NOTE 4 – ASSETS ACQUIRED IN FDIC-ASSISTED ACQUISITIONS

From October 2009 through February 2012, the Company participated in nine FDIC-assisted acquisitions whereby the Company purchased certain failed institutions out of the FDIC’s receivership. These institutions include:


Bank Acquired	Location:	Branches:	Date Acquired
American United Bank (“AUB”)	Lawrenceville, Ga.	1	October 23, 2009
United Security Bank (“USB”)	Sparta, Ga.	2	November 6, 2009
Satilla Community Bank (“SCB”)	St. Marys, Ga.	1	May 14, 2010
First Bank of Jacksonville (“FBJ”)	Jacksonville, Fl.	2	October 22, 2010
Tifton Banking Company (“TBC”)	Tifton, Ga.	1	November 12, 2010
Darby Bank & Trust (“DBT”)	Vidalia, Ga.	7	November 12, 2010
High Trust Bank (“HTB”)	Stockbridge, Ga.	2	July 15, 2011
One Georgia Bank (“OGB”)	Midtown Atlanta, Ga.	1	July 15, 2011
Central Bank of Georgia (“CBG”)	Ellaville, Ga.	5	February 24, 2012

On February 24, 2012, the Bank purchased substantially all of the assets and assumed substantially all the liabilities of Central Bank of Georgia (“CBG”) from the FDIC, as Receiver of CBG. CBG operated five branches in Ellaville, Buena Vista, Butler, Cusseta and Macon, Georgia. The Company’s agreement with the FDIC included shared-loss agreements that afford the Bank significant protection from losses associated with loans and OREO. Under the terms of the shared-loss agreements, the FDIC will absorb 80% of all losses and share 80% of all loss recoveries. The shared-loss agreement applicable to single family residential mortgage loans provides for FDIC loss sharing and reimbursement by the Bank to the FDIC for ten years. The shared-loss agreement applicable to commercial loans and securities provides for FDIC loss sharing for five years and reimbursement by the Bank to the FDIC for eight years.

The estimated fair value of the assets acquired and the liabilities assumed are shown below:


(Dollars in Thousands)	Central Bank of Georgia
Assets acquired:
Cash and due from banks	$	33,150
Securities available for sale		39,920
Loans		124,782
Foreclosed property		6,177
Estimated FDIC indemnification asset		52,654
Other assets		4,606

Assets acquired		261,289
Cash received (paid) to settle the acquisition		31,900

Fair value of assets acquired	$	293,189

Liabilities assumed:
Deposits	$	261,036
Other borrowings		10,334
Other liabilities		1,782

Fair value of liabilities assumed	$	273,152

Net assets acquired / gain from acquisition	$	20,037

The Company’s bid to acquire the assets of CBG included a discount of approximately $33.9 million, and the Company received a $31.9 million cash payment from the FDIC to settle the acquisition.

The shared-loss agreements are subject to the servicing procedures as specified in the agreements with the FDIC. The expected reimbursements under the CBG shared-loss agreements were recorded as an indemnification asset at its estimated fair value of $52.7 million on the acquisition date. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded on the transaction.

The CBG transaction resulted in a before-tax gain of $20.0 million, which is included in the Company’s June 30, 2012 Consolidated Statement of Operations. Due to the difference in tax bases of the assets acquired and liabilities assumed, the Bank recorded deferred tax liabilities with respect to CBG of $7.0 million, resulting in an after-tax gain of $13.0 million.

The determination of the initial fair values of loans at the acquisition date and the initial fair values of the related FDIC indemnification assets involves a high degree of judgment and complexity. The carrying values of the acquired loans and the FDIC indemnification assets reflect management’s best estimate of the fair value of each of these assets as of the date of acquisition. However, the amount that the Company realizes on these assets could differ materially from the carrying values reflected in the financial statements included in this report, based upon the timing and amount of collections on the acquired loans in future periods. Because of the loss-sharing agreements with the FDIC on these assets, the Company does not expect to incur any significant losses. To the extent the actual values realized for the acquired loans are different from the estimates, the indemnification assets will generally be affected in an offsetting manner due to the loss-sharing support from the FDIC.

FASB ASC 310 – 30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310”), applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. ASC 310 prohibits carrying over or creating an allowance for loan losses upon initial recognition for loans which fall under the scope of this statement. At the acquisition dates, a majority of these loans were valued based on the liquidation value of the underlying collateral because the future cash flows are primarily based on the liquidation of underlying collateral. There was no allowance for credit losses established related to these ASC 310 loans at the acquisition dates, based on the provisions of this statement. Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected. If the expected cash flows expected to be collected increases, the Company adjusts the amount of accretable discount recognized on a prospective basis over the loan’s remaining life. If the expected cash flows expected to be collected decreases, the Company records a provision for loan loss in its consolidated statement of operations.

