Ameris Bancorp - FORM 8-K/A - EX-99.3 - EXHIBIT 99.3

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EX-99.4 - EXHIBIT 99.4 - Ameris Bancorp	tv502457_ex99-4.htm
EX-99.2 - EXHIBIT 99.2 - Ameris Bancorp	tv502457_ex99-2.htm
EX-23.1 - EXHIBIT 23.1 - Ameris Bancorp	tv502457_ex23-1.htm
8-K/A - FORM 8-K/A - Ameris Bancorp	tv502457_8k-a.htm

Exhibit 99.3

HAMILTON STATE BANCSHARES, INC.
AND SUBSIDIARIES

Consolidated Financial Statements (Unaudited)

As of and for the three months ended March 31, 2018 and 2017

HAMILTON STATE BANCSHARES, INC.
AND SUBSIDIARIES

Table of Contents

	Page

Consolidated Financial Statements (Unaudited):

Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (Unaudited)	1

Consolidated Statements of Income for the three months ended March 31, 2018 and 2017 (Unaudited)	2

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017 (Unaudited)	3

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2018 and 2017 (Unaudited)	4

Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (Unaudited)	5

Notes to Consolidated Financial Statements (Unaudited)	6

Hamilton State Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

March 31, 2018 and December 31, 2017 (In thousands except share data) (Unaudited)

	March 31,			December 31,
	2018			2017
ASSETS
Cash and due from banks	$	13,039		$	13,712
Interest-bearing deposits in other banks		124,077			108,756
Federal funds sold		3,776			313
Cash and cash equivalents		140,892			122,781
Time deposits in other banks		11,563			11,565
Securities available-for-sale at fair value		170,205			179,036
Securities held to maturity, (fair value of $102,203 and $107,774 at March 31, 2018 and December 31, 2017, respectively)		102,918			106,814
Loans receivable - Acquired:
Loans receivable, net covered		43,560			45,978
Loans receivable, net noncovered		121,511			130,258
Less allowance for loan losses, Acquired Loans		(1,951	)		(2,073	)
Loans receivable, Originated		1,132,039			1,119,944
Less allowance for loan losses, Originated Loans		(9,268	)		(9,410	)
Net Loans		1,285,891			1,284,697
FDIC indemnification assets, net		2,386			3,680
Other real estate owned-covered		164			434
Other real estate owned-noncovered		1,071			1,223
Premises and equipment, net		27,941			28,418
Goodwill		17,477			17,477
Core deposit intangibles, net		1,488			1,769
Deferred tax assets, net		12,162			11,606
Federal Home Loan Bank stock, at cost		2,186			2,245
Bank owned life insurance		4,440			4,426
Accrued interest receivable		5,144			5,473
Other assets		3,250			4,994
Total assets	$	1,789,178		$	1,786,638

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits	$	368,760		$	357,399
Interest-bearing demand deposits		274,830			271,188
Savings and money market		405,071			415,511
Time deposits under $250,000		452,695			447,774
Time deposits over $250,000		58,724			57,803
Total deposits		1,560,080			1,549,675
Borrowings:
Federal Home Loan Bank advances		12,750			12,819
Trust Preferred Securities		3,093			3,093
Clawback liabilities		8,318			8,199
Accrued interest payable and other liabilities		4,587			6,482
Total liabilities		1,588,828			1,580,268
Stockholders' equity:
Common stock; 80,000,000 shares authorized, $0.01 par value, 35,063,586 and 35,032,548 shares issued, 34,693,929 and 34,664,904 shares outstanding as of March 31, 2018 and December 31, 2017, respectively		351			350
Common stock; non-voting; 20,000,000 shares authorized, $0.01 par value, 5,723,226 shares issued and outstanding as of March 31, 2018 and December 31, 2017		57			57
Additional paid-in capital		207,495			211,893
Retained earnings		-			-
Accumulated other comprehensive loss		(4,826	)		(3,220	)
Treasury stock, at cost, 369,657 and 367,644 shares outstanding as of March 31, 2018 and December 31, 2017, respectively		(2,727	)		(2,710	)
Total stockholders' equity		200,350			206,370
Total liabilities and stockholders' equity	$	1,789,178		$	1,786,638

See notes to consolidated financial statements.

Hamilton State Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

Three Months Ended March 31, 2018 and 2017 (In thousands except shares and per share data) (Unaudited)

	Three Months Ended
	March 31,
	2018			2017
Interest income:
Interest and fees on loans	$	17,657		$	18,995
Interest on investment securities		1,528			1,728
Interest on deposits in other banks		426			335
Interest on federal funds sold and securities purchased under agreements to resell		11			5
Total interest income		19,622			21,063
Interest expense:
Deposits		1,513			1,350
Borrowings		102			158
Total interest expense		1,615			1,508
Net interest income		18,007			19,555
Provision for loan losses		(87	)		51
Net interest income after provision for loan losses		18,094			19,504
Other income:
Service charges on deposit accounts		952			1,098
Other commissions and fee income		729			696
Mortgage origination income		164			155
Gains (losses) on sale of securities available for sale		(3	)		(3	)
Other		39			232
Total other income		1,881			2,178
Other expenses:
Salaries and employee benefits		6,914			6,887
Occupancy and equipment		1,759			1,907
Professional fees		445			729
Other real estate owned expenses		139			16
Data processing expenses		969			1,130
Amortization of intangibles		282			373
Amortization of indemnification assets		379			1,433
Clawback liability adjustments, net		120			419
Losses (gains) on other real estate		228			76
Other		2,970			1,577
Total other expenses		14,205			14,547
Income before income taxes		5,770			7,135
Income tax provision		1,370			2,478
Net income	$	4,400		$	4,657
Net income per common share available to common stockholders:
Basic	$	0.11		$	0.12
Diluted		0.10			0.11
Weighted average shares outstanding – basic		40,411,493			40,252,432
Weighted average shares outstanding – diluted		42,477,794			41,755,078

See notes to consolidated financial statements.

Hamilton State Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2018 and 2017 (In thousands except share data) (Unaudited)

	Three Months Ended
	March 31,
	2018			2017

Net income	$	4,400		$	4,657
Components of other comprehensive income:
Reclassification adjustment for net (gains) losses on sale of securities available for sale included in net income, net of tax of $(1) and $(1), respectively		2			2
Change in net unrealized gains (losses) on securities available for sale during the period, net of tax of $(608) and $191, respectively		(1,753	)		300
Amortization of unrealized net loss on securities transferred to held-to-maturity, net of tax of $50 and $91, respectively		145			144
Total other comprehensive income (loss)		(1,606	)		446
Total comprehensive income	$	2,794		$	5,103

See notes to consolidated financial statements.

Hamilton State Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

For the Three Months Ended March 31, 2018 and 2017 (In thousands except share data) (Unaudited)

												Accumulated
						Additional						Other
	Common Stock					Paid-In			Retained			Comprehensive			Treasury Stock					Total
	Shares			Amount		Capital			Earnings			Loss			Shares		Amount			Equity

Balance, January 1, 2017		40,579,922		$	406	$	228,569		$	17,053		$	(3,302	)		361,745	$	(2,667	)	$	240,059
Net income		-			-		-			4,657			-			-		-			4,657
Other comprehensive loss		-			-		-			-			446			-		-			446
Stock-based compensation expense		55,116			-		216			-			-			-		-			216
Surrender of restricted stock units		(3,738	)		-		(31	)		-			-			-		-			(31	)
Contractual dividend forfeited		-			-		1			-			-			-		-			1
Dividend declared		-			-		(28,290	)		(21,710	)		-			-		-			(50,000	)
Balance, March 31, 2017		40,631,300		$	406	$	200,465		$	-		$	(2,856	)		361,745	$	(2,667	)	$	195,348

Balance, January 1, 2018		40,755,774		$	407	$	211,893		$	-		$	(3,220	)		367,644	$	(2,710	)	$	206,370
Net income		-			-		-			4,400			-			-		-			4,400
Other comprehensive income		-			-					-			(1,606	)		-		-			(1,606	)
Stock-based compensation expense		45,073			1		326			-			-			-		-			327
Surrender of restricted stock units		(14,035	)		-		(125	)		-			-			-		-			(125	)
Contractual dividend forfeited		-			-		1			-			-			-		-			1
Dividend declared		-			-		(4,600	)		(4,400	)		-			-		-			(9,000	)
Purchase of treasury stock		-			-		-			-			-			2,013		(17	)		(17	)
Balance, March 31, 2018		40,786,812		$	408	$	207,495		$	-		$	(4,826	)		369,657	$	(2,727	)	$	200,350

See notes to consolidated financial statements.

