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Section 1: 8-K/A (FORM 8-K/A)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K/A

(Amendment No. 1)

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

Date of report (Date of earliest event reported):                      June 29, 2018                        

 

Ameris Bancorp

 

(Exact Name of Registrant as Specified in Charter)

 

Georgia 001-13901 58-1456434

(State or Other

Jurisdiction of Incorporation)

(Commission File Number)

(IRS Employer

Identification No.)

 

310 First Street, S.E., Moultrie, Georgia 31768
(Address of Principal Executive Offices) (Zip Code)

  

Registrant’s telephone number, including area code:                                  (229) 890-1111                           

 

 
 

(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

 

 

 

 

EXPLANATORY NOTE

 

Ameris Bancorp (the “Company”) filed a Current Report on Form 8-K on July 2, 2018 (the “Original Report”) to report, among other things, the completion of its previously announced merger with Hamilton State Bancshares, Inc. (“Hamilton”). This Amendment No. 1 to the Original Report (“Amendment No. 1”) amends and restates in its entirety Item 9.01 of the Original Report to include the consolidated financial statements of Hamilton pursuant to Item 9.01(a) of Form 8-K and the unaudited pro forma financial information pursuant to Item 9.01(b) of Form 8-K that were excluded from the Original Report. This Amendment No. 1 makes no other amendments to the Original Report.

 

Item 9.01 Financial Statements and Exhibits.

 

(a)       Financial Statements of Businesses Acquired.

 

Attached hereto as Exhibits 99.2 and 99.3 are the audited financial statements of Hamilton and the unaudited quarterly financial statements of Hamilton, respectively, as required by this Item 9.01(a). Such financial statements are incorporated by reference into this Item 9.01(a).

 

(b)        Pro Forma Financial Information.

 

Attached hereto as Exhibit 99.4 is the unaudited pro forma condensed consolidated financial statements reflecting the Merger as required by this Item 9.01(b). Such financial statements are incorporated by reference into this Item 9.01(b).

 

(d)       Exhibits.

 

2.1 Agreement and Plan of Merger dated as of January 25, 2018 by and between Ameris Bancorp and Hamilton State Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to Ameris Bancorp’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2018).
   
4.1 Indenture between Ameris Bancorp (as successor to Hamilton State Bancshares, Inc.) and Wilmington Trust Company dated as of November 10, 2005.*
   
4.2 Second Supplemental Indenture dated as of June 29, 2018 by and among Ameris Bancorp, Hamilton State Bancshares, Inc. and Wilmington Trust Company.*
   
4.3 Form of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debenture (included as Exhibit A to the Indenture filed herewith as Exhibit 4.1).*
   
23.1 Consent of Crowe LLP (formerly known as Crowe Horwath LLP).
   
99.1 Press Release dated July 2, 2018.*
   
99.2 Audited Consolidated Financial Statements of Hamilton State Bancshares, Inc. and Subsidiaries for the years ended December 31, 2017 and 2016.
   
99.3 Unaudited Consolidated Financial Statements of Hamilton State Bancshares, Inc. and Subsidiaries as of and for the three months ended March 31, 2018 and 2017.
   
99.4 Unaudited Pro Forma Condensed Consolidated Financial Statements reflecting the Merger.
   
* Previously filed with the Original Report.

 

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

  AMERIS BANCORP
     
     
  By:    /s/ Nicole S. Stokes
    Nicole S. Stokes
    Executive Vice President and Chief Financial Officer

 

Date: September 12, 2018 

 

 

 

 

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Section 2: EX-23.1 (EXHIBIT 23.1)

 

Exhibit 23.1

  

CONSENT OF INDEPENDENT AUDITORS

 

We consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-202277, 333-216035, 333-216254, and 333-223080) and Form S-8 (Nos. 333-131244, 333-197208, and 333-200597) of Ameris Bancorp of our report dated March 5, 2018 on the consolidated financial statements of Hamilton State Bancshares, Inc., which is included in this Current Report on Form 8-K.

 

 

  /s/ Crowe LLP
  Crowe LLP

  

Atlanta, Georgia 

September 12, 2018

 

 

 

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Section 3: EX-99.2 (EXHIBIT 99.2)

tv490567-s4a_DIV_19-appxe - none - 14.3687158s
Exhibit 99.2​
[MISSING IMAGE: 394982731_lg_hamilton-bancshares.jpg]
HAMILTON STATE BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2017 and 2016
(With Independent Auditors’ Reports Thereon)

HAMILTON STATE BANCSHARES, INC.
AND SUBSIDIARIES
Table of Contents
Page(s)
1 – 2
Consolidated Financial Statements:
3
4
5
6
7
8 – 61
i

[MISSING IMAGE: 394982731_lthd_crowehorwath-reg.jpg]
INDEPENDENT AUDITOR’S REPORT
Board of Directors
Hamilton State Bancshares, Inc. and Subsidiaries
Hoschton, Georgia
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Hamilton State Bancshares, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend of the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hamilton State Bancshares, Inc. and Subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
(Continued)
1

Report on Other Legal and Regulatory Requirements
We also have audited in accordance with auditing standards generally accepted in the United States of America, Hamilton State Bancshares, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) relevant to reporting objectives for the express purpose of meeting the regulatory requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) and our report dated March 5, 2018 expressed an unmodified opinion.
[MISSING IMAGE: 394982731_sg_crowe-horwath3.jpg]
Crowe Horwath LLP
Atlanta, Georgia
March 5, 2018
   
