News Column

STATE BANK FINANCIAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 9, 2014

The following discussion analyzes our consolidated financial condition as of March 31, 2014 as compared to December 31, 2013 and our results of operations for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. This discussion should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing in this report and in conjunction with the financial statements and related notes in our 2013 Annual Report on Form 10-K. Unless the context indicates otherwise, all references to the "Company," "we," "us" and "our" refer to State Bank Financial Corporation and our wholly-owned subsidiary, State Bank and Trust Company. All references to the "Bank" refer to State Bank and Trust Company.



Introduction

The Company is a bank holding company that was incorporated under the laws of the State of Georgia in January 2010 to serve as the holding company for the Bank. The Bank is a Georgia state-chartered bank that opened in October 2005 in Pinehurst, Georgia. From October 2005 until July 23, 2009, the Bank operated as a small community bank from two branch offices located in Dooly County, Georgia with total assets of approximately $33.6 million, total loans receivable of approximately $22.5 million, total deposits of approximately $26.1 million and total shareholders' equity of approximately $5.7 million at December 31, 2008. On July 24, 2009, the Bank raised approximately $292.1 million in gross proceeds (before expenses) from investors in a private offering of its common stock. In connection with the private offering, the FDIC and the Georgia Department of Banking and Finance approved the Interagency Notice of Change in Control application filed by our new management team, which took control of the Bank on July 24, 2009. Since that date and through the date of this report, the Bank has acquired $3.9 billion in assets and assumed $3.6 billion in deposits from the FDIC, as receiver, in 12 different failed bank transactions. Concurrently with each of our acquisitions, we entered into loss share agreements with the FDIC that cover certain of the acquired loans and other real estate owned. Where applicable, we refer to loans subject to loss share agreements with the FDIC as "covered loans" and loans that are not subject to loss share agreements with the FDIC as "noncovered loans." We refer to the indemnification assets associated with the FDIC loss share agreements related to our acquired banks as the "FDIC receivable." As a result of our failed bank acquisitions, the Bank was transformed from a small community bank in Pinehurst, Georgia to a much larger commercial bank now operating 19 full service branches throughout middle Georgia and metropolitan Atlanta. As of March 31, 2014, our total assets were approximately $2.6 billion, our total loans receivable were approximately $1.4 billion, our total deposits were approximately $2.1 billion and our total shareholders' equity was approximately $441.4 million.



Overview

Our net income for the quarter ended March 31, 2014 was $4.3 million, or $.13 per diluted share, compared to a net loss for the quarter ended March 31, 2013 of $1.2 million, or $.04 per share. 36 -------------------------------------------------------------------------------- Our net interest income on a taxable equivalent basis (TE) was $42.5 million for the quarter ended March 31, 2014, an increase of $6.9 million, or 19.3% from the quarter ended March 31, 2013. The increase was almost entirely the result of higher accretion income on covered loans, principally from gains of $15.9 million on covered loan pools that closed during the quarter, and higher interest income on noncovered loans driven by organic loan growth. Our interest expense decreased $102,000 during the quarter ended March 31, 2014, compared to the same period in 2013, primarily as a result of improvements in our deposit mix which lowered our cost of funds. Average earning assets improved 6.3% during the first quarter of 2014 compared to the first quarter of 2013, with our net interest margin (TE) increasing 80 basis points to 7.38%. Our yields on assets increased 77 basis points during the first quarter of 2014 compared to the first quarter of 2013 primarily from increases in our covered loan yields, which were partially offset by decreases in yields on both our noncovered loans and our investment securities. Our noncovered loans increased $43.4 million, or 3.9%, for the quarter ended March 31, 2014, compared to the year ended December 31, 2013, and represented 82.6% of our total loan portfolio at March 31, 2014. Our covered loans decreased $11.2 million, or 4.4%, from December 31, 2013 to March 31, 2014, as covered loans were paid down or charged off and submitted to the FDIC for loss share reimbursement. Our asset quality remained strong in our noncovered loan portfolio for the quarter ended March 31, 2014, with a ratio of noncovered nonperforming assets to total noncovered loans plus noncovered other real estate owned of .26% and a ratio of nonperforming loans to total noncovered loans of .18%. We recorded the loans we acquired in each of our FDIC-assisted acquisitions at their estimated fair values on the date of each acquisition. We refer to the expected cash flows that exceed the net covered loan balance as the "accretable discount." The accretable discount is recognized as interest income over the remaining life of the loan. The accretable discount on covered loans decreased to $156.4 million for the three months ended March 31, 2014, compared to $204.6 million for the same period in 2013. The decrease year over year is a result of $128.4 million in accretion income recognized, including gains of $56.0 million on covered loan pools that closed, partially offset by transfers from the nonaccretable discount to the accretable discount resulting from improved estimated cash flows on covered loans. The accretable discount has an estimated weighted average life of ten quarters compared to future scheduled amortization of the FDIC receivable, which has an estimated weighted average life of four quarters. Without the consideration of timing issues, we expect the remaining accretable discount, net of the amortization of the FDIC receivable, to be positive to our longer-term earnings. The FDIC receivable for loss share agreements decreased to $65.2 million at March 31, 2014, compared to $103.2 million at December 31, 2013. The FDIC receivable decreased as a result of our submission of claims to the FDIC and the receipt of cash from the FDIC under the terms of our loss share agreements and amortization of the FDIC receivable. Projected cash flows on our covered loans continue to be better than we originally expected, resulting in a decrease in the estimated cash flows expected to be received from the FDIC under the terms of our loss share agreements and, therefore, an impairment of the FDIC receivable. The total impairment is not recorded in the current period, but is recognized prospectively as amortization expense in noninterest income over the lesser of the remaining life of the covered asset or the related loss share agreement. Our total covered and noncovered provision for loan losses was $590,000 for the three months ended March 31, 2014, compared to a negative $2.0 million for the three months ended March 31, 2013. We recorded no provision for noncovered loan losses for the three months ended March 31, 2014, compared to $350,000 that we recorded for the three months ended March 31, 2013. Net recoveries on noncovered loans were $202,000 and $112,000 for the first quarter of 2014 and 2013, respectively. The provision for covered loan losses charged to operations in the first quarter of 2014 was $590,000 primarily relating to one of the loan pools that closed during the quarter. The first quarter of 2013 included a negative provision for covered loan losses of $2.4 million primarily due to improved cash flow assumptions. The total allowance for loan losses on covered and noncovered loans increased $2.0 million to $36.0 million at March 31, 2014, compared to $34.1 million recorded at December 31, 2013. The increase was driven mainly from the provision for loan losses on covered loans. The determination of the allowance for loan losses for noncovered and covered loans is discussed in Note 1 to the consolidated financial statements. The Company's capital ratios exceeded all regulatory "well capitalized" guidelines, with a Tier 1 leverage ratio of 16.67%, a Tier 1 risk-based capital ratio of 27.20% and a Total risk-based capital ratio of 28.47% at March 31, 2014. During the first quarter of 2014, we declared a quarterly cash dividend of $.03 per share to common shareholders. 37 --------------------------------------------------------------------------------



Recent Developments

Proposed Acquisition of Atlanta Bancorporation, Inc.

On April 25, 2014, the Company entered into a definitive agreement to acquire Atlanta Bancorporation, Inc. and its wholly-owned subsidiary, Bank of Atlanta. Upon the closing of the transaction, Atlanta Bancorporation, Inc. will merge into State Bank Financial Corporation, immediately followed by the merger of Bank of Atlanta into State Bank and Trust Company. At March 31, 2014, Bank of Atlanta had approximately $198.3 million of total assets, $123.1 million of loans and $161.2 million of deposits. Bank of Atlanta is headquartered in midtown Atlanta and operates one additional banking office in Duluth, Georgia. State Bank Financial Corporation has agreed to pay approximately $25.2 million in cash for all outstanding shares of Atlanta Bancorporation, Inc. The definitive agreement has been unanimously approved by the Boards of Directors of both companies and is expected to close no later than the fourth quarter of 2014. Completion of the transaction is subject to certain closing conditions, including customary regulatory approvals and the approval by Atlanta Bancorporation, Inc. shareholders. 38 --------------------------------------------------------------------------------



Financial Summary

The following table provides unaudited selected financial data for the periods presented. This data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 1 and the information contained in this Item 2.