Hamilton State Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2018 and 2017 (In thousands) (Unaudited)

	Three Months Ended
	March 31,
	2018			2017
Operating activities:
Net income	$	4,400		$	4,657
Adjustments to reconcile net income to net cash provided by operating activities
Accretion, depreciation, and amortization, net		1,715			3,508
Provision for loan losses		(87	)		51
Loss on sales and write-downs of other real estate owned		228			76
Loss on sale of fixed assets		-			1
Loss on sale of securities available for sale		3			3
Stock compensation expense		327			216
Surrender of restricted stock units		(125	)		(31	)
Change in:
FDIC indemnification assets		554			1,984
Bank owned life insurance		(13	)		(14	)
Accrued interest receivable and other assets		2,073			1,929
Accrued interest payable and other liabilities		(1,895	)		(485	)
Net cash provided by operating activities		7,180			11,895
Investing activities:
Purchase of securities available for sale		(12,889	)		-
Maturities of securities available for sale		11,755			2,525
Sale or call of securities available for sale		1,275			660
Principal repayments from mortgage-backed and other securities		5,988			6,906
Principal repayments from securities held to maturity		3,995			4,672
Net change in time deposits in other banks		2			6
Net change in Federal Home Loan Bank stock		59			1,725
Net decrease (increase) in loans		(2,064	)		38,269
Proceeds from sale of and payments received on other real estate		1,150			1,188
Disposals (purchases) of premises and equipment		(62	)		(89	)
Proceeds from the FDIC for indemnification assets		361			2,655
Net cash provided by investing activities		9,570			58,517
Financing activities:
Net increase in deposits		10,414			16,298
Repayment of Federal Home Loan Bank advances		(36	)		(42,036	)
Net decrease in securities sold under agreements to repurchase		-			(3,776	)
Common stock dividend paid		(9,000	)		-
Purchase of treasury stock		(17	)		-
Net cash provided by (used in) financing activities		1,361			(29,514	)
		18,111			40,898
Cash and cash equivalents at beginning of year		122,781			118,857
Cash and cash equivalents at end of year	$	140,892		$	159,755

Supplemental disclosure of cash flow information:
Cash paid for:
Interest		1,624			1,592
Taxes		-			2
Noncash transactions:
Loans transferred to other real estate		501			1,205

See notes to consolidated financial statements.

Hamilton State Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except per share data)

(1)

Summary of Significant Accounting Policies

(a)

Nature of Operations

Hamilton State Bancshares, Inc. (the Parent Company) is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Hamilton State Bank (the Bank). Additionally, certain assets of the Bank, primarily branch locations and other real estate owned, are owned by wholly owned subsidiaries of the Bank. In addition to the Bank, Auto Finance South LLC (Auto Finance) is a subsidiary of the Parent Company. Auto Finance began operations in the second quarter of 2016 and is primarily involved in purchasing automobile loans at a discount. Both the Bank and Auto Finance are included in the consolidated financial statements. Collectively, Hamilton State Bancshares, Inc. and its subsidiaries are hereafter referred to as the “Company.” The Bank is a community-oriented commercial bank with emphasis on both retail and commercial banking. The Bank offers such customary banking services as consumer and commercial checking accounts, savings accounts, mortgages, certificates of deposit, commercial and consumer loans, money transfers and a variety of other banking services. As of March 31, 2018, the Bank had 28 banking offices located in the Georgia cities of Acworth, Braselton, Canton, Cartersville, Cumming, Dallas, Douglasville, Ellenwood, Gainesville, Hoschton, Jackson, Jefferson, Lithia Springs, Locust Grove, Marietta, McDonough, Monticello, Oakwood, Smyrna, Stockbridge, and Woodstock. The Bank conducts its banking activities primarily in Barrow, Bartow, Butts, Cherokee, Cobb, Douglas, Forsyth, Gwinnett, Hall, Henry, Jackson, Jasper, Paulding and surrounding counties.

The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the Federal Reserve) and the Georgia Department of Banking and Finance (the Georgia Department). The Bank is a state bank incorporated under the laws of Georgia and is subject to federal and state laws and regulations. The Company is under the supervision and examination of its primary regulators: the Georgia Department, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC).

(b)

Basis of Presentation and Accounting Estimates

The accompany unaudited consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statement presentation. The interim consolidated financial statements included herein are unaudited but reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods presented. The results of operations for the period ended March 31, 2018 are not necessarily indicative of the results to be expected for the full year.

The consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany transactions and balances have been eliminated in consolidation. All amounts presented in the consolidated financial statements are in thousands except for per share data unless otherwise noted.

In preparing the consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(c)

Acquisition Accounting

The Company acquired all of the outstanding common stock of Highland Commercial Bank on August 31, 2015 and Cherokee Banking Company, Inc. on February 17, 2014 (both non-covered acquisitions) and the significant assets and liabilities of Bartow County Bank (Bartow) on April 15, 2011, McIntosh State Bank (McIntosh) on June 17, 2011, First State Bank (FSB) on January 20, 2012 and Douglas County Bank (DCB) on April 26, 2013 (collectively, the Covered Acquisitions). The Covered Acquisitions were all FDIC assisted transactions. The expiration dates for the covered transactions for non-single family (NSF) and single family residence (SFR) are as follows:

	NSF	SFR

Bartow	Expired	June 30, 2021

McIntosh	Expired	June 30, 2021

FSB	Expired	March 31, 2022

DCB	June 30, 2018	N/A

The Company accounts for business combinations under the acquisition method of accounting. Assets acquired and liabilities assumed are measured and recorded at fair value at the date of acquisition, including identifiable intangible assets. If the fair value of net assets acquired exceeds the fair value of the consideration paid, a bargain purchase gain is recognized at the date of acquisition. Conversely, if the consideration paid exceeds the fair value of the net assets acquired, goodwill is recognized at the acquisition date. Fair values are subject to refinement for up to a maximum of one year after the closing date of an acquisition as information relative to closing date fair values, which could have reasonably been known as of the closing date, becomes available.

The determination of the fair value of loans acquired takes into account credit quality deterioration and probability of loss; therefore, the related allowance for loan losses previously recorded by the acquired institution is not carried forward. The Company has further segregated acquired loans into two separate categories: (1) loans receivable-covered and (2) loans receivable-noncovered. Loans receivable-covered refers to loans covered under a FDIC loss-share agreement and loans receivable-noncovered refers to those acquired loans not covered under a FDIC loss-share agreement. At June 30, 2016, the NSF loss share agreement expired for the Bartow and McIntosh acquisitions and at March 31, 2017, the NSF loss share agreement expired for FSB. Due to this, the remaining loans that were covered under those loss share agreements were transferred from covered to noncovered loans. In the Day 1 Accounting, an adjustment of the unpaid principal balance to reflect an appropriate market rate of interest, given the risk profile and grade is assigned to each loan. This adjustment is accreted into earnings as a yield adjustment, using the effective yield method, over the remaining life of each loan.

Liabilities are also recognized separately to record at fair market value certain time deposits that had contractual interest rates that were different from the prevailing market interest rates at the time of acquisition. The time deposit intangibles are reflected in “Deposits – Time deposits under $250,000” and “Deposits – Time deposits over $250,000” in the accompanying consolidated balance sheets and are accreted to interest expense over the remaining applicable terms of the time deposits to which they apply.

Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity). The related depositor relationship intangible asset, known as the core deposit intangible asset, may be exchanged in observable exchange transactions. As a result, the core deposit intangible asset is considered identifiable, because the separability criterion has been met.

An FDIC indemnification asset is recognized when the FDIC contractually indemnifies, in whole or in part, the Company for a portion of credit losses of acquired covered loan portfolios and losses on covered other real estate owned up to certain specified thresholds. The recognition and measurement of an indemnification asset is based on the related indemnified items. The Company recognizes an indemnification asset at the same time that the indemnified item is recognized and measures it on the same basis as the indemnified items, subject to collectability or contractual limitations on the indemnified amounts.

Under FDIC loss-sharing agreements, the Company may be required to return a portion of cash received from the FDIC in the event that losses do not reach a specified threshold, based on the initial discount less cumulative servicing costs for the covered assets acquired. Such liabilities are referred to as clawback liabilities and are considered to be contingent consideration, as they require the return of a portion of the initial consideration in the event that certain contingencies are met.

(d)

Cash and Cash Equivalents

For purposes of reporting consolidated cash and cash equivalents, the balance includes cash on hand, cash items in process of collection, amounts due from banks, interest-bearing deposits in other banks, and federal funds sold.

The Bank is required at times to maintain average balances in cash with the Federal Reserve Bank. The reserve balances required to be held at the Federal Reserve Bank were $2.6 million and $2.7 million as of March 31, 2018 and December 31, 2017, respectively.

(e)

Reclassifications

Certain items in the 2017 consolidated financial statements have been reclassified to conform to the presentation adopted in 2018. There was no impact to net income available to common stockholders or equity.

(f)

Recently Adopted Accounting Standards

ASU 2014-09 Revenue from Contracts with Customers. In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. On January 1, 2018, the Company adopted ASU 2014-09 and all subsequent amendments to the ASU (collectively ASC 606). The adoption of ASU 606 did not change the timing or amount of revenue recognized for in-scope revenue streams. Accordingly, no cumulative effect adjustment was recorded under the modified retrospective transition method.

ASU 2016-01 – Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 (1) requires equity investments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with changes recognized through net income; (2) simplifies the impairment assessment of equity investments without readily determinable fair values by allowing a qualitative assessment similar to those performed on long-lived assets, goodwill or intangibles to be utilized at each reporting period; (3) eliminates the use of the entry price method requiring all preparers to utilize the exit price notion consistent with Topic 820, Fair Value Measurement in disclosing the fair value of financial instruments measured at amortized cost; (4) requires separate disclosure within other comprehensive income of changes in the fair value of liabilities due to instrument-specific credit risk when the fair value option has been elected; and (5) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, and interim periods. During the first quarter of 2018, the Company adopted ASU 2016-01. Other than changing from the entry price method to an exit price notion in disclosing fair value of financial instruments at amortized cost, the adoption did not have a material impact on the Company's consolidated financial statements.

(g)

Recently Issued Accounting Standards Update

ASU 2016-02 Leases. In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We do not expect a material change to the timing of expense recognition but will continue to evaluate the impact.

