2.	ACQUISITION ACTIVITY

Acquisition of PSB Financial Corporation

On December 28, 2012, the Company acquired all of the outstanding common stock of PSB Financial Corporation ("PSB"), the holding company of Many, Louisiana based The Peoples State Bank, for total consideration of $39.5 million, which resulted in preliminary goodwill of $18.0 million, as shown in the following table (dollars in thousands):

	Number of Shares		Amount
Equity consideration:
Common stock issued		756,511	$	11,530
Preferred stock issued		99,971		9,997
Non-equity consideration:
Cash				16,003
Contingent value right				2,000
Total consideration paid				39,530
Fair value of net assets acquired including identifiable intangible assets				(21,572	)
Goodwill			$	17,958

The fair value of the 756,511 shares of common stock issued as part of the equity consideration paid for PSB ($11.5 million) was determined on the basis of the average of the closing market prices for the twenty days prior to the signing of the Agreement and Plan of Merger.

The transaction was accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair values on the acquisition dates. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information relative to fair values become available. Assets acquired, excluding goodwill, totaled $465.0 million, including $260.1 million in loans, $17.8 million in cash, $152.7 million of investment securities, $12.4 million of fixed assets and $2.7 million of identifiable intangible assets. Liabilities assumed were $443.5 million, including $400.6 million of deposits.

Preliminary goodwill of $18.0 million is calculated as the purchase premium after adjusting for the fair value of net assets acquired and represents the value expected from the synergies created from combining the businesses as well as the economies of scale expected from combining the operations of the acquired banks with those of the Company. None of the goodwill recognized is expected to be deductible for income tax purposes.

The following table provides the assets purchased and the liabilities assumed and the adjustments to fair value (in thousands):

	As Recorded		Fair Value			Fair
Assets	By PSB		Adjustments			Value
Cash	$	17,847	$	-		$	17,847
Federal funds sold		5,200		-			5,200
Time deposits held in banks		172		-			172
Investment securities		152,667		-			152,667
Loans receivable		269,053		(9,000	)		260,053
Fixed assets		11,845		578			12,423
Core deposit intangible		-		2,662			2,662
Cash surrender value of life insurance		8,234		-			8,234
Other real estate owned		838		-			838
Other assets		4,635		314			4,949
Total assets acquired	$	470,490	$	(5,446	)	$	465,045

Liabilities
Deposits	$	399,845	$	722		$	400,567
FHLB advances		25,296		1,832			27,128
Notes payable		2,000		-			2,000
Junior subordinated debentures		13,919		-			13,919
Other liabilities		2,606		(2,747	)		(141	)
Total liabilities assumed	$	443,666	$	(193	)		443,473
Fair value of net assets acquired including identifiable intangible assets						$	21,572

The discounts on loans receivable will be accreted to interest income over the estimated average life of the loans using the level yield method. The core deposit intangible asset is being amortized over a seven-year life on an accelerated basis. The deposit premiums will be amortized over the average life of the related deposits as a reduction of interest expense. The premiums on FHLB advances will be amortized over the life of the related advances as a reduction of interest expense.

There were no material operating results of PSB between December 28, 2012 and December 31, 2012. Therefore, the operating results of the Company for the year ended December 31, 2012 includes no operating results for PSB.

The following unaudited pro forma information presents the results of operations for the years ended December 31, 2012 and 2011, as if the acquisition had occurred at January 1, 2011 (in thousands). These adjustments include the impact of certain purchase accounting adjustments such as intangible assets amortization and the impact of the increase in the bond amortization as a result of the acquisition. In addition, the $1.2 million in merger expenses related to the acquisition are included for the year ended December 31, 2012.

	December 31,
	2012		2011
Total revenues, net of interest expense	$	89,845	$	80,573
Net income		14,694		10,361
Earnings per share – basic		1.12		0.76
Earnings per share - diluted		1.09		0.75

In many cases, determining the fair value of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations related to the fair valuation of acquired loans. Acquired loans are initially recorded at their acquisition date fair values. The carryover of the allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions including the remaining life of the acquired loans, estimated prepayments, estimated value of the underlying collateral and net present value of cash flows expected to be collected. Acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the acquirer will be unable to collect all contractually required payments are specifically identified and analyzed. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses expected to be incurred over the life of the loan.

Loans at the acquisition date are presented in the following table (in thousands):

	Acquired Impaired Loans		Acquired Performing Loans		Total Acquired Loans
Commercial, financial and agricultural	$	82	$	59,011	$	59,093
Real estate – construction		-		16,431		16,431
Real estate – commercial		4,205		127,866		132,071
Real estate – residential		455		34,232		34,687
Installment loans to individuals		-		17,652		17,652
Other		-		119		119
Total	$	4,742	$	255,311	$	260,053

The following table presents information about the acquired impaired loans at acquisition (in thousands):

Contractually required principal and interest payments	$	7,449
Non-accretable discount		2,084
Cash flows expected to be collected		5,365
Accretable discount		623
Fair value of loans acquired with a deterioration of credit quality	$	4,742

In connection with the PSB acquisition, the Company recorded a liability for contingent payment of $2.0 million to stockholders of PSB based on the complete payoff before December 28, 2015 less charge-offs of up to $3.0 million of certain Identified Loans in The Peoples State Bank legacy loan portfolio. Generally, no contingent payment will be made if the net charge-offs on the Identified Loans exceeds $3.0 million.

