Exhibit 99.3

COMMUNITY & SOUTHERN HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

		Page
Consolidated Balance Sheets at September 30, 2015 and December 31, 2014			1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014			2
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014			3
Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014			4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014			5
Notes to Consolidated Financial Statements (Unaudited)			6

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Community & Southern Holdings, Inc.

Consolidated Balance Sheets (Unaudited)

 

(In thousands of dollars, except share data)

 

		September 30, 2015				December 31, 2014
Assets
Cash and due from banks		$	118,456			$	203,956
Investment securities available-for-sale (amortized cost of $512,542 and $441,728, respectively)			517,669				444,883
Investment securities held-to-maturity (market value of $85,223 and $86,460, respectively)			81,825				82,903
Loans held for sale			1,026				1,981
Loans held for investment (including $169,535 and $304,877 covered under FDIC loss share agreements, respectively)			2,872,862				2,422,287
Allowance for loan losses			(45,513	)			(37,910	)
Loans, net of allowance for loan losses			2,827,349				2,384,377
Premises and equipment			59,523				64,617
Other real estate owned (including $4,589 and $12,817 covered under FDIC loss share agreements, respectively)			8,142				14,363
FDIC loss share receivable			18,838				34,464
Goodwill			33,187				23,084
Other intangible assets			9,037				9,738
Bank owned life insurance			84,355				62,424
Other assets			100,129				73,784
Total assets		$	3,859,536			$	3,400,574
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing		$	439,316			$	365,084
Interest-bearing			2,695,939				2,470,942
Total deposits			3,135,255				2,836,026
Other borrowings			215,095				78,905
Other liabilities			52,310				50,573
Total liabilities			3,402,660				2,965,504
Shareholders’ equity
Common stock ($0.01 par value; 100,000,000 shares authorized; 36,949,266 shares issued and outstanding, respectively)			369				369
Additional paid-in capital			374,362				372,670
Retained earnings			78,371				59,461
Accumulated other comprehensive income			3,774				2,570
Total shareholders’ equity			456,876				435,070
Total liabilities and shareholders’ equity		$	3,859,536			$	3,400,574

The accompanying notes are an integral part of these consolidated financial statements.

 

1

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Community & Southern Holdings, Inc.

Consolidated Statements of Income (Unaudited)

 

(In thousands of dollars)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Interest income
Interest and fees on loans		$	36,940			$	35,969			$	107,206			$	104,317
Interest and dividends on investment securities			3,484				3,319				9,874				9,976
Interest on other earning assets			92				86				254				191
Total interest income			40,516				39,374				117,334				114,484
Interest expense
Deposits			4,283				3,435				11,634				9,082
Other borrowings			454				405				1,237				1,229
Total interest expense			4,737				3,840				12,871				10,311
Net interest income			35,779				35,534				104,463				104,173
Provision for credit losses			1,060				4,201				11,406				5,470
Net interest income after provision for credit losses			34,719				31,333				93,057				98,703
Noninterest income
Service charges on deposit accounts			2,998				2,923				8,648				8,325
Securities gains, net			136				132				136				211
Gain on acquisition			—				2,278				—				2,278
Other			2,451				2,008				7,397				5,015
Total noninterest income			5,585				7,341				16,181				15,829
Noninterest expense
Salaries and employee benefits			12,837				11,762				37,612				33,955
Occupancy and equipment expense			2,987				2,919				8,999				8,348
Expense on loans and other real estate owned			1,061				981				2,534				3,027
Other real estate owned and repossession losses, net			585				44				529				1,198
Amortization expense			924				834				2,675				2,167
FDIC loss share receivable valuation adjustments			960				1,001				2,431				3,722
FDIC loss share receivable amortization			1,342				9,935				6,218				36,671
Other			7,376				8,331				20,317				21,189
Total noninterest expense			28,072				35,807				81,315				110,277
Income before income taxes			12,232				2,867				27,923				4,255
Income tax expense (benefit)			4,355				(1,050	)			9,013				(657	)
Net income		$	7,877			$	3,917			$	18,910			$	4,912

The accompanying notes are an integral part of these consolidated financial statements.

 

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Community & Southern Holdings, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

 

(In thousands of dollars)

 

		Three Months Ended September 30								Nine Months Ended September 30
		2015				2014				2015				2014
Net Income		$	7,877			$	3,917			$	18,910			$	4,912
Components of other comprehensive income / (loss):
Unrealized gains / (losses) on available-for-sale investment securities arising during period			2,402				(855	)			1,373				1,941
Reclassification adjustment for net investment securities gains realized in earnings			(90	)			(87	)			(90	)			(139	)
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity			(25	)			(27	)			(79	)			(103	)
Total other comprehensive income / (loss)			2,287				(969	)			1,204				1,699
Comprehensive income		$	10,164			$	2,948			$	20,114			$	6,611

The accompanying notes are an integral part of these consolidated financial statements.

 

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Community & Southern Holdings, Inc.

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

(In thousands of dollars)

 

		Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
Balance at December 31, 2013		$	369			$	370,139			$	52,617			$	710			$	423,835
Net income			—				—				4,912				—				4,912
Change in accumulated other comprehensive income			—				—				—				1,699				1,699
Stock-based compensation expense			—				1,938				—				—				1,938
Balance at September 30, 2014		$	369			$	372,077			$	57,529			$	2,409			$	432,384
Balance at December 31, 2014		$	369			$	372,670			$	59,461			$	2,570			$	435,070
Net income			—				—				18,910				—				18,910
Change in accumulated other comprehensive income			—				—				—				1,204				1,204
Stock-based compensation expense			—				1,692				—				—				1,692
Balance at September 30, 2015		$	369			$	374,362			$	78,371			$	3,774			$	456,876

The accompanying notes are an integral part of these consolidated financial statements.

 

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Community & Southern Holdings, Inc.