ASU 2016-13 Financial Instruments – Credit Losses. In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2020. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

ASU 2016-15 Statement of Cash Flows. In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2017-04 Simplifying the Test for Goodwill Impairment. In January 2017, the FASB amended the Goodwill and Other Topic of the Accounting Standards Codification to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements will be effective for the Company for reporting periods beginning after December 15, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2017-12 Derivatives and Hedging. In August 2017, the FASB amended the requirements of the Derivatives and Hedging Topic of the Accounting Standards Codification to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments will be effective for the Company for annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

(2)

Securities Available for Sale and Held to Maturity

The amortized cost and fair value of securities available for sale and held to maturity with gross unrealized gains and losses are summarized as follows:

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
Securities available for sale at March 31, 2018:
Debt securities:
U.S. government and federal agencies	$	60		—		—			60
Mortgage-backed – government-sponsored enterprises (GSE) residential		132,629		108		(3,812	)		128,925
State and municipal securities		36,351		126		(396	)		36,081
Corporate securities		5,139		—		—			5,139
Total securities available for sale		174,179		234		(4,208	)		170,205

Securities held to maturity at March 31, 2018:
Debt securities:
U.S. government and federal agencies		2,902		17		—			2,919
Mortgage-backed – government-sponsored enterprises (GSE) residential		73,644		23		(856	)		72,811
State and municipal securities		26,372		264		(163	)		26,473
Total securities held to maturity		102,918		304		(1,019	)		102,203
Total debt securities	$	277,097		538		(5,227	)		272,408

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
Securities available for sale at December 31, 2017:
Debt securities:
U.S. government and federal agencies	$	5,075		—		(3	)		5,072
Mortgage-backed – government-sponsored enterprises (GSE) residential		125,927		176		(1,798	)		124,305
State and municipal securities		40,500		256		(245	)		40,511
Corporate securities		9,150		—		(2	)		9,148
Total securities available for sale		180,652		432		(2,048	)		179,036

Securities held to maturity at December 31, 2017:
Debt securities:
U.S. government and federal agencies		3,070		92		—			3,162
Mortgage-backed – government-sponsored enterprises (GSE) residential		77,375		622		(128	)		77,869
State and municipal securities		26,369		379		(5	)		26,743
Total securities held to maturity		106,814		1,093		(133	)		107,774
Total debt securities	$	287,466		1,525		(2,181	)		286,810

During the first quarter of 2014, approximately $172.6 million of securities available for sale were reclassified as securities held to maturity. These securities were transferred at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The unrealized net holding loss on the available for sale securities on the date of transfer totaled approximately $7.08 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. For the three months ended March 31, 2018 and 2017, $195 thousand and $235 thousand, respectively, were amortized to interest income. There were no gains or losses recognized as a result of this transfer.

The amortized cost and fair value of debt securities at March 31, 2018 and December 31, 2017 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

March 31, 2018:	Amortized
	cost		Fair value
Securites available for sale:
Due in less than 1 year	$	4,015		3,999
Due in 1 to 5 years		20,912		20,695
Due in 5 to 10 years		16,525		16,484
Due after 10 years		98		102
Mortgage-backed – GSE residential		132,629		128,925
Total securities available for sale		174,179		170,205

Securites held to maturity:
Due in 1 to 5 years		19,972		19,862
Due in 5 to 10 years		4,784		4,896
Due after 10 years		4,518		4,634
Mortgage-backed – GSE residential		73,644		72,811
Total securities held to maturity		102,918		102,203
Total debt securities	$	277,097		272,408

December 31, 2017:	Amortized
	cost		Fair value
Securites available for sale:
Due in less than 1 year	$	12,968		12,958
Due in 1 to 5 years		24,038		23,929
Due in 5 to 10 years		17,091		17,155
Due after 10 years		628		689
Mortgage-backed – GSE residential		125,927		124,305
Total securities available for sale		180,652		179,036

Securites held to maturity:
Due in 1 to 5 years		19,963		20,041
Due in 5 to 10 years		4,788		4,978
Due after 10 years		4,688		4,886
Mortgage-backed – GSE residential		77,375		77,869
Total securities held to maturity		106,814		107,774
Total debt securities	$	287,466		286,810

Securities with carrying values of $131.4 million and $148.0 million at March 31, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Securities with a carrying value of $13.0 million and $3.2 million were sold, called, matured or paid-off at a loss of $3 thousand and a loss of $3 thousand for the three months ended March 31, 2018, and 2017, respectively, and were recorded in noninterest income in the consolidated statements of income.

Temporarily Impaired Securities

The following table shows the gross unrealized losses and fair value of the entity’s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2018 and December 31, 2017.

	March 31, 2018
	Less than 12 months				Over 12 months
	Gross				Gross				Total
	unrealized		Fair		unrealized		Fair		unrealized
	losses		value		losses		value		losses
Securities available for sale
Mortgage-backed-GSE residential	$	1,188		55,943		2,624		59,640		3,812
State and municipal securities		302		24,830		94		3,581		396
Total available for sale		1,490		80,773		2,718		63,221		4,208

Securites held to maturity
Mortgage-backed-GSE residential		125		7,419		731		65,392		856
State and municipal securities		163		21,757		—		—		163
Total held to maturity		288		29,176		731		65,392		1,019
Total	$	1,778		109,949		3,449		128,613		5,227

	December 31, 2017
	Less than 12 months				Over 12 months
	Gross				Gross				Total
	unrealized		Fair		unrealized		Fair		unrealized
	losses		value		losses		value		losses
Securities available for sale
U.S. government and federal agencies	$	3		4,997		—		—		3
Mortgage-backed-GSE residential		242		31,767		1,556		63,130		1,798
State and municipal securities		171		21,331		74		4,397		245
Corporate securities		2		4,005		—		—		2
Total available for sale		418		62,100		1,630		67,527		2,048

Securites held to maturity
Mortgage-backed-GSE residential		13		2,769		115		11,933		128
State and municipal securities		5		3,133		—		—		5
Total held to maturity		18		5,902		115		11,933		133
Total	$	436		68,002		1,745		79,460		2,181

At March 31, 2018, the Company owned 130 securities with an aggregate unrealized loss of $5.2 million. Mortgage-backed securities accounted for 90 of the securities and are all rated Aaa by Moody’s and AA+ by Standard & Poors. There were 40 municipal securities with unrealized losses, of which all continue to pay regularly and are rated from Aaa to A2 by Moody’s and /or from A to AAA by Standard & Poors with the exception of three securities. The Moody’s rating was withdrawn on one issue of an Arkansas school district due to Moody’s view of the Arkansas Intercept program. The Moody’s rating was also withdrawn on two issues of Georgia State Municipal Gas Authority due to Moody’s view of the reliance on short-term debt and the absence of a debt service reserve fund. The Georgia State Municipal Gas Authority maintains a Standard & Poors’s rating of AA-. Credit reviews have been performed on all municipal bonds and the Company believes there is no significant risk of credit default at this time. The Company continues to perform periodic credit reviews on all corporate bonds. As management did not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized-cost basis, which may be maturity, the Company does not consider these securities to be other than temporarily impaired at March 31, 2018.

At December 31, 2017, the Company owned 89 securities with an aggregate unrealized loss of $2.2 million. In analyzing the issuers’ financial condition, management noted that 35 of these securities are issued or guaranteed by the federal government or its agencies. Mortgage-backed securities accounted for 23 of the securities and are all rated Aaa by Moody’s and AA+ by Standard & Poors. There were 30 municipal securities with unrealized losses, of which all continue to pay regularly and are rated from Aaa to A2 by Moody’s and /or from A to AAA by Standard & Poors with the exception of one issue of an Arkansas school district for which the Moody’s rating was withdrawn due to Moody’s view of the Arkansas Intercept program. Credit reviews have been performed on all municipal bonds and the Company believes there is no significant risk of credit default at this time. There is one corporate bond rated A3 by Moody’s and A- by Standard & Poors and has little risk of default in the Company’s opinion. The Company continues to perform periodic credit reviews on all corporate bonds. As management did not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized-cost basis, which may be maturity, the Company does not consider these securities to be other than temporarily impaired at December 31, 2017.

(3)

Loans Receivable and Allowance for Loan Losses, Originated

For purposes of the disclosures required pursuant to ASC Topic 310, the loan portfolio was disaggregated into segments and then further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. There are three loan portfolio segments that include commercial, financial, and agricultural; real estate; and consumer and other. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and assessing credit risk. Commercial, financial, and agricultural is a separate loan segment and class while loan classes within the real estate segment include construction and development, residential, and commercial. Consumer and other is a separate loan segment and class.

The following describe the risk characteristics relevant to each of the portfolio segments.

Commercial, financial, and agricultural – includes loans to finance working capital operations, fixed asset purchases, or other needs for commercial customers. Also included in this category are loans to finance farming operations. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower.

Real Estate – includes loans disaggregated into three classes: Construction and development, Residential, and Commercial.

Construction and development – includes loans to acquire and improve real estate. Loans in this class include loans for residential development, commercial development, raw land, commercial construction, and residential construction. Generally, the primary source of repayment is the sale of the underlying real estate or refinance into a permanent mortgage.

Residential – primarily includes loans to finance 1-4 single-family residences. Loans in this class include first mortgages on primary residences, first mortgages on investment properties, junior liens on primary residences, and home equity lines of credit (both first and junior liens). Generally, the primary source of repayment is the borrower’s ordinary income.