Acquisitions of certain locations of Jefferson Bank, First Louisiana National Bank and the Tyler, Texas branch of Beacon Federal

On July 29, 2011, the Bank purchased all five former Jefferson Bank locations in the Dallas-Fort Worth, Texas area. The Bank acquired the branch network from First Bank and Trust Company, which purchased Jefferson Bank's assets in connection with the bankruptcy of Jefferson Bank's parent company. The Bank acquired at fair value approximately $57.7 million in performing loans and assumed approximately $165.8 million in Jefferson Bank deposits for a purchase price of approximately $10.4 million.

On December 1, 2011, the Bank purchased substantially all of the assets of First Louisiana National Bank ("FLNB"), a wholly owned subsidiary of First Bankshares of St. Martin, Ltd, for total consideration of $20.3 million, which resulted in preliminary goodwill of $4.1 million, as shown in the following table (in thousands):

	Number of Shares		Amount
Equity consideration:
Common stock issued		725,000	$	8,838
Non-equity consideration:
Cash				11,500
Total consideration paid				20,338
Fair value of net assets acquired including identifiable intangible assets				(16,230	)
Goodwill			$	4,108

On December 2, 2011, the Bank purchased the Tyler, Texas branch of Beacon Federal, a wholly owned federal savings bank of Beacon Federal Bancorp, Inc. The Bank acquired at fair value approximately $22.2 million in performing loans and assumed approximately $79.8 million in Beacon Federal deposits.

The three transactions were accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair values on the acquisition dates. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information relative to fair values become available. Assets acquired totaled $370.4 million, including $127.8 million in loans, $177.2 million in cash, $32.8 million of investment securities, $7.8 million of fixed assets and $23.0 million of intangibles. Liabilities assumed were $350.0 million, including $349.6 million of deposits.

Preliminary goodwill of $15.7 million is calculated as the purchase premium after adjusting for the fair value of net assets acquired and represents the value expected from the synergies created from combining the businesses as well as the economies of scale expected from combining the operations of the acquired banks with those of the Bank.

The following table provides the assets purchased and the liabilities assumed and the adjustments to fair value for the Jefferson Bank acquisition (in thousands):

	As Recorded		Fair Value			Fair
Assets	By Jefferson		Adjustments			Value
Cash	$	93,800	$	-		$	93,800
Investment securities		175		-			175
Loans receivable		59,818		(2,124	)		57,694
Fixed assets		2,240		1,392			3,632
Core deposit intangible		-		2,702			2,702
Other assets		327		-			327
Total assets acquired	$	156,360	$	1,970		$	158,330

Liabilities
Deposits	$	164,368	$	1,405		$	165,773
Other liabilities		283		-			283
Total liabilities assumed		164,651		1,405			166,056
Excess of liabilities assumed over assets acquired	$	8,291
Aggregate fair value adjustments			$	565
Goodwill						$	7,726

The following table provides the assets purchased and the liabilities assumed and the adjustments to fair value for the FLNB acquisition (in thousands):

	As Recorded		Fair Value			Fair
Assets	By FLNB		Adjustments			Value
Cash	$	31,208	$	-		$	31,208
Time deposits held in banks		710		-			710
Investment securities		32,625		(1	)		32,624
Other investments		140		-			140
Loans receivable		48,645		(693	)		47,952
Fixed assets		2,234		1,445			3,679
Core deposit intangible		-		3,434			3,434
Other assets		641		-			641
Total assets acquired	$	116,203	$	4,185		$	120,388

Liabilities
Deposits	$	103,857	$	134		$	103,991
Other liabilities		167		-			167
Total liabilities assumed	$	104,024	$	134			104,158
Fair value of net assets acquired including identifiable intangible assets						$	16,230

The following table provides the assets purchased and the liabilities assumed and the adjustments to fair value for the Beacon Federal acquisition (in thousands):

	As Recorded		Fair Value			Fair
Assets	By Beacon		Adjustments			Value
Cash	$	52,170	$	-		$	52,170
Loans receivable		23,760		(1,600	)		22,160
Fixed assets		288		153			441
Core deposit intangible		-		1,126			1,126
Other assets		51		-			51
Total assets acquired	$	76,269	$	(321	)	$	75,948

Liabilities
Deposits	$	76,466	$	3,331		$	79,797
Other liabilities		5		-			5
Total liabilities assumed		76,471		3,331			79,802
Excess of liabilities assumed over assets acquired	$	202
Aggregate fair value adjustments			$	(3,652	)
Goodwill						$	3,854

The discounts on loans receivable will be accreted to interest income over the estimated average life of the loans using the level yield method. The core deposit intangible assets are being amortized over a 10 year life on an accelerated basis. The deposit premiums will be amortized over the average life of the related deposits as a reduction of interest expense.

Management determined that the loans acquired in 2011 were performing and that there was no evidence of credit quality deterioration. Therefore, these loans are accounted for under ASC 310-20, and, accordingly, contractual cash flows equal the expected cash flows. The loans are categorized into different loan pools per loan types. The Company determined expected cash flows on the acquired loans based on the best available information at the date of acquisition. In accordance with GAAP, there was no carry-over of each acquired bank's previously established allowance for loan losses.