2014 2013 (dollars in thousands, except per share amounts) First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter Selected Results of Operations Data: Total interest income on invested funds $ 2,493$ 2,416$ 2,587$ 2,693$ 2,502 Interest income on noncovered loans, including fees 15,275 15,861 15,800 15,141 14,374 Accretion income on covered loans 26,536 48,065 27,978 25,787 20,636 Total interest expense 1,894 1,961 1,981 1,995 1,996 Net interest income 42,410 64,381 44,384 41,626 35,516 Provision for loan losses (noncovered loans) - - 905 665 350 Provision for loan losses (covered loans) 590 (98 ) (636 ) (1,288 ) (2,385 ) Amortization of FDIC receivable for loss share agreements (15,292 ) (31,372 ) (18,971 ) (20,762 ) (16,779 ) Other noninterest income 3,103 3,955 4,471 4,224 4,121 Total noninterest income (12,189 ) (27,417 ) (14,500 ) (16,538 ) (12,658 ) Noninterest expense 23,083 22,718 23,124 25,461 26,664 Income (loss) before income taxes 6,548 14,344 6,491 250 (1,771 ) Income tax expense (benefit) 2,226 4,927 2,142 113 (615 ) Net income (loss) $ 4,322$ 9,417$ 4,349 $ 137 $ (1,156 ) Per Common Share Data: Basic net income (loss) per share $ .13 $ .29 $ .14 $ - $ (.04 ) Diluted net income (loss) per share .13 .28 .13 - (.04 ) Cash dividends declared per share .03 .03 .03 .03 .03 Book value per share at period end 13.74 13.62 13.36 13.34 13.38 Tangible book value per share at period end 13.36 13.24 12.97 12.94 12.96 Weighted Average Shares Outstanding: Basic 32,094,473 32,086,781 31,998,901 31,918,677 31,908,776 Diluted 33,644,135 33,519,550 33,296,650 33,124,681 31,908,776 Capital Ratios: Average equity to average assets 17.05 % 16.78 % 16.68 % 16.16 % 16.35 % Leverage ratio 16.67 % 16.55 % 16.20 % 15.57 % 15.51 % Tier 1 risk-based capital ratio 27.20 % 27.85 % 26.18 % 25.88 % 28.17 % Total risk-based capital ratio 28.47 % 29.11 % 27.44 % 27.14 % 29.45 % Performance Ratios: Return on average assets .68 % 1.46 % .67 % .02 % (.18 )% Return on average equity 3.99 % 8.70 % 4.04 % .13 % (1.09 )% Cost of funds .37 % .37 % .38 % .37 % .38 % Net interest margin (1)(4) 7.38 % 11.26 % 7.95 % 7.40 % 6.58 % Interest rate spread (2)(4) 7.25 % 11.13 % 7.83 % 7.29 % 6.47 % Efficiency ratio (3)(4) 76.19 % 61.28 % 77.16 % 101.14 % 116.21 % 39

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2014 2013 First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter Asset Quality Ratios: Net (recoveries) charge-offs to total average noncovered loans (.07 )% (.08 )% .10 % (.01 )% (.05 )% Nonperforming loans to total noncovered loans (5) .18 % .20 % .25 % .32 % .41 % Nonperforming assets to loans + ORE: Noncovered .26 % .29 % .33 % .42 % .44 % Covered 13.23 % 15.22 % 15.11 % 13.56 % 10.67 % Allowance for loan losses to loans: Noncovered 1.44 % 1.48 % 1.41 % 1.41 % 1.44 % Covered 7.79 % 6.76 % 4.16 % 5.28 % 7.23 % Selected Average Balances: Total assets $ 2,575,216$ 2,559,725$ 2,561,802$ 2,644,241$ 2,627,041 Investment securities 430,696 379,975 375,321 359,391 321,599 Loans receivable: Noncovered loans (6) 1,133,802 1,144,116 1,140,052 1,083,549 1,007,094 Covered loans 250,824 258,600 305,487 351,955 419,204 Interest-earning assets 2,333,684 2,271,737 2,219,251 2,260,718 2,195,826 Total deposits 2,088,787 2,089,202 2,077,170 2,147,653 2,115,382 Interest-bearing liabilities 1,652,851 1,663,983 1,662,506 1,747,126 1,736,646 Noninterest-bearing liabilities 483,260 466,248 472,084 469,876 460,809 Shareholders' equity 439,105 429,494 427,212 427,239 429,586 Selected Actual Balances: Total assets $ 2,617,378 2,600,705 $ 2,527,101$ 2,607,697$ 2,641,306 Investment securities 454,053 387,048 374,838 370,146 351,565 Loans receivable: Noncovered loans 1,166,913 1,123,475 1,164,854 1,123,122 1,051,455 Covered loans 246,279 257,494 290,077 333,683 396,831 Allowance for loan losses (noncovered loans) (16,858 ) (16,656 ) (16,427 ) (15,805 ) (15,122 ) Allowance for loan losses (covered loans) (19,182 ) (17,409 ) (12,075 ) (17,630 ) (28,706 ) Interest-earning assets 2,418,390 2,359,145 2,229,921 2,258,641 2,261,731 Total deposits 2,141,061 2,128,325 2,049,911 2,126,084 2,148,190 Interest-bearing liabilities 1,674,018 1,667,085 1,636,414 1,705,398 1,746,293 Noninterest-bearing liabilities 501,921 496,437 462,094 476,373 468,077 Shareholders' equity 441,439 437,183 428,593 425,926 426,936 (1) Annualized net interest income divided by average interest-earning assets. (2) Yield on interest-earning assets less cost of interest-bearing liabilities. (3) Noninterest expenses divided by net interest income plus noninterest income. (4) Calculated on a fully tax-equivalent basis. (5) The ratio of nonperforming loans to total loans is disclosed for noncovered loans only because there are no covered loans designated as nonperforming. (6) Includes average nonaccrual loans of $2.1 million for first quarter 2014, $2.6 million for fourth quarter 2013, $2.4 million for third quarter 2013, $4.1 million for second quarter 2013 and $4.0 million for first quarter 2013. 40 --------------------------------------------------------------------------------



Critical Accounting Policies

There have been no changes to our critical accounting policies from those disclosed in our 2013 Annual Report on Form 10-K. The reader should also refer to the notes in our 2013 Annual Report on Form 10-K.

Balance Sheet Review

General

At March 31, 2014, we had total assets of approximately $2.6 billion, consisting principally of $1.2 billion in net noncovered loans, $227.1 million in net covered loans, $454.1 million in investment securities, $65.2 million in FDIC receivable, $38.4 million in other real estate owned and $556.9 million in cash and cash equivalents. Our liabilities at March 31, 2014 totaled $2.2 billion, consisting principally of $2.1 billion in deposits. At March 31, 2014, our shareholders' equity was $441.4 million. At December 31, 2013, we had total assets of approximately $2.6 billion, consisting principally of $1.1 billion in net noncovered loans, $240.1 million in net covered loans, $387.0 million in investment securities, $103.2 million in FDIC receivable, $47.2 million in other real estate owned and $598.7 million in cash and cash equivalents. Our liabilities at December 31, 2013 totaled $2.2 billion, consisting principally of $2.1 billion in deposits. At December 31, 2013, our shareholders' equity was $437.2 million.



Investments

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk, while providing a vehicle for the investment of available funds, furnishing liquidity and supplying securities to pledge as required collateral. At March 31, 2014, we had $454.1 million in our available-for-sale investment securities portfolio representing approximately 17.3% of our total assets, compared to $387.0 million, or 14.9% of total assets, at December 31, 2013. Investment securities were up $67.0 million, or 17.3%, compared to December 31, 2013. Our increased investment in securities was due to management's decision to gain a greater return on liquid assets, which grew during the first quarter of 2014. The securities we purchased had short durations and no material impact on our overall liquidity or interest rate risk profile. Investment securities with an aggregate value of $142.8 million were also pledged to secure public deposits or for other purposes at March 31, 2014. Our investment portfolio consists of U.S. government sponsored agency mortgage-backed securities, nonagency mortgage-backed securities, U.S. government agency securities and municipal securities and asset-backed securities. Agency mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages and are principally issued by "quasi-federal" agencies such as Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac"). These securities are deemed to have high credit ratings, and the minimum monthly cash flows of principal and interest are guaranteed by the issuing agencies. Although investors generally assume that the federal government will support these agencies, it is under no obligation to do so. Other agency mortgage-backed securities are issued by Government National Mortgage Association ("Ginnie Mae"), which is a federal agency, and are guaranteed by the U.S. government. The actual maturities of these mortgage-backed securities will differ from their contractual maturities because the loans underlying the securities can prepay. At March 31, 2014, $72.9 million, or 16.0%, of our available-for-sale securities were invested in U.S. government agencies, compared to $81.1 million, or 21.0%, as of December 31, 2013. At March 31, 2014, $251.7 million, or 55.4%, of our available-for-sale securities were invested in agency mortgage-backed securities, compared to $175.9 million, or 45.5%, as of December 31, 2013. At March 31, 2014, $114.9 million, or 25.3% of our available-for-sale securities were invested in nonagency mortgage-backed securities, compared to $117.6 million, or 30.4%, as of December 31, 2013. Our nonagency mortgage-backed securities were purchased at significant market discounts compared to par value. The underlying collateral consists of mortgages originated prior to 2006 with the majority being 2004 and earlier. None of the collateral is subprime and we own the senior tranche of each bond. At March 31, 2014, $7.9 million, or 1.7%, of our available-for-sale securities were invested in asset-backed securities, compared to $2.9 million, or .8%, as of December 31, 2013. Asset-backed securities currently consist of highly rated collateralized loan obligations. The growth in this asset class was due to management's decision to invest in securities with significant credit support and variable rate structures that would provide higher returns than other variable rate paper without adding significant risk. 41 --------------------------------------------------------------------------------