On the acquisition date, the preliminary estimates of the contractually required payments receivable for all ASC 310 loans acquired in the CBG acquisition totaled $137.2 million and the estimated fair values of the loans totaled $73.4 million, net of an accretable discount of $10.2 million, the difference between the value of the loans on the Company’s balance sheet and the cash flows they are expected to produce. These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments.

The estimated fair values of loans acquired in the CBG acquisition are detailed below based on their initial estimate of credit quality (dollars in thousands):


	Loans with deterioration of credit quality		Loans without a deterioration of credit quality		Total loans, at fair value
Commercial, industrial, agricultural	$	1,256	$	6,288	$	7,544
Real estate – residential		22,389		22,213		44,602
Real estate – commercial & farmland		34,458		10,538		44,996
Construction & development		15,038		5,507		20,545
Consumer		273		6,822		7,095

	$	73,414	$	51,368	$	124,782

The results of operations of CBG subsequent to the acquisition date are included in the Company’s consolidated statements of operations. The following unaudited pro forma information reflects the Company’s estimated consolidated results of operations as if the acquisitions had occurred on December 31, 2011 and 2010, unadjusted for potential cost savings (in thousands).


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Net interest income and noninterest income	$	37,756	$	37,462	$	94,217	$	70,496
Net income (loss)	$	2,495	$	2,275	$	7,747	$	(2,104	)
Net income (loss) available to common stockholders	$	1,678	$	1,468	$	6,115	$	(3,709	)
Income (loss) per common share available to common stockholders – basic	$	0.07	$	0.06	$	0.26	$	(0.16	)
Income (loss) per common share available to common stockholders – diluted	$	0.07	$	0.06	$	0.26	$	(0.16	)
Average number of shares outstanding, basic		23,819		23,449		23,791		23,445
Average number of shares outstanding, diluted		23,973		23,508		23,945		23,491

In addition to the covered assets acquired in the most recent acquisitions, the Company has other investments in covered assets remaining from its previous FDIC-assisted acquisitions. The following table summarizes components of all covered assets at June 30, 2012 and 2011 and at December 31, 2011 and their origin:


	Covered loans		Less: Credit risk adjustments		Less: Liquidity and rate adjustments		Total covered loans		OREO		Less: Fair value adjustments		Total covered OREO		Total covered assets		FDIC indemnification asset
As of June 30, 2012:	(Dollars in thousands)
AUB	$	29,740	$	2,542	$	—	$	27,198	$	11,489	$	—	$	11,489	$	38,687	$	2,620
USB		40,355		4,666		—		35,689		7,192		50		7,142		42,831		6,757
SCB		46,033		840		—		45,193		11,078		646		10,432		55,625		4,663
FBJ		35,618		6,645		59		28,914		2,787		515		2,272		31,186		7,051
DBT		222,724		60,218		455		162,051		24,121		1,422		22,699		184,750		65,684
TBC		63,593		8,155		252		55,186		8,616		1,184		7,432		62,618		14,838
HTB		98,624		20,676		60		77,888		16,860		6,499		10,361		88,249		25,249
OGB		88,717		22,041		156		66,520		13,397		6,573		6,824		73,344		26,105
CBG		153,342		50,037		207		103,098		8,637		3,821		4,816		107,914		50,834

Total	$	778,746	$	175,820	$	1,189	$	601,737	$	104,177	$	20,710	$	83,467	$	685,204	$	203,801


	Covered loans		Less: Credit risk adjustments		Less: Liquidity and rate adjustments		Total covered loans		OREO		Less: Fair value adjustments		Total covered OREO		Total covered assets		FDIC indemnification asset
As of December 31, 2011:	(Dollars in thousands)
AUB	$	34,242	$	3,236	$	—	$	31,006	$	11,100	$	—	$	11,100	$	42,106	$	7,271
USB		51,409		5,259		50		46,100		7,445		50		7,395		53,495		10,648
SCB		56,780		5,779		155		50,846		10,635		500		10,135		60,981		6,527
FBJ		40,106		7,473		92		32,541		2,370		641		1,729		34,270		8,551
DBT		260,883		68,757		703		191,423		28,947		2,763		26,184		217,607		105,528
TBC		79,586		14,358		331		64,897		8,441		1,274		7,167		72,064		18,628
HTB		110,899		28,024		73		82,802		20,132		10,171		9,961		92,763		48,289
OGB		105,285		33,221		190		71,874		12,615		7,669		4,946		76,820		36,952

Total	$	739,190	$	166,107	$	1,594	$	571,489	$	101,685	$	23,068	$	78,617	$	650,106	$	242,394