2

Hamilton State Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2017 and 2016 (In thousands except share data)
2017
2016
ASSETS
Cash and due from banks
$
13,712
14,808
Interest-bearing deposits in other banks
108,756
103,626
Federal funds sold
313
423
Cash and cash equivalents
122,781
118,857
Time deposits in other banks
11,565
11,577
Securities available-for-sale at fair value
179,036
224,776
Securities held to maturity, (fair value of  $107,774 and $126,445 at December 31, 2017 and 2016, respectively)
106,814
124,877
Loans receivable – Acquired:
Loans receivable, net covered
45,978
94,851
Loans receivable, net noncovered
130,258
151,988
Less allowance for loan losses, Acquired Loans
(2,073)
(2,542)
Loans receivable, Originated
1,119,944
1,028,978
Less allowance for loan losses, Originated Loans
(9,410)
(9,674)
Net Loans
1,284,697
1,263,601
FDIC indemnification assets, net
3,680
13,411
Other real estate owned-covered
434
4,098
Other real estate owned-noncovered
1,223
2,861
Premises and equipment, net
28,418
30,885
Goodwill
17,477
17,477
Core deposit intangibles, net
1,769
3,078
Deferred tax assets, net
11,606
16,158
Federal Home Loan Bank stock, at cost
2,245
3,970
Bank owned life insurance
4,426
4,370
Accrued interest receivable
5,473
5,419
Other assets
4,994
5,711
Total assets
$
1,786,638
$ 1,851,126
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand deposits
$
357,399
326,111
Interest-bearing demand deposits
271,188
276,045
Savings and money market
415,511
401,155
Time deposits under $250,000
447,774
473,981
Time deposits over $250,000
57,803
57,557
Total deposits
1,549,675
1,534,849
Borrowings:
Securities sold under agreements to repurchase
3,776
Federal Home Loan Bank advances
12,819
56,118
Trust Preferred Securities
3,093
3,093
Clawback liabilities
8,199
7,901
Accrued interest payable and other liabilities
6,482
5,330
Total liabilities
1,580,268
1,611,067
Stockholders’ equity:
Common stock; 80,000,000 shares authorized, $0.01 par value, 35,032,548 and 34,856,696 shares issued 34,664,904 and 34,494,951 shares outstanding as of December 31, 2017 and 2016, respectively
350
349
Common stock; non-voting; 20,000,000 shares authorized, $0.01 par value, 5,723,226 shares issued and outstanding as of December 31, 2017 and 2016
57
57
Additional paid-in capital
211,893
228,569
Retained earnings
17,053
Accumulated other comprehensive loss
(3,220)
(3,302)
Treasury stock, at cost, 367,644 and 361,745 shares outstanding as of December 31, 2017 and 2016, respectively
(2,710)
(2,667)
Total stockholders’ equity
206,370
240,059
Total liabilities and stockholders’ equity
$
1,786,638
$ 1,851,126
See accompanying notes.
3

Hamilton State Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2017 and 2016 (In thousands except shares and per share data)
2017
2016
Interest income:
Interest and fees on loans
$
74,483
$ 69,588
Interest on investment securities
6,617
7,163
Interest on deposits in other banks
1,234
664
Interest on federal funds sold and securities purchased under agreements to resell
27
11
Total interest income
82,361
77,426
Interest expense:
Deposits
5,499
5,122
Borrowings
469
489
Total interest expense
5,968
5,611
Net interest income
76,393
71,815
Provision for loan losses
217
2,334
Net interest income after provision for loan losses
76,176
69,481
Other income:
Service charges on deposit accounts
4,253
3,838
Other commissions and fee income
2,964
2,979
Mortgage origination income
524
485
Gains (losses) on sale of securities available for sale
12
(24)
Other
299
96
Total other income
8,052
7,374
Other expenses:
Salaries and employee benefits
27,511
25,336
Occupancy and equipment
7,132
7,704
Professional fees
1,902
1,926
Other real estate owned expenses
309
584
Data processing expenses
3,930
4,300
Amortization of intangibles
1,309
1,524
Amortization of indemnification assets
3,311
5,113
Clawback liability adjustments, net
298
(2,230)
Losses (gains) on other real estate
460
(399)
Other
6,451
6,868
Total other expenses
52,613
50,726
Income before income taxes
31,615
26,129
Income tax provision
16,936
9,076
Net income
$
14,679
$ 17,053
Net income per common share available to common stockholders:
Basic
$
0.36
$ 0.43
Diluted
0.35
0.41
Weighted average shares outstanding – basic
40,318,170
40,107,566
Weighted average shares outstanding – diluted
42,216,852
41,348,928
See accompanying notes.
4

Hamilton State Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2017 and 2016 (In thousands except share data)
2017
2016
Net income
$
14,679
$ 17,053
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  $5 and ($9), respectively
(7)
15
Change in net unrealized gains (losses) on securities available for sale during the period, net of tax of  $61 and ($746), respectively
95
(1,209)
Amortization of unrealized net loss on securities transferred to held-to-maturity, net of tax of  $360 and $443, respectively
564
697
Total other comprehensive income (loss)
652
(497)
Total comprehensive income
$
15,331
$ 16,556
See accompanying notes.
5

Hamilton State Bancshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2017 and 2016 (In thousands except share data)
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury Stock
Total
Equity
Shares
Amount
Shares
Amount
Balance, January 1, 2016
40,363,885 $ 404 $ 227,495 $ $ (2,805) 364,245 $ (2,687) $ 222,407
Net income
17,053 17,053
Other comprehensive loss
(497) (497)
Stock-based compensation expense
211,958 2 1,114 1,116
Exercise of options
20,209 22 22
Surrender of restricted stock units, including tax benefit of  $117 thousand
(16,130) (64) (64)
Contractual dividend forfeited
2 2
Issuance of treasury stock
(2,500) 20 20
Balance, December 31, 2016
40,579,922 $ 406 $ 228,569 $ 17,053 $ (3,302) 361,745 $ (2,667) $ 240,059
Net income
14,679 14,679
Other comprehensive income
652 652
Reclass tax effects stranded due to tax reform
570 (570)
Stock-based compensation expense
192,601 2 1,152 1,154
Exercise of options
1,250 4 4
Surrender of restricted stock units
(17,999) (1) (138) (139)
Contractual dividend forfeited
4 4
Dividend declared ($1.2393 per share – see Note 13)
(17,698) (32,302) (50,000)
Purchase of treasury stock
5,899 (43) (43)
Balance, December 31, 2017
40,755,774 $ 407 $ 211,893 $ $ (3,220) $ 367,644 $ (2,710) $ 206,370
See accompanying notes.
6