The following table is a summary of our available-for-sale investment portfolio for the periods presented (dollars in thousands):

March 31, 2014 December 31, 2013 Available-for-Sale: Amortized Cost Fair Value Amortized Cost Fair Value U.S. Government securities $ 72,468 $ 72,873 $ 80,692 $ 81,111 States and political subdivisions 6,493 6,538 9,317 9,367 Residential mortgage-backed securities - nonagency 107,461 114,932 110,900 117,647 Residential mortgage-backed securities - agency 252,117 251,725 176,503 175,926 Asset-backed securities 7,919 7,932 2,936 2,940 Equity securities 51 53 51 57 Total $ 446,509$ 454,053$ 380,399$ 387,048



The following table shows contractual maturities and yields on our investments in debt securities at March 31, 2014 (dollars in thousands):

Distribution of Maturities 1 Year or 1-5 5-10 After 10 March 31, 2014 Less Years Years Years Total Amortized Cost (1): U.S. Government securities $ 5,754$ 29,886$ 8,780$ 28,048$ 72,468 States and political subdivisions 3,628 2,561 304 - 6,493 Residential mortgage-backed securities - nonagency - - - 107,461 107,461 Residential mortgage-backed securities - agency - - 162,550 89,567 252,117 Asset-backed securities - - - 7,919 7,919 Total debt securities $ 9,382$ 32,447$ 171,634$ 232,995$ 446,458 Fair Value (1): U.S. Government securities $ 5,766$ 30,063$ 8,819$ 28,225$ 72,873 States and political subdivisions 3,646 2,571 321 - 6,538 Residential mortgage-backed securities - nonagency - - - 114,932 114,932 Residential mortgage-backed securities - agency - - 162,355 89,370 251,725 Asset-backed securities - - - 7,932 7,932 Total debt securities $ 9,412$ 32,634$ 171,495$ 240,459$ 454,000 Weighted average yield (2): Total debt securities 1.27 % .77 % 1.49 % 2.18 % 1.79 % (1) The amortized cost and fair value of investments in debt securities are presented based on contractual maturities. Actual cash flows may differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. (2) Average yields are based on amortized cost and presented on a fully taxable equivalent basis. 42

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Loans

We had total net loans outstanding of approximately $1.4 billion at March 31, 2014 and $1.3 billion at December 31, 2013. Loans secured by real estate mortgages are the principal component of our loan portfolio. Most of our real estate loans are secured by commercial or residential property. We do not generally originate traditional long-term residential mortgages for our portfolio, but we do originate and hold traditional second mortgage residential real estate loans and home equity lines of credit. Even if the principal purpose of the loan is not to finance real estate, where possible, we obtain a security interest in the real estate in addition to any other available collateral to increase the likelihood of the ultimate repayment or collection of the loan. Our noncovered loans increased $43.4 million, or 3.9%, to $1.2 billion at March 31, 2014 from December 31, 2013, as we continued to replace our covered loan run-off with organic loan growth. Our covered loans decreased $11.2 million, or 4.4%, to $246.3 million at March 31, 2014 from December 31, 2013, as covered loans were paid down or charged off and submitted to the FDIC for loss share reimbursement. We expect our noncovered loans to continue to increase as we originate and purchase well-underwritten loans, while we expect our covered loans to continue to decrease as such loans are collected, charged-off or the underlying collateral is foreclosed on and sold. Due to the current economic environment, covered loans may decrease faster than noncovered loans increase, thereby resulting in a decrease in gross loans receivable.



The following table summarizes the composition of our loan portfolio for the periods presented (dollars in thousands):

March 31, 2014 December 31, 2013 % of % of Covered Gross Noncovered Covered Gross Noncovered Loans Loans Total Amount



Total Loans Loans Total Amount Total Construction, land & land development $ 259,488 $ 30,770$ 290,258

20.5 % $ 251,043$ 35,383$ 286,426 20.7 % Other commercial real estate

593,260 65,599 658,859 46.6 % 550,474 67,573 618,047 44.8 % Total commercial real estate 852,748 96,369 949,117 67.1 % 801,517 102,956 904,473 65.5 % Commercial & industrial 28,140 4,216 32,356 2.3 % 30,145 4,271 34,416 2.5 % Owner-occupied real estate 171,221 52,791 224,012



15.9 % 174,858 54,436 229,294 16.6 % Total commercial & industrial

199,361 57,007 256,368



18.2 % 205,003 58,707 263,710 19.1 % Residential real estate

67,896 92,509 160,405



11.4 % 66,835 95,240 162,075 11.7 % Consumer & other

46,908 394 47,302 3.3 % 50,120 591 50,711 3.7 % Total gross loans receivable, net of deferred fees 1,166,913 246,279 1,413,192



100.0 % 1,123,475 257,494 1,380,969 100.0 % Less - allowance for loan losses

(16,858 ) (19,182 ) (36,040 ) (16,656 ) (17,409 ) (34,065 )



Total loans, net $ 1,150,055$ 227,097$ 1,377,152

$ 1,106,819$ 240,085$ 1,346,904

FDIC Receivable for Loss Share Agreements and Clawback Liability

In connection with each of our FDIC-assisted acquisitions, we entered into loss share agreements with the FDIC and we recorded a net receivable from the FDIC which represents the estimated reimbursements we expect to receive from losses we incur as we dispose of loans and other real estate covered under the loss share agreements, less payments owed on recoveries and the clawback liability. At March 31, 2014, 17.4% of our outstanding principal balance of loans and 97.7% of our other real estate assets were covered under loss share agreements with the FDIC in which the FDIC has agreed to reimburse us either 80% or 95% of all losses we incur in connection with those assets. 43 -------------------------------------------------------------------------------- At March 31, 2014, we had $246.3 million of covered loans and $37.5 million of covered other real estate owned subject to loss share agreements. Of this amount, $111.9 million of loans and $26.4 million of other real estate owned are associated with commercial loss share agreements under which our right to be reimbursed by the FDIC for losses is expiring in 2014. We are amortizing any impairment of the FDIC receivable for loss share agreements over the lesser of the remaining life of the loan or the expiration of the loss share agreement. The only portion of the FDIC receivable related to each applicable loss share agreement that will remain upon the expiration of such loss share agreement will be for claims on losses submitted to the FDIC prior to the time the agreement expired, but for which we have not yet received reimbursement. Any recoveries on commercial assets during the three year period following expiration of the loss share coverage will be shared with the FDIC generally at 80% or 95%, depending on the threshold included in the loss share agreement. Any losses on covered assets after the applicable loss share agreement expires will not be eligible for reimbursement from the FDIC. We do not anticipate that these losses will be material to our overall financial results. The covered loans will continue to be subject to the quarterly re-estimation of cash flows. The other real estate owned is carried at the lower of cost or fair value less estimated costs to sell, with periodic reviews of the carrying value. The FDIC receivable for loss share agreements was $65.2 million at March 31, 2014, a decrease of $37.9 million, or 36.8%, from $103.2 million as of December 31, 2013. The decrease in the FDIC receivable for the first quarter of 2014 as compared to the year ended December 31, 2013 was the result of $16.5 million in cash collected from the FDIC on realized losses on our covered assets. Additionally, we recognized $15.3 million of amortization expense resulting from impairments to the FDIC receivable as cash flow estimates improve for certain of our covered loans. The total impairment is not recorded in the current period, but is recognized prospectively as amortization expense in noninterest income over the lesser of the remaining life of the covered asset or the related loss share agreement. Of the remaining FDIC receivable, $29.1 million is currently scheduled for future amortization with an estimated weighted average life of four quarters. This time frame for amortization is driven, in large part, by the fact that our earliest failed bank acquisitions were our largest transactions and the commercial loss share agreements for these transactions begin expiring in 2014. At the end of each of the loss share agreements with the FDIC, with the exception of the six bank subsidiaries of Security Bank Corporation, we will be required to reimburse the FDIC in the event that losses on covered assets do not reach originally expected losses. The potential reimbursement to the FDIC is based on the initial discount received less cumulative servicing amounts for the covered assets acquired. As of March 31, 2014, we have recorded a $5.1 million liability to the FDIC related to the First Security National Bank, NorthWest Bank & Trust, United Americas Bank, Community Capital Bank and Piedmont Community Bank acquisitions, which is netted against the FDIC Receivable for Loss Share Agreements in our consolidated statements of financial condition.