Commercial – primarily includes loans to finance income-producing commercial, farmland, owner occupied commercial real estate, and multifamily properties. Loans in this class include loans for retail centers, hotels, medical and professional offices, single retail stores, industrial buildings, warehouses, and apartments leased generally to local businesses and residents. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral.

Consumer and Other Loan Segments – include loans to individuals, secured by personal property or unsecured, or loans to government entities. Loans in this category include loan for autos, unsecured notes, overdraft lines of credit, and loans to local government entities. Generally, the primary source of repayment is the cash flow from ordinary income of the borrower, tax receipts and other governmental assessments.

Segments and classes of originated loans at March 31, 2018 and December 31, 2017 are summarized as follows:

	March 31,			December 31,
	2018			2017
Commercial, financial, and agricultural loans	$	200,425			204,890
Real estate loans:
Construction and development		170,625			157,393
Residential		105,168			107,629
Commercial		562,364			552,774
Total real estate loans		838,157			817,796
Consumer and other loans		94,447			98,316
Loans receivable, originated		1,133,029			1,121,002
Deferred loan fees		(990	)		(1,058	)
Total loans receivable, originated	$	1,132,039			1,119,944

(a)

Loan Concentrations

The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in the Georgia Counties of Barrow, Bartow, Butts, Cherokee, Cobb, Douglas, Forsyth, Gwinnett, Hall, Henry, Jackson, Jasper, Paulding counties and surrounding counties. A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market in these areas.

(b)

Nonaccrual and Past Due

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of March 31, 2018 and December 31, 2017 for all originated loans:

	March 31, 2018
			Accruing		Accruing
	Current		30 – 89 days		greater than
	loans		past due		90 days		Nonaccrual		Total loans
Commercial, financial, and agricultural loans	$	200,373		—		—		52		200,425
Real estate loans:
Construction and development		170,589		—		—		36		170,625
Residential		104,496		129		—		543		105,168
Commercial		561,042		—		—		1,322		562,364
Total real estate loans		836,127		129		—		1,901		838,157
Consumer and other loans		94,435		12		—		—		94,447
Total loans receivable, originated	$	1,130,935		141		—		1,953		1,133,029

	December 31, 2017
			Accruing		Accruing
	Current		30 – 89 days		greater than
	loans		past due		90 days		Nonaccrual		Total loans
Commercial, financial, and agricultural loans	$	204,751		37		—		102		204,890
Real estate loans:
Construction and development		157,356		—		—		37		157,393
Residential		106,965		125		—		539		107,629
Commercial		551,201		428		—		1,145		552,774
Total real estate loans		815,522		553		—		1,721		817,796
Consumer and other loans		98,225		89		1		1		98,316
Total loans receivable, originated	$	1,118,498		679		1		1,824		1,121,002

Interest income on nonaccrual loans outstanding at March 31, 2018 and 2017, that would have been recorded for the three months ended March 31, 2018 and 2017 if the loans had been current and performed in accordance with their original terms was $3 thousand and $23 thousand, respectively.

(c)

Asset Quality

Grading of Loans

Commercial, Financial, Agricultural and Real Estate Loan Segments

The Bank has established a Loan Grading System that consists of nine individual Credit Risk Grades (Risk Grades or RG). The model is based on the risk of default for an individual credit and establishes certain criteria to delineate the level of risk across the nine unique Risk Grades. Risk Grade definitions are as follows:

Pass Grades (RG 1 – RG 5) – represents groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risk measured by a variety of credit risk criteria such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment including guarantors and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.

Special Mention (RG 6) – a loan that is currently performing satisfactorily, but has a potential weakness that if not corrected will lead to a more severe rating. Potential weakness may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Additionally, this grade may include loans where adverse economic conditions that develop subsequent to loan origination substantially increase the level of risk, but do not jeopardize liquidation of the debt.

Substandard (RG 7) – Loans classified as Substandard must 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. The secondary means of repayment do not provide a sufficient level of support to offset the identified weakness but are sufficient to prevent a loss at this time, however, certain of these loans have a specific allowance for loan losses and certain loans in RG 7 have been moved to nonaccrual status.

Doubtful (RG 8) – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus 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. However, these loans are not yet rated as loss because certain events may occur which would provide recovery.

Loss (RG 9) – Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the entire loan even though a partial recovery may occur in the future. Loans in this classification are typically charged off.

By definition, credit risk grades Special Mention (RG 6), Substandard (RG 7), Doubtful (RG 8), and Loss (RG 9) are criticized loans while Substandard (RG 7), Doubtful (RG 8), and Loss (RG 9) are classified loans. The criticized loan definitions are standardized by all bank regulatory agencies. The remaining credit risk grades are considered pass credits and are solely defined by the Bank.

To enhance this process, loans that are rated in one of the classified categories are reviewed no less than quarterly to establish an expectation of loss, if any, and if such examination indicates that the level of reserve is not adequate to cover the expectation of loss, a specific reserve is established, the balance is charged down to market value and / or impairment is generally applied.

Each loan officer assesses the appropriateness of the internal risk rating assigned to the credits on an ongoing basis, which is subsequently submitted to a regional credit officer for review. The Bank utilizes third-party loan reviewers who conduct independent credit quality reviews of a sample of the Bank’s originated loan portfolio and adherence to bank loan policy and the loan administration process.

Certain real estate loans made to consumers are not graded. The allowance calculation methodology used for these loans is the same as that used for consumer loans, as discussed in the Consumer and Other Loans segment below.

Consumer and Other Loans Segment

The Bank monitors the levels and severity of past-due consumer loans on a weekly basis through its collection activities. Of the $94.5 million of loans in this segment at March 31, 2018, municipal loans make up 94.6%, or $89.3 million of the pool. Historically, loans to state or local municipalities have been low-risk lending opportunities. The Company has had a good history with lending to municipalities with most loans getting an internal grade of 1 or 2 and none with a grade of higher than four. The allowance calculation methodology still takes these loans into account when determining the amount of the loan allowance.

The allowance calculation methodology delineates the consumer loan portfolio into homogeneous pools of loans that contain similar structure, repayment, collateral and risk profile, which include direct consumer loans, auto finance, credit cards, and overdrafts. The consumer loans are not individually graded; however, for these pools, the bank assigns a proxy risk grade to each loan based upon days past due. Loans that are rated in one of the criticized categories are routinely reviewed to establish an expectation of loss, if any, and if such examination indicates that the level of reserve is not adequate to cover the expectation of loss, a specific reserve or impairment is generally applied.

The following tables present the Company’s loan balances by class and segment as well as risk rating category as of March 31, 2018 and December 31, 2017 for all originated loans:

	March 31, 2018
	Graded loans, originated
			Special		Substandard
	Pass		mention		(1)		Doubtful/loss		Total
Commercial, financial, and agricultural loans	$	186,555		3,843		9,985		—		200,383
Real estate loans:
Construction and development		159,176		771		36		—		159,983
Residential		16,717		833		543		—		18,093
Commercial		557,100		1,891		3,373		—		562,364
Total real estate loans		732,993		3,495		3,952		—		740,440
Consumer and other loans		89,310		—		1		—		89,311
Total	$	1,008,858		7,338		13,938		—		1,030,134

(1)

Includes $2.0 million of nonaccrual substandard loans.

	March 31, 2018
	Ungraded loans, originated
					Past due
			Past due		greater than
	Current		30 – 89 days		90 days		Nonaccrual		Total
Commercial, financial, and agricultural loans	$	42		—		—		—		42
Real estate loans:
Construction and development		10,642		—		—		—		10,642
Residential		86,946		129		—		—		87,075
Commercial		—		—		—		—		—
Total real estate loans		97,588		129		—		—		97,717
Consumer and other loans		5,124		12		—		—		5,136
Total	$	102,754		141		—		—		102,895
Total loans receivable, originated									$	1,133,029

	December 31, 2017
	Graded loans, originated
			Special		Substandard
	Pass		mention		(1)		Doubtful/loss		Total
Commercial, financial, and agricultural loans	$	200,578		3,890		379		—		204,847
Real estate loans:
Construction and development		144,373		1,728		37		—		146,138
Residential		17,644		865		539		—		19,048
Commercial		547,630		1,921		3,223		—		552,774
Total real estate loans		709,647		4,514		3,799		—		717,960
Consumer and other loans		92,460		—		13		—		92,473
Total	$	1,002,685		8,404		4,191		—		1,015,280

(1)

Includes $1.8 million of nonaccrual substandard loans.

	December 31, 2017
	Ungraded loans, originated
					Past due
			Past due		greater than
	Current		30 – 89 days		90 days		Nonaccrual		Total
Commercial, financial, and agricultural loans	$	43		—		—		—		43
Real estate loans:
Construction and development		11,255		—		—		—		11,255
Residential		88,456		125		—		—		88,581
Commercial		—		—		—		—		—
Total real estate loans		99,711		125		—		—		99,836
Consumer and other loans		5,753		89		1		—		5,843
Total	$	105,507		214		1		—		105,722
Total loans receivable, originated									$	1,121,002

(d)

Impaired Loans, Originated

At March 31, 2018 and December 31, 2017, the recorded investment in originated loans that were considered to be impaired (including TDRs) was $13.4 million and $3.4 million, respectively. At March 31, 2018 and December 31, 2017, impaired loans of $11.9 million and $2.2 million, respectively, were on accrual status. Of the impaired loans on accrual status $0 and $277 thousand were considered TDRs at March 31, 2018 and December 31, 2017, respectively. The amount of interest income recognized on impaired loans for the three months ended March 31, 2018 and 2017 was $362 thousand and $44 thousand, respectively. Below is a detailed summary of impaired loans as of March 31, 2018 and December 31, 2017.