Hamilton State Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2017 and 2016
2017
2016
Operating activities:
Net income
$
14,679
$ 17,053
Adjustments to reconcile net income to net cash provided by operating activities
Accretion, depreciation, and amortization, net
4,497
192
Provision for loan losses
217
2,334
Loss (gain) on sales and write-downs of other real estate owned
460
(399)
(Gain) loss on sale of fixed assets
(204)
55
(Gain) loss on sale of securities available for sale
(12)
24
Stock compensation expense
1,154
1,116
Surrender of Restricted Stock Units
(135)
(64)
Change in:
FDIC indemnification assets
1,748
(1,294)
Deferred taxes
4,136
2,170
Bank owned life insurance
(56)
(68)
Accrued interest receivable and other assets
663
(3,269)
Accrued interest payable and other liabilities
1,152
80
Net cash provided by operating activities
28,299
17,930
Investing activities:
Purchase of securities available for sale
(18,029)
(56,236)
Maturities of securities available for sale
29,460
15,699
Sale or call of securities available for sale
5,339
3,830
Principal repayments from mortgage-backed and other securities
27,340
35,084
Principal repayments from securities held to maturity
18,547
22,334
Net change in time deposits in other banks
12
(2,633)
Net change in Federal Home Loan Bank stock
1,725
(1,675)
Net (increase) decrease in loans
(17,623)
(126,827)
Proceeds from sale of and payments received on other real estate
6,131
20,143
Disposal (purchases) of premises and equipment
128
(921)
Proceeds from the FDIC for indemnification assets
4,672
2,115
Net cash provided by (used in) investing activities
57,702
(89,087)
Financing activities:
Net increase in deposits
14,883
12,325
Proceeds from Federal Home Loan Bank advances
80,000
Repayment of Federal Home Loan Bank advances
(43,145)
(40,945)
Net (decrease) increase in securities sold under agreements to repurchase
(3,776)
2,287
Common stock dividend declared
(50,000)
Proceeds received from stock option excercises
4
22
(Purchase) issuance of treasury stock
(43)
20
Net cash (used in) provided by financing activities
(82,077)
53,709
3,924
(17,448)
Cash and cash equivalents at beginning of year
118,857
136,305
Cash and cash equivalents at end of year
$
122,781
$ 118,857
Supplemental disclosure of cash flow information:
Cash paid for:
Interest
6,222
6,067
Taxes
11,492
8,441
Noncash transactions:
Loans transferred to other real estate
2,172
6,268
See accompanying notes.
7

(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 December 31, 2017, 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 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 U.S. generally accepted accounting principles (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
   
8

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 under $250” and “Deposits — Time over $250” 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 assets, known as the core deposit intangible assets, 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. For the year ended December 31, 2017, the Company recorded an additional $298 thousand in clawback liabilities related to the acquisitions of McIntosh, FSB and DCB. For the year ended December 31, 2016, the Company recorded an overall reduction of  $2.2 million in clawback liabilities related to the acquisitions of McIntosh, FSB and DCB. A portion of the reduction in 2016 was based on a true-up calculation by a third party consultant in the amount of  $2.6 million, which was off-set by accretion and re-yield adjustments.
(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.
   
9

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 $2.7 and $2.8 million as of December 31, 2017 and 2016, respectively.
(e)
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase
The Company employs various strategies designed to maintain and improve net interest income including short-term investments such as securities purchased under agreements to resell when they have a return advantage over other investment options and it is consistent with the Company’s liquidity strategy to do so. These agreements are generally on an overnight basis and are carried at contractual amounts plus any accrued interest. These agreements may result in credit exposure in the event the counterparty to the transaction is unable to fulfill its contractual obligations.
Transfers of financial assets are accounted for as sales when control over the assets (i.e., loans or investment securities) has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
The Company did not have any securities sold under agreements to repurchase at December 31, 2017. As of December 31, 2016, securities sold under agreements to repurchase were offered to one cash management customer as an automated, collateralized investment account and were classified as secured borrowings.
(f)
Securities
At December 31, 2017 and 2016 all investment securities were classified as available for sale or held to maturity. Securities classified as available for sale are recorded at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss), net of the related deferred tax effect. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. Securities available for sale are used as part of the Company’s interest rate risk management strategy and may be sold in response to changes in interest rates, prepayment factors, and other factors. Securities classified as held to maturity are carried at amortized cost. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Securities held to maturity may not be sold. Typically, Management determines the appropriate classification of securities at the time of purchase. During the first quarter of 2014, approximately $172.6 million of securities available for sale were reclassified as securities held to maturity. See note 2 for further discussion of this reclassification. The Company currently has no securities classified as trading.
Management evaluates all investments for other-than-temporary impairments on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Impairment is considered to not be other-than-temporary if  (a) it is not credit-related (b) the Company does not have the intent to sell a debt security prior to recovery and (c) it is more likely than not that it will not have to sell the debt security prior to recovery. When an entity does intend to sell the security, or it is more likely than not the entity will have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and any remaining portion in other comprehensive loss.
(g)
Loans Receivable, Acquired
Acquired loans are accounted for under the acquisition method of accounting. The Company has further segregated acquired loans into covered and noncovered loans. Covered loans represent the loans that are subject to a loss share arrangement with the FDIC, which indemnifies and reimburses the Company for a portion of the losses incurred on the covered loans. Covered and noncovered loans acquired via FDIC assisted transactions are collectively referred to as “FDIC Assist loans”. Noncovered loans
   