Allowance for Loan Losses (ALL)

The ALL represents the amount that management believes is necessary to absorb probable losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. The ALL is critical to the portrayal and understanding of our financial condition, liquidity and results of operations. The determination and application of the ALL accounting policy involves judgments, estimates and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity and results of operations. The ALL on our noncovered loan portfolio is determined based on factors such as changes in the nature and volume of the portfolio, overall portfolio quality, delinquency trends, adequacy of collateral, loan concentrations, specific problem loans and economic conditions that may affect the borrowers' ability to pay. The ALL for noncovered loans consists of two components: a specific reserve and a general amount. The specific reserve is representative of identified credit exposures that are readily predictable by the current performance of the borrower and the underlying collateral and relates to loans that are individually determined to be impaired. The general amount is based on historical loss experience adjusted for current economic factors and relates to nonimpaired loans. Historical losses are adjusted by a qualitative analysis that reflects several key economic indicators such as gross domestic product, unemployment and core inflation as well as asset quality trends, rate risk and unusual events or significant changes in personnel, policies or procedures. The qualitative analysis requires judgment by management and is subject to continuous validation. The ALL on our covered loan portfolio is determined based on expected future cash flows. Because we record acquired loans at their acquisition date fair values, which are based on expected future cash flows and include estimates for future loan losses, we recorded no allowance for loan losses related to the acquired covered loans on the acquisition date. On the date of acquisition, management determines which covered loans are placed in homogeneous risk pools or reviewed specifically as part of the periodic cash flow re-estimation process. If a loan is placed in a pool, the overall performance of the pool will determine if any future ALL is required. 44 -------------------------------------------------------------------------------- The covered loan ALL analysis represents management's estimate of the potential impairment of the acquired loan portfolio subsequent to the original acquisition date. Typically, decreased estimated cash flows result in impairment, while increased estimated cash flows result in a full or partial reversal of previously recorded impairment and potentially the calculation of a higher effective yield. The potentially higher yield is recorded as accretion income on covered loans on our consolidated statements of operations. If actual losses exceed the estimated losses, we record a provision for loan losses on covered loans as an expense on our consolidated statements of operations. If actual losses are less than our previously estimated losses, we reduce the covered ALL by recording a negative provision for loan losses on covered loans up to the amount of the ALL previously recorded. We record the provision for loan losses on covered loans on our consolidated statements of operations net of the amount that will be recovered by us under the related FDIC loss share agreements.



At March 31, 2014, our total ALL for noncovered and covered loans was $36.0 million, an increase of $2.0 million compared to December 31, 2013. The ALL reflected net charge-offs and provision for loan losses of $1.2 million and $590,000, respectively, on noncovered and covered loans for the quarter ended March 31, 2014.

At March 31, 2014, our noncovered ALL increased $202,000 to $16.9 million, compared to $16.7 million at December 31, 2013 resulting from net recoveries. There was no provision for loan losses charged to expense for our noncovered loans for the three months ended March 31, 2014, compared to $350,000 of provision for loan losses charged to expense for the three months ended March 31, 2013. The noncovered ALL to total noncovered loans was 1.44% at March 31, 2014, compared to 1.49% at December 31, 2013. We established the covered ALL due to additional credit deterioration in our covered loan portfolio subsequent to initial fair value estimates. At March 31, 2014, our covered ALL increased $1.8 million to $19.2 million, compared to $17.4 million at December 31, 2013. The increase in the covered ALL was mainly due to provision expense recorded in the three months ended March 31, 2014 relating primarily to one of the loan pools that closed during the quarter. The provision for loan losses charged to expense for the three months ended March 31, 2014 was $590,000, net of the amount recorded through the FDIC receivable, compared to negative $2.4 million for the same period in 2013. At March 31, 2014, our covered loan portfolio balance continued to decline with an ending balance of $246.3 million, compared to $257.5 million at December 31, 2013. The overall covered loan portfolio continues to perform in excess of our initial projections at the applicable acquisition dates. However, the performance is not uniform across all asset classes, individually reviewed loans and loan pools. Despite the net positive credit trends in covered loans, there remains the potential for future volatility within the provision for loan losses on covered loans. Because all of our covered loans are purchased credit impaired loans, our provision for loan losses will be most significantly influenced by differences in actual credit losses resulting from the resolution of covered loans from the estimated credit losses used in determining the estimated fair values of such purchased credit impaired loans as of their acquisition or re-estimation dates. For noncovered loans, the provision for loan losses will be affected by the loss potential of impaired loans and trends in the delinquency of loans, nonperforming loans and net charge-offs, which may be more than our historical experience. 45

-------------------------------------------------------------------------------- The following table summarizes the activity in our allowance for loan losses related to our noncovered and covered loans for the periods presented (dollars in thousands):



Three Months Ended March 31

2014 2013 Noncovered Loans Covered Loans Totals Noncovered Loans Covered Loans Total Balance, at the beginning of period $ 16,656$ 17,409$ 34,065$ 14,660$ 55,478$ 70,138 Charge-offs: Construction, land & land development 65 1,916 1,981 - 6,236 6,236 Other commercial real estate - 3,001 3,001 1 2,931 2,932 Total commercial real estate 65 4,917 4,982 1 9,167 9,168 Commercial & industrial 65 539 604 10 189 199 Owner-occupied real estate - 794 794 - 1,210 1,210 Total commercial & industrial 65 1,333 1,398 10 1,399 1,409 Residential real estate - 410 410 - 455 455 Consumer & other 6 10 16 1 195 196 Total charge-offs $ 136 $ 6,670$ 6,806 $ 12 $ 11,216$ 11,228 Recoveries on loans previously charged-off: Construction, land & land development 282 1,847 2,129 111 2,351 2,462 Other commercial real estate - 1,528 1,528 3 880 883 Total commercial real estate 282 3,375 3,657 114 3,231 3,345 Commercial & industrial 54 302 356 - 281 281 Owner-occupied real estate - 816 816 5 2,010 2,015 Total commercial & industrial 54 1,118 1,172 5 2,291 2,296 Residential real estate 2 698 700 1 1,487 1,488 Consumer & other - 40 40 4 - 4 Total recoveries $ 338 $ 5,231 $



5,569 $ 124 $ 7,009$ 7,133 Net (recoveries) charge-offs

(202 ) 1,439 1,237 (112 ) 4,207 4,095 Provision for loan losses - 3,212 3,212 350 (22,565 ) (22,215 ) Amount attributable to FDIC loss share agreements - (2,622 ) (2,622 ) - 20,180 20,180 Total provision for loan losses charged to operations - 590 590 350 (2,385 ) (2,035 ) Provision for loan losses recorded through the FDIC loss share receivable - 2,622 2,622 - (20,180 ) (20,180 ) Balance, at end of period $ 16,858$ 19,182$ 36,040$ 15,122$ 28,706$ 43,828 Allowance for loan losses to loans receivable 1.44 % 7.79 % 2.55 % 1.44 % 7.23 % 3.03 % Ratio of net (recoveries) charge-offs to average loans outstanding (.07 )% 2.33 % .36 % (.05 )% 4.07 % 1.16 % 46

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Allocation of Allowance for Loan Losses

The following table presents the allocation of the allowance for loan losses for noncovered and covered loans and the percentage of the total amount of loans in each loan category listed as of the dates indicated (dollars in thousands): March 31, 2014 December 31, 2013 % of Loans % of Loans to Total to Total Amount Loans Amount Loans Noncovered loans: Construction, land & land development $ 3,614 18.3 % $ 3,667 18.2 % Other commercial real estate 8,112 42.0 % 7,496 39.9 % Total commercial real estate 11,726 60.3 % 11,163 58.1 % Commercial & industrial 500 2.0 % 604 2.2 % Owner-occupied real estate 2,496 12.2 % 2,535 12.7 % Total commercial & industrial 2,996 14.2 % 3,139 14.9 % Residential real estate 1,033 4.8 % 1,015 4.8 % Consumer & other 1,103 3.3 % 1,339 3.6 % Total allowance for noncovered loans $ 16,858 82.6 % $ 16,656 81.4 % Covered loans: Construction, land & land development $ 3,736 2.2 % $ 4,341 2.5 % Other commercial real estate 8,371 4.6 % 6,885 4.9 % Total commercial real estate 12,107 6.8 % 11,226 7.4 % Commercial & industrial 1,360 .3 % 1,680 .3 % Owner-occupied real estate 2,688 3.7 % 1,950 3.9 % Total commercial & industrial 4,048 4.0 % 3,630 4.2 % Residential real estate 2,986 6.6 % 2,481 6.9 % Consumer & other 41 - % 72 .1 % Total allowance for covered loans $ 19,182 17.4 % $ 17,409 18.6 % Total allowance for loan losses $ 36,040 100.0 % $ 34,065 100.0 % Nonperforming Assets Nonperforming assets consist of nonaccrual loans, troubled debt restructurings, other real estate owned and foreclosed property. For noncovered loans, management continuously monitors loans and transfers loans to nonaccrual status when they are 90 days past due. All of our covered loans were acquired in failed bank transactions and were considered to have evidence of credit deterioration as limited due diligence was afforded to allow a sufficient detailed review to classify the acquired loans into credit deterioration and performing categories. At the time of acquisition, our covered loans were designated as specifically-reviewed or as part of loan pool and accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. As a result, we do not consider our covered loans acquired to be nonperforming assets as long as their cash flows and timing of such cash flows continue to be estimable and probable. Therefore, interest income is recognized through accretion of the difference between the carrying value of these loans and the present value of expected future cash flows. As a result, management has excluded covered loans from the table in this section. 47