Consolidated Statements of Cash Flows (Unaudited)

 

(In thousands of dollars)

 

		Nine Months Ended September 30
		2015				2014
Cash flows from operating activities
Net income		$	18,910			$	4,912
Adjustments to reconcile net income to cash provided by operating activities:
Net amortization/accretion of premiums and discounts			(23,709	)			(33,745	)
Provision for credit losses			11,406				5,470
Other real estate owned and repossession losses, net			529				1,198
Stock-based compensation expense			1,692				1,938
Deferred income tax benefit			(2,174	)			(5,675	)
Depreciation, amortization and accretion			3,163				2,498
Gain on acquisitions			—				(2,278	)
Securities gains, net			(136	)			(211	)
Net change in loans held for sale			955				(769	)
Net change in FDIC loss share receivable			15,626				62,242
Increase in cash surrender value of bank owned life insurance			(1,931	)			(1,464	)
Net change in other assets			(20,883	)			(15,529	)
Net change in other liabilities			1,577				(11,278	)
Net cash provided by operating activities			5,025				7,309
Cash flows from investing activities
Net change in loans held for investment (originations, net of principal repayments)			(339,152	)			(330,356	)
Purchases of investment securities available-for-sale			(152,442	)			(72,896	)
Proceeds from maturities and calls of investment securities available-for-sale			60,168				55,563
Proceeds from sales of investment securities available-for-sale			40,779				72,855
Proceeds from calls and maturities of investment securities held-to-maturity			7,890				2,803
Purchases of investment securities held-to-maturity			(7,069	)			(6,134	)
Purchases of premises and equipment			(2,391	)			(1,085	)
Disposals of premises and equipment			4,040				1,483
Other adjustments in other real estate owned			2,761				3,752
Proceeds from sales of other real estate owned			11,770				28,123
Net cash (paid) acquired from acquisitions			(333	)			74,890
Purchases of bank owned life insurance			(20,000	)			—
Net cash used in investing activities			(393,979	)			(171,002	)
Cash flows from financing activities
Net change in deposits			174,266				106,989
Proceeds from other borrowings			174,384				70,000
Repayment of other borrowings			(45,196	)			(60,000	)
Net cash provided by financing activities			303,454				116,989
Change in cash and due from banks			(85,500	)			(46,704	)
Beginning of period			203,956				217,071
End of period		$	118,456			$	170,367
Supplemental disclosure of cash flow information
Transfers of loans to other real estate owned		$	8,839			$	10,321
Cash paid for interest			12,393				9,778
Cash paid for income taxes			21,902				18,514
Change in unrealized gain on investment securities available-for-sale			1,972				2,772

The accompanying notes are an integral part of these consolidated financial statements.

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

1.	Significant Accounting Policies

Community & Southern Holdings, Inc. (the “Company”), headquartered in Atlanta, Georgia, is a financial holding company that was incorporated under the laws of the State of Delaware on September 18, 2009 to serve as the holding company for Community & Southern Bank (“C&S Bank”). The Company operates two subsidiaries: (1) C&S Bank, a Georgia-state chartered bank that was incorporated on January 29, 2010, which provides traditional credit and depository banking services to its retail and commercial customers through 47 branches in northern and central Georgia, including metro Atlanta, as well as Jacksonville, Florida, and (2) CSB Risk Management, Inc., a captive insurance company established with the specific objective of insuring risks for the Company, its subsidiaries, and a group of unaffiliated member banks. C&S Bank is the parent company of CSB Investments, Inc., a Nevada corporation that owns all of the investment securities of C&S.

Principles of Consolidation and Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, certain information normally presented for complete consolidated financial statements required by US GAAP has been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could vary from these estimates. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

These financial statements should be read in conjunction with the 2014 Consolidated Financial Statements of Community & Southern Holdings, Inc. (the “Company”). There have been no significant changes to the Company’s accounting policies as disclosed in the 2014 Consolidated Financial Statements.

Recent Accounting Pronouncements

The following relevant accounting pronouncements, issued during 2015, could have a material effect on the Company’s financial statements. The 2014 Consolidated Financial Statements summarize relevant pronouncements issued prior to 2015.

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The ASU rescinds the indefinite deferral of previous amendments to ASC Topic 810 for certain entities and amends components of the consolidation analysis under ASC Topic 810, including evaluating limited partnerships and similar legal entities, evaluating fees paid to a decision maker or service provider as a variable interest, the effects of fee arrangements and/or related parties on the primary beneficiary determination and investment fund specific matters. The ASU may be adopted either retrospectively or on a modified retrospective basis and early adoption is permitted. The ASU is effective prospectively for fiscal years beginning on or after December 15, 2015. This ASU is not expected to have a significant impact on the Company’s financial conditions or results of operations.

In September 2015, the FASB issued ASU 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The new guidance requires acquirers to recognize adjustments to provisional amounts (that are identified during the measurement period) in the reporting period in which the

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

adjustment amounts are determined. The new guidance also requires such amounts to be disclosed in the consolidated financial statements. The ASU is effective prospectively for fiscal years beginning on after December 15, 2016. This ASU is not expected to have a significant impact on the Company’s financial conditions or results of operations.

 

2.	Acquisitions

Community Business Bank

On May 6, 2015, the Company acquired 100% of the outstanding shares of Community Business Bank (“CBB”), a Georgia state-chartered banking institution headquartered in Cumming, Georgia, for cash consideration of $27.9 million. The acquisition provided the Company with an opportunity to expand its banking presence in north metro Georgia.

Upon consummation of the acquisition, CBB was merged with and into the Company, with the Company as the surviving entity in the merger. CBB had a total of two banking locations located in north metro Georgia. The table below presents a summary of the assets acquired and liabilities assumed as a result of the CBB acquisition (dollars in thousands):

 

		Carrying Value Acquired				Purchase Adjustments				As Recorded by CSB
Assets
Cash and due from banks		$	27,545			$	—			$	27,545
Investment securities			21,403				(20	)			21,383
Loans, net			97,458				(1,938	)			95,520
Premises and equipment			2,521				(2,154	)			367
Intangible assets			—				1,800				1,800
Deferred tax assets			1,383				1,742				3,125
Other assets			821				(11	)			810
Total assets acquired		$	151,131			$	(581	)		$	150,550
Liabilities
Deposits
Noninterest-bearing		$	33,648			$	—			$	33,648
Interest-bearing			91,000				315				91,315
Total deposits			124,648				315				124,963
Other borrowings			7,652				—				7,652
Other liabilities			160				—				160
Total liabilities assumed		$	132,460			$	315			$	132,775
Net identifiable assets acquired										$	17,775
Cash consideration transferred to CBB											27,878
Goodwill										$	10,103

The acquisition of CBB resulted in the recognition of $10.1 million in goodwill, none of which is deductible for tax purposes. The goodwill arose primarily as a result of the expected synergies from combining the operations of CBB with the Company.

The loans acquired had gross contractual amounts receivable of $116.7 million. At the acquisition date, the Company’s current estimate of expected cash flows to be collected was $111.4 million.

