NOTE 4 – ASSETS ACQUIRED IN FDIC-ASSISTED ACQUISITIONS

From October 2009 through July 2012, the Company participated in ten 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
Montgomery Bank & Trust (“MBT”)	Ailey, Ga.	2	July 6, 2012

On July 6, 2012, the Bank purchased certain assets and assumed substantially all the deposits of Montgomery Bank & Trust (“MBT”) from the FDIC, as Receiver of MBT. MBT operated two branches in Ailey and Vidalia, Georgia. The Bank assumed approximately $156.6 million in customer deposits and acquired approximately $18.1 million in assets, including approximately $16.7 million in cash and cash equivalents and approximately $1.2 million in deposit-secured loans. The assets were acquired without a discount and the deposits were assumed with no premium. To settle the transaction, the FDIC made a cash payment to the Bank totaling approximately $138.7 million, based on the differential between liabilities assumed and assets acquired.

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


(Dollars in Thousands)	Montgomery Bank & Trust
Assets acquired:
Cash and due from banks	$	16,726
Loans		1,218
Other assets		183

Assets acquired		18,127
Cash received (paid) to settle the acquisition		138,740

Fair value of assets acquired	$	156,867

Liabilities assumed:
Deposits	$	156,699
Other liabilities		168

Fair value of liabilities assumed	$	156,867

Net assets acquired / gain from acquisition	$	—

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 September 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 estimated 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 estimated 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 and MBT 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 September 30,				Nine Months Ended September 30,
	2012		2011		2012			2011
Net interest income and noninterest income	$	38,069	$	65,844	$	134,799		$	138,697
Net income (loss)	$	1,903	$	8,596	$	(14,905	)	$	(3,957	)
Net income (loss) available to common stockholders	$	1,076	$	7,779	$	(17,364	)	$	(6,379	)
Income (loss) per common share available to common stockholders – basic	$	0.05	$	0.33	$	(0.73	)	$	(0.27	)
Income (loss) per common share available to common stockholders – diluted	$	0.04	$	0.33	$	(0.72	)	$	(0.27	)
Average number of shares outstanding, basic		23,819		23,438		23,800			23,439
Average number of shares outstanding, diluted		23,973		23,559		23,954			23,530

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 September 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
	(Dollars in thousands)
As of September 30, 2012:

AUB	$	28,955	$	2,532	$	—	$	26,423	$	10,342	$	—	$	10,342	$	36,765	$	3,256

USB		33,145		5,036		—		28,109		7,641		99		7,542		35,651		8,408

SCB		44,340		3,892		—		40,448		10,464		646		9,818		50,266		6,130

FBJ		33,312		6,299		43		26,970		3,407		572		2,835		29,805		6,731

DBT		186,815		47,598		331		138,886		33,404		2,798		30,606		169,492		63,789

TBC		51,084		5,790		212		45,082		10,110		1,533		8,577		53,659		15,559

HTB		95,904		18,727		56		77,121		15,219		5,766		9,453		86,574		23,698

OGB		86,091		18,719		146		67,226		7,874		3,663		4,211		71,437		21,419

CBG		139,583		43,406		208		95,969		8,518		3,007		5,511		101,480		49,450

Total	$	699,229	$	151,999	$	996	$	546,234	$	106,979	$	18,084	$	88,895	$	635,129	$	198,440


	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
	(Dollars in thousands)
As of December 31, 2011:

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
	(Dollars in thousands)
As of September 30, 2011:

AUB	$	39,217	$	3,594	$	64	$	35,559	$	13,415	$	37	$	13,378	$	48,937	$	3,215

USB		58,121		5,913		199		52,009		7,489		51		7,438		59,447		7,431

SCB		58,748		6,029		258		52,461		10,957		500		10,457		62,918		5,365

FBJ		42,499		8,239		108		34,152		3,037		1,559		1,478		35,630		8,863

DBT		313,029		112,480		827		199,722		35,672		8,774		26,898		226,620		104,739

TBC		90,044		18,995		371		70,678		6,955		1,274		5,681		76,359		19,046

HTB		129,269		47,738		73		81,458		21,953		12,618		9,335		90,793		47,604

OGB		110,188		40,609		190		69,389		19,242		12,000		7,242		76,631		43,456

Total	$	841,115	$	243,597	$	2,090	$	595,428	$	118,720	$	36,813	$	81,907	$	677,335	$	239,719

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	September 30, 2012		December 31, 2011		September 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)	$	16,210	$	22,031	$	15,846

Adjustments needed where the Company’s initial estimate of cash flows were overstated: (recorded through a provision for loan losses)		11,435		11,940		8,055

Amounts reflected in the Company’s Statement of Operations	September 30, 2012		December 31, 2011		September 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)	$	3,242	$	4,406	$	3,169

Adjustments needed where the Company’s initial estimate of cash flows were overstated: (recorded through a provision for loan losses)		2,287		2,388		1,611

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


(Dollars in Thousands)	September 30, 2012			December 31, 2011			September 30, 2011
Balance, January 1	$	307,790		$	252,535		$	252,535
Change in estimate of cash flows, net of charge-offs or recoveries		(7,119	)		(25,787	)		(18,815	)
Additions due to acquisitions		73,414			124,136			124,136
Other (loan payments, transfers, etc.)		(70,402	)		(43,094	)		(36,899	)

Ending balance	$	303,683		$	307,790		$	320,957

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


(Dollars in Thousands)	September 30, 2012			December 31, 2011			September 30, 2011
Balance, January 1	$	266,966		$	302,456		$	302,456
Change in estimate of cash flows, net of charge-offs or recoveries		3,861			(11,604	)		(16,886	)
Additions due to acquisitions		51,367			35,439			35,439
Other (loan payments, transfers, etc.)		(72,755	)		(59,325	)		(46,538	)

Ending balance	$	249,439		$	266,966		$	274,471

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


(Dollars in Thousands)	September 30, 2012			December 31, 2011			September 30, 2011
Balance, January 1	$	29,537		$	37,383		$	37,383
Additions due to acquisitions		9,863			24,094			24,094
Accretion		(36,241	)		(36,519	)		(18,765	)
Other activity, net		16,210			4,579			(1,606	)

Ending balance	$	19,369		$	29,537		$	41,106

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 nine months ended September 30, 2012, for the year ended December 31, 2011 and for the nine months ended September 30, 2011 are as follows:


(Dollars in Thousands)	September 30, 2012			December 31, 2011			September 30, 2011
Balance, January 1	$	242,394		$	177,187		$	177,187
Indemnification asset recorded in acquisitions		52,654			94,973			94,973
Payments received from FDIC		(97,399	)		(36,813	)		(22,107	)
Effect of change in expected cash flows on covered assets		791			7,047			(10,334	)

Ending balance	$	198,440		$	242,394		$	239,719