Note 2 - Acquisition of Peoples Bancorp, Inc. of Bullitt County

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Business Combination Disclosure [Text Block]

(2)

            ACQUISITION OF PEOPLES BANCORP, INC. OF BULLITT COUNTY

On

December

4,

2015,

the Company acquired

100%

of the outstanding common shares of Peoples Bancorp, Inc. of Bullitt County (“Peoples”), the bank holding company for The Peoples Bank of Bullitt County (“Peoples Bank”), headquartered in Shepherdsville, Kentucky, pursuant to an Agreement and Plan of Merger dated

June

4,

2015

(the “Merger Agreement”). Under the Merger Agreement, Peoples merged with and into the Company, with the Company as the surviving corporation, and Peoples Bank merged with and into the Bank, with the Bank as the surviving corporation. The acquisition expanded the Company’s presence into Bullitt County, Kentucky and expanded its overall presence in the greater Louisville, Kentucky metropolitan market. The Company expects to benefit from growth in this new market area as well as from expansion of the banking services provided to the existing customers of Peoples Bank. Cost savings are also expected for the combined bank through economies of scale and the consolidation of business operations.

Pursuant to the terms of the Merger Agreement, shareholders of Peoples had the right to elect to receive either

382.83

shares of Company common stock or

$9,475

in cash for each share of Peoples common stock owned, subject to certain adjustments and proration provisions specified in the Merger Agreement that provided for a targeted aggregate mix of total consideration of

50%

common stock and

50%

cash. Due to such adjustments, at the effective time of the merger, Peoples shareholders had the right to elect to receive either

377.637

shares of Company common stock or

$9,607.08

in cash for each share of Peoples common stock owned. The Company paid cash consideration of

$14.7

million in the transaction and issued

580,017

shares of Company common stock, with a total fair value of

$14.8

million based on the

$25.44

per share average closing price of the Company’s common stock for the

20

days ended

November

27,

2015,

to the former Peoples shareholders. Acquisition-related costs totaling

$1.0

million were expensed as incurred and reported in noninterest expense in the accompanying consolidated statement of income for the year ended

December

31,

2015.

As part of the merger, the Company acquired foreclosed real estate with an estimated fair value of

$3.75

million (the “Contingent Assets”). Under the terms of the Merger Agreement, if the Company sells the Contingent Assets within

24

months after the effective date of the merger or has entered into a written contract for the sale of the Contingent Assets which are then sold within

60

days after the expiration of that

24

-month period, the Company will distribute additional cash consideration of

50%

of the sale proceeds in excess of

$3.75

million on a pro rata basis to the former shareholders of Peoples. At

December

31,

2016,

there was no written contract for the sale of the Contingent Assets and no contingent consideration is anticipated.

The transaction was accounted for using the acquisition method of accounting. Accordingly, the results of operations of Peoples have been included in the Company’s results of operations since the date of acquisition. Under the acquisition method of accounting, the purchase price was assigned to the assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess of cost over the fair value of the acquired net assets of

$1.1

million was recorded as goodwill. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Peoples. No amount of the goodwill arising in the acquisition is deductible for income tax purposes.

In accounting for the acquisition,

$1.4

million was assigned to a core deposit intangible which is being amortized over a weighted-average estimated economic life of

9.67

years. It is not anticipated that the core deposit intangible will have a significant residual value.

Following is a summary of the assets acquired and the liabilities assumed recognized at the date of acquisition:

	(In thousands)
Cash and cash equivalents	$	33,458
Interest-bearing time deposits		4,980
Investment securities		131,959
Loans		55,727
FHLB and other stock		1,295
Foreclosed real estate		4,349
Premises and equipment		3,465
Cash value of life insurance		828
Goodwill		1,085
Core deposit intangible		1,418
Other assets		1,886
Total assets acquired		240,450
Deposit accounts		209,084
Net deferred tax liability		17
Other liabilities		1,846
Total liabilities assumed		210,947
Total consideration	$	29,503

FASB ASC

310

-

30,

Loans and Debt Securities Acquired with Deteriorated Credit Quality

, applies to loans with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable (referred to as purchased credit impaired loans or PCI loans). See Note

5

for additional disclosures related to the Company’s PCI loans. Following is a summary of the acquired loans at the date of acquisition:

(In thousands)	Fair Value		Gross Contractual Amounts Receivable		Estimated Contractual Cash Flows Not Expected to be Collected
Acquired loans subject to ASC 310-30	$	1,570	$	2,934	$	1,033
Acquired loans not subject to ASC 310-30		54,157		60,013		1,927
Total acquired loans	$	55,727	$	62,947	$	2,960

For the period from

December

4,

2015

to

December

31,

2015,

Peoples contributed

$291,000

in loan interest income and

$94,000

in deposit interest expense to the Company’s operations. Total contributed revenues and net income of Peoples for the period from

December

4,

2015

to

December

31,

2015

is not available as separate information on all revenues and expenses was not maintained. The following unaudited pro forma summary presents combined results of operations as if the acquisition was consummated on

January

1,

2015:

	Pro Forma Year Ended December 31, 2015
(In thousands)
Revenue (interest income and noninterest income)	$	32,655
Net income		6,284

In addition to combining the historical results of operations, the pro forma calculations consider the purchase accounting adjustments and nonrecurring charges directly related to the acquisition and the related tax effects. The pro forma calculations do not include any anticipated cost savings as a result of the acquisition. The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the acquisition actually been consummated on

January

1,

2015,

or results that

may

occur in the future.