-------------------------------------------------------------------------------- Noncovered loans that have been placed on nonaccrual are considered impaired and are valued at either the observable market price of the loan, the present value of expected future cash flows or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. The majority of our noncovered nonaccrual loans are collateral dependent and, therefore, are valued at the fair value of collateral less estimated costs to sell. The fair value of collateral is determined through a review of the appraised value and an assessment of the recovery value of the collateral through discounts related to various factors noted below. When a loan reaches nonaccrual status, we review the appraisal on file and determine if the appraisal is current and valid. A current appraisal is one that has been performed in the last twelve months, and a valid appraisal is one that we believe accurately and appropriately addresses current market conditions. If the appraisal is more than twelve months old or if market conditions have deteriorated since the last appraisal, we will order a new appraisal. In addition, we require a new appraisal at the time of foreclosure or repossession of the underlying collateral. Upon determining that an appraisal is both current and valid, management assesses the recovery value of the collateral, which involves the application of various discounts to the market value. These discounts may include the following: length of time to market and sell the property, as well as expected maintenance costs, insurance and taxes and real estate commissions on sale. Other real estate owned (OREO), consisting of real estate acquired through foreclosure or a deed in lieu of foreclosure in satisfaction of a loan, is initially recorded at the lower of the principal investment in the loan or the fair value of the collateral less estimated costs to sell at the time of foreclosure. Management considers a number of factors in estimating fair value including appraised value, estimated selling prices and current market conditions. Any excess of the loan balance over the fair value less estimated costs to sell is treated as a charge against the allowance for loan losses at the time of foreclosure. For acquired OREO, the loan is transferred into OREO at its fair value not to exceed the carrying value of the loan at foreclosure. Management periodically reviews the carrying value of OREO for impairment and adjusts the values as appropriate through noninterest expense. For banking premises no longer used for a specific business purpose, the property is transferred into OREO at the lower of its carrying value or fair value less estimated costs to sell, with any excess of the carrying value over the fair value less estimated costs to sell recorded to noninterest expense. For noncovered loans, we will record either a specific allowance or a charge-off against the allowance for loan losses if an impairment analysis indicates a collateral deficiency. Subsequently, we will review our noncovered allowance for loan losses and replenish it as required by our allowance for loan loss model. Noncovered nonperforming loans remain on nonaccrual status until the factors that previously indicated doubtful collectibility on a timely basis no longer exist. Specifically, we look at the following factors before returning a nonperforming loan to performing status: documented evidence of debt service capacity; adequate collateral; and a minimum of six months of satisfactory payment performance. Loan modifications on noncovered loans constitute a troubled debt restructuring if we, for economic or legal reasons related to the borrower's financial difficulties, grant a concession to the borrower that we would not otherwise consider. For loans that are considered troubled debt restructurings, we either compute the present value of expected future cash flows discounted at the original loan's effective interest rate or we may measure impairment based on the observable market price of the loan or the fair value of the collateral when the troubled debt restructuring is deemed collateral dependent. We record the difference between the carrying value and fair value of the loan as a charge-off or valuation allowance, as the situation may warrant. Loan modifications on covered loans accounted for within a pool under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, do not result in the removal of the loan from the pool even if the modification of the loan would otherwise be considered a troubled debt restructuring. At March 31, 2014, we did not have any covered loans classified as troubled debt restructurings. 48

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The following tables set forth our nonperforming assets for the periods presented (dollars in thousands):

March 31, 2014December 31, 2013 Noncovered Assets Covered Assets



Total Noncovered Assets Covered Assets Total Nonaccrual loans

$ 1,265 $ - $ 1,265 $ 1,396 $ - $ 1,396 Troubled debt restructurings not included above 866 - 866 869 - 869 Total nonperforming loans 2,131 - 2,131 2,265 - 2,265 Other real estate owned 901 37,536 38,437 965 46,222 47,187 Total nonperforming assets $ 3,032 $ 37,536$ 40,568 $ 3,230 $ 46,222$ 49,452 Nonperforming loans to total loans .18 % - % .15 % .20 % - % .16 % Nonperforming assets to total loans and other real estate owned .26 % 13.23 % 2.79 % .29 % 15.22 % 3.46 % Nonperforming assets, defined as nonaccrual loans, troubled debt restructurings and other real estate owned, totaled $40.6 million, or 2.8% of total loans and other real estate owned, at March 31, 2014, compared to $49.5 million, or 3.5% of total loans and other real estate owned, at December 31, 2013. Of the $40.6 million in nonperforming assets at March 31, 2014, $37.5 million related to other real estate owned covered by loss share agreements with the FDIC. Of the $49.5 million in nonperforming assets at December 31, 2013, $46.2 million related to other real estate owned covered by loss share agreements with the FDIC. Covered assets accounted for 92.5% and 93.5% of total nonperforming assets at March 31, 2014 and December 31, 2013, respectively. At both March 31, 2014 and December 31, 2013, we had no accruing noncovered loans greater than 90 days past due. At both March 31, 2014 and December 31, 2013, a significant portion of our covered loans were past due, including many that were 90 days or greater past due. However, as noted previously, under ASC 310-30, our covered loans are classified as performing, even though they are contractually past due, as long as their cash flows and the timing of such cash flows are estimable and probable of collection. Interest income on noncovered nonaccrual loans that would have been earned if the loans had performed in accordance with the original terms was approximately $25,000 for the three months ended March 31, 2014. Interest income recognized on noncovered nonaccrual loans was approximately $47,000 for the three months ended March 31, 2014. Potential noncovered problem loans amounted to $3.8 million, or .3%, of total noncovered loans outstanding at March 31, 2014, compared to $8.3 million, or .7%, of total noncovered loans outstanding at December 31, 2013. Potential noncovered problem loans are those loans where management has a concern about the financial health of a borrower that causes management to have serious doubts as to the ability of the borrower to comply with the present loan terms.



Deferred Tax Asset

As of March 31, 2014, we had $7.6 million in net deferred tax assets. Deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. Although realization is not assured, management believes the recorded deferred tax assets are fully recoverable based on taxable income in carryback years and the current forecast of taxable income that is sufficient to realize the net deferred tax assets during periods through which losses may be carried forward. The amount of taxable income available in the carryback years is approximately $148 million. Future taxable income required to support the deferred tax asset in the carry forward period, which is currently 20 years, is approximately $20 million. If we are unable to demonstrate that we can continue to generate sufficient taxable income in the near future, then we may not be able to conclude it is more likely than not that the benefits of the deferred tax assets will be fully realized and we may be required to recognize a valuation allowance against our deferred tax assets with a corresponding decrease in income. 49

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Deposits

Total deposits at March 31, 2014 were $2.1 billion, an increase of $12.7 million from December 31, 2013. During the three months ended March 31, 2014, we continued to enhance our deposit product offerings for commercial customers. Interest rates paid on specific deposit types are determined based on (i) interest rates offered by competitors, (ii) anticipated amount and timing of funding needs, (iii) availability and cost of alternative sources of funding, and (iv) anticipated future economic conditions and interest rates. We regard our deposits as attractive sources of funding because of their stability and relative cost. Deposits are regarded as an important part of our overall client relationship, which provide us opportunities to cross sell other services. The overall mix of deposits improved during the three months ended March 31, 2014, with noninterest-bearing deposits increasing $3.3 million from December 31, 2013 to $471.4 million and representing 22.0% of total deposits. The increase in noninterest-bearing deposits resulted primarily from commercial checking accounts. Interest-bearing transaction accounts increased $14.7 million during the three months ended March 31, 2014. The majority of the increase was related to growth in commercial accounts. Furthermore, interest-bearing deposits in savings and money market accounts increased $11.1 million, primarily resulting from business development activity in commercial deposits. Time deposits, excluding brokered and wholesale time deposits, decreased $14.6 million during the three months ended March 31, 2014. The duration of our CD portfolio continues to remain short, and we continue to aggressively reprice high cost deposits. Due to our strategy of decreasing our cost of funds, we were not able to renew all maturing deposits. Customers with maturing CDs in 2014 were offered lower rates at renewal resulting in some customers choosing not to renew or opting to invest in other products. Our continued focus on growing low cost deposit relationships resulted in an average cost of funds of 37 basis points for the three months ended March 31, 2014 and 2013. The following table shows the composition of deposits as of the dates indicated (dollars in thousands): March 31, 2014 December 31, 2013 % of % of Amount Total Amount Total



Noninterest-bearing demand deposits $ 471,414 22.0 % $ 468,138

22.0 % Interest-bearing transaction accounts 382,697 17.9 % 367,983 17.3 % Savings and money market deposits 903,198 42.2 % 892,136 41.9 % Time deposits less than $100,000 162,002 7.6 % 168,611 7.9 % Time deposits $100,000 or greater 116,858 5.4 % 124,827 5.9 % Brokered and wholesale time deposits 104,892 4.9 % 106,630 5.0 % Total deposits $ 2,141,061 100.0 % $ 2,128,325 100.0 %