	March 31, 2018
							Average		Interest
							recorded		income
							investment		recognized
							for the		for the
			Unpaid				three months		three months
	Recorded		principal		Related		ended		ended
	investment		balance		allowance		March 31		March 31
With no related allowance recorded:
Commercial, financial, and agricultural loans	$	9,660		9,660		—		10,463		321
Real estate loans:
Construction and development		—		—		—		—		—
Residential		247		278		—		279		5
Commercial		3,246		3,246		—		3,262		32
Total real estate loans		3,493		3,524		—		3,541		37
Consumer and other loans		—		—		—		—		—
Total with no related allowance		13,153		13,184		—		14,004		358
With an allowance recorded:
Commercial, financial, and agricultural loans		273		273		68		275		4
Real estate loans:
Construction and development		—		—		—		—		—
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Total real estate loans		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total with an allowance recorded		273		273		68		275		4
Total impaired loans originated	$	13,426		13,457		68		14,279		362

	December 31, 2017
							Average		Interest
							recorded		income
							investment		recognized
							for the		for the
			Unpaid				year		year
	Recorded		principal		Related		ended		ended
	investment		balance		allowance		December 31		December 31
With no related allowance recorded:
Commercial, financial, and agricultural loans	$	—		—		—		—		—
Real estate loans:
Construction and development		—		—		—		—		—
Residential		251		281		—		287		14
Commercial		2,852		2,852		—		2,855		139
Total real estate loans		3,103		3,133		—		3,142		153
Consumer and other loans		—		—		—		—		—
Total with no related allowance		3,103		3,133		—		3,142		153
With an allowance recorded:
Commercial, financial, and agricultural loans		277		277		69		288		19
Real estate loans:
Construction and development		—		—		—		—		—
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Total real estate loans		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total with an allowance recorded		277		277		69		288		19
Total impaired loans originated	$	3,380		3,410		69		3,430		172

(e)

Allowance for Loan Losses, Originated

The following tables detail the changes in the allowance for loan losses by loan type for the three months ended March 31, 2018 and 2017, respectively:

	Three months ended March 31, 2018
								Provision for
	January 1		Charge-offs			Recoveries		loan losses			March 31
Commercial, financial, and agricultural loans	$	2,780		—			2		(133	)		2,649
Real estate loans:
Construction and development		1,189		—			3		85			1,277
Residential		939		—			2		(32	)		909
Commercial		4,113		—			—		75			4,188
Total real estate loans		6,241		—			5		128			6,374
Consumer and other loans		389		(154	)		57		(47	)		245
Total allowance for loan losses, originated	$	9,410		(154	)		64		(52	)		9,268

	Three months ended March 31, 2017
								Provision for
	January 1		Charge-offs			Recoveries		loan losses			March 31
Commercial, financial, and agricultural loans	$	2,497		(2	)		18		(164	)		2,349
Real estate loans:
Construction and development		1,079		—			3		174			1,256
Residential		994		—			—		(43	)		951
Commercial		4,856		—			—		35			4,891
Total real estate loans		6,929		—			3		166			7,098
Consumer and other loans		248		(58	)		25		164			379
Total allowance for loan losses, originated	$	9,674		(60	)		46		166			9,826

The following tables present an analysis of the allowance for loan losses and recorded investment in originated loans by portfolio segment and class as well as impairment methodology as of March 31, 2018 and December 31, 2017.

	March 31, 2018
	Individually evaluated				Collectively evaluated				Total
	Allowance		Recorded		Allowance		Recorded		Allowance		Recorded
	for loan		investment		for loan		investment in		for loan		investment in
	losses		in loans		losses		loans		losses		loans
Commercial, financial, and agricultural loans	$	68		9,933		2,581		190,492		2,649		200,425
Real estate loans:
Construction and development		—		—		1,277		170,625		1,277		170,625
Residential		—		247		909		104,921		909		105,168
Commercial		—		3,246		4,188		559,118		4,188		562,364
Total real estate loans		—		3,493		6,374		834,664		6,374		838,157
Consumer and other loans		—		—		245		94,447		245		94,447
Total	$	68		13,426		9,200		1,119,603		9,268		1,133,029

	December 31, 2017
	Individually evaluated				Collectively evaluated				Total
	Allowance		Recorded		Allowance		Recorded		Allowance		Recorded
	for loan		investment		for loan		investment in		for loan		investment in
	losses		in loans		losses		loans		losses		loans
Commercial, financial, and agricultural loans	$	69		277		2,711		204,613		2,780		204,890
Real estate loans:
Construction and development		—		—		1,189		157,393		1,189		157,393
Residential		—		251		939		107,378		939		107,629
Commercial		—		2,852		4,113		549,922		4,113		552,774
Total real estate loans		—		3,103		6,241		814,693		6,241		817,796
Consumer and other loans		—		—		389		98,316		389		98,316
Total	$	69		3,380		9,341		1,117,622		9,410		1,121,002

(4)

Loans Receivable, Acquired and FDIC Indemnification Assets

(a)

Acquired Loans

The following table presents changes in the accretable yield on all acquired loans accounted for under ASC 310-30 during the respective periods:

	Acquired impaired loans
	Three months ended
	March 31,
	2018			2017
Balance, beginning of year	$	12,881			22,852
Net transfers from nonaccretable difference to accretable yield		640			687
Accretion		(2,057	)		(3,946	)
Balance, end of period	$	11,464			19,593

No allowance for loan losses was brought forward on any of the acquired loans, as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition dates. Updates to expected cash flows for acquired loans accounted for under ASC 310-30 result in a provision for loan losses and the establishment of an allowance for loan losses to the extent the amount and timing of expected cash flows decrease compared to those originally estimated at acquisition. These estimates are calculated on an individual loan pool basis, and any allowances for loan losses are also recorded on a loan pool basis.

Accretable yield represents interest income that will be recorded in future periods. It is the excess of cash flows expected at acquisition over the initial investment in the loan and is recognized in interest income over the remaining life of the loan, or pool of loans.

At March 31, 2018 and December 31, 2017, acquired loans, covered and noncovered, consisted of the following:

	March 31,		December 31,
	2018		2017
Commercial, financial, and agricultural loans:
Covered	$	475		484
Noncovered		5,719		7,217
Total commercial, financial and agricultural loans		6,194		7,701
Real estate loans:
Construction and development:
Covered		948		966
Noncovered		6,615		6,757
Residential:
Covered		18,155		19,918
Noncovered		22,738		25,198
Commercial:
Covered		23,933		24,558
Noncovered		85,783		90,431
Total real estate loans		158,172		167,828

Consumer and other loans:
Covered		—		—
Noncovered		555		535
Total consumer and other loans		555		535
Loans receivable-covered		43,511		45,926
Loans receivable-noncovered		121,410		130,138
Loans receivable, acquired		164,921		176,064
Deferred loan fees
Covered		49		52
Noncovered		102		120
Total consumer and other loans		151		172
Total loans receivable-covered		43,560		45,978
Total loans receivable-noncovered		121,512		130,258
Total loans receivable, acquired	$	165,072		176,236

There were no acquired covered loans which were considered TDRs as of March 31, 2018 and December 31, 2017. No pooled loans accounted for under ASC 310-30 are considered TDRs under that accounting guidance.

At March 31, 2018 and December 31, 2017, approximately $3.8 million and $2.8 million, respectively, of acquired loans accounted for under ASC 310-20 were classified as impaired nonaccrual loans.

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of March 31, 2018 for acquired loans.

	Acquired loans at March 31, 2018
			Accruing 30 –		Accruing
	Current		89 days past		greater than
	loans		due		90 days		Nonaccrual		Total loans
Commercial, financial, and agricultural loans
Covered	$	475		—		—		—		475
Noncovered		5,415		304		—		—		5,719
Total commercial, financial and agricultural loans		5,890		304		—		—		6,194
Real estate loans:
Construction and development:
Covered		948		—		—		—		948
Noncovered		6,213		—		—		402		6,615
Residential:
Covered		17,744		14		—		397		18,155
Noncovered		22,604		—		—		134		22,738
Commercial:
Covered		23,933		—		—		—		23,933
Noncovered		82,923		33		—		2,827		85,783
Total real estate loans		154,365		47		—		3,760		158,172
Consumer and other loans:
Covered		—		—		—		—		—
Noncovered		555		—		—		—		555
Total consumer and other		555		—		—		—		555
Total loans receivable, acquired covered		43,100		14		—		397		43,511
Total loans receivable, acquired noncovered		117,710		337		—		3,363		121,410
Total loans receivable, acquired	$	160,810		351		—		3,760		164,921

Acquired impaired loans that are contractually past due are still considered to be accruing and performing loans and disclosed as “current.”

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of December 31, 2017 for acquired loans.