10

acquired via open bank transactions are collectively referred to as “Open Bank loans.” Noncovered loans are not subject to a loss share agreement. When a loss share agreement expires the remaining loans that are covered by the loss share agreement are transferred from covered loans to noncovered loans. The acquired loans are recorded at their estimated fair values as of the acquisition date. Fair value of acquired loans is determined using a discounted cash flow model based on assumptions regarding the amount and timing of principal and interest payments, estimated prepayments, estimated default rates, estimated loss severity in the event of defaults, current market rates, and collateral values. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not recorded on the acquisition date.
The Company accounts for Open Bank Loans with “pass” risk grades (1-5 on a 9 point scale), which are recorded at their estimated fair values at acquisition with the resulting premiums or discounts, if any, accreted over the remaining term of the loan as an adjustment to the related loan’s yield.
An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company would be unable to collect all contractually required payments. The Company has elected to account for FDIC Assist loans as impaired loans by association. Open Bank loans were individually determined for impairment at acquisition. For FDIC Assist loans, only revolving credit agreements such as home equity lines are excluded from acquired impaired loan accounting requirements.
For acquired impaired loans, the Company (a) calculates the contractual amount and timing of undiscounted principal and interest payments (the undiscounted contractual cash flows) and (b) estimates the amount and timing of undiscounted expected principal and interest payments (the undiscounted expected cash flows). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable yield. The nonaccretable yield represents an estimate of the loss exposure of principal and interest related to the acquired impaired loan portfolio and such amount is subject to change over time based on the performance of such loans.
The excess of undiscounted expected cash flows at acquisition over the initial fair value of acquired impaired loans is referred to as the “accretable yield” and is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. Cash flows are initially determined based on contractual cash flows, term assumptions related to timing, loan performance, and various other factors. The accretable yield is accounted for and included in interest income on loans within the statements of income and cash flows. Improvements in expected cash flows over those originally estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those originally estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses. The carrying value of acquired impaired loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.
The Company aggregates most acquired impaired loans into pools of loans with common credit risk characteristics such as loan and collateral type. To establish accounting pools of acquired impaired loans, loans are first categorized by similar purpose and collateral. Loan pools are initially booked at the aggregate fair value of the loan pool constituents, based on the present value of the Company’s expected cash flows from the loans. An acquired loan will be removed from a pool of loans if the loan is sold, foreclosed, or payment is received in full satisfaction of the loan. The acquired loan will be removed from the pool at its carrying value. If an individual acquired loan is removed from a pool of loans, the difference between its relative carrying amount and the fair value of any consideration received will be recognized as interest income, net of the amount due to the FDIC. Pursuant to the FSB acquisition, separate loan pools were established for purchased credit impaired loans and those other acquired loans treated as impaired “by analogy.” This treatment was not applied with respect to the Bartow, McIntosh and DCB acquisitions.
As required, the Company periodically reestimates the expected cash flows to be collected over the life of the acquired impaired loan pools. If, based on current information and events, it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition, the acquired loan pools are considered impaired. The decrease in the expected cash flows reduces the carrying value of the acquired loan pools, to
   
11

maintain a stable accretable yield and results in the establishment of an allowance for loan losses which is recorded through a combination of a charge to the provision for loan losses and an increase in the FDIC indemnification asset if the decrease occurs on a covered pool. If, based on current information and events, it is probable that there is a significant increase in the cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, the Company will reduce the allowance for loan losses established on the acquired impaired loans for the increase in the present value of cash flows expected to be collected, if an allowance has been established post acquisition. The increase in the expected cash flows for the acquired impaired loans over those originally estimated at acquisition increases the carrying value of the acquired loan pools over time through an increase in accretable yield on the loan pool and (1) a reduction in the accretion rate on the FDIC indemnification asset when the present value of undiscounted cash flows exceeds the FDIC indemnification assets recorded on the Company’s books, if it occurs on a covered pool or (2) an increase in amortization expense when the present value of undiscounted cash flows is less than the FDIC indemnification assets recorded on the Company’s books. An increase in the accretable yield on the loans is recognized as interest income over the remaining average life of the acquired loans if it occurs on a covered pool.
Individual loans in the acquired impaired loan pools are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when expected cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans and disclosed as “current.” If the timing and amount of cash flows is not reasonably estimable, the loans in a pool may be classified as nonaccrual loans and interest income may be recognized on a cash basis or as a reduction of the principal amount outstanding.
When the Company records a charge off on an acquired loan, the charge off is first recorded against the nonaccretable yield. Once the nonaccretable yield is exhausted, the Company records any additional charge offs against the allowance for loan loss for the pool to which it is assigned.
(h)
Loans Receivable, Originated
Loans originated by the Company that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding principal balances less deferred fees, origination costs and charge-offs. Interest income is accrued on the outstanding principal balance. Loan fees, net of certain origination costs, are deferred and amortized on a straight-line basis over the lives of the respective loans, which approximates the effective-interest method.
Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of principal or interest in full is doubtful or if the loan is 90 days past due. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged against interest income on loans. Generally, payments received on nonaccrual loans are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments of principal and interest are reasonably assured.
A loan is considered impaired when it is probable, based on current information and events, the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Additionally, all loans modified as part of a troubled debt restructuring (TDR) are considered to be impaired as well. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest when due. Loans are reviewed on an individual basis. Impaired loans are measured by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value, less disposition costs of the collateral if the loan is collateral dependent. Interest on accruing impaired loans is recognized only if such loans do not meet the criteria for nonaccrual status, which generally means they are a performing TDR or they are well secured and in the process of collection.
When a borrower is experiencing financial difficulties, the Company may, in order to assist the borrower in repaying the principal and interest owed to the Company, make certain modifications to the borrower’s loan. All loan modifications and renewals are evaluated for TDR classification. A TDR is
   