The following table shows the average balance amounts and the average rates paid on deposits held by us for the dates indicated (dollars in thousands):

For the Three Months Ended March 31 2014 2013 Average Average Amount Average Rate Amount Average Rate Noninterest-bearing demand deposits $ 441,875 - % $ 384,660 - % Interest-bearing transaction accounts 357,988 .12 % 324,342 .12 % Savings and money market deposits 894,994 .44 % 956,517 .43 % Time deposits less than $100,000 165,158 .54 % 197,893 .59 % Time deposits $100,000 or greater 122,217 .69 % 145,329 .74 % Brokered and wholesale time deposits 106,555 .93 % 106,641 .93 % Total deposits $ 2,088,787$ 2,115,382 50

-------------------------------------------------------------------------------- The maturity distribution of our wholesale and time deposits of $100,000 or greater at March 31, 2014 was as follows (dollars in thousands): Three months or less $ 31,224 Over three through six months 29,617 Over six though twelve months 47,139 Over twelve months 43,106 Total $ 151,086 Capital Resources We maintain an adequate capital base to support our activities in a safe manner while at the same time attempting to maximize shareholder returns. At March 31, 2014, shareholders' equity was $441.4 million, or 16.9% of total assets, compared to $437.2 million, or 16.8% of total assets, at December 31, 2013. The primary factors affecting changes in shareholders' equity were our net income and the change in accumulated other comprehensive income, offset by dividends declared during the year. Federal regulations impose minimum regulatory capital requirements on all institutions with deposits insured by the FDIC. The Federal Reserve Board ("FRB") imposes similar capital regulations on bank holding companies. To be considered "well capitalized" under capital guidelines, the Bank must maintain total risk-based capital, Tier I capital and leverage ratios of 10%, 6%, and 5%, respectively. To be considered "adequately capitalized" under capital guidelines, the Company must maintain total risk-based capital of 8% and Tier I and leverage ratios of 4%. At March 31, 2014, we exceeded all minimum regulatory capital requirements as shown in the table below. At March 31, 2014, Tier 1 and Total Risk-Based Capital ratios declined for the Bank and Company compared to December 31, 2013, as a result of the declaration of dividends and the increase in risk-weighted assets, offset by net income for the first quarter of 2014. The increase in risk-weighted assets was attributable in large part to the growth in our noncovered loan portfolio which has higher risk-weights than our covered loan portfolio and the FDIC receivable, each of which declined during the first quarter of 2014. At March 31, 2014, the leverage ratio increased for the Company and Bank compared to the December 31, 2013 as a result of a decrease in average assets. The following table shows the Bank's and the Company's regulatory capital ratios for the periods presented. March 31, 2014 December 31, 2013 Bank Company Bank Company Leverage ratio 14.44 % 16.67 % 14.28 % 16.55 %



Tier 1 risk-based capital ratio 23.55 % 27.20 % 24.06 % 27.85 % Total risk-based capital ratio 24.82 % 28.47 % 25.32 % 29.11 %

The Company and the Bank entered into a Capital Maintenance Agreement with the FDIC that terminated on December 31, 2013. Under the terms of the Capital Maintenance Agreement, the Bank was required to maintain a leverage ratio of at least 10% and a total risk-based capital ratio of at least 12%. During the term of the agreement, if at any time the Bank's leverage ratio fell below 10%, or its risk-based capital ratio fell below 12%, the Company would have been required to immediately cause sufficient actions to be taken to restore the Bank's leverage and risk-based capital ratios to 10% and 12%, respectively. The Company and the Bank entered into a new Capital Maintenance Agreement with the FDIC on substantially the same terms as the prior agreement that requires the Bank to maintain the same capital levels as the prior agreement. The new Capital Maintenance Agreement expires on July 26, 2016. The Bank was in compliance with each respective Capital Maintenance Agreement at March 31, 2014 and December 31, 2013. 51

-------------------------------------------------------------------------------- In July 2013, the Federal Reserve announced its approval of a final rule to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Act. The framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions. For the largest, most internationally active banking organizations, the rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. In terms of quality of capital, the final rule emphasizes common equity Tier 1 capital and implements strict eligibility criteria for regulatory capital instruments. It also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. The phase-in for covered banking organizations will not begin until January 2015, while the phase-in period for advanced approaches organizations starts in January 2014. The U.S. implementation of the new capital and liquidity standards is not expected to significantly impact the Company and the Bank as our current capital levels far exceed those required under the new rules. Regulatory policy statements generally provide that bank holding companies should pay dividends only out of current operating earnings and that the level of dividends must be consistent with current and expected capital requirements. Dividends received from our subsidiary bank have been our primary source of funds available for the payment of dividends to our shareholders. Federal and state banking laws and regulations restrict the amount of dividends subsidiary banks may distribute without prior regulatory approval. As of March 31, 2014, our subsidiary bank had no dividend capacity to pay dividends to us without prior regulatory approval. At March 31, 2014, the Company had $55.7 million in cash and due from bank accounts, which can be used for additional capital as needed by the Bank, payment of holding company expenses, payment of dividends to shareholders or for other corporate purposes. On March 18, 2014, we paid a cash dividend of $.03 per common share to our shareholders. We currently have a level of capitalization that will support significant growth, and the long term management of our capital position is an area of significant strategic focus. We actively seek and regularly evaluate opportunities to acquire additional financial institutions as well as acquisitions that would complement or expand our present product capabilities. In accordance with this approach, we recently entered into a definitive agreement to acquire Atlanta Bancorporation, Inc. and its wholly-owned subsidiary bank, Bank of Atlanta. To the extent that we are unable to appropriately leverage our capital with organic growth and acquisitions, we will actively consider alternative means of normalizing our level of capitalization, including increasing our quarterly dividend, paying a special dividend and/or repurchasing shares.



Off-Balance Sheet Arrangements

Commitments to extend credit are agreements to lend to a customer as long as the customer has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the borrower. At March 31, 2014, unfunded commitments to extend credit were $325.9 million. A significant portion of the unfunded commitments related to commercial and residential real estate and consumer equity lines of credit. Based on experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. At March 31, 2014, there were commitments totaling approximately $1.7 million under letters of credit. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Because most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. Except as disclosed in Note 12 to our consolidated financial statements located in Part I, Item I of this Quarterly Report on Form 10-Q, we are not involved in off-balance sheet contractual relationships or commitments, unconsolidated related entities that have off-balance sheet arrangements, or other off-balance sheet transactions that could result in liquidity needs that significantly impact earnings. 52 --------------------------------------------------------------------------------



Contractual Obligations

In the normal course of business, we have various outstanding contractual obligations that will require future cash outflows. The following table presents our largest contractual obligations as of March 31, 2014 (dollars in thousands): Payments Due by Period Less Than More Than Total 1 Year 1 to 3



Years 3 to 5 Years 5 Years Operating lease obligations $ 22,691$ 2,692$ 5,204$ 5,051$ 9,744