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

3.	Investment Securities

The aggregate values of investment securities at September 30, 2015 and December 31, 2014, along with unrealized gains and losses determined on an individual security basis are as follows (dollars in thousands):

 

		Held-to-Maturity As of September 30, 2015																Available-for-Sale As of September 30, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. government		$	—			$	—			$	—			$	—			$	40,093			$	36			$	222			$	39,907
Certificates of deposit			23,249				45				125				23,169				—				—				—				—
FNMA, GNMA and FHLMC mortgage-backed securities			—				—				—				—				250,342				4,076				370				254,048
Asset backed securities			—				—				—				—				16,997				5				279				16,723
Collateralized mortgage obligations			—				—				—				—				157,377				1,832				261				158,948
State, county and municipal			58,576				3,490				12				62,054				8,852				163				6				9,009
Corporate bonds			—				—				—				—				35,555				159				6				35,708
Equity securities			—				—				—				—				3,326				—				—				3,326
Total investment securities		$	81,825			$	3,535			$	137			$	85,223			$	512,542			$	6,271			$	1,144			$	517,669
		Held-to-Maturity As of December 31, 2014																Available-for-Sale As of December 31, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. government		$	—			$	—			$	—			$	—			$	39,822			$	89			$	745			$	39,166
Certificates of deposit			17,974				39				98				17,915				—				—				—				—
FNMA, GNMA and FHLMC mortgage-backed securities			—				—				—				—				208,915				3,608				547				211,976
Asset backed securities			—				—				—				—				18,791				3				72				18,722
Collateralized mortgage obligations			—				—				—				—				142,107				1,430				827				142,710
State, county and municipal			64,929				3,643				27				68,545				7,016				99				3				7,112
Corporate bonds			—				—				—				—				21,255				206				86				21,375
Equity securities			—				—				—				—				3,822				—				—				3,822
Total investment securities		$	82,903			$	3,682			$	125			$	86,460			$	441,728			$	5,435			$	2,280			$	444,883

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The following table provides contractual maturity information for investment securities as of September 30, 2015 (dollars in thousands). Callable investment securities are assumed to mature on their earliest call date. Actual maturities may differ from contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Held-to-Maturity As of September 30, 2015								Available-for-Sale As of September 30, 2015
		Cost				Fair Value				Cost				Fair Value
Maturing in
One year or less		$	2,046			$	2,050			$	11,056			$	11,203
One through five years			28,715				29,383				273,520				278,058
Five through ten years			43,490				45,771				205,178				205,577
Over ten years			7,574				8,019				19,462				19,505
Equity securities			—				—				3,326				3,326
Total investment securities		$	81,825			$	85,223			$	512,542			$	517,669

The following table provides information regarding investment securities with unrealized losses as of September 30, 2015 and December 31, 2014 (dollars in thousands):

 

		As of September 30, 2015
		Less Than 12 Months												More Than 12 Months												Total
		Investment Positions				Fair Value				Unrealized Losses				Investment Positions				Fair Value				Unrealized Losses				Investment Positions				Fair Value				Unrealized Losses
U.S. government			2			$	10,072			$	26				2			$	9,786			$	196				4			$	19,858			$	222
Certificates of deposit			40				8,344				75				11				2,428				50				51				10,772				125
FNMA, GNMA and FHLMC mortgage-backed securities			8				47,481				230				5				18,855				140				13				66,336				370
Asset backed securities			2				7,357				176				2				6,751				103				4				14,108				279
Collateralized mortgage obligations			2				17,512				54				3				10,953				207				5				28,465				261
State, county and municipal			5				3,813				12				1				700				6				6				4,513				18
Corporate bonds			2				13,055				6				—				—				—				2				13,055				6
Total investment securities			61			$	107,634			$	579				24			$	49,473			$	702				85			$	157,107			$	1,281

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

		As of December 31, 2014
		Less Than 12 Months												More Than 12 Months												Total
		Investment Positions				Fair Value				Unrealized Losses				Investment Positions				Fair Value				Unrealized Losses				Investment Positions				Fair Value				Unrealized Losses
U.S. government			10			$	4,952			$	15				5			$	24,368			$	730				15			$	29,320			$	745
Certificates of deposit			20				4,480				26				19				4,194				72				39				8,674				98
FNMA, GNMA and FHLMC mortgage-backed securities			1				10,167				35				9				36,944				512				10				47,111				547
Asset backed securities			3				10,211				35				1				4,825				37				4				15,036				72
Collateralized mortgage obligations			6				48,245				484				2				9,633				343				8				57,878				827
State, county and municipal			4				1,487				3				3				1,812				27				7				3,299				30
Corporate bonds			1				5,100				82				1				4,997				4				2				10,097				86
Total investment securities			45			$	84,642			$	680				40			$	86,773			$	1,725				85			$	171,415			$	2,405

The Company held certain investment securities having unrealized loss positions. As of September 30, 2015, the Company did not intend to sell these investment securities nor was it more likely than not that the Company would be required to sell these investment securities before their anticipated recovery or maturity. The Company has reviewed its portfolio for OTTI in accordance with the accounting policies outlined in Note 1, “Summary of Significant Accounting Policies and Nature of Business”, to the 2014 Consolidated Financial Statements. Market changes in interest rates and credit spreads will result in temporary unrealized losses as the market price of investment securities fluctuates. As a result, the Company had no other-than-temporary impairment for the nine months ended September 30, 2015 and the year ended December 31, 2014.

The Company had pledged held-to-maturity and available-for-sale investment securities having aggregate fair values of $21.1 million and $270.7 million, respectively at September 30, 2015, and $28.0 million and $304.5 million, respectively at December 31, 2014 to secure public funds on deposit and certain other borrowings, and for other purposes as required by law.

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

4.	Loans Held for Investment

Composition of Loan Portfolio

The Company’s recorded investment in loans outstanding at September 30, 2015 and December 31, 2014, is summarized as follows (dollars in thousands):

 

		Sept. 30, 2015				Dec. 31, 2014
Commercial loans:
Construction		$	248,434			$	283,528
Commercial real estate			1,115,837				835,163
Commercial & industrial			361,837				335,853
Total commercial loans			1,726,108				1,454,544
Consumer loans:
Residential real estate			163,669				121,912
Automobile			352,692				230,576
Marine and recreational vehicle			364,017				298,740
Other consumer purpose			10,503				11,274
Total consumer loans			890,881				662,502
Purchased credit-impaired loans:
Construction			14,301				16,382
Commercial real estate			145,433				172,733
Commercial & industrial			9,007				10,556
Residential real estate			86,208				104,256
Other consumer purpose			924				1,314
Total purchased credit-impaired loans			255,873				305,241
Loans held for investment		$	2,872,862			$	2,422,287
Loans held for sale		$	1,026			$	1,981

Under a line of credit agreement with the Federal Home Loan Bank of Atlanta (“FHLBA”), at September 30, 2015, the Company had pledged certain loans under a blanket lien as collateral for its FHLBA borrowings. The loans encumbered by the blanket lien included all qualifying 1-4 family first mortgage loans, multi-family first mortgage loans, and commercial real estate loans. Loans pledged as collateral for FHLBA borrowings totaled $2.56 billion and $2.06 billion at September 30, 2015 and December 31, 2014, respectively.