	Acquired loans at December 31, 2017
			Accruing 30 –		Accruing
	Current		89 days past		greater than
	loans		due		90 days		Nonaccrual		Total loans
Commercial, financial, and agricultural loans
Covered	$	484		—		—		—		484
Noncovered		6,980		237		—		—		7,217
Total commercial, financial and agricultural loans		7,464		237		—		—		7,701
Real estate loans:
Construction and development:
Covered		966		—		—		—		966
Noncovered		6,336		—		—		421		6,757
Residential:
Covered		19,011		427		—		480		19,918
Noncovered		24,688		416		—		94		25,198
Commercial:
Covered		24,558		—		—		—		24,558
Noncovered		88,619		34		—		1,778		90,431
Total real estate loans		164,178		877		—		2,773		167,828
Consumer and other loans:
Covered		—		—		—		—		—
Noncovered		535		—		—		—		535
Total consumer and other		535		—		—		—		535
Total loans receivable, acquired covered		45,019		427		—		480		45,926
Total loans receivable, acquired noncovered		127,158		687		—		2,293		130,138
Total loans receivable, acquired	$	172,177		1,114		—		2,773		176,064

Acquired impaired loans that are contractually past due are still considered to be accruing and performing loans and disclosed as “current.”

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of March 31, 2018 for acquired loans.

	Acquired graded loans at March 31, 2018
			Special				Doubtful/
	Pass		Mention		Substandard		loss		Total
Commercial, financial, and agricultural loans
Covered	$	475		—		—		—		475
Noncovered		5,483		—		236		—		5,719
Total commercial, financial and agricultural loans		5,958		—		236		—		6,194
Real estate loans:
Construction and development:
Covered		714		37		156		—		907
Noncovered		3,291		536		2,473		—		6,300
Residential:
Covered		2,942		290		1,855		—		5,087
Noncovered		5,953		442		1,679		—		8,074
Commercial:
Covered		23,443		55		435		—		23,933
Noncovered		77,334		1,608		6,841		—		85,783
Total real estate loans		113,677		2,968		13,439		—		130,084
Consumer and other loans:
Covered		—		—		—		—		—
Noncovered		—		—		—		—		—
Total consumer and other		—		—		—		—		—
Total loans receivable, acquired covered		27,574		382		2,446		—		30,402
Total loans receivable, acquired noncovered		92,061		2,586		11,229		—		105,876
Total loans receivable, acquired	$	119,635		2,968		13,675		—		136,278

	March 31, 2018
	Ungraded loans, acquired
			Accruing 30 –		Accruing
			89 days past		greater than
	Current		due		90 days		Nonaccrual		Total loans
Commercial, financial, and agricultural loans
Covered	$	—		—		—		—		—
Noncovered		—		—		—		—		—
Total commercial, financial and agricultural loans		—		—		—		—		—
Real estate loans:
Construction and development:
Covered		41		—		—		—		41
Noncovered		315		—		—		—		315
Residential:
Covered		12,895		173		—		—		13,068
Noncovered		14,510		154		—		—		14,664
Commercial:
Covered		—		—		—		—		—
Noncovered		—		—		—		—		—
Total real estate loans		27,761		327		—		—		28,088
Consumer and other loans:
Covered		—		—		—		—		—
Noncovered		555		—		—		—		555
Total consumer and other		555		—		—		—		555
Total loans receivable, acquired	$	28,316		327		—		—		28,643
Total loans receivable, acquired										164,921

The following tables present loan balances by class and segment as well as risk rating category as of December 31, 2017 for all acquired loans:

	December 31, 2017
	Graded loans, acquired
			Special				Doubtful/
	Pass		Mention		Substandard		loss		Total
Commercial, financial, and agricultural loans
Covered	$	476		—		8		—		484
Noncovered		6,854		73		290		—		7,217
Total commercial, financial and agricultural loans		7,330		73		298		—		7,701
Real estate loans:
Construction and development:
Covered		726		40		157		—		923
Noncovered		3,342		546		2,530		—		6,418
Residential:
Covered		3,097		358		2,564		—		6,019
Noncovered		7,508		451		1,991		—		9,950
Commercial:
Covered		23,731		57		770		—		24,558
Noncovered		81,247		2,142		7,042		—		90,431
Total real estate loans		119,651		3,594		15,054		—		138,299
Consumer and other loans:
Covered		—		—		—		—		—
Noncovered		—		—		—		—		—
Total consumer and other		—		—		—		—		—
Total loans receivable, acquired covered		28,030		455		3,499		—		31,984
Total loans receivable, acquired noncovered		98,951		3,212		11,853		—		114,016
Total loans receivable, acquired	$	126,981		3,667		15,352		—		146,000

	December 31, 2017
	Ungraded loans, acquired
			Accruing 30 –		Accruing
			89 days past		greater than
	Current		due		90 days		Nonaccrual		Total loans
Commercial, financial, and agricultural loans
Covered	$	—		—		—		—		—
Noncovered		—		—		—		—		—
Total commercial, financial and agricultural loans		—		—		—		—		—
Real estate loans:
Construction and development:
Covered		43		—		—		—		43
Noncovered		339		—		—		—		339
Residential:
Covered		13,518		381		—		—		13,899
Noncovered		14,832		416		—		—		15,248
Commercial:
Covered		—		—		—		—		—
Noncovered		—		—		—		—		—
Total real estate loans		28,732		797		—		—		29,529
Consumer and other loans:
Covered		—		—		—		—		—
Noncovered		535		—		—		—		535
Total consumer and other		535		—		—		—		535
Total loans receivable, acquired	$	29,267		797		—		—		30,064
Total loans receivable, acquired										176,064

(b)

Allowance for Loan Losses, Acquired

The following tables detail the changes in the allowance for loan losses by loan type for acquired loans for the three months ended March 31, 2018 and 2017.

	Three months ended March 31, 2018
											Provision for
								Provision for			loan losses
								loan losses			through
								charged			FDIC loss
								through			share
	January 1		Charge-offs			Recoveries		operations			receivable			March 31
Commercial, financial, and agricultural loans	$	93		—			—		(9	)		(25	)		59
Real estate loans		1,972		(28	)		—		(20	)		(34	)		1,890
Consumer and other loans		8		—			—		(6	)		—			2
Total allowance for loan losses, acquired	$	2,073		(28	)		—		(35	)		(59	)		1,951

	Three months ended March 31, 2017
											Provision for
								Provision for			loan losses
								loan losses			through
								charged			FDIC loss
								through			share
	January 1		Charge-offs			Recoveries		operations			receivable			March 31
Commercial, financial, and agricultural loans	$	169		(8	)		—		1			—			162
Real estate loans		2,360		(120	)		—		(115	)		(15	)		2,110
Consumer and other loans		13		(4	)		—		(1	)		—			8
Total allowance for loan losses, acquired	$	2,542		(132	)		—		(115	)		(15	)		2,280

The following tables present an analysis of the allowance for loan losses and recorded investment in acquired loans by portfolio segment and impairment methodology as of March 31, 2018 and December 31, 2017.

	March 31, 2018
	Individually evaluated				Collectively evaluated				PCI loans					Total
	Allowance		Recorded		Allowance		Recorded		Allowance			Recorded		Allowance		Recorded
	for loan		investment		for loan		investment in		for loan			investment in		for loan		investment in
	losses		in loans		losses		loans		losses			loans		losses		loans
Commercial, financial, and agricultural loans	$	—		—		62		5,449		(3	)		745		59		6,194
Real estate loans		—		3,758		163		80,058		1,727			74,356		1,890		158,172
Consumer and other loans		—		—		2		496		—			59		2		555
Total	$	—		3,758		227		86,003		1,724			75,160		1,951		164,921

	December 31, 2017
	Individually evaluated				Collectively evaluated				PCI loans				Total
	Allowance		Recorded		Allowance		Recorded		Allowance		Recorded		Allowance		Recorded
	for loan		investment		for loan		investment in		for loan		investment in		for loan		investment in
	losses		in loans		losses		loans		losses		loans		losses		loans
Commercial, financial, and agricultural loans	$	—		—		73		6,864		20		837		93		7,701
Real estate loans		—		2,773		254		86,386		1,718		78,669		1,972		167,828
Consumer and other loans		—		—		8		470		—		65		8		535
Total	$	—		2,773		335		93,720		1,738		79,571		2,073		176,064

(c)

FDIC Indemnification Assets

The FDIC indemnification assets were initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-sharing agreements. The difference between the present value at the acquisition dates and the undiscounted cash flows the Company expects to collect from the FDIC is accreted into noninterest income over the life of each FDIC indemnification asset when the present value of undiscounted cash flows exceeds the FDIC indemnification assets recorded on the Company’s books, or amortized into noninterest expenses over the life of each FDIC asset when the present value of undiscounted cash flows is less than the FDIC indemnification assets recorded on the Company’s books. The FDIC receivables are reported with the indemnification assets. The FDIC receivables represent loss claims submitted but not yet received, as well as estimated loss claims not yet submitted.

The FDIC indemnification assets are presented separately from any clawback liability due to the FDIC at the termination of the loss-sharing agreements. Pursuant to the provisions of the loss-sharing agreements, the Company may be required to make a true-up payment to the FDIC at the termination of the loss-sharing agreements should actual losses be less than certain thresholds established in the agreements.

The following table presents the activity in the FDIC indemnification assets and receivables during the three months ended March 31, 2018 and 2017.

	Three months ended
	March 31,
	2018			2017
Beginning balance	$	3,680			13,411
Amortization		(379	)		(1,433	)
Payments from the FDIC on covered loans		(135	)		(2,655	)
Other cash and noncash transactions		(780	)		(1,983	)
Total FDIC indemnification assets and receivables	$	2,386			7,340

FDIC reimbursement of covered losses included expenses incurred for the resolution of covered assets netted with recoveries received on covered assets that were not included in the expected cash flows of the indemnification assets. The loss claims filed are subject to review and approval, including audits, by the FDIC or its assigned agents for compliance with the terms in the loss-sharing agreements. As of March 31, 2018, the estimated amount to be collected from FDIC is $1.3 million with the remaining $1.5 million to be amortized over the life of the indemnification asset.

