Note 2 - Mergers/Acquisitions/Sales

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Mergers/Acquisitions/Sales

Note 2. Mergers/Acquisitions/Sales

GFED Acquisition

On April 1, 2022, the Company acquired GFED and on April 2, 2022 merged GFED’s bank subsidiary into SFCB, the Company’s Springfield-based charter.  The combined bank changed its name to Guaranty Bank.

Stockholders of GFED received for each share of GFED common stock owned, at the election of each stockholder, subject to proration and adjustment, (1) $30.50 in cash, (2) 0.58775 shares of the Company’s common stock, or (3) mixed consideration of $6.10 in cash and 0.4702 shares of the Company’s common stock.  On March 31, 2022, the last trading date before the closing date, the Company’s common stock closed at $56.59, resulting in stock consideration valued at $117.2 million and total cash consideration paid by the Company of $26.9 million.  The Company funded the cash portion of the purchase price through operating cash.

The acquisition of GFED supports the strategic goals of the Company. It allows for increased product and service capabilities of the combined bank and the Company anticipates it will result in strong growth in Springfield, MO and its surrounding communities.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805.  The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects.  The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date due to timing of third party reports and management’s reviews of reports.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill.  This goodwill is not deductible for tax purposes.

Note 2. Mergers/Acquisitions/Sales (continued)

The fair values of the assets acquired and liabilities assumed including the consideration paid and resulting goodwill is as follows:

	As of
	April 1, 2022
	(dollars in thousands)
ASSETS
Cash and due from banks	$	171,844
Interest-bearing deposits at financial institutions		17,134
Securities		143,017
Loans/leases receivable, net		801,697
Bank-owned life insurance		32,100
Premises and equipment		16,257
Restricted investment securities		2,220
Other real estate owned		55
Intangibles		10,264
Other assets		23,685
Total assets acquired	$	1,218,273
LIABILITIES
Deposits	$	1,076,573
FHLB advances		16,000
Subordinated notes		19,621
Junior subordinated debentures		10,310
Other liabilities		15,225
Total liabilities assumed	$	1,137,729
Net assets acquired	$	80,544
CONSIDERATION PAID:
Cash	$	26,871
Common stock		117,214
Total consideration paid	$	144,085
Goodwill	$	63,541

The Company acquired $143.0 million of securities and subsequent to the closing, the Company sold $111.4 million of the acquired securities portfolio to improve the efficiency of the combined balance sheets.

The Company acquired loans both with and without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution’s previously recorded allowance for loan and lease losses. Acquired loans are accounted for under ASC 326, Financial Instruments – Credit Losses.

The fair value of acquired loans recorded at the time of acquisition is based upon several factors, including the timing and payment of expected cash flows, as adjusted for estimated credit losses and prepayments, and then discounting these cash flows using comparable market rates.  The resulting fair value adjustment is recorded in the form of a premium or discount to the unpaid principal balance of the respective loans.  As it relates to acquired loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination (“PCD”), the net premium or net discount is adjusted to reflect the Company’s allowance for credit losses recorded for PCD loans at the time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the respective loans.  As it relates to loans not classified as PCD (“non-PCD”) loans, the credit loss and yield components of their fair value adjustment are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the remaining life of the respective loans.  The Company recorded an accretable discount of $12.0 million on the non-PCD loans.  The Company also recorded an ACL for non-PCD loans at the time of acquisition through provision expense of $11.0 million (pre-tax).

Note 2. Mergers/Acquisitions/Sales (continued)

The carrying amount of loans acquired and classified as PCD is as follows:

	Guaranty Bank
	April 1, 2022
	(dollars in thousands)
Principal balance of PCD loans at acquisition	$	38,711
Allowance for credit losses at acquisition		(5,902)
Non-credit discount at acquisition		(1,366)
Fair value of PCD loans at acquisition	$	31,443

Premises and equipment acquired with a fair value of $16.3 million includes sixteen branch locations.  The fair value was determined with the assistance of a third party appraiser.  The assets and related fair value adjustments will be recognized as an increase in depreciation expense over 39 years.

The Company recorded a core deposit intangible totaling $10.3 million, which is the portion of the acquisition purchase price that represents the value assigned to the existing deposit base.  The core deposit intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be ten years).

The following table presents the assumed borrowings as of the acquisition date:

	Amount	Rate	Terms	Maturity Date	Collateral
	(dollars in thousands)
FHLB advance	6,500	0.59%	monthly interest payments; principal due at maturity	5/15/2023	commercial and residential real estate loans
FHLB advance	6,500	0.82%	monthly interest payments; principal due at maturity	5/15/2025	commercial and residential real estate loans
FHLB advance	3,000	1.12%	monthly interest payments; principal due at maturity	5/17/2027	commercial and residential real estate loans
Subordinated notes	19,621	5.25%	monthly interest payments; principal due at maturity	9/30/2030	unsecured
Junior subordinated debentures	10,310	4.09%	monthly interest payments; principal due at maturity	2/23/2036	unsecured
Fair value of borrowings assumed	$ 45,931

The Company prepaid the $16.0 million of FHLB advances in full shortly after closing.

During 2022, the Company incurred $3.7 million of expenses related to the acquisition, comprised primarily of legal, accounting, investment banking costs and personnel costs, and $5.5 million of post-acquisition, compensation, transition and integration costs, comprised primarily of personnel costs, IT integration and data conversion costs related to the acquisition.  GB results are included in the consolidated statements of income effective on the acquisition date.

Unaudited pro forma combined operating results for the year ended December 31, 2022 and 2021, giving effect to the GFED acquisition as if it had occurred as of January 1, 2021, are as follows:

	For the Year Ended December 31,
	2022			2021
Net interest income	$	242,161	$	222,839
Noninterest income	$	82,966	$	114,095
Net income	$	119,899	$	99,606
Earnings per common share:
Basic	$	6.97	$	5.60
Diluted	$	6.89	$	5.53

Note 2. Mergers/Acquisitions/Sales (continued)

Sale of the Bates Companies

On August 12, 2020, the Company sold all of the issued and outstanding capital stock of the Bates Companies.  The aggregate consideration paid to the Company was a $500 thousand note receivable, less imputed interest of $52 thousand, plus cancellation of all future amounts otherwise to become payable to the purchaser by the Company under an earn-out agreement entered into between the same parties in 2018 with a non-discounted value of approximately $880 thousand at the sale date.

Assets and liabilities of the Bates Companies sold are summarized as follows as of the date of closing:

	As of
	August 12, 2020
	(dollars in thousands)
ASSETS
Cash and due from banks	$	349
Premises and equipment, net		19
Other assets		2,259
Total assets sold	$	2,627
LIABILITIES
Other liabilities	$	946
Total liabilities sold	$	946
Net assets sold	$	1,681
Cash consideration	$	195
Forgiveness of earn-out consideration		880
Note receivable consideration		448
Loss on sale of subsidiary	$	158

Disposition costs in 2020 related to the sale totaled $227 thousand and were comprised primarily of legal, accounting and personnel costs.