Liquidity Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds to meet the operating, capital and strategic needs of the Company and the Bank. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control when we make investment decisions. Net deposit inflows and outflows, however, are far less predictable and are not subject to the same degree of certainty. The asset portion of the balance sheet provides liquidity primarily through scheduled payments, maturities and repayments of loans and investment securities. Cash and short-term investments such as federal funds sold and interest-bearing deposits with other banks are also sources of funding. As we dispose of our covered loans and assets, the collection of the FDIC receivable provides an additional source of funding. At March 31, 2014, our liquid assets, which consist of cash and amounts due from banks, interest-bearing deposits in other financial institutions and federal funds sold, amounted to $556.9 million, or 21.3% of total assets. Our available-for-sale securities at March 31, 2014 amounted to $454.1 million, or 17.3% of total assets. Investment securities and lines of credit traditionally provide a secondary source of liquidity because they can be converted into cash in a timely manner. The liability portion of the balance sheet serves as our primary source of liquidity. We plan to meet our future cash needs through the generation of deposits. Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. At March 31, 2014, core deposits were 148.7% of net loans, compared with 150.8% at December 31, 2013. We maintain seven federal funds lines of credit with correspondent banks totaling $150.0 million. We are also a member of the Federal Home Loan Bank of Atlanta (FHLB), from whom we can borrow for leverage or liquidity purposes. The FHLB requires that securities and qualifying loans be pledged to secure any advances. At March 31, 2014, we had no advances from the FHLB and a remaining credit availability of $82.0 million. In addition, we maintain a line with the Federal Reserve Bank's discount window of $207.5 million secured by certain loans from our loan portfolio. Asset/Liability Management Market risk is the risk of loss from adverse changes in market prices and rates, which principally arise from interest rate risk inherent in our lending, investing, deposit gathering and borrowing activities. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business. Asset/liability management is the process by which we monitor and control the mix and maturities of our assets and liabilities. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities to minimize potentially adverse effects on earnings from changes in market interest rates. Our Risk Committee monitors and considers methods of managing exposure to interest rate risk and is responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits. Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable time-frame that minimizes the changes in net interest income. 53 -------------------------------------------------------------------------------- In the event of a shift in interest rates, management may take certain actions intended to mitigate negative impacts on net interest income or to maximize positive impacts on net interest income. These actions may include, but are not limited to, restructuring of interest-earning assets and interest-bearing liabilities, seeking alternative funding sources or investment opportunities, modifying the pricing or terms of loans and deposits, and using derivatives. Through the use of derivatives, we are able to efficiently manage the interest rate risk identified in specific assets and liabilities on our balance sheet. As of March 31, 2014, we had interest rate swaps and caps with aggregate notional amounts of $152.9 million and $200.0 million, respectively. The fair value of the derivative financial assets was $6.7 million as of March 31, 2014, compared to $8.1 million as of December 31, 2013. The fair value of the derivative financial liabilities was $813,000 as of March 31, 2014, compared to $764,000 as of December 31, 2013. Note 8 to our consolidated financial statements located in Part I, Item 1 of this Quarterly Report on Form 10-Q provides additional information on these contracts. We regularly review our exposure to changes in interest rates. Among the factors we consider are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. Typically, our Risk Committee reviews, on at least a quarterly basis, our interest rate risk position. The primary tool used to analyze our interest rate risk and interest rate sensitivity is an earnings simulation model. We also monitor the present value of assets and liabilities under various interest rate scenarios, and, to a lesser extent, monitor the difference, or gap, between rate sensitive assets and liabilities. This earnings simulation model projects a baseline net interest income (assuming no changes in interest rate levels) and estimates changes to that baseline net interest income resulting from changes in interest rate levels. We rely primarily on the results of this model in evaluating our interest rate risk. This model incorporates a number of additional factors including: (1) the expected exercise of call features on various assets and liabilities, (2) the expected rates at which various rate-sensitive assets and rate-sensitive liabilities will reprice, (3) the expected growth in various interest-earning assets and interest-bearing liabilities and the expected interest rates on new assets and liabilities, (4) the expected relative movements in different interest rate indexes which are used as the basis for pricing or repricing various assets and liabilities, (5) existing and expected contractual cap and floor rates on various assets and liabilities, (6) expected changes in administered rates on interest-bearing transaction, savings, money market and time deposit accounts and the expected impact of competition on the pricing or repricing of such accounts, (7) cash flow and accretion expectations from loans acquired in FDIC transactions, and (8) other relevant factors. Inclusion of these factors in the model is intended to more accurately project our expected changes in net interest income resulting from interest rate changes. We typically model our changes in net interest income assuming interest rates go up 100 basis points, up 200 basis points, down 100 basis points and down 200 basis points. We also model more extreme rises in interest rates (e.g. up 500 basis points). For purposes of this model, we have assumed that the changes in interest rates phase in over a 12-month period. While we believe this model provides a reasonably accurate projection of our interest rate risk, the model includes a number of assumptions and predictions which may or may not be correct and may impact the model results. These assumptions and predictions include inputs to compute baseline net interest income, growth rates, expected changes in administered rates on interest-bearing deposit accounts, competition and a variety of other factors that are difficult to accurately predict. Accordingly, there can be no assurance the earnings simulation model will accurately reflect future results. The following table presents the earnings simulation model's projected impact of a change in interest rates on the projected baseline net interest income for the 12-month period commencing April 1, 2014. Based on the simulation run at March 31, 2014, annual net interest income would be expected to increase approximately .30%, if rates increased from current rates by 100 basis points. If rates increased 200 basis points from current rates, net interest income is projected to increase approximately 1.38%. If rates decreased 100 basis points from current rates, net interest income is projected to increase approximately .64%. The change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in the slope of the yield curve. % Change in Projected Baseline Net Interest Income



Shift in Interest Rates

(in basis points) March 31, 2014 December 31, 2013 +200 1.38 % 1.61 % +100 .30 .40 -100 .64 .67 -200 Not meaningful Not meaningful 54

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Results of Operations

Net Interest Income (Taxable Equivalent)

Net interest income, which is our primary source of earnings, is the difference between interest earned on interest-earning assets, as well as any accretion income on covered loans under our loss share agreements with the FDIC, and interest incurred on interest-bearing liabilities. Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources and movements in market interest rates. Our net interest income on a taxable equivalent basis was $42.5 million for the three months ended March 31, 2014, an increase of $6.9 million, or 19.3%, from the three months ended March 31, 2013. Our net interest spread on a taxable equivalent basis, which is the difference between the yields earned on average earning assets and the rates paid on average interest-bearing liabilities was 7.25% for the three months ended March 31, 2014, an increase of 78 basis points from the same period in 2013. Our net interest margin on a taxable equivalent basis, which is net interest income divided by average interest earning assets was 7.38% for the three months ended March 31, 2014, an increase of 80 basis points from the three months ended March 31, 2013. The yield on average earnings assets was 7.71% for the three months ended March 31, 2014, an increase of 77 basis points from the three months ended March 31, 2013, driven primarily by increases in our covered loan yield. Our covered loan yield increased to 42.91% for the three months ended March 31, 2014, compared to 19.96% for the three months ended March 31, 2013 resulting from a $5.9 million, or 28.6%, increase in accretion income on covered loans for the three months ended March 31, 2014 compared to the same period in 2013, even while average covered loans decreased $168.4 million, or 40.2%, over the same period. The increase in accretion income on our covered loans is primarily from gains of $15.9 million on covered loan pools that closed during the quarter, as well as, increases in estimated cash flows on covered loans and earlier and than expected payoffs on covered loans during the three months ended March 31, 2014. The increases in our covered loan yields were partially offset by decreases in both our yield on noncovered loans and our investment portfolio. Our noncovered loan yield for the three months ended March 31, 2014 was 5.49%, a 33 basis point decrease from the three months ended March 31, 2013, primarily driven by continued competitive pressures and the prolonged low interest rate environment. The yield on our investment portfolio was 2.03% for the three months ended March 31, 2014, down 83 basis points from the three months ended March 31, 2013, primarily driven by higher-yielding nonagency mortgage-backed securities becoming a smaller percentage of our investment portfolio. Over the past twelve months, cash flows from our nonagency mortgage-backed securities and a portion of excess cash on our balance sheet were invested into lower-yielding securities thus lowering the overall yield. Continued reinvestment into lower-yielding investments, due to the current interest rate environment and our focus on maintaining a short duration portfolio, is expected to produce lower overall yields in our investment portfolio. The average rate on interest-bearing liabilities was .46% for the three months ended March 31, 2014, a decrease of one basis point from the three months ended March 31, 2013, resulting from a change in mix of interest-bearing liabilities. The average rate paid on interest-bearing deposits was .43% for the three months ended March 31, 2014, a decrease of two basis points from the three months ended March 31, 2013, while the average balance of interest-bearing deposits outstanding was $1.6 billion for the three months ended March 31, 2014, a decrease of $83.8 million from the same period in 2013. The decline in the average rate paid was a result of our continued shift in our deposit mix away from higher cost money market accounts and time deposits to lower cost transaction deposits. Our cost of funds was 37 basis points for the three months ended March 31, 2014 and 2013. 55 --------------------------------------------------------------------------------



Average Balances, Net Interest Income, Yields and Rates

The following tables show our average balance sheet and our average yields on assets and average costs of liabilities for the periods indicated (dollars in thousands). We derive these yields by dividing annualized income or expense by the average balance of the corresponding assets or liabilities, respectively. We have derived average balances from the daily balances throughout the periods indicated. For the Three Months Ended March 31, 2014 March 31, 2013 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets: Interest-bearing deposits in other financial institutions $ 518,362$ 345 .27 % $ 447,929$ 251 .23 % Taxable investment securities 425,158 2,127 2.03 % 314,510 2,220 2.86 % Nontaxable investment securities, tax-equivalent basis (1) 5,538 32 2.34 % 7,089 48 2.75 % Noncovered loans receivable, tax-equivalent basis (2) (3) 1,133,802 15,340 5.49 % 1,007,094 14,443 5.82 % Covered loans receivable 250,824 26,536 42.91 % 419,204 20,636 19.96 % Total earning assets 2,333,684 44,380 7.71 % 2,195,826 37,598 6.94 % Total nonearning assets 241,532 431,215 Total assets $ 2,575,216$ 2,627,041 Liabilities: Interest-bearing liabilities: Interest-bearing transaction accounts $ 357,988$ 106 .12 % $ 324,342$ 94 .12 % Savings & money market deposits 894,994 968 .44 % 956,517 1,022 .43 % Time deposits less than $100,000 165,158 220 .54 % 197,893 288 .59 % Time deposits $100,000 or greater 122,217 207 .69 % 145,329 266 .74 % Brokered and wholesale time deposits 106,555 245 .93 % 106,641 245 .93 % Notes Payable 5,212 148 11.52 % 2,536 80 12.79 % Securities sold under agreements to repurchase 727 - - % 3,388 1 .12 % Total interest-bearing liabilities 1,652,851 1,894 .46 % 1,736,646 1,996 .47 % Noninterest-bearing liabilities: Noninterest-bearing demand deposits 441,875 384,660 Other liabilities 41,385 76,149 Shareholders' equity 439,105 429,586 Total liabilities and shareholders' equity $ 2,575,216$ 2,627,041 Net interest income $ 42,486$ 35,602 Net interest spread 7.25 % 6.47 % Net interest margin 7.38 % 6.58 % Cost of funds .37 % .37 % (1) Reflects taxable equivalent adjustments using the federal statutory tax rate of 35% in adjusting interest on tax-exempt securities to a fully taxable basis. The taxable equivalent adjustments included above are $11,000 and $17,000 for the three months ended March 31, 2014 and 2013, respectively. (2) Includes average nonaccruing noncovered loans of $2.1 million and $4.0 million for the three months ended March 31, 2014 and 2013, respectively. There are no nonaccrual covered loans. (3) Reflects taxable equivalent adjustments using the federal statutory tax rate of 35% in adjusting tax-exempt loan interest income to a fully taxable basis. The taxable equivalent adjustments included above are $65,000 and $69,000 for the three months ended March 31, 2014 and 2013, respectively. 56

