Note 3 - Business Combinations

3 Months Ended

Mar. 31, 2013

Business Combination Disclosure [Text Block]

Note 3– Business Combinations

Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with FASB Accounting Standards Codification (“ASC”) 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available.

Citizens South

On October 1, 2012, Citizens South was merged with and into the Company, with the Company as the surviving legal entity, in accordance with an Agreement and Plan of Merger dated as of May 13, 2012.  Under the terms of the Citizens South merger agreement, Citizens South stockholders received either $7.00 in cash or 1.4799 shares of the Company’s Common Stock for each Citizens South share they owned immediately prior to the merger, subject to the limitation that the total consideration paid in the merger would consist of 30% in cash and 70% in Common Stock.  The Citizens South merger was structured to be tax-free to Citizens South stockholders with respect to the shares of Common Stock received in the merger and taxable with respect to the cash received in the merger.  Cash was paid in lieu of fractional shares.  The aggregate merger consideration consisted of 11,857,226 shares of Common Stock and $24.3 million in cash.  Based on the $4.94 per share closing price of the Common Stock on September 28, 2012, the last trading date prior to consummation of the merger, the transaction value was $82.9 million.  In addition, in connection with the merger, the preferred stock previously issued by Citizens South to the United States Department of the Treasury ( the “Treasury”) in connection with Citizens South’s participation in the Small Business Lending Fund (“SBLF”) program was converted to 20,500 shares of a substantially identical newly created series of the Company’s preferred stock.  See Note 10 – Preferred Stock for further discussion.

Citizens South operated 21 full service branches in North Carolina, South Carolina and Georgia at the date of acquisition. The acquisition of Citizens South was part of the Company’s business plan seeking accelerated organic growth and to acquire regional and community banks in the Carolinas and Virginia.

The assets and liabilities assumed from Citizens South were recorded at their fair value as of the closing date of the merger.  Determining the fair value of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.  Fair values are preliminary and subject to refinement for up to one year after the closing date of the merger as information relative to closing date fair values becomes available.  Goodwill of $22.5 million was initially recorded at the time of acquisition. As a result of refinements to the fair value mark on loans, bank-owned life insurance, OREO, the FDIC indemnification asset and other assets, goodwill as indicated below is $1.6 million greater than the goodwill estimated in the Company’s 2012 audited consolidated financial statements. Goodwill as of December 31, 2012 has been retrospectively adjusted.  The following table summarizes the consideration paid by the Company in the merger with Citizens South and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date:

	As Recorded by Citizens South		Fair Value and Other Merger Related Adjustments			As Recorded by the Company
Consideration Paid
Cash						$	24,283
Common shares issued (11,857,226 shares)							58,575
Fair value of noncontrolling interest							20,500
Fair Value of Total Consideration Transferred						$	103,358
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivelents	$	48,661	$	-		$	48,661
Securities		88,068		2,275			90,343
Nonmarketable equity securities		5,390		-			5,390
Loans held for sale		1,695		-			1,695
Loans, net of allowance		694,016		(12,340	)		681,676
Premises and equipment		25,443		4,326			29,769
Core deposit intangibles		1,032		5,168			6,200
Other real estate owned		18,957		(3,169	)		15,788
Bank owned life insurance		18,879		(79	)		18,800
Deferred tax asset		3,560		875			4,435
FDIC indemnification asset		20,652		1,846			22,498
Other assets		4,338		(238	)		4,100
Total assets acquired	$	930,691	$	(1,336	)	$	929,355
Deposits	$	826,134	$	2,166		$	828,300
Short term borrowings		7,678		-			7,678
Junior subordinated debt		15,464		(6,627	)		8,837
Other liabilities		418		4,859			5,277
Total liabilities assumed	$	849,694	$	398		$	850,092
Total identifiable assets	$	80,997	$	(1,734	)	$	79,263
Goodwill resulting from acquisition						$	24,095