12

defined as a modification with a borrower that is experiencing financial difficulties, and the Company has granted a financial concession it would not normally make. The concession is either granted through an agreement with the customer or imposed by a court of law. Concessions include modifying original loan terms to reduce or defer cash payments required as part of the loan agreement, including but not limited to one of the following:

A reduction of the stated interest rate for a period of time deemed appropriate by the Company

Modify the loan to an interest only loan for a period of time deemed appropriate by the Company

Extension of the maturity date or dates under terms not consistent with new debt with similar risk characteristics

Reduction in the remaining principal amount owed or maturity amount of the debt as stated in the agreement

Reduction of accrued interest receivable on the debt
In its determination of whether the customer is experiencing financial difficulties, the Company considers numerous indicators, including, but not limited to the following:

Whether the customer is currently in default on its existing loan, or is in an economic or legal position where it is probable the customer will be in default on its loan in the foreseeable future without a modification

Whether the customer has declared or is in the process of declaring bankruptcy

Whether there is substantial doubt about the customer’s ability to continue as a going concern

Whether, based on its projections of the customer’s current capabilities, the Company believes the customer’s future cash flows will be insufficient to service the debt, including interest, in accordance with the contractual terms of the existing agreement for the foreseeable future

Whether, without modification, the customer cannot obtain sufficient funds from other sources at an effective interest rate equal to the current market rate for similar debt for a nontroubled debtor
The amount of impairment on a TDR, if any, is determined in accordance with ASC 310-10-35, Accounting by Creditors for Impairment of a Loan.
(i)
Allowance for Loan Losses, Acquired Loans
The majority of acquired loans have been accounted for under ASC 310-30, whereby the Company is required to periodically reestimate the expected cash flows on the loans. For purposes of applying the guidance under ASC 310-30, the Company grouped most acquired impaired loans into pools based on common risk characteristics. Generally, a decline in expected cash flows for a pool of loans is referred to as impairment and results in an increase in the allowance for loan losses, which is achieved through a charge to provision expense for loan loss, along with an increase in the FDIC indemnification asset to the extent the loan is covered under a loss sharing agreement. Improvement in expected cash flows for a pool of loans results first in a reversal of previously recorded allowances, if any, and then prospectively as an adjustment to the yield on the loans. Correspondingly, aggregate increases in the credit quality and cash flows of loans decrease the value of the FDIC shared loss agreements that give rise to the FDIC indemnification asset, resulting in a decrease in amount of FDIC indemnification assets over the remaining life of the loss share agreement. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the FDIC indemnification asset. For loans accounted for under ASC 310-30, expected cash flows are re-estimated periodically during the year, with any decline in expected cash flows recorded as noted above. These cash flow evaluations are inherently subjective, as they require material estimates, all of which may be susceptible to significant change.
Loans acquired that are not considered purchase credit impaired, are accounted for under ASC 310-20. Discounts created when the loans were recorded at their estimated fair values at acquisition are accreted over the remaining term of the loan as an adjustment to the related loan’s yield. The accrual of interest income is discontinued when the collection of a loan or interest, in whole or in part, is doubtful. At such
   
13

time when the outstanding contractual amount of one of these loans, net of this credit related discount, exceed the contractual cash flows less any losses inherent in these loans, an allowance for loan losses for the loans will be established through a charge to provision expense, along with an increase in the FDIC indemnification asset to the extent the loan is covered under a loss sharing agreement. Improvement in the credit quality does not impact amortization or accretion of any premium or discount previously recognized on a loan accounted for under ASC 310-20.
(j)
Allowance for Loan Losses, Originated Loans
The allowance for loan losses is established for losses inherent in the portfolio as of the reporting date through a provision for loan losses charged to expense. Loans are charged-off against the allowance for loan losses when management believes that the collection of the principal is unlikely. The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable incurred losses as of the reporting date on existing loans that become uncollectible. Loans confirmed as uncollectible are charged-off and deducted from the allowance; recoveries on loans previously charged-off are credited back to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the uncollectibility of loans in light of historical experience, the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect the borrower’s ability to pay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
The allowance consists of specific and general components. Each of these components calls for the use of estimates and judgments. The specific component is determined in accordance with ASC 310-30-35, which relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. For loans that are not considered impaired, a general allowance for loan losses is determined based upon loss estimation factors where the loan portfolio is segmented into cohorts by product type, and loan loss is empirically estimated using loan level performance data for average monthly risk grade migrations and charge-offs. Key assumptions of the migration-based model are the look back period of 84 months over which risk migration is observed; the loss emergence period, estimating the length of time in which the loss becomes evident, and; qualitative environmental factors that reflect changes in the collectability of loans not captured in historical loss data. Qualitative environmental factors include consideration of the following: levels of and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard or doubtful; trends in volume and terms of loans; effects of any change in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration.
(k)
Other Real Estate Owned-Covered
All other real estate initially acquired in a FDIC-assisted acquisition that is subject to a FDIC loss-share agreement is reported at fair value separately in the Company’s consolidated balance sheets as other real estate owned-covered. Other real estate owned-covered is reported exclusive of expected reimbursement cash flows from the FDIC, which are included in the FDIC indemnification assets. Foreclosed covered loan collateral subsequent to the acquisition date is transferred into covered other real estate at the collateral’s net realizable value, less estimated selling costs.
   