(d)

Clawback Liabilities

Under FDIC loss-sharing agreements, the Company is required to return a portion of cash received from the FDIC in the event that losses do not reach a specified threshold, based on the initial discount less cumulative servicing costs for the covered assets acquired. Such liabilities are referred to as clawback liabilities and are considered to be contingent consideration, as they require the return of a portion of the initial consideration in the event that certain contingencies are met. The Bank calculates the projected clawback liability to the FDIC quarterly and records a liability for the present value of the projected amount due to the FDIC at the termination of the loss-share agreements. Changes in the FDIC clawback liability are recorded to noninterest expense.

As of March 31, 2018 and December 31, 2017, the Company has recorded $8.3 million and $8.2 million, respectively, in clawback liabilities related to the acquisitions of McIntosh, FSB and DCB.

The following table presents the activity in the clawback liabilities during the three months ended March 31, 2018 and 2017.

	Three months ended
	March 31,
	2018		2017
Balance, beginning of year	$	8,199		7,901
Clawback liability adjustments		—		280
Accretion		119		139
Balance, end of year	$	8,318		8,320

(5)

Other Real Estate Owned

Gains on sales and write-downs and expenses related to other real estate owned, both covered and noncovered, are included in noninterest expense in the consolidated statements of income as follows:

	Three months ended
	March 31,
	2018		2017
Losses (gains) on sales and write-downs of other real estate owned, net of covered losses	$	228		76
Other operating expenses on covered other real estate owned		58		8
Other operating expenses on noncovered other real estate owned		81		8
Total other real estate owned expenses	$	367		92

(a)

Other Real Estate Owned-Noncovered

A summary of other real estate owned, noncovered, is presented as follows:

	March 31,
	2018			2017
Balance, beginning of year	$	1,223			2,861
Net transfers from originated loans		501			976
Other real estate-noncovered during the period due to the expiration of loss share agreement		—			1,135
Disposals		(653	)		(365	)
Write-downs		—			(112	)
Balance, end of year	$	1,071			4,495

At March 31, 2018 and December 31, 2017, other real estate owned-noncovered, consisted of the following types of properties:

	March 31,		December 31,
	2018		2017
Construction and development	$	463		877
Residential		366		346
Commercial		242		—
Total other real estate owned-noncovered	$	1,071		1,223

(b)

Other Real Estate Owned-Covered

Covered other real estate owned activity for the three months ended March 31, 2018, is summarized as follows:

	Bartow			McIntosh			FSB			DCB			Total
Balance at beginning of year	$	15			86			36			297			434
Disposals		(15	)		(86	)		(32	)		(137	)		(270	)
Balance at March 31, 2018	$	0			0			4			160			164

Covered other real estate owned activity for the three months ended March 31, 2017, is summarized as follows:

	Bartow		McIntosh			FSB			DCB			Total
Balance at beginning of year	$	—		266			1,348			2,484			4,098
Other real estate, transferred due to expiration of loss share agreement		—		—			(1,135	)		—			(1,135	)
Net transfers from covered loans		—		41			51			137			229
Disposals		—		(99	)		(263	)		(385	)		(747	)
Write-downs		—		(28	)		(1	)		(407	)		(436	)
Balance at March 31, 2017	$	—		180			—			1,829			2,009

At March 31, 2018, covered other real estate consisted of the following types of properties:

	Bartow		McIntosh		FSB		DCB		Total
Construction and development	$	—		—		4		160		164
Total other real estate covered	$	—		—		4		160		164

At December 31, 2017, covered other real estate consisted of the following types of properties:

	Bartow		McIntosh		FSB		DCB		Total
Construction and development	$	—		—		4		297		301
Residential		15		86		32		—		133
Total other real estate covered	$	15		86		36		297		434

(6)

Long-term Obligations

Long-term obligations amounted to $15.8 million and $15.9 million at March 31, 2018 and December 31, 2017, respectiveley.

At March 31, 2018 and December 31, 2017, long-term obligations included $12.7 million and $12.8 million, respectively, in FHLB borrowings and $3.1 million in junior subordinated debentures representing obligations to Cherokee Statutory Trust I. The trust preferred securities mature in 2035, and may be redeemed at par in whole or in part at any time.

Trust Preferred Securities consist of the following:

	March 31,		December 31,
	2018		2017
Junior subordinated debenture at 3-month LIBOR + 1.50% (3.62% at March 31, 2018) maturing November 10, 2035	$	3,093	$	3,093

FHLB advances consist of the following:

				Maturity	March 31,		December 31,
	Rate			date	2018		2017
Convertible		4.68	%	May 2019	$	1,500	$	1,500
Convertible		3.60	%	May 2018		2,000		2,000
Fixed rate hybrid		2.73	%	Nov 2018		5,000		5,000
Fixed rate advance		4.55	%	Dec 2030		1,300		1,300
Fixed rate advance		4.55	%	Dec 2030		900		900
Fixed rate amortizing advance		3.10	%	Sep 2031		1,957		1,994
		3.47	%			12,657		12,694
Unamortized portion of fair value adjustments						93		125
Total					$	12,750	$	12,819

At March 31, 2018 and December 31, 2017, the unamortized fair value adjustments of $93 thousand and $125 thousand, respectively, remain from the acquisitions of McIntosh, Cherokee and Highland are included in FHLB advances.

At March 31, 2018, the outstanding advances from the FHLB are secured by $247.0 million of certain qualifying loans. There were no securities securing outstanding advances. Additionally, the FHLB requires the Company to maintain an investment in FHLB stock as a condition of the FHLB advances, the amount of which is determined by the Bank’s asset size and the amount of outstanding advances. The Company’s investment in FHLB stock totaled $2.2 million and $2.2 million at March 31, 2018 and December 31, 2017, respectively.

At March 31, 2018, the Company had unsecured lines of credit available totaling $45 million with its correspondent banks, which represent credit for overnight borrowings. There were no outstanding balances at March 31, 2018 and December 31, 2017.

(7)

Net Income per Common Share

The factors used in the earning per share computation are as follows:

	Three months ended
	March 31,
	2018		2017
Basic:
Net income available to common stockholders	$	4,404		4,657
Weighted average common shares outstanding		40,411,493		40,252,432
Basic earnings per common share	$	0.11		0.12
Diluted:
Net income available to common stockholders	$	4,404		4,657
Weighted average common shares outstanding for basic earnings per share		40,411,493		40,252,432
Add dilutive effects of assumed exercise of stock options		698,156		542,349
Add dilutive effects of unvested restricted stock grants		163,460		11,472
Add dilutive effects of warrants		1,204,685		948,825
Average shares and dilutive potential common shares		42,477,794		41,755,078
Diluted earnings per share	$	0.10		0.11

(8)

Commitments

(a)

Loan Commitments

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments could include commitments to extend credit, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

In most cases, the Bank requires collateral or other security to support financial instruments with credit risk.

	Approximate
	contract amount at
	March 31,		December 31,
	2018		2017
Financial instruments whose contract amount represents risk:
Commitments to extend credit	$	255,415		257,309
Standby letters of credit		3,580		3,839

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include unimproved and improved real estate, certificates of deposit, or personal property.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to local businesses. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At March 31, 2018 and December 31, 2017, $2 million and $2 million of the standby letters of credit outstanding were collateralized, respectively.

(b)

Contingencies

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company’s consolidated financial statements.

(9)

Fair Value of Assets and Liabilities

(a)

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with Fair Value Measurement guidance (FASB ASC Topic 820), the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (as opposed to a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

(b)

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets generally measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using certain pricing models, discounted cash flow methodologies, or similar techniques when they involve unobservable inputs, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There were no transfers of assets or liabilities between Levels 1, 2, or 3 during the three months ended March 31, 2018 or the year ended December 31, 2017.

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 quoted market prices exist for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. 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. Significant assets and liabilities that are not considered financial instruments include deferred income taxes, other real estate and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in the estimates.

Recurring Fair Value Changes

Securities available for sale are within either Level 1 or Level 2 of the valuation hierarchy. Level 1 includes securities that have quoted prices in active markets for identical assets. Level 2 includes securities that are matrix priced based on trades of similar securities. The Company’s securities include GSE obligations, U.S. government, federal agency, and state and municipal bonds, mortgage-backed securities, and corporate bonds.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair value measurements using
	Quoted
	prices
	in active		Significant
	markets for		other		Significant
	identical		observable		unobservable		Total
	assets		inputs		inputs		carrying
	(Level 1)		(Level 2)		(Level 3)		value
March 31, 2018:
Assets:
Securities available for sale U.S. government and federal agencies	$	60		—		—		60
Mortgage-backed government sponsored (GSE) residential		—		128,925		—		128,925
State and municipal securities		—		36,081		—		36,081
Corporate securities		—		5,139		—		5,139
Total	$	60		170,145		—		170,205

December 31, 2017:
Assets:
Securities available for sale U.S. government and federal agencies	$	75		4,997		—		5,072
Mortgage-backed government sponsored (GSE) residential		—		124,305		—		124,305
State and municipal securities		—		40,511		—		40,511
Corporate securities		—		9,148		—		9,148
Total	$	75		178,961		—		179,036

Nonrecurring Fair Value Changes

From time to time, certain assets and liabilities may be recorded at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period.

