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Note 3 - Bank Acquisitions
12 Months Ended
Dec. 31, 2023
Notes to Financial Statements  
Business Combination Disclosure [Text Block]

(3) Bank Acquisition

 

Commonwealth Bancshares, Inc.

 

On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. in a combined stock and cash transaction for total consideration of $168 million. Bancorp acquired 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky.

 

Effective December 31, 2022, management finalized the fair values of the acquired assets and assumed liabilities in advance of the 12 month post-acquisition date, as allowed by GAAP.

 

The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, final provisional period adjustments to those previously reported preliminary values, and the final fair values of those assets and liabilities as recorded by Bancorp.

 

  

As Recorded

  

Fair Value

   

Classification

  

Provisional Period

  

As Recorded

 

(in thousands)

 

By CB

  

Adjustments (1)

   

Adjustments (2)

  

Adjustments (1)

  

by Bancorp

 

Assets aquired:

                     

Cash and due from banks

 $380,450  $   $  $  $380,450 

Mortgage loans held for sale

  3,559             3,559 

Available for sale debt securities

  247,209   (416)

a

  (161,819)     84,974 

Held to maturity debt securities (2)

      

a

  161,819      161,819 

Federal Home Loan Bank stock, at cost

  4,436             4,436 

Loans

  645,551   (13,147)

b

        632,404 

Allowance for credits losses on loans

  (16,102)  6,152 

c

        (9,950)

Net loans

  629,449   (6,995)         622,454 

Premises and equipment, net

  28,784   4,009 

d

        32,793 

Accrued interest receivable

  1,973             1,973 

Goodwill

  5,412   (5,412)

e

         

Core deposit intangible

     12,724 

f

        12,724 

Customer list intangibles

     14,360 

g

        14,360 

Mortgage servicing rights

  9,387   3,289 

h

        12,676 

Deferred income taxes, net

     (3,727)

i

        (3,727)

Other assets

  9,389   (1,065)

j

        8,324 

Total assets acquired

 $1,320,048  $16,767   $-  $-  $1,336,815 
                      

Liabilities assumed:

                     

Deposits:

                     

Non-interest bearing

 $302,098  $   $  $  $302,098 

Interest bearing

  818,334   371 

k

        818,705 

Total deposits

  1,120,432   371          1,120,803 
                      

SSUAR

  66,220             66,220 

Subordinated debentures

  26,806   (794)

l

        26,012 

Line of credit

  3,200             3,200 

Accrued interest payable

  243             243 

Other liabilities

  17,822   1,296 

m

        19,118 

Total liabilities assumed

  1,234,723   873          1,235,596 

Net assets acquired

 $85,325  $15,894   $-  $-  $101,219 
                      

Consideration for common stock

                  $133,825 

Cash consideration paid

                   30,994 

Non-controlling interest of acquired entity

                   3,094 

Total consideration

                  $167,913 
                      

Goodwill

                  $66,694 

 

(1)

See the following page for explanations of individual fair value/provisional period adjustments.

 

(2)

As of acquisition date, securities with a fair value of $162 million were classified by Bancorp as HTM.

 

Explanation of fair value/provisional period adjustments:

 

a.

Adjustment to investment securities based on Bancorp’s evaluation of the acquired portfolio.

 

b.

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

 

(in thousands)

    

Fair value adjustment - acquired non PCD loans

 $(9,216)

Fair value adjustment - acquired PCD loans

  (4,094)

Eliminate unrecognized loan fees on acquired loans and fair value hedge

  163 

Net loan fair value adjustments

 $(13,147)

 

c.

The net adjustment to the ACL on loans includes the following:

 

(in thousands)

    

Reversal of historical CB ACL for loans

 $(16,102)

Estimate of lifetime credit losses for PCD loans

  9,950 

Net change in ACL for loans

 $(6,152)

 

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 CB goodwill.

 

f.

Calculation of CDI related to the acquisition.

 

g.

Calculation of CLI related to the acquisition.

 

h.

Adjustment to reflect the estimated fair value of MSRs.

 

i.

Adjustment to net DTAs 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, which was based on an analysis of market interest rates and maturity dates at the time of acquisition.

 

l.

Adjustment to reflect the estimated fair value of subordinated debentures, which was based primarily on an analysis of market interest rates and maturity dates at the time of acquisition.

 

m.

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

 

Bancorp recorded initial goodwill of approximately $67 million and incurred merger related expenses totaling $19.5 million during the first quarter of 2022 as a result of the CB acquisition. As a result of Bancorp’s disposition of its partial interest in LFA, which resulted in a pre-tax loss of $870,000 recorded in other non-interest expense on the consolidated income statements for the fourth quarter of 2022, goodwill totaling $8.5 million was written off, bringing total goodwill related to the CB acquisition to $58 million as of December 31, 2022. This goodwill is attributable to the Company’s Commercial Banking and Wealth Management & Trust segments. Goodwill related to the CB acquisition is not deductible for tax purposes, as the transaction was structured as a stock sale.

 

Loans acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $540 million and $549 million at the date of acquisition.

 

Total revenue, defined as net interest income and non-interest income, attributed to CB totaled approximately $38.6 million for the year ended December 31, 2022, respectively.

 

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

 

(in thousands, except per share data)
Year ended December 31,

 

2022

  

2021

 
         

Net interest income

 $238,416  $218,376 

Provision for credit losses (1)

  5,828   (7,667)

Non-interest income

  92,089   123,530 

Non-interest expense (2)

  182,783   200,941 

Income before taxes

  141,894   148,632 

Income tax expense

  32,212   31,443 

Net income

  109,682   117,189 

Less net income attributed to NCI

  337   362 

Net income available to stockholders

 $109,345  $116,827 
         

Earnings per share:

        

Basic

 $3.75  $4.02 

Diluted

  3.72   3.99 
         

Basic weighted average shares outstanding

  29,122   29,037 

Diluted weighted average shares outstanding

  29,386   29,295 

 

(1) - Excludes $4.4 million in merger related credit loss expense for the year ended December 31, 2022. Excludes $7.4 million in merger related credit loss expense for the year ended December 31, 2021.

 

(2) - Excludes $24.1 million in pre-tax merger expenses for the year ended December 31, 2022. Excludes $18.5 million in pre-tax merger expenses for the year ended December 31, 2021.