(3) Acquisition

The Company completed the acquisition, by its wholly-owned subsidiary, Landmark National Bank, of Citizens Bank, National Association (“Citizens Bank”) from First Capital Corporation (“First Capital”), effective November 1, 2013. The purchase price consisted of cash of $6.3 million. The acquisition was effected through the merger of Citizens Bank with and into the Bank. The acquisition added eight branches, located in Fort Scott, Iola, Kincaid, Lenexa, Mound City, Overland Park and Pittsburg, Kansas, to the Bank’s existing branch network. In addition, the Company assumed $5.2 million of subordinated debentures from First Capital for $5.0 million of cash, which resulted in a net purchase price of $1.3 million.

The transaction was accounted for using the acquisition method of accounting, and as such, assets acquired and liabilities assumed were recorded at their estimated fair value on the acquisition date. Acquired loans were recorded at fair value at the acquisition date and no separate valuation allowance was established. No purchased credit impaired loans were acquired. Market value adjustments are accreted or amortized on a level yield basis over the expected term of the asset or liability. Additionally, the Company recorded a core deposit intangible of $1.7 million. The core deposit intangible is amortized on an accelerated basis over the estimated useful life of the deposits. Based on the estimated fair values, the Company recorded $4.5 million of goodwill. The acquisition created $5.5 million of tax deductible goodwill. The Company incurred $1.9 million of acquisition related costs relating to the acquisition during 2013.

The Company assumed subordinated debentures with principal outstanding of $5.2 million and fair value of $4.2 after a discount of $1.0 million. The initial fair value was determined with the assistance of a valuation specialist that discounted expected cash flows at appropriate rates. The discount will be accreted as interest expense on a level yield basis over the expected remaining term of the subordinated debentures.

Results of the operations of the acquired business are included in the income statement from the effective date of the acquisition.

The fair values of assets acquired and liabilities assumed, including fair value adjustments and purchase accounting entries are as follows:

(Dollars in thousands)	As of November 1, 2013
	Citizens		Fair value		Acquired
	Bank		adjustments		balances
Assets
Cash and cash equivalents	$	31,316	$	(6,288)	$	25,028
Investment securities available-for-sale		56,720		(941)		55,779
Bank stocks, at cost		565		-		565
Loans, net		97,051		(1,933)		95,118
Loans held for sale, net		3,470		-		3,470
Premises and equipment, net		4,358		1,611		5,969
Goodwill		-		4,456		4,456
Other intangible assets, net		161		2,060		2,221
Accrued interest and other assets		1,720		35		1,755
Total assets	$	195,361	$	(1,000)	$	194,361

Liabilities and Stockholders’ Equity
Liabilities:
Total deposits	$	181,875	$	-	$	181,875
Other borrowings		7,489		-		7,489
Subordinated debentures		5,155		(1,000)		4,155
Accrued interest, taxes, and other liabilities		842		-		842
Total liabilities	$	195,361	$	(1,000)	$	194,361

Unaudited pro forma consolidated operating results for the years ended December 31, 2013 and December 31, 2012, as if the acquisition was consummated on January 1 of that year are as follows:

(Dollars in thousands, except per share amounts)	Years ended December 31,
	2013		2012

Total interest income	$	29,055	$	31,661
Net earnings		6,537		8,038
Earnings per share:
Basic		1.92		2.38
Diluted		1.89		2.35

The Company completed the acquisition, by its wholly-owned subsidiary, Landmark National Bank, of The Wellsville Bank from Wellsville Bancshares, Inc., effective April 1, 2012. The purchase price consisted of cash of $3.7 million for 100% of The Wellsville Bank. The acquisition was effected through the merger of The Wellsville Bank with and into Landmark National Bank. The acquisition added one additional branch, located in Wellsville, Kansas, to the Company’s existing branch network.

The assets acquired and liabilities assumed were recorded by the Bank at their estimated fair value as of April 1, 2012 based on management’s best estimate using information available at the time. The acquisition included the assumption of investments of $14.2 million, loans of $15.0 million and deposits of $35.0 million. The unpaid contractual amount of the loans totaled $15.1 million. During the year ended December 31, 2012, the Company incurred $147,000 of acquisition related expenses. Based on estimates of the fair values of the net assets acquired, the Company recorded $181,000 of goodwill. The acquisition created $51,000 of tax deductible goodwill.