14

Other real estate-covered is initially recorded at its estimated fair value on the acquisition date or foreclosure date based on similar market comparable valuations less estimated selling costs. Any subsequent valuation adjustments due to declines in fair value are charged to noninterest expense, and are mostly offset by the corresponding increase to the FDIC indemnification asset for the loss reimbursement amount. Any recoveries, net of the amount due to the FDIC, are credited to noninterest income.
(l)
Other Real Estate Owned-Noncovered
Other real estate owned-noncovered refers to real estate associated with loans originated by the Company, which were subsequently foreclosed on, other real estate acquired through an Open Bank transaction, other real estate acquired as part of the Covered Acquisitions that is not subject to a loss-share agreement with the FDIC, or other real estate that was originally under a loss share agreement but has since expired. Other real estate owned-noncovered, acquired through, or in lieu of, loan foreclosure is held for sale and initially recorded at fair value less selling costs. Any write-down to fair value less costs to sell at the time of transfer to other real estate owned is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by outside appraisers and the assets are carried at the lower of carrying amount or fair value less costs to sell. Costs of improvements are capitalized, whereas costs relating to holding other real estate owned and subsequent write-downs to the value are included in other operating expenses. Gains related to the sale of other real estate owned-noncovered is included in noninterest income.
Also included in other real estate owned-noncovered at December 31, 2017 and 2016 was land owned by the Parent Company in the amount of  $437 thousand, which is held for sale.
(m)
FDIC Indemnification Assets and Accretion of Indemnification Assets
The Company accounts for amounts receivable under the FDIC loss share agreements as indemnification assets in accordance with FASB ASC Topic 805, Business Combinations. The FDIC indemnification assets are initially recorded at fair value, based on the expected future cash flows under the FDIC loss share agreements, which are discounted at a risk free rate that is adjusted for uncertainty in the timing of cash flows. 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 indemnification assets are presented separately from clawback liabilities due to the FDIC at the termination of the loss share agreements. See note 1(c) to the consolidated financial statements, Acquisition Accounting, for additional information regarding the FDIC clawback liabilities under the loss share agreements.
The FDIC indemnification assets are reduced as loss share claims are submitted to the FDIC. The FDIC indemnification assets are revalued concurrent with the loan cash flow reestimation and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of covered loans and covered other real estate. These adjustments are measured on the same basis as the related covered loans and covered other real estate. Increases in the estimated cash flow of the covered loans and covered other real estate over those previously expected reduce the accretion (or increase amortization) recognized on the FDIC indemnification assets. For Bartow, McIntosh, FSB and DCB, decreases in the cash flow of the covered loans and covered other real estate under those previously expected result in an increase in the allowance for loan losses, acquired loans and decrease in the carrying value of covered other real estate, which is partially offset by an increase recognized in the FDIC indemnification asset to the extent the loss is covered.
Under the FSB loss share agreement, the FDIC will reimburse the Bank for 80% of the first $167.0 million in losses arising from covered loans and other real estate, 0% of the next $37.4 million in losses arising from covered loans and other real estate, and for 80% of any losses above $204.4 million on covered loans and other real estate. As of December 31, 2017, the Company’s actual losses are approximately $143.0 million, below the $167.0 million threshold noted above, and the Company still believes that total losses subject to reimbursement by the FDIC will fall within the range estimated above.
   
15

Under the Bartow and McIntosh loss share agreements, the FDIC will reimburse the Bank for 80% of the losses arising from covered commercial loans, consumer loans, and other real estate. The DCB loss share agreement excludes the consumer loans acquired. The FDIC will only reimburse the Bank for 80% of losses arising from covered commercial real estate loans and other real estate.
Projected increases and decreases to the amounts to be reimbursed by the FDIC are recorded as an adjustment to the yield of the FDIC indemnification assets and accreted into income over the remaining life of the loans or indemnified period if less. The amount ultimately collected from the FDIC is dependent upon the performance of the underlying covered assets, the passage of time, and claims submitted to the FDIC, which are subject to review and could be adjusted by the FDIC.
(n)
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the shorter of the estimated useful lives or estimated lease terms, including expected lease renewals, of the related assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is reflected in operations for the period. The cost of maintenance and repairs which does not improve or extend the useful life of the respective asset is charged to operations as incurred, whereas additions and significant improvements are capitalized. The range of estimated useful lives for premises and equipment are:
Buildings 20 – 40 years
Building improvements varies, but typically 10 years
Equipment and furniture 3 – 7 years
Software 3 years or life of contract
Leasehold improvements life of lease; not to exceed life of asset
(o)
Goodwill and Core Deposit Intangibles
Goodwill is established and recorded if the consideration given during an acquisition transaction exceeds the fair value of the net assets received. The Company’s current goodwill balance relates to acquisitions made in 2006, 2008 and 2015. Goodwill has an indefinite useful life and is not amortized, but is evaluated annually for potential impairment, or when events or circumstances indicate a potential impairment. The Company first evaluates potential impairment of goodwill by comparing the fair value of the reporting unit to its carrying amount, including goodwill. Any excess of carrying value over fair value would indicate a potential impairment and the Company would proceed to perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment. The Company evaluates goodwill for impairment annually and at interim dates if indicators of impairment exist. Goodwill at December 31, 2017 and 2016 totaled $17.5 million.
Core deposit intangibles (CDI) were acquired in connection with business combinations. The core deposit premium is initially recognized based on a valuation performed as of the transaction date. The CDI is amortized over the average remaining life of the acquired customer deposits. Amortization periods are reviewed annually and assessed for impairment if there are economic, market, industry, or other factors that would suggest the carrying amount of CDI is not recoverable.
There was no impairment of goodwill or CDI in 2017 or 2016.
The carrying amount of the CDI at December 31, 2017 and 2016 was $1,769 and $3,078 net of accumulated amortization of  $8,966 and $7,657, respectively. Amortization expense for the years ended December 31, 2017 and 2016 was $1,309 and $1,524, respectively.
   
