ACQUISITION ACTIVITY

12 Months Ended

Dec. 31, 2013

ACQUISITION ACTIVITY [Abstract]

ACQUISITION ACTIVITY

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 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

The following table presents changes in the carrying amount of the accretable yield for purchased impaired and non-impaired loans for the years ended December 31, 2012 and 2013 (in thousands):

	2013			2012
Balance, beginning of year	$	11,400		$	-
Acquisition of PSB		-			11,400
Accretion		(4,821	)		-
Net transfers from nonaccretable difference to accretable yield		368			-
Balance, end of year	$	6,947		$	11,400

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 would have been made if the net charge-offs on the Identified Loans exceeded $3.0 million.  Following the payoff of these Identified Loans during the second quarter of 2013, the $2.0 million contingent payment was made to the stockholders of PSB.