Exhibit 99.2​

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

i

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)

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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.

Crowe Horwath LLP

Atlanta, Georgia
March 5, 2018

   

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Hamilton State Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets
December 31, 2017 and 2016 (In thousands except share data)

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)

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)

See accompanying notes.

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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)

See accompanying notes.

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Hamilton State Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
For the years ended December 31, 2017 and 2016

See accompanying notes.

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(1)

Summary of Significant Accounting Policies

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(a)

Nature of Operations

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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

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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

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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:

   

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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

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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.

   

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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

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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

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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

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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

   

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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

   

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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

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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

   

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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:

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

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•

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

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•

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

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•

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

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•

Reduction of accrued interest receivable on the debt

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In its determination of whether the customer is experiencing financial difficulties, the Company considers numerous indicators, including, but not limited to the following:

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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

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

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

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•

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

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•

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

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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

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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

   

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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

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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

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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.

   

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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

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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.

   

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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:

(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.

   

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The amortization expense for each of the next five years is as follows:

(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.

   

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​

(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:

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.

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.

   

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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.

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

   

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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.

​

   

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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:

(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:

   

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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.

​

   

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​

•

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:

(1)

Includes $1.8 million of nonaccrual substandard loans.

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