Impaired Loans: In accordance with the provisions of ASC Topic 310, the Company records loans considered impaired at their fair value. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured based on the value of the collateral for collateral-dependent loans. For other impaired loans, fair value is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s market price if available. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower’s underlying financial condition.

Other Real Estate Owned: Other real estate owned represents real estate foreclosed upon by the Company through loan defaults by customers, or obtained through bank acquisitions. Upon foreclosure, the property is recorded at fair value, based on appraised value, less selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for loan losses. Additional losses for subsequent valuation adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are reflected in noninterest expense, as applicable. Other real estate owned is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs in determining fair value. Appraisal values are property-specific and sensitive to the changes in the overall economic environment.

For assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2018 and December 31, 2017, the following tables provide the level of valuation assumptions used to determine each adjustment, the related carrying value, and the fair value adjustments recorded during the respective periods.

March 31, 2018

Quoted

prices in

Fair value

active

Significant

adjustments

markets for

other

Significant

for the three

identical

observable

unobservable

months ended

assets

inputs

March 31,

Description

Total

(Level 1)

(Level 2)

(Level 3)

2018

Assets:

Impaired loans

17,184

—

17,184

Other real estate owned-covered

164

—

164

—

Other real estate-noncovered

1,071

—

1,071

—

December 31, 2017

Quoted

prices in

Fair value

active

Significant

adjustments

markets for

other

Significant

for the year

identical

observable

unobservable

ended

assets

inputs

December 31,

Description

Total

(Level 1)

(Level 2)

(Level 3)

2017

Assets:

Impaired loans

6,153

—

6,153

312

Other real estate owned-covered

434

—

434

—

Other real estate-noncovered

1,223

—

1,223

—

Quantitative Information about Level 3 Fair Value Measurements

The tables below provide an overview of the valuation techniques and significant unobservable inputs used in those techniques to measure assets and liabilities that are classified within Level 3 of the valuation hierarchy. The table is presented in two parts: (1) the assets and liabilities resulting from the Covered Acquisitions, including assets and liabilities attributable to loss-share agreements with the FDIC and (2) originated assets. With respect to the Covered Acquisitions, the range of discounts to fair value represent discounts applied to contractual amounts due as of the date of acquisition. Such discounts are updated quarterly.

The following tables present information related to Level 3 nonrecurring fair value measurements for Covered Acquisitions at March 31, 2018 and December 31, 2017:

March 31, 2018:			General
			range of
	Fair value		discounts to	Valuation	Unobservable
	balance		fair value	techniques	inputs
			(weighted avg.)
Assets:
Impaired loans, acquired	$	3,758	0% - 100% (6%)	Discounted cash flows	Probability of default
				Third party appraisals	Credit losses Prepayment rates Expected cash flows

Other real estate owned, covered		164	(6%)	Discounted cash flows	Discount rates
				Third party appraisals	Property type

December 31, 2017:			General
			range of
	Fair value		discounts to	Valuation	Unobservable
	balance		fair value	techniques	inputs
			(weighted avg.)
Assets:
Impaired loans, acquired	$	2,773	0%-100% (6%)	Discounted cash flows	Probability of default
				Third party appraisals	Credit losses Prepayment rates Expected cash flows

Other real estate owned, covered		434	(6%)	Discounted cash flows	Discount rates
				Third party appraisals	Property type

The following tables present information related to Level 3 nonrecurring fair value measurements for originated assets at December 31, 2017 and 2016:

March 31, 2018:			General
			range of
	Fair value		discounts to	Valuation	Unobservable
	balance		fair value	techniques	inputs
			(weighted avg.)
Assets:
Impaired loans, originated	$	13,426	0% - 25% (1%)	Discounted cash flows	Discount rates
				Third party appraisals less selling costs	Management discount for property type, market volatility, credit losses, loan term

Other real estate owned, noncovered		1,071	(6%)	Third party appraisals, less selling costs	Comparable properties within the market

December 31, 2017:			General
			range of
	Fair value		discounts to	Valuation	Unobservable
	balance		fair value	techniques	inputs
			(weighted avg.)
Assets:
Impaired loans, originated	$	3,380	0% - 25% (2%)	Discounted cash flows	Discount rates
				Third party appraisals less selling costs	Management discount for property type, market volatility, credit losses, loan term

Other real estate owned, noncovered		1,223	(6%)	Third party appraisals, less selling costs	Comparable properties within the market

Fair Value Disclosures

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents, Time Deposits in Other Banks, Accrued Interest Receivable and Accrued Interest Payable, Securities Sold under Agreement to Repurchase: For these assets the carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.

Loans: The fair value for loans held for investment is estimated using an exit price methodology. An exit price methodology considers expected cash flows that take into account contractual loan terms, as applicable, prepayment expectations, probability of default, loss severity in the event of default, recovery lag and, in the case of variable rate loans, expectations for future interest rate movements. These cash flows are present valued at a risk adjusted discount rate, which considers the cost of funding, liquidity, servicing costs, and other factors. Because observable quoted prices seldom exist for identical or similar assets carried in loans held for investment, Level 3 inputs are primarily used to determine fair value exit pricing. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable. A loan is determined to be impaired if the Company believes it is probable that all principal and interest amounts due according to the terms of the note will not be collected as scheduled. The fair value of impaired loans is determined in accordance with ASC 310-10, Accounting by Creditors for Impairment of a Loan, and generally results in a specific reserve established through a charge to the provision for loan losses. Losses on impaired loans are charged to the allowance when management believes the uncollectability of a loan is confirmed. Management has determined that the majority of impaired loans are Level 3 assets due to the extensive use of market appraisals.

Federal Home Loan Bank Stock: It is not practical to determine the fair value of FHLB stock due to the restrictions placed on its transferability.

Deposits: The fair value of demand deposits, savings accounts, NOW accounts, and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using current rates at which comparable time deposits would be issued.

Federal Home Loan Bank Advances: The fair value is estimated using the discounted value of contractual cash flows based on current incremental borrowing rates for similar borrowing arrangements with the FHLB and/or termination values provided by the FHLB.

Commitments to Extend Credit and Standby Letters of Credit: Because commitments to extend credit and standby letters of credit are made using variable rates, have short maturities, and represent commitments which have not yet been drawn, their carrying value and fair value are immaterial.

The carrying values and estimated fair values of the Company’s financial instruments as of March 31, 2018 and December 31, 2017 were as follows. The methods used to estimate the fair value of financial instruments at December 31, 2017 approximated an entry price. In accordance with the adoption of ASU 2016-01, the methods utilized to estimate the fair value of financial instruments at March 31, 2018 represent an approximation of exit price; however, an actual price derived in an active market may differ.

			Fair value measurements
			at March 31, 2018 using
			Quoted
			prices in
			active		Significant
			markets for		other		Significant
			identical		observable		unobservable
	Carrying		assets		inputs		inputs		Fair value
	value		(Level 1)		(Level 2)		(Level 3)		balance
Assets:
Cash and cash equivalents	$	140,892		140,892		—		—		140,892
Time deposits in other banks		11,563		11,563		—		—		11,563
Securities available for sale		170,205		60		170,145		—		170,205
Securities held to maturity		102,918		—		102,203		—		102,203
FHLB stock		2,186		—		—		—		N/A
Loans receivable, net of allowance for loan losses		1,285,891		—		—		1,282,325		1,282,325
Accrued interest receivable		5,144		—		5,144		—		5,144
Liabilities:
Deposits		1,560,080		—		1,563,422		—		1,563,422
FHLB advances		12,750		—		12,986		—		12,986
Accrued interest payable		320		—		320		—		320
Trust preferred securities		3,093		—		—		3,093		3,093

			Fair value measurements
			at December 31, 2017 using
			Quoted
			prices in
			active		Significant
			markets for		other		Significant
			identical		observable		unobservable
	Carrying		assets		inputs		inputs		Fair value
	value		(Level 1)		(Level 2)		(Level 3)		balance
Assets:
Cash and cash equivalents	$	122,781		122,781		—		—		122,781
Time deposits in other banks		11,565		11,565		—		—		11,565
Securities available for sale		179,036		75		178,961		—		179,036
Securities held to maturity		106,814		—		107,774		—		107,774
FHLB stock		2,245		—		—		—		N/A
Loans receivable, net of allowance for loan losses		1,284,697		—		—		1,288,299		1,288,299
Accrued interest receivable		5,473		—		5,473		—		5,473
Liabilities:
Deposits		1,549,675		—		1,552,644		—		1,552,644
FHLB advances		12,819		—		13,185		—		13,185
Accrued interest payable		291		—		291		—		291
Trust preferred securities		3,093		—		—		3,093		3,093

(10)

Subsequent Event

On June 29, 2018, the Company was acquired by Ameris Bancorp (Nasdaq: ABCB) (Ameris) pursuant to an Agreement and Plan of Merger (the merger agreement) entered into by the Company and Ameris on January 25, 2018. On June 29, 2018 and pursuant to the merger agreement, the Company was merged with and into Ameris. Accordingly, the separate corporate existence of the Company ceased, with Ameris continuing as the surviving entity. Also on June 29, 2018, the Bank merged with and into Ameris Bank, a wholly owned subsidiary of Ameris, with Ameris Bank continuing as the surviving bank.

Under the terms of the merger agreement, the Company’s shareholders received 0.16 shares of Ameris common stock and $0.93 in cash for each share of Hamilton State Bancshares, Inc. voting common stock or nonvoting common stock they previously held.

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