Note 2 - Acquisitions

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Business Combination Disclosure [Text Block]

Note 2 - Acquisitions

On April 1, 2019, the Company completed its acquisition of Roanoke-based HomeTown Bankshares Corporation ("HomeTown") and its wholly owned subsidiary bank, HomeTown Bank. Pursuant and subject to the terms of the merger agreement, as a result of the merger, the holders of shares of HomeTown common stock received 0.4150 shares of the Company's common stock for each share of HomeTown common stock held immediately prior to the effective date of the merger.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other. The following table provides an assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in thousands):

Consideration Paid:
Common shares issued (2,361,686)	$	82,470
Issuance of replacement stock options/restricted stock		753
Cash paid in lieu of fractional shares		27
Value of consideration		83,250
Assets acquired:
Cash and cash equivalents		26,283
Investment securities		34,876
Restricted stock		2,588
Loans		444,324
Premises and equipment		12,034
Deferred income taxes		2,960
Core deposit intangible		8,200
Other real estate owned		1,188
Bank owned life insurance		8,246
Other assets		14,244
Total assets		554,943
Liabilities assumed:
Deposits		483,626
Short-term FHLB advances		14,883
Long-term FHLB advances		778
Subordinated debt		7,530
Other liabilities		6,052
Total liabilities		512,869
Net assets acquired		42,074
Goodwill resulting from merger with HomeTown	$	41,176

The following table details the changes in fair value of net assets acquired and liabilities assumed from the amounts reported in the Form 10-K for the year ended December 31, 2019 (dollars in thousands):

Goodwill at December 31, 2019	$	40,130
Effect of adjustments to:
Premises and equipment		520
Other real estate owned		254
Other liabilities		272
Goodwill at June 30, 2020	$	41,176

The increase in goodwill made during the first quarter of 2020 was due to adjustments to the valuations of several acquired buildings and other real estate owned ("OREO") obtained on the date of merger.  The additional goodwill adjustment for other liabilities related to a reassessment of the interest rate prevailing for supplemental early retirement plan obligations at the merger date.

The acquired loans were recorded at fair value at the acquisition date without carryover of HomeTown's previously established allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and leases and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). Fair values determined at the acquisition date were preliminary and subject to refinement during the one-year measurement period as additional information was obtained regarding facts and circumstances about expected cash flows that existed as of the acquisition date.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality (acquired impaired), and loans that do not meet these criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs (acquired performing).

The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):

Contractually required principal and interest at acquisition	$	45,551
Contractual cash flows not expected to be collected (nonaccretable difference)		8,296
Expected cash flows at acquisition		37,255
Interest component of expected cash flows (accretable yield)		4,410
Fair value of acquired loans accounted for under FASB ASC 310-30	$	32,845

Direct costs related to the HomeTown acquisition were expensed as incurred. There were no merger related expenses during the six months ended June 30, 2020 compared to $11.3 million of merger expenses recorded during the six months ended June 30, 2019. 

The following table presents unaudited pro forma information as if the acquisition of HomeTown had occurred on January 1, 2018. These results combine the historical results of HomeTown in the Company's Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of HomeTown's provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. Pro forma adjustments below include the elimination of merger-related costs for 2019. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands):

	Unaudited Pro forma Three Months Ended
	June 30, 2019
Total revenues (1)	$	24,671
Net income		7,506

	Unaudited Pro forma Six Months Ended
	June 30, 2019
Total revenues (1)	$	45,768
Net income		13,382

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(1) Includes net interest income and noninterest income.