Covered Loans

Included in loans held for investment are loans acquired in Federal Deposit Insurance Corporation (“FDIC”) assisted transactions that are initially covered under loss share agreements (“covered loans”). The Company’s recorded investment in covered loans at September 30, 2015 and December 31, 2014 is summarized as follows (dollars in thousands):

 

		Sept. 30, 2015				Dec. 31, 2014
Commercial loans		$	1,178			$	2,127
Consumer loans			12,243				15,030
Purchased credit-impaired loans:			156,114				287,720
Total covered loans		$	169,535			$	304,877

 

11

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Credit Quality

The Company monitors the credit quality of its commercial loan portfolio using internal credit risk ratings. These credit risk ratings are based upon established regulatory guidance and are assigned upon initial approval of credit to borrowers. Credit risk ratings are updated at least annually after the initial assignment or whenever management becomes aware of information affecting the borrowers’ ability to fulfill their obligations. The Company utilizes the following categories of credit grades to evaluate its commercial loan portfolio:

Pass. Higher quality loans that do not fit any of the other categories described below.

Special Mention. The Company assigns a special mention rating to loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or the Company’s credit position at some future date.

Substandard. The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have well-defined weaknesses that jeopardize repayment of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not addressed.

Doubtful. The Company assigns a doubtful rating to loans with all the attributes of a substandard rating with 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. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

The following tables show the credit quality indicators associated with the Company’s commercial loan portfolio (excluding purchased credit impaired (“PCI”) loans) as of September 30, 2015 and December 31, 2014 (dollars in thousands):

 

		As of September 30, 2015
		Construction				Commercial Real Estate				Commercial & Industrial				Total
Pass		$	244,014			$	1,056,130			$	332,062			$	1,632,206
Special Mention			2,902				19,226				8,769				30,897
Substandard			1,518				40,481				10,544				52,543
Doubtful			—				—				10,462				10,462
		$	248,434			$	1,115,837			$	361,837			$	1,726,108

 

		As of December 31, 2014
		Construction				Commercial Real Estate				Commercial & Industrial				Total
Pass		$	283,011			$	783,889			$	312,756			$	1,379,656
Special Mention			172				36,015				3,540				39,727
Substandard			345				15,259				4,925				20,529
Doubtful			—				—				14,632				14,632
		$	283,528			$	835,163			$	335,853			$	1,454,544

 

12

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The Company monitors the credit quality of its consumer portfolio based primarily on payment activity and credit scores. Payment activity is the primary factor considered in determining whether a consumer loan should be classified as nonperforming.

The following tables show the credit quality indicators associated with the Company’s consumer loan portfolio (excluding PCI loans) as of September 30, 2015 and December 31, 2014 (dollars in thousands):

 

		As of September 30, 2015
		Residential Real Estate				Automobile				Marine & RV				Other Consumer				Total
Performing		$	163,306			$	352,393			$	363,989			$	10,500			$	890,188
Nonperforming			363				299				28				3				693
		$	163,669			$	352,692			$	364,017			$	10,503			$	890,881

 

		As of December 31, 2014
		Residential Real Estate				Automobile				Marine & RV				Other Consumer				Total
Performing		$	120,511			$	230,283			$	298,671			$	11,264			$	660,729
Nonperforming			1,401				293				69				10				1,773
		$	121,912			$	230,576			$	298,740			$	11,274			$	662,502

The following tables show the credit quality indicators associated with the Company’s commercial PCI loans as of September 30, 2015 and December 31, 2014 (dollars in thousands):

 

		As of September 30, 2015
		Construction				Commercial Real Estate				Commercial & Industrial				Total
Pass		$	5,337			$	90,718			$	6,949			$	103,004
Special Mention			1,466				16,410				1,671				19,547
Substandard			7,214				36,533				381				44,128
Doubtful			284				1,772				6				2,062
		$	14,301			$	145,433			$	9,007			$	168,741

 

		As of December 31, 2014
		Construction				Commercial Real Estate				Commercial & Industrial				Total
Pass		$	5,958			$	99,498			$	9,293			$	114,749
Special Mention			1,296				22,071				284				23,651
Substandard			7,865				49,065				972				57,902
Doubtful			1,263				2,099				7				3,369
		$	16,382			$	172,733			$	10,556			$	199,671

 

13

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The following tables show the credit quality indicators associated with the Company’s consumer PCI loans as of September 30, 2015 and December 31, 2014 (dollars in thousands):

 

		As of September 30, 2015
		Residential Real Estate				Other Consumer				Total
Performing		$	82,247			$	909			$	83,156
Nonperforming			3,961				15				3,976
		$	86,208			$	924			$	87,132

 

		As of December 31, 2014
		Residential Real Estate				Other Consumer				Total
Performing		$	89,984			$	1,287			$	91,271
Nonperforming			14,272				27				14,299
		$	104,256			$	1,314			$	105,570

Delinquency

An aging analysis for the Company’s loan portfolio (excluding PCI loans) at September 30, 2015 and December 31, 2014, is shown in the tables below (dollars in thousands):

 

		As of September 30, 2015
		Current				30 – 89 Days Past Due				90+ Days Past Due				Total				90+ Days Accruing				Nonaccrual
Commercial loans:
Construction		$	247,054			$	1,380			$	—			$	248,434			$	—			$	590
Commercial real estate			1,113,183				1,476				1,178				1,115,837				—				5,497
Commercial & industrial			350,632				737				10,468				361,837				—				18,910
Consumer loans:
Residential real estate			162,374				932				363				163,669				—				2,229
Automobile			350,184				2,209				299				352,692				11				632
Marine & RV			363,872				117				28				364,017				—				117
Other consumer purpose			10,425				75				3				10,503				—				3
		$	2,597,724			$	6,926			$	12,339			$	2,616,989			$	11			$	27,978

 

		As of December 31, 2014
		Current				30 – 89 Days Past Due				90+ Days Past Due				Total				90+ Days Accruing				Nonaccrual
Commercial loans:
Construction		$	283,487			$	—			$	41			$	283,528			$	—			$	233
Commercial real estate			830,162				4,663				338				835,163				—				5,507
Commercial & industrial			329,305				333				6,215				335,853				164				14,722
Consumer loans:
Residential real estate			120,464				1,104				344				121,912				113				1,401
Automobile			229,404				1,002				170				230,576				30				293
Marine & RV			298,312				413				15				298,740				—				69
Other consumer purpose			11,138				136				—				11,274				—				10
		$	2,102,272			$	7,651			$	7,123			$	2,117,046			$	307			$	22,235

 

14

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

For PCI loans, if the Company has a reasonable expectation about the timing and amount of cash flows expected to be collected, the loans meet the criteria for the recognition of income and are considered to be accruing loans.

