered loans”) and $7.7 million of OREO (the “covered OREO”) at March 31, 2013. These assets were acquired by Citizens South in prior transactions with the FDIC.

Within the first purchase and assumption agreement are two loss share agreements which originated in April 2011, related to Citizens South’s acquisition of New Horizons Bank, a Georgia state-chartered bank headquartered in East Ellijay, Georgia. The first loss share agreement covers certain residential loans and OREO for a period of ten years. The other loss-share agreement covers all remaining covered assets for a period of five years. Pursuant to the terms of these loss-share agreements, the FDIC is obligated to reimburse the Bank for 80% of all eligible losses, which begins with the first dollar of loss occurred, and certain collection and disposition expenses with respect to covered assets. The Bank has a corresponding obligation to reimburse the FDIC for 80% of eligible recoveries with respect to covered assets for a period of ten years for residential properties and eight years for all other covered assets. At March 31, 2013, the Bank recorded an estimated receivable from the FDIC in the amount of $6.0 million, which represents the discounted value of the FDIC’s estimated portion of the expected future loan losses.

Within the second purchase and assumption agreement are two loss share agreements which originated in March 2010, related to Citizen South’s acquisition of Bank of Hiawassee, a Georgia state-chartered bank headquartered in Hiawassee, Georgia. Under these loss-share agreements, the FDIC will cover 80% of net loan losses up to $102 million and 95% of net loan losses that exceed $102 million. The term of the loss-share agreements is ten years for losses and recoveries on residential real estate loans, five years for losses on all other loans and eight years for recoveries on all other loans. At March 31, 2013, the Bank recorded an estimated receivable from the FDIC in the amount of $9.3 million, which represents the discounted value of the FDIC’s estimated portion of the expected future loan losses.

The following table provides changes in the receivable from the FDIC during the first quarter of 2013:

Balance, beginning of period	$	18,697
Additional losses to OREO		201
Reimbursable expenses (income)		125
Accretion discounts and premiums, net		35
Reimbursements from the FDIC		(3,415	)
Other changes, net		(303	)
Balance, end of period	$	15,340

The FDIC receivable for loss share agreements is measured separately from the related covered assets and is recorded at carrying value. At March 31, 2013, the projected cash flows related to the FDIC receivable for losses on covered loans and assets was approximately $15.9 million. At December 31, 2012, the projected cash flows related to the FDIC receivable for losses on covered loans and assets was approximately $19.6 million. Subsequent to year-end, the Company received $3.4 million from loss share claims filed, including reimbursable expenses.

In relation to the FDIC indemnification asset is an expected "true-up" with the FDIC related to the loss share agreements above. The loss share agreements between the Bank and the FDIC with respect to New Horizons Bank and Bank of Hiawassee each contain a provision that obligates us to make a "true-up" payment to the FDIC if the realized losses of each of these acquired banks are less than expected. This amount is determined each reporting period. At March 31, 2013, the present value “true-up” amount was estimated to be approximately $5.0 million at the end of the loss share agreements. At December 31, 2012, the “true-up” amount was estimated to be approximately $4.9 million at the end of the loss share agreements. These amounts are recorded in other liabilities on the balance sheet. The actual payment will be determined at the end of the term of the loss sharing agreements and is based on the negative bid, expected losses, intrinsic loss estimate, and assets covered under the loss share agreements.