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Note 2 - Acquisition

6 Months Ended

Jun. 30, 2021

Business Combination Disclosure [Text Block]

(2)

Acquisition

Bancorp completed its acquisition of Kentucky Bancshares, Inc. during the second quarter in a combined stock and cash transaction for total consideration of $233 million. Bancorp acquired 19 branches in 11 communities throughout central and eastern Kentucky, including the Lexington, Kentucky metropolitan statistical area and contiguous counties, and also acquired a captive insurance subsidiary.

The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The preliminary fair value adjustments and the preliminary fair values shown in the following table continue to be evaluated by management and may be subjected to further adjustment.

Acquisition of Kentucky Bancshares, Inc.

Summary of Assets Aquired and Liabilities Assumed

	As Recorded			Fair Value				As Recorded
(in thousands)	By KB			Adjustments (1)				by Bancorp
Assets aquired:
Cash and due from banks	$	53,257		$	—			$	53,257
Mortgage loans held for sale		3,071			—				3,071
Available for sale debt securities		396,157			(295	)	a		395,862
Federal Home Loan Bank stock, at cost		7,072			—				7,072
Loans		755,932			(757	)	b		755,175
Allowance for credits losses on loans		(9,491	)		2,734		c		(6,757	)
Net loans		746,441			1,977				748,418
Premises and equipment, net		27,401			(6,361	)	d		21,040
Bank owned life insurance		18,909			—				18,909
Accrued interest receivable		4,939			—				4,939
Goodwill		14,001			(14,001	)	e		—
Core deposit intangible		—			3,404		f		3,404
Other real estate owned		674			(123	)	g		551
Mortgage servicing rights		1,628			34		h		1,662
Deferred income taxes, net		1,856			715		i		2,571
Other assets		6,421			(1,866	)	j		4,555
Total assets acquired	$	1,281,827		$	(16,516	)		$	1,265,311

Liabilities assumed:
Deposits:
Non-interest bearing	$	359,544		$	—			$	359,544
Interest bearing		678,528			1,146		k		679,674
Total deposits		1,038,072			1,146				1,039,218

Securities sold under agreements to repurchase		11,360			—				11,360
Federal Home Loan Bank advances		88,581			2,490		l		91,071
Accrued interest payable		505			—				505
Other liabilities		16,231			(2,004	)	m		14,227
Total liabilities assumed		1,154,749			1,632				1,156,381
Net assets acquired	$	127,078		$	(18,148	)		$	108,930

Consideration for common stock								$	204,670
Cash consideration paid									28,276
Total consideration								$	232,946

Goodwill								$	124,016

(1)

See the following page for explanations or individual fair value adjustments.

Explanation of fair value adjustments

a.	Adjustment based on Bancorp’s evaluation of the acquired investment portfolio. Approximately $91 million in AFS debt securities were sold by Bancorp shortly after acquisition.

b.	Adjustments to loans to reflect estimated fair value adjustments, including the following:

(in thousands)

Fair value adjustment - acquired non PCD loans	$	228
Fair value adjustment - acquired PCD loans		(735	)
Eliminate unrecognized loan fees on acquired loans and fair value hedge		(250	)
Net loan fair value adjustments	$	(757	)

c.	The net adjustment to allowance for credit losses includes the following:

(in thousands)

Reversal of historical KB allowance for credit losses on loans	$	9,491
Estimate of lifetime credit losses for PCD loans		(6,757	)
Net change in allowance for credit losses	$	2,734

d.	Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets.

e.	Elimination of the historical KB goodwill of $14.0 million at the closing date.

f.	Calculation of core deposit intangible related to the acquisition.

g.	Adjustment to reflect the estimated fair value of other real estate owned.

h.	Adjustment to reflect the estimated fair value of mortgage servicing rights.

i.	Adjustment to net deferred tax assets associated with the effects of the purchase accounting adjustments.

j.	Adjustment to other assets to reflect the estimated fair value of prepaid and other assets.

k.	Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates.

l.	Adjustment to reflect the estimated fair value of Federal Home Loan Bank advances for differences in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates. All KB FHLB advances were paid off immediately upon acquisition.

m.	Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL and various accrual adjustments.

Goodwill of approximately $124 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, is expected to be recorded in the KB acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Commercial Banking segment and is not expected to be deductible for tax purposes. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the KB acquisition will change.

Net income, excluding all purchase accounting adjustments, attributed to KB totaled $2.1 million for the three and six months ended June 30, 2021.

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the purchase accounting adjustments and acquisition expenses, had the KB acquisition taken place at the beginning of the period:

(in thousands)	Three months ended June 30, 2021			Three months ended June 30, 2020

Net interest income	$	47,465		$	42,664
Provision for loan losses (1)		(3,167	)		7,525
Non-interest income		18,078			16,621
Non-interest expense (2)		37,257			32,903
Income before taxes		31,453			18,857
Income tax expense		6,026			2,518
Net income	$	25,427		$	16,339

Earnings per share
Basic	$	0.95		$	0.62
Diluted		0.94			0.62

Basic weighted average shares outstanding		26,687			26,363
Diluted weighted average shares outstanding		26,926			26,542

(in thousands)	Six months ended June 30, 2021			Six months ended June 30, 2020

Net interest income	$	94,043		$	84,156
Provision for loan losses (1)		(4,542	)		15,075
Non-interest income		36,090			32,719
Non-interest expense (2)		71,803			65,864
Income before taxes		62,872			35,936
Income tax expense		11,979			4,716
Net income	$	50,893		$	31,220

Earnings per share
Basic	$	1.91		$	1.19
Diluted		1.89			1.18

Basic weighted average shares outstanding		26,670			26,341
Diluted weighted average shares outstanding		26,911			26,540

(1) - Excludes $7.4 million in merger related credit loss expense for the three* and six months ended June 30, 2021, respectively.*
(2) - Excludes $18.1 million and $18.5 million in pre-tax merger expenses for the three* and six months ended June 30, 2021, respectively.*