An aging analysis for the Company’s PCI loans at September 30, 2015 and December 31, 2014 is shown in the tables below (dollars in thousands):

 

		As of September 30, 2015
		Current				30 – 89 Days Past Due				90+ Days Past Due				Total				90+ Days Accruing				Nonaccrual
PCI loans:
Construction		$	13,369			$	93			$	839			$	14,301			$	839			$	—
Commercial real estate			135,711				1,397				8,325				145,433				8,325				—
Commercial & industrial			8,844				27				136				9,007				136				—
Residential real estate			80,682				1,565				3,961				86,208				3,961				—
Other consumer purpose			895				13				16				924				16				—
		$	239,501			$	3,095			$	13,277			$	255,873			$	13,277			$	—

 

		As of December 31, 2014
		Current				30 – 89 Days Past Due				90+ Days Past Due				Total				90+ Days Accruing				Nonaccrual
PCI loans:
Construction		$	14,423			$	147			$	1,812			$	16,382			$	1,812			$	—
Commercial real estate			156,696				2,700				13,337				172,733				13,337				—
Commercial & industrial			9,903				134				519				10,556				519				—
Residential real estate			95,194				4,155				4,907				104,256				4,907				—
Other consumer purpose			1,247				63				4				1,314				4				—
		$	277,463			$	7,199			$	20,579			$	305,241			$	20,579			$	—

 

15

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

5.	Allowance for Loan Losses

Activity in the Allowance for Loan Losses (“ALL”) for the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively, is summarized in the tables below (dollars in thousands):

 

		For the Period Ended September 30, 2015
		Commercial				Consumer				PCI				Total
Beginning Balance		$	23,675			$	9,059			$	5,176			$	37,910
Charge-offs			(1,310	)			(1,723	)			(2,260	)			(5,293	)
Recoveries			505				614				1,821				2,940
Provision1			4,951				3,416				1,589				9,956
Ending Balance		$	27,821			$	11,366			$	6,326			$	45,513
September 30, 2015 ALL allocated to:
Loans individually evaluated for impairment		$	6,840			$	88			$	—			$	6,928
Loans collectively evaluated for impairment			20,981				11,278				—				32,259
Loans acquired with deteriorated credit quality			—				—				6,326				6,326
Ending Balance		$	27,821			$	11,366			$	6,326			$	45,513
September 30, 2015 recorded investment in loans:
Individually evaluated for impairment		$	24,997			$	2,981			$	—			$	27,978
Collectively evaluated for impairment			1,701,111				887,900				—				2,589,011
Acquired with deteriorated credit quality			—				—				255,873				255,873
Ending Balance		$	1,726,108			$	890,881			$	255,873			$	2,872,862

 

		For the Year Ended December 31, 2014
		Commercial				Consumer				PCI				Total
Beginning Balance		$	12,186			$	6,608			$	11,741			$	30,535
Charge-offs			(5,160	)			(924	)			(2,557	)			(8,641	)
Recoveries			74				392				3,936				4,402
Provision / (Release)2			16,575				2,983				(7,944	)			11,614
Ending Balance		$	23,675			$	9,059			$	5,176			$	37,910
December 31, 2014 ALL allocated to:
Loans individually evaluated for impairment		$	5,146			$	27			$	—			$	5,173
Loans collectively evaluated for impairment			18,529				9,032				—				27,561
Loans acquired with deteriorated credit quality			—				—				5,176				5,176
Ending Balance		$	23,675			$	9,059			$	5,176			$	37,910
December 31, 2014 recorded investment in loans:
Individually evaluated for impairment		$	20,487			$	2,014			$	—			$	22,501
Collectively evaluated for impairment			1,434,057				660,488				—				2,094,545
Acquired with deteriorated credit quality			—				—				305,241				305,241
Ending Balance		$	1,454,544			$	662,502			$	305,241			$	2,422,287

 

1	Does not include $1,450 in provision for unfunded commitments.

2	Does not include ($2,660) in release for unfunded commitments.

 

16

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

In addition to the ALL, the Company also estimates probable and reasonably estimable credit losses related to unfunded lending commitments, such as letters of credit and binding unfunded loan commitments. This reserve for unfunded lending commitments totaled $5.0 million and $3.5 million at September 30, 2015 and December 31, 2014, respectively and is included within the other liabilities section of the Consolidated Balance Sheet.

 

6.	FDIC Loss Share Receivable

The following table shows changes in the carrying value of the FDIC loss share receivable for loss share agreements and the related recorded investment of the covered assets for the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively (dollars in thousands):

 

		Nine Months Ended September 30, 2015
		FNBGA				ACB				BOE				TPB				FCCB				GTB				FCSB				Total
Carrying value of FDIC loss share receivable, at December 31, 2014		$	5,485			$	14,589			$	1,086			$	1,450			$	1,792			$	3,847			$	6,215			$	34,464
Additions resulting from:
Charge-offs, writedowns, and other losses			599				764				(9	)			(14	)			(16	)			82				235				1,641
Allowable external expenses			282				(14	)			110				148				170				51				145				892
Effect of valuation adjustment on covered assets			559				(103	)			15				21				24				1				2				519
Reductions resulting from:
Amortization			(1,105	)			(1,630	)			(462	)			(624	)			(714	)			(437	)			(1,246	)			(6,218	)
Payments received			(2,485	)			(4,931	)			(445	)			(602	)			(688	)			(860	)			(2,449	)			(12,460	)
Carrying value of FDIC loss share receivable, at September 30, 2015		$	3,335			$	8,675			$	295			$	379			$	568			$	2,684			$	2,902			$	18,838
Covered Assets:
Loans			29,336				29,089				16,093				29,597				14,830				16,720				33,870				169,535
OREO			248				558				1,203				871				1,135				565				455				5,035
Total covered assets		$	29,584			$	29,647			$	17,296			$	30,468			$	15,965			$	17,285			$	34,325			$	174,570

 