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Rate/Volume Analysis on a Taxable Equivalent Basis

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volumes. The following table reflects the effect that varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented (in thousands): Three Months Ended March 31, 2014 vs. March 31, 2013 Change Attributable to Total Increase Volume Rate (Decrease) (1) Interest income: Noncovered loans $ 5,449$ (4,552 ) $ 897 Covered loans (60,793 ) 66,693 5,900 Taxable investment securities 2,709 (2,802 ) (93 ) Nontaxable investment securities (10 ) (6 ) (16 ) Interest-bearing deposits in other financial institutions 46 48 94 Total interest income (52,599 ) 59,381 6,782 Interest expense: Total deposits (91 ) (78 ) (169 ) Notes payable 165 (97 ) 68 Securities sold under repurchase agreements and federal funds purchased - (1 ) (1 ) Total interest expense 74 (176 ) (102 ) Net interest income $ (52,673 )$ 59,557$ 6,884 (1) Amounts shown as increase (decrease) due to changes in either volume or rate includes an allocation of the amount that reflects the interaction of volume and rate changes. This allocation is based on the absolute dollar amounts of change due solely to changes in volume or rate.



Provision for Loan Losses

We have established an allowance for loan losses on both noncovered and covered loans through a provision for loan losses charged as an expense on our consolidated statements of operations.

We review our noncovered loan portfolio, consisting of loans that are not covered by loss share agreements with the FDIC, on a quarterly basis to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. Please see the discussion above, under "Balance Sheet Review - Allowance for Loan Losses (ALL)," for a description of the factors we consider in determining the amount of periodic provision expense to maintain this allowance. We did not establish an allowance for loan losses at the date of each acquisition for the covered loans in our loan portfolio that we acquired under loss share agreements with the FDIC because we recorded these loans at fair value at the time of each respective acquisition. We evaluate the recorded investment in our covered loans during our quarterly re-estimation of cash flows, which includes a comparison of our actual losses to our estimated losses to determine whether additional provision is necessary. We update our re-estimations of cash flows on a quarterly basis based on changes to assumptions regarding default rates, loss severities and other factors that are reflective of current market conditions. If our re-estimated cash flows decline from the last estimated cash flows, we record a provision for loan losses in our consolidated statements of operations. In that event, due to the FDIC loss share agreements, we would bear a net expense between 5% and 20% of the estimated loss, depending upon the applicable loss share agreement to which the loss is related. Conversely, if the expected cash flows improve from our last estimates, any previous impairment is partially or fully reversed and an adjustment to yield is recognized over the remaining life of the loan or pool of loans, as applicable. We recorded no provision for loan losses related to noncovered loans for the three months ended March 31, 2014, compared to $350,000 for the three months ended March 31, 2013. The amount of noncovered loan loss provision recorded in each period reflects the amount required such that the total balance of the allowance for loan losses is appropriate, in management's opinion, to sufficiently cover probable losses in the noncovered loan portfolio. 57 -------------------------------------------------------------------------------- Our provision for loan losses related to covered loans was $590,000 for the three months ended March 31, 2014 compared to negative $2.4 million for the three months ended March 31, 2013. The covered provision for loan losses charged to operations in the first quarter of 2014 primarily related to one of the loan pools that closed during the quarter. The negative provision of $2.4 million for the quarter ended March 31, 2013 was primarily due to improved cash flow expectations on covered loans from the previous re-estimation.



Noninterest Income

Noninterest income for the three months ended March 31, 2014 totaled negative $12.2 million, down $469,000 from the three months ended March 31, 2013. The following table presents the components of noninterest income for the periods indicated (dollars in thousands): Three Months Ended March 31 2014 2013 Service charges on deposits $ 1,158$ 1,215 Payroll fee income 953 832 ATM income 590 605 Bank-owned life insurance income 329 344 Mortgage banking income 159 306 Gain on sale of investment securities 11 364 Other (97 ) 455



Noninterest income before amortization of FDIC receivable for loss share agreements

3,103 4,121 Amortization of FDIC receivable for loss share agreements (15,292 ) (16,779 ) Total noninterest income $ (12,189 )$ (12,658 )



Payroll fee income increased $121,000, or 14.5%, to $953,000 for the three months ended March 31, 2014 compared to the same period in 2013 due to the introduction of our automated human resources information system ("HRIS"), associated implementation fees, and increased customer volume.

Other noninterest income decreased $552,000, or 121.32%, to negative $97,000 for the three months ended March 31, 2014 compared to the same period in 2013. The decrease was a result of losses on the sale of premises and equipment of $259,000 for the three months ended March 31, 2014, compared to gains on the sale of premises and equipment of $2,000 for the same period in 2013. Also contributing to the decrease were net losses of $244,000 in hedge ineffectiveness for the three months ended March 31, 2014, compared to net gains of $92,000 in hedge ineffectiveness for the three months ended March 31, 2013. The offset resulting from the change in the fair value of the interest rate swaps and value of the underlying assets contributed to the ineffectiveness during 2014 and 2013. Net amortization of the FDIC receivable decreased $1.5 million, or 8.9%, to $15.3 million for the three months ended March 31, 2014 compared to the same period in 2013. The decrease in amortization expense is due to changes made to assumptions during the quarterly re-estimation of cash flows recognized over the lesser of the remaining life of the loan or the applicable loss share period. To the extent that currently estimated cash flows on covered loans are more than originally estimated and therefore projected losses are less than originally expected, the related reimbursements from the FDIC are less. The result of higher expected cash flows and lower projected losses is amortization of the present value of expected future cash flows from the FDIC receivable. 58 --------------------------------------------------------------------------------



Noninterest Expense

Noninterest expense for the three months ended March 31, 2014 totaled $23.1 million, down $3.6 million from the three months ended March 31, 2013. The following table presents the components of noninterest expense for the three months ended March 31, 2014 and 2013 (dollars in thousands):

Three



Months Ended March 31

2014



2013

Salaries and employee benefits $ 15,077$ 17,395 Occupancy and equipment 2,529 2,456 Data processing 1,672 1,437 Legal and professional fees 1,014 1,601 Loan collection and OREO costs 624 1,288 Federal deposit insurance premiums and other regulatory fees 334 469 Marketing 332 328 Amortization of intangibles 162 370 Other 1,339 1,320 Total noninterest expense $ 23,083$ 26,664 Salaries and employee benefits decreased $2.3 million, or 13.3%, to $15.1 million during the three months ended March 31, 2014 compared to the same period in 2013, primarily as a result of the recognition of a one-time severance expense of $1.6 million related to ongoing efficiency improvements during the three months ended March 31, 2013. The remaining decrease is largely attributable to the reduction in personnel within the special assets division. Legal and professional fees decreased $587,000, or 36.7%, to $1.0 million during the three months ended March 31, 2014 compared to the same period in 2013, primarily as a result of decreases in consulting fees and audit and accounting fees. Consulting fees and audit and accounting fees were down $570,000 from first quarter 2013 due to greater reliance on internal resources and fewer outsourced internal audit engagements during the quarter. Loan collection and OREO costs decreased $664,000, or 51.6% to $624,000 during the three months ended March 31, 2014 compared to the same period in 2013, resulting from quarterly volatility related to covered asset resolution. FDIC insurance premiums and other regulatory fees decreased $135,000, or 28.8%, to $334,000 for the first quarter of 2014, compared to the same period in 2013 primarily due to a lower rate assessment due to a decrease in the trailing twelve months average covered loans net charge-offs in 2014 as compared to 2013.



Income Taxes

Income tax expense (benefit) is composed of both state and federal income tax expense. The effective tax rate was a relatively consistent 34.0% and 34.7% for the three months ended March 31, 2014 and 2013, respectively. Income tax expense increased $2.8 million in the quarter ended March 31, 2014 as compared to the same quarter last year primarily due to the higher level of income before income taxes.


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