Business Combinations

6 Months Ended

Jun. 30, 2014

Business Combinations [Abstract]

Business Combinations

NOTE B - BUSINESS COMBINATIONS

Merger Agreement with First Citizens Bancorporation, Inc.

On June 10, 2014, BancShares and First Citizens Bancorporation, Inc. (Bancorporation) entered into an Agreement and Plan of Merger (the Merger Agreement). Pursuant to the Merger Agreement, Bancorporation will merge with and into BancShares, whereupon the separate corporate existence of Bancorporation will cease and BancShares will continue (the Merger). The Merger is expected to be completed during the fourth quarter of 2014. Sometime thereafter, First Citizens Bank and Trust Company, Inc. (FCB-SC), a wholly-owned subsidiary of Bancorporation, will merge with and into FCB, whereupon the separate corporate existence of FCB-SC will cease and FCB will continue.

Under the terms of the Merger Agreement, each share of Bancorporation common stock will be converted into the right to receive 4.00 shares of BancShares' Class A common stock and $50.00 cash, unless the holder elects for each share to be converted into the right to receive 3.58 shares of BancShares' Class A common stock and 0.42 shares of BancShares' Class B common stock.

Consummation of the Merger is subject to customary conditions, including, among others, approval of the shareholders of each company and receipt of regulatory approvals.

The Merger Agreement includes certain termination rights for both BancShares and Bancorporation and under specified circumstances Bancorporation may be required to pay BancShares a termination fee equal to $6.5 million, $10.0 million or $22.6 million, depending on the circumstances of the termination.

1st Financial Services Corporation Merger

On January 1, 2014, FCB completed its merger with 1st Financial Services Corporation (1st Financial) of Hendersonville, NC and its wholly-owned subsidiary, Mountain 1st Bank & Trust Company (Mountain 1st). The merger allowed FCB to expand its presence in Western North Carolina. Mountain 1st had twelve branches located in Asheville, Brevard, Columbus, Etowah, Fletcher, Forest City, Hendersonville, Hickory, Marion, Shelby and Waynesville. FCB requested and received approval from the North Carolina Commissioner of Banks and the FDIC to close seven Mountain 1st branches due to their proximity to legacy FCB branches. The branches in Asheville, Brevard, Fletcher, Forest City, Hendersonville, Hickory and Marion were closed in May. All customer relationships assigned to those branches were transferred to the nearest FCB branch.

FCB paid $10.0 million to acquire 1st Financial, including payments of $8.0 million to the U.S. Treasury to acquire and subsequently retire 1st Financial's Troubled Asset Relief Program (TARP) obligation and $2.0 million paid to the shareholders of 1st Financial. As a result of the merger, FCB recorded $24.5 million in goodwill and $3.8 million in core deposit intangibles.

The 1st Financial transaction was accounted for under the acquisition method of accounting, and the purchased assets, assumed liabilities and identifiable intangible assets were recorded at their estimated fair values as of the acquisition date. Fair values are subject to refinement for up to one year after the closing date of the transaction as additional information regarding closing date fair values becomes available. During the second quarter of 2014, no adjustments were deemed necessary.

The following table provides the carrying value of acquired assets and assumed liabilities, as recorded by 1st Financial, the fair value adjustments calculated at the time of the merger and the resulting fair value recorded by FCB.

	January 1, 2014
(Dollars in thousands)	As recorded by 1st Financial			Fair value adjustments			As recorded by FCB
Assets
Cash and cash equivalents	$	28,194		$	—		$	28,194
Investment securities	246,890			(9,452		)	237,438
Loans held for sale	1,183			—			1,183
Restricted equity securities	3,105			671			3,776
Loans	338,170			(21,843		)	316,327
Less: allowance for loan losses	(7,796		)	7,796			—
Premises and equipment	3,871			(1,185		)	2,686
Other real estate owned	12,896			(1,305		)	11,591
Intangible asset	—			3,780			3,780
Other assets	16,811			(465		)	16,346
Total assets acquired	$	643,324		$	(22,003	)	$	621,321
Liabilities
Deposits:
Noninterest-bearing	$	152,444		$	—		$	152,444
Interest-bearing	477,881			1,546			479,427
Total deposits	630,325			1,546			631,871
Short-term borrowings	406			—			406
Other liabilities	3,392			167			3,559
Total liabilities assumed	$	634,123		$	1,713		635,836
Fair value of net liabilities assumed							14,515
Cash paid to shareholders							2,000
Cash paid to acquire TARP securities							8,000
Goodwill recorded for 1st Financial							$	24,515

Goodwill recorded for 1st Financial represents future revenues to be derived from the existing customer base, including efficiencies that will result from combining operations and other non-identifiable intangible assets. The 1st Financial transaction is a taxable asset acquisition, and goodwill resulting from the transaction is deductible for income tax purposes.

Merger costs related to the 1st Financial transaction are estimated to be between $5.5 million and $6.0 million. Loan related interest income generated from 1st Financial was approximately $4.2 million for the second quarter of 2014 and $8.6 million for the year to date.

All loans acquired with the 1st Financial transaction are accounted for under the expected cash flow method (ASC 310-30).

For loans acquired from 1st Financial, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of the merger date were:

(Dollars in thousands)	January 1, 2014
Contractually required payments	$	414,233
Cash flows expected to be collected	400,622
Fair value at acquisition date	316,327

The recorded fair values of loans acquired in the 1st Financial transaction as of the merger date were as follows:

(Dollars in thousands)	January 1, 2014
Commercial:
Construction and land development	$	41,516
Commercial mortgage	123,925
Other commercial real estate	6,698
Commercial and industrial	29,126
Total commercial loans	201,265
Noncommercial:
Residential mortgage	113,177
Consumer	1,885
Total noncommercial loans	115,062
Total loans acquired from 1st Financial	$	316,327