		Year Ended December 31, 2014
		FNBGA				ACB				BOE				TPB				FCCB				GTB				FCSB				Total
Carrying value of FDIC loss share receivable, at December 31, 2013		$	30,922			$	40,283			$	6,052			$	2,449			$	12,615			$	5,752			$	10,194			$	108,267
Additions resulting from:
Charge-offs, writedowns, and other losses			(605	)			1,408				225				305				349				14				40				1,736
Allowable external expenses			1,120				1,102				(36	)			(50	)			(56	)			119				338				2,537
Reductions resulting from:
Effect of valuation adjustment on covered assets			(2,508	)			(2,115	)			(604	)			(818	)			(935	)			(204	)			(582	)			(7,766	)
Amortization			(20,803	)			(12,481	)			(1,440	)			1,844				(7,056	)			(745	)			(2,125	)			(42,806	)
Payments received			(2,641	)			(13,608	)			(3,111	)			(2,280	)			(3,125	)			(1,089	)			(1,650	)			(27,504	)
Carrying value of FDIC loss share receivable, at December 31, 2014		$	5,485			$	14,589			$	1,086			$	1,450			$	1,792			$	3,847			$	6,215			$	34,464
Covered Assets:
Loans			93,916				73,938				19,207				37,542				20,119				20,029				40,126				304,877
OREO			3,109				4,366				1,272				1,558				935				—				1,577				12,817
Total covered assets		$	97,025			$	78,304			$	20,479			$	39,100			$	21,054			$	20,029			$	41,703			$	317,694

 

17

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

7.

Deposits

Deposits at September 30, 2015 and December 31, 2014, are summarized as follows (dollars in thousands):

 

		September 30, 2015				December 31, 2014
Noninterest-bearing demand		$	439,316			$	365,084
Interest-bearing demand			456,260				426,406
Money market			676,602				687,025
Savings			99,776				91,329
Time			1,463,301				1,266,182
Total deposits		$	3,135,255			$	2,836,026

Time deposits with a minimum denomination of $100 thousand totaled $937.8 million and $750.9 million at September 30, 2015 and December 31, 2014, respectively.

At September 30, 2015, the scheduled maturities of time deposits were (dollars in thousands):

 

2015		$	347,328
2016			754,645
2017			134,352
2018			49,956
2019 and thereafter			177,020
Total time deposits		$	1,463,301

 

8.	Other Borrowings

Other borrowings at September 30, 2015 and December 31, 2014, are as follows (dollars in thousands):

 

		September 30, 2015				December 31, 2014
Advances payable to the FHLBA with contractual rates ranging from 0.20 percent to 4.39 percent and maturities ranging from October 2015 to May 2019 (inclusive of unamortized premium of $1,256 and $1,905 for September 30, 2015 and December 31, 2014, respectively)		$	215,095			$	78,905
Total other borrowings		$	215,095			$	78,905

 

9.	Fair Values Measurements

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, US GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Level 1 and 2 of the hierarchy) and reporting entity’s own assumptions developed based on the best information available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).

Fair Value Hierarchy

Level 1

Valuation is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

18

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Level 2

Valuation is based on inputs, other than quoted prices included within Level 1, that are observable for the asset and liability, either directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other market-corroborated inputs.

Level 3

Valuation inputs are unobservable inputs for the asset or liability, which shall be used to measure fair value to the extent that observable inputs are not available. The inputs shall reflect the Company’s own assessment regarding assumptions that market participants would use in pricing the asset or liability.

Fair value estimates are made at a specific point in time based upon relevant market information and information about each asset and liability. Where information regarding the fair value of an asset or liability is available, those values are used, as is the case with investment securities and residential mortgage loans. In these cases, an open market exists in which these assets are actively traded.

Because no market exists for many assets and liabilities, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For those assets or liabilities with a fixed interest rate, an analysis of the related cash flows was the basis for estimating fair values. The expected cash flows were then discounted to the valuation date using an appropriate discount rate. The discount rates used represent the rates under which similar transactions would be currently negotiated. For assets or liabilities with fixed and variable rates, fair value estimates also consider the impact of liquidity discounts appropriate as of the measurement date.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s valuation process. There were no significant transfers between levels during the nine months ended September 30, 2015 or year ended December 31, 2014.

Fair Value of Financial Instruments Measured on a Recurring Basis

The following methods and assumptions were used by the Company in estimating the fair value of its financial assets on a recurring basis:

Investment Securities

Investment securities classified as available-for-sale are recorded at fair value on a recurring basis. The Company’s investment portfolio primarily consists of U.S. government agency mortgage-backed securities, non-agency mortgage-backed securities, U.S. government securities, corporate bonds and municipal securities. The fair value of investment securities classified as available-for-sale are generally determined using widely accepted valuation techniques including matrix pricing and broker-quote-based applications. Inputs may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other

 

19

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

relevant items. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. From time to time, the Company validates the appropriateness of the valuations provided by the independent pricing service to prices obtained from an additional third party or prices derived using internal models.

The following tables summarize the financial assets and liabilities measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014 (dollars in thousands):

 

		As of September 30, 2015
Description		Fair Value				Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) Inputs				Quoted Prices for Similar Assets and Liabilities (Level 2) Inputs				Significant Unobservable Inputs (Level 3) Inputs
Investment securities available-for-sale
U.S. government		$	39,907			$	—			$	39,907			$	—
FNMA, GNMA, FHLMC mortgage-backed securities			254,048				—   —				254,048				—
Asset backed securities			16,723				—				16,723				—
Collateralized mortgage obligations			158,948				—				158,948				—
State, county and municipal			9,009				—				9,009				—
Corporate bonds			35,708				—				35,708				—
Equity securities			3,326				—				—				3,326
		$	517,669			$	—			$	514,343			$	3,326
		As of December 31, 2014
Description		Fair Value				Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) Inputs				Quoted Prices for Similar Assets and Liabilities (Level 2) Inputs				Significant Unobservable Inputs (Level 3) Inputs
Investment securities available-for-sale
U.S. government		$	39,166			$	—			$	39,166			$	—
FNMA, GNMA, FHLMC mortgage-backed securities			211,976				—   —				211,976				—   —
Asset backed securities			18,722				—				18,722				—
Collateralized mortgage obligations			142,710				—				142,710				—
State, county and municipal			7,112				—				7,112				—
Corporate bonds			21,375				—				21,375				—
Equity securities			3,822				—				—				3,822
		$	444,883			$	—			$	441,061			$	3,822

During 2015, the Company purchased level 3 investment securities of $736 thousand, received settlements of $1.2 million and recognized no gains or losses in earnings or other comprehensive income.

 

20

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Fair Value of Financial Instruments Measured on a Nonrecurring Basis

The following methods and assumptions were used by the Company in estimating the fair value of its financial assets on a nonrecurring basis:

Impaired Loans

Loans are considered impaired when it is determined to be probable that all amounts due under the contractual terms of the loans will not be collected when due. Loans considered individually impaired are evaluated and a specific allowance is established if required based on the underlying collateral value of the impaired loans or the estimated discounted cash flows for such loans. A specific allowance is required if the fair value of the expected repayments or the fair value of the collateral is less than the recorded investment in the loan. The Company records impaired loans as nonrecurring level 3.