16

The amortization expense for each of the next five years is as follows:
2018
$ 883
2019
383
2020
316
2021
118
2022
69
(p)
Federal Home Loan Bank Stock
The Company is required to maintain an investment in capital stock of the Federal Home Loan Bank of Atlanta (FHLB). The stock has no quoted fair value and is carried at cost, which also represents the anticipated redemption value. At its discretion, the FHLB may declare dividends on the stock. Management reviews for impairment based on the ultimate recoverability of the cost basis in the stock through redemption with the FHLB. Management believes there was no impairment of this investment during the periods presented in these financial statements.
(q)
Bank-Owned Life Insurance
The Company acquired existing life insurance policies on certain key executives in the Cherokee Bank acquisition. Bank-owned life insurance (BOLI) is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value that is probable at settlement. Increases to cash surrender values are recorded as a component of  ‘‘other noninterest income’’ on the consolidated statements of income.
(r)
Mortgage Origination Income
The Company earns mortgage origination income from third-party investors who fund residential mortgage loans for which the Company performs certain loan origination services. Accordingly, the loans are not funded or recorded by the Company, and the income is recorded as it is earned (i.e., when the loan closes).
(s)
Income Taxes
The Company accounts for income taxes using the asset-and-liability method in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of revenues over deductions. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not that the deferred tax assets will be realized. Deferred tax assets may be reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of an entity’s deferred tax assets will not be realized.
A tax position that meets the more-likely than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
On December 22, 2017, the Tax Cuts and Jobs Act (the TCJA) was signed into law. The effect of the change in tax law is required to be recognized as of the date of enactment, which is officially December 22, 2017. As a result of the timing of the enactment of the TCJA, the Company must include the tax impact in the financial reporting period that encompasses the enactment date. See Note 9 — Income Taxes for further discussion and impact of the Tax Law.
   
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The Company’s ASC 740 policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties are included within the related tax asset/liability line in the consolidated balance sheet.
(t)
Stock Compensation Plans
Stock compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded vesting, the Company has elected to recognize compensation cost on a straight-line basis over the requisite service period for the entire award. A Black-Scholes-Merton model is used to estimate the fair value of stock options, while the estimated fair value of the Company’s common stock is used for restricted stock awards and stock grants, both determined at the date of grant. For 2017 and 2016, the estimated fair value of the Company’s common stock was primarily based on comparable transactions of similar size and geographical located companies.
During the years ended December 31, 2017 and 2016, there were 458,002 and 249,960 shares, respectively, in stock compensation awards granted.
(u)
Net Income Available to Common Stockholders and Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period, plus potential common shares issuable for stock options, restricted stock units and warrants outstanding, as calculated under the treasury-stock method. The weighted average number of common shares used in the computation of basic earnings per share was 40,318,170 and 40,107,566 for the years ended December 31, 2017 and 2016, respectively. The Company included potential common shares of 1,898,682 and 1,241,362 in the computation of diluted earnings per share for years ended December 31, 2017 and 2016, respectively. Stock options, restricted stock units and warrants totaling 2,118,668 and 2,229,788 for the years ended December 31, 2017 and 2016, respectively, were excluded from diluted shares because including such shares would be antidilutive.
(v)
Other Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, are reported net of tax, as a separate component of the equity section of the balance sheet, and such items, along with net income, are components of comprehensive income (loss).
(w)
Reclassifications
Certain items in the 2016 consolidated financial statements have been reclassified to conform to the presentation adopted in 2017. There was no impact to net income available to common stockholders or equity.
(x)
Recently Adopted Accounting Standards Update
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.   In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The amendments will be effective for the
   
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Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The Company implemented this ASU in fiscal year 2017 and realized a tax benefit of  $134 thousand.
ASU 2018-02 Income Statement Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.   In February 2018, the FASB issued guidance clarifying the reclassification amount of stranded tax amounts related to the application of the Tax Cuts and Jobs Act of 2017. The Company will be required to disclose the stranded tax amounts that are reclassified. The changes will be effective for all entities for fiscal years beginning after December 15, 2008. Early adoption for public business entities is allowed. The Company has elected to early adopt the standard and has reclassified $570 thousand in stranded tax amounts.
(y)
Recently Issued Accounting Standards Update
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. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.
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.
   
19

(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:
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
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
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Securities available for sale at December 31, 2016:
Debt securities:
U.S. government and federal agencies
$ 5,156 6 (1) 5,161
Mortgage-backed – government-sponsored enterprises (GSE) residential
136,195 237 (1,977) 134,455
State and municipal securities
47,127 279 (301) 47,105
Corporate securities
38,059 26 (30) 38,055
Total securities available for sale
226,537 548 (2,309) 224,776
Securities held to maturity at December 31, 2016:
Debt securities:
U.S. government and federal agencies
3,711 90 3,801
Mortgage-backed – government-sponsored enterprises (GSE) residential
94,810 1,085 (233) 95,662
State and municipal securities
26,356 626 26,982
Total securities held to maturity
124,877 1,801 (233) 126,445
Total debt securities
$ 351,414 2,349 (2,542) 351,221
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
   
20

amortized to interest income over the remaining life of the securities as a yield adjustment. For the years ended December 31, 2017 and 2016, $924 thousand and $1.1 million, respectively, had been 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 December 31, 2017 and 2016, 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.
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
2016:
Amortized
cost
Fair
value
Securites available for sale:
Due in less than 1 year
$ 29,476 29,469
Due in 1 to 5 years
38,799 38,882
Due in 5 to 10 years
19,674 19,589
Due after 10 years
2,393 2,381
Mortgage-backed – GSE residential
136,195 134,455
Total securities available for sale
226,537 224,776
Securites held to maturity:
Due in 1 to 5 years
19,419 19,728
Due in 5 to 10 years
4,638 4,813
Due after 10 years
6,010 6,242
Mortgage-backed – GSE residential
94,810 95,662
Total securities held to maturity
124,877 126,445
Total debt securities
$ 351,414 351,221
Securities with carrying values of  $148.0 and $149.7 million at December 31, 2017 and 2016, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
Securities with a carrying value of  $34.8 and $19.5 million were sold, called, matured or paid-off at a gain of  $12 thousand and a loss of  $24 thousand for the years ended December 31, 2017 and 2016, respectively, and were recorded in noninterest income in the consolidated statements of income.
   