	Covered loans		Less: Credit risk adjustments		Less: Liquidity and rate adjustments		Total covered loans		OREO		Less: Fair value adjustments		Total covered OREO		Total covered assets		FDIC indemnification asset
As of June 30, 2011:	(Dollars in thousands)
AUB	$	48,309	$	5,208	$	86	$	43,015	$	11,064	$	77	$	10,987	$	54,002	$	5,338
USB		67,203		6,332		249		60,622		10,274		73		10,201		70,823		9,888
SCB		61,958		6,471		361		55,126		9,761		500		9,261		64,387		9,669
FBJ		45,011		8,500		119		36,392		3,053		1,559		1,494		37,886		9,812
DBT		326,991		112,589		951		213,451		36,383		9,582		26,801		240,252		100,150
TBC		99,529		21,249		397		77,883		6,113		1,274		4,839		82,722		26,070

Total	$	649,001	$	160,349	$	2,163	$	486,489	$	76,648	$	13,065	$	63,583	$	550,072	$	160,927

On the dates of acquisition, the Company estimated the future cash flows on each individual loan and made the necessary adjustments to reflect the asset at fair value. At each quarter end subsequent to the acquisition dates, the Company revises the estimates of future cash flows based on current information and makes the necessary adjustments to continue reflecting the assets at fair value. The adjustments to fair value are performed on a loan-by-loan basis and have resulted in the following:


Total Amounts	June 30, 2012		December 31, 2011		June 30, 2011
	(Dollars in thousands)
Adjustments needed where the Company’s initial estimate of cash flows were underestimated: (recorded with a reclassification from non-accretable difference to accretable discount)	$	8,189	$	22,031	$	8,448
Adjustments needed where the Company’s initial estimate of cash flows were overstated: (recorded through a provision for loan losses)		7,185		11,940		8,018

Amounts reflected in the Company’s Statement of Operations	June 30, 2012		December 31, 2011		June 30, 2011
	(Dollars in thousands)
Adjustments needed where the Company’s initial estimate of cash flows were underestimated: (recorded with a reclassification from non-accretable difference to accretable discount)	$	1,638	$	4,406	$	1,689
Adjustments needed where the Company’s initial estimate of cash flows were overstated: (recorded through a provision for loan losses)		1,437		2,388		1,604

A rollforward of acquired loans with deterioration of credit quality for the six months ended June 30, 2012, the year ended December 31, 2011 and the six months ended June 30, 2011 is shown below:


(Dollars in Thousands)	June 30, 2012			December 31, 2011			June 30, 2011
Balance, January 1	$	307,790		$	252,535		$	252,535
Change in estimate of cash flows, net of charge-offs or recoveries		(3,702	)		(25,787	)		(6,681	)
Additions due to acquisitions		73,414			124,136			—
Other (loan payments, transfers, etc.)		(44,164	)		(43,094	)		(2,648	)

Ending balance	$	333,338		$	307,790		$	243,206

A rollforward of acquired loans without deterioration of credit quality for the six months ended June 30, 2012, the year ended December 31, 2011 and the six months ended June 30, 2011 is shown below:


(Dollars in Thousands)	June 30, 2012			December 31, 2011			June 30, 2011
Balance, January 1	$	266,966		$	302,456		$	302,456
Change in estimate of cash flows, net of charge-offs or recoveries		1,152			(11,604	)		—
Additions due to acquisitions		51,367			35,439			—
Other (loan payments, transfers, etc.)		(42,627	)		(59,325	)		(59,173	)

Ending balance	$	276,858		$	266,966		$	243,283

The following is a summary of changes in the accretable discounts of acquired loans during the six months ended June 30, 2012, the year ended December 31, 2011 and the six months ended June 30, 2011.


(Dollars in Thousands)	June 30, 2012			December 31, 2011			June 30, 2011
Balance, January 1	$	29,537		$	37,383		$	37,383
Additions due to acquisitions		9,863			24,094			—
Accretion		(25,166	)		(36,519	)		(10,073	)
Other activity, net		8,189			4,579			(7,178	)

Ending balance	$	22,423		$	29,537		$	20,132

The shared-loss agreements are subject to the servicing procedures as specified in the agreement with the FDIC. The expected reimbursements under the shared-loss agreements were recorded as an indemnification asset at their estimated fair values on the acquisition dates. Changes in the FDIC shared-loss receivable for the six months ended June 30, 2012, for the year ended December 31, 2011 and for the six months ended June 30, 2011 are as follows:


(Dollars in Thousands)	June 30, 2012			December 31, 2011			June 30, 2011
Balance, January 1	$	242,394		$	177,187		$	177,187
Indemnification asset recorded in acquisitions		52,654			94,973			—
Payments received from FDIC		(86,482	)		(36,813	)		(5,162	)
Effect of change in expected cash flows on covered assets		(4,765	)		7,047			(11,098	)

Ending balance	$	203,801		$	242,394		$	160,927