Loans Held for Sale

Level 1 loans held for sale consist of conforming residential mortgage loans accounted for at lower of cost or market. Fair value is determined based upon pricing assigned on a loan-by-loan basis, at the time a loan is locked with the borrower, through correspondent relationships that the Company maintains in order to sell loans held for sale.

OREO

The fair value of OREO is determined when the asset is transferred to foreclosed assets. The assets are carried at the lower of the carrying value or fair value less estimated costs to sell. Fair value is based upon appraised values of the collateral or management’s estimation of the value of the collateral. Management requires a new appraisal at the time of foreclosure or repossession of the underlying collateral. Updated appraisals are obtained on at least an annual basis on all OREO and are considered to contain Level 3 inputs. Management has also determined, in some cases, that fair value of collateral is further impaired based upon real estate market trends and declining foreclosed property pricing. Therefore, all OREO is recorded as a nonrecurring Level 3 hierarchy.

For assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of September 30, 2015 and December 31, 2014 (dollars in thousands):

 

		As of September 30, 2015
Description		Net Carrying Value				Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) Inputs				Quoted Prices for Similar Assets and Liabilities (Level 2) Inputs				Significant Unobservable Inputs (Level 3) Inputs
Impaired loans		$	28,752			$	—			$	—			$	28,752
Loans held for sale			1,026				1,026				—				—
OREO			8,142				—				—				8,142
		As of December 31, 2014
Description		Net Carrying Value				Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) Inputs				Quoted Prices for Similar Assets and Liabilities (Level 2) Inputs				Significant Unobservable Inputs (Level 3) Inputs
Impaired loans		$	22,635			$	—			$	—			$	22,635
Loans held for sale			1,981				1,981				—				—
OREO			14,363				—				—				14,363

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2015 and December 31, 2014 (dollars in thousands):

 

As of September 30, 2015
Financial Instrument		Net Carrying Value				Valuation Technique		Unobservable Input		Range of Inputs
						1) Non-Collateral		1) a) Loss given default		1) a) 0% – 64%
						Dependent: Discounted		b) Probability of default		b) 100%
Impaired loans		$	28,752			cash flow analysis		c) Discount rate		c) 4% – 9%
						2) Collateral Dependent: Third party appraisal		2) Management discount for property type, recent market volatility, lien position, and costs to sell.		2) 0% – 95%
OREO		$	8,142			Third party appraisal		Management discount for property type, recent market volatility and time on the market		0% – 40%
As of December 31, 2014
Financial Instrument		Net Carrying Value				Valuation Technique		Unobservable Input		Range of Inputs
						1) Non-Collateral		1) a) Loss given default		1) a) 0% – 73%
						Dependent: Discounted		b) Probability of default		b) 35% – 100%
Impaired loans		$	22,635			cash flow analysis		c) Discount rate		c) 3% – 8%
						2) Collateral Dependent: Third party appraisal		2) Management discount for property type, recent market volatility, lien position, and costs to sell.		2) 0% – 83%
OREO		$	14,363			Third party appraisal		Management discount for property type, recent market volatility and time on the market		0% – 40%

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Fair Value of Financial Instruments

The following table includes the estimated fair value of the Company’s financial assets and financial liabilities (dollars in thousands). The methodologies for estimating the fair value of financial assets and financial liabilities measured on a recurring and nonrecurring basis are discussed above. The methodologies for estimating the fair value for other financial assets and financial liabilities are discussed below. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts at September 30, 2015 and December 31, 2014.

 

		September 30, 2015								December 31, 2014
		Carrying Value				Fair Value				Carrying Value				Fair Value
Cash and due from banks		$	118,456			$	118,456			$	203,956			$	203,956
Investment securities available-for-sale			517,669				517,669				444,883				444,883
Investment securities held-to-maturity			81,825				85,223				82,903				86,460
Loans held for sale			1,026				1,053				1,981				2,035
Loans held for investment, net			2,827,349				2,897,729				2,384,377				2,443,694
FDIC loss share receivable			18,838				18,838				34,464				34,464
Bank owned life insurance (“BOLI”)			84,355				84,355				62,424				62,424
FHLBA stock			12,283				12,283				6,429				6,429
Deposits			3,135,255				3,113,723				2,836,026				2,808,630
Other borrowings			215,095				216,195				78,905				80,047

Cash and Due From Banks

The carrying amount approximates fair value for these instruments.

Investment Securities

The fair value of investment securities are generally determined using widely accepted valuation techniques including matrix pricing and broker-quote-based applications.

Loans Held For Sale

Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one-to-four family residential real estate loans originated for sale to qualified third parties. Fair value is based upon the contractual price to be received from these third parties, which may be different than cost.

Loans Held for Investment

Fair values are estimated for portfolios of loans with similar financial characteristics if collateral-dependent. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect observable market information incorporating the credit, liquidity, yield and other risks inherent in the loan. The estimate of maturity is based upon the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions.

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Fair value for significant non-performing loans is generally based upon recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

Fair values for PCI loans are valued based upon a discounted expected cash flow methodology that considers various factors including the type of loan and related collateral, credit quality, fixed or variable interest rate, term of loan and whether or not the loan was amortizing and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. PCI loans are grouped together according to common risk characteristics and are evaluated in aggregated pools when applying various valuation techniques. The Company estimated the gross cash flows expected to be collected on these loans based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments. The carrying amounts of PCI loans approximate fair value.

FDIC Loss Share Receivable

The fair value of the FDIC loss share receivable is estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. The cash flows are discounted to reflect the uncertainty of the time of receipt of the loss-sharing reimbursements from the FDIC. The carrying amount of the FDIC loss share receivable approximates fair value.

BOLI

The carrying amount approximates fair value for these instruments.

FHLBA Stock

FHLBA stock is carried at its original cost basis, as cost approximates fair value and there is no ready market for such investments.

Deposits

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and money market and checking accounts, is based on the discounted value of estimated cash flows. The fair value of time deposits is based upon the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Other Borrowings

The fair value of the Company’s FHLBA advances is estimated based upon the discounted value of contractual cash flows. The fair value of investment securities sold under agreements to repurchase approximates the carrying amount because of the short maturity of these borrowings. The discount rate is estimated using rates quoted for the same or similar issues or the current rates offered to the Company for debt of the same remaining maturities.

Commitments and Contingencies

For off-balance sheets commitments and contingencies, carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to the Company’s financial position.