21

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 December 31, 2017 and 2016.
December 31, 2017
Less than 12 months
Over 12 months
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Total
unrealized
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
December 31, 2016
Less than 12 months
Over 12 months
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Total
unrealized
losses
Securities available for sale
U.S. government and federal agencies
$ 1 155 1
Mortgage-backed-GSE residential
1,561 79,220 416 14,950 1,977
State and municipal securities
279 26,855 22 229 301
Corporate securities
5 4,173 25 9,974 30
Total available for sale
1,845 110,248 464 25,308 2,309
Securites held to maturity
Mortgage-backed-GSE residential
31 1,367 202 13,370 233
Total held to maturity
31 1,367 202 13,370 233
Total
$ 1,876 111,615 666 38,678 2,542
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
   
22

these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of its amortized-cost basis, which may be maturity, the Company does not consider these securities to be other than temporarily impaired at December 31, 2017.
At December 31, 2016, the Company owned 82 securities with an aggregate unrealized loss of $2.5 million. In analyzing the issuers’ financial condition, management noted that 31 of these securities are issued or guaranteed by the federal government or its agencies. Mortgage Backed securities accounted for 19 of the securities and are all rated Aaa by Moody’s and AA+ by Standard & Poors. There were 29 municipal securities with unrealized losses, of which all continue to pay regularly and are rated from Aa2 to Aaa by Moody’s and/or from AA- 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 were three corporate bonds, which are rated A3 to Aa3 by Moody’s and A- to AA- by Standard & Poors and have 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 its amortized-cost basis, which may be maturity, the Company does not consider these securities to be other than temporarily impaired at December 31, 2016.
(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.
   
23

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 December 31, 2017 and 2016 are summarized as follows:
2017
2016
Commercial, financial, and agricultural loans
$ 204,890 235,711
Real estate loans:
Construction and development
157,393 142,274
Residential
107,629 101,162
Commercial
552,774 467,718
Total real estate loans
817,796 711,154
Consumer and other loans
98,316 82,905
Loans receivable, originated
1,121,002 1,029,770
Deferred loan fees
(1,058) (792)
Total loans receivable, originated
$ 1,119,944 1,028,978
(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 December 31, 2017 and 2016 for all originated loans:
December 31, 2017
Current
loans
Accruing
30 – 89 days
past due
Accruing
greater than
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
   
24

December 31, 2016
Current
loans
Accruing
30 – 89 days
past due
Accruing
greater than
90 days
Nonaccrual
Total
loans
Commercial, financial, and agricultural loans
$ 232,993 742 1,976 235,711
Real estate loans:
Construction and development
142,265 9 142,274
Residential
99,227 347 1,588 101,162
Commercial
465,720 378 1,620 467,718
Total real estate loans
707,212 725 3,217 711,154
Consumer and other loans
82,767 100 38 82,905
Total loans receivable, originated
$ 1,022,972 1,567    — 5,231 1,029,770
Interest income on nonaccrual loans outstanding at December 31, 2017 and 2016, that would have been recorded for the years ended December 31, 2017 and 2016 if the loans had been current and performed in accordance with their original terms was $32 and $81 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.
   
25


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 $98.3 million of loans in this segment, municipal loans make up 94.0%, or $92.5 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 December 31, 2017 and 2016 for all originated loans:
December 31, 2017
Graded loans, originated
Pass
Special
mention
Substandard(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.
   
26

Ungraded loans, originated
Current
Past due
30 – 89 days
Past due
greater than
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
December 31, 2016
Graded loans, originated
Pass
Special
mention
Substandard(1)
Doubtful/loss
Total
Commercial, financial, and agricultural loans
$ 232,495 1,240 1,976 235,711
Real estate loans:
Construction and development
140,266 138 9 140,413
Residential
23,188 854 1,944 25,986
Commercial
463,860 1,719 2,139 467,718
Total real estate loans
627,314 2,711 4,092 634,117
Consumer and other loans
74,379 38 74,417
Total
$ 934,188 3,951 6,106    — 944,245
(1)
Includes $5.2 million of nonaccrual substandard loans.
Ungraded loans, originated
Current
Past due
30 – 89 days
Past due
greater than
90 days
Nonaccrual
Total
Commercial, financial, and agricultural loans
$
Real estate loans:
Construction and development
1,861 1,861
Residential
74,971 205 75,176
Commercial
Total real estate loans
76,832 205 77,037
Consumer and other loans
8,388 100 8,488
Total
$ 85,220 305    —    — 85,525
Total loans receivable, originated
$ 1,029,770
   
27

(d)
Impaired Loans, Originated
At December 31, 2017 and 2016, the recorded investment in originated loans that were considered to be impaired (including TDRs) was $3.4 and $4.8 million, respectively. At December 31, 2017 and 2016, impaired loans of  $2.2 million and $318 thousand, respectively, were on accrual status. Of the impaired loans on accrual status $277 and $318 thousand were considered TDRs at December 31, 2017 and 2016, respectively. The amount of interest income recognized on impaired loans for the years ended December 31, 2017 and 2016 was $172 and $243 thousand, respectively. Below is a detailed summary of impaired loans as of December 31, 2017 and 2016.
December 31, 2017
Recorded
investment
Unpaid
principal
balance
Related
allowance
Average
recorded
investment
Interest
income
recognized
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
   
28

December 31, 2016
Recorded
investment
Unpaid
principal
balance
Related
allowance
Average
recorded
investment
Interest
income
recognized
With no related allowance recorded:
Commercial, financial, and agricultural loans
$ 605 605 665 28
Real estate loans:
Construction and development
Residential
971 1,001 1,027 43
Commercial
1,129 1,369 1,413 55
Total real estate loans
2,100 2,370 2,440 98
Consumer and other loans