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

10.	Other noninterest expense

Other noninterest expense for the three months and nine months ended September 30, 2015 and 2014 included the following (dollars in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Technology and data processing		$	2,743			$	2,687			$	8,650			$	6,606
Legal and professional services			1,177				1,759				3,958				3,847
Printing, posage and supplies			450				433				1,201				1,201
Advertising			614				569				1,440				1,121
FDIC deposit insurance expense			662				687				1,881				1,896
Clawback (income) expense			271				632				(747	)			2,338
Other			1,459				1,564				3,934				4,180
Total other noninterest expense		$	7,376			$	8,331			$	20,317			$	21,189

 

11.	Accumulated Other Comprehensive Income (AOCI)

In addition to presenting the Consolidated Statements of Comprehensive Income herein, the following table shows the tax effects allocated to each component of AOCI for the three and nine month periods ending September 30, 2015 and September 30, 2014, respectively (dollars in thousands):

 

		Three Months Ended
		September 30, 2015												September 30, 2014
		Before -Tax Amount				Tax				Net-of-Tax Amount				Before -Tax Amount				Tax				Net-of-Tax Amount
AOCI, beginning balance		$	2,321			$	(834	)		$	1,487			$	5,134			$	(1,756	)		$	3,378
Unrealized gains / (losses) on securities:
Net unrealized gains / (losses) arising during the period			3,639				(1,237	)			2,402				(1,295	)			440				(855	)
Less: reclassification adjustment for gains included in net income			(136	)			46				(90	)			(132	)			45				(87	)
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity			(38	)			13				(25	)			(41	)			14				(27	)
AOCI, ending balance		$	5,786			$	(2,012	)		$	3,774			$	3,666			$	(1,257	)		$	2,409

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

		Nine Months Ended
		September 30, 2015												September 30, 2014
		Before-Tax Amount				Tax				Net-of-Tax Amount				Before-Tax Amount				Tax				Net-of-Tax Amount
AOCI, beginning balance		$	3,961			$	(1,391	)		$	2,570			$	1,094			$	(384	)		$	710
Unrealized gains / (losses) on securities:
Net unrealized gains / (losses) arising during the period			2,081				(708	)			1,373				2,939				(998	)			1,941
Less: reclassification adjustment for gains included in net income			(136	)			46				(90	)			(211	)			72				(139	)
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity			(120	)			41				(79	)			(156	)			53				(103	)
AOCI, ending balance		$	5,786			$	(2,012	)		$	3,774			$	3,666			$	(1,257	)		$	2,409

Reclassifications out of AOCI consisted of the following (dollars in thousands)::

 

		Three Months Ended September 30								Affected line item in the Consolidated Financial Statements
Details about components of AOCI		2015				2014
Realized gains on AFS securities:		$	(136	)		$	(132	)		Securities gains
			46				45			Income tax expense
		$	(90	)		$	(87	)
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity:		$	(38	)		$	(41	)		Investment securities held-to-maturity
			13				14			Income tax expense
		$	(25	)		$	(27	)

 

		Nine Months Ended September 30								Affected line item in the Consolidated Financial Statements
Details about components of AOCI		2015				2014
Realized gains on AFS securities:		$	(136	)		$	(211	)		Securities gains
			46				72			Income tax expense
		$	(90	)		$	(139	)
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity:		$	(120	)		$	(156	)		Investment securities held-to-maturity
			41				53			Income tax expense
		$	(79	)		$	(103	)

 

12.	Income Taxes

For the three months ended September 30, 2015 and 2014, income tax expense (benefit) was $4,355 and $(1,050) representing effective tax rates of 35.6% and (36.6)%, respectively. For the nine months ended September 30, 2015 and 2014, income tax expense (benefit) was $9,013 and $(657), representing effective tax rates of 32.3%

 

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Community & Southern Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

and (15.4)%, respectively. The higher effective tax rates for the three months and nine months ended September 30, 2015, compared to the three months and nine months ended September 30, 2014, were primarily due to higher pre-tax income.

The provision for income taxes includes both federal and state income taxes and differs from the provision using statutory rates primarily due to favorable permanent tax items such as income from nontaxable loans and investments and tax exempt income on Bank owned life insurance. The Company calculated provision for income taxes for the three and nine months ended September 30, 2015 by applying the estimated annual effective tax rate to year-to-date pretax income, and calculated provision for income taxes for the three and nine months ended September 30, 2014 by using the actual effective tax rate.

 

13.	Subsequent Events

Management has evaluated the effects of subsequent events through December 2, 2015 and has determined that the following events require disclosure:

Certus Bank

On October 9, 2015, the Company successfully completed the acquisition of certain loans and deposits related to fourteen Certus Bank branches throughout Georgia and Florida. The purchase included $575.2 million in deposits and $181.2 million in loans. The Company is currently in the process of calculating purchase accounting adjustments associated with this acquisition.

Acquisition by Bank of the Ozarks, Inc.

On October 19, 2015, the Company entered into a definitive merger agreement with Bank of the Ozarks, Inc. (“OZRK”). The Company and OZRK jointly announced the signing of a definitive agreement and plan of merger (“Agreement”) whereby OZRK will acquire the Company and its wholly owned bank subsidiary, Community & Southern Bank (“CSB”), in an all-stock transaction valued at approximately $799.6 million, or approximately $20.50 per fully diluted Company share, subject to potential adjustments as described in the Agreement.

Under the terms of the agreement, which has been approved by the boards of directors of both companies, each holder of outstanding shares of common stock of the Company will receive shares of common stock of OZRK. The number of OZRK shares to be issued will be determined based on the fifteen day volume weighted average stock price of OZRK’s common stock as of the second business day prior to the closing date, subject to a minimum and maximum price of $34.10 and $56.84, respectively.

Upon the closing of the transaction, the Company will merge into OZRK and CSB will merge into OZRK’s wholly-owned bank subsidiary, Bank of the Ozarks. Completion of the transaction is subject to certain closing conditions, including customary regulatory and shareholder approvals. The transaction is expected to close during the first quarter of 2016.

Legal Contingencies

C&S Bank recorded a litigation loss of $1.0 million in December of 2015 related to an acquired loan participation. In this legal matter, participant bank on a defaulted loan filed suit against C&S Bank for full loan recovery liquidation proceeds based on a negotiated contract with C&S Bank’s predecessor in interest. The judgment against C&S Bank was upheld on appeal; C&S Bank continues to evaluate the merits of additional appeal. Amounts paid to satisfy the judgment, to the extent the matter is not appealed, will be offset by proceeds from disposition of underlying collateral as well as with any amounts collected as a result of final judgment obtained by C&S Bank against underlying borrowers and guarantors